Tuesday, July 22, 2014

2014 Federal Income Tax Rates

As the close of the year draws near, taxpayers grow concerned about limiting their tax liability in 2014. By understanding their incremental federal income tax rates, individuals can appreciate the benefit received from a potential deduction.

2014 Income Tax Rate Schedules

Income tax rate tables, or brackets, are published each year by the federal government through the Internal Revenue Service or IRS. These tables outline the tax owed and incremental tax rates.  These schedules can also be used to estimate a potential income tax liability in 2014.  However, more accurate estimates can be achieved by completing Form 1040.

The American Taxpayer Relief Act of 2012 added a seventh bracket (39.6%) in 2013.  The remaining six rates were unchanged.  Reading a tax rate schedule is a fairly simple process.
The first step is to calculate an individual's total federal taxable income.  Again, IRS Form 1040 can help individuals determine that value more accurately.  Once the taxable income is known, the next step involves selecting the proper rate table.
There are four schedules, depending on the individual's filing status such as Single or Married, Filing Jointly.  The instructions for Form 1040 explain the process for selecting the correct status.

2014 Unmarried Individuals: Rate Schedule X

Taxable income is over -But not over -The tax is:Of the amount over -
$0$9,075$0 + 10%$0
9,07536,900907.50 + 15%9,075
36,90089,3505,081.25 + 25%36,900
89,350186,35018,193.75 + 28%89,350
186,350405,10045,353.75 + 33%186,350
405,100406,750117,541.25 + 35%405,100
406,750-118,118.75 + 39.6%406,750

2014 Married filing jointly or Surviving Spouses: Rate Schedule Y-1

Taxable income is over -But not over -The tax is:Of the amount over -
$0$18,150$0 + 10%$0
18,15073,8001,815.00 + 15%18,150
73,800148,85010,162.50 + 25%73,800
148,850223,05028,925.00 + 28%148,850
226,850405,10050,765.00 + 33%226,850
405,100457,600109,587.50 + 35%405,100
457,600 -127,962.50 + 39.6%457,600

2014 Married filing separately: Rate Schedule Y-2

Taxable income is over -But not over -The tax is:Of the amount over -
$0$9,075$0 + 10%$0
9,07536,900907.50 + 15%9,075
36,90074,4255,081.25 + 25%36,900
74,425113,42514,462.50 + 28%74,425
113,425202,55025,382.50 + 33%113,425
202,550228,80054,793.75 + 35%202,550
228,800 -63,981.25 + 39.6%228,800

2014 Head of Household: Rate Schedule Z

Taxable income is over -But not over -The tax is:Of the amount over -
$0$12,950$0 + 10%$0
12,95049,4001,295.00 + 15%12,950
49,400127,5506,762.50 + 25%49,400
127,550206,60026,300.00 + 28%127,550
206,600405,10048,434.00 + 33%206,600
405,100432,200113,939.00 + 35%405,100
432,200-123,434.00 + 39.6%432,200

Tax Rate Example Calculation

We're going to run through a quick example to illustrate how the above tables are used to determine a taxpayer's incremental tax bracket in 2014.  In this example, let's say that Bill's filing status is Married Filing Jointly.  That means he will be using Schedule Y-1 above.  If Bill's federally taxable income in 2014 is $100,000, then the tax owed is calculated as follows:
Bill is going to use the third row of the Y-1 schedule because his income falls between $73,800 and $148,800.  That puts Bill in the 25% tax bracket.  Calculating the tax liability from that table:
$10,162.50 + 25% x ($100,000 - $73,800)
$10,162.50 + 0.25 x $26,200
$10,162.50 + $6,550.00 = $16,712.50

Marginal Tax Rates

Anyone that understands how to use these tables also understands why they are referred to as marginal tax rates.  Within each rate schedule it's possible to find the taxpayer's incremental tax rate, or marginal rate of tax.  This is the rate at which each incremental dollar earned is taxed.  In the above example, the marginal tax rate was 25%.

One of the more common misconceptions is that if someone earns more money, then all of the income is taxed at the higher rate.  The above tables demonstrate this is simply not true.  Individuals are taxed at an incremental rate on marginal income.  That means an individual might be taking home less pay for each additional hour worked, but they are certainly bringing home more money.

