Financial Ducks In A Row • Independent financial advice: IRA, Social Security, income tax, and all things financial

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Tagged: Affordable Care Act · income tax · Obamacare

The Cost of Waiting

Apr 11th, 2014

by sraskie.

3 comments

Procrastination is a silent and slow killer. Everyone, including yours truly, is guilty of putting things off, waiting until the last minute and then scurrying around frantically to get done what we could have easily gotten finished weeks or months ago if we would have either planned ahead or simply started.

Let me give you an example. Last year my wife and I were debating whether or not to have a tree removed from our back yard. The culprit is the much loathed sweet gum tree that is common in this area of the country. Readers familiar with this pariah of the deciduous family of trees recognize it with annoying “gumballs” that are far from being smooth but rather are the sharp and pointy fruits that fall relentlessly from the tree mainly in the fall and work wonders on mower blades and bare feet. Needless to say they are a pain – good only for the occasional “Darn it!” (My kids are within earshot).

Tired of raking and tripping over them we got an estimate to have the tree removed. Balking at the price, we waited. A year later we decided to have it removed for sure. This year’s estimate was much higher than last. Crud. If only we hadn’t waited…

Naturally this story can be related to financial planning – appropriate in many situations but perhaps mostly apt when it comes to saving for retirement. What is the true cost of waiting? Planners and savers alike have probably seen scenarios or illustrations that depict what happens if someone starts saving for retirement at say age 21 versus someone who waits and doesn’t start until a later age.

Let’s look at an example. To be fair, this example will use an average rate of return over a number of years. As we know the market is hardly consistently average but it helps explain the cost of waiting.

Jane, age 21 and a college senior wakes between naps in class and actually listens to her personal finance professor and opens an IRA and starts contributing $2,000 annually (a slight ribbing to my student readers – of which there may be zero!). Jane consistently saves $2,000 annually for the next 40 years and makes a modest 4% rate of return over her working life until age 61. After 40 years she’s acquired a nice sum of $190,051.

John, also the same age decides to wait and says he’ll start saving when he “can afford to”. John finally realizes he needs to start saving at age 41. Thinking he’s smarter than most he decides to play catch-up and “doubles down” on his savings payment over Jane’s. He saves $4,000 per year for the next 20 years. Again assuming a 4% return over 20 years John’s IRA reaches a respectable $119,112 but roughly $70,000 less than Jane. If only John knew that he could save less annually by starting early and have more in the end.

His cost of waiting: $70,000.

Trees and IRAs aside, the cost of waiting can be seen in many aspects of our lives. I am not saying that we need to rush to judgment, but I am saying that procrastination is bad when we know we need to act and feel guilty if we don’t. So what are you waiting for?

Posted on Apr 11th, 2014

by author: sraskie.

3 comments already - add to the conversation!

Posted in: financial planning, IRA, ira account, iras, saving.
Tagged: fiduciary · financial planning · IRA · ira account · retirement savings

Avoiding Mistakes on Your Tax Return

Apr 10th, 2014

1 comment

189px-YOU_ARE_ONE_-_NARA_-_516201 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 most tax return errors by using IRS e-file. People who do their taxes on paper are about 20 times more likely to make an error than e-filers. IRS e-file is the most accurate way to file your tax return.

Here are eight common tax-filing errors to avoid:

Wrong or missing Social Security numbers. Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.
Wrong names. Be sure that you spell the names of everyone on your tax return exactly as they are on the Social Security cards.
Filing status errors. Some people use the wrong filing status, such as Head of Household instead of Single. The Interactive Tax Assistant on www.IRS.gov can help you choose the right one. Tax software helps e-filers choose.
Math mistakes. Double-check your math. For example, be careful when you add or subtract or figure items on a form or worksheet. Tax preparation software does all the math for e-filers.
Errors in figuring credits or deductions. Many filers make mistakes figuring their Earned Income Credit, Child and Dependent Care Credit, and the standard deduction. If you’re not e-filing, follow the instructions carefully when figuring credits and deductions. For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.
Wrong bank account numbers. You should choose to get your refund by direct deposit. But it’s important that you use the right bank and account numbers on your return. The fastest and safest way to get a tax refund is to combine e-file with direct deposit.
Forms not signed or dated. An unsigned tax return is like an unsigned check – it’s not valid. Remember that both spouses must sign a joint return.
Electronic filing PIN errors. When you e-file, you sign your return electronically with a Personal Identification Number. If you know last year’s e-file PIN, you can use that. If not, you’ll need to enter the Adjusted Gross Income from your originally-filed 2012 federal tax return. Don’t use the AGI amount from an amended 2012 return or a 2012 return that the IRS corrected.

Posted on Apr 10th, 2014

by author: jblankenship.

Posted in: income tax, irs.
Tagged: income tax · irs

Capital Gains and Losses and Your Tax Return

Apr 9th, 2014

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AlistairDarling (Photo credit: StCartmail)

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 Tip 2014-27 which lists ten facts about capital gains and losses that you may find useful as you prepare your tax return. The text of the actual Tip is below:

Ten Facts about Capital Gains and Losses

When you sell a ‘capital asset,’ the sale usually results in a capital gain or loss. A ‘capital asset’ includes most property you own and use for personal or investment purposes. Here are 10 facts from the IRS on capital gains and losses:

Capital assets include property such as your home or car. They also include investment property such as stocks and bonds.
A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.
You must include all capital gains in your income. Beginning in 2013, you may be subject to the Net Investment Income Tax. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts. For details see www.IRS.gov/aca.
You can deduct capital losses on the sale of investment property. You can’t deduct losses on the sale of personal-use property.
Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.
If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your short-term capital loss, you have a ‘net capital gain’.
The tax rates that apply to net capital gains will usually depend on your income. For lower-income individuals, the rate may be zero percent on some or all of their net capital gains. In 2013, the maximum net capital gain tax rate increased from 15 to 20 percent. A 25 or 28 percent tax rate can also apply to special types of net capital gains.
If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate tax return.
If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened that year.
You must file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses with your return.

