Whether or not you are required to file a federal income tax return this year will depend on how much you earned (gross income) — and the source of that income — as well as your filing status and your age. Your gross income includes all the income you receive that is not exempt from tax, not counting your Social Security benefits, unless you are married and filing separately.
Here’s a rundown of the IRS filing requirements for this tax season. If your 2014 gross income was below the threshold for your age and filing status, you probably won’t have to file. But if it’s over, you will.
Single: $10,150 ($11,700 if you’re 65 or older by Jan. 1, 2015).
Married filing jointly: $20,300 ($21,500 if you or your spouse is 65 or older; or $22,700 if you’re both over 65).
Married filing separately: $3,950 at any age.
Head of household: $13,050 ($14,600 if age 65 or older).
Qualifying widow(er) with dependent child: $16,350 ($17,550 if age 65 or older).
SPECIAL REQUIREMENTS
There are, however, some other financial situations that will require you to file a tax return, even if your gross income falls below the IRS filing requirement. For example, if you had earnings from self-employment in 2014 of $400 or more, or if you owe any special taxes to the IRS such as alternative minimum tax or IRA tax penalties, you’ll probably need to file.
To figure this out, the IRS offers a tool on their website that asks a series of questions that will help you determine if you’re required to file, or if you should file because you’re due a refund.
You can access this page at irs.gov/filing — click on “Do you need to file a return?” Or, you can get assistance over the phone by calling the IRS helpline at 800-829-1040. You can also get face-to-face help at a Taxpayer Assistance Center. See irs.gov/localcontacts or call 800-829-1040 to locate a center near you.
CHECK YOUR STATE
Even if you’re not required to file a federal tax return this year, don’t assume that you’re also excused from filing state income taxes. The rules for your state might be very different. Check with your state tax agency before concluding that you’re entirely in the clear. For links to state and local tax agencies see taxadmin.org— click on “State Agencies/Links” on the menu bar.
Saturday, February 7, 2015
Friday, February 6, 2015
10 Tax Facts the IRS Doesn’t Want You to Know
FROM THEFISCALTIMES.COM
This is shaping up to be a tough year for the Internal Revenue Service…and, potentially, for taxpayers. Not only is the agency hobbled by budget cuts, but it faces more demands due to Obamacare and rampant tax-related identity theft. Customer service will be worse than ever.
The IRS ideally projects an image of efficiency and fairness. But as a government agency, it also has to inform citizens about its inner workings. Gleaned from its public documents, here are 10 facts the IRS would probably rather the American public did not know:
1. It’s unlikely that you’ll get audited. The IRS audited fewer than 1 percent of individual returns last year and this number is likely to drop again this year due to budget cuts. The IRS budget approved by Congress this fiscal year is $10.9 billion, down from $12 billion in 2012. The agency has about 17,000 fewer staffers than it did in 2010. Meantime, it has to deal with a surge in tax refund identity theft (see No. 6, below) as well as complex new filing requirements related to Obamacare.
Of course, the odds of getting audited are a lot higher for some taxpayers. If your income is over $1 million, your chances of getting audited jumps to 11 percent. And there are plenty of additional red flags that can trigger an IRS audit.
2. Calling us for help is a crapshoot. If you need to speak to an IRS agent, you may be out of luck. Last year, 35.6 percent of phone calls went unanswered by customer service representatives. But this year the IRS projects only 43 percent of callers will get through to an agent after a wait of 30 minutes. That’s an average, notes National Taxpayer Advocate Nina E. Olson, in a January report to Congress. That means some days will be “truly abysmal,” she says.
3. We can’t handle the paperwork, either. In the same report, Olson estimates that 50 percent of letters to the IRS were not handled in a timely fashion. This year it will be worse, with 1.9 million fewer pieces of correspondence than last year dealt with in a timely basis — which means within about 45 days.
4. We’re worried about Obamacare collection. If you signed up for Obamacare and thought that was complicated, just wait until you file your taxes this year. If you got a subsidy based on your projected income, and you made more than that projection, you may have to pay back part of the subsidy. If you didn’t sign up for health care, you may be able to file for an exemption, or you could owe a small penalty. If you’re confused, you’re not alone.
5. Your refund may be delayed this year. Again, blame the budget cuts, says IRS Commissioner John Koskinen. He wrote a memo in January to employees warning them about a hiring freeze and possible two-day furlough later this year. He also mentioned that people who file paper returns could wait a week longer for their refund due to staffing shortages.
6. Scammers are having a field day with us. The IRS paid about $5.2 billion in fraudulent identity theft refunds during the 2013 filing season, the Government Accountability Office estimates. Separately, Americans are being bilked out of millions by con artists calling on the phone pretending to be IRS agents and demanding money.
7. We don’t collect about 20 percent of taxes owed. According to the IRS’ last study of the problem, the annual “tax gap” was $450 billion out of a total $2 trillion collected. The tax gap is money the IRS figures it is owed, but that wasn’t paid. Through enforcement it has gotten about $65 billion of that money back. Koskinen estimates the agency won’t be able to collect $2 billion in revenue due to reduced enforcement this year. Fact is, the IRS counts on people paying their taxes voluntarily.
8. We may be willing to negotiate what you owe. One upside to all the pressure on IRS employees is that you may find you can negotiate with your examiner if the IRS says you owe more money. Agents are under pressure to complete their examination in a timely manner, which, just like the legal system, can lead to quick settlements. Consider asking for a delay, to pay in installments, or just to get the amount you owe reduced. Acceptable reasons for reductions can include that you don’t have the money or that paying it would cause economic hardship.
9. Watch out for automated liens and levies. If you think the IRS is too strapped to catch a mistake, not true. The agency is highly automated and quick to send out letters based on basic math errors that show up in its system. You ignore those letters at your peril. Automated liens and levies may kick in before you’ve been able to make your case to an agent. With customer service getting worse, this is something tax advocate Olson worries about a lot.
