Author: Jan Roberg

Posted on by Jan Roberg

Sub-Chapter S Corporations: Paying Yourself Enough?

Are you paying yourself enough?

Owners of Sub-Chapter S Corporations often pay themselves a salary and take the rest of the company profit as passive income.  It’s a pretty popular tax reduction strategy.  You don’t reduce your overall income tax rate, but you do save some money on the payroll taxes which amount to around 15% of your income. 

But it’s really important to make sure that the salary you pay yourself in your Sub-S Corporation is relevant to what you really should be paid.  Recently, the IRS won a case against an accountant, with 20 years of experience, in Iowa for only paying himself a wage of $24,000 while receiving distributions amounting to over $200,000.  According the IRS, a first year accounting grad can be expected to receive a salary of around $40,000.  They determined that the accountant should have paid himself a salary of $91,044.  (Okay, I know you’re thinking $91,044?  I can understand the $91,000 but how’d they get the $44?  Don’t ask me, I haven’t a clue.)

You may be wondering, why bother paying a salary out of the S Corp and taking the rest of the profits as a distribution in the first place?  Isn’t it all just profit anyway?  Well yes, but there’s a difference.  In the Iowa case, the man paid himself a wage of $24,000 plus he had distributions of $200,000.  In essence, his company had a profit of $224,000.  (I’m rounding, okay?)  If he were to receive all of that income as self employment income, he’d pay regular income tax on the $224,000 (less his deductions of course)  plus he’d pay 12.4% social security tax on $106,800 of that income, plus another 2.9% on the whole $224,000.  That’s $19, 739 over and above his regular income tax.  By paying himself a wage of $24,000, his employment taxes are $3,672.  Although it doesn’t work out that cleanly, he basically saved himself about $16,000 in taxes.  That is until the IRS stepped in.

For Subchapter S owners, this issue of an appropriate wage for self employment tax isn’t going to go away.  Last year Congress tried to make all Sub-S income from personal service firms (lawyers, accountants, and consultants) taxable as self-employment income.  The issue failed, but I suspect it will return again. 

So how should you value what you pay yourself?  The IRS doesn’t give us any firm guidelines.  Although some accountants suggest that any personal service provider should claim 70% or more of his or her S-Corp income as wages, the IRS only revised the accountant’s self employment wage to about 40% of his income.  That leaves us open for some interpretation.

One guideline I like to use for people who remain in the same career, but start a new business is what did they make performing the same service at their old company?  What would you get paid if you were to be hired today at a different company for the same job?  It’s a good way to substantiate that what you’re paying yourself is a legitimate wage. 

To read more about the case of the accountant in Iowa, check out the Wall Street Journal link here:  http://online.wsj.com/article/SB10001424052748703951704576092371207903438.html?mod=sf2tw

Posted on by Jan Roberg

Tax Tips for Single People

 

Singles need tax breaks too.

Updated November 15, 2018

If you’ve skimmed through my other blog posts, you might notice that I have lots of tips for people with children, people who are old, or people with various family situations.  What you don’t see is much about people who are single and working.  This post is for you.

 

If you’re a young adult out on your own, earning wages, and living in an apartment, you’ve probably noticed that you don’t have many tax deductions to work with.  The three most likely things you might qualify for are the student loan interest deduction, the IRA deduction, and the retirement savings contribution credit.  Other than that, unless you’re ready to buy a home, you usually don’t have much to work with.   But let’s take a look at these three items.

 

Student loan interest deduction:  if you’ve finished college, or are at least temporarily out, you’re probably paying student loans.  The most you can claim per year for this deduction is $2,500—now that’s for the interest you pay, not the principal.  I often find people trying to claim everything they paid and that won’t fly.  You can only use the amount on your form 1098E that you get in the mail.

 

Now if you’re single and you make less than $65,000 per year, then you can claim the full amount of your deduction.  If you make over $80,000 you lose the deduction completely.  For those of you in between, you’re in what’s called the phaseout range.  It’s a funky equation, bottom line, the closer you are to $80,000, the less you’ll be able to claim.