For more information about this topic, see the Schedule D instructions and Publication 550, Investment Income and Expenses. They’re both available on www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Posted on Apr 9th, 2014

by author: jblankenship.

Posted in: capital gains and losses, income tax, investing, investment, irs.
Tagged: capital gains and losses · investment

Simplified Home-Office Deduction Available

Apr 7th, 2014

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home office (Photo credit: Sean MacEntee)

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 officing-at-home) it can be complex.

Unfortunately, in my experience working with tax returns so far this season, it seems that the simplified method often results in a smaller home-office deduction than the old method. With the simplified method you get the option to deduct your full real estate taxes and home mortgage interest above and beyond the home office deduction, whereas the old method required you to apportion these expenses between business and personal. If the new method appeals to you, it is much simpler than gathering all the records and figuring out how to correctly fill out the forms.

The IRS recently issued their a news release, IR-2014-24, which details information about the simplified deduction.

Reminder To Home-Based Businesses: Simplified Option for Claiming Home Office Deduction Now Available; May Deduct up to $1,500; Saves 1.6 Million Hours A Year

Washington – The Internal Revenue Service today reminded people with home-based businesses that this year for the first time they can choose a new simplified option for claiming the deduction for business use of a home.

In tax year 2011, the most recent year for which figures are available, some 3.3 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction) totaling nearly $10 million.

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

The new options is available starting with the 2013 return taxpayers are filing now. Normally, home-based businesses are required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Instead, taxpayers claiming the optional deduction need only complete a short worksheet in the tax instructions and enter the result on their return. Self-employed individuals claim eht home office deduction on Schedule C Line 30, farmers claim it on Schedule F Line 32, and eligible employees claim it on Schedule A Line 21.

Though some homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible.

Long-standing restrictions on the home office deduction, such as the requirement that a home office be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

Further details on the home office deduction and the new option can be found in Publication 587, posted on www.IRS.gov.

Posted on Apr 7th, 2014

by author: jblankenship.

Posted in: deductions, home office, income tax, irs.
Tagged: deductions · income tax · irs

Should You Pay Off Your Mortgage Early?

Apr 4th, 2014

by sraskie.

12 comments

As individuals pursue the American Dream of buying their first or next home the question may arise on whether or not it’s a good idea to pay down the mortgage and have no mortgage debt or pay the normal monthly payment and invest the extra money that would have gone to pay down the mortgage early in a place (the stock market) that offers the potential for higher returns over the long run.

There are many fierce advocates for paying off debt, any debt early. While this is a wise choice regarding high interest debts such as credit cards, student loans and other high interest loans it may not necessarily be the case for home mortgage debt.

Here’s a situation where for some folks it may make sense to pay down early and for others they may wish to consider invested the extra money elsewhere.

Generally, the younger a person or couple is when owning the home and the lower the interest rate on the mortgage it may make sense to forgo the extra payments to the mortgage and invest the money for potential greater returns on the market. With lower interest rates and the potential deductibility of the home mortgage interest the return on paying down the mortgage early may not be as great as long term gains in the market.

On the other hand, for an older couple nearing retirement they may consider paying down the mortgage early and owning their home free and clear when entering retirement. The emotional satisfaction of not having that expense in retirement and being able to take their former house payment and use that money elsewhere can bring great satisfaction. Since the couple has less time to accumulate wealth via the market, they can possibly achieve a greater return by paying off their home.

Another situation to consider is if there’s a need or a want for a safe, guaranteed return on someone’s money. Paying off debt early is an excellent way to achieve these types of returns. For example, if a couple has a 3.5% interest rate on their home and they have 15 years left on their mortgage, by paying off the home mortgage early they can achieve 3.5% returns, guaranteed, by eliminating that debt as soon as possible.

The trade-off here is they may miss out on potential gains in the market that may supersede the 3.5% return on paying off the debt. Again, this is a judgment call based on someone’s desire to get a guaranteed return or completely eliminate their debt.

So the answer is that it really depends on a person’s goals, situation and appetite for debt and risk. Home debt isn’t bad (we are not considering being upside down on a mortgage or buying a home that can’t be afforded). It’s simply a way to own a piece of the American Dream and the choice to pay down the mortgage early is a matter of judgment.

Posted on Apr 4th, 2014

by author: sraskie.

12 comments already - add to the conversation!

Posted in: fee-only, fiduciary, financial planning, first time homebuyer credit, itemized deduction, itemized deductions, mortgage, mortgage debt, remortgage.
Tagged: fiduciary · financial planning

Further Guidance on the One-Rollover-Per-Year Rule for IRAs

Apr 2nd, 2014

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As a follow-up to the recent post on this blog The One-Rollover-Per-Year Rule: Revised, the IRS has recently released some additional guidance on the subject, via Announcement 2014-15.

As previously mentioned, the IRS has determined to begin using the one-rollover-per-year rule applied to ALL IRAs that the taxpayer owns, rather than only the affected IRAs that have been involved in a rollover.

According to the Announcement, the IRS fully acknowledges that the previous understanding of the rule was that it applied on an IRA-by-IRA basis. In fact, there was a Proposed Regulation § 1.408-4(b)(4)(ii) on the books that was to further define the rule as applied only to the involved IRAs. Ever since the Tax Court decided otherwise in the case Bobrow v. Commissioner (TC Memo 2014-21), the rule has been changed.

