Tax Planning - Individual Archives

How to Determine if Your Taxes Will Increase for the 2019 Tax-Filing Season

by Jean Miller | Accounting News, News, Tax, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual

President Trump signed the Tax Cuts and Jobs Act in December of last year, but the income tax credits, deductions, and individual tax rates aren’t applicable until the 2019 tax-filing season. Various factors, such as your tax bracket, can influence whether your taxes will increase under the new tax code. Below are some indicators that could signal an increase on your tax bill.

Do You Have a Large Family?

The new tax code eliminated personal and dependent exemption deductions, which was estimated to have been $4,150 each in 2018 under previous law. However, standard deductions were nearly doubled. For 2018-2025 the deductions are as follows:

$12,000 for single (previously $6,350)
$24,000 for joint-filing marries couples (previously $12,700)
$18,000 for heads of households (previously $9,350)

The elimination of dependent exemptions hurts some families and benefits others. Large families, who don’t benefit from increased standard deductions, will be hit the hardest.

Are You an Average Taxpayer?

If you have a conventional job, file a W-2, and don’t own a lot of property or foreign investments, your taxes won’t likely increase. Instead, you should see a modest decrease as a result of lower tax rates, increased standard deduction, and an increased child tax credit. Despite this, however, there are thousands of potential tax situations that could affect the average taxpayer differently (i.e. a wealthier couple with children who itemize state and local taxes would be limited to a $10,000 deduction under the new law – a loss of $20,000 in deductions – and would likely have higher taxes under the new tax code).

Are You Withholding Enough from Your Paycheck?

The IRS changed the tax withholding tables back in February. The tables are calculated by how much income you earn and the number of allowances you claim. If you aren’t withholding enough from your paycheck, you could end up owing taxes. Check the tax withholding tables on IRS.gov to determine how much income tax should be withheld from your paycheck.

Do You Have Older Children?

The new tax code increases the child tax credit from $1,000 to $2,000 per child under the age of 17. Taxpayers with children over 17 only receive a $500 tax credit.

Do You Have High Property Taxes?

Under prior law you could claim an itemized deduction for an unlimited amount of personal state and local income and property taxes. So, a big property tax bill could be completely deducted if you itemized. However, under the new tax code, itemized deductions for personal state and local property taxes and personal state and local income taxes are capped at $10,000 ($5,000 if you use married filing separate status).

Even considering the above factors, with the myriad of potential tax circumstances and the complexity of the changes implemented by the Tax Cuts and Jobs Act, it’s difficult to predict how your taxes will be affected until you run the numbers.

If you have any questions about how to plan for your 2018 tax return, please feel free to contact me at jmiller@mkrcpas.com.

How to Avoid the Alternative Minimum Tax

by Pete McAllister | Accounting News, News, Tax, Tax Planning - Individual, Tax Preparation - Individual

Congress originally designed the Alternative Minimum Tax (AMT) to make sure wealthy taxpayers who take advantage of multiple tax breaks and itemized deductions would still pay their fair share in federal income taxes each year. The AMT produces around $60 billion a year in federal taxes from the top one percent of taxpayers. However, because the AMT wasn’t tied to inflation, the tax has extended down to a growing number of middle-income taxpayers. Here’s what to do about it.

AMT Primer

It’s called the Alternative Minimum Tax because it is a mandatory alternative to the standard income tax. If you are a high-income earner, you are required to calculate your taxes twice – once under standard tax rules and again under the stricter AMT rules (the AMT disallows many deductions, such as state and local tax, childcare credits, and property taxes). Ultimately, you are required to pay the higher amount.

Are You at Risk?

First, be aware of the triggers for AMT, as earning a higher income isn’t the only factor. For example, it can also affect those who are married and file jointly, have a large family (more than four dependents), enjoy profits from stock options, or live in a high-tax state. Therefore, any move that reduces your adjusted gross income (AGI) – like upping your contributions to qualified retirement accounts such as IRAs, 401(k)s, and health savings accounts – might help avoid the AMT. Additionally, aim to reduce your itemized deductions and increase your charitable contributions. Finally, pay attention to long-term capital gains – when you sell a home or other investments for a profit. These are taxed at the same rate under both the standard income tax and the AMT, but capital gains could put you over the threshold for AMT, thereby triggering it and disqualifying you from deducting state income taxes paid on the capital gains.
If you practice careful year-round preparation while being mindful of the above triggers, you’ll have a better chance of avoiding the AMT.

Pros and Cons of Health Savings Accounts

by Jean Miller | Accounting News, Healthcare, News, Tax, Tax Planning - Individual, Tax Preparation - Individual

Established in 2003, HSAs allow individuals with high-deductible health plans to pay for current healthcare expenses and save for future healthcare expenses on a tax-favored basis. Money is deposited pre-tax, it grows tax-free, and is distributed tax-free as long as the funds are used for qualified health care expenses. Aside from the obvious benefit of tax savings, below is a breakdown of advantages and disadvantages of HSAs to help you determine if it’s a good fit for you.

