To itemize or not to itemize your deductions, that my friends is truly the tax question. Regarding your deductions, you actually have two options.
The first option is to take the government's hand out that they call a standard deduction. The standard deduction has different values depending on a couple of different factors. You get the following standard deductions based on what your filing status is Single/Married filing separately $6300, Married Filing Jointly or Qualifying Widow(er) $12, 600, Head of Household $9,250. If you or your husband/wife are blind or born before January 2, 1951, you get $1,650 for each box that you are able to check on line 39a.
The other option is to itemize your deductions. In order to itemize your deductions, you need to fill out Schedule A.
Medical and Dental Expenses - In this section, you take the total Medical and Dental Expenses and put it on line 1. One line 2 you put your adjusted gross income. On line 3 you multiply line 2 by 10% unless you were born before January 2, 1951 in which case it is multiplied by 7.5% You are going to subtract the two and put the difference (assuming line 3 is smalller) on line 4. Line 4 is the amount of your Medical and Dental Expenses you are able to deduct. Basically, it is the amount that you exceed 10% or 7.5% depending on your age.
Taxes You Paid - On line 5, you have the option of either deducting either state/local income tax deducted in 2015 or general sales tax paid in 2015. We already went over line 6 and 7 in the home ownership blog. Line 8 is basically any other deductible tax that is not listed on lines 5, 6 and 7.
Interest You Paid - Lines 10-13 were covered under the home ownership blog. On line 14, you list any interest paid on money borrowed that is allocable to property held for investment.
Gifts to Charity - Gifts by cash or check go on line 16. Line 17 will be any gifts that are non-cash/non-check. Line 18 is simply anything that should have been claimed last year.
Casualty or theft losses - This is any loss by natural disaster or theft. You can deduct personal casualty or theft losses only to the extent that: The amount of each separate casualty or theft loss is more than $100, and The total amount of all losses during the year (reduced by the $100
limit discussed in (1)) is more than 10% of the amount of your adjusted gross income.
Job Expenses and certain miscellaneous deductions - Line 21 is unreimbursed employee expenses. These need to be what is ordinary (not lavish) and necessary (in order to do your job). What is necessary and ordinary will depend on what you do for a job. Line 22 are tax preparation fees. Line 23 are other expenses. The instructions for schedule a details all of the different expenses that you could put one line 23. Basically you enter the total amount you paid to produce or collect taxable income and manage or protect property held for earning income. On line 24 you add them together. Basically you can only deduct the amount that exceeds 2% of your adjusted gross income. That amount will finally go on line 27.
Other Miscellaneous Deductions - There are only certain expenses that you can list on this line. See the instructions for schedule a under line 28. One example would be gambling losses.
You are able to deduct all of the expenses as long as your adjusted gross income is not greater than 154,950. If it is, your deduction is limited. You will have to refer to the instructions to determine the percentage of the total that you will be able to deduct. At this point you add all of the deduction up and put the total on line 30. This will transfer to Line 40 on the 1040.
Link to instructions Schedule A
Link to Schedule A
Link to Form 1040
Wednesday, January 27, 2016
Monday, January 25, 2016
Tax Deductions for Homeowners
I am going to spend a couple of blog topics going over schedule A. Schedule A is the form that you attach to the Form 1040 that details your itemized deductions. On the 1040, you have two options, standard deduction ($6300 Single/MFS, $12,600 MFJ/Qualifying Widow, and $9250 HOH) and itemized deduction. If you are able to itemize more than your standard deduction for your filing status, you are able to deduct the greater amount of the itemized deduction.
Four of the deductions for homeowners have to do with home ownership. I am going to go over these four deductions on this blog. I have assumed that you are filing Form 1040, U.S. Individual Income Tax Return, and you are itemizing your deductions on Schedule A (Form 1040).
Real Estate Taxes - You can deduct real estate taxes imposed on you. You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6.
Sales Taxes - Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate.
Home Mortgage Interest - To be deductible, the interest you pay must be on a loan secured by your main home or a second home. The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan.
If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. One item that normally appears on a settlement or closing statement is home mortgage interest. You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). This amount should be included in the mortgage statement.
You cannot deduct the full amount of points in the year paid. They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage
Enter on line 10 of Schedule A the home mortgage interest and points reported to you on Form 1098. If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12.