10. You have an advocate. Feel like the IRS is giving you the bum’s rush? Try reaching out to the IRS Taxpayer Advocate Service for free help. You can call the toll-free number at 1-877-777-4778 or go to www.irs.gov/advocate.
This is shaping up to be a tough year for the Internal Revenue Service…and, potentially, for taxpayers. Not only is the agency hobbled by budget cuts, but it faces more demands due to Obamacare and rampant tax-related identity theft. Customer service will be worse than ever.
The IRS ideally projects an image of efficiency and fairness. But as a government agency, it also has to inform citizens about its inner workings. Gleaned from its public documents, here are 10 facts the IRS would probably rather the American public did not know:
1. It’s unlikely that you’ll get audited. The IRS audited fewer than 1 percent of individual returns last year and this number is likely to drop again this year due to budget cuts. The IRS budget approved by Congress this fiscal year is $10.9 billion, down from $12 billion in 2012. The agency has about 17,000 fewer staffers than it did in 2010. Meantime, it has to deal with a surge in tax refund identity theft (see No. 6, below) as well as complex new filing requirements related to Obamacare.
Of course, the odds of getting audited are a lot higher for some taxpayers. If your income is over $1 million, your chances of getting audited jumps to 11 percent. And there are plenty of additional red flags that can trigger an IRS audit.
2. Calling us for help is a crapshoot. If you need to speak to an IRS agent, you may be out of luck. Last year, 35.6 percent of phone calls went unanswered by customer service representatives. But this year the IRS projects only 43 percent of callers will get through to an agent after a wait of 30 minutes. That’s an average, notes National Taxpayer Advocate Nina E. Olson, in a January report to Congress. That means some days will be “truly abysmal,” she says.
3. We can’t handle the paperwork, either. In the same report, Olson estimates that 50 percent of letters to the IRS were not handled in a timely fashion. This year it will be worse, with 1.9 million fewer pieces of correspondence than last year dealt with in a timely basis — which means within about 45 days.
4. We’re worried about Obamacare collection. If you signed up for Obamacare and thought that was complicated, just wait until you file your taxes this year. If you got a subsidy based on your projected income, and you made more than that projection, you may have to pay back part of the subsidy. If you didn’t sign up for health care, you may be able to file for an exemption, or you could owe a small penalty. If you’re confused, you’re not alone.
5. Your refund may be delayed this year. Again, blame the budget cuts, says IRS Commissioner John Koskinen. He wrote a memo in January to employees warning them about a hiring freeze and possible two-day furlough later this year. He also mentioned that people who file paper returns could wait a week longer for their refund due to staffing shortages.
6. Scammers are having a field day with us. The IRS paid about $5.2 billion in fraudulent identity theft refunds during the 2013 filing season, the Government Accountability Office estimates. Separately, Americans are being bilked out of millions by con artists calling on the phone pretending to be IRS agents and demanding money.
7. We don’t collect about 20 percent of taxes owed. According to the IRS’ last study of the problem, the annual “tax gap” was $450 billion out of a total $2 trillion collected. The tax gap is money the IRS figures it is owed, but that wasn’t paid. Through enforcement it has gotten about $65 billion of that money back. Koskinen estimates the agency won’t be able to collect $2 billion in revenue due to reduced enforcement this year. Fact is, the IRS counts on people paying their taxes voluntarily.
8. We may be willing to negotiate what you owe. One upside to all the pressure on IRS employees is that you may find you can negotiate with your examiner if the IRS says you owe more money. Agents are under pressure to complete their examination in a timely manner, which, just like the legal system, can lead to quick settlements. Consider asking for a delay, to pay in installments, or just to get the amount you owe reduced. Acceptable reasons for reductions can include that you don’t have the money or that paying it would cause economic hardship.
9. Watch out for automated liens and levies. If you think the IRS is too strapped to catch a mistake, not true. The agency is highly automated and quick to send out letters based on basic math errors that show up in its system. You ignore those letters at your peril. Automated liens and levies may kick in before you’ve been able to make your case to an agent. With customer service getting worse, this is something tax advocate Olson worries about a lot.
10. You have an advocate. Feel like the IRS is giving you the bum’s rush? Try reaching out to the IRS Taxpayer Advocate Service for free help. You can call the toll-free number at 1-877-777-4778 or go to www.irs.gov/advocate.
Thursday, February 5, 2015
A Survival Guide to Small Business Taxes
The more things change…the harder it becomes to do your small business taxes. Between the Affordable Care Act coming into full effect, on-again/off-again/on-again tax credits gurgling out of Washington, and even a shakeup of the venerable TurboTax product line, this year—more than ever—small business owners need guidance and support as April 15 approaches.
Changes in Small Business Tax Regulations
The government mostly taketh away, but sometimes the government giveth. Mike Trabold, director of compliance risk at Paychex, identified tax provisions that small business owners should pay attention to when filing paperwork for 2014 and when looking ahead to 2015. As a leading provider of payroll, human resource, insurance and benefits service for more than half a million small businesses, the team at Paychex has had their hands full keeping tabs on the changes. According to Trabold these are the most notable.
· Health Care Tax Credit for Small Employers
Part of the Affordable Care Act, this provision allows qualifying small businesses to get a tax credit for health premiums paid on behalf of employees. Employers can apply to receive a tax credit on their annual business tax return (or Form 990-T for tax-exempt businesses).
Changes in small business tax regulations
In 2014, the maximum amount of the potential credit increased to 50 percent (35 percent for tax-exempt businesses) of an employer's contributions to health coverage. Additionally, beginning in 2014, the small business tax credit is limited to two consecutive years and available only to eligible businesses that offer coverage to employees through the Small Business Health Options Program (SHOP).
