When you own certain kinds of assets and you sell them, you may incur a capital gain or loss that is applicable to your income tax preparation. If the original purchase price plus applicable expenses associated with the asset (known as the basis) is less than the proceeds that you receive from the sale of the asset, you have incurred a capital gain. On the other hand, if the basis of your asset is greater than the proceeds from the sale, you have incurred a capital loss. Capital gains are taxable to you, using a separate tax rate – and capital losses can be deducted from your capital gains for the year. Excess capital losses (above your capital gains for the year) can be used to reduce your income by up to $3,000 per year, carried forward until used up (or for your lifetime). The IRS recently produced their Tax […]
income tax
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 […]
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Can You Itemize? Or, Should You Itemize?
When you prepare your taxes each year, you’re faced with a decision – itemize deductions or take the standard deduction? Most of the time it’s not a question of whether you can itemize, but rather should you itemize. Most Anyone Can Itemize… This is due to the fact that most anyone can itemize. If you’ve paid state and/or local income or sales taxes, real estate taxes, or paid mortgage interest, you have deductions to itemize. Same goes for charitable contributions. All of these items that you’ve paid out are eligible to be deducted on Schedule A of your tax return, without a lower limit. If you have medical expenses, these can be deductible if the total of your medical expenses are more than 10% of your Adjusted Gross Income (AGI). For 2013 tax returns, if you’re 65 years of age or older, your medical expenses that are more than 7.5% […]
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Use Direct Deposit for Your Tax Refund
When filing your tax returns this year, consider using direct deposit for your refund. By doing this, you don’t have to worry about the mail “making the trip”, and also you won’t have to make a visit to the bank to cash or deposit the refund. On top of that, direct deposit refunds usually are deposited more quickly than a check is delivered by mail, getting you the money faster. Among the many alternatives for the places you can have the money deposited to are virtually any bank account, as long as you have the routing and account information, as well as transferring your funds to your TreasuryDirect account to purchase US Treasury marketable securities and savings bonds. You can also split your refund to be deposited in two or three different accounts – the account(s) need to be title in your name, your spouse’s name, or both, not someone […]
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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 […]
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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 […]
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Penalty for Having No Health Insurance
Note: this provision has been repealed beginning with tax year 2019. As you may already be aware, individuals are required to carry health insurance on themselves and their dependents, as of January 1, 2014. This is the mandate set forth in the Affordable Care Act – and of course it’s an important part of making the whole Act work. Small businesses (less than 50 employees) have a similar mandate to provide coverage for employees beginning in 2015, or face penalties themselves. Without mandating insurance coverage for everyone, the system can’t sustain the lower-cost options for folks who desperately need the medical coverage. This includes folks who are not covered by any other means (employer, Medicare, Medicaid or individually-purchased policies) and who have medical problems that require costly care. With the mandate, healthier individuals will also have to pony up and purchase health insurance, so that the overall cost is spread […]
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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 […]
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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 […]
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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 […]
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Increase Your Income Tax Knowledge
If you find yourself stymied by the Income Tax Code (more power to you if you don’t!) and you’d like to get a better understanding of this very important area of your financial life, the IRS has many resources to help you improve your knowledge of taxes. At the risk of sounding churlish, I suggest that if you’re an incurable insomniac these resources can also be used in lieu of the strongest over-the-counter sleep aid drug with satisfactory results and few (if any) side-effects. The IRS recently published their Summertime Tax Tip 2013-21, which describes several of the resources available to help you gain a better understanding of income taxes. The text of the Tip follows, in its entirety: Explore a Quick and Simple Way of Understanding Taxes If you’re a student or teacher, the summer months may be a nice break from class, but they’re also a good time […]
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Same-Sex Joint Filing
One result of the strike-down of DOMA is that legally-married same-sex couples will now be required to file federal tax returns as marrieds – either married-filing-jointly or married-filing-separately. This ruling takes effect on September 16, 2013. This means that, regardless of how the members of the couple filed their returns in the past, they only have the MFJ or MFS filing statuses to choose from for returns filed on or after September 16, 2013. For couples who have not filed a return for 2012, now is the time to review whether filing as Single status provides a superior result (lower overall taxes) versus the MFS or MFJ option. If filing Single or Head of Household works out better for the couple, the (presumably) extended 2012 tax return must be filed before September 16, 2013 in order to utilize a Single or Head of Household filing status. After that date, the […]
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3 Reasons to use the new safe harbor home office deduction and two reasons not to
Home office workers! In case you hadn’t heard about it, the IRS made some changes to the way the home office deduction works for 2013. Essentially, you are now allowed to deduct a flat $5 per square foot of dedicated office space, with a maximum of 300 square feet. But this new “safe harbor” option isn’t for everyone. Listed below are three reasons this may be good for you, and a couple of reasons that you might want to use the old method. 3 Reasons It’s a Good Thing Depreciation recapture not needed any longer – if you are just starting out taking the home office deduction, you can forget about this concept of “depreciation recapture”. This is a required add-back (actually basis reduction) when you sell your home. If you took the old-style home office deduction, including depreciation of your home office space, you’ll still need to keep records of […]
