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.
by Stephen Reed | Accounting News, News, Tax, Tax Consulting, Tax Planning
The majority of American taxpayers typically receive a refund from their federal tax returns, and in 2019 those refunds could increase by 26 percent, which is higher than previous years.
The jump in expected refunds is most likely a result of the recent tax overhaul that cut personal income tax rates so that workers can keep more of their income. Theoretically, such a change in taxes should prompt American workers to adjust their withholding rates accordingly through a Form W-4 with their employer. However, research shows that roughly 75 percent of tax payers, who historically over withhold from their paychecks anyway, only partially adjust those rates when new tax laws are introduced, or they don’t adjust them at all. This means that even more taxes are withheld from their paychecks than necessary, which results in a heftier refund.
The prospect of a bigger tax refund is enticing, and tax refunds are typically used to boost savings, pay down debt, and pay for vacations. But for those Americans who fall within the 75 percent of workers living paycheck to paycheck with little to no money in savings, over withholding is probably not the best move.
If Americans withhold more than necessary from their paychecks, they have less funds to apply to everyday expenses, financial goals, and life emergencies that pop up. If you are someone who might be over withholding and could benefit from an increase in your paycheck rather than waiting to see that money in your tax refund, see about submitting a new Form W-4 with your employer.
by Pete McAllister | Audit and Accounting, IRS, News, Professional Services, Tax, Tax Consulting, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
We are deep in the throws of tax season, and although many of you have already filed, it certainly never hurts to become more aware of possible deductions. And it goes without saying that we all love saving money or getting a larger return. Below are some unusual deductions that taxpayers often don’t consider or simply don’t even know exist.
- Letting a friend crash on your couch – Did you know that you could have been claiming your college buddy who’s been sleeping on your couch for the last 5 months as a dependent? That is if said friend is earning less than $4,050 and you have been providing significant financial support. Similarly, children supporting their retired, elderly parents may claim them as dependents, even if they don’t live in the same home.
- Putting in a pool – Unfortunately, you cannot deduct this item simply because you like to cool off in the summertime and it cost you a lot of cash. However, if you have significant health issues, such as obesity or heart disease, and your doctor has recommended swimming as a beneficial form of regular exercise, putting a pool in your backyard may qualify as a deductible medical expense.
- Sending your kids to camp – This credit is only available to working parents. If both spouses work, and you send your child or children to either a summer day camp, a mini winter camp or even a daycare program over winter break, you may be able to receive a credit between $1000-$2000, depending on the number of children. Unfortunately though, overnight camps do not qualify under this credit.
- Losing money in Vegas – For those who gamble with some regularity, you know you must report your winnings and pay the subsequent taxes. However, reporting your losses as well can offset the amount of taxes charged on your winnings. One thing to keep in mind though is that you can only claim in losses the amount you made in winnings, no more.
- Taking a course – Did you take a design or business course in the last year to expand your knowledge or further develop yourself in your career? Anyone who took a course that enhanced their knowledge to boost job prospects and paid tuition or enrollment fees, or purchased books or supplies, can claim the Lifetime Learning Credit. The max amount one can receive is $2000, and the credit phases out altogether once your income reaches a certain level.
- Searching for a job – Paying fees to a job agency, hiring a career coach, or traveling to long-distance interviews can all be deducted if they amount to less than 2 percent of your adjusted gross income. However, buying a new suit or a nice pair of shoes for an interview do not qualify as deductible expenses.
- Driving for work – While your commute to work does not count as a deduction, most of the driving done during your work day, such as driving to a meeting or even to Office Max, can be deducted as work-related up to 54 cents per mile. Miles must be tracked exactly and documented properly to receive any deduction though.
If you have any questions about these potential income tax deductions, please contact me at [email protected].
by Daniel Kittell | Bookkeeping, IRS, News, Resources, Tax, Tax Consulting, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
The dust has ultimately settled from the somewhat turbulent Presidential Election of 2016 and preparations are fully underway for our new President’s January 20th inauguration. The transition period from President Obama to President Trump is in full swing with staff being nominated and confirmed and policies taking shape. One such plan that taxpayers would do well to pay notice to is the President-Elect’s tax plan. Trump’s plans for both businesses and individuals may involve some considerable shifts and could impact your early 2017 filing decisions. Although tax laws and regulations are in almost constant flux, Trump’s proposals could trigger some significant changes.
