29 Biggest Tax Problems For Married Couples

Preparing your annual income tax return is a chore. It’s even more complex when you’re married. You might have two sets of income, assets, debts and deductions. Further, if you were separated, widowed or divorced during the year, you might have a thorny tax situation.

A qualified accountant can advise you on the basic tax problems that married couples face. For a brief introduction, read through to see 29 of the most significant tax problems married people might encounter. Understanding these challenges can help you get more tax breaks this year.

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1. YOU’RE NOT SURE OF THE YOUR MARITAL STATUS FOR THE TAX YEAR

When preparing taxes, you first need to determine your marital status. It might seem like a straightforward task. However, life is not always so simple.

The IRS considers you to be married if you were lawfully wed on the last day of the tax year. For example, if you tied the knot at any time in the past and were still married on Dec. 31, 2016, you were married to your spouse for the entire year in the eyes of the IRS. The laws of the state where you live determine whether you were married or legally separated for the tax year.

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2. YOU’RE NOT SURE OF YOUR MARITAL STATUS IN A SAME-SEX RELATIONSHIP

Married, same-sex couples are treated the same as married, heterosexual couples for federal tax purposes. However, same-sex couples in a registered domestic partnership or civil union cannot choose to file as married couples, as state law doesn’t consider those types of couples to be married.

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3. YOU DON’T KNOW WHICH FILING STATUS TO CHOOSE

If you weren’t married on Dec. 31 of the tax year, the IRS considers you to be single, head of household or a qualified widow(er) for that year.

If you were married, there are three filing possibilities:

  • Married filing jointly
  • Married filing separately
  • Head of household

If more than one category might apply to you, the IRS permits you to pick the one that lets you pay the least amount in taxes.

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4. YOU CAN’T DECIDE WHETHER TO FILE JOINTLY OR SEPARATELY

If you’re married and don’t qualify to file as head of household, you typically have two choices: filing jointly or separately. It’s best to choose the one that allows you to pay the least amount in taxes, which all comes down to your particular circumstances.

Sometimes it makes sense to file separately, said Josh Zimmelman, owner of Westwood Tax & Consulting, a New York-based accounting firm. “A joint return means that your finances are linked, so you’re both liable for each other’s debts, penalties and liabilities,” he said. “So if either of you has some financial issues or baggage, then filing separately will better protect your spouse from your bad record, or vice versa.”

If you file jointly, you can’t later uncouple yourselves to file married filing separately. “On the other hand, if you file separate returns and then realize you should have filed jointly, you can amend your returns to file jointly, within three years,” Zimmelman said.

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5. YOU ASSUME MARRIED FILING JOINTLY IS ALWAYS THE BEST OPTION

Even if married filing jointly has been your best choice in the past, don’t assume it will always be that way. Do the calculations each year to determine whether filing singly or jointly will give you the best tax result.

Changes in your personal circumstances or new tax laws might make a new filing status more desirable. What was once a marriage tax break might turn into a reason to file separately, or vice versa.

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6. YOU’RE NOT CLEAR ABOUT HEALTHCARE REQUIREMENTS

The Patient Protection and Affordable Care Act — more commonly known as “Obamacare” — requires that you and your dependents have qualifying health care coverage throughout the year, unless you qualify for an exemption or make a shared responsibility payment.

Even if you lose your health insurance coverage because of divorce, you still need continued coverage for you and your dependents during the entire tax year.

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7. YOU CHANGED YOUR LAST NAME

If you want to change your last name after a marriage or divorce, you must officially inform the federal government. Your first stop is the Social Security Administration. Your name on your tax return must match your name in the SSA records. Otherwise, your tax refund might be delayed due to the mismatched records. Also, don’t forget to update the changed names of any dependents.

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8. YOUR SPOUSE DIED DURING THE TAX YEAR

If your spouse died during the year, you’ll need to figure out your filing status. If you didn’t marry someone else the same year, you may file with your deceased spouse as married filing jointly.

If you did remarry during that tax year, you and your new spouse may file jointly. However, in that case, you and your deceased spouse must file separately for the last tax year of the spouse’s life.

In addition, if you didn’t remarry during the tax year of your spouse’s death, you might be able to file as qualifying widow(er) with dependent child for the following two years if you meet certain conditions. This entitles you to use joint return tax rates and the highest standard deduction amount.

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9. YOU FILE JOINTLY AND YOU’RE BOTH LIABLE

If you use the status married filing jointly, each spouse is jointly and severally liable for all the tax on your combined income, said Gail Rosen, a Martinsville, N.J.-based certified public accountant. “This means that the IRS can come after either one of you to collect the full amount of the tax,” she said.

“If you are worried about your spouse and being responsible for their share of their taxes — including interest and penalties — then you might consider filing separately,’ she said.

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10. YOU FILE SEPARATELY AND LOSE TAX BENEFITS

Although filing separately might protect you from joint and several liabilities for your spouse’s mistakes, it does have some disadvantages.

For example, people who choose the married filing separately status might lose their ability to deduct student loan interest entirely. In addition, they’re not eligible to claim the Earned Income Tax Credit and they might also lose the ability to claim the Child and Dependent Care Credit or Adoption Tax Credit, said Eric Nisall, an accountant and founder of AccountLancer, which provides accounting services to freelancers.

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11. YOU DON’T MEET THE MEDICAL EXPENSE DEDUCTION THRESHOLD

To include non-reimbursed medical and dental expenses in itemized deductions, the expenses must meet a threshold of exceeding 10 percent of your adjusted gross income. However, when you file jointly — and thus report a larger combined income — it can make it more difficult for you to qualify.