Advantages

Most HSAs come with a debit card to make paying for prescriptions and other expenses easy. Bills can be paid over the phone with this debit card, and you can access cash at an ATM.
Long lasting and portable. If you change health insurance plans, change jobs, or enter retirement, funds left in your HSA remain available for use. They can be used for qualified medical expenses and continue to grow tax free.
Roll-over funds. Unlike FSAs (Flexible Spending Accounts), any money left in an HSA at the end of the year automatically rolls over to the next year.
In addition to personal contributions to your HSA, your employer and anyone else may contribute, and the recipient of the contribution receives the tax deduction for the amount contributed.

Disadvantages

High deductible requirement. Although you pay less in monthly premiums, you are responsible for all healthcare costs until the deductible is met.
Unexpected healthcare expenses. It’s possible that healthcare costs could exceed your HSA savings.
Savings ambition. The desire to save money versus the necessity for healthcare when you need it could set up an internal struggle.
Recordkeeping. This time-consuming task is a necessity as you’ll have to keep receipts and prove that withdrawals were used for eligible healthcare expenses.
Taxes and penalties. Withdrawing funds for non-qualified expenses before age 65 results in a 20 percent penalty and taxes owed; after age 65 you’ll pay taxes but no penalty.
Fees. Some HSAs charge monthly maintenance or per-transaction fees, though typically not high. Sometimes if a certain minimum balance is maintained, these fees can be waived.

How to Roll Over a 401(k) Plan When You Change Jobs

by Daniel Kittell | Accounting News, IRS, News, Retirement, Tax, Tax Consulting, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual

When you accept a new job with a new company, you need to decide what to do with the money in your 401(k) plan. Here are your options.

1. Leave the money in your former employer’s 401(k) plan

While this is typically an option, and your funds will continue to grow tax-deferred, it may not be the best option. For starters, once you move to your new place of employment, you’re no longer able to contribute to it. Another possible deterrent is the fact that your former employer could switch 401(k) providers or get bought out by a different company. Both scenarios would potentially leave you in the dark in regards to your account number or login information. However, if your new employer requires employees to work a certain length of time at the company before permitting them to partake in the 401(k) plan, leaving your 401(k) funds with your former employer temporarily might be a good game plan.

2. Roll your 401(k) to your new employer’s plan

If your new employer allows rollovers, you can have your 401(k) funds directly transferred to your new employer’s plan. This is called a “trustee-to-trustee” transfer: assets from one trustee or custodian of a retirement savings plan are transferred to the trustee or custodian of another retirement savings plan. By having your 401(k) funds directly transferred following federal rollover rules, you’ll avoid having federal income tax withheld, and your money will be easier to manage in one account. You can also have the funds transferred to a new or existing IRA.

3. Transfer your plan via an indirect rollover

Another possible alternative is to roll the funds over to another employer-sponsored retirement plan by having your 401(k) distribution check made out to you, and then depositing the funds to a new retirement savings plan. However, this particular move will require that 20 percent of the taxable portion of your distribution is withheld for federal income taxes. And if you wait beyond 60 days to redeposit the funds, the full amount of your distribution will be taxable.

Whichever way you choose to move forward with your 401(k) plan, you should be aware of rollover fees. Typically the fee is only a minimal one-time fee, but it’s worth checking in with your 401(k) provider to discuss this as well as any other questions you might have.

Top Tax Write-Offs for the Self-Employed

by Stephen Reed | Accounting News, News, Tax, Tax Planning, Tax Planning - Individual

Understanding self-employment taxes can be intimidating, but it’s important to educate yourself so you don’t miss out on deductions that can lower your tax bill. Below is a list of 15 self-employment tax deductions you may be eligible for as a freelancer or a self-employed individual.

1. Self-employment tax deduction

Self-employment tax is the portion of Medicare and Social Security taxes that self-employed individuals are required to pay, but you can claim 50% of this as an income tax deduction. For example, a $1,000 self-employment tax payment reduces taxable income by $500.

2. Qualified Business Income (QBI) Deduction

As of January 1, 2018, self-employed taxpayers can deduct generally 20% of their qualified business income from qualified partnerships, S corporations, and sole proprietorships.

3. Home Office Deduction

If your home office is your primary place of business – and used solely for your business – you are permitted to deduct it from your taxes. You can also deduct a percentage of household expenses such as electricity, gas, water, trash, cleaning services, and certain repairs to the home.

4. Retirement Plans

If you use a qualified retirement plan, such as a 401(k), an IRA, or a simplified employee pension (SEP), you are able to deduct your contributions to that plan.