According to the recent announcement though, this will not take affect across the board until January 1, 2015. Prior to that date, presumably, the old interpretation will be used, except, apparently, for Mr. Bobrow’s case (and any further cases that might be tried by the Tax Court).

Posted on Apr 2nd, 2014

by author: jblankenship.

Posted in: IRA, irs.
Tagged: IRA · irs

File and Suspend in the Crosshairs?

Mar 31st, 2014

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Image courtesy of chanpipat at FreeDigitalPhotos.net

Note: with the passage of the Bipartisan Budget Act of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.

Apparently in the President’s recent budget documentation there is a brief mention of a desire to curtail the availability of File and Suspend as an option for Social Security benefit filing.

The reason, it appears, is that the Obama administration views this option as one used only by high income folks to take advantage of the government with this valuable option.

The problem with that viewpoint is that it is used by folks of all income levels, and in fact if it is taken away this could cause some big problems for folks who can least afford to lose benefits. As if anyone can afford to lose benefits, right?

Here’s what happens with File and Suspend: a Social Security benefit recipient has a spouse and/or children that would be eligible for benefits based on his or her record when he or she files for benefits. If he or she happens to be at or older than Full Retirement Age (FRA, age 66 for folks born before 1955, up to age 67 for folks born in 1960), he or she can file and immediately suspend his or her own benefits, allowing his or her spouse or young children to receive benefits immediately. By suspending his or her own benefit, he or she will earn delayed retirement credits of 8% per year, which will later provide him or her with an enhanced retirement benefit.

This is exactly the same outcome for the spouse and dependents that would play out if the benefit recipient was to file and *not* suspend benefits – and actuarially the end result should be the same for the primary benefit recipient as well. Where use of File and Suspend makes a big difference is much later. In the event of the recipient’s untimely early death, the spouse will receive a much enhanced survivor benefit. And if the recipient lives a long, healthy life, he or she will enjoy the enhanced benefit as well.

I can’t see where this is an issue of higher income versus lower income, as has been reported. I believe that the File and Suspend option is being unfairly vilified without complete understanding. The fact that folks with higher incomes have been more likely to choose File and Suspend as an option shouldn’t be cause to eliminate the option for everyone. As I mentioned, actuarially this should have little or no effect.

The likely reason that higher income folks have been more likely to choose this option is because higher income folks are more likely to seek guidance when filing for Social Security benefits – but again, the word is getting out about this option and more folks are choosing it (once they talk the SSA folks into understanding it!).

As well, often folks with lower incomes and future Social Security benefits may not be in a position to delay receipt of benefits, making File and Suspend a good idea but not viable.

I hope that this gets dropped. Doing away with File and Suspend will have no beneficial impact on the future viability of the Social Security system, in my opinion. All this is likely to do is make a lot of software developers rewrite their software to remove this option. If looking for provisions to remove in order to make the system a bit more cost-effective, perhaps the restricted application should be considered. This one may actually cost the system a bit extra, but so few people even know about it that it’s unlikely.

The real answer is to either re-do the overall calculations, put in place more effective means testing, and/or change the tax structure, perhaps to include all earned income instead of the capped income as the system works now. Until we face these factors and make real changes, we’re likely to continue on the path to unsustainability within the Social Security system.

Posted on Mar 31st, 2014

by author: jblankenship.

Posted in: #noTOP, file and suspend, Social Security, Social Security spousal benefit.
Tagged: file and suspend · social security administration · social security spousal benefits

A Bad Day or a Bad Life?

Mar 28th, 2014

by sraskie.

4 comments

As a financial planner I am often asked whether or not a personal liability umbrella policy is worth the price. Generally, my answer is a resounding “Yes!”

Personal liability umbrella policies or PLUPs (for the remainder of this article) are insurance policies that provide coverage above and beyond the underlying liability limits on an individual’s or family’s auto insurance or home owners insurance. PLUPs can also be purchased by folks that have renters insurance or condo insurance policies. PLUPs are usually purchased in $1 million limits starting at $1 million.

Umbrella policies work like this: Generally the person applying for the PLUP has their auto and or home insurance with the insurance company they are considering purchasing the PLUP through. What the insurance company will do is require that in the underlying auto policy that the personal liability (if a member of the insured household is liable for damages in an auto accident) of the policy be at least a specific amount – often $250,000 or higher.

Likewise with the home policy; the insurance company will require the liability coverage of the home be at least a certain amount – often $300,000 or higher. These amounts must be exhausted first before the PLUP will pay.

Should the insured be liable in an auto accident or accident at the home (trample injuries or pool incidences are common) the insurance company will pay from the auto or home policy first and any damages left over are then recovered from the umbrella policy. Liability in an auto accident or home accident cannot be interchanged (you can’t use home liability for an auto accident and vice versa).

Let’s look at an example. Suppose Danny was driving his car and crossed the center line and hit another car head on. All three passengers in the other car sustained serious injuries totaling $750,000. Danny’s auto policy is set up where it pays $250,000 of bodily injury per person and $500,000 total per accident. Assuming each person sustained $250,000 in damages, Danny’s policy would cover $500,00 of the damages and essentially ‘run out’ of money. If Danny doesn’t have an umbrella – he’s responsible for the remaining $250,000.

Luckily, Danny purchased a PLUP. With $1 million in umbrella coverage the umbrella takes care of the remaining $250,000 Danny is liable for – including any legal defense. Here Danny only had a bad day.

If Danny didn’t have the PLUP – he is subject to wage garnishment, seizure of assets, etc. until he pays what he owes. In other words, he’s got a bad life.

PLUPs may also cover liability in the event someone is liable but the act wasn’t caused while using the auto or home policies. Typically the PLUP will pay after the insured pays a self-insured retention (deductible) which may be anywhere from $1,000 to $5,000.