Monday, July 21, 2014

Tax planning moves to consider for your new child

Now obviously, everybody’s situation is different, but below are 3 tax-planning moves you should  plan to make as soon as possible once you become a father. Perhaps one or more of them is relevant for you and your planning.
  1. Fund a 529 Plan – 529 plans are great way to save money for a child’s education. These accounts, like IRAs, allow you to accumulate funds on a tax-favored basis. Although there is no federal income tax deduction for contributions to a 529 plan, funds grow tax-deferred while in a 529 account and, if distributions are used to pay qualified higher education costs, those distributions are tax-free. Plus, although there is no federal income tax deduction available, many states offer a state income tax break for contributions made by its residents to its own plan. Just like IRAs, the earlier one starts saving in a 529 plan, the better off they will be. With higher education costs continuing to sky rocket, I’m going to start as early as I can! 
  2. Attempt to Establish a Roth IRA as Soon as Possible – There are no minimum age requirements to open a Roth IRA. In theory, even a newborn can have one. The key, however, is that a person, regardless of age, needs some sort of “compensation” to make a Roth IRA contribution. Usually, that compensation is some sort of earned income. Now you might ask, “How can a newborn have earned income?” Well, there are a number of ways. Perhaps you own a business and you use your child’s likeness on marketing material. You could pay them for that, legitimately of course. Then, an amount equal to that earned income could be contributed to their Roth IRA (provided they meet the other requirements). I personally have no idea when my child will generate earned income. Maybe it will be soon. Maybe not for 20 or more years. That said, whenever the time comes, I am going to do everything in my power to start his tax-free retirement savings off as early as possible, even if it means I have to make a contribution to his Roth IRA with my own money.
  3. Update my Beneficiary Forms – Updating one’s beneficiary forms doesn’t sound like a tax-planning move, but instead, simply an estate planning move. In reality, it is both. Designated beneficiaries – generally living, breathing people named on the beneficiary form – are able to stretch distributions over their life expectancy. This helps an account grow tax-deferred as long as possible and minimize the tax impact on any distributions.
If something were to happen to me in the near future and my children were to inherit my retirement funds, they would be able to distribute those funds over more than an 80-year period. 

Sunday, July 20, 2014

Tapping a 529 Plan: 5 Tips to Get the Most Out of College Savings

Apart from retirement, saving for college expenses is one of the longest-term goals that families set for their finances. After scrimping for years to build up your college savings, the last thing you want to do is make mistakes that will cost you when it comes time to make withdrawals.

If you've used 529 plans to save for college, making the most of the available tax advantages is just part of the picture. Here are five tips for making the most of your 529 plan cash.

1. Spend Your 529 Plan Money on the Right Expenses

You're allowed to get tax-free treatment on withdrawals for qualified higher education expenses. Those expenses include tuition, fees, books, supplies and equipment.

If the student attends college at least half-time or more, room and board also qualifies -- but the amount is limited to a figure set by the school. So if the student lives off-campus, ask the school for its maximum.

2. Don't Waste Your Opportunities for Other Tax Credits

Even if you have enough 529 plan money to cover every penny of your college expenses, you still might not want to withdraw the full amount you owe. That's because multiple tax breaks are available for college expenses, but you can only use each dollar of expenses for one benefit.

Specifically, many students and parents are eligible for the American Opportunity credit, which gives a tax credit of 100 percent of the first $2,000 and 25 percent of the next $2,000 of educational expenses. You can use 529 plan money to claim that credit, but if you do, then it won't be eligible for the usual tax-free treatment on 529 plan distributions. Yet you definitely don't want to miss out on what could be as much as $2,500 in free tax credits, so being smart with your planning involves using expenses where they'll help you and your kids the most.

3. Know the Implications of Who Gets the Check

Most 529 plans give you a choice to have withdrawals paid to you, your student or the college. Having money go directly to the school might seem to make the most sense, but some experts worry that can affect a student's financial aid from the school.

Having money paid to a parent or the student can raise tax-audit flags. Parents and students should keep meticulous records matching up money withdrawn from 529 plans to the qualifying expenses to convince the Internal Revenue Service that they in fact used withdrawals for eligible expenses.

4. Get the Timing Right

Schools don't typically use the calendar-year system that the IRS uses. So while withdrawing a full school year's worth of expenses might seem like the simplest, it won't pass muster with the IRS.

Rather, the IRS wants to see you take money out in the same calendar year in which it's due. So if your spring-semester bill isn't due until January, wait until January to take that money out of your 529 plan account.

5. Be Smart About Scholarships

One frequent concern among 529 plan savers is that their child will get a scholarship and not need the 529 plan money. If that happens, you can withdraw the scholarship amount from the 529 plan account. It won't be treated as a tax-free distribution, but you won't owe a 10 percent penalty on that amount.

Whether you want to take a scholarship-exception withdrawal depends on how much money you have in the 529 plan, what future expenses might be, and whether you have other children who need college money. But if this is the last chance to get money out of a 529 plan without paying a penalty, it's usually worth it to avoid paying more later on.