 

IRA deduction:  My Dad always used to lecture me about saving for retirement.  Now that I’m older, I just recycle his lecture. (I’m sure he doesn’t mind.)  If you don’t have a retirement plan at work, you can put up to $5,500 into a traditional IRA and that money will not be subject to income tax.

So, if you put $5,500 into an IRA, then your taxable income would go down by $5,500.  By saving money for your retirement, you’d also save on your tax bill.  If you’re in the 22% tax bracket, you’d save $1,210!  That’s a pretty good bang for your buck.

 

If you do have a retirement plan at work, you can just reduce your taxable income by putting money into your 401(k) plan there.  It works a lot like the traditional IRA.  One thing to remember, if you do have a retirement plan at work and you make over $80,000 then you won’t be able to claim a deduction for an IRA contribution.  You can still claim a full deduction if you make less than $65,000, and anything in between puts you into that “phase out category”.

 

Saver’s Credit (formerly known as the Retirement Savings Contribution Credit):  Putting money away for retirement can be especially helpful tax-wise if you qualify for the Retirement Savings Contribution Credit.  You can only claim this credit if you income is $31,500 or less though and you cannot be a full time student.  So, if you graduated in May and started working in June you wouldn’t be able to claim the Saver’s credit this year.  (But then we’re looking at the Education credit so that’s usually a better deduction anyway.)

 

The credit is worth between 10% and 50% of your retirement savings contribution.  The maximum contribution you can claim is $2,000—so even if you put $5,000 into your IRA, you could only claim $2,000 towards the credit.   The percentages work like this; if you made less than $16,750 you can claim 50% of your contribution.  Up to $18,000 you claim 20%, and over that you get a 10% tax credit.

 

So let’s say you made $25,000 and put $1,000 into an IRA.  You’d qualify for a $100 tax credit (1,000 times 10% is $100.)  Another cool thing about this credit is that you can mess around with it.  Let’s say that you make $28,000—oops, you can’t get a Saver’s Credit.  But wait, if you put $1,000 into an IRA now your income is only $27,000 and you do qualify.

 

You don’t get a lot of tax savings options when you’re working and single, but it’s important to know what is available to you and how to make to most out of what you’ve got.

Posted on by Jan Roberg

Is it Taxable?

Is it taxable?
Click here for more Late Show.

 Have you ever watched the David Letterman show when he does the “Will it float?” routine?  They pick some ridiculous item and drop it into a huge tub of water to see if it will float.  It’s probably the singularly most stupid thing on television, but I can’t turn it off.  I don’t think they do it anymore, but I loved it when they used to have it.   As a child, my best friend and I would fill up the sink and test all sorts of stuff to see if it would float or not.  I guess Dave was just doing the same thing (on a much bigger scale!) 

Anyway, that’s how I feel about taxable versus non-taxable income.  Will it float?  Do I gotta pay taxes on the money or not?  For me, most of the time, I already know the answer, it’s what I do for a living.  But there’s always some new challenge, something I haven’t seen before.  Figuing out if various types of income are taxable or not is my personal little “Will it Float?” contest.  And let’s face it; I always like to find money that you don’t have to pay taxes on.

Here’s a list of some of the things you do not have to pay taxes on:

  • Child support payments
  • Gifts, bequests and inheritances—you may have heard of estate taxes, but if Uncle Joe dies and leaves you cash money, you don’t pay tax on that.  If Uncle Joe dies and leaves you his IRA, those distributions are taxable, it’s different from just being left cash.
  • Workers’ compensation benefits
  • Meals and lodging for the convenience of your employer – let’s say your boss sends you to Chicago for a business trip and you put the trip on your credit card.  Your boss reimburses you for your hotel stay and your food, you don’t pay tax on that.
  • Compensatory Damages awarded in a lawsuit.  Compensatory damages are to “make you whole.”  Let’s say you sued your neighbor because he ran over you with his car.  If the damages awarded to you are to cover your hospital costs, that would be compensatory damages and they wouldn’t be taxed.  If you sued for lost wages because you couldn’t work, that would be a different type of damages and that part of your lawsuit award would be taxed.  I’ve worked on tax returns dealing with lawsuits that awarded several different types of income from damages.  We’d have to split them into the correct categories for tax purposes.
  • Welfare benefits are not taxed.
  • Cash rebates from a dealer or manufacturer.
  • Adoption expense reimbursements for qualifying expenses are not taxed either.