· Tax Extenders
In December, President Obama signed into law the Tax Increase Prevention Act of 2014, and in doing so expanded approximately 50 tax breaks retroactively through December 31, 2014. For now, it's a short-term extension of tax breaks covering such things as bonus depreciation and accelerated expensing of certain asset purchases, but Congress may extend them yet again to cover 2015 occurrences.
· FUTA Credit Reduction
The Great Recession's high unemployment rate left many states' unemployment insurance coffers empty. The Federal government stepped in with loans to cover the shortfall, but it's time to pay the piper—and for employers in states that are overdue paying back the Fed's strings-attached largesse, employers may foot some of the bill.
Employers in debtor states will continue to have their FUTA (Federal Unemployment Tax Act) credit amount reduced as a way to pay back the outstanding debt, so employers in the impacted states should plan to pay higher FUTA taxes for tax year 2015 (due in January 2016), and may want to consider planning for the additional tax amount early in order to avoid an unexpected tax expense at the end of the year.
· Energy Investment Tax Credits
If your small business purchased an alternative-energy system such as solar panels, fuel cell, or wind generator, you may qualify for business energy tax credits. The Energy Improvement and Extension Act of 2008 extended the Business Energy Investment Tax Credit (ITC) by eight years.
You can take advantage of this credit for the 2014 filing year for any systems installed by December 31, 2014. Still want to get green for going green? Credits are available in the respective tax year for systems placed into service on or before December 31, 2016.
· New 401(k) Plan
Small businesses that started a new 401(k) plan can claim a federal tax credit for the first three years of the plan to offset plan startup costs. Eligible startup costs include those necessary to set up and administer the plan, as well as those to educate employees about the plan. A percentage of contributions made by the employer are tax deductible as well.
· Deduction for Working from Home
If you run your business out of your home, you already know that you may qualify for a home-office deduction. Last year, the IRS introduced a streamlined option that reduced many of the recordkeeping requirements for this tax credit. But you aren't locked into that one-size-fits-all deduction; if you're willing and able to maintain the paperwork substantiating all your expenses, you can still apply for a bigger deduction.
· Taxation of Online Sales
This is likely to be an issue that affects many small businesses for tax year 2015, noted Trabold. To level the playing field between brick-and-mortar retailers and online merchants (and to address state concerns about lost revenue), the U.S. Senate passed the Marketplace Fairness Act in May 2013. This would have allowed states to collect sales tax on purchases made by state residents regardless of the seller's location. The bill stalled in 2014, but because of the amount of revenue at stake, businesses should expect this legislation to be resurrected this year.
More Tax Regulation Changes for Small Business
A leading professional services firm specializing in accounting, technology, investment banking, and advisory services, Sikich LLP also keeps abreast of tax-law changes for its clients. George Malina, the company's partner-in-charge, accounting services, provided other valuable small business tax tidbits.
· Tangible Property Regulations
The new tangible property regulations go into effect for tax years beginning on or after January 1, 2014. These regulations govern whether a taxpayer is required to depreciate or take as a current deduction expenditures such as the purchase of a new desktop computer or the installation of a new VoIP phone system.
Almost every business should have put in place a fixed asset capitalization policy effective prior to the start of their fiscal year that began on or before the effective date, or otherwise risk being required to depreciate de minimis small items such as memory upgrades or inexpensive peripherals rather than taking them as a current expense.
Every taxpayer will also be required to address these regulations when they file their tax return for the first year in which these new regulations are put into place. Business owners will need to determine how they will indicate compliance with the new regulations when they file their tax return.
On one end of the scale, some taxpayers may be able to insert a simple statement as part of their tax return, while others may need to prepare and file one or more IRS Form 3115, Application for Change in Accounting Method. Incorrectly complying with these new regulations could result in the permanent loss of future tax deductions.
· Out-of-state Sales Taxes
States lose an estimated $23 billion in sales tax revenue as a result of out-of-state purchases and have responded by significantly increasing their audit activity as they look to recapture this lost revenue. It's important that businesses review their out-of-state purchases to determine if sales tax was collected and, if appropriate, self-assess and pay that tax.
Common general ledger accounts to review include fixed assets and office supplies, but business owners should then drill deeper to the vendor level to determine which invoices to review. In most cases, business owners will be able to determine which vendors don't charge sales tax and which will let them collect this data throughout the year rather than doing it along with the chore of income tax filing.
Changes in Small Business Tax Regulations
The government mostly taketh away, but sometimes the government giveth. Mike Trabold, director of compliance risk at Paychex, identified tax provisions that small business owners should pay attention to when filing paperwork for 2014 and when looking ahead to 2015. As a leading provider of payroll, human resource, insurance and benefits service for more than half a million small businesses, the team at Paychex has had their hands full keeping tabs on the changes. According to Trabold these are the most notable.
· Health Care Tax Credit for Small Employers
Part of the Affordable Care Act, this provision allows qualifying small businesses to get a tax credit for health premiums paid on behalf of employees. Employers can apply to receive a tax credit on their annual business tax return (or Form 990-T for tax-exempt businesses).
Changes in small business tax regulations
In 2014, the maximum amount of the potential credit increased to 50 percent (35 percent for tax-exempt businesses) of an employer's contributions to health coverage. Additionally, beginning in 2014, the small business tax credit is limited to two consecutive years and available only to eligible businesses that offer coverage to employees through the Small Business Health Options Program (SHOP).
· Tax Extenders
In December, President Obama signed into law the Tax Increase Prevention Act of 2014, and in doing so expanded approximately 50 tax breaks retroactively through December 31, 2014. For now, it's a short-term extension of tax breaks covering such things as bonus depreciation and accelerated expensing of certain asset purchases, but Congress may extend them yet again to cover 2015 occurrences.
