Posted on January 2, 2017 by Jan Roberg

3 Numbers That Can Get You Audited!

Some numbers can cause the IRS to audit your tax return.

Certain numbers on your tax return can cause the IRS to be more interested in you than you might like.

Can just one number cause you to be audited by the IRS? Probably not. But there are some numbers that are just plain old suspicious, and once your return gets flagged for review, a suspicious number can move you from the “review” pile to “audit” pile.

Now, you can ask an IRS auditor why you’re being audited, and she’ll tell you it was just a random audit. And that’s usually a lie. Random audits account for a very small percentage of the actual audits. Usually, something makes the computer kick out your return for review – like unreported income. And that usually generates a simple IRS letter, “Hey, we noticed you missed something here….yada, yada, yada, please send us some more information.” That’s called a correspondence audit and they’re usually no big deal. The IRS sends you a letter, you send them a letter back with some explanation.

But if the computer kicks out your return and the reviewer sees a couple of anomalies, well, then you’ll more likely to be asked for a personal appearance. Let’s face it, you don’t want to make a personal appearance at the IRS office. You don’t even want to have a correspondence audit for that matter.

So what are the three nasty numbers?

The first one is $5,000. I often see this number for “non-cash charitable contributions”. $5,000 is the value you can donate without having a written appraisal. It goes on form 8283 which feeds to your Schedule A for itemized deductions. Here’s the thing – if you are claiming that you donated $5,000 worth of items to a charity, you’d better be able to substantiate it – even if you didn’t have an appraisal. First, you need to keep those receipts from Goodwill or Salvation Army. Also, you want to maintain a list of everything you donated. On that list you also want to write down what the item was worth at the time you donated it, and what you paid for it in the first place. Here’s a clue: if you bought a sofa for $1,000 and kept it in your house for 10 years – sitting on it, sleeping on it, letting the dog puke on it, etc., before donating it to charity– it’s not worth $5,000 now. Just being honest with you here.

Another nasty number is $10,000. For some reason, people who lie on their taxes like to lie with this number. I once had a woman call me because she was being audited. She was distraught because she had received a letter from the IRS about her charitable donation. I told her it was no problem, all she had to do was mail a copy of the donation receipt to the IRS. She said, “You don’t understand the problem, I don’t have a receipt!” I asked her how much the donation was for, she said, “$10,000.” I asked her who the donation was to, she said, “My college.” So I told her, “That’s not a problem! If your donated $10,000 to your college they will gladly you send you a copy of your receipt.” She told me, “You don’t understand the problem, I didn’t give no money to my college!” I now understood the problem completely and told her to write the IRS a check, I couldn’t help her.

Here’s the thing. Sadly, liars like to use the number 10,000. So if you have a real deduction that is for $10,000 – you really want to make sure that you’ve got your receipt.

My last nasty number is 20,000 – usually this is the number of miles claimed as a business expense. The average male driver puts 16,550 on his car per year, female drivers average 10,142 – and that’s total miles. So if you’re claiming 20,000 business miles it looks a little suspicious. Especially if you claim 20,000 miles even. Seriously? You drove 20,000 miles even? A round number like that is a lot suspicious. You should always have a mileage log to back up your auto expense deduction. You can get a blank copy here: mileage log.

Are you noticing a pattern here? Round numbers get extra scrutiny. It’s okay if you have deductions that are round numbers, but make sure you can back them up with receipts or logs.

Posted on December 1, 2016November 30, 2017 by Jan Roberg

Itemized Deductions 2017

The House and Senate Tax Plans call for eliminating many current tax deductions like state and local income taxes.

Is 2017 your last chance to itemize your deductions? It’s possible. The House and the Senate both have tax plans out and they both look like many things that we currently itemize will be on the chopping block for 2018.

That’s not all bad, the trade-off will be a larger standard deduction and for many people, lower tax brackets. This is not law yet, but it is looking likely something will pass.

