The Tax Cuts and Jobs Act (H.R. 1) as approved by Congress, impacts virtually every individual and business on a level not seen in over 30 years. As with any tax bill, there will be 'winners' and 'losers.' This historic bill calls for lowering the individual and corporate tax rates, repealing countless tax credits and deductions, enhancing the child tax credit, boosting business expensing, and more. The bill also impacts the Affordable Care Act (ACA), effectively repealing the individual shared responsibility requirement. Most provisions are effective starting in 2018.
H.R. 1 carries temporary tax rates of 10, 12, 22, 24, 32, 35, and 37 percent after 2017. Under prior law, individual income tax rates have been 10, 15, 25, 28, 33, 35, and 39.6 percent.
RESULT The IRS has announced that initial withholding guidance (Notice 1036) to reflect enactment of the Tax Cuts and Jobs Act, would be issued in January 2018, “which would allow taxpayers to begin seeing the benefits of the change as early as February.”
H.R. 1 nearly doubles the standard deduction. It increases the standard deduction to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other individuals, indexed for inflation for tax years beginning after 2018. All increases are temporary, starting in 2018 but ending after December 31, 2025. Under prior law, the standard deduction for 2018 had been set at $13,000 for joint filers, $9,550 for heads of households, and $6,500 for all other filers. The additional standard deduction for the elderly and the blind ($1,300 for married taxpayers, $1,600 for single taxpayers) is retained.
RESULT Goal of higher standard deduction is to simplify tax filing through cutting, by more than half, those taxpayers who would otherwise do better by itemizing deductions. Of course, that group will realize less of a net tax benefit than those taxpayers who do not now itemize. Supporters argue that, in addition to simplification, it effectively creates a more broadly applicable “zero tax bracket” for taxpayers earning less than the standard deduction amount.
Doubling of the standard deduction effectively eliminates most individuals from claiming itemized deductions other than higher-income taxpayers. For the vast majority of married taxpayers filing jointly, only those with allowable mortgage interest, state income and local income/property taxes (up to $10,000), and charitable deductions that exceed $24,000 will claim them as itemized deductions (absent extraordinary medical expenses). With fewer individuals claiming those deductions, this could have broad impact on both real estate prices and charitable organizations despite retaining those two deductions, in modified form.
New law eliminates the deduction for personal exemptions and the personal exemption phase-out through 2025. That repeal, as scored by the Joint Committee on Taxation, will raise $1.22 trillion in revenue over the next 10 years. That repeal will reduce the net benefit of the standard deduction for most taxpayers. An enhanced child and family tax credit is positioned to make up some of the difference for certain families. H.R. 1 does not change the current tax treatment of qualified dividends and capital gains. The new law does not repeal the Affordable Care Act’s taxes, except for the penalty under the 'individual mandate'. Left untouched are the net investment income (NII) tax, the additional Medicare tax, the medical device excise tax, and more.
Mortgage interest deduction
The new law limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), in the case of tax years beginning after December 31, 2017, and beginning before January 1, 2026. For acquisition indebtedness incurred before December 15, 2017, the new law allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately).
New law also allows taxpayers to continue to include mortgage interest on second homes, but within those lower dollar caps. However, no interest deduction will be allowed for interest on home equity indebtedness.
State and local taxes
The new law limits annual itemized deductions for all non-business state and local taxes deductions, including property taxes, to $10,000 ($5,000 for married taxpayer filing a separate return). Sales taxes may be included as an alternative to claiming state and local income taxes.
RESULT The new law short-circuits an immediate year-end tax strategy by adding a provision that disallows prepayment in 2017 of state and local income taxes imposed for a year after 2017 to avoid the new dollar limitation.
Miscellaneous itemized deductions
The new law temporarily repeals all miscellaneous itemized deductions that are subject to the two-percent floor under current law.
The new law temporarily enhances the medical expense deduction. It lowers the threshold for the deduction to 7.5 percent of adjusted gross income (AGI) for tax years 2017 and 2018.