· FUTA Credit Reduction
The Great Recession's high unemployment rate left many states' unemployment insurance coffers empty. The Federal government stepped in with loans to cover the shortfall, but it's time to pay the piper—and for employers in states that are overdue paying back the Fed's strings-attached largesse, employers may foot some of the bill.
Employers in debtor states will continue to have their FUTA (Federal Unemployment Tax Act) credit amount reduced as a way to pay back the outstanding debt, so employers in the impacted states should plan to pay higher FUTA taxes for tax year 2015 (due in January 2016), and may want to consider planning for the additional tax amount early in order to avoid an unexpected tax expense at the end of the year.
· Energy Investment Tax Credits
If your small business purchased an alternative-energy system such as solar panels, fuel cell, or wind generator, you may qualify for business energy tax credits. The Energy Improvement and Extension Act of 2008 extended the Business Energy Investment Tax Credit (ITC) by eight years.
You can take advantage of this credit for the 2014 filing year for any systems installed by December 31, 2014. Still want to get green for going green? Credits are available in the respective tax year for systems placed into service on or before December 31, 2016.
· New 401(k) Plan
Small businesses that started a new 401(k) plan can claim a federal tax credit for the first three years of the plan to offset plan startup costs. Eligible startup costs include those necessary to set up and administer the plan, as well as those to educate employees about the plan. A percentage of contributions made by the employer are tax deductible as well.
· Deduction for Working from Home
If you run your business out of your home, you already know that you may qualify for a home-office deduction. Last year, the IRS introduced a streamlined option that reduced many of the recordkeeping requirements for this tax credit. But you aren't locked into that one-size-fits-all deduction; if you're willing and able to maintain the paperwork substantiating all your expenses, you can still apply for a bigger deduction.
· Taxation of Online Sales
This is likely to be an issue that affects many small businesses for tax year 2015, noted Trabold. To level the playing field between brick-and-mortar retailers and online merchants (and to address state concerns about lost revenue), the U.S. Senate passed the Marketplace Fairness Act in May 2013. This would have allowed states to collect sales tax on purchases made by state residents regardless of the seller's location. The bill stalled in 2014, but because of the amount of revenue at stake, businesses should expect this legislation to be resurrected this year.
More Tax Regulation Changes for Small Business
A leading professional services firm specializing in accounting, technology, investment banking, and advisory services, Sikich LLP also keeps abreast of tax-law changes for its clients. George Malina, the company's partner-in-charge, accounting services, provided other valuable small business tax tidbits.
· Tangible Property Regulations
The new tangible property regulations go into effect for tax years beginning on or after January 1, 2014. These regulations govern whether a taxpayer is required to depreciate or take as a current deduction expenditures such as the purchase of a new desktop computer or the installation of a new VoIP phone system.
Almost every business should have put in place a fixed asset capitalization policy effective prior to the start of their fiscal year that began on or before the effective date, or otherwise risk being required to depreciate de minimis small items such as memory upgrades or inexpensive peripherals rather than taking them as a current expense.
Every taxpayer will also be required to address these regulations when they file their tax return for the first year in which these new regulations are put into place. Business owners will need to determine how they will indicate compliance with the new regulations when they file their tax return.
On one end of the scale, some taxpayers may be able to insert a simple statement as part of their tax return, while others may need to prepare and file one or more IRS Form 3115, Application for Change in Accounting Method. Incorrectly complying with these new regulations could result in the permanent loss of future tax deductions.
· Out-of-state Sales Taxes
States lose an estimated $23 billion in sales tax revenue as a result of out-of-state purchases and have responded by significantly increasing their audit activity as they look to recapture this lost revenue. It's important that businesses review their out-of-state purchases to determine if sales tax was collected and, if appropriate, self-assess and pay that tax.
Common general ledger accounts to review include fixed assets and office supplies, but business owners should then drill deeper to the vendor level to determine which invoices to review. In most cases, business owners will be able to determine which vendors don't charge sales tax and which will let them collect this data throughout the year rather than doing it along with the chore of income tax filing.
Wednesday, February 4, 2015
Claiming the Federal Adoption Tax Credit for 2014
For adoptions finalized in 2014, there is a federal adoption tax credit of up to $13,190 per child. The 2014 adoption tax credit is NOT a refundable credit, which means taxpayers can only get the credit refunded if they have federal income tax liability (see below).
The credit is paid one time for each adopted child, and should be claimed when taxpayers file taxes for 2014 (typically in early 2015).
To be eligible for the credit, parents must:
Have adopted a child other than a stepchild — A child must be either under 18 or be physically or mentally unable to take care of him or herself.
Be within the income limits — How much of the credit parents claim is affected by income. In 2014, families with a modified adjusted gross income below $197,880 can claim full credit. Those with incomes above $237,880 cannot claim the credit; those with incomes from $197,880 to $237,880 can claim partial credit.
The Amount of Credit to Be Claimed
Families who finalize the adoption of a child with special needs in 2014 (see details below) can claim the full credit of $13,190 on the line that asks for expenses—whether or not they had any expenses.
Example — A woman adopts three of her grandchildren from foster care and the state paid all of the fees. All three children receive monthly adoption assistance benefits and thus are considered special needs. The grandmother earns less than $197,880 so can claim the full credit of $13,190 per child for a total of $39,570. How much the grandmother actually receives, however, will depend on her tax liability (explained below).
Other adopters can claim a credit based on their qualified adoption expenses, which are the reasonable and necessary expenses paid to complete the adoption as long as those expenses are not reimbursed by anyone else. If the expenses are less than $13,190, the adopters claim only the amount of the expenses. If expenses exceed $13,190, the maximum to be claimed is $13,190 per child.
