Tax Planning Isn’t Rocket Science, But it Can Save You Money!

Tax planning can save you money.

You don’t have to be a rocket scientist to do a little planning ahead to save big dollars on your tax return.

Today I want to talk about tax planning, and  why it’s so important.


I recently got a call from a woman who wanted to take $30,000 out of her IRA to buy something special.  She went to her financial planner to take the money out and he told her that she needed to take another $7500 out just to cover her taxes, but to talk to a tax person first.  So she called me.


Well, I ran the numbers for her and if she took $37,500 out of her IRA , it was going to cost her over $9,000 in state and federal taxes combined.  Even though she would be withholding $7500 for her federal taxes, she’d still have to come up with another $2000 to be whole.  Then we started talking.


You see, she didn’t need to make the purchase right away, she was just thinking about it.  So I decided to see what would happen if we split the $30,000  between 2013 and 2014, $15,000 each year.  What a difference!  Instead of paying over $9000, she’ pay $688 per year total for her state and federal income  taxes combined.  That wasn’t a typo–six hundred and eighty-eight dollars a year.  $1376 total tax for a savings of over $8000!


So by waiting for another 60 days to take half the money she wanted out of her IRA she’d save $8000.  How cool is that?


In fairness, the woman’s particular situation just put her into a sweet zone for this to work out so well.  For many people, splitting up the IRA withdrawal  would not save them any taxes at all.  But my point is–how do you know?   By taking the time to ask–she saved $8000.


What’s going on in your life that could benefit from a little tax planning?  Selling some stocks or mutual funds?  Donating to charity?  Do you own a small
business?   Are you getting married?  Getting divorced?  Having a baby?  Getting a new job?  Buying a home?  Any of these events, and many more, could use
a little tax planning.


My business card says, “If you don’t have a tax strategy, you’re probably paying too much.”    It’s true.  So often in my job, I’m trying to help people who’ve already made decisions and come to me when its’ too late to make changes.  Why would you want to give the IRS more money then you need to?  It’s not rocket science, it’s just common sense.   The best way to keep more of your money is to make a plan for keeping it.  Call me.  I can help.

Extreme Makeover Home Edition TV Show—Tax Issues

Ever watch those reality TV shows and wonder how the winners pay their taxes? You’ve probably heard about Richard Hatch, the “Survivor” winner who wound up going to jail for not paying taxes on his winnings from that show. And what about the “Extreme Makeover Home Edition” people? They basically live in shacks that get remade into mansions. Those people are poor and they’re not getting cash money, so how do they pay the taxes on their new homes? I’ve got some answers for you.

Generally, if you win money or prizes on a game show, the money or the cash value of the prize is taxable to you on your personal income tax return. That’s why if you’re ever on a game show and your choice is the prize or the cash, my advice is to take the cash so that you can pay the tax.

Extreme Makeover Home Edition is a little different. The winners usually don’t get cash and the value of the makeover can be worth over a million dollars, so how do those people deal with the taxes? The answer: they don’t. You see, according to IRS regulations, if a tenant makes improvements to a landlord’s property, the landlord is not required to pay tax on the property improvement made by the tenant. When Extreme Makeover comes knocking at the door, they sign a lease that says they’re renting the property from the homeowner. That makes those crazy improvements they do tax free!

There’s also a whole lot of things that go on during that week that you don’t get to see. For example: when you watch the show, you see them putting up one home. In reality, they’re shooting two shows at once and Ty Pennington and the other stars are racing back and forth between two home building sites. Putting up one home in a week would make me dizzy, I can’t imagine working on two at a time.

Another issue that they have to settle before a family is selected is the mortgage. ABC actually works with the mortgage holders of the properties to make sure they won’t foreclose on the winners after the project is done. Sometimes on the show you’ll see a scene where the mortgage is forgiven by the bank. That too would create a tax situation for the winner, but once again, Extreme Home Makeover has done their tax homework. When a mortgage debt is for the purchase or improvement of a taxpayer’s main home, then when the debt is forgiven. That debt forgiveness is excluded from the income at tax time, so the Extreme Makeover winners don’t pay tax on their debt forgiveness either!