RESULT The loss of many itemized deductions will channel an even greater number of taxpayers to the standard deduction. Big losers may include state and local governments that depend upon the federal itemized deductions for state and local income taxes and real estate taxes as an indirect subsidy for those taxes. Limitations on the mortgage interest deduction will also likely hurt the housing industry.
Once again, the concessions for retaining some deductions are valuable only to those taxpayers who will do better continuing to itemize deductions than taking the higher standard deduction.
The new law temporarily increases the current child tax credit from $1,000 to $2,000 per qualifying child. Up to $1,400 of that amount would be refundable. It also raises the adjusted gross income phase-out thresholds, starting at adjusted gross income of $400,000 for joint filers ($200,000 for all others). The child tax credit is further modified to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children.
RESULT As a credit, in contrast to a deduction, the enhanced child credit has been highlighted as one of the provisions that will lower overall tax liability for middle-class families.
The new law retains the student loan interest deduction. It also modifies section 529 plans and ABLE accounts. It does not overhaul the American Opportunity Tax Credit, as proposed in the original House bill. The new law also does not repeal the exclusion for interest on U.S. savings bonds used for higher education, as proposed in the House bill.
RESULT Exclusion for graduate student tuition waivers is retained. New law does not renew the above-the-line deduction for education expenses that expired at the end of 2016.
The new law repeals the deduction for alimony payments and their inclusion in the income of the recipient.
RESULT To give taxpayers time to adjust, new rules will apply only to divorce or separation instruments executed after December 31, 2018.
The new law generally retains the current rules for 401(k) and other retirement plans. However, it repeals the rule allowing taxpayers to re-characterize Roth IRA contributions as traditional IRA contributions to unwind a Roth conversion. Rules for hardship distributions are modified, among other changes.
Alternative Minimum Tax
New law retains the alternative minimum tax (AMT) for individuals with modifications. It temporarily increases (through 2025) the exemption amount to $109,400 for joint filers ($70,300 for others, except trusts and estates). New law also raises the exemption phase-out levels so that the AMT will apply to an income level of $1 million for joint filers ($500,000 for others). These amounts are all subject to annual inflation adjustment.
Affordable Care Act
New law repeals the Affordable Care Act (ACA) individual shared responsibility requirement, making the payment amount $0. This change is effective for penalties assessed after 2018.
RESULT IRS has cautioned that, under current law, for tax year 2017, it will not consider a return complete and accurate if the taxpayer does not report full-year coverage, claim a coverage ex- emption, or report a shared responsibility payment on the return.
H.R. 1 calls for a 21-percent corporate tax rate beginning in 2018. The new law makes the new rate permanent. The maximum corporate tax rate currently tops out at 35 percent.
RESULT Although the current 2017 maximum corporate tax rate is 35 percent, many corporations now pay an effective tax rate that is considerably less.
Under the new law, the 80-percent and 70-percent dividends received deductions under current law are reduced to 65-percent and 50-percent, respectively. It also repeals the AMT on corporations.
H.R. 1 increases the 50-percent 'bonus depreciation' allowance to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft). A 20-percent phase-down schedule would then kick in. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property.
The new law raises the cap placed on depreciation write-offs of business-use vehicles. The new caps will be $10,000 for the first year a vehicle is placed in service (up from a current level of $3,160); $16,000 for the second year (up from $5,100); $9,600 for the third year (up from $3,050); and $5,760 for each subsequent year (up from $1,875) until costs are fully recovered. The provision is effective for property placed in service after December 31, 2017, in taxable years ending after such date.
Section 179 Expensing
The new law enhances Code Sec. 179 expensing; setting the Code Sec. 179 dollar limitation at $1 million and the investment limitation at $2.5 million.
RESULT Although the differences between bonus depreciation and Code Sec. 179 expensing are lessened if both offer 100-percent write-offs for new or used property, some remain. Code Sec. 179 property is subject to recapture if business use of the property during a tax year falls to 50 percent or less; but Code Sec. 179 allows a taxpayer to elect to expense only particular qualifying assets within any asset class.