A temporary exception to the 10 percent threshold for filers ages 65 or older ran through Dec. 31, 2016. Under this rule, individuals only need to exceed a lower 7.5 percent threshold before they are eligible for the deduction. The exception applies to married couples even if only one person in the marriage is 65 or older.

Starting Jan. 1, 2017, all filers must meet the 10 percent threshold for itemizing medical deductions, regardless of age.

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12. YOU DON’T TAKE ADVANTAGE OF THE MARRIAGE BONUS

Many people complain about the marriage tax penalty. “Married filing jointly may result in a higher tax bill for the couple versus when each spouse was filing single, especially if both spouses make roughly the same amount of income,” said Andrew Oswalt, a certified public accountant and tax analyst for TaxAct, a tax-preparation software company.

However, you might have an opportunity to pay less total tax — a marriage tax break — if one spouse earns significantly less. “When couples file jointly with largely differing income levels, this may result in a ‘marriage tax benefit,’ potentially resulting in less tax owed than when the spouses filed with a single filing status,” Oswalt said.

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13. YOU’RE DIVORCED BUT STILL NEED TO FILE A FINAL MARRIED RETURN

If your divorce became official during the tax year, you need to agree with your ex-spouse on your filing status for the prior year when you were still married. As to whether you should file your final return jointly or separately, there is no single correct answer. It partially depends on your relationship with your ex-spouse and whether you can agree on such potentially major financial decisions.

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14. YOU HAVE TO DETERMINE THE STATUS OF DEPENDENTS AFTER A DIVORCE

Tax laws about who qualifies as a dependent are quite complex. Divorcing parents might need to determine which parent gets to claim the exemption for dependent children.

Normally, the custodial parent takes the deduction, Zimmelman said. “So if your child lives with you more than half the year and you’re paying at least 50 percent of their support, then you should claim them as your dependent,” he said.

In cases of shared custody and support, you have a few options. “You might consider alternating every other year who gets to claim them,” said Zimmelman. Or if you have two children, each parent can decide to claim one child, he said.

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15. YOU DEDUCT VOLUNTARY ALIMONY PAYMENTS

If you want to deduct alimony payments you made to a former spouse, it must be in accordance with a legal divorce or separation decree. You can’t deduct payments you made on a voluntary basis.

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16. YOU DEDUCT CHILD SUPPORT PAYMENTS

Even if you don’t take the standard deduction and instead itemize your deductions, you can’t claim child support payments you paid to a custodial parent.

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17. YOU CLAIM CHILD SUPPORT PAYMENTS AS INCOME

Do not report court-ordered child support payments as part of your taxable income. You don’t need to report it anywhere on your tax return. On the other hand, you must report alimony you receive as income on line 11 of your Form 1040.

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18. YOU DON’T CLAIM ALIMONY YOU PAID AS A DEDUCTION

Unlike child support that isn’t tax deductible, you are permitted to deduct court-ordered alimony you paid to a former spouse. It’s a deduction you can take even if you don’t itemize your deductions.

Make sure you include your ex-spouse’s Social Security number or individual taxpayer identification number on line 31b of your own Form 1040. Otherwise, you might have to pay a $50 penalty and your deduction might be disallowed.

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19. YOUR SPOUSE DOESN’T WORK AND MISSES TAX SAVINGS

Saving for retirement is important. Contribute to a 401k plan and you will both save money for your golden years and lower your taxable income now. If your employer offers a 401k plan, you can contribute money on a pretax basis, subject to certain limits.

However, nonworking spouses can’t contribute to a 401k because they don’t have wages from an employer.

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20. YOU MISS QUARTERLY TAX PAYMENTS

Single or married, you might have to pay quarterly tax payments to the IRS, especially if you are self-employed. Make sure you know how to calculate estimated taxes. If you are required to make such payments but do not do so, you might have to pay an underpayment penalty, Rosen said.

All taxpayers must pay in taxes during the year equal to the lower of 90 percent of the tax owed for the current year, or 100 percent — 110 percent for higher-income taxpayers — of the tax shown on your tax return for the prior year, Rosen said. “The problem for married couples is that often they do not realize they owe more taxes due to the combining of the two incomes,” she said.

You should be proactive each year. “To avoid owing the underpayment penalty, make sure to do a projection of your potential tax for 2017 when you finish preparing your 2016 taxes,” she said, adding that you should make sure to comply with the payment rules outlined above.

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21. YOU PHASE OUT OF PASSIVE LOSSES

Crystal Stranger — a Los Angeles-based enrolled agent, president of 1st Tax and author of “The Small Business Tax Guide” — said she sees a lot of married couples who have issues with passive loss limitation rules.

“With these rules, if you have a passive loss from rental real estate or other investments, you are allowed to take up to $25,000 of passive losses against your other income,” she said. “But this amount phases out starting at $100,000 (of) adjusted gross income, and is fully lost by $150,000 (of) adjusted gross income.”

Married filers lose out, as the phaseout amount is the same for a single taxpayer as for a married couple. “This is a big marriage penalty existing in the tax code,” Stranger said. “It gets even worse if a married couple files separately. The phaseout then starts at $12,500, meaning almost no (married filing separately) filers will qualify.”

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22. YOU CLAIM A CHILD AS A DEPENDENT, BUT YOUR INCOME IS HIGH

You are not obligated to claim your kids as dependents on your own tax return. In fact, it might be beneficial not to claim them.

