For many, leaving college means starting to pay student loan debt which can often equal a house payment. Some student loan lenders offer an Income Based Repayment (IBR) or Pay as You Earn Repayment (PAYE) based on the adjusted gross income of your tax return. If you are married and your spouse has a high income, this pushes your AGI up and probably doesn’t give you much benefit in lowering student loans. One potential way around this is to file married filing separate (MFS) instead of married filing joint (MFJ). I say potential as MFS generally means higher taxes are paid as a couple.
Here are some tax implications to keep in mind with the MFS filing status:
- Dependent Care Credit not allowed
- Earned Income Tax Credit not allowed
- Student Loan interest deduction not allowed
- Lifetime Learning Education Credit not allowed
- Tax rates higher than MFJ
Another thing to keep in mind down the line is the taxability of future loan forgiveness with an IBR or PAYE. As the tax law stands right now student loan debt forgiveness is considered taxable income (except under the Public Service Loan forgiveness program). This means you could have a large tax bill in the year the debt is forgiven.
So the question is, should you file MFS and reduce your student loan payment? It all comes down to the math running an MFS v MFJ tax return comparisons along with calculating loan repayment schedules based on the AGIs produced in both tax returns and seeing which one nets the most benefit while potentially looking at future taxability of any loan forgiveness. Whoever said this was easy? Online tax programs or a tax professional can help with these calculations.
I have had a lot of inquiries lately about taxes due on the sale of a personal home as many homeowners still think old tax laws are in effect. Things have gotten a lot easier in excluding any gain on the sale of a personal home but let’s start with what the old law was.
OLD Tax law: If you sold your personal home at a gain, to escape tax on capital gains the proceeds of the sale had to be rolled over into the purchase of another home. Individuals over 55 were allowed a once-in-a-lifetime exclusion of $125,000 from capital gains on the sale of their home.
NEW Tax law (as of 5/6/97 yes that’s 1997): If you lived in the home as your primary residence and owned it 2 out of the last 5 years, you are eligible for a $250,000 (single/MFS/HoH) or $500,000 (MFJ) exclusion from capital gains tax. If you lived in the home less than 2 years, some exceptions to the rule might apply to allow a pro-rated exclusion: move due to change of job, health, or unforeseen circumstances such as divorce. If you depreciated the home due to renting it out or claimed depreciation in the home office deduction, that amount will need to be “recaptured” and taxed at rates up to 25% (this is technically a section 1250 gain, not capital). Another caveat is you cannot claim the exclusion more than once every two years.
That’s it in a nutshell for selling your house without having to cough up money on the gain to the government. As with any tax law, if your situation is a little more complex than described above, please contact a tax professional.
Happy 2017! As tax documents start flowing into your mailbox and email inbox, please keep in mind the following dates for the 2017 tax filing season for 2016 tax returns.
January 17, 2017: Due date 4th Quarter estimated tax payments
January 23: IRS begins processing returns for 2016 tax year
January 31: Deadline for employers to mail out W-2s and most 1099-MISC
February 15: Deadline for financial institutions to mail out 1099-B (interest, dividends, capital gains)
February 15: All 2016 tax returns claiming the Earned Income Credit (EIC) and/or Additional Child Tax Credit held by IRS until this date
March 15: Partnership (1065) & S-Corp (1120S) tax deadline. Please note the new tax deadline for partnership returns is now March 15 instead of April 15 (or 18 depending on the year).
April 18: Individual and C-Corp (1120) tax deadline or request for extension. Yes that’s right, you get an extra few days to prepare your return!
Is it really possible that 2016 is almost over? Looking back over previous articles, last year’s tax planning one came to mind and I’ll put it out there again with a few more additions. Here are things to consider before midnight on December 31 rolls around:
- Adjust Withholdings: If you had a significant increase (decrease) in income, change in marital status or dependency exemptions, it’s very important to adjust withholdings for these changes especially if a big year end bonus is coming your way. Not paying enough during the year can trigger an underpayment penalty. Paying too much is an interest free loan to the government.