Deductions and Credits
Numerous business tax preferences are eliminated. These include the Code Sec. 199 domestic production activities deduction, non-real property like-kind exchanges, and more. Additionally, the rules for business meals are revised, as are the rules for the rehabilitation credit. The new law leaves the research and development credit in place, but requires five-year amortization of research and development expenditures. It also creates a temporary credit for employers paying employees who are on family and medical leave.
The new law generally caps the deduction for net interest expenses at 30 percent of adjusted taxable income, among other criteria. Exceptions exist for small businesses, including an exemption for businesses with average gross receipts of $25 million or less.
Currently, up to the end of 2017, owners of 'pass-through' entities, pay tax at the individual rates, with the highest rate at 39.6 percent. The new law provides a 20 percent deduction against qualified pass-through business income equal to the lesser of 20% of the taxpayer's 'qualified business income' OR the greater of (a) 50 percent of wage income or (b) 25 percent of wage income plus 2.5 percent of the cost of tangible depreciable property, and many service businesses are excluded, such as trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
RESULT Rules are in place to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.
Net Operating Losses
The new law modifies current rules for net operating losses (NOLs). Generally, NOLs will be limited to 80 percent of taxable income for losses in tax years beginning after December 31, 2017. It also denies the carry back for NOLs in most cases while providing for an indefinite carry forward, subject to the percentage limitation.
Identity theft is the fastest growing crime in America, with the number of identity theft incidents nearing 10 million a year. And in most cases, you won't know you are a victim of tax-related identity theft until you file your tax return.
How And When To Report Tax-Related Identity Theft
There are usually two ways a taxpayer becomes aware he or she is a victim of tax-related identity theft:
Filing the ID Theft Affidavit notifies the IRS that someone else has already filed a return using your SSN or you have been informed of a suspicious return filed or you know your information has been compromised due to a lost or stolen wallet or for some other reason. This notification allows the IRS to take steps to secure your account.
Most cases are resolved within 120 days but can take up to 180 days. Certain tax-related identity theft victims will be placed into the Identity Protection PIN program to add an extra layer of identity protection. Taxpayers who are victims of identity theft will receive a letter (CP01A) with an Identity Protection Personal Identification Number (IP PIN) prior to the start of next filing season to help protect their tax returns going forward.
And if your refund is delayed due to ID theft and it’s causing a financial hardship such as an imminent eviction, utility cutoff, inability to pay for medical needs, tuition, etc., you should contact the Taxpayer Advocate Service..
If you are a victim of identity theft, the Federal Trade Commission (FTC) recommends these steps:
IRS ID Verification Service
A pre-screening procedure has been implemented for suspicious tax returns. But since the return could be legitimate, the IRS has provided opportunity to verify identity. When the IRS receives a suspicious return, Letter 5071C will be mailed, asking for verification of identity. The letter provides two options for responding. Either by calling the toll-free number listed on the letter or by visiting idverify.irs.gov within 30 days. Whichever option you use, have available a copy of your prior year tax return and your current year tax return, if you filed one, including supporting documents.
If the taxpayer fails to respond to the verification request or responds and answers a question incorrectly the IRS will flag the return as fraudulent and follow the prescribed procedures for resolving identity theft cases.
If identity is verified, the taxpayer can then confirm whether or not they filed the return in question. If they did not file the return, the IRS can take steps at that time to assist them. If they did file the return, it will take approximately six to nine weeks to process it and issue a refund.
So many of us have already begun to make plans to go south. And Florida is often the choice, presenting us with warm weather, a relaxed lifestyle, and let's not forget golf and beaches! But Florida also offers the opportunity to significantly reduce taxes.
There is no state income tax or state estate tax in Florida, and real estate tax laws favor residents over nonresidents, so for these reasons alone, a move to Florida often provides enough tax savings to easily cover Florida living expenses.