Example — A couple adopted two children from China and had $40,000 in legal, travel, and agency fees. They received a grant of $20,000, leaving them with $20,000 in qualified adoption expenses. They can claim only $20,000 (not the full $26,380 they might have been eligible for had their expenses been higher). If their modified adjusted gross income was between $197,880 and $237,880, they would receive only a portion of the credit, since the credit begins to phase out at incomes of $197,880.
When to Claim the Credit
Parents who adopt a child with special needs claim the credit the year of finalization. Parents who adopt internationally cannot claim the credit until the year of finalization. Parents who are adopting from the U.S. and claiming qualified adoption expenses can claim the credit the year of finalization or the year after they spent the funds.
Example — A family begins adopting a U.S. infant in 2012 and pays $4,000 in expenses in 2012, $5,000 in 2013, and $3,000 in 2014. The adoption finalizes in 2014. The parents must file for the $4,000 spent in 2012 on their 2013 taxes. They cannot claim the $5,000 and $3,000 until they file their 2014 taxes.
Qualifying as Special Needs
Families who finalized in 2014 the adoption of a child who has been determined to have special needs can claim the full credit of $13,190 as their expenses, regardless of their actual adoption expenses. The credit for all other adopted children is based on the family’s qualified adoption expenses.
Basically, a child with special needs is a U.S. foster child who receives adoption subsidy or adoption assistance program benefits (which can include a monthly payment, Medicaid, or reimbursement of nonrecurring expenses). The instructions for the 2014 tax credit explain that to be considered a child with special needs, the child must meet all three of the following characteristics:
“The child was a citizen or resident of the United States or its possessions at the time the adoption effort began (US child).
A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents’ home.
The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by states to make this determination include:
The child's ethnic background and age,
Whether the child is a member of a minority or sibling group, and
Whether the child has a medical condition or a physical, mental, or emotional handicap.”
Just because a child has a disability does not mean the child is special needs under the tax credit. No child adopted internationally is considered special needs for the adoption tax credit. Not even every child adopted from foster care is considered special needs (about 10 percent of children adopted from care do not receive adoption assistance support). Those who do not receive any support from the adoption assistance program are likely not to have been determined to have special needs.
Bottom line, if your child does not receive adoption subsidy/adoption assistance benefits, you will likely have to have qualified expenses to claim the credit.
How Much Taxpayers Will Benefit
How much, if any, of the adoption tax credit a parent will receive depends on their federal income tax liability in 2014 (and the next five years). In one year, taxpayers can use as much of the credit as the full amount of their federal income tax liability, which is the amount on line 47 of the Form 1040 less certain other credits (see Child Tax Credit below). Even those who normally get a refund may still have tax liability and could get a larger refund with the adoption tax credit. Taxpayers have six years (the year they first claimed the credit plus five additional years) to use the credit.
People who do not have federal income tax liability will not benefit. We encourage them to file a Form 8839 with their taxes to document the credit. They will then be able to carry the credit forward to future years in case the credit becomes refundable again in the future or their tax situation changes. (If a tax preparer wants to charge extra to file the Form 8839 and you won't benefit at all with your 2014 taxes, you might want to wait and amend your taxes if the credit is ever made refundable.)
Below are a couple of examples of how the tax credit might benefit families who finalized adoptions in 2014 (these are simplified examples, which do not take into account the Child Tax Credit explained below).
Example 1 — A couple adopted two brothers who had been determined to have special needs. The parents had $6,500 in federal income tax withheld from their paychecks, and their tax liability is $7,000, which means they would normally owe $500 to the IRS. Their adoption tax credit is $26,380, and they can use $7,000 (their tax liability) of that with their 2014 taxes. They get a refund of the $6,500 they had already paid, and can carry over $19,380 for up to five more years.
Example 2 — A couple adopted three siblings with special needs. They had $1,000 in federal income tax withheld from their paychecks, and their tax liability is $0, which means they would receive a refund of $1,000. They have $39,570 in the adoption tax credit, but they cannot use it with their 2014 taxes since they have no federal income tax liability. They should still file Form 8839 with their 2014 tax return so that they can establish the credit, and carry it forward for up to five additional years in case their tax liability goes up in the future or the credit becomes refundable.
Interaction with the Child Tax Credit
If parents can claim their child as a dependent, then they should also look into the Child Tax Credit. The Child Tax Credit and the Adoption Tax Credit interact and may reduce the Child Tax Credit a family can claim. To determine the amount of the Child Tax Credit they can use, a family must complete the Child Tax Credit Worksheet in IRS Publication 972.
Taxpayers who can answer Yes on the last line of the Child Tax Credit Worksheet may be eligible for the Additional Child Tax Credit, which is a refundable credit (meaning they can claim the credit regardless of their tax liability). To claim the Additional Child Tax Credit, parents must complete IRS Form 8812.
Claiming the Credit
To claim the credit, taxpayers will complete the 2014 version of IRS Form 8839 and submit it with their Form 1040 when they file their 2014 taxes. Before filing, taxpayers should review the 2014 Form 8839 instructions carefully to be sure they apply for the credit correctly. The instructions contain a worksheet needed to calculate tax liability and thus how much of the credit will be received
Tuesday, February 3, 2015
THE WISCONSIN TAX DEDUCTION FOR PRIVATE AND RELIGIOUS TUITION EXPENSES
What is the tax deduction for tuition expenses?
• The state budget bill (2013 Wisconsin Act 20) established a tuition tax deduction (see Wis.
Stat. s. 71.05(6)(b)49), which begins in the 2014 tax year. When filing in 2015, taxpayers
may deduct the private and religious school tuition expenses they have paid, up to $4,000
for each dependent child in kindergarten through eighth grade and up to $10,000 for each
dependent child in grades nine through twelve. The tuition expenses must have been
paid on or after January 1, 2014.
How much will the deduction benefit families?