- Bunch Miscellaneous Itemized Deductions: If you itemize deductions and have large amounts of unreimbursed employee expenses, lawyer fees attributed to alimony or other taxable income related items, or tax preparation fees it’s a good idea to check if you will make it over that 2% income threshold to take the deduction. If your close, expenses can be bunched for the 2016 tax year by paying for them with cash or CC by Dec. 31. If you are subject to AMT, this deduction may not be beneficial to you.
- Open and Fund Retirement Accounts: If you earn money from self-employment, you are eligible for additional tax-advantaged retirement savings beyond your IRA. The deadline to open a SIMPLE IRA was Oct. 1, but you can still open an individual 401(k), Roth or traditional, until Dec. 31. The contribution deadline varies by type of entity. The deadline to contribute to other retirement accounts is usually April 15, or whenever you file your taxes, but there is some variation among types of accounts. If your 401(k) or 403(b) is through your employer, your deadline for contributions is Dec. 31. If you earn money from self-employment, you are eligible for additional tax-advantaged retirement savings beyond your IRA.
- Organize Your Materials: I can’t stress enough how important it is to have your tax receipts and statements organized whether digitally or by paper before you sit down to prepare your tax return. Here is a post about it.
- Decide who will Take Dependents: If parents are divorced, decide now who will take the dependency exemption as only one can.
- Spend Your Flex Spending Account Money: In most FSAs, only $500 of unused funds may be rolled over to the next calendar year and a use-it-or-lose-it rule is in place for anything above that amount.
- Give to Charity: Now is a good time to donate to your favorite charity (ies) not only for the benefit of helping others but also for the potential tax savings. If you itemize your deductions, donating to a charitable organization-501(c) may lower your tax liability.
- Accelerate Deductions or Delay Income: Make your mortgage payment early, pay property taxes, tuition, medical bills or other deductible expenses now to increase this year’s deductions – unless you’d be better off financially deducting those items next year. You might also be able to delay bonuses or other income until next year if that’s a better move.
- Balance Capital Gains with Losses: If you have capital gains from stock or other asset sales, look at your portfolio to see if it makes sense to sell an asset that has a loss to offset your capital.
- Give Gifts from Your Future Estate: If you want to reduce the estate tax liability for your heirs, look to give them a gift now. Gifts to an individual in a calendar year up to $14,000 ($28,000 for a married couple) are tax free for both the giver and receiver. Gifts made directly to educational institutions for higher learning and medical bills paid directly on behalf of someone else are also tax free.
Now that Halloween is over, retailers will be setting up their holiday displays in force. The holiday season makes us think of giving gifts a little more than at other times in the year. Just in case you have a rich parent, aunt, or grandparent that wants to be very generous in their giving (or you are one), here are some things to keep in mind about gifts & potential gift taxes.
- Any gift taxes levied on gifts are paid by the giver (donor), not the one receiving the gift.
- The definition of gift for IRS purposes is “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”
- Gifts can be cash, goods (cars, etc), stocks/investments, really anything with value.
- If you give a gift in 2016 or 2017 with a value of $14,000 or less to an individual, no need to worry about gift taxes. A husband and wife can combine this amount to give $28,000 to an individual tax free.
- Gifts made directly to educational institutions for tuition/educational expenses or medical facilities for medical expenses on behalf of someone do not count as taxable gifts. Just make sure the money goes directly to the institution and not to the individual to pay the institution.
- If your gift is greater than the $14,000/$28,000 gift tax exclusion, please consult a tax professional about the potential tax liability.
Have fun gift-giving (receiving)!