However, it is crucial to properly establish domicile and understand the difference and relationship between the laws of the two states. Since most of us will often maintain some connection to Massachusetts, problems will most likely come up if both states’ laws are not well thought-out when planning or contemplating a move to Florida.
To take advantage of Florida’s favorable tax laws, one must become an actual Florida resident, not a Massachusetts resident spending time in Florida.
And the standard used to determine establishment of domicile is whether he or she;
Physical presence is fulfilled when one purchases a home or rents an apartment in the new state and spends time during the year living in that residence. But intent involves examining factors indicating intent to be a resident of the new state against those showing an intent to remain a resident of the former state.
Domicile analysis can be applied to taxpayers purchasing homes in Florida, while retaining a condominium in Massachusetts, even after spending time throughout the year at both homes, and filing multiple years as Florida residents. Domicile analysis is often used by the Massachusetts Department of Revenue, DOR, as a way to challenge residency by investigating whether there has been failure to establish 'clear and convincing evidence' of an intent to become a Florida resident.
Connections to Massachusetts, including ownership of a condominium, association with the business community, and visits with family members on holidays and special occasions, are often examined. And while the domicile test does not require a complete severance of one’s ties to his or her former residence, there may be an attempt by DOR auditors to examine whether intent to become Florida residents has been established.
If an individual intends to become a Florida resident, and wants to minimize any potential issues from such a change, there are many steps that can be followed. These steps include, but are not limited to; filing a homestead exemption, changing the primary address for credit cards and bills, changing voter registration, changing title to automobiles, obtaining a Florida driver’s license, executing Florida estate planning documents, opening Florida bank and financial accounts, filing income tax returns as a Florida resident, acquiring Florida burial plots, consulting with a Florida physician, joining Florida social and religious organizations, and changing membership status with non-Florida social and religious organizations to non-resident, becoming active in Florida politics, and opening a Florida safety deposit box.
In addition, file a Florida Declaration of Domicile with the Clerk of the Circuit Court for the county of residence in Florida. This filing, authorized under the Florida Statutes, allows placing in public record a sworn statement that he or she resides in Florida and intends to make Florida his or her permanent residence, and serves as further evidence in support of a genuine change of domicile.
For taxpayers who maintain homes in Massachusetts, the continuing ties to Massachusetts often go well beyond real estate maintenance. As noted, these continuing ties typically include; visits to children and grandchildren living in Massachusetts and social, legal, financial and business relationships with friends and advisors in Massachusetts, as well as receiving specialized medical treatments in Massachusetts.
Thankfully, the Appellate Tax Board, ATB, has recognized ties continue to exist. The Board has stated, 'continuing ties to Massachusetts do not prevent a finding of change of domicile; such change does not require that a taxpayer divest himself of all remaining links to the former place of abode, or stay away from that place entirely.'
Applying common sense certainly helps in such situations, and where the taxpayer 'centers' his or her life is often key in determining the taxpayer's intent. In a recent case, the ATB overruled the DOR and held for a taxpayer who had maintained social ties to Massachusetts. The Board noted the taxpayer joined a church in Florida, becoming members and eventually directors of the neighborhood housing association, developed a large number of friends in Florida and attended local Elks and Moose lodges in Florida. ATB countered DOR's argument that taxpayer's social ties to Massachusetts prevented a change in domicile. Due to taxpayers' changes previously noted, as well as changes in drivers' licenses, voter registrations, and similar items, the ATB ruled that the taxpayers had indeed changed their domicile to Florida.
183 Day Rule
Even if domicile is well established, there may be an additional residency hurdle. If a Massachusetts residence continues to be maintained, then Massachusetts may consider legal residence for tax purposes to be Massachusetts, even if the taxpayer is domiciled in another state. If the taxpayer maintains a permanent place of abode in Massachusetts and spends more than 183 days, including partial days, in Massachusetts during the year, then efforts to establish domicile outside of Massachusetts could be worthless, if challenged.