Mortgage Interest premiums - You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2015 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction.
Note: The itemized deduction for mortgage insurance premiums has been extended through December 31, 2016.
Link to Schedule A
Four of the deductions for homeowners have to do with home ownership. I am going to go over these four deductions on this blog. I have assumed that you are filing Form 1040, U.S. Individual Income Tax Return, and you are itemizing your deductions on Schedule A (Form 1040).
Real Estate Taxes - You can deduct real estate taxes imposed on you. You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6.
Sales Taxes - Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate.
Home Mortgage Interest - To be deductible, the interest you pay must be on a loan secured by your main home or a second home. The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan.
If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. One item that normally appears on a settlement or closing statement is home mortgage interest. You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). This amount should be included in the mortgage statement.
You cannot deduct the full amount of points in the year paid. They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage
Enter on line 10 of Schedule A the home mortgage interest and points reported to you on Form 1098. If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12.
Mortgage Interest premiums - You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2015 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction.
Note: The itemized deduction for mortgage insurance premiums has been extended through December 31, 2016.
Link to Schedule A
Thursday, January 21, 2016
How do Income tax brackets work?
Over the last week, I had dinner with one of my fraternity brothers. During the meal, we spoke about a number of different issues. One of the issues that we spoke about was Federal Income Tax Brackets and how to determine the amount of tax owed.
In our tax system, we have 7 different tax rates or brackets. When someone talks about the bracket that they are in, they are talking about the rate that they pay on the highest dollar of income. The tax bracket tells the consumer, what percentage they would have to pay on the next dollar of income. Our tax system is a progressive system. The more money that you make, the higher the percentage of tax or the tax bracket. I guess the government feels that the higher income earners in our society can afford to pay a higher amount of tax.
Take a look at the 2015 1040 form. You list your income in lines 7-21 and the total on line 22 is your total income. Lines 23-35 are tax credits that will reduce your total income if you are eligible. These lines are totaled on line 36 and you take total income less line 36 and the result is adjusted gross income on line 37. From this, you subtract out your deduction, either standard or itemized and your deductions, which is $4,000 times the number of people in your family you are able to deduct. The result is your taxable income. This is the amount you pay taxes on.
Using the chart below, I am going to go over two examples of how the progressive tax bracket system would figure taxes.
First example, single taxpayer income of $50,000. In this example, the taxpayer would owe 10% up to $9225, or $922.50. In the next bracket, the taxpayer would owe 15% between $37,450 and $9226, or $4233.75. In the next bracket, the taxpayer would owe 25% between 50,000 and $37451 or $3137.50. Total would be 922.50+4233.75+3137.50 or $8293.75. The highest tax bracket is 25% but the effective tax rate is 16.5%.
Second example, married taxpayers with income of $100,000. In this example, the taxpayers would owe 10% up to $18,450, or $1845. In the next bracket, the taxpayers would owe 15% between $74,900 and $18,450, or $8467.50. In the next bracket, the taxpayer would owe 25% between 100,000 and $74,900 or 6275.00. Total would be 1845+8467.50+6275 or $16,587.50. The highest tax bracket is 25% but the effective tax rate is 16.6%..
Just think, using the tax bracket you are in can help you make decisions. You can figure out that any overtime you make, you will be paying 25% in federal income tax. You can also know that any amount that you increase your itemized deduction will save you 25% of the increase in taxes. This also could go for a retirement contribution.
In our tax system, we have 7 different tax rates or brackets. When someone talks about the bracket that they are in, they are talking about the rate that they pay on the highest dollar of income. The tax bracket tells the consumer, what percentage they would have to pay on the next dollar of income. Our tax system is a progressive system. The more money that you make, the higher the percentage of tax or the tax bracket. I guess the government feels that the higher income earners in our society can afford to pay a higher amount of tax.
Take a look at the 2015 1040 form. You list your income in lines 7-21 and the total on line 22 is your total income. Lines 23-35 are tax credits that will reduce your total income if you are eligible. These lines are totaled on line 36 and you take total income less line 36 and the result is adjusted gross income on line 37. From this, you subtract out your deduction, either standard or itemized and your deductions, which is $4,000 times the number of people in your family you are able to deduct. The result is your taxable income. This is the amount you pay taxes on.