If you live in the beautiful state of Colorado (yes I’m a little biased in this regard), this year might mark a change on your state income tax return with a not-so-new but recently highlighted tax called the use tax. Normally when you buy a physical product (and now many digital products) the seller charges sales tax and remits in to the state. Use tax comes into play when purchases are made on the Internet (or by old-fashioned mail order) but no sales tax is charged at the time of purchase because the retailer doesn’t have a presence in the states (one of the requirements for having to collect it) and the purchaser is supposed to calculate the amount that should have been paid in the form of use tax and add it on their income tax return. This tax has traditionally not been enforced but ever since the Internet Tax Freedom Act of 1998 and subsequent renewals, states have been trying to come up with ways to collect “lost” tax revenues from online retailers that don’t have a presence in the state.
For Colorado, the most recent attempt to collect sales tax from the end consumer instead of the retailer of Internet goods has come from a law passed in 2010. The enforcement of the law was struck down by a district court that same year and put on the back burner but then reversed by the federal court earlier this year. The law requires retailers with $100,000 or more in annual sales to Colorado residents provide those consumers with a report of their past year’s purchases (if above $600) and notify them of their responsibility to pay use tax on those purchases. This is similar to a 1099-MISC contractors receive for payments made to them for services. The law also requires the retailers to provide the state with an annual report listing the names, billing addresses, shipping addresses and the total amount of purchases for each of their Colorado customers.
What does this mean for residents of Colorado? In short, if you buy a lot of items online with no sales tax charged, your income tax bill might be higher than expected this year. Don’t throw away any official tax form from retailers because the state will receive that information and match it up to your tax return. For those that like to shop at Amazon, some purchases on the website now charge Colorado sales tax, putting the burden back on the retailer but it seems to be spotty.
The end might be near for no sales tax on online purchases as laws like Colorado spread throughout the U.S. and lawmakers finally put an end to the moratorium created by the Internet Tax Freedom Act of 1998. For now, the paperwork and tax burden will continue to be on the consumer as states look to more vehemently enforce the use tax. So be educated, and keep an eye out in January/February for a tax document from your favorite online retailer.
Individuals make up 72% of charitable giving to nonprofit organizations in the United States according to the National Center for Charitable Statistics. If you would like a tax benefit as a result of your charitable giving, here are some tax rules to keep in mind.
- Itemize–On your federal tax return, the charitable deduction is only available if you itemize deductions on Schedule A. In Colorado, if you don’t itemize but take the standard deduction at the federal level but have charitable contributions over $500, the amount over $500 may be deducted as a charitable deduction. I only speak for Colorado so check your state tax code to see if it has anything similar.
- Contribute to Qualified Organizations–Want to give money to a church, school PTO, or other 501(c)(3) non-profit organization? Those are qualified organizations, for others see here. See a friend’s Go Fund Me website and want to contribute? Although it is a very charitable action, the IRS does not allow deductions for contributions made to an individual. Also to keep in mind during this political cycle, most political contributions also cannot be deducted as a charitable contribution.
- Keep Receipts–Did you donate clothing/household goods to Goodwill and Salvation Army but not pick up the receipt given at the drop-off station? The IRS seems to be getting more picky on documenting donations. When giving cash or non-cash items, always get a receipt with at least date, amount of donation, and organization donated to, and tuck it away with your other important tax papers during the year.
- Non-Cash Goods Valuation–Speaking of Goodwill, Salvation Army, and all the other organizations that take noncash goods, you are the one (not your tax professional although they can help) assigning the donated value to the goods. Goodwill and Salvation Army have good valuation guides so use them (or find one for your specific organization) based on the condition of items donated. If the value of noncash items donated on your return is anticipated to go over $5,000 (whether one item or multiple), an appraisal is needed or the noncash donations will be capped at $5,000 (unless you are asking for an audit).
Go forth and be charitable and tax-wise!