The best way of avoiding the application of these rules is to spend 183 days or less in Massachusetts during each tax year in question and by maintaining detailed records to prove the amount of time spent within or outside of Massachusetts. In an audit, the Department of Revenue may want copies of credit card statements, phone bills, and bank account statements for the years in question as evidence of location during the tax years. And keeping airline tickets, indicating dates of stay within and outside of Massachusetts, and a journal of dates spent in Massachusetts is a good idea.
If you are unable to limit time in Massachusetts to 183 days, then proving you maintain no 'permanent place of abode' in Massachusetts may be possible, but it can be difficult. Per Massachusetts definition; a permanent place of abode is a dwelling continually maintained by a person, whether or not owned by the person, and includes a dwelling owned or leased by the person's spouse.
The Department of Revenue maintains a list of exceptions to the definition of a 'permanent place of abode.' Unless you meet one of the exceptions, it will not be possible for a 'dwelling place' in Massachusetts to avoid treatment as a permanent place of abode. Having children or grandchildren move into the home or renting out the property for less than a year will not be adequate, if challenged. The only rental exception the DOR has recognized is a full rental to a non-related individual, for at least one year, where the taxpayer has no right to occupy any portion of the premises during the lease period.
Therefore, taxpayers who wish to maintain a home in Massachusetts yet receive tax benefits of having a domicile outside of Massachusetts must prove, if challenged, that they have spent more than 183 days outside of Massachusetts and have established a domicile outside of Massachusetts.
If you don't pay, the IRS files liens as claims against your real and personal property in order to secure the payment of taxes you owe. The filing of the Notice of Federal Tax Lien serves as a public notice to other creditors that the IRS has a claim against your property.
Not only do these liens appear on title to your real property, they also appear on your credit record and can affect your ability to borrow money. Even after the tax liability is paid off and the IRS releases the lien, the lien release will stay on your credit record for up to seven years unless the IRS agrees to withdraw the lien.
Thankfully, the IRS Fresh Start program makes it a bit easier for taxpayers to pay back taxes and avoid tax liens. The goal is to hopefully reduce the harmful impact of a lien on a taxpayer. Key elements include;
These new taxes only apply when income is over certain levels. You generally won’t pay either of these taxes unless you make over $200,000 in one year. If you are married and you file a separate return, you may pay additional taxes after your income exceeds $125,000. You never pay both of these taxes on the same income.
The investment income tax is based on investment income, such as interest and dividends, while the additional Medicare tax is on wages and other earned income.
Starting with your 2013 tax return, due when you file in 2014, you must pay an additional 3.8% on any “net investment income” if your modified adjusted gross income is more than $200,000, $250,000 if married filing jointly, or $125,000 if married filing separately.
Investment income is money you receive when your investments are working for you. This includes interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.
Investment income does not include gain from the sale of your home that you can exclude. However, if you have gain from the sale of your home that you cannot exclude, you may owe net investment income tax on that amount.
Investment income does not include wages, unemployment compensation, Social Security benefits, alimony, tax-exempt interest, or self-employment income.
Before you pay the additional tax on investment income, you can deduct certain expenses. This may include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes assignable to the investment income.
What About My Children's Investments?
Will I have to pay net investment income tax on my children’s interest, dividends and capital gains that I report on my Form 1040? You won’t pay this tax on your children’s income that you exclude from taxable income because of the threshold amounts on Form 8814. However, you may pay the net investment income tax on the remaining portion of your children’s investment income if you report it on your return. Because of this, if you are subject to the net investment income tax, you may want to file separate returns for your children.
Do I have to include the net investment income tax in my estimated tax payments? Yes. You should take the new tax into account when you make your quarterly estimated tax payments, or you may owe additional taxes, penalty and interest.
Additional Medicare Tax…
You must pay this tax if your wages, compensation, and self-employment income, $250,000 if filing jointly, or $125,000 if married filing separately, and for all others, $200,000.
The additional tax is 0.9% of your wages over $200,000, and will be withheld by your employer. If you are paid by more than one employer, and do not earn more over $200,000 from either one, but you will be over the threshold, then you pay the additional Medicare tax along with your other tax liability.