Some things are kind of iffy, they’re taxed in some cases and not in others.  Here are some examples of “maybe yes, and maybe no.”

  • Life insurance- if somebody dies and you are paid death benefits, that’s not taxable.  If you surrender a life insurance policy for case, any proceeds that are more than what you paid for the policy will be taxable.
  • Scholarship or Fellowship Grants- If you are a degree candidate, then you can exclude from your taxable income amounts that you receive as a qualified scholarship.  If you get one of those super scholarships where they pay for your room and board, that doesn’t qualify as tax free and you will be taxed on that part.

Most other items count as taxable:  wages, salaries, tips, unemployment, self employment, pensions, interest, stock sales, etc.

There’s an IRS publication that goes into complete detail of what is and isn’t taxable.  It’s 43 pages long and it goes into some serious detail over what is and isn’t taxable.  For example:  did you know that death payments for astronauts dying in the line of duty after 2002 are not taxable?  That one was new to me, I just learned it now trying to pick up the link to the website.  The alphabetical list of types of income and whether it’s taxable or not begins on page 31.  http://www.irs.gov/pub/irs-pdf/p525.pdf

When in doubt, it’s probably taxable.  There’s actually a line in the tax code that says, if something isn’t specifically listed in the tax code as being not taxed, then it is taxable.  (They don’t actually phrase it that way, to be honest, if you read the actual paragraph you may not even know what they’re saying.  I took some liberties with the language, but the meaning is head on.  If you discover a new type of income, and there’s no mention of it anywhere, then by default the IRS taxes it.

Posted on by Jan Roberg

Missouri Seniors May Want to File Separately

If you’re married and receiving a public pension or social security in Missouri, it may make sense for you to file your tax return as married filing separately instead of jointly.  It sort of defies the conventional wisdom of tax preparation, but it’s worth checking out.

Usually, as in 99.5% of the time, a married couple is better off filing a joint return, at least as far as their federal tax return is concerned.  But often times, especially when there are no dependents claimed on the return, the difference is negligible if anything.   It’s just natural to file a tax return jointly because it’s easier and usually cost effective.  But most tax software programs that do a “married filing jointly (MFJ) vs married filing separately (MFS)” comparison analysis usually don’t include the state results in the analysis. 

If you live in Missouri, and you both have a public pension, you’ll want to take a closer look at the potential difference.  Here’s why:  If you’re married and your combined income exceeds $100,000, your public pension exemption becomes limited.  If you change your status to MFS, you each are allowed income of $85,000 before any limitations kick in.    The higher your income, the more you’re going to want to consider splitting your return.  Now remember, this works for public pensions and social security, if you have a private pension, the rules are different and there’s no tax benefit to filing separately.

Public pensions are pensions from government organizations such as the military, the postal service, or state or local governments.  Teacher pensions are considered to be public pensions.  Private pensions are from corporations like Boeing or Nestle.  If you’re not sure what kind of pension you have, call your plan administrator. 

Let’s say for example that you and your wife are retired school teachers–meaning that you both have public pensions.  Your income is $70,000 and your wifes’ is $74,000.  Combined, you’re well above the $100,000 limitation.  Because you’ve exceeded the income limitation, your pension exemption is limited to $23,406.  If you filed separately, the income limitation would be $85,000–which you’d both be under, and you’d each get a pension exemption for $33,703 (or a total of $67,406.)  That’s a difference of $44,000!  Compute that out at the 6% tax rate for Missouri and you’ll have saved $2,610. 

That’s a big difference.  Using the standard “MFJ vs MFS” calculator for the federal return, I showed that with the married filing separately status, you’d owe an extra $12.  I’ll gladly pay $12 to save $2600.  But without doing the extra work, I wouldn’t have known there was that huge difference.