Normally, I don’t like to do tax planning based upon speculation. But here’s my opinion–you know that you may claim itemized deductions for 2017. You don’t know if you can claim them for 2018. It seems to me, that it makes sense to stack as many of your deductible expenses on your 2017 return as you can so you won’t lose them if the law changes.

So what’s at stake here? Currently, the new tax proposals would eliminate the deductions for medical expenses, state and local income taxes, real estate taxes, and employee business expenses. (The current plan keeps the charitable donation and the mortgage interest deduction.)

So what does that mean? How would you “stack” your deduction? Let’s use state and local income taxes for an example. If you make estimated tax payments, your fourth quarter payment isn’t due until January 15th. That payment gets applied to your 2017 state tax return as tax paid, but if you pay the estimated payment on January 15th, you can’t claim it as a deduction on your federal return until you file your 2018 tax return. By making your estimated tax payment by December 31st, you move that deduction up to your 2017 federal 1040 return.

I live in St Louis and many of my clients have to pay City of St Louis income taxes. Almost everybody pays those taxes in April, when they file their tax return and then we claim the deduction on the next year’s taxes. But, you can actually make an estimated payment for the City of St Louis tax. By paying the tax in advance, you can also move that deduction to 2017 instead of losing it next year. Here’s a link to the City of St Louis Estimated Payment Voucher There are other cities and localities with taxes that this would apply to as well.

So does it really make a difference? Well yes it does! Let’s say your estimated tax payment is $500 and you’re in the 25% tax bracket. That would be a tax savings of $125. Now before, it would have been save $125 now, or $125 later – but if the GOP plan gets passed, there is no $125 later.

Medical expenses are another potential item on the chopping block. If you have enough medical expenses to itemize on your return, it might make sense to pay for any additional procedures, or buy your glasses, or refill prescriptions before the year ends.

If you claim employee business expenses (that includes job hunting costs) and you’re trying to decide if you should make a purchase now or later, it might be a good time to buy now so you can put it on your 2017 taxes.

And don’t forget to pay your real estate and personal property taxes before the end of the year if you want to claim them on this year’s taxes. Remember, you can only claim the deduction in the year you actually paid the tax!

I’ve got one important caveat here: if you have to pay the Alternative Minimum Tax (AMT) – moving up tax payments might not help you at all because with AMT you don’t get the use the state income tax deduction or the deduction for employee business expenses. If you’re a high income earner, you might want to run the numbers to see if you’ll actually benefit from moving any tax deductions up or not.

So like I said, the current House and Senate tax bills are not law yet. But given the political climate, it’s highly likely that it will pass and I’d hate to see you lose out on a deduction that you could easily be claiming. But even if it the new tax bill doesn’t pass, you’re just getting the tax benefit now rather than later.

Posted on December 9, 2011November 29, 2016 by Jan Roberg

Sub-S Corp Year End Tax Tips

As the year comes to a close, make sure you do everything you can to reduce your tax liability.

Updated for 2016

You read a lot of news stories about year-end tax tips, but you don’t see a lot of things specifically targeted at Sub-S Corporations, and there’s nothing out there for the single owner S Corporation. It’s kind of sad because most people with Sub-S Corps are set up that way for the tax advantage. If you own a Sub-Chapter S Corporation, then you need to make sure that you maximize your deductions. These tips are especially for you:

First, and most importantly, if you’ve got a profit this year, you want to make sure that you are paying yourself some type of payroll. This is one of the most common mistakes that S Corps make. The point of having an S Corp is to protect some of your income from self employment taxes. (Notice I said some, you can’t protect yourself from all self employment tax.) S-Corporaton owners need to pay themselves a salary. In the early years of a business, there’s often a loss and the salary isn’t important, but once the business is in the profit side, the owner should be paying a wage that is commensurate with what he or she’d be earning if he worked the same job for someone else. If you don’t do this, the IRS can come back and assess self-employment tax on 100% of your S corp profit. That would completely defeat the whole purpose of being an S Corp, so that’s the first thing you want to handle.