Another big win that you see a lot on Extreme Makeover is some local college will grant scholarships to the kids. Once again, college scholarships aren’t taxable, ka-ching! I love this show.

Now sometimes you’ll see a family get a car or something else—that is still taxable and when that happens, the winner will get a 1099MISC for the value of the prize.

When it comes to the best bang for the buck, Extreme Makeover Home Edition gets the prize for the best tax-advantaged reality show on TV.

Tax Tips for Newlyweds

tax tips for newlyweds

Danielle and Jeremy

Updated for 2013

Congratulations on getting married!  It’s so fun to start out your new life together, but it’s a big adjustment too.  One of those really difficult adjustments is learning a new phrase, “Our money.”  You already know “your” money and “my” money, but the whole “our” money concept is a little difficult to grasp sometimes.  Hopefully, this will help with the tax side of that at least.

Pick the right filing status:   It doesn’t matter how long you’ve been married for, if you were married on December 31st you are considered married for tax filing purposes.  For most couples, your best bet is to choose the Married Filing Jointly tax status, it will usually give you the best tax rate.   There are times though, when it may make sense to use the married filing separately status.  For example:  if one of you has an income tax problem from before the marriage, it might make sense to file separately until the tax issue is cleared up.  Many accountants will tell you to just file jointly and file an injured spouse claim.  I often recommend that too.  But if filing separately isn’t going to hurt your taxes very much, I prefer keeping your tax matters completely separated until the old tax issues are erased.  It’s just a safety precaution.  When you file separately, you know exactly what money you’ll get back from the IRS, when you file as injured spouse, the IRS makes the determination.  I prefer keeping the control.

Now that you’re married, you cannot claim the Head of Household filing status. This is a common problem that I see with tax returns all the time.  Couples who have been together for years and have a couple of kids decide to get married.  They forget to change their filing status on their tax forms after they get married.  Oops.  Not only is it a mistake, but if you received benefits that you wouldn’t have gotten if you filed as married, then it’s considered income tax fraud.  Don’t fall into that trap.  Be sure to use one of the married filing statuses.  (If the marriage goes belly up and you separate for the last 6 months of the year, then you might be able to file as HH, but this is the newlywed page.)

The good, the bad, and the ugly:  The good part about married filing jointly is that you double your exemption and your standard deduction.  Also, your tax rate is lowered.  If you’re a newlywed and one of you is the wage earner and the other had little or no income, you’re going to have a great tax year.

The bad part is that with most young married couples today, both spouses are working.  Your deductions may go up but really you’re just combining your two incomes so you really get no major tax break at all for being married.

Now here’s the ugly:  For some couples getting married actually puts them in a worse tax situation than when they were single.  For example, let’s day that Danielle and Jeremy were both in the 15% tax bracket when they were single, but combining their incomes puts them in the 25% tax bracket.  If they didn’t make adjustments to their withholding, they could get hit with a nasty little tax bill in April.

Here are some other issues that you might not have thought about yet.  First to the bride, did you change your name?  If so, did you make it official with social security yet?  If yes, then you’ll be able to file your tax return with your new name.  If not, make sure that you use your old name to e-file your tax return. If you don’t use the name that the social security office has on record for you, your tax return will be rejected.

The stupid question:  Whose name is going to go on the top of the form?  I warned you it was a stupid question.  Does it matter?  No.  What does matter is that the name that’s on the top of the form will stay there.  Some couples, especially if they have equal incomes, will change which name goes on top each year, seems fair doesn’t it?  What they don’t realize is that the IRS looks at that as an attempt to cover up fraudulent activity.  Generally, put the higher wage-earner’s name on top of the form and leave it there, even if your incomes change later.

Hopefully, you’re getting a refund.  Aside from those wedding gift checks, this will be the first “joint” money you receive.  That’s kind of cool.  Do you have a joint bank account yet?  The money will be in both of your names, so both of you should be named on the checking account for the money to be direct deposited.  One thing you should know, although the IRS will direct deposit your tax refund into a single account of a married couple, some states and financial institutions won’t allow it.  If your refund seems to have gotten held up, that could be the reason.