Saturday, July 19, 2014

4 Mid-Year Tax Tips That Could Save You Big Bucks

Here are four steps you can take to help prepare your 2014 taxes:
Manage your taxable income. For 2014, the top income tax rate of 39.6 percent will apply to individuals with taxable income over $406,751, or $457,601 for joint filers. If you expect your 2014 income to be near that threshold, start thinking of ways to reduce your taxable income by deferring income, contributing to pre-tax investments including to a retirement account, or shifting income to family members in lower tax brackets by giving them income-producing investments. “You want to manage your bracket,” said Rice. “It can translate into real savings.”

High-income earners subject to the alternative minimum tax should also pay close attention to their taxable income and in some cases, they may want to accelerate income. As always, your accountant should offer concrete strategies.
Generate investment losses. The stock market has had a strong run so far in 2014 and chances are, you’ve realized some gains. With the capital gains rate for taxpayers in the top bracket at 20 percent, you should keep track of how much capital gains you’ve realized or plan to realize, and consider selling some depreciated investments to generate losses and offset those gains. You can always repurchase these investments if you wait at least 31 days.
Contribute to retirement. It will help reduce your taxable income, as mentioned above, in addition to help you plan for the future. You can contribute to traditional IRAs, which will be tax deductible. Pretax deferrals to employer-sponsored retirement plans such as 401(k)s also help save taxes. “You pay no tax as long as the funds are in the account, which reduces your taxes for years to come,” Rice said. “Plus, tax-deferred compounding can help your investments grow more quickly.”
Plan for medical expenses. As of 2013, the threshold for deducting medical expenses increased from 7.5 percent of your adjusted gross income to 10 percent. You can deduct only expenses that exceed that floor. If they don’t, you can save by contributing to a tax-advantaged health care account such as a health savings account, HSA, or a flexible spending account, FSA. While contributions are pretax or tax-deductible and withdrawals are tax free, some rules and limits apply as to what types of medical expenses qualify. Another change for 2014 you can plan for now is the addition of a 3.8 percent Medicare tax, one of the main consequences of Obamacare for most taxpayers. That tax will kick in for married people making over $250,000.

Friday, July 18, 2014

5 Questions to Ask Before Making Gifts for Medicaid or Tax Planning

Many seniors consider transferring assets for estate and long-term care planning purposes, or just to help out children and grandchildren. Gifts and transfers to a trust often make a lot of sense. They can save money in taxes and long-term care expenditures, and they can help out family members in need and serve as expressions of love and caring.
But some gifts can cause problems, for both the generous donor and the recipient. Following are a few questions to ask yourself before writing the check:
  1. Why are you making the gift? Is it simply an expression of love on a birthday or big event, such as a graduation or wedding? Or is it for tax planning or long-term care planning purposes? If the latter, make sure that there's really a benefit to the transfer. If the value of your assets totals less than the estate tax threshold in your state, your estate will pay no tax in any case. For federal purposes the threshold is $5.34 million (in 2014). Gifts can also cause up to five years of ineligibility for Medicaid, which you may need to help pay long-term care costs.
  2. Are you keeping enough money? If you're making small gifts, you might not need to worry about this question. But before making any large gifts, it makes sense to do some budgeting to make sure that you will not run short of funds for your basic needs, activities you enjoy -- whether that's traveling, taking courses or going out to eat -- and emergencies such as the need for care for yourself or to assist someone in financial trouble.
  3. Is it really a gift (part one)? Are you expecting the money to be paid back or for the recipient to perform some task for you? In either case, make sure that the beneficiary of your generosity is on the same page as you. The best way to do this is in writing, with a promissory note in the case of a loan or an agreement if you have an expectation that certain tasks will be performed.
  4. Is it really a gift (part two)? Another way a gift may not really be a gift is if you expect the recipient to hold the funds for you (or for someone else, such as a disabled child) or to let you live in or use a house that you have transferred. These are gifts with strings attached, at least in theory. But if you don't use a trust or, in the case of real estate, a life estate, legally there are no strings attached. Your expectations may not pan out if the recipient doesn't do what you want or runs into circumstances -- bankruptcy, a lawsuit, divorce, illness -- that no one anticipated. If the idea is to make the gifts with strings attached, it's best to attach those strings legally through a trust or life estate.
  5. Is the gift good for the recipient? If the recipient has special needs, the funds could make her ineligible for various public benefits, such as Medicaid, Supplemental Security Income or subsidized housing. If you make many gifts to the same person, you may help create a dependency that interferes with the recipient learning to stand on his own two feet. If the recipient has issues with drugs or alcohol, he may use the gifted funds to further the habit. You may need to permit the individual to hit bottom in order to learn to live on his own (i.e., don't be an "enabler").
If after you've answered all of these questions, you still want to make a gift, please go ahead. But unless the gift is for a nominal amount, it is advisable to check with your attorney to make sure you are aware of the Medicaid, tax and other possible implications of your generosity.