“High earners lose the personal exemption after crossing certain income thresholds,” said Nisall. So in some cases, it might make more sense to let working children claim the exemption for themselves on their own return, he said.

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23. YOU MISS OUT ON THE CHILD TAX CREDIT

Married couples might be able to claim the Child Tax Credit up to a limit of $1,000 for each qualifying child.

“The Child Tax Credit phases out starting at $55,000 for couples electing to use the married filing separately filing status, and (at) $110,000 for those choosing the married filing jointly status,” said Oswalt. “But married couples receive twice the standard deduction that individuals receive, so the phaseout limitations may not negatively impact a married couple’s return if they choose to file jointly.”

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24. YOU NEGLECT THE TAX BREAK FROM A HOME SALE

The IRS provides a tax break when you sell your home, subject to certain conditions. Generally, you must meet a minimum residency period by owning and living in the house for two of the five years previous to the sale.

A single person who owns a home that has increased in value can qualify to exclude up to $250,000 in gains from income, said Oswalt. However, married people can exclude up to $500,000 in gains. This rule can become tricky if one person in the couple purchased the house prior to marriage.

“If you are married when you sell the house, only one of you needs to meet the ownership test for the $250,000 exclusion,” Oswalt said. “You both must meet the residency period to exclude up to the full $500,000 of gain from your income, however.”

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25. YOU DON’T CLAIM THE CHILD AND DEPENDENT CARE CREDIT

Married tax filers might be eligible for the Child and Dependent Care Credit if they paid expenses for the care of a qualifying individual so that they could work or look for work. The rules for who can be a dependent and who can be a care provider are strict. This credit is not available if you file separately.

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26. YOU CAN’T DEDUCT STUDENT LOAN INTEREST

If you’re paying back student loans, you might be looking forward to taking the student loan interest deduction. However, if you’re married, it might not be so easy to do that.

“For a single filer, the deduction begins to phase out when the taxpayer’s adjusted gross income is greater than $65,000,” said Oswalt. “This amount is doubled to $130,000 when filing jointly.”

“So if both spouses are making $65,000 or less, then their deduction will not be affected by the phaseout,” he explained. “However, if one is making $60,000 and the other $75,000, the deduction begins to phase out, which will ultimately result in a larger tax bill.”

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27. YOU INCORRECTLY ACCOUNT FOR GAMBLING WINS AND LOSSES

Imagine a married couple where both spouses like to gamble in Las Vegas. He’s not so lucky and has losses, while she has winnings. If they file a joint return, they might have to report the gambling winnings as taxable income. Meanwhile, the losses might be deductible if the couple itemizes their deductions instead of taking the standard deduction.

However, they can’t take the amount of gambling winnings, subtract the losses and claim the net amount as winnings. Instead, they must report the entire amount of gambling winnings as income, whereas the losses are reported as an itemized deduction up to the amount of the winnings. The IRS requires you to keep accurate records of your winnings and losses.

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28. YOU BECAME A VICTIM OF TAX IDENTITY THEFT

Identify theft is a financial nightmare, no matter how it happens. Tax identity theft happens when someone files a tax return using one or both of the spouse’s Social Security numbers in hopes of scooping up your legitimate refund. If this happens to you, “contact the IRS immediately and fill out an identity-theft affidavit,” said Zimmelman. “You should also file a complaint with the Federal Trade Commission, contact your banks and credit card companies, and put a fraud alert on your and your spouse’s credit reports.”

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29. YOU CAN’T GET YOUR 2015 RETURN

The IRS and state tax agencies work to develop safeguards to avoid identity theft related to tax returns. In 2017, they will be particularly concerned about the implications of taxpayers who file using tax software.

The IRS has alerted taxpayers that they might need to have their 2015 adjusted gross income handy if they are changing software products this year. This number might be required to submit your return electronically.

Getting your 2015 adjusted gross income might be difficult if you are a member of a divorced couple that is not on positive terms, or that hasn’t even been in contact the past few years.

However, you still have options. You might be able to get the information if you go to the IRS website and use the Get Transcript service.

 

 

Written By: Valerie Rind
Source: GOBankingRates

The 10 Most Commonly Googled Tax Questions — Answered

Taxes can be confusing. We’re here to help. To find out what people’s most burning questions about taxes are, MONEY asked Google for a list of its top tax-related queries—and assembled the information you need.

1. When are taxes due?

It’s April 18 this year. Usually, it’s the 15th — you can read why you get an extra three days here. (If you file for an extension, you get until Oct. 16 to file your return, because Oct. 15 is a Sunday. You must still pay what you estimate you owe by April 18, though.)

2. How to file taxes

This IRS page has links to online forms you can print as well as a locator tool where you can find an office if you prefer to pick up forms in person or don’t have access to a printer. You might also find tax forms at your local library or post office.

If you make less than $64,000, the IRS has a page where you can file your taxes electronically at no charge under the Free File program. If you plan to file with a simple form like a 1040A or 1040EZ, some tax preparation companies like TurboTax, H&R Block, Jackson Hewitt and TaxAct have their own platforms you can use to do your taxes online for free.

If you’re not sure which form you should use, the IRS spells out the differences here. Not sure how to file state taxes? This IRS page has links to all of the state governments, including tax departments.