One last piece of advice:  If you are getting a refund this year, it’s a great way to start putting away some money into savings.  I know you’ve got bills to pay and things you want to buy, but saving now while you’re just starting out is the best thing you can possibly do for yourself.  Allocate some money for spending, but get that savings cushion started and keep adding to it.  You’ll be glad you did.

I just saw a news item on television:  Couples with $10,000 of debt and zero savings are twice as likely to get a divorce as couples with $10,000 in savings and zero debt.  The best thing you can do for your marriage is to have a little padding in that savings account.  (End of mom-style lecture.)

Back to School Time

Whho’s Back to School Time


In my neighborhood it’s back to school week!  Here’s some tax tips related to sending the kids back to school.


It seems like if they start school on Monday, then the gift wrap/candy sale starts on Tuesday.  If you have a choice, you’re better off writing a check directly to the PTO for whatever donation you’d like to make to the school rather than buying whatever the kids are selling.  For one thing, the school will get all of your donation instead of the money going to some fundraiser sales company.  For another, your check to the PTO will be 100% tax deductible.  (I would argue that 50% of whatever you pay for the gift wrap should be counted as tax deductible as well, but the fund raising companies will argue that their gift wrap really is worth $7 per roll so it’s an iffy deduction.)


If you’re a school volunteer, the money you spend for the classroom counts as a charitable contribution.  For example, let’s say you’re the “Halloween Party Mom.”  You spend $30 on candy, $20 on art supplies, and $15 on face paint.  Save those receipts because that’s a $65 contribution to the school.  The same goes for scouts and church groups.  Hold on to those receipts for  those projects as well.


Now if the kids pay an activity fee and you’re using the kids’ activity money to buy supplies, then you can’t deduct those receipts.  But if you’re spending your own money on projects, then you definitely can use that as a deduction.   Scout leaders–your uniform is deductible, your kids uniform isn’t.


Remember that the mileage you put on your car for volunteering is also deductible with your contributions.  Charity miles are counted as 14 cents per mile.  It doesn’t seem like much, but for some people it really adds up.


Welcome back and have a great year!


Checkpoint, How’s Your Withholding?

It's a good idea to just make sure that you are withholding enough tax from your paycheck.

It’s a good idea to just make sure that you are withholding enough tax from your paycheck.


I recently read an online forum where a fellow wanted to sue his employer for not properly withholding the man’s income taxes  from his wages.  While I felt sorry for the man and his looming tax debt, given some of the information he posted, I wasn’t convinced that the employer was at fault.  But the tax code and the forms are all pretty confusing, so how do you know that you are withholding correctly?  Fortunately, there is help.


First and foremost, if nothing has changed about your job or life situation and you’re happy with your refund/balance due situation, this isn’t for you.  If everything is fine, why change?  But–if you owed too much last April, or you had a job or lifestyle change, then you really should do a mid-year evaluation to make sure that your withholding is on track.  It’s a whole lot easier to change your withholding now than it is to make adjustments in December or after the year is already over.


What you need to do is have a copy of your latest pay stub and your last tax return handy.  You’ll need both to answer the questions in the calculator.  Then you’re going to click on the link to the IRS withholding calculator.


Now I’m going to be honest, the first time I looked at this I went, “Oh gee, who’d want to bother with this?”  But seriously, it’s the best program for figuring out where you stand with your taxes.  For most situations, I like it better than some of the fancy professional tax projection programs I’ve used.  Most importantly, you don’t need any special training to use it.  Just answer all the questions.  Sometimes you may have to guess, but do your best.  You really do need to have your latest pay stub and last tax return to do this though.  If you’re just estimating, it’s not going to be helpful.


The program will tell you, based on what’s actually been taken out of your check, how much your refund or balance due will be.  And, if you are expected to owe, it tells you how to change your withholding so as not have a balance due.


So let’s say you ran the program and it does recommend that you change your withholding.  What next?  That’s easy, take the information to your employer (or the payroll department) and fill out a new W4 form.  Unlike some other paperwork that can only be completed annually, you are allowed to change your W4 any time during the year.


So about that guy who wants to sue his employer?  I’ll leave that up to the courts.   As for me, I’d rather catch a problem before it gets out of hand, and the IRS withholding calculator lets me do that.