PLUPs are pretty reasonably priced and will fluctuate based on a number of factors. For example, a single person with one car, one home, no moving violations or at-fault accidents will pay a pretty cheap premium – about $150-$200 annually. A couple with two cars, a home, boat, ATVs, and teenage drivers will pay much more since there is more risk with the vehicles and teen drivers. They may be looking at $500-$750 annually. The premium will fluctuate according to the risk exposure.

Why are PLUPs generally so cheap? It’s because the underlying insurance requirement on the policies under the “umbrella” must be high. It’s rare that these higher amounts are exceeded and umbrellas are used. Insurance companies know that due to the low percentage of PLUPs that pay that PLUPs are cash cows for them and they can price them reasonably for their clients.

Are PLUPs a good idea? Yes. In the event that the worst happens, would you rather have a bad day or a bad life?

Posted on Mar 28th, 2014

by author: sraskie.

4 comments already - add to the conversation!

Posted in: Insurance, Personal liability umbrella, PLUP, umbrella insurance.
Tagged: financial planning

How Does an Early Withdrawal from a Retirement Plan Affect My Taxes?

Mar 26th, 2014

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Image courtesy of adamr at FreeDigitalPhotos.net

Oftentimes we are faced with difficult situations in life – where we need extra money to pay for a major car repair, a new roof for the house, or just day-to-day living expenses – and our emergency funds are all tapped out. Now your options become poor: should I go to a payday loan place, put more on my credit card? My mortgage is upside-down so there’s no home equity loan in my future, and I can’t ask my folks for a loan, I’ve asked them for too much. Hey, what about my retirement plan? I’ve got some money socked away in an IRA that’s just sitting there, why don’t I take that money?

It’s really tough to be in a situation like this, but you need to understand the impacts that you’ll face if you decide to go the route of the IRA withdrawal, especially if you’re under age 59½.

Any money that you take out of a retirement plan as a withdrawal will be taxed as ordinary income – just like wages, salaries, and tips. So if you’re in the 25% marginal tax bracket, every dollar that you withdraw from your IRA or 401(k) plan (if allowed) will cost you 25 cents right off the top.

In addition to the ordinary income tax, if you’re less than 59½ years of age you’ll also be hit with an additional 10% penalty for an early withdrawal (unless your withdrawal meets one of these 19 exceptions). So now every dollar that you withdraw costs an extra 10 cents on top of the ordinary income tax. If you’re in the 25% bracket, that $10,000 withdrawal from your IRA can cost you as much as $3,500 in extra taxes and penalties.

Bear in mind that you may be able to take a temporary loan from your 401(k) or other qualified retirement plan (QRP) if you’re still employed by that employer. Naturally you’ll need to repay the loan, but it might be a better option cost-wise than the other choices. Plus, if you have an outstanding loan from your QRP and you leave the employer you’ll be required to either recognize the balance of the loan as a withdrawal or pay it back to the plan immediately.

Armed with this information makes your decision points much more clear: review all of the available options mentioned above (loans from family and friends, home equity loans, payday loans, and the like) against the cost of the taxes for taking an early withdrawal from your retirement plan. The best option may be to see about a formal loan from family, paying them a reasonable rate of interest. But of course, your circumstances are going to dictate the best option for you. Just go into it with your eyes wide open.

Posted on Mar 26th, 2014

by author: jblankenship.

Posted in: Early Distribution, IRA, qrp.
Tagged: early distribution · IRA · qrp

Can You Itemize? Or, Should You Itemize?

Mar 24th, 2014

1 comment

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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% of your AGI will be deductible.

In addition, certain job expenses and other miscellaneous expenses, such as tax preparation expenses, safe deposit box rental, and the like, can be deductible to the extent that they exceed 2% of your AGI.

If you’ve paid out any of these expenses during the tax year, you can itemize. That doesn’t mean that you should itemize, though.

… But Should You Itemize?

So you’ve determined that you have deductible expenses and you can itemize – let’s look at reasons why you should itemize.

The initial answer is really rather simple – if the total of all the deductible items that you’ve found to put on your Schedule A is greater than your applicable Standard Deduction, then you probably should itemize. The Standard Deduction is based upon your Filing Status (2013 figures):

Filing Status	Standard Deduction	Over Age 65 or Blind, per Person
Single	$6,100	+ $1,500
Married Filing Jointly	$12,200	+ $1,200
Head of Household	$8,950	+ $1,500
Married Filing Separately*	$6,100	+ $1,200
Qualifying Widow(er)	$12,200	+ $1,200

If someone else claims you as a dependent on his or her tax return, your Standard Deduction is the lesser of $1,000 or earned income plus $350, up to the normal Standard Deduction for your filing status.

If your deductions amount to less than the Standard Deduction for your filing status, don’t despair. It’s not as if being able to itemize your deductions is some sort of bonus – it’s actually the other way around. You see, if you have more deductions when itemizing than the Standard Deduction, that means you had to pay out that money during the year. On the other hand, if you had fewer itemized deductions (or no deductions to itemize), you’re getting to reduce your taxable income by the Standard Deduction without having to pay out that money!

Now there is at least one circumstance when you’re required to itemize your deductions, and we’ll cover that next.

Or, Do You Have to Itemize?

*If you and your spouse file separate returns with filing status of Married Filing Separately and your spouse itemizes deductions on Schedule A, you are also required to itemize your deductions on Schedule A, or take a Standard Deduction of $0.

Wrapping it up

You can always choose to itemize your deductions even if they are less than the Standard Deduction for your filing status. You only need to mark the box on Line 30 of Schedule A. You might want to do this if it would somehow benefit your state income tax, for example.

Lastly – the only way to itemize deductions is by also filing your tax return on Form 1040. If you choose to use either Form 1040A or Form 1040EZ, you are not eligible to itemize your deductions. If you use tax return preparation software (or your qualified preparer does) the decision will be made for you, more than likely.

