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income tax

Resurrecting the Qualified Charitable Distribution?

This past week the US House of Representatives passed a bill (HR 4719, known as the America Gives More Act) which would re-instate the Qualified Charitable Distribution from IRAs and make the provision permanent.  This provision expired at the end of 2013, as it has multiple times in the past, only to be re-instated temporarily time and again. A Qualified Charitable Distribution (QCD) is when a person who is at least age 70½ years of age and subject to Required Minimum Distributions from an IRA is allowed to make a distribution from the IRA and direct the distribution to a qualified charitable organization without having to recognize the income for taxable purposes.  This has been a popular option for many taxpayers, especially since the QCD can also be recognized as the Required Minimum Distribution for the year from the IRA. 

Starting a new job in the middle of the year? Use the part year withholding method to avoid excess tax withheld

When you file your W4 form with a new employer, this instructs the employer how much tax to withhold from your pay, based on a full year’s pay rate.  There is a strategy you can employ that will reduce the amount of tax withheld from your pay – known as the part year withholding method.  This method of tax withholding calculation takes into account that you are only working and earning for a part of the year, so your overall income will be less, and there would be less tax required. If you start working in the middle of the year (or worse, late in the year) the normal rate of withholding would result in significant over-payment of tax withheld.  The standard tables used to calculate withholding make the assumption on each pay that you are earning at this rate over the entire period.

A Quick Trick to Reduce Your Tax Liability

Now that most folks are recovering from tax time there may be some individuals that paid an excessive amount of tax to Uncle Sam and are looking for ways to reduce their tax liability for next year. This post will be short and sweet, but hopefully it will drive a few points home. The best way to explain this is through an example. Let’s say that Mary and her husband Paul both work and file their taxes jointly. Their tax liability for 2013 was $4,000 – meaning that’s the amount of the check they wrote to the IRS. Needless to say, they are both looking for a potential way to reduce that liability – at least in the here and now. In this case, their marginal tax rate is 25%. The quick trick in this example is to take their tax rate which is 25% and divide it into their […]

Be Careful When Converting

When converting from a 401(k), traditional IRA, 403(b), SIMPLE IRA, SEP or 457(b) to a Roth IRA there are some important tax considerations to keep in mind. First, converting from a tax deferred plan to a tax free plan it’s not always the best idea. Generally, it’s going to make sense to convert if the tax payer believes that he or she will be in a higher income tax bracket in retirement. For example, John, age 28 has a 401(k) and recently left his employer. He’s currently in the 15% bracket but expects to be in the 28% bracket or higher in retirement. It may make sense for John to convert his 401(k) to his Roth IRA. This makes sense for John because when he converts from a pre-tax, employer sponsored plan like the 401(k) it’s money that has not yet been taxed. If he converts while in the 15% […]

Tax Time is Over. Maybe.

For most folks tomorrow marks the one week anniversary of filing their 2014 tax return. Not much needs to be done after they’ve filed except for deciding to have more withheld in 2014 for those folks who had to write a check to Uncle Sam or deciding what to do with the refund (hint: put it in an IRA) for those folks who got a refund. What happens when the return may have been submitted with mistakes or perhaps costly errors? Generally, if the error is minor the IRS will correct errors or accept returns without certain forms or schedules attached. For those returns that have a change in filing status, income, deductions, and credits then filing an amended return will most likely be appropriate. For those folks needing to file an amended return they are allowed to file using form 1040X. Form 1040X will allowing corrections to earlier filed […]

Obamacare and Your 2013 Tax Return

So – you’re considering your income tax return (or maybe you’ve already filed) and you’re wondering if there are things you need to know with regard to Obamacare.  Fortunately, it’s not much (for most folks), for your 2013 return anyhow.  Next year will be a different story. The IRS recently produced their Health Care Tax Tip HCTT-2014-10 which lists some tips about how the health care law impacts your 2013 tax return.  The actual text of the Tip is below: What do I need to know about the Health Care Law for my 2013 Tax Return? For most people, the Affordable Care Act has no effect on their 2013 federal income tax return.  For example, you will not report health care coverage under the individual shared responsibility provision or claim the premium tax credit until you file your 2014 return in 2015. However, for some people, a few provisions may […]