Thursday, July 17, 2014


Many consumers may not like to think about it, but tax time is probably closer than they might realize, at least in terms of when the filing period opens. While the deadline is months away, experts generally agree that those who stay on top of planning all year long are going to be in the best position to keep their liabilities as low as possible.

There are many things to consider when doing tax planning far out from the filing deadline, and a lot of them are typically going to be based on educated guesses, according to a report from Bluffton Today. For instance, those who are slated to have a child in the second half of the year should keep in mind that this kind of life event can have major tax implications in a number of ways, and therefore looking into what those are so that they can be properly factored in before the baby arrives and things get a little more hectic.

The same is true for those who are expecting raises or promotions from their jobs, because this too will drastically alter their liabilities, the report said. Spending half the year at one salary and then jumping to another will result in a larger taxable income than the worker likely faced the year prior, and as such they might need to prepare to write a larger check once filing season arrives.

What else could be done?
Consumers should keep in mind that some changes, such as having a baby or getting married or divorced, can alter their filing statuses as well, sometimes for the better, the report said. Of course, when that changes, it should bring with it additional advance work to make sure that the taxpayer knows exactly what will be different about their filings in a few months' time.

Of course, those hoping to make sure their necessary documents are completely ready to go once filing season rolls around should also try to work with a tax professional throughout the year as well. Doing so will help them prepare in this way, and also to identify any potential hiccups they might face which could make their ability to submit a little trickier.

Wednesday, July 16, 2014

The Tax Consequences of Losing Your Job

Losing your job is hard enough without having to consider tax planning, but unfortunately, that’s exactly what needs to be done in order to help keep your finances intact.

In fact, any time you encounter a major life change, whether it’s a marriage, divorce, buying a home or starting a business, it’s important to review the tax implications and create the best strategy.

First the bad news: If your final pay check included severance pay and accumulated leave, sick, and vacation pay, it is taxable income. Hopefully, there was enough withholding to countermand the ensuing tax liability.

If you begin collecting unemployment benefits, that is also taxable income. If it makes financial sense, ask for federal income taxes to be withheld from the unemployment checks. If you don’t think you will be on unemployment for very long, or if you will be dipping into a lower tax bracket due to job loss, you may be able to max out the unemployment benefits without increasing your tax liability and having to withhold for it. Simply crunch the numbers to make sure.

If you receive gifts and loans from family and friends to help make ends meet while searching for a new job, this is not taxable income to you. It is generally the giver who may be taxed on the value of the gift if it exceeds the annual gift exclusion of $14,000.

However, if you dip into your retirement plan for a cash injection, you will be required to pay taxes on the distribution. If you are under the age of 59 1/2, you may be subject to a 10% early withdrawal penalty as well. If you are completely and totally disabled or use the funds to pay for health insurance premiums while unemployed or are simply rolling over the funds to a new retirement plan, you will not face a penalty. Check with your tax pro or read up on the topic in IRS Publication 575. Ask your plan provider to withhold the income taxes due on funds you withdraw.

If you sell stocks or bonds to supplement your income, you must report the sales on your income tax return and pay capital gains tax on any profit. Remember, you will not be required to pay tax on the full amount of the sale. You are allowed to subtract your cost basis from the sales proceeds and pay taxes on the difference. It’s possible that you will cash out stocks at a loss and therefore enjoy a capital loss on your tax return to defray other income.

Costs you incur in your new job search, such as resume preparation, employment agency fees, travel to and from job interviews are deductible as itemized deductions on Schedule A.

If you find a new job and are required to relocate, your moving expenses may be deductible. Check out IRS Publication 521 to see what is deductible and how to claim the deduction.

If you decide to don the entrepreneurial hat and open your own business, it’s a good idea to meet with a tax professional to form a tax strategy—especially if you’ve never operated a business.  Becoming a small business owner completely changes your tax picture and you do not want any unpleasant surprises come next April 15.

If you are paying off a prior year tax liability and losing your job puts you in a position that you cannot keep a roof over your head and continue the monthly IRS payments, call the agency immediately and ask to be deemed currently not collectible. IRS agents are sympathetic and cooperative. They will require a financial analysis to determine your eligibility for this program so be prepared with income and expense data when you place the call.

If you’re wondering if you can now file your 2014 income tax return now and get a refund, the answer is no. First of all, the forms and tax software are not yet available. Congress has not finished changing tax law that may or may not be retroactive to the beginning of the year. W2 forms are issued in January, even if your previous employer has gone bankrupt, they do not have access to the 2014 W2 forms and are not required to send one to you until January 2015. Make sure you keep your previous employer apprised of your current address so that you receive your W2 in a timely manner.