3. When can you file taxes?

The IRS began accepting electronic returns for 2016 on Jan. 23, 2017.
You technically have until 11:59:59 p.m. on April 18 to file your taxes if you’re filing online, according to TurboTax, but waiting until the last second is a bad idea: A pokey computer could cost you big in penalties. If you’re using U.S. mail, you have to have your return and payment postmarked by April 18. Some post offices stay open late for Tax Day; you can find out which ones have extended hours here.

If you (or your accountant) file your taxes electronically, you have the option of paying online using the IRS’s Electronic Funds Withdrawal function (which is free). You can also pay via credit or debit card (which will cost you a convenience fee of a bit under $3 if you use a debit card, or around 2% of the charge if you use a credit card).

4. How to file a tax extension

If you procrastinated and April 18 is looking like a long shot, experts say you should file for an extension. This doesn’t get you out of paying any taxes you owe by the deadline, but it gives you an extra six months to file. An extension will keep you from getting hit with a late-filing penalty of 5% of the unpaid taxes for each month or part of a month you’re late, up to 25%.

That’s in addition to a late-payment penalty of 0.5% of the unpaid taxes for each month or part of a month—plus interest at a rate of the federal short-term interest rate plus 3%.
If you expect a refund, you obviously have an incentive to get your return in as soon as possible to get those dollars in your pocket. If you file for an extension thinking you’ll get a refund and instead find that you owe, you’ll have to tack on the late-payment charges.

Don’t forget about state taxes. A handful of states will automatically give you an extension if you request one through the IRS, while others require a separate request to that state’s tax department. In some cases, the rules are different depending on whether you owe money or are due a refund.

5. How much do you have to make to file taxes?

There are various thresholds, depending on your filing status, age, and the type of income you receive. For instance, if you’re single, under 65 and your income was below $10,350 last year, you generally don’t need to file federal taxes. This IRS tool can help you figure out if you need to file a tax return.

Even if appears you don’t have to file, experts say it’s generally a good idea to fill in the blanks on a return and see what your bottom line would be. About 70% of Americans are expected to qualify for refunds this year, according to the IRS, but many people never file to collect. The average unclaimed refund is nearly $700. Especially for lower-income Americans, a number of credits and deductions could make you eligible for a refund.

6. How long to keep tax records

The IRS says you should hang onto your tax documents for three years; if you get audited, that’s generally the look-back period they’re allowed to cover. However, if they suspect fraud or underpayment of income tax, or if you’ve written off worthless securities, they can request up to seven years’ worth of tax records. Hang onto documents like receipts that justify deductions like business expenses, charitable donations and so on.

7. When is the last day to do taxes?

Yeah, there are clearly a lot of procrastinators out there. As explained above in No. 1, the filing deadline is pushed back a few days from the usual April 15 this year to the 18th. You have until midnight local time—but if you’re going to put it off that long you should consider just filing for an extension.

8. Is Social Security taxed?

It’s possible. Depending on your income, up to 85% of Social Security benefits may be taxable. If you’re a single filer and your combined income—that is, adjusted gross income, nontaxable interest from municipal bonds and half of your Social Security benefits—is more than $25,000, you will have to pay taxes. If you’re married and file jointly, the threshold is $32,000.

9. How long does it take to get taxes back?

The answer this year might be “longer than usual.” To combat tax fraud, the IRS is taking extra time checking filers’ tax information if they claimed either the Earned Income Tax Credit or the Additional Child Tax Credit. Under a new law, the agency is holding back refunds claiming those credits until at least Feb. 15, and people aren’t likely to see those refunds until the end of February at the earliest. On top of that, “New identity theft and refund fraud safeguards put in place by the IRS and the states may mean some tax returns and refunds face additional review,” the agency warns. For everybody else, the IRS says refunds should be issued in its standard window of 21 days from the time it get your return.

10. Why do I owe taxes?

The first income tax in the U.S. was authorized by Congress in 1861 and levied the following year, to help pay for the Civil War, according to the Civil War Trust, but taxes have been around nearly as long as civilization itself. Historians have found tax records that go back to 6,000 B.C. in what is now Iraq, and the ancient Greek, Egyptian and Chinese cultures all had their own versions. In Biblical times, Roman emperor Caesar Augustus established rules around some personal and inheritance taxes that the English later used to create similar taxes centuries later, according to the Handbook on Tax Administration. Ironically, modern-day Italy has the lowest rate of income-tax compliance out of 10 major developed nations, with less than two-thirds of citizens giving the tax man his due.

And although plenty of Americans have argued in court that they shouldn’t have to pay taxes, the IRS has a helpful 71-page paper that methodically debunks these claims, The Truth About Frivolous Tax Arguments, (which might be equally helpful as a cure for tax-season-induced insomnia.)

 

 

Written By: Martha C. White
Source: MONEY

2017 Tax Planning Guide

During this Tax Season, we want to provide you with a great Tax Planning Guide to help you evaluate your options and outline tax planning strategies with your accounting professional.

In addition to referencing this guide during the tax season, it can also be a helpful year-round tool. Staying actively involved in these and other underlying areas of tax planning will keep you in a position to preserve and create longer-term wealth for yourself and your family.

Click Here for your Free 2017 Tax Planning Guide

 

 

Tax Changes for 2017: A Checklist

Welcome, 2017! As the New Year rolls around, it’s always a sure bet that there will be changes to current tax law and 2017 is no different. From health savings accounts to tax rate schedules and standard deductions, here’s a checklist of tax changes to help you plan the year ahead.

Individuals

For 2017, more than 50 tax provisions are affected by inflation adjustments, including personal exemptions, AMT exemption amounts, and foreign earned income exclusion.