Avoiding Mistakes on Your Tax Return

When filing your tax return you want to make sure that you don’t make mistakes.  Mistakes can be costly in terms of additional tax and penalties, as well as the extra time and grief they can cause you.  Most of the time using e-filing software can help you to avoid these mistakes, but you should check over the return anyhow to make certain you haven’t fat-fingered something or if something didn’t go wrong with the software. The IRS recently issued their Tax Tip 2014-46, which lists out 8 common mistakes that folks make on their tax return, and how to avoid them where possible.  The actual text of the Tip follows below: Eight Common Tax Mistakes to Avoid We all make mistakes.  But if you make a mistake on your tax return, the IRS may need to contact you to correct it.  That will delay your refund. You can avoid […]

Simplified Home-Office Deduction Available

Beginning with your 2013 tax return you have a new option available for calculating the Home-Office deduction – based solely on the square footage of the dedicated space used for the home office. Instead of having to maintain records that are directly and indirectly associated with your home office, you can use the simplified method, which applies a flat $5 rate per square foot to the home office space, up to a maximum of $1,500. The record-keeping and tax preparation simplification is very beneficial: Form 8829 (the usual home-office deduction form) can cause a lot of headaches to prepare, especially if you have more than one home office and you itemize your home mortgage interest and real estate taxes.  For a single home office your tax preparation software will do much of the work for you, but complications like a second home office (not that uncommon in these days of […]

Your Social Security Benefits: Are They Taxable?

If you’re receiving Social Security benefits, either for disability, retirement, or survivor’s benefits, when you file your tax return you will need to figure out if the benefits you’ve received during the prior year are taxable to you. You’ll receive a Form SSA-1099 from Social Security sometime in the first months of the year, showing what your benefits were in the prior year, as well as any deductions that were made throughout the year – including Medicare premiums (Part B and/or Part D) if applicable, and federal income taxes withheld. But are the benefits taxable to you?  At most, 85% of your benefit might be taxed – and it’s possible that none of your benefit is taxable, all dependent upon your total income for the year.  See this article for a detailed explanation of How Taxation of Social Security Benefits Works.  The IRS recently published their Tax Tip 2014-23, which […]

The Alternative Minimum Tax

You may not be aware of this, since income taxes are so complicated that not a lot of folks do much digging into the nuances, but there is another income tax rate that could affect you in certain circumstances. This other income tax is called the Alternative Minimum Tax, or AMT.  This “alternative” tax applies when you have income above certain thresholds. Essentially it ensures that you pay a certain minimum amount of income tax if your deductions reduce your income so much that your ordinary income tax falls below the minimum applied by the AMT.  It gets pretty complicated, but I’ll go over the high points below. Alternative Minimum Tax (AMT) AMT has a separate set of rules for definitions of income and expenses, rules for accounting and timing, and exemptions and tax rates.  AMT limits the tax benefit of certain types of income and deductions, otherwise available to […]

Looking for free tax preparation? IRS provides some tips

For lots of people, the option of free tax preparation is an excellent way to go.  There are quite a few providers who will allow you to prepare a simple return for free (more complexity equals more cost, of course).  It’s a good idea to go through the process if you have the aptitude, because it’s helpful to understand the ins and outs of a tax return.  Knowing about how your tax return works can help you to have a better understanding of ways to reduce your taxes in the future. When using a commercial organization to prepare your return for free, beware of the “add-ons” that make a free process extremely costly.  Among these are – add-on state filing (sometimes more costly than federal preparation!), refund anticipation loans (like a payday loan, only more expensive!), and payment via your refund (another type of refund anticipation loan, with the associated […]

What’s in Store for 2014?