Reimburse yourself for your employee expenses: Write yourself an expense report and have the S Corp write you a check. For example: let’s say you took a business trip for a convention and your travel expenses cost $1000. You paid it out of your own pocket because it was easier at the time and you just figured that you’d write it off on your taxes later. But that’s a stinky idea. Here’s why:

Even though you are the owner of the business, you are also an employee. As an employee of the S corp, you would put the $1000 travel cost on your schedule A as an employee business expense. When you do it that way, the expense would be subject to the 2% limitation rules. Meaning, you can only deduct expenses that are over 2% of your adjusted gross income. The higher your income, the smaller the deduction you get to claim. If you pay Alternative Minimum Tax, or don’t itemize your deductions, you could even get a zero tax benefit from putting it on your schedule A. So putting the expense on your schedule A gives you a much smaller tax benefit than if it’s on your S Corp return.

When you do an expense report, and reimburse yourself through the business you get 100% of the allowable business deduction. Isn’t that much better?

Next up: Pay your health insurance through your S Corp: This is a little convoluted, but stick with me. If you claim this deduction, you want to do it right. As an employee of your S Corp, you can’t claim the self-employed health insurance deduction like you could as a sole proprietor. Your health insurance would go on your schedule A subject to a 10% limitation before anything could be deducted (for most people that’s a zero deduction.) We don’t like zero deductions! So you have to do the S-Corp health insurance dance. It goes like this:

Your S Corp pays your health insurance, then it comes to you as a taxable fringe benefit. When you do it this way you get to deduct the cost of your health insurance on page 1 of your tax return (just like a sole proprietor)—a much better place to put a deduction. You do not pay FICA on your health insurance.

So let’s say your wages from your S corp are $10,000 and your health insurance is $5,000. In box 1 of your W2, it would say wages $15,000. In boxes 3 and 5 – the Social security and medicare wages, it would say $10,000. You would then deduct the $5,000 that you paid in health insurance under the self employed health insurance line. (Line 29 in the 2015 return.) Yes, I realize that this sounds like a cockamamie way to do the accounting for your health insurance–but those are the IRS rules. ‘Nuf said, right? And while I realize that this sounds crazy, that’s really how you do it.

Another expense you don’t want to miss out on is to reimburse yourself for your home office deduction: It’s hard to claim a home office deduction on a Sub-S corporation. Like other employee expenses, it would go on your Schedule A and be subject to the 2% limitation rules like any other employee business expense. Many accountants won’t even touch a home office for a Sub-S Corporation.

Some people try to charge rent to their S Corps for their home office, but that’s just moving your income from one taxable entity to another so you don’t really save anything on you taxes that way either..

What you want to do is reimburse yourself for your home office deduction in a fully accountable plan. That’s a phrase that you want to remember: fully accountable plan. Prepare a form 8829 Home Office form like you were doing it for a sole proprietorship and use that report to determine how much you should reimburse yourself for your home office. Remember, it’s a reimbursement, not a rent payment. It reduces taxable income to the company, but it is not taxable to you because you have “accounted” for the expenses. For more information about home office deductions, you might want to read this post: How to Boost Your Home Office Deduction

If you’re interest in more year end tax tips, you might also want to check out: Year End Tax Tips for Tiny Business Owners.

Posted on December 6, 2011November 27, 2016 by Jan Roberg

Year End Tax Tips for Tiny Business Owners

Planning ahead on your taxes could save you money!

Updated for 2016!

Tiny business owners, you know who you are: you’re a single member LLC or sole proprietor, or maybe you’re in business with your spouse. You might even have an employee or two, but that’s about it. When Congress passes laws to help “small business” they don’t mean us. This post is for you. If you have a Sub-chapter S corporation, I’ve got some different tips here: Tax Tips for Sub-chapter S Corporations

Number 1: If you’re going to be in the red for this year, you don’t really need to worry about reducing your business tax, right? Your negative business income will help offset your other income (if you’re lucky enough to have some). You can devote your energy to being profitable next year.