One major alteration Trump has proposed is to shift from seven tax brackets to only three tax brackets at 12%, 25% and 33% respectively. While this would present a cutting of taxes for some higher income brackets who had seen rates as high as 43.4% under President Obama, some lower income brackets could actually see their tax rates raised from 10% to 12%. Joint filers without children could also see definitive benefits from Trump’s plan, though large families or single parent filers may not. The President-Elect has also proposed to remove the 3.8% net investment income tax enacted under Obamacare. Thus, the top tax rate would be capped at 33%, and the top capital gains and dividends rate would not exceed 20%. Another proposal of Trump’s plan for individuals would include capping itemized deductions for married couples at $200,000.
On a business level, Trump’s proposals seem even more drastic. The President-Elect has suggested that he would cut all business tax rates to 15%, a drastic shift from the average 35% tax rate for most major corporations. Under President Obama, corporations have been paying a 35% tax rate, and those owning LLC’s, partnerships and S corporations are taxed for their flow-through business income at their respective income rate, though not exceeding 43.4%. Trump’s plan would prove especially beneficial for sole proprietors who had previously fit into the highest tax bracket; these entities could see their tax rates drop by almost 30%.
However, Trump’s tax plan is not presenting significant changes for many IRS tax rules, including the constructive receipt doctrine, which affects both businesses and individuals. Essentially, the IRS can tax you on any income or payment you have the legal right to in 2016, even if you don’t actually receive it until 2017. This includes sales made but not officially received until January, or bonus checks sent out but not cashed until January, something to keep in mind when filing in 2017. In addition to tax cuts, Trump’s plans have the potential to affect the housing market as well. To read more about the President-Elect and the housing market, check out our blog here. Of course, some of Trump’s proposals may not occur, but with a Republican majority in both the House and Senate, some level of tax cuts are likely. However, no matter what changes eventually come into effect, these prospective tax revisions could have significant impacts on 2017 and the years beyond.
by Daniel Kittell | Accounting News, Tax, Uncategorized
Ending several weeks of uncertainty, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012 shortly before adjourning for a long President’s Day weekend. President Obama is expected to sign the bill as soon as it reaches the White House.
The centerpiece of the new measure is an extension of the “payroll tax holiday” through the remainder of 2012. (It also extends unemployment benefits and adjusts physician payments under Medicare.) Absent this legislation, the holiday would have ended March 1, 2012, after a previous two-month extension.
Normally, both employees and employers must pay the OASDI (Old Age, Survivors, and Disability Income) portion of federal payroll tax at a 6.2 percent rate on wages up to the annual “wage base.” For 2012, the wage base is $110,100, up from $106,800 in 2011. Self-employed individuals must pay the OASDI tax at a 12.4 percent rate on the same wage base, but they may deduct half of their payments “above the line” on Form 1040.
First, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the usual 6.2 percent OASDI rate for employees (but not for employers) by 2 percent to an effective rate of 4.2 percent. But this tax break was created to last just one year – 2011. Self-employed individuals also benefitted from a 2 percent reduction in OASDI tax on amounts up to the 2011 wage base. The full 1.45 percent Medical Hospital Insurance (HI) portion of the federal payroll tax continued to apply to all wages for both employees and employers.
Subsequently, legislation enacted late last year – the Temporary Payroll Tax Cut Continuation Act of 2011 – extended the payroll tax holiday for two additional months through February 29, 2012. This extension included a recapture provision for employees receiving more than $18,350 in wages during the first two months of 2012 (the two-month equivalent of the $110,100 wage base). These employees were required to pay any additional amount owed on their 2012 tax returns.
Now, the new law wipes the slate clean. Under the Middle Class Tax Relief and Job Creation Act of 2012, the payroll tax holiday will continue unabated through December 31, 2012. In addition, the new legislation repeals the recapture provision included in the 2011 law. As was the case last year, high-income employees will benefit from the 2 percent reduction on wages up to the annual wage base.
Although the latest extension was hardly unexpected, the outcome remained in doubt during contentious debates within the halls of Congress. Surprisingly, gridlock over the required revenue offset was eased when both parties agreed to use transfers from the general funds of the Treasury to the Social Security fund. The new law also removed an estimated tax provision for certain large corporations that had accompanied the previous extension.
The IRS has gone on record as saying that implementing the payroll tax holiday for the entire year should not cause any major problems in its systems.
Make sure your business clients are on board.
Full Article: http://www.accountingweb.com/topic/tax/its-official-payroll-tax-holiday-extends-through-2012