• The average Wisconsin family will see their taxes cut around $240 per primary school
child and around $600 per high school student. However, because this is a deduction and
not a tax credit, the amount that any one family or individual will save is partly
dependent on income, how they file, and the resulting tax liability.
Who is eligible to claim the deduction?
• Anyone who pays tuition expenses at a private school is eligible, but the deduction is
most beneficial to people whose tuition expenses are within the allowable deduction per
child and have incomes that incur at least some tax liability.
Can I deduct all tuition if my child receives a scholarship or financial aid?
• No, taxpayers can only claim those expenses that they have actually paid.
What if my student is going from elementary or middle school to high school?
• If a student is in both elementary and secondary school in the same taxable year (i.e. a
student goes from eighth to ninth grade), the taxpayer may claim tuition expenses that
were paid for only one grade in that taxable year. Therefore, the family must decide
whether to claim the tuition paid for eighth grade in that taxable year (up to $4,000), or
the tuition paid for ninth grade (up to $10,000).
Do you have examples of how the deduction works?
(Assume all costs are tuition expenses paid between January 1 and December 31, 2014.)
• A couple makes $60,000 in income and spends $2,500 on tuition for their elementary
school student in 2014. When the family files their taxes in 2015, their tax obligation is
reduced from $3,762 to $3,605, a savings of $157.
• A family with two high school students makes $90,000 in income and spends $7,500 per student on tuition in 2014 (for a total of $15,000). With the deduction, that family's taxes are reduced from $5,643 to $4,703, a savings of $940.
• A mother makes $46,000 and sends her two children to a Catholic elementary school that charges $2,000 per student for tuition. Her taxes before the deduction are $2,884. After the $4,000 deduction, her taxes fall to $2,633, saving her $251.
• A family makes $120,000 and has three students in Catholic schools - one in elementary school, one in middle school, and one that finished eighth grade and started high school. Tuition for the youngest student was $3,000, and for the middle school student, $4,100. For the student who started high school, tuition was $2,000 for the second semester of eighth grade and $3,500 for the first semester of high school. When filing their taxes in 2015, the family may claim a deduction of $10,500, which is the full tuition amount paid for youngest child, the maximum tuition payment deduction allowed for middle school child ($4,000), plus the semester of high school tuition for the eldest child. With the deduction, the family's tax obligation goes from $7,524 to $6,866, for a savings of $658. Can families claim the deduction for tuition paid at all private schools?
• The deduction applies to tuition expenses paid at an institution that meets the definition of a private school under Wisconsin Statutes s. 118.165.
What does a taxpayer need to do to claim the deduction?
• Families need to make certain that the school their child attends meets the basic definition of a private school, and they should save payment records (receipts, etc.) as supporting documentation for their tax records.
• The state budget bill (2013 Wisconsin Act 20) established a tuition tax deduction (see Wis.
Stat. s. 71.05(6)(b)49), which begins in the 2014 tax year. When filing in 2015, taxpayers
may deduct the private and religious school tuition expenses they have paid, up to $4,000
for each dependent child in kindergarten through eighth grade and up to $10,000 for each
dependent child in grades nine through twelve. The tuition expenses must have been
paid on or after January 1, 2014.
How much will the deduction benefit families?
• The average Wisconsin family will see their taxes cut around $240 per primary school
child and around $600 per high school student. However, because this is a deduction and
not a tax credit, the amount that any one family or individual will save is partly
dependent on income, how they file, and the resulting tax liability.
Who is eligible to claim the deduction?
• Anyone who pays tuition expenses at a private school is eligible, but the deduction is
most beneficial to people whose tuition expenses are within the allowable deduction per
child and have incomes that incur at least some tax liability.
Can I deduct all tuition if my child receives a scholarship or financial aid?
• No, taxpayers can only claim those expenses that they have actually paid.
What if my student is going from elementary or middle school to high school?
• If a student is in both elementary and secondary school in the same taxable year (i.e. a
student goes from eighth to ninth grade), the taxpayer may claim tuition expenses that
were paid for only one grade in that taxable year. Therefore, the family must decide
whether to claim the tuition paid for eighth grade in that taxable year (up to $4,000), or
the tuition paid for ninth grade (up to $10,000).
Do you have examples of how the deduction works?
(Assume all costs are tuition expenses paid between January 1 and December 31, 2014.)
• A couple makes $60,000 in income and spends $2,500 on tuition for their elementary
school student in 2014. When the family files their taxes in 2015, their tax obligation is
reduced from $3,762 to $3,605, a savings of $157.
• A family with two high school students makes $90,000 in income and spends $7,500 per student on tuition in 2014 (for a total of $15,000). With the deduction, that family's taxes are reduced from $5,643 to $4,703, a savings of $940.
• A mother makes $46,000 and sends her two children to a Catholic elementary school that charges $2,000 per student for tuition. Her taxes before the deduction are $2,884. After the $4,000 deduction, her taxes fall to $2,633, saving her $251.
• A family makes $120,000 and has three students in Catholic schools - one in elementary school, one in middle school, and one that finished eighth grade and started high school. Tuition for the youngest student was $3,000, and for the middle school student, $4,100. For the student who started high school, tuition was $2,000 for the second semester of eighth grade and $3,500 for the first semester of high school. When filing their taxes in 2015, the family may claim a deduction of $10,500, which is the full tuition amount paid for youngest child, the maximum tuition payment deduction allowed for middle school child ($4,000), plus the semester of high school tuition for the eldest child. With the deduction, the family's tax obligation goes from $7,524 to $6,866, for a savings of $658. Can families claim the deduction for tuition paid at all private schools?
• The deduction applies to tuition expenses paid at an institution that meets the definition of a private school under Wisconsin Statutes s. 118.165.
What does a taxpayer need to do to claim the deduction?