Posted on Mar 24th, 2014

by author: jblankenship.

Posted in: income tax, irs, itemized deductions.
Tagged: itemized deductions · standard deductions

How To Save (and Pay) for College

Mar 21st, 2014

by sraskie.

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Saving for college is a priority among many parents. Often we are asked about the right savings vehicle for college education. There are a few that parents can choose from between Coverdell ESAs, prepaid tuition and 529 college savings savings plans.

We’ll discuss the 529 plan here. The 529 plan is essentially a college savings vehicle very similar to an IRA or an employer-sponsored plan. Depending on the state you live in your state may have a 529 plan that will have access to stock and bond mutual funds and or a pre-determined mix that will invest the money and allocate it for you depending on your risk tolerance or your time horizon upon entering college.

Many states such as Illinois well even offer a state tax deduction for any contributions that you make up to a certain dollar limit. The beauty of 529 savings plans is that there is no income phase out so parents who make quite a bit of money can still contribute.

For grandparents wanting to put their grandkids through school or help pay for college a 529 can be an excellent way to help do that as well as reduced their estate. For 2014, a person can gift up to $14,000 to a 529 savings plan and couples who elect to split gifts can contribute $28,000 for one individual (529 beneficiary). This can be done for multiple beneficiaries that each have a 529 plan.

For couples who want to make an even bigger contribution they are allowed to make a five-year pro-rata contribution to a 529 savings plan. For a single person this means contributing up to $70,000 at one time without incurring any gift tax consequences and for a married couple contributing up to $140,000 at one time based on this special five year pro-rata rule. Once this is done another gift cannot be made until the five year period is over. The process can be repeated again for another 5 year pro-rata period.

From an estate planning perspective once the 5 years is up, the gifted money is removed from the estate.

Money contributed to 529 plans grow tax deferred and qualified withdrawals from the 529 for education expenses are then tax free. Withdrawals not used for expenses are subject to ordinary income tax and a 10% penalty.

Another way for a grandparent to remove money from the estate is to make a direct payment for tuition to the college or university the grandchild attends. This direct tuition payment does not count toward the annual exclusion and can be done for any number of grandchildren. Keep in mind that the payment must go for the tuition and directly to the school. If the grandparent pays the grandchild directly, they can use the annual exclusion, but if the tuition is $25,000 and the exclusion is only $14,000 (single) then there may be gift tax consequences.

Posted on Mar 21st, 2014

by author: sraskie.

Posted in: 529, coverdell accounts, coverdell education savings, coverdell education savings account, coverdell esa.
Tagged: 529 · college saving · college savings plans

Use Direct Deposit for Your Tax Refund

Mar 17th, 2014

1 comment

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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 else’s account.

Of course, if you owe money to the IRS from past tax returns, your refund will be used to pay your debt first and foremost. You also have the option to apply any leftover refund toward your tax obligation for the current year as well.

If your refund is less than $1 (which is highly unlikely since tax figures these days are generally rounded to the nearest dollar), you have to specifically request a refund from the IRS in writing.

Setting up direct deposit is a relatively simple activity, whether you’re using tax software or paper filing your return. You just need to fill out the form with the appropriate bank routing and account information, and the deed is done. If requesting direct deposit to multiple accounts, you’ll need to use Form 8888. Form 8888 is also used to purchase paper I-series US Savings Bonds with your refund (limited to $5,000).

So do yourself a favor this year, and set up direct deposit of your tax refund. It’s flexible, convenient, simple, and secure.

Posted on Mar 17th, 2014

by author: jblankenship.

Posted in: income tax, refunds.
Tagged: direct deposit · efiling · irs

How Much Do I Need to Save: Part II

Mar 14th, 2014

by sraskie.

3 comments

Last week I gave some general indications on how much someone needed to save. We used general percents and some basic numbers but this week I want to actually put those numbers to work.

For example – let’s say we have a 30 year old couple that says they would like to have $3,000,000 saved at retirement (assume their both the same age and will both retire at 65). We’ll also assume that they have not started saving yet. Using a 5% compounded annual rate of return this couple would need to save about $2,640 per month for 35 years in order to hit their goal. If we assume they’ve amassed $50,000 by age 30, then they only need to save $2,388 per month. If we use the $2,388 as our savings made at 10% that means our annual income for the couple is about $286,560.

Using the same amount needed at retirement of $3,000,000 let’s take a couple that wants to retire at 65 but waits until age 45 to start saving. With only 20 years to save at 5% interest they need to slam a whopping $6,968 per month to reach $3,000,000! Obviously the 10% rule of thumb is not going to get them close to their goal – unless they’re earning $836,160 annually. In this case they would need to save much more than 10% of their income to hit their goals.

Naturally we can argue that in both cases if their rate of return is higher they can either save less or will have more for retirement.

One of the biggest takeaways from this exercise is it shows the value of compounding and saving early. The earlier we start saving the more advantage we can take of compounding. The other advantage is that we can use different rates of return. Higher rates mean more money in the end or less one has to save while lower rates mean either less money at the end or more we have to save. The numbers can be used no matter what monetary goal one has at retirement.

How do we save more? Take full advantage of your employer sponsored plan such as a 401(k), 403(b), SIMPLE, SEP, 457. In addition, start contributing or continue to contribute the maximum to your IRA. And pay yourself first – make your retirement savings the first bill you pay every month and then live off the rest. This may seem difficult at first, but it boils down to spending less than what you earn.

Looking to hit the ground running? Consider saving all of your tax refund.

Posted on Mar 14th, 2014

by author: sraskie.

3 comments already - add to the conversation!