Number 2: If your business is in the black, congratulations! You’re going to want to look at cash flow and make sure you’re got enough cash to pay your upcoming expenses (like payroll and payroll tax if you’ve got it), but let’s look at some ways to reduce your excess income before the year is out.

Hire your kids: If you’ve got kids under the age of 18, you can hire then without having to pay FICA. It used to be if you had an LLC, you paid FICA for your kids but that changed in 2011 so even if you have an LLC, you don’t pay FICA on your children’s wages. There are rules that have to be followed, but if you could use a little help at work this time of year you’d at least be keeping the money in the family. For more information check this: Hire Your Kids

Pre-pay business expenses: Most tiny business owners use something called “cash basis accounting”, basically, you’re taxed on what comes in versus what goes out. If you are cash heavy, you can pre-pay some of your business expenses for up to twelve months. For example: I lease my office space, I’ve got a one year contract so I know that I’m going to have that monthly expense for the rest of the year. If I were cash heavy (in my dreams) I could prepay my rent for the next year and write it off on this year’s taxes. But you see how you can play with that? While I won’t be paying a full year of rent in advance, I did pay a few January bills early.

Delay invoices: Remember, this only works if you’re cash flush. Let’s say you did a job and a client owes you $1000 and you normally would send out the bill with a due date of December 30th. Change to due date to January 15th—you’re pushing that income ahead to next year. Besides, your client might just appreciate the break at Christmastime. I set up a billing schedule for a client that didn’t start until January and I used “I thought you could use a little Christmas break.” She was thrilled and I delayed the income—talk about a perfect win/win situation.

Credit card purchases: According to IRS rules, if you buy something with a credit card, you’ve bought it now. So, let’s say you’re a little cash poor right now but you’ll have the revenues next month to cover your expenses. Pay expenses with your credit card and it will count as having been paid when charged. I always like to be cautious about credit card spending–hate those bills, but it’s a good solution for some businesses.

This one I don’t like to say, but buy equipment: If you need it. I almost hate to list this as advice because it’s the standard that everybody says every year. One of my clients fired his old accountant for saying it. Like he said, “I know what I do need and don’t need to run my business and I don’t need any more equipment. What other ideas you got?” Here’s my advice, “Don’t buy crap you don’t need.” If you do need equipment, and you’re profit heavy, it’s better to buy in December than in January. But buy what makes sense for the business.

Get your retirement plan in place: If you’re just investing in an IRA, you don’t need to worry about that yet, you’ve got until April to do that. If you’ve been wanting to set up a SEP or a 401(k), you need to get that done by December 31st. Contact your financial advisor about setting up your business retirement plan.

Last, because this isn’t really business: charitable contributions. If you’re a sole proprietor, your charitable contributions do not count as business expenses. So if you give money to the Salvation Army, that’s a personal deduction, not a business deduction. Every year, I see a lot of people trying to claim their charitable contributions as business expenses and it won’t fly with the IRS. Even if you pay a charity from your business bank account, it’s not allowed as a business expense. Charitable contributions won’t help reduce your self-employment taxes. Please give to charities and give generously, but know that it’s a personal deduction, not a business one.

Posted on June 24, 2011May 31, 2016 by Jan Roberg

Tax Tips for Artists: Things You Need to Know!

Photo by Preston Kemp on Flickr.com

It’s audit season and I just got back from meeting with the IRS. So far this season, I’ve worked with two different artists and they both were contacted about the same thing: Cost of Goods Sold.

If you go to the IRS website and research what they’re looking for, you’re not going to find much information. I did find an old IRS audit guideline for artists from back in the 90’s, but that didn’t address Cost of Goods Sold for artists either.