While the take home tax software products are really good, this is one of those situations where you can miss out on a major tax savings.  You have to know about the public pension exemption.  You have to know about the different income limitations.  And most importantly, you have to actively set up and do the work to make sure you don’t miss this opportunity.  If you think you might be missing out on important deductions like this one, maybe it’s time to set up an appointment with a professional.

Posted on by Jan Roberg

Tax Tips for Senior Citizens

senior citizens get hit with taxesThis year seems to be the year that seniors are getting slammed from all sides.  First, there was no increase in Social Security benefits, but the Medicare premium they had to pay was increased leaving them with smaller checks.  Last year we had a brief, additional federal tax deduction for real estate taxes which was specially designed to help senior home owners, but that was eliminated for this year. 

Here in Missouri, the state recently ended the Historic Preservation Credit, which helped control senior’s real estate tax bills.  And right now they’re trying to end the popular Property Tax Credit for seniors who rent instead of own their homes.  (Some seniors have already felt the bite of this as the credit is now denied to seniors of subsidized housing.) 

So instead of just harping on bad news, what are some tax tips and strategies that are available to senior citizens?  First, even if you don’t make enough income to be required to file, file a federal return anyway.  Why?  Two reasons, the first is that you’re on the radar in the event the government offers some sort of tax rebate or credit for senior citizens.  Many seniors missed out on the $250 rebate a few years ago just by not filing.  Second, and this is probably even more important, is that if you file a return, there’s a statute of limitations where the IRS can’t come back after you for more money.  If you don’t file a return, there is no statute of limitations.  I’ve had to deal with seniors who now have tax liens on their homes because they didn’t file a return and the IRS came up with something years later.  Had a timely return been filed, the IRS would have been too late to make the claim.

Another important strategy for seniors is planning their income.  Depending upon your marital status, your social security becomes taxable once you reach a certain income.  You don’t have much choice about how much you receive for your pension, and you’re required to take your minimum required distribution from your IRAs, but you have a lot of flexibility elsewhere.  Right now, during the early part of 2011 is a good time to plot out your strategy for your next year’s tax return.  If you’re anywhere near the borderline on taxable social security, planning is absolutely essential.  Some strategies include:  moving assets to a tax free munincipal bond fund, using the charitable donation option on your IRS to use your required minimum distribution, and selling stocks that have lost value to offset your capital gains. 

A flip side strategy for some seniors would be if you’re already in a situation where 85% of your social security is going to be taxed, go ahead and do even more taxable transactions.  This sounds crazy coming from me as I’m always trying to defer income and taxes, but hear me out.  When you’re in the “taxable social security zone”, you’re really paying a double tax.  If you’re in the 15% tax bracket, then you’re really paying 30% because that social security wasn’t taxable until you hit the zone.  If you’re pushed into the 25% tax bracket, that extra income is really taxed at 50%.  50%!  So, let’s say you have a year where you’ve already reached the point where 85% of your social security is going to be taxed.  Once you’ve crossed that line, the IRS can’t tax anymore of your social security for that year, the remaining tax will be at the regular rate (25, 28 or 32% so it’s a tax reduction now.)  It might just make sense to go ahead and do that extra income transaction now, if it will keep you from having to be in the extra tax zone next year.  It’s really going to depend upon your individual situation

Posted on by Jan Roberg

My Ex Claimed My Kid: Now What Do I Do?

What to do if an ex spouse claims your chlid for taxes

It’s a hassle if someone else claims your child on their tax return, but that doesn’t mean you have to give up.

 

This happens to people all the time.  You go to electronically file your tax return and it gets rejected because someone else has already claimed your child.  What do you do?  I say fight back, and here’s how.