Posted in: 401 k, 401 k 403 b, 401k, 403 b, 457, employer plan, goals, IRA, ira account, ira money, iras, personal finance, qualified retirement plan, saving, SEP IRA, SIMPLE.
Tagged: financial planning

Your Social Security Benefits: Are They Taxable?

Mar 12th, 2014

2 comments

Image courtesy of Salvatore Vuono at FreeDigitalPhotos.net

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 details some facts about taxability of Social Security benefits. The actual text of the Tip is below:

Are Your Social Security Benefits Taxable?

Some people must pay taxes on part of their Social Security benefits. Others find that their benefits aren’t taxable. If you get Social Security, the IRS can help you determine if some of your benefits are taxable.

Here are seven tips about how Social Security affects your taxes:

If you received these benefits in 2013, you should have received a Form SSA-1099, Social Security Benefit Statement, showing the amount.
If Social Security was your only sources of income in 2013, your benefits may not be taxable. You also may not need to file a federal income tax return.
If you get income from other sources, then you may have to pay taxes on some of your benefits.
Your income and filing status affect whether you must pay taxes on your Social Security.
The best, and free, way to find out if your benefits are taxable is to use IRS Free File to prepare and e-file your tax return. If you made $58,000 or less, you can use Free File tax software. the software will figure the taxable benefits for you. If your income was more than $58,000 and you feel comfortable doing your own taxes, use Free File Fillable Forms. Free File is available only at www.IRS.gov/freefile.
If you file a paper return, visit www.IRS.gov and use the Interactive Tax Assistant tool to see if any of your benefits are taxable.
A quick way to find out if any of your benefits may be taxable is to add one-half of your Social Security benefits to all your other income, including any tax-exempt interest. Next, compare this total to the base amounts below. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. The three base amounts are:
- $25,000 – for single, head of household, qualifying widow(er) with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year.
- $32,000 – for married couples filing jointly
- $0 – for married persons filing separately who lived together at any time during the year.

For more on this topic visit www.IRS.gov.

Posted on Mar 12th, 2014

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: income tax, irs, Social Security, social security benefits, social security tax.
Tagged: income tax · social security benefits

7 Debunked Myths About Mortgages

Mar 10th, 2014

2 comments

Guest post by Diana Fishlock for Zillow.com. Diana Fishlock has researched and written articles on a wide variety of subjects for newspapers in New York, Pennsylvania and Maryland. She lives near Harrisburg, PA and writes for Zillow.

Securing a mortgage can be a daunting, confusing process for first-time home buyers as well as experienced homeowners considering moving or buying a second home. There are lots of myths and misconceptions about mortgages, such as who qualifies and what makes a good one.

Myth 1: Prequalified means preapproved.

Reality: Prequalifying for a mortgage and being preapproved are two different steps. Prequalifying is a lot simpler. It requires informing a lender about debts, income and assets in a general sense. Prequalifying helps buyers loosely determine their affordable price ranges.

For preapproval, a buyer must submit to the lender much more detailed information, including a financial history. The lender then verifies the borrower’s debt-to-income ratio before agreeing in writing to loan a specific amount. Preapproval indicates to home sellers that a buyer is approved by a lender and serious about making a purchase.

Myth 2: Buyers should choose the mortgage lender with the lowest interest rate.

Reality: The annual percentage rate (APR) is a better measure of the cost of a mortgage because it includes not only interest rate, but points and other fees. With all of the high costs of buying a home, owning a home and maintaining the property, it’s important to consider all the costs.

Myth 3: Buyers should always choose the lender who offers the lowest APR.

Reality: There are other important factors too. It’s important for buyers to look at lenders’ costs and fees, which can add up quickly. But borrowers should opt for well-known, reputable lenders. Buyers should ask friends and neighbors for recommendations on lenders they used for buying or refinancing homes. They can also read online reviews of lenders on Zillow Mortgage Marketplace. Reviews include information on which lenders were easy to work with, available to answer questions and clear and respectful with their responses.

Myth 4: Salary is the most important factor to lenders.

Reality: While lenders like to work with borrowers who earn large salaries, they’re looking for the whole package with the lowest risk. Lenders factor in debt, credit ratings and both financial and work histories. A borrower with a big paycheck but numerous loans and a history of job-hopping isn’t as attractive to lenders as the patient saver who stayed at one job for years. Lenders also want to see someone who made a habit of saving money, not a person whose parents made a big deposit right before it was time to buy a house.

Myth 5: Bigger downpayments are always better.

Reality: Putting 20 percent down is great for buyers with loads of cash on hand, but these days many people can secure favorable mortgages with 10, 5 or even 3.5 percent down. With interest rates low, some homebuyers prefer to use as little cash as possible for a downpayment and opt instead to keep a bigger nest egg for buying furniture and appliances or maintaining a safety cushion.

Myth 6: Refinancing is a smart decision.

Reality: Refinancing is not always the best decision. Refinancing a mortgage to pay a lower interest rate or consolidate loans can be a very good idea. Refinancing is not the right choice for homeowners who don’t plan on staying in their houses for many years, or those whose credit has depreciated. Any savings realized from lowering the interest rates for homeowners planning to move soon may be eaten up by the lender’s closing fees. Homeowners with poor credit risk getting higher interest rates on their refinances.

Myth 7: Homeowners should pay off their mortgages as soon as possible.

Reality: Although outright homeownership is a major achievement, homeowners should be in less of a rush to pay down their principals if they have more expensive debts to pay. Homeowners should pay off their highest-interest rate debts first, which usually means credit cards. Interest on a mortgage is also tax deductible, while credit cards and car loans are not. Paying off a mortgage ahead of schedule is beneficial to avoid some interest payments but should be evaluated on an individual basis.

Mortgage shopping can be a long, frustrating process without the right information. Smart homebuyers who can separate myth from reality can secure the best mortgages available, saving money and inconvenience by locking in a great rate with a reputable lender.