While the tax rate structure, which ranges from 10 to 39.6 percent, remains the same as in 2016, tax-bracket thresholds increase for each filing status. Standard deductions and the personal exemption have also been adjusted upward to reflect inflation. For details see the article, “Tax Brackets, Deductions, and Exemptions for 2017,” below.

Alternative Minimum Tax (AMT)

Exemption amounts for the AMT, which was made permanent by the American Taxpayer Relief Act (ATRA) are indexed for inflation and allow the use of nonrefundable personal credits against the AMT. For 2017, the exemption amounts are $54,300 for individuals ($53,900 in 2016) and $84,500 for married couples filing jointly ($83,800 in 2016).

“Kiddie Tax”

For taxable years beginning in 2017, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $1,050 (same as 2016). The same $1,050 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax.” For example, one of the requirements for the parental election is that a child’s gross income for 2017 must be more than $1,050 but less than $10,500.

For 2017, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $2,100.

Health Savings Accounts (HSAs)

Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.

A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.

For calendar year 2017, a qualifying HDHP must have a deductible of at least $1,300 for self-only coverage or $2,600 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $6,550 for self-only coverage and $13,100 for family coverage.

Medical Savings Accounts (MSAs)

There are two types of Medical Savings Accounts (MSAs): the Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high-deductible health plan (HDHP).

  • Self-only coverage. For taxable years beginning in 2017, the term “high deductible health plan” means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,250 and not more than $3,350 (same as 2016), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,500 (up $50 from 2016).
  • Family coverage. For taxable years beginning in 2017, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,500 and not more than $6,750 (up $50 from 2016), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,250 (up $100 from 2016).

Penalty for not Maintaining Minimum Essential Health Coverage

For calendar year 2017, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is $695.

AGI Limit for Deductible Medical Expenses

In 2017, the deduction threshold for deductible medical expenses remains at 10 percent (same as 2016) of adjusted gross income (AGI). Prior to January 1, 2017, if either you or your spouse were age 65 or older as of December 31, 2016, the 7.5 percent threshold that was in place in earlier tax years continued to apply. That provision expired at the end of 2016, however, and starting in 2017, the 10 percent of AGI threshold applies to everyone.

Eligible Long-Term Care Premiums

Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or younger at the end of 2017, the limitation is $410. Persons more than 40 but not more than 50 can deduct $770. Those more than 50 but not more than 60 can deduct $1,530 while individuals more than 60 but not more than 70 can deduct $4,090. The maximum deduction is $5,110 and applies to anyone more than 70 years of age.

Medicare Taxes

The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly), which went into effect in 2013, remains in effect for 2017, as does the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the new tax.

Foreign Earned Income Exclusion

For 2017, the foreign earned income exclusion amount is $102,100, up from $101,300 in 2016.

Long-Term Capital Gains and Dividends

In 2017 tax rates on capital gains and dividends remain the same as 2016 rates; however threshold amounts are indexed for inflation. As such, for taxpayers in the lower tax brackets (10 and 15 percent), the rate remains 0 percent. For taxpayers in the four middle tax brackets, 25, 28, 33, and 35 percent, the rate is 15 percent. For an individual taxpayer in the highest tax bracket, 39.6 percent, whose income is at or above $418,400 ($470,700 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.

Pease and PEP (Personal Exemption Phaseout)

Both Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) have been permanently extended (and indexed to inflation) for taxable years beginning after December 31, 2012, and in 2017, affect taxpayers with income at or above $261,500 for single filers and $313,800 for married filing jointly.

Estate and Gift Taxes

For an estate of any decedent during calendar year 2017, the basic exclusion amount is $5,490,000, indexed for inflation (up from $5,450,000 in 2016). The maximum tax rate remains at 40 percent. The annual exclusion for gifts remains at $14,000.

Individuals – Tax Credits

Adoption Credit

In 2017, a non-refundable (only those individuals with tax liability will benefit) credit of up to $13,570 is available for qualified adoption expenses for each eligible child.

Earned Income Tax Credit

For tax year 2017, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $6,318, up from $6,269 in 2016. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Child Tax Credits

For tax year 2017, the child tax credit is $1,000 per child. The enhanced child tax credit was made permanent this year by the Protecting Americans from Tax Hikes Act of 2016 (PATH). In addition to a $1,000 credit per qualifying child, an additional refundable credit equal to 15 percent of earned income in excess of $3,000 has been available since 2009.

Child and Dependent Care Credit

If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2017.For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Individuals – Education

American Opportunity Tax Credit and Lifetime Learning Credits

The American Opportunity Tax Credit (formerly Hope Scholarship Credit) was extended to the end of 2017 by ATRA but was made permanent by PATH in 2016. The maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000 per return; however, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $112,000, up from $111,000 for tax year 2016.

Interest on Educational Loans

In 2017 (as in 2016), the $2,500 maximum deduction for interest paid on student loans is no longer limited to interest paid during the first 60 months of repayment. The deduction is phased out for higher-income taxpayers with modified AGI of more than $65,000 ($135,000 joint filers).

Individuals – Retirement

Contribution Limits

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains at $18,000. Contribution limits for SIMPLE plans remain at $12,500. The maximum compensation used to determine contributions increases to $270,000 (up from $265,000 in 2016).

Income Phase-out Ranges

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $62,000 and $72,000, up from $61,000 to $71,000.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range increases to $99,000 to $119,000, up from $98,000 to $118,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $186,000 and $196,000, up from $184,000 and $194,000.