However, if you had withholding on the excess, and you are filing jointly, with total wages and compensation not more than $250,000, then you do not owe the tax and your total tax liability will be reduced by the amount of additional Medicare tax you have withheld.
Workers with high salaries may be vulnerable to under-withholding of the 0.9% additional Medicare tax on earned income. This can happen during a midyear job change or with working spouses.
As an example, take for instance a single taxpayer who earns $175,000 from each of two employers. With earned income of $350,000, minus the $200,000 threshold for single filers, he’ll owe additional Medicare tax on $150,000. Yet employers don’t withhold the tax until a worker’s wages reach $200,000. So none of this tax will be withheld by either employer.
And as another example, consider a married couple, with one spouse earning $175,000 and the other $300,000. Their joint earned income of $475,000, minus the $250,000 threshold for taxing joint filers, leaves $225,000 subject to additional Medicare tax. But the first spouse won’t have any of the tax withheld, and the second spouse’s employer will only withhold on $100,000, ($300,000 salary, minus $200,000 threshold).
With the Defense of Marriage Act provision defining marriage overturned, many same-sex couples are facing legal responsibilities and benefits that many never had considered….
In June, the U.S. Supreme Court issued a ruling for the Windsor v. United States case. The court found a section or provision of the federal Defense of Marriage Act, (DOMA), which defined marriage as between a man and a woman, to be unconstitutional.
The Windsor case involved Edith Windsor and Thea Spyer, who married in Canada in 2007, after being in a relationship for 40 years. When Spyer died in 2009, Windsor was forced to pay $363,053 in federal taxes on Spyer’s estate, which she would not have had to pay if she’d been Spyer’s husband. She argued that DOMA, which prevented her from being considered Spyer’s spouse for federal purposes, cost her $363,053.
Below are some key benefits that same-sex married couples are now entitled to under the Windsor decision:
Death or disability has a devastating impact. For a spouse who previously relied on the deceased or disabled spouse’s earnings to maintain the household, the financial impact can be catastrophic.
S.S. benefits are based on your own earning history OR the earning history of your spouse. A surviving spouse or disabled spouse is entitled to benefits based on his or her spouse’s earnings. Until the Windsor decision, a disabled spouse or a surviving spouse, in a same-sex marriage, did not have access to spousal Social Security benefits.
Spousal rollover of IRA
IRAs and 401ks allow contribution to a retirement account tax-free, with contributions growing tax free. When the account owner reaches age 70.5, he or she must start taking withdrawals, and pay tax on the amount withdrawn.
If a married person dies, and owned an IRA or other qualified retirement account, the surviving spouse, as beneficiary of the account, has the right to take that retirement account as his or her own and may defer withdrawals until reaching age 70.5. This means the funds in the account continue to grow income tax free. This is a terrific tax benefit that was denied to same-sex spouses prior to the Windsor decision.
Joint federal income tax return
Due to the Windsor decision, same-sex married couples are able to file joint federal income tax returns. Filing a joint return usually reduces federal income taxes, especially when one spouse has a high income and the other has a low or no income. On the other hand, federal income tax will typically be increased when both spouses have high income.
For example, in 2013, single taxpayers reach the 33 percent tax bracket at $184,000 of income, but married couples did not hit the highest bracket until their income reached $223,000. It may be possible for same-sex couples to amend some prior years’ tax returns and collect significant refunds.
Spouses of federal employees are entitled to many benefits, including health insurance, dental and vision, life insurance, COBRA and more. These benefits are described on the federal employees' website, which now includes a statement indicating that, following the Supreme Court’s repeal of section 3 of DOMA, the government “will now be able to extend certain benefits to federal employees and annuitants who have legally married a spouse of the same sex.”
Estate and gift tax
The Windsor case is an estate tax case. Federal estate tax law allows for an unlimited deduction for assets that pass to a surviving spouse either by gift during life, or at death. This means that a surviving spouse never pays any estate tax upon the death of the first spouse.