• Families need to make certain that the school their child attends meets the basic definition of a private school, and they should save payment records (receipts, etc.) as supporting documentation for their tax records.
Monday, February 2, 2015
Tax planning tips for high-income earners
Accountants and financial advisors may be breathing a sigh of relief that there were no major new tax-law changes this year, but that doesn't mean they're happy about the higher taxes their clients are paying now compared to just a few years ago.
Some clients whose situation did not change at all paid $6,000 or more in 2013 vs. 2012.
There is less emphasis on estate taxes because the exemption—$5.43 million per person—is so high now.
But income taxes are higher. The top bracket is now 39.6 percent for people earning $400,000 as singles and $450,000 for married couples filing jointly.
High earners also pay a 3.8 percent Medicare surtax on their net investment income if their modified adjustable gross income is more than $200,000 for singles and $250,000 for married couples. And there's the 0.9 percent Medicare payroll withholding tacked on to the incomes of people earning $200,000 if single and $250,000 if married.
Take a multiyear approach
Tax planning is better done looking out three or five years. If you see some sort of trend coming up—will there be an increase in income or a reduction in income—you can tailor your deductions or deferrals.
For example, if your income is high this year and you expect it to increase in coming years because your career is on a roll, it's better to accelerate deductions when you can to offset some of those higher earnings through higher charitable contributions, prepayment of state income tax or selling securities at a loss.
Another option is to postpone some of that income, perhaps by maxing out 401(k) plan contributions or moving out the sale date of stock options into a year when you have less income.
You want to ask yourself, 'Do I pull the lever [on deductions or income] now, or will I be in a better position to take advantage of them later on?
Location matters
It's not just real estate where location is key. To avoid adding to their clients' tax burdens, tax planners make sure to place income-producing investments, such as bonds and real estate investment trusts, in tax-sheltered accounts, including 401(k) plans and individual retirement accounts.
The income from those investments is taxed as ordinary income and could push a taxpayer into the higher categories if they are hovering on the edge. But when it's in a retirement account, no tax is owed until the funds are withdrawn (or in the case of Roth IRAs, no tax will ever be owed after the contributions are made).
Prove you’ve met the mandate
Starting with your 2014 tax returns, you'll need to prove that you are covered by a health insurance plan that meets that standards of the Affordable Care Act or pay a penalty. To do that, you'll need a form that you submit with your tax return to avoid the penalty, the crux of the plan's so-called individual mandate.
The penalties are pretty nominal the first year. But the penalties will rise over time.
For tax year 2014, the penalty is $95 or 1 percent of your taxable income, whichever is greater; in year two it goes up to $325 or 2 percent; and in year three it's $695 or 2.5 percent.
The rule of thumb used to be that you gave away as much as you can during your lifetime, but there are real advantages in keeping things in your estate now.
Fewer estate taxes, but watch the state tax
The higher estate-tax exemption means that few people pay the federal estate tax now. Many professionals are rethinking their traditional advice.
By keeping appreciating assets inside the estate, heirs have the opportunity to get a step up in basis when they inherit them. So if a stock, for example, appreciates from $100 to $1,000 during a person's lifetime, the clock starts over for heirs at the time they inherit it. When heirs sell those securities, their cost basis is on the date they inherited the assets.
Some people may no longer have to pay the federal estate tax but still need to pay it in the state where they live, because the exemption limits may be lower.
Every state has different rules about estate taxes. That comes up a lot when dealing with clients that have beneficiaries that don't live in the same state.
Some clients whose situation did not change at all paid $6,000 or more in 2013 vs. 2012.
There is less emphasis on estate taxes because the exemption—$5.43 million per person—is so high now.
But income taxes are higher. The top bracket is now 39.6 percent for people earning $400,000 as singles and $450,000 for married couples filing jointly.
High earners also pay a 3.8 percent Medicare surtax on their net investment income if their modified adjustable gross income is more than $200,000 for singles and $250,000 for married couples. And there's the 0.9 percent Medicare payroll withholding tacked on to the incomes of people earning $200,000 if single and $250,000 if married.
Take a multiyear approach
Tax planning is better done looking out three or five years. If you see some sort of trend coming up—will there be an increase in income or a reduction in income—you can tailor your deductions or deferrals.
For example, if your income is high this year and you expect it to increase in coming years because your career is on a roll, it's better to accelerate deductions when you can to offset some of those higher earnings through higher charitable contributions, prepayment of state income tax or selling securities at a loss.
Another option is to postpone some of that income, perhaps by maxing out 401(k) plan contributions or moving out the sale date of stock options into a year when you have less income.
You want to ask yourself, 'Do I pull the lever [on deductions or income] now, or will I be in a better position to take advantage of them later on?
Location matters
It's not just real estate where location is key. To avoid adding to their clients' tax burdens, tax planners make sure to place income-producing investments, such as bonds and real estate investment trusts, in tax-sheltered accounts, including 401(k) plans and individual retirement accounts.
The income from those investments is taxed as ordinary income and could push a taxpayer into the higher categories if they are hovering on the edge. But when it's in a retirement account, no tax is owed until the funds are withdrawn (or in the case of Roth IRAs, no tax will ever be owed after the contributions are made).
Prove you’ve met the mandate
Starting with your 2014 tax returns, you'll need to prove that you are covered by a health insurance plan that meets that standards of the Affordable Care Act or pay a penalty. To do that, you'll need a form that you submit with your tax return to avoid the penalty, the crux of the plan's so-called individual mandate.
The penalties are pretty nominal the first year. But the penalties will rise over time.
For tax year 2014, the penalty is $95 or 1 percent of your taxable income, whichever is greater; in year two it goes up to $325 or 2 percent; and in year three it's $695 or 2.5 percent.
The rule of thumb used to be that you gave away as much as you can during your lifetime, but there are real advantages in keeping things in your estate now.