The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $118,000 to $133,000 for singles and heads of household, up from $117,000 to $132,000. For married couples filing jointly, the income phase-out range is $186,000 to $196,000, up from $184,000 to $194,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Saver’s Credit

In 2017, the AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low and moderate income workers is $62,000 for married couples filing jointly, up from $61,500 in 2016; $46,500 for heads of household, up from $46,125; and $31,000 for married individuals filing separately and for singles, up from $30,750.

Businesses

Standard Mileage Rates

The rate for business miles driven is 53.5 cents per mile for 2017, down from 54 cents per mile in 2016.

Section 179 Expensing

The Section 179 expense deduction was made permanent at $500,000 by the Protecting Americans from Tax Hikes Act of 2016 (PATH). For equipment purchases, the maximum deduction is $510,000 of the first $2,030,000 million of qualifying equipment placed in service during the current tax year. The deduction is phased out dollar for dollar on amounts exceeding the $2 million threshold (adjusted for inflation beginning in tax year 2017) amount and eliminated above amounts exceeding $2.5 million. In addition, Section 179 is now indexed to inflation in increments of $10,000 for future tax years.

The 50 percent bonus depreciation has been extended through 2019. Businesses are able to depreciate 50 percent of the cost of equipment acquired and placed in service during 2015, 2016, and 2017. However, the bonus depreciation is reduced to 40 percent in 2018 and 30 percent in 2019.

Work Opportunity Tax Credit (WOTC)

Extended through 2019, the Work Opportunity Tax Credit has been modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire.

Research & Development Tax Credit

Starting in 2017, businesses with less than $50 million in gross receipts are able to use this credit to offset alternative minimum tax. Certain start-up businesses that might not have any income tax liability will be able to offset payroll taxes with the credit as well.

Employee Health Insurance Expenses

For taxable years beginning in 2017, the dollar amount is $26,200. This amount is used for limiting the small employer health insurance credit and for determining who is an eligible small employer for purposes of the credit.

Employer-provided Transportation Fringe Benefits

If you provide transportation fringe benefits to your employees, in 2017 the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $255 and the monthly limitation for qualified parking is $255. Parity for employer-provided mass transit and parking benefits was made permanent by PATH.

While this checklist outlines important tax changes for 2017, additional changes in tax law are more than likely to arise during the year ahead.

 

 

 

Source: Abedian & Totlian

45% of Americans Pay No Federal Income Tax

IT

Many Americans don’t have to worry about giving Uncle Sam part of their hard-earned cash for their income taxes this year.

An estimated 45.3% of American households — roughly 77.5 million — will pay no federal individual income tax, according to data for the 2015 tax year from the Tax Policy Center, a nonpartisan Washington-based research group. (Note that this does not necessarily mean they won’t owe their states income tax.)

Roughly half pay no federal income tax because they have no taxable income, and the other roughly half get enough tax breaks to erase their tax liability, explains Roberton Williams, a senior fellow at the Tax Policy Center.

Despite the fact that rich people paying little in the way of income taxes makes plenty of headlines, this is the exception to the rule: The top 1% of taxpayers pay a higher effective income-tax rate than any other group (around 23%, according to a report released by the Tax Policy Center in 2014) — nearly seven times higher than those in the bottom 50%.

On average, those in the bottom 40% of the income spectrum end up getting money from the government. Meanwhile, the richest 20% of Americans, by far, pay the most in income taxes, forking over nearly 87% of all the income tax collected by Uncle Sam.

The top 1% of Americans, who have an average income of more than $2.1 million, pay 43.6% of all the federal individual income tax in the U.S.; the top 0.1% — just 115,000 households, whose average income is more than $9.4 million — pay more than 20% of it.

When it comes to all federal taxes — individual income, payroll, excise, corporate income and estate taxes — the distributions of who pays what is more spread out. This is partially because nearly everyone pays excise taxes, which includes taxes on gasoline, alcohol and cigarettes.

Written by Catey Hill of MarketWatch

(Source: MarketWatch)

7 Questions to Ask Yourself Before Deciding to Retire

Few Americans save abundantly for retirement. Whether due to financial issues or a lack of foresight, a lot of people either don’t give much thought to retirement or are unable to save up enough to help them fund their elder years.

In fact, only 13 percent of people who haven’t retired yet say they’ve given a lot of thought to financial planning for retirement, according to the Report on the Economic Well-Being of U.S. Households in 2014 conducted by the Federal Reserve Board. Nearly 40 percent say they have given little to no thought to retirement planning.

Mapping out your retirement takes more than asking yourself, “When should I retire?” Consider these seven questions to help you better plan for financial and personal obstacles in retirement.

1. What kind of lifestyle do I want?

If you’re married, you’ll need to speak with your spouse to make sure your retirement plans are aligned.

© Blend Images/REX If you’re married, you’ll need to speak with your spouse to make sure your retirement plans are aligned.

Before you try to figure out how much money you need to retire, you need to consider what sort of lifestyle you want to have in retirement, said John Sweeney, Executive Vice President of Retirement and Investing Strategies at Fidelity. Do you want to stay in your current home or downsize? Will you want to move to a bigger city or someplace warmer? Maybe you want to travel the world.

No matter how you envision your retirement, you’ll need to plan ahead to fund it. Depending on your goals, you might need to save more than you originally planned. If you’re married, you’ll need to speak with your spouse to make sure your retirement plans are aligned.