However, when Edith Windsor’s spouse, Thea Spyer, passed away and left her estate to Edith, the IRS denied the estate the marital deduction and assessed $363,000 of estate tax against Ms. Spyer’s estate. Ms. Windsor paid and then successfully sued for a refund. The case made history.
Same-sex married couples now have the same right to the unlimited estate and gift tax deduction as heterosexual couples.
What to do…what’s next?
While the ruling has changed the lives of many, it has also raised issues that will likely take years and more court cases to resolve.
Couples need to ask themselves many questions, such as:
Should we get married?
Should we amend our previously filed tax returns?
Should we change our wills or trust?
Should we alter the way our investments are vested or titled?
Overall, many financial arrangements previously made should be reviewed. And since the ruling, there have been a number of lawsuits citing the Windsor case as a basis for granting same-sex married couples the same rights as opposite sex married couples in other areas of the law. In states that do not recognize same-sex marriage there may be additional difficulties to overcome. However, the Windsor decision is a significant step in providing same-sex spouses with the same security and benefits traditional married couples enjoy.
And while you can push your tax filing date, and paying, to the limit, you need to act, to make sure your tax bill is as small as possible. There are measures, many of them online or via smartphone apps, that you can put in place, to save you time, and save you money.
And there's an app for that..
Tracking expenses, time and mileage can be a pain, but not having and keeping important documents could lead to substantial penalties if you are audited. Small business owners and individuals with significant expenses, that are determined not to leave money on the table at tax time, can use the app Expensify, which allows recording billable hours, mileage to and from client offices, and expenses.
If it’s important for you to track every hour, then this app may help you accomplish that goal. It takes about one minute to enter in time and provide details about how many hours worked, hourly rate, client and project. If items billable are marked, then it automatically creates an invoice to send from your iPhone.
The app also allows capturing pictures of receipts, and it provides the ability to record mileage on the go. With IRS mileage rates at 56.5 cents per mile, taking advantage of every mile can help save money at tax time.
Don't play the guessing game..
Many taxpayers cut their expected refunds short, or increase their tax bill, because they lack accounting records and receipts. Then, at tax time, taxpayers have to guess at the amount spent for items that qualify as deductions. Playing the guessing game can cost you big bucks.
Using a tax checklist or organizer can help. These can be found on the Internet. A checklist serves as a road map of which expenses are deductible throughout the year. Also, having a sound system in place is the key to taking advantage of all available deductions. Your system doesn't have to be fancy, but it should be work for you. Programs such as Mint.com and other software can keep you on the right track. Small-business owners may benefit from sites such as Outright.com, to provide online bookkeeping to help categorize tax-deductible expenses upfront and create a custom reports. In addition to apps, review your bank statements monthly or bimonthly, and highlight expenses that are tax-deductible.
And how much do you owe?
If you are wondering how much you will owe in taxes, check out IRS.gov’s withholding calculator to help estimate tax liability. With a few clicks, you can determine whether you are on a path to a refund or owing money. If you are likely to owe money, you can complete Form W- 4 to make adjustments to your withholdings. However, if you are self-employed or receive income not subject to enough or any withholding, you may need to pay estimated taxes.
What are the requirements to file for investment income? Tax must be figured using the parents’ rates if a child’s investment income is more than $1,900 and meets one of three age requirements;
-under age 18 at the end of the year
-age 18 at the end of the year, did not have earned income that was more than half of his or her support
-full-time student over age 18 and under age 24 at the end of the year, did not have earned income more than half of his or her support
To figure your child's tax using your rate, fill out Form 8615,“Tax for Certain Children Who Have Investment Income of More Than $1,900,” and attach it to your child's federal income tax return.
And when certain conditions are met, you may be able to avoid having to file a tax return for your child by including the income on your tax return. In this situation, see Form 8814 and Parent's Election to Report Child's Interest and Dividends in Publication 929.
But keep in mind that when you add your child's income to your return, that extra money could mean the loss (or at least a reduced benefit) of some tax deductions and credits that are phased out as income grows. You should run the numbers on Form 8615 and Form 8814 to guarantee that you, and your child, pay the least possible tax on the investment earnings. If you have more than one child with unearned income, you must repeat this process for each child.