Fewer estate taxes, but watch the state tax
The higher estate-tax exemption means that few people pay the federal estate tax now. Many professionals are rethinking their traditional advice.
By keeping appreciating assets inside the estate, heirs have the opportunity to get a step up in basis when they inherit them. So if a stock, for example, appreciates from $100 to $1,000 during a person's lifetime, the clock starts over for heirs at the time they inherit it. When heirs sell those securities, their cost basis is on the date they inherited the assets.
Some people may no longer have to pay the federal estate tax but still need to pay it in the state where they live, because the exemption limits may be lower.
Every state has different rules about estate taxes. That comes up a lot when dealing with clients that have beneficiaries that don't live in the same state.
Sunday, February 1, 2015
This tax season, don’t overlook these potential deductions
Tax time is on its way. And according to professional income tax preparers, the road is littered with missed opportunities.
The biggest mistake individual filers make as the April 15 filing deadline nears is not taking all the personal deductions they’re entitled to take, they say. People may not be aware of them, while many miss out by not keeping records of their deductions during the year.
Child care expenses, license tabs and unreimbursed job-related expenses often are missed. Some out-of-pocket medical costs, including health insurance premiums, co-pays and prescription costs, also are missed.
Besides interest on home mortgages and property taxes on one’s home, some filers don’t realize that the real estate taxes they pay for cabins and bare land also are deductible. The cost of safety deposit boxes can even be claimed, as long as they hold qualifying documents. Some teachers fail to claim the up to $250 allowed for money they spend on their classrooms. Some nurses forget to deduct the cost of their scrubs.
But the biggest misses come in failing to keep track of charitable contributions.
“They don’t keep track of the little checks. “They’re better at the bigger ones that are over $250. But under $250, people are bad about it. And a lot of people miss deductions because of that.”
Contributions of clothes, household items and other in-kind donations of goods to nonprofits such as Goodwill Industries and the Salvation Army often are missed. Just be sure to get a receipt with the estimated value of the donated items.
The number of miles driven to and from medical appointments and for hospital stays often are missed. So is the use of a personal vehicle to do volunteer work.
“If you’re driving for charitable work, keep a log keeping track of those miles.
Missed education credits
Parents with dependent children in college often know they can can get a refundable tax credit for the tuition and related fees they pay.
“What they forget is all the books and all the expenses at colleges, noting that up to $4,000 of those college-related expenses can be claimed to get a maximum of $2,500 in refundable credits.
College students who are self-supporting and pay their own college costs are even less aware of the credit, often failing to list their tuition and fees as well as the cost of books.
Health insurance mandate
But the biggest change in this year’s income tax filing is the result of the Affordable Care Act.
Everyone who files a return must now show proof of having essential health insurance coverage. For those who have plans through their employer, it’s already noted on their W-2s. But those who purchased health coverage through a health insurance marketplace will need their Form 1095-A in order to finish their tax returns.
“If they don’t have health insurance, they will be penalized.
The penalty is $95 or 1 percent of their income, whichever is greater. But the penalty can be avoided for those who qualify for exemptions.
Life events — such as getting married, getting divorced, having a baby, buying a house, starting a business, retirement or a death in the family — make tax returns more complicated. But tax planners say they can help people navigate those changes as well as help in yearlong tax planning.
“A lot of times we can help with not only what is happening today, but with planning for the future.
The biggest mistake individual filers make as the April 15 filing deadline nears is not taking all the personal deductions they’re entitled to take, they say. People may not be aware of them, while many miss out by not keeping records of their deductions during the year.
Child care expenses, license tabs and unreimbursed job-related expenses often are missed. Some out-of-pocket medical costs, including health insurance premiums, co-pays and prescription costs, also are missed.
Besides interest on home mortgages and property taxes on one’s home, some filers don’t realize that the real estate taxes they pay for cabins and bare land also are deductible. The cost of safety deposit boxes can even be claimed, as long as they hold qualifying documents. Some teachers fail to claim the up to $250 allowed for money they spend on their classrooms. Some nurses forget to deduct the cost of their scrubs.
But the biggest misses come in failing to keep track of charitable contributions.
“They don’t keep track of the little checks. “They’re better at the bigger ones that are over $250. But under $250, people are bad about it. And a lot of people miss deductions because of that.”
Contributions of clothes, household items and other in-kind donations of goods to nonprofits such as Goodwill Industries and the Salvation Army often are missed. Just be sure to get a receipt with the estimated value of the donated items.
The number of miles driven to and from medical appointments and for hospital stays often are missed. So is the use of a personal vehicle to do volunteer work.
“If you’re driving for charitable work, keep a log keeping track of those miles.
Missed education credits
Parents with dependent children in college often know they can can get a refundable tax credit for the tuition and related fees they pay.
“What they forget is all the books and all the expenses at colleges, noting that up to $4,000 of those college-related expenses can be claimed to get a maximum of $2,500 in refundable credits.
College students who are self-supporting and pay their own college costs are even less aware of the credit, often failing to list their tuition and fees as well as the cost of books.
Health insurance mandate
But the biggest change in this year’s income tax filing is the result of the Affordable Care Act.
Everyone who files a return must now show proof of having essential health insurance coverage. For those who have plans through their employer, it’s already noted on their W-2s. But those who purchased health coverage through a health insurance marketplace will need their Form 1095-A in order to finish their tax returns.
“If they don’t have health insurance, they will be penalized.
The penalty is $95 or 1 percent of their income, whichever is greater. But the penalty can be avoided for those who qualify for exemptions.
Life events — such as getting married, getting divorced, having a baby, buying a house, starting a business, retirement or a death in the family — make tax returns more complicated. But tax planners say they can help people navigate those changes as well as help in yearlong tax planning.
“A lot of times we can help with not only what is happening today, but with planning for the future.
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