2. What will my expenses in retirement be?

When to retire

© Provided by Gobankingrates When to retire

Sweeney said most people can expect to spend about 85 cents in retirement for every dollar spent before retirement. Depending on your health, however, you might need to save more to cover medical expenses. If you have a chronic condition or have mobility issues, over time you might end up needing to spend more money to maintain your quality of living.

To help you project rough estimates of your retirement costs, you can use an online retirement income calculator. With a financial planner, you can get a detailed cash-flow analysis and help managing taxes.

3. Will I have enough savings to cover my expenses?

© Ocean/Corbis

Less than half of all workers say they’ve ever tried to calculate how much money they will need to save to live comfortably in retirement, according to The 2015 Retirement Confidence Survey conducted by the Employee Benefit Research Institute. Scott Bishop, Director of Financial Planning at STA Wealth Advisors in Houston, recommends comparing your current monthly expenses with how much income you’ll have in retirement.

If your retirement savings can’t sustain your mortgage, insurance and other typical costs, you might want to reconsider your current savings plan. You will also want to calculate your Social Security benefit to determine how it will affect your monthly budget. When considering whether you’ll have enough income in retirement, assume you’ll be in retirement for 25 years and have access to four percent of your savings annually.

In retirement, you’ll want to revisit your withdrawal percentage, adjusting for your actual spending, said Bishop. Your retirement portfolio, which should include numerous asset types, should also be structured to outpace inflation. Sweeney recommends you have a mix of stocks — about 55 percent — in your early years of retirement to maintain growth, and fixed income, such as bonds, to guard against market volatility.

4. What impact will taxes have on my retirement income?

© Heide Benser/Corbis

Taxes don’t disappear when you stop working. In fact, your tax bill can take a big bite out of your retirement income.

Up to 85% of your Social Security benefits might be taxable if you have income in addition to your benefits. Withdrawals from tax-deferred retirement accounts, such as traditional IRAs and 401(k)s, are also taxed. So, if you need $5,000 a month to cover expenses in retirement, you might need to withdraw up to $6,000, thanks to taxes, Bishop said.

Higher-income taxpayers will have to pay taxes on profits from the sale of stocks, bonds, mutual funds and other investments not held in a tax-deferred retirement account. States have their own rules for taxing retirement income, so depending on where you live, you could be hit with an above-average tax bill.

The states that impose the highest taxes on retirees include California, Connecticut, New York, Oregon, Rhode Island and Vermont, according to a 2014 analysis of state taxes conducted by Kiplinger, a publisher of business forecasts and personal finance advice. A financial planner can help you figure out how taxes will impact you in retirement and what strategies you can use to minimize your tax bill.

5. Where will I get my health care?

© REX/Blend Images

Chances are your employer won’t continue providing health care coverage for you in retirement. Only 28% of companies with 200 or more employees offer retiree health coverage, according to the 2013 Kaiser/HRET Survey of Employer-Sponsored Health Benefits.

You are eligible for Medicare when you turn 65. You likely won’t need to pay a premium for Medicare Part A, which covers inpatient hospital stays, care at nursing facilities, hospice care and some home health care. If you want extended health benefits, however, you’ll need to pay a monthly premium for Medicare Part B, which covers most doctors’ services and outpatient services. Medicare Part B typically costs around $104.90.

If you retire early, you’ll have to get an insurance policy on your own. Couples who retire at 62 can expect to pay $17,000 a year for health insurance premiums and out-of-pocket costs until they’re eligible for Medicare, according to Fidelity. A retiree can expect to pay an average of $220,000 in medical expenses over the course of their retirement.

You also need to factor in long-term medical care, which could wipe out your retirement savings if you’re not prepared. The median annual cost of care in an assisted living facility is $43,200, and the average cost of a private nursing home room is more than double that, according to the Genworth 2015 Cost of Care Survey. To curb these types of costs, you can look into long-term care insurance.

6. How much debt do I have?

© JLP/Jose L. Pelaez/Corbis

The more debt you carry into retirement, the more retirement income you’ll need to pay off what you owe. When you’re deciding when to retire, you need to figure you how long it will take to pay off your existing debts. You should pay off any high-interest debts that aren’t tax-deductible first, such as credit card debt, said Bishop. If you have good credit, refinance any high-interest debt that’s tax-deductible, such as a mortgage, to get the lowest rate possible.

7. Am I emotionally ready to retire?

Glum businessman working in office

© Jose Luis Pelaez Inc/Getty Images Glum businessman working in office

Ask yourself what you will do once you retire. If you don’t know — and most people don’t — you might have a problem, said Bishop. Few people still have the traditional view of retirement of doing little more than playing shuffleboard all day. In fact, only around 22 percent of people surveyed by the Federal Reserve Board say they plan to stop working entirely in retirement.

You need to figure out before you retire whether you want to continue working in some capacity. If you initially choose not to work in retirement, you might have a harder time becoming employed after being out of the workforce for a while.

Deciding to retire, much less knowing how to map out a retirement plan, takes work and careful thought. Consider meeting with a financial planner to help you determine how to decide when to retire and to create an action plan for retirement. Knowing how and when you will retire will allow you to look forward to retirement.

Written by Cameron Huddleston of GoBankingRates

(Source: GoBankingRates)

10 States Where Taxes Are Going Up

© Thinkstock
© Thinkstock

Some states, still facing tight budgets after years of recession and slow recovery, are turning to tax increases to make up for the shortfalls. In some states, you’ll soon pay more for Gucci bags and other luxury goods. In others, soft drinks, cigarettes, gasoline and live entertainment will cost more.