Posted on Mar 10th, 2014

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: guest, mortgage, mortgage debt.

How Much Do I Need to Save?

Mar 7th, 2014

by sraskie.

1 comment

Frequently I’m asked by folks how much they need to be socking away for retirement. Many people I talk to are concerned about having enough (a very common concern I would say among most people) for retirement and fear running out of money.

As much as I would love to give them a rock-solid answer and as much as they want a definitive answer, the true answer is that it depends – on a number of factors.

1. How much do you plan to spend in retirement?

This question can be difficult to answer especially if you’re young and can’t contemplate nor even come close to an estimate of what expenses will be in retirement. For others, this may be more readily a number to come up with especially if one is close to retirement or in the peak accumulation years of their careers which is usually later in life.

2. How much do you plan to give in retirement?

For many folks there is a desire to give away some or all of their wealth at retirement. This could range from a few thousand to several billion dollars (we’re talking Warren Buffett wealth here). Naturally, the amount saved and accumulated over the working years needs to be greater than simply an amount needed to survive or enjoy retirement.

3. What assets have you currently saved and accumulated?

If you’re younger you’re not looking at much, but here’s the good news: time is on your side. You have much longer until retirement but you also have the advantage of compounding returns as well as the potential of your human capital (your earnings over your lifetime) compounding as you advance in your career. If you’re middle aged or older aged, there’s a chance you have a home you may potentially downsize from or perhaps you’d consider a HECM reverse mortgage. As you age, you have less human capital the closer you get to retirement, but hopefully that’s been replaced with financial capital (what you’ve saved while working).

4. How much do you plan on earning over your lifetime?

This is the $64,000 question – although I will say be careful with thinking that more money means more savings. Just by the numbers if a person makes more they have the ability to save more, but it’s true that the more someone makes the more they spend. I have seen very simple, frugal folks that turn out to be the millionaires next door and I have seen dual six-figure spouses live paycheck to paycheck and worry. A key point is this – when you start saving – save a percentage and as you get raises, continue to live like you did when you had nothing. It’s amazing how fast your wealth will build.

Next week we’ll cover some different equations (for all you math lovers – you know who you are!) that show some examples but for now – a good rule of thumb is to start with 10% of your gross income (what you make before taxes) and gradually move toward 20%. In theory as you make more you should be able to easily save more – especially if you’re expenses stay as they were before your income increased. Good in theory, but hard for many folks to do.

Posted on Mar 7th, 2014

by author: sraskie.

Posted in: personal finance, saving.
Tagged: fiduciary · financial planning · retirement savings

Education Tax Benefits

Mar 3rd, 2014

2 comments

Going to college can be a stressful time for students and parents. Some of the costs of your education can be offset by tax credits and reductions to income. These credits and reductions can be complicated, so it takes a bit of coordination to keep things straight.

More than one education tax benefit may be taken in one year, but generally the expenses must be segregated from one another in your reporting. In other words, you couldn’t take two tax benefits based upon the exact same education expenses, with some exceptions. For example, you can use most qualified expenses for the tax credits and apply the expense toward eliminating the 10% penalty on IRA distributions at the same time.

Generally though, most tax benefits for education can only be applied once to each expense. Only one of the following credits may be used per student in any given year: American Opportunity Tax Credit, Lifetime Learning Credit, or Tuition and Fees Deduction. If you have enough students with the appropriate circumstances, it is feasible that you could use all three types of benefit in a single tax year.

Listed below are the three primary tax benefits and the specifics around them:

American Opportunity Tax Credit. This credit can be up to $2,500 per eligible student. The AOTC is available for the first four years of post secondary education. Forty percent of the credit is refundable. That means that you may be able to receive up to $1,000 of the credit as a refund, even if you don’t owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment.

There are income limitations on this credit. Generally, your Modified Adjusted Gross Income must be less than $80,000 (if single) or $160,000 (if married) to claim the full credit. The credit is phased out above those levels and eliminated at $90,000 and $180,000 respectively.

The AOTC is not allowed if you file Married Filing Separately, or if you are claimed as a dependent on another taxpayer’s return. In addition, the credit is not refundable if you are under age 24 and are essentially dependent upon your parents (that is, they are alive) and you are unmarried. If you are under age 18 none of the credit is refundable.
Lifetime Learning Credit. With the LLC, you may be able to claim up to $2,000 for qualified education expenses on your federal tax return. There is no limit on the number of years you can claim this credit for an eligible student. The credit is 20% of the first $10,000 of education expenses for the student.

This credit has income limitations as well. If your Modified AGI is less than $53,000 (single) or $107,000 (married filing jointly) the credit is fully available. The phaseout occurs at $63,000 and $127,000 respectively. Again, you are not allowed to use this credit if you file Married Filing Separately, or are the dependent of another taxpayer.
Tuition and Fees deduction. This benefit provides a reduction in your Adjusted Gross Income of up to $4,000 for modified AGI less than $65,000 (single) or $130,000 (married filing jointly), or $2,000 if your modified AGI is above those limits but less than $80,000 or $160,000 respectively. Above those limits the deduction is not available. Like the other benefits, the Tuition and Fees deduction is not available if filing MFS or you are the dependent of another taxpayer.

One difference with this deduction is that you can include course materials in the deduction only if purchased directly from the educational institution (other benefits allow any source of purchase of course materials).
Student loan interest deduction. Other than home mortgage interest, you generally can’t deduct the interest you pay. However, you may be able to deduct interest you pay on a qualified student loan. The deduction can reduce your taxable income by up to $2,500. You don’t need to itemize deductions to claim it.