In a normal business, Cost of Goods Sold would be what you pay for the stuff you sell. For example: say you own a teddy bear store. You pay $5 for each bear and then you turn around and sell the bear for $10. You start the year with 100 bears in your inventory, you buy 500 more bears to sell, and you end the year with 50 bears in your inventory. Let’s do the math:

Beginning inventory: $500 (100 bears times $5 each)

Purchases: $2,500 (500 bears times $5 that you paid for each new bear)

Ending inventory: $ 250 (because you have 50 bears left times the $5)

Cost of Goods sold: $2,250 (this is the confusing one: you take the 500 and add the 2500—that’s all the bears that you’ve purchased to sell, right? That equals $3000. Then you subtract the ending inventory 250 (because you didn’t sell those) and you’re left with $2,250—that’s your Cost of Goods Sold.)

But if you’re an artist, you don’t have a bunch of identical $5 bears. How do you even begin to value your artwork? Here’s the thing—most artists should not be doing a Cost of Goods Sold report on their taxes. Let me repeat that: Most artists should NOT be doing a Cost of Goods Sold report on their taxes.

Think about your art. If each piece is a unique work, where the value of the piece is mostly due to your labor as opposed to the materials that you put into the work, then generally you’re fine just writing off your expenses as “expenses” rather than listing your materials as a Cost of Goods Sold.

So at what point do you “cross over” from just recording your expenses to actually keeping inventory? I asked that at the IRS the other day. “It’s really hard to say,” was the answer I got. Even for an IRS agent with years of experience, this was a tough question. If you’re mass producing works-for example you’ve produced a limited edition of numbered prints, well then that’s a case where you should be taking inventory. Still—your purchases are only the products that you sell. For example: you pay $2,000 to have 100 prints produced which you then hand number and sign. You sell 70 of the prints for $100 each.

Your Beginning inventory: $0 (up until now, all of your art was unique. You never did COGS before)

Purchases: $2000 (because that’s what you paid for them)

Ending inventory: $600 (You have 30 prints left and they cost you $20 each because 2000 divided by 100 equals 20.)

Cost of Goods Sold: $1400 (You started with $0, you added $2000 in purchases. To get the Cost of Goods Sold you subtract the ending inventory of $600 and you get $1400.)

Is this making sense? Art and Accounting don’t go together well, but you need to know this stuff. (And I’ve worked with enough artists by now to know that you’re way better at math than you let on.)

But what about the 70 prints I sold for $100 each? That goes in the front of your schedule C, $7000 under gross receipts on line 1.

Cost of Goods Sold will go on line 4.

You’ll take your Gross Receipts minus your Cost of Goods Sold to get your Gross Income. In this example, you’d take the $7,000 – $1,400 to get $5,600.

But once again, let me make this clear—as a professional artist, you shouldn’t be using Cost of Goods Sold unless you are producing a significant amount of work and you have a way of determining the cost and a way of counting the work. For example: A painter could count canvasses, but it would be almost impossible to count paint. Canvas could be a COGS but paint would be a regular expense. A potter might be able to count pounds of clay, but the tools and glazes might need to be a regular expense.

If you choose to count your inventory, it’s important to value items at what they cost and not what you are selling them for. Let’s go back to our example about the prints. You paid $20 apiece for them so your ending inventory of 30 prints is worth $600. If you value your inventory at what you want to sell the prints for ($100 apiece) then your ending inventory will be $3000—that’s more than you spent on the prints to begin with. If you did that on your tax return, your COGS would come out as negative $1000 and your income would go up to $8,000 instead of the $7000 that you actually made. Valuing your inventory at the “retail” price will really mess you up, so don’t do that.

Remember, as an artist your business situation is as unique as your art. Don’t let your packaged software intimidate you into using Cost of Goods Sold when you shouldn’t. If you’re thinking that you produce enough that you should be taking inventory, spend the money to get help from a professional so that you get started on the right track. It’s much cheaper than an audit.