5. Office Supplies

Provided they are used solely for your business, materials such as tools, basic office supplies, and machinery (including service expenses) may be deducted.

6. Depreciation

Capital expenses that experience the gradual loss of value (particularly business equipment or buildings) through increasing age, natural wear and tear, or deterioration may be deducted if they are used to generate income for your business.

7. Educational Expenses

Business-related educational expenses, such as continuing education classes, seminars and conferences, conventions and trade shows, and subscriptions and dues for industry organizations can all be deducted.

8. Health Insurance

If you are self-employed or own more than 2% of your S Corporation, you can deduct health insurance premiums for yourself and any dependents under the age of 27.

9. Advertising and Promotion

Any materials or services used to promote your business, such as business cards, web hosting, full media advertisements, etc. are deductible.

10. Internet Fees and Communication Expenses

Internet costs can be deducted, but only the percentage of time that it’s used for business purposes. Cell phone services also may be deducted in the proportion that it relates to business usage. To keep the personal vs. business line clear, it’s recommended to have separate computers and phones for business when possible.

11. Mileage

If you use your car for your business, you can take a standard mileage deduction, or take a deduction based on actual costs of fuel, maintenance, licensing, and depreciation. Some public transportation expenses are also deductible. Good record and receipt keeping as proof of business is key here.

12. Bank Fees and Interest Charges

As long as your business bank account is separate from your personal account, some bank fees connected to your business account may be deductible. Likewise, you can deduct interest on credit card balances and loans that are directly linked to your business.

13. Travel

Some business travel expenses can be deducted by 100% if they occur away from your home office and are considered necessary. Under the new Tax Cuts and Jobs Act, certain entertainment write-offs have been removed, but the 50% deduction on food and beverage expenses is still applicable.

14. Security System

If you work from a home office, you can deduct a percent of the expenses of a total home security system, and the purchase and installation of the system can be included when calculating depreciation.

15. Moving Expenses

If you move more than 50 miles from your location for business purposes, you are able to deduct most incurring expenses, such as transportation, packing, and utility connection fees.

IRS Reminds Taxpayers Tax Day 2018 is the Last Day to Claim 2014 Returns

by Stephen Reed | Accounting News, IRS, News, Tax, Tax Consulting, Tax Planning - Individual, Tax Preparation - Individual

Although it might be difficult to imagine not claiming a tax refund, the IRS has estimated that nearly 1 million Americans have not claimed tax refunds from the 2014 tax year (filed in 2015), refunds that total over $1 billion. The IRS is also reminding taxpayers that they have until this year’s official tax day (April 17) to file those returns and receive their refund. The average refund owed from the 2014 tax year is $847 and taxpayers have three years from when they are supposed to file to claim a refund. After that time, the funds are considered property of the U.S. Treasury.

If you are owed a refund, there is no penalty for filing late, however, you must also have filed (or currently file) for your 2015 and 2016 returns. Refunds from 2014 will first be applied toward any money owed to the IRS or a state tax agency, and can also be used toward past due federal debts such as unpaid child support or student loans. Failing to file a return for 2014 could cost some taxpayers more than just an $850 refund; low or moderate income workers could be eligible for the Earned Income Tax Credit (EITC), which was worth as much as $6,143 in 2014.

So why did so many Americans fail to claim their refunds?

As mentioned, many taxpayers fail to apply for the EITC. To qualify, your income must have been below $46,997 (or below $52,427 if married filing jointly) and you claimed three or more qualifying children; $43,756 for those with two qualifying children ($49,186 married filing jointly); $38,511 for taxpayers with one qualifying child ($43,941 married filing jointly); and $14,590 for people with no qualifying children ($20,020 married filing jointly).
If you make under a certain amount annually, you do not have to file taxes. In 2014, single Americans over the age of 65 who earned less than $11,500, singles under 65 who earned $10,000 or less, or those married filing jointly who made less than $20,000 did not have to file. However, even though they did not have to file does not mean taxes were not taken out of their paychecks, which means those taxpayers could be owed a refund. Those who made estimated tax payments that year could also have overpaid in taxes, earning them a refund.
Many students or their parents fail to claim the American Opportunity Education Credit, which allows education-related expenses such as course books, room and board, tuition and other education supplies and equipment to be deducted. In 2014, the credit maxed out at $2,500.
Some individuals move and do not update their addresses correctly, which means refund checks and sent back to the IRS and left unclaimed. Other individuals simply forget.

How can I claim my money?

If you did not file for the 2014 tax year, and you think you may be owed a refund, the IRS suggests that you find applicable tax documents such as your W-2, 1098, 1099 or 5498 for the 2014, 2015 and 2016 tax years. If you are unable to find these forms or get them from your employer, act quickly and request a wage and income transcript from the IRS on their website or by phone at 800-908-9946, as transcripts can take between 5-10 days to be received in the mail.

« Older Entries