Pay attention even if your state isn’t on this list. Some of the taxes are aimed at tourists and motorists passing through the states. And many other states may follow suit with similar tax hikes if these states’ efforts prove successful at raising revenues without upsetting voters.

CONNECTICUT

Buying a pair of Jimmy Choo shoes or even a T-shirt from the Gap will cost a little more in the Constitution State under a budget deal that is expected to yield nearly $1.7 billion in new revenue.

Starting July 1, yachts and other luxury items will be taxed at 7.75%, up from 7%, as part of a state budget plan for the next two years. And clothing and shoes under $50 will no longer be exempt from the state’s 6.35% sales tax.

The state tax on cigarettes also will climb — from $3.40 to $3.65 per pack on October 1, 2015, and to $3.90 per pack on July 1, 2016.Connecticut’s wealthiest citizens and businesses will feel the biggest pinch. A projected $300 million will come from the addition of two income tax brackets above the state’s current highest rate of 6.7%. The new top rate: 6.9%.

GEORGIA

Hotel guests will have to pay $5 more each night, thanks to a tax package that could yield up to $1 billion to fix the Peach State’s backlog of road and bridge repairs.

Drivers and owners of electric cars will also have to pay more. Motorists will pay an additional 6 cents for each gallon of gas starting July 1, 2016, under a new law that moves the state from a series of sales and excise taxes on gasoline to a single excise tax. Owners of electric vehicles face new registration fees ($200 a year for noncommercial electric vehicles, $300 for commercial). Meanwhile, heavy trucks will have to pay an extra “highway impact fee” of $50 to $100.

Counties also were given the green light to ask voters to approve a sales tax of up to 1% to fund local transportation projects.

KANSAS

Kansans will pay more for nearly everything they buy in the Sunflower State. Lawmakers raised the state’s sales tax to 6.5% to close a $400-million budget gap. The hike came three years after Gov. Sam Brownback, a Republican, backed the largest tax cut in the state’s history.

The new rate, up from 6.15%, is effective July 1. Coupled with local sales taxes, Kansas now leapfrogs California to have the eighth-highest sales tax in the United States, according to the Tax Foundation.

Smokers will pay more, too. The per-pack tax on cigarettes goes to $1.29, from 79 cents, effective July 1. And beginning July 1, 2016, people who use e-cigarettes will be taxed 20 cents per milliliter of consumable material.

NEVADA

What happens in Vegas may stay in Vegas, but so will more of your money, thanks to a historic tax package that is expected to raise $1.5 billion over the next two years. Everything from hailing a cab, smoking and attending events will cost more in the Silver State.

Taxi passengers, including Uber users, will see a 3% excise tax on all fares, and the cigarette tax will go up a buck, to $1.80 per pack. That’s still a far cry from the nation’s highest tobacco tax, $4.35 per pack in New York state.Most venues with live entertainment will have to charge a 9% ticket tax, instead of a sliding scale of 5% to 10%. The tax applies to fees for escort services, but not to rates charged by prostitutes at the state’s legal brothels.

Finally, a 0.35% sales tax boost that was due to expire became permanent. Nevada relies heavily on the sales tax and tourism because it doesn’t have an income tax. Most of the increases start July 1, although the live entertainment levy kicks in on October 1.

SOUTH DAKOTA

Motorists will have to pay more, but in return they’ll be able to drive faster on two major highways.

State lawmakers passed sweeping legislation earlier this year that raised the gas tax by 6 cents per gallon on April 1, to 28 cents. It also added 1 percentage point to the excise tax on vehicle purchases, making it 4%. The legislation allows counties and townships to raise property taxes for road and bridge work, if voters agree. The entire funding package is expected to raise $85 million per year for state and local infrastructure work.

In exchange, drivers can legally travel 80 miles per hour on Interstates 90 and 29, 5 mph faster than the old maximum speed.

UTAH

Motorists will pay 5 cents more per gallon at the pump, starting Jan. 1, 2016. The revenue will help fund transportation projects and maintenance. In addition, counties can add a sales tax increase of a quarter-cent per dollar if voters give an OK. Before the hike, the Beehive State faced an $11-billion funding gap for critical road projects through 2040.

Meanwhile, homeowners will see a boost of $50 on property tax bills in November. The $75 million in new revenue will be used for education programs.

VERMONT

Soft drinks and cigarettes will cost more, while wealthy taxpayers will be able to take fewer deductions. The changes were aimed at closing a budget gap of nearly $100 million.

For the first time, Vermont’s 6% sales tax will hit soft drinks. The tax applies to nonalcoholic beverages that contain natural or artificial sweeteners, but not to those containing milk or milk substitutes, or to drinks that include at least 50% vegetable juice or fruit juice by volume. Also, smokers will pay an extra 33 cents in state taxes for cigarettes, raising the rate to $3.08 a pack by next year.

Millionaires in Vermont could pay about $5,000 more in taxes. The plan limits the amount filers can deduct from income taxes to $15,000 for an individual and $31,500 for a household. Vermonters also won’t be able to deduct from this year’s tax liability what they paid in state and local taxes the previous year.

IDAHO, IOWA, NEBRASKA

Gas tax increases are also coming in Idaho (7 cents a gallon), Iowa (10 cents per gallon) and Nebraska (a 6-cent hike spread over four years).

Other states are likely to boost gas taxes in the coming years as Congress struggles to pass a long-term surface transportation bill to fund road and bridge repairs, and as the cost of deferred maintenance soars.

Written by Kiplinger

(Source: Kiplinger)