 

The first step to fighting back is to make sure that you’re in the right.  Ask yourself these questions:

 

1.  Are you the biological parent of the child?  Hint:  if your answer is “I’ve raised her like my own.”  You’re going to have trouble winning.  If you’re a grandparent, step parent, aunt or uncle; and the person who claimed the child is the actual parent, you don’t stand much of a chance.  (That said, some folks will have a credible case, but I’d suggest professional help here because it is tricky.)  To go this route you should be the real parent.

 

2.  Did the child live with you all year?  If not all year, for at least over half of the year?  If you had custody all year you have a much better shot of winning.  You absolutely must have had custody for over half of the year to even think of trying this.  If you’re on the border line, where your ex had the child for half the year and you had half, this might not be worth it.

 

3.  Is this good for your child?  Generally you’d think that having more money in the household would be good for your child, but if fighting with your ex could cause harm to your child, you might want to stop and think about it a bit.

 

Step two.  Once you’ve determined that you are in the right and that you are entitled to claim your child, then what you need to do is print out, sign and mail that rejected return to the IRS —keeping your child as your dependent on the tax return.  When you do this, the IRS has to take it in.  They have to look at it and it’s going to throw whoever claimed your child into an audit.  If an Earned Income Tax Credit is involved then those audit papers generally run 11 to 22 pages long.  (11 pages for a straight EIC audit, 22 for an EIC and head of household audit, they’re the same questions it’s just that 22 pages is more intimidating.)

 

Here’s the scary part, you’re going to get the same paperwork.  It is a little intimidating, but you’re expecting it.  Because you’re the custodial parent, that is your child lives with you, you can answer those questions with no problem.  People who shouldn’t be claiming your kids can’t answer the questions and that’s why you’ll win.  If your kids are in school, you’ll need a document from the school saying they attend and where they live.  If they’re too young for school, you can get a statement from the doctor’s office that you’re their parent and you pay their medical bills.  You’ll have the resources to prove that you’re the parent.

 

If you’re reading this and thinking, “I can’t prove I have custody of my kids,” then maybe you shouldn’t be filing for them.  You will have to provide some proof:  school records, doctor’s files, church documents, day care receipts, health insurance records, something professional.   Your Mom or a friend can’t vouch for you.

 

Once you’ve received the audit papers, completed them and sent them back, then it’s a waiting game.  Your ex (or whoever claimed your child) will have to complete the same paperwork.  The IRS will examine the papers and determine who had the proper right to claim your child.  But since it’s you, you will win.

 

The big downside to this is that it will take months to settle.  Months.  On the upside, once your ex has lost an audit case for claiming your child, it will be very difficult to ever try it again.  You’re not just solving a problem for one year, you’re preventing future problems as well.

 

What if you need the money now?  That’s the most common question.  Sorry, but that’s impossible.  What you’ve lost, you can’t get back without a fight.  If you have more than one child, and only one was claimed incorrectly, you could file now and at least get part of your refund, then file an amended return later.  I don’t recommend doing that, but I also understand sometimes you need the cash now.

 

If you try doing this as an amended return there are two consequences:  first, it will slow everything down even more.  You can’t file an amended return until your first return is completely processed.  An amended return will take about 16 weeks to run through the system before the whole audit process begins so you’re basically adding 4 to 5 months to the timeline for solving this issue.  Second, filing a return and amending to add a child reduces your credibility with the IRS.  Your documentation had better be rock solid because you will have no wiggle room for doubt if you submit an amended return to claim your child.

 

One more thing to consider before you go through with this.  Call your ex and talk it out.  I’m not crazy, hear me out.  You’ve read this far, you know that fighting is a big hassle.  Before you go into warrior mode, maybe you can negotiate a peace treaty.  What do you stand to gain from this?  What does your ex stand to gain?  It’s important that you file your returns legally, but with divorced or never married couples, you can split an exemption:  the custodial parent claims head of household and EIC, the non-custodial parent claims the child tax credit and the exemption.  It could be a good thing for both of you and for your child.  (Remember, what’s best for the child?)  Instead of going to war, you have your ex amend his/her return and you file your return right after the amendment is accepted.  It still is slow, but much faster than going through an audit.  And it’s a peaceful solution.  (Please, don’t even think of trying this if your ex is dangerous.  Safety first.)