What if my child has a summer job and investment income? For a qualifying dependent child, any one of the situations below will require a federal income tax return to be filed;
Filing to recover taxes withheld. Some employers may automatically withhold part of pay for income taxes. By filing Form W-4 in advance of withholding, those who do not expect to owe any income tax can request that employers not withhold. But if the employer has already withheld taxes, file a return to get the taxes back from the IRS.
Are there other reasons to file? Yes, if self-employed and earned more than $400 or if Social Security or Medicare tax owed on tips is not reported to your employer. Remember, if a filing is required for investment income and there is no other income except unearned income, parents can avoid a separate filing by making an election to include the tax on their return.
Earned money from mowing lawns is a form of self-employment. While this type of work usually involves cash payments and does not require filing a tax return unless net profit from self-employment is $400 or more, it might be a good idea to report self-employment income, for two reasons;
Earning Social Security work credits - Children can begin earnings work credits toward future Social Security and Medicare benefits when they earn a sufficient amount of money, file the appropriate tax returns, and pay FICA or self-employment tax.
Start an IRA - By declaring self-employment income, your child becomes eligible to start a Traditional or Roth IRA and contribute up to 100% of net income from self-employment.
Who should file the return? The answer to this question is really up to you, as a parent. Interestingly, there are no official age guidelines defining who can sign and file a tax return. If your child is able to understand the instructions, and fill out the return, then by all means, have them do so. This can be an excellent opportunity to teach your kids about money management and the process of filing taxes. Just remember, they will be responsible for any penalties that might occur. If a child is too
young to handle this kind of responsibility, then you, as parent or guardian, will be expected to complete the form for them. If your child isn’t old enough to sign their own return, you should complete it, sign their name for them, and add “By (your name), parent (or guardian) for minor child.”
Filing can be educational. Filing income taxes can teach your child how the U.S. tax system works while helping them create sound filing habits early in life. In some cases, it also can help children start saving money or earning benefits for the future.
Ideas to communicate. Their first paycheck stub. It will show gross earnings, any deductions for income taxes and any deductions for FICA taxes (Social Security and Medicare). Explain that they will probably receive a refund of any income taxes withheld, but the FICA deductions won't be refunded, and they will continue for every paycheck the child receives, at any age. This is a good time to explain the basics of Social Security and Medicare and the benefits of earning credits in these programs.
Earning a paycheck can be a rewarding experience for your child-unless caught off-guard by the tax withholdings. You can minimize potential disappointments by helping him understand his role as a U.S. taxpayer. Generally, all citizens and residents must pay taxes to fund local, state and federal governments. Employers assist in this effort by withholding money from wages to cover each employee's tax liability.
Explain that two pieces of information are required on every income tax form; the taxpayer's name and tax identification number. The IRS wants these two items to match the data it has on file, and problems will arise if there is a discrepancy. Emphasize that individual income tax returns are due by April 15, but there is no penalty for filing earlier, and doing so generally is a good habit.
Point out that tax returns contain confidential information that should be protected from prying eyes. Set a good example by filing away completed returns and copies in a secure place. Explain that the signature attests to the form's truth, accuracy and completeness under penalty of perjury. Emphasize that perjury means "telling a lie under oath" to emphasize the need for honesty in filing taxes. Reinforce the importance of paying attention to taxes, filing on time and taking IRS obligations seriously.
You might not think much about it, but filing taxes will be part of almost every child's ‘growing-up’ experience. Since income tax filing is not taught in schools and it's not a captivating subject, many have only a vague idea of what income taxes are, let alone the specific rules they are required to meet. A parent’s role should be as a guide. The best way is to start teaching early, and walk them through the process the first few times. Fully explain the reasons for each action they are taking - and if you don't know the answer to their questions, make sure to talk to a professional who does. They may not want to admit it, but your children will need your help in understanding how income taxes work.