Posted on February 9, 2011November 15, 2018 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 February 2, 2011May 31, 2016 by Jan Roberg

Tax Tips for Senior Citizens

This 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 January 26, 2011May 31, 2016 by Jan Roberg

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 31^st 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 January 19, 2011May 31, 2016 by Jan Roberg

Tax Tips for Gay Couples

Even if you're legally married, federal tax law doesn't recognize your marriage.

There’ve been a lot a changes this past year with some states legalizing gay marriage, some authorizing civil unions, and of course the end to “Don’t Ask Don’t Tell” in the military. But despite all these changes, US federal tax law still does not recognize gay relationships in tax law. Even if you’re in a state where your marriage rights are fully recognized, you’ll still be considered unmarried for federal tax purposes and social security benefits. These tips are for couples who are legally married, or would be legally married if they lived in a state that allows gay marriage.

There are two main issues here that you have to deal with. The first is working to reduce your current tax liability and the second is to ensure that you’ve got sufficient coverage for both of your retirements. To that end, you need a tax professional and a financial advisor that can sit down with you and your partner to develop some long term and short term strategies. Right now, if you’re thinking, “I’d never even tell my tax guy I’m gay,” then it’s time to hire a new advisor.

Couples where both partners earn wages and have similar incomes: are pretty straight forward for tax purposes. You can both take advantage of IRA contributions, you’ll both receive equal social security benefits from your wage earning, you won’t lose any tax benefits from the married filing separately status, and your tax rates will be fairly comparable to folks filing as married. In this situation, many couples just split everything evenly and that’s a pretty fair arrangement. But, it may make sense to load all of the deductions onto one partner and let the other partner take the standard deduction.

For example: let’s say that Jen and Gina together would have itemized deductions of $13,000 a little more than the $11,400 they would claim as a standard deduction if they could file as married. Filing as single they can each claim a standard deduction of $5,700. If they’re splitting the itemized deductions, they can each claim a deduction of $6,500. But, if we load all of the deductions onto Jen and have Gina claim the standard deduction, then together they’d have a combined deduction of $18,700 and that would save them a substantial amount of money.

Now, remember, it’s not that perfectly even. In most cases, part of the $13,000 would be state income tax, you can’t load that onto your partner’s return, but with planning, you can put your mortgage, real estate tax, and charitable contribution deductions all on one person and enjoy a substantial tax savings.

Couples where there is self employment income: The biggest tax issue facing sole proprietors is paying the self employment tax. If you’re already in the 25% income tax bracket, and you add that 15% self employment tax to that, then you’re paying 40% tax on your income. Anything you can do to reduce your self employment tax is a good thing.

One possibility is to hire your partner as an employee. This in itself doesn’t really eliminate your self employment tax as you’re just shifting it to your partner and paying the employer’s share. But, hire your partner and provide health care benefits and now you’ve got something. For example: let’s say Jack and Dean have been together for 10 years. Jack has modest income from a part time job but spends a lot of time helping Dean with his small business as a professional entertainer. Dean is fairly successful and averages about $100,000 a year in income. Jack books appointments for Dean and makes sure that Dean is where he needs to be at all times. If Dean were to have to hire someone to do Jack’s job, he estimates that it would easily cost him $15,000 or more. So instead, he hires Jack as an employee. Instead of taking a salary of $15,000, Jack chooses a smaller wage but wants health insurance benefits. Because Jack would be Dean’s only employee, Dean can afford to have his employee package include health insurance benefits. And, more importantly, Dean could provide a health care plan that covered Jack’s partner (which happens to be Dean.) Now Jack and Dean have just excluded all of their health care costs from self employment tax.

Here’s why: Health care benefits reduce the employer’s taxable income. Health care benefits are not included in the employee’s taxable income. It’s a win/win situation for both of them.

Everyone’s tax situation is unique and the laws keep changing so you have to stay on top of things. Right now though, with the tax laws as they are, doesn’t it make sense to take advantage of them instead of letting them take advantage of you?