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State Income Tax and Retirement Income
On only a few rare occasions does it make sense to defer money to your 401(k) or other employer sponsored plan instead of a Roth IRA. Those occasions include when your gross income excludes you from contributing directly to a Roth IRA (you can still convert), you are currently at a very high tax rate or the case of when you live in a state where retirement income is excluded from state taxation. Here in Illinois, the current law exempts retirement income from being taxed at the state level. What this means, is that any contributions to a 401(k), 403(b), SEP, SIMPLE and 457 avoid state income taxation. Qualified distributions at retirement are only taxed at the federal level, and then only as income. If you contribute directly to a Roth IRA that money is after-tax money going in. After-tax in this case meaning it’s been already taxed at the […]
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Last-Minute Tax Tips
Since today is D-Day for income tax filing, I’ve pulled together a few recent tips that the IRS published. These tips cover a few of the areas that you may find interesting, including how to get a six-month extension for your filing (but not for payment of tax), errors to avoid as you complete your tax return, how to make IRA contributions, and tips for the self-employed at tax time. This is a much longer post than I normally write, but I think it has a lot of very good and very timely information that will be useful today. The actual text of these tips are listed below, with the reference number of each tip. IRS Newswire IR-2013-38 Can’t File by April 15? Use Free File to Get a Six-Month Extension; E-Pay and Payment Agreement Options Available to People Who Owe Tax WASHINGTON – The Internal Revenue Service today […]
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Estimated Tax Payments
When you have income from sources other than traditional employment, it often becomes necessary to make Estimated Tax payments since you don’t have withholding (as you would from traditional wages). This income may be from self-employment, rents or royalties, or from interest and dividends from your investments. Income of this variety may also be from pensions, Social Security, and IRAs or qualified retirement plans. Sometimes you can set up the payments from various sources to withhold tax payments and the provider will then send the withheld tax to the IRS on your behalf. These tax payments will be reported to you on your 1099R, SSA-1099, and/or other specific tax documents that you receive at the end of the year. If you don’t have another form of withholding, you may need to make estimated tax payments throughout the year. The IRS recently issued their Tax Tip 2013-49, which details Six Tips […]
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What Income is Taxable?
It may be tough to figure out which parts of your income you’ve received over the year are taxable, and what parts are not taxable. This is because certain kinds of income may seem like they should not be taxed (but they are), while other items of income seem like they should be taxed (but they’re not). The IRS has published a Tax Tip to help understand which income is taxable and which is not. The complete text of IRS Tax Tip 2013-12 is detailed below. Taxable and Nontaxable Income Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable: Child support payments; Gifts, bequests and inheritances; Welfare benefits; Damage awards for physical injury or sickness; Cash rebates from a dealer or manufacturer for an item you buy; and […]
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What You Need to Know About the Alternative Minimum Tax (AMT)
When you have high taxable income and certain deductions and exclusions from income, you may be subject to the Alternative Minimum Tax, or AMT. This is a nearly flat-tax, which excludes a higher amount of income from the regular income tax. For 2012 taxes, the exclusion of income is $50,600 for singles, and $78,750 for married couples. The “nearly flat” tax rate starts at 26% and the upper end rate is 28%. Under the AMT, no deduction is allowed for the standard deduction, or for personal exemptions. State and local taxes are also not allowed to be deducted from your income. Your other itemized deductions are allowed, at least to a certain extent. Recently the IRS issued their Tax Tip 2013-17, which lists Five Facts to Know About AMT. The actual text of this Tip is below. Five Facts to Know about AMT The Alternative Minimum Tax may apply to […]
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Capital Gains and Losses on Your Tax Return
When you sell things, including stocks, bonds, real estate, collectibles, and other items, you may either gain money or lose money from the original purchase price. This gain or loss is known as a capital gain or capital loss, and (with some exceptions) you will report these capital gains or losses on your income tax return. Often the gains are afforded special tax rates and treatment, and the losses provide additional benefits as well. This entire area of tax reporting can be confusing and there are special rules that you need to follow in order to make sure that you report these transactions correctly and pay the appropriate taxes. The IRS recently published their Tax Tip 2013-28, which details Ten Facts about Capital Gains and Losses. The actual text of the Tip is below: Ten Facts about Capital Gains and Losses The term “capital asset” for tax purposes applies to […]
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Adoption Credit for Tax Year 2012 and beyond
As you probably already know if you’re in the position to seek the adoption credit, this credit has undergone some changes for the 2012 filing season. In the past, for tax years 2010 and 2011, the adoption credit was a refundable credit – meaning that you could receive the entire credit regardless of the amount of tax you have to pay. For example, if you had $10,000 of adoption credit and your tax return otherwise indicates that your tax is $6,000, you were able to claim the entire credit and $4,000 would be refunded to you. This was in addition to any overpayment you may have made on your withholding. However, for 2012 (and beyond, unless the rules change again) the adoption credit is back to being non-refundable. Now, in the situation described above, the maximum amount of credit that you could claim is equal to your tax, or $6,000. […]
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And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.