One often misunderstood consequence of pulling money out early (before age 59 1/2) from a retirement fund–401(k), IRA, Roth–is tax liability. Clients will say, “I paid the taxes due when I pulled out the money.” Unfortunately, this is usually not the case. Just like withholdings on a paycheck, money withheld from an early retirement fund withdrawal are estimates and the total tax liability depends on your overall tax picture. If withdrawing 401(k) or traditional IRA funds before age 59 1/2, a 10% early withdrawal penalty is imposed on top of your regular income tax rate (15%, 25%, 28%, etc) unless certain exceptions apply. Don’t forget state taxes too which here in Colorado are 4.63%. All told, taxes on your withdrawal could be around 40% and the extra taxable income from the cash-out could push you up into a higher tax bracket or over limits for credits like the child tax credit resulting in a higher tax burden. If you need cash quick, consider these alternatives to raiding your 401(k).
- Withdraw from a Roth IRA fund before choosing an IRA or 401(k): Money that goes into a Roth IRA is already taxed so taking contributed money out is tax-free but the 10% early withdrawal penalty applies if you don’t qualify for the exceptions found here. If you pull money from earnings, then both income tax rate and early withdrawal penalty apply.
- Borrow from your 401(k): Check with your retirement fund provider but this could be a better alternative than pulling the money out. 401(k) loans must be repaid within five years but generally have decent interest rates which you are paying back to yourself and not Uncle Sam.
- Get a loan: Besides borrowing from your retirement fund, if you own a home one lending option is a Home Equity Loan or HELOC. Money can also be borrowed from a family member or legitimate loan websites like lendingtree.com or prosper.com.
- Sell Stuff: Big ticket items like cars, electronics, or furniture that you can live without in times of need can provide needed cash.
- Get a 2nd (or 3rd) job: Jobs like babysitting, dog/house watching, or participating in research studies can provide extra short-term cash.
- Rent Your Stuff: The sharing model economy has taken off with the Internet. Websites like airbnb.com help rent out a single room in your house, relayrides.com helps with car rentals, and so much more.
These are just a few ideas to think about before taking money out of your 401(k) and incurring higher tax rates and tax penalties than anticipated to get at your money. As always, if you have questions specific to your tax situation, please consult a tax professional.
With increased information being passed through online servers, data breaches are becoming more commonplace resulting in your information (or some of it) being leaked into the hands of cyber hackers. Large security breaches like those at Target, Office of Personnel Management, Anthem and many more have come to light in recent years. The Internal Revenue Service has not been immune to these security breaches and the filing of fraudulent tax returns. Last year, the IRS says about 334,000 taxpayers had their information stolen through an IRS-record keeping application. This breach made it possible for criminals to get away with about $50 million in fraudulent refunds. Many taxpayers filed their returns only to find out that someone had already filed with their information causing a massive headache in resolving the matter and significantly delaying the receipt of refunds rightly due.
While the IRS is trying to step up their practices to identify and stop fraudulent returns, one thing you can do to help is file your 2015 return as soon as possible. The sooner you file, the sooner you can get a refund back if due one and make it less likely that a crook will beat you to it. Today marks the start of tax return processing at the IRS so as soon as you get those W-2s, 1099s, 1098s, and other tax documents sit down to prepare your return or contact your tax professional.
Tax preparation season is right around the corner. Here are a few dates to keep in mind:
January 15, 2016: Due date 4th Quarter estimated tax payments
January 19: IRS begins processing returns for 2015 tax year
February 1: Deadline for employers to mail out W-2s and most 1099-MISC
February 15: Deadline for financial institutions to mail out 1099-B (interest, dividends, capital gains)
March 15: Corporate tax deadline
April 18: Individual and partnership tax deadline or request for extension. Deadline to contribute to traditional & SEP IRAs for 2015 tax year. Yes, the April 18th date is not a mistake as April 15th is Emancipation Day and an official holiday in the District of Columbia closing all federal offices. If you live in Maine or Massachusetts, you get another extra day as returns aren’t due until April 19 because of the state’s Patriots’ Day.
If you are anxious to know when you will be receiving your tax refund, here is the IRS direct deposit refund cycle chart.