 

Finding out that someone else has claimed your child for taxes can be shocking and financially devastating.  The assumption is usually that it’s the ex, but that’s not always the case.   When you file to claim your child, you will never be told who the other person is.  (Of course, if it’s your ex you’ll probably get an unfriendly phone call so you’ll know.)  It’s scary how often it’s not the ex, though.  Be sure to protect your child’s social security number.  Don’t keep the card in your purse.  Don’t share the social security number with anyone.  Your child needs your protection.  It’s hard enough being a kid, being a kid with a stolen identity is worse.

_______________________________________________________________________

Note:  Here are some links that might help:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

 

Posted on by Jan Roberg

EITC Awareness Day: A Contrary View

Earned Income Credit Awareness DayJanuary 28, is EITC Awareness Day.  EITC is the Earned Income Tax Credit.  To find out if you might qualify for and Earned Income Tax Credit, you can go to the IRS website and check out the EITC Assistant.  It basically asks you questions and helps you figure out if you can get and Earned Income credit or not.  The site is:   http://apps.irs.gov/app/eitc2010/SetLanguage.do?lang=en

Last year, the IRS handed out $58 billion in Earned Income Tax Credits.  It’s estimated that only four out of every five people who qualify for an earned income credit actually claim it.  Some of the underserved categories of people who missed their EITC (also called EIC) are small business owners and farmers.  If you have self employment income, that still qualifies you for EIC. 

Another category of people who missed their EIC claims are grandparents who have custody of their grandchildren.  It seems that a few years back, when the IRS tightened up the rules about grandparents claiming their grandchildren there was the mistaken thought that grandparents could never claim their grandchildren.  That’s not the case.  If your grandchildren live with you, be sure to check the EITC eligibility page to see if you might qualify.

Okay, the IRS asked me to plug EIC today and that was the plug.  Here’s my side of the story.  As a tax professional, all year long I have heard what I consider to be veiled threats from the IRS to tax pros around the country about EIC.  They can come to our office at any time, pull our files and inspect to see that we’ve completed the proper due diligence on all of our clients.  The PTIN registration, which quite frankly only covers us “good guys who follow the rules” will be used to monitor our returns.  If one of our clients files a fraudulent EIC claim, the IRS can then pull all tax returns that have our PTIN number to check for fraud as well. 

Now I shouldn’t complain.  I don’t file very many EIC returns anyway and the ones that I do file, I’ve done the due diligence.  I have my paperwork in order so it wouldn’t be a problem if the IRS did an EIC audit of my office.  But I guess I’m just a little shocked that the IRS wants me, or anyone for that matter, to promote EIC. 

Here’s why I’m shocked:  of the $58 billion dollars that was handed out last year, the IRS estimates that $13 to $16 billion of that was erroneous payments.  Now let’s be realistic honest mistakes do happen, but a pretty fair chunk of that change is due to downright fraud.  We’re talking roughly 25% of the EIC claims are wrong.  That’s one in four EIC claims.  ONE IN FOUR!

Back in the old days, I used to do EIC audit work for a large tax company.  Many of the audit clients didn’t have their taxes done by one of our preparers, we were just the best place to go to once they got the audit letter.  Some of the “fly by night” operators who prepare those “erroneous” EIC returns disappear after April 15th and some vanish even sooner than that.  I learned a lot from that experience about what not to claim on a tax return.  Maybe this can help someone else.

Do not submit a tax return claiming head of household status if you have been incarcerated for the entire year.  Generally head of household status means that your children are living with you and most prison wardens don’t let you keep your kids with you overnight.  It’s estimated that 4 to 5 thousand fraudulent EIC returns were submitted from prisons last year.  Currently, the IRS does not have access to prison records so they can’t immediately identify those returns.

Do not submit a tax return claiming head of household status if you are in a nursing home.  Kind of like prison, the nurses don’t let you keep the grandkids overnight either.

Do not claim your live-in underage girlfriend as your “qualified child”.   (And please, there are just some things I don’t want to know.)