Posted on Mar 3rd, 2014

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: education expenses, income tax credit, tax credits.
Tagged: education expenses · education tax credits · income tax credit

The Unmarried Penalty With Social Security (and the Divorce Advantage)

Feb 26th, 2014

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Okay, penalty probably is the wrong term for it – maybe the better term would be short-change.

You’ve undoubtedly heard of the marriage penalty for income taxes – this is where it can be beneficial tax-wise for two people to remain single than to be married and be forced to file either jointly or separately. The tax code contains several ways that this is true. But did you know that there is a way that married folks might level the field versus singles in the Social Security law-scape? Plus, divorced folks may also have an advantage over singles AND married folks who were never divorced (or who divorced after marriage of less than ten years)?

The Marriage Advantage

When a worker remains single over his or her working life, there is an inequality in benefits paid out based on his or her record when you compare it to that of a married person. Here’s what happens:

Let’s say Dave and Eddie are the same age, with the same earnings record over their lifetimes (in fact they worked side-by-side for most of their careers). Dave has been single his whole life, but Eddie married Valerie 30 years ago and they remain married. Both Dave and Eddie are 66 this year, and they both file for their Social Security benefits, at a rate of $2,000 per month.

At the same time, Valerie didn’t work very much outside the home (not enough to be eligible for Social Security benefits on her own record – she only worked one day at a time). However, since she’s also 66 this year, she can file for a spousal benefit based on Eddie’s Social Security record, in the amount of 50% of Eddie’s age 66 benefit, or $1,000.

So, for the exact same amount paid into the Social Security system over the years, Eddie’s earnings have generated benefits 50% greater than Dave’s.

And it doesn’t stop there – if Dave and Eddie both live to age 80, but then Valerie lives another five years after Eddie’s death, she will receive a survivor benefit equal to Eddie’s benefit for those additional five years. There is no survivor benefit paid on Dave’s record since he was never married.

The Un-Divorced Penalty

When a worker is married for more than 10 years, gets divorced and then remarries, each spouse that he is either currently married to or was married to for more than ten years is eligible for spousal benefits based upon the worker’s record. In this way, the Social Security record of someone who has been married more than once (if the marriage(s) lasted at least 10 years before divorce) will bear even more fruit than the record of Eddie above and definitely more than Dave. For example:

Tom was married to Jane for 22 years and then they divorced. Not long after, he married Dana and remains married to her to this day. Jane never remarried, and she never worked outside the home – and neither did Dana. All three, Tom, Jane and Dana are 66 this year. Tom decides to file for his own Social Security retirement benefits at $2,000 per month, and Dana files for the spousal benefit based on Tom’s record, for $1,000 per month. Jane also decides to file for Spousal Benefits based on Tom’s record as well (Jane didn’t remarry after her divorce from Tom), and her benefit is $1,000 per month as well (50% of Tom’s age 66 benefit).

So, with the exact same earnings record as Dave and Eddie (from our first example), benefits paid on Tom’s record amount to $4,000 per month – double the benefits paid on Dave’s record, and 33% more than the benefits paid on Eddie’s record.

Posted on Feb 26th, 2014

by author: jblankenship.

Posted in: Social Security, Social Security spousal benefit, Spousal Benefit.
Tagged: Social Security · social security spousal benefits

The Alternative Minimum Tax

Feb 24th, 2014

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Image courtesy of pakorn at FreeDigitalPhotos.net

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 some taxpayers under the “normal” rules.

If you have a high income for the year but your taxable income is relatively low due to a large number of dependents, a high amount of your income is long-term capital gains, large Schedule A deductions, or a large amount of tax-free income from private activity bonds, you may be subject to AMT taxation. Form 6251 is the appropriate form to use when determining if your income is subject to AMT.

Using Form 6251 you add to your taxable income those items that are used to determine the Alternative Minimum Taxable Income (AMTI), as explained below.

Starting with your taxable income (before exemptions) on line 41 of your Form 1040, you must make the several adjustments, adding back in many deductions from Schedule A (some medical expenses, mortgage interest, taxes, and miscellaneous deductions). In addition to those additions, there are differences in the way that AMT rules define investment interest expense, depletion, stock option exercises, and quite a few specialized items that will only be of interest to business owners.

After these adjustments are made to your income, the AMT tax rates are applied. If the tax calculated is greater than the ordinary income tax, you’ll have to file with the AMT rates applied.

The IRS recently published their Tax Tip 2014-10 which lists out a few facts that may help you to understand the AMT. Especially helpful is the AMT Assistant Tool, for which a link is provided below. The complete text of the Tip is listed below:

What You Should Know about AMT

Have you ever wondered if the Alternative Minimum Tax applies to you? You may have to pay this tax if your income is above a certain amount. The AMT attempts to ensure that some individuals who claim certain tax benefits pay a minimum amount of tax.

Here are some things from the IRS that you should know about AMT:

You may have to pay the tax if your taxable income, plus certain adjustments, is more than the AMT exemption amount for your filing status. If your income is below this amount, you usually will not owe AMT.
The 2013 AMT exemption amounts for each filing status are:
- Single and Head of Household = $51,900
- Married Filing Joint and Qualifying Widow(er) = $80,800
- Married Filing Separate = $40,400
The rules for AMT are more complex than the rules for regular income tax. The best way to make it easy on yourself is to use IRS e-file to prepare and file your tax return. E-file tax software will figure AMT for you if you owe it.
If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.
If you owe AMT, you usually must file Form 6251, Alternative Minimum Tax – Individuals. Some taxpayers who owe AMT can file Form 1040A and use the AMT Worksheet in the instructions.

Visit IRS.gov to find out more about AMT. Also, see the Form 6251 instructions. You can get it at IRS.gov too or by calling 800-TAX-FORM (800-829-3676).

Posted on Feb 24th, 2014

by author: jblankenship.