A few weeks ago I was interviewed by a local business journal about our firm’s thoughts as to how the market would react in 2014 and how to best prepare for that reaction. Essentially, the journal was asking us to predict where the market would be in 2014. Most of our clients know the answer I am about to write, which was, “No one can predict the direction of the market with any degree of accuracy.” “If that were the case, (as I told the interviewer) neither she nor I would be having this interview.” In other words, we’d be clinking our glasses on our respective tropical beaches because we’d have gotten filthy rich predicting and timing the moves of the market. Markets are pretty efficient – meaning that the price of any particular stock in any particular sector, industry or country is generally priced based on all available information […]

Charitable Donations

This time of year many people find it in their hearts to give. They’ll give to friends, family, loved ones and charitable organizations that can help maximize the gift such as a church, charity, or foundation. Last week I had written about the law of reciprocity and giving, and this week I’d like to mention how you can make your giving work in favor when tax season rolls around. As of this writing there are about 11 days left in 2013. Some individuals will be looking to see how much they can give or how much more they can give in order to receive the biggest tax deduction they can for charitable giving. Of course, gifts to friends and family are not deductible, but there are times when gifts or donations are completely deductible and may be to the tax advantage of the person giving or donating the gift. According to […]

Flex Spending “Use it or Lose it” is a Thing of the Past

If you have a Flex Spending Account (FSA) for healthcare expenses through your employer, you are familiar with the “use it or lose it” concept.  Each year during December, it’s a mad dash to get that last-minute eye exam, or fill prescriptions, or what-have-you to use up the Flex Spending money before the end of the year.  That tradition will, for many folks, be a thing of the past if their employers adopt the carryover rule now allowed by IRS. Traditionally, with a Flex Spending Account (FSA) for healthcare expenses you arrange with your employer to withhold a certain amount of money out of each paycheck and then as you incur expenses for healthcare throughout the year, you can be reimbursed for those expenses up to the amount of your annual withholding for FSA.  The money withheld for the FSA is pre-tax, so it’s to your advantage to take part […]

… And now that they’re back?

Now that the government is back “in action”, the IRS has issued some notices about how the shutdown is affecting operations. All of the systems that we mentioned that were not working during the shutdown are back up and running, so you can once again call in and get a live person, order transcripts, and the like. On the other hand, IRS is pointing out that the shutdown came during the time when they were working on testing systems for return processing for the 2013 filing season – and the testing is running behind as a result.  Given that the systems are running behind in testing, the IRS says that the beginning of the filing season will be delayed by a couple of weeks.  This will only impact those folks that file ASAP in mid-January – you’ll have to wait until early February to file.  The final filing date of […]

So, What’s Going on at the IRS During the Shutdown?

While the government is in hiatus, what’s going on at the IRS? Well, not a lot.  As I understand it, none of the phone lines are being manned, so if you call in for any reason you wind up with the automatons handling your questions.  The website is still in operation as well (at least partly).  So, you may be able to do a few things, but you’re limited. For example, if you need a transcript of a prior year’s return, I understand that you can request this for yourself – but you can’t ask your accountant or anyone else operating as POA for you to request a transcript.  I’ve experienced this myself in attempting to get a transcript for a client – I was shut down.  (The same individual had trouble getting a transcript for himself, as the IRS records of his address didn’t match what he was entering […]

Selling Your Home? Be Aware of These Half-Truths

Since selling a home is one of those events that many folks only do a few times in their lives, there is much uncertainty about what kinds of potential rules and laws may trip you up.  Recent data suggests that the average American will buy and sell their primary home something like 10 times in their lifetimes – for many that number will be far less.  There is a lot of information about the tax impacts of selling a home out there flying about on the internet, and some of it is mostly bunk.  And much of what’s not bunk is limited in applicability. Below are a few half-truths about home sales that you want to understand before you sell your home, along with the explanation of the facts behind them, including how they may apply to your situation if at all. 1. If I sell my house I need […]