Head of Household status is a confusing designation.   According to IRS rules, a head of household is someone who is not married that is providing over half of the support for another person, usually a child, but it can be a parent, grandparent, or even a friend that lives with you.  You can’t claim head of household if someone else is supporting you.  Here’s a hint, if you only made $3,000 last year, you didn’t make enough money to support anybody.  Don’t claim head of household.  Its fine to claim single, and claim your child as a dependent and you’ll still qualify for EIC.  But if you claim head of household, it gets your tax return looked at even if it doesn’t change your refund.

Do not claim your neighbor’s child on your tax return no matter how often she sleeps over and eats at your house.  The child is not yours and she doesn’t really live with you—it just feels like it.

Do not make up a fake business to claim income for the EIC.  If you have a real business, bring your receipt books and your expense ledger with you to your appointment.  The IRS is on to that.  Professional preparers are now required to look at your books and see some type of evidence that your business is legitimate.

And finally, do not claim a child on your tax return just to make life difficult for your ex.  If you have a legitimate claim, that’s one thing, but if you don’t and you’re just trying to punish someone, don’t go there.  It will land you in a heap of trouble that’s not easy to crawl out of.

Posted on by Jan Roberg

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.)

Posted on by Jan Roberg

IRAs for Dummies

Writer

 

Okay first and foremost, you’re not a dummy!  But I wanted to make a simple post with simple explanations about IRAs.  This isn’t the be all end all of IRA stuff.  But hopefully it will give you a little clue about them.

A traditional IRA lets you put money away for retirement and you can get a tax deduction for the money that you put into the IRA.  For example:  if you’re in the 25% tax bracket and you put $1,000 into an IRA then you will save $250 in taxes for the year you put the money in.  (The tricky part is that there are limits as to how much is deductible if you or your spouse have a retirement plan at work.  There are also complications if you’re using the married filing separately status.  I’m not covering that here.  If this sounds like you, give me a call and I can help you figure it out.)

A Roth IRA lets you put money away for retirement but you don’t get a tax deduction for the money you put in.  $1,000 into a Roth IRA gives you no tax savings.  (There are income limits for contributing to a Roth, the phase out starts at $167,000.  If you’re under that income level, you’re fine.)
Generally, the most you can contribute to an IRA in a year is $5,500.  If you’re married, you can contribute $5,500 for you and $5,500 for your spouse, even if your spouse doesn’t work.  You can’t put more money into an IRA than you earned (so if you only made $3,000 that’s going to be your maximum contribution.)   If  you’re over 50 years old, you can contribute up to $6,500 to your IRA.
Remember, the $5,500 is a maximum.  It’s fine to contribute less.  Most accounts are going to want at least a $1,000 to open, but you don’t have to have $5,500 to put into an IRA. Its not an all or nothing kind of investment.
When you take money out of your traditional IRA, the money you take out is taxable.  So, once again if you’re in the 25% tax bracket and you take $1,000 out of your IRA then you’ll pay $250 in taxes.  The concept is kind of like:  take a tax deduction now/pay taxes later.  Here’s where it’s tricky…if you take the $1,000 out before you are 59 1/2, not only will you pay the $250 in taxes, but you’ll also pay a 10% penalty making the total tax you pay $350.  There are exceptions to the penalty if you use the money to buy a house or pay tuition.  You will pay the tax no matter what, but sometimes you can escape the penalty.
With the traditional IRA you are playing a gambling game.  You’re betting that your taxes are higher now and will be lower when you retire.  That’s a good bet for many people.  So the traditional IRA is a good thing.
When you take money out of your Roth IRA, the money you take out is not taxable.  So, if you take out $1,000 from your Roth and you’re in the 25% tax bracket, you will pay zero tax on that $1,000.  If you take the $1,000 out before you turn 59 1/2, you may pay a 10% penalty on the earnings but not on the whole $1000.  Roth IRA means tax-free income later.
I really like the Roth IRA for a couple of reasons:
  1. It’s especially good for young people.  The Roth is a great savings tool that can be used for buying a home and paying college tuition.  If you invest in a Roth when you’re in the 15% tax bracket but wind up taking the money out when you’re in the 25% tax bracket:  zowie!  You win!  It’s like a little tax bonus.
  2. Even if you’re more mature and already in the 25%  tax bracket or higher, I still like the Roth.  When you’re retired and receiving social security payments, your social security isn’t taxable until you cross a certain income threshhold.  Once you cross that line, your social security becomes taxable and it’s like you’re paying double taxes.  For example:  let’s say your pension and social security put you right at the line where if you make any more money your social security would be taxable.  Once you cross that line you’ll pay tax on your social security income.  If you take money out of your traditional IRA, let’s use the $1,000 example again, and you’re in the 15% tax bracket, you won’t pay 15%–you’ll pay even more because now your social security will be taxed too.  It’s not exactly double, it’s more like one and  a half times more.  (Kind of a funky equation.)  Bottom line:  once you start receiving social security payments, extra income is actually taxed at an even higher rate than your real tax rate because they start taxing your social security.    Ouch!  Ask any senior citizen who’s been hit with this.  It hurts.
  3. Now  if your retirement income is so far over the threshold that you don’t need to worry about additional tax (because you’ve maxed out your taxable social security), or if it’s nowhere near the threshold, then it’s not really an issue for you.  But for many seniors, extra taxable income can be a big problem for them.  The Roth IRA can be a real lifesaver when you’re older.
If it’s not completely obvious yet, I’m a big Roth fan.  That said, if you need a tax deduction now, then traditional IRA is the way to go.  For example:  one  year, I needed to lower my personal income by $310 to claim a $2000 tax credit.  That’s a no brainer, of course I spent $310 on a traditional IRA to save $2,000.  I put the rest of my retirement money into a Roth.  You can do stuff like that when and if you need to.
There’s so much to know about IRAs and it can be really confusing.  This little post is just the tip of the iceberg.  For detailed information about IRAs, the IRS has a book called Publication 590.  Here’s a link to it:  Pub 590
Okay, I confess, that publication looks a little intimidating.  It’s 110 pages long.  But if you look at page one, the chapters and sections are set up based upon the questions people ask.  Look for your question and it will tell you the right page to find your answer.  It’s not so scary when you know that in advance.
Posted on by Jan Roberg

Missouri Health Insurance Deduction

Missouri has a tax deduction for health insurance premiums

 

When you live in a state that has an income tax, like Missouri, you need to be aware of the state’s little deductions that aren’t automatically on your federal tax return.  One of these is the Health Insurance deduction.

 

It’s very difficult to claim any medical deductions on your federal income tax return because you have to meet the requirement that your medical expenses exceed 10% of your adjusted gross income.  In Missouri, you don’t have that.  If your health insurance isn’t already exempt from taxes, you can claim your health insurance as a deduction on your Missouri State income tax return.

 

You’ll find the deduction on line 12 of the Missouri schedule A.  For most people, its just a straight, direct entry on the form.  If you happen to have been able to claim your health insurance on your federal schedule A, or had medicare payments withheld from your Social Security, there’s a worksheet to determine just how much of a deduction you’ll get to claim on your Missouri return.  (For some people, your computer software will automatically calculate the amount of medicare insurance you can deduct, but you need to watch out if you’re adding additional insurance payments that you don’t delete the medicare payments.)

 

The health insurance deduction is especially valuable to senior citizens who may qualify for the Missouri Property Tax Credit.  It not only reduces their taxable Missouri income, but by reducing the income, it can increase the amount of property tax credit they receive.  Many seniors who qualify for the property tax credit don’t have any Missouri taxable income so the preparers don’t bother to look for deductions and that’s a mistake.

 

If you’d like to take a look at the worksheet for the qualified health insurance deduction, click on this link:

Missouri Health Insurance Worksheet

 

Also, if you happen to be self employed, be sure to check my post about the Missouri Self-Employed Health Insurance Tax Credit.  If you qualify for that, it’s even better for your taxes than the deduction.