Using the chart below, I am going to go over two examples of how the progressive tax bracket system would figure taxes.
First example, single taxpayer income of $50,000. In this example, the taxpayer would owe 10% up to $9225, or $922.50. In the next bracket, the taxpayer would owe 15% between $37,450 and $9226, or $4233.75. In the next bracket, the taxpayer would owe 25% between 50,000 and $37451 or $3137.50. Total would be 922.50+4233.75+3137.50 or $8293.75. The highest tax bracket is 25% but the effective tax rate is 16.5%.
Second example, married taxpayers with income of $100,000. In this example, the taxpayers would owe 10% up to $18,450, or $1845. In the next bracket, the taxpayers would owe 15% between $74,900 and $18,450, or $8467.50. In the next bracket, the taxpayer would owe 25% between 100,000 and $74,900 or 6275.00. Total would be 1845+8467.50+6275 or $16,587.50. The highest tax bracket is 25% but the effective tax rate is 16.6%..
Just think, using the tax bracket you are in can help you make decisions. You can figure out that any overtime you make, you will be paying 25% in federal income tax. You can also know that any amount that you increase your itemized deduction will save you 25% of the increase in taxes. This also could go for a retirement contribution.
Federal Income Tax Brackets, 2015 Tax Year
| Tax rate | Single filers | Married filing jointly or qualifying widow(er) | Married filing separately | Head of household |
|---|---|---|---|---|
| 10% | Up to $9,225 | Up to $18,450 | Up to $9,225 | Up to $13,150 |
| 15% | $9,226 to $37,450 | $18,451 to $74,900 | $9,226 to $37,450 | $13,151 to $50,200 |
| 25% | $37,451 to $90,750 | $74,901 to $151,200 | $37,451 to $75,600 | $50,201 to $129,600 |
| 28% | $90,751 to $189,300 | $151,201 to $230,450 | $75,601 to $115,225 | $129,601 to $209,850 |
| 33% | $189,301 to $411,500 | $230,451 to $411,500 | $115,226 to $205,750 | $209,851 to $411,500 |
| 35% | $411,501 to $413,200 | $411,501 to $464,850 | $205,751 to $232,425 | $411,501 to $439,000 |
| 39.6% | $413,201 or more | $464,851 or more | $232,426 or more | $439,001 or more |
Monday, January 18, 2016
Earned Income Tax Credit - What is it and what does it mean for me in 2015?
One of the most lucrative tax credits in recent years is the Earned Income Tax Credit. This tax credit is for individuals who make less than $50,000 roughly. This credit can give you extra money in the form of a refund or if you have withheld less than you should have, you can use the money to pay for your federal income taxes. Each year there are changes to the amounts of earned income and adjusted gross income that you need to be below before you will receive the credit.
The government takes into consideration your Earned Income, which includes wages, salaries, tips, and other taxable employee pay, union strike benefits, long-term disability benefits received prior to minimum retirement age and net earnings from self-employment. The levels that you need to be under are dependent on whether you have any qualifying children and whether you are married. Note that you are unable to claim this credit should you decide to file married filing jointly. Your qualifying children are children less than 19 or less than 24 if they are a full time student. These children need to be living with you and not earning more than $6300. ($6300 will require that they file taxes.) Other relatives are allowed to be qualifying children, but the typical person who claims this credit uses his or her own children. Another requirement is that you have no more than $1050 worth of unearned income in savings, stocks, etc.
In order for you to be able to claim this credit, there are rules on forms and questions that your tax professional must ask you or he/she will be fined. The government calls this “Due Diligence”. There are four due diligence requirements. Generally, if your tax professional prepares EITC claims, he/she must not only ask all the questions to get the information required on Form 8867, Paid Preparers' Earned Income Credit Checklist, but they must also ask additional questions when the information that a client gives seems incorrect, inconsistent or incomplete. He/She must prepare, submit, and keep a copy of the Form 8867. They must prepare and keep all worksheets showing how the credit was computed. So if your tax professional is preparing your taxes and you are taking the Earned Income Tax Credit, understand when he/she asks you some interesting questions. He/She is doing it so that you can get the credit and he/she does not get fined.
Earned Income Chart
The earned income and adjusted gross income for 2013 will need to be less than:
· $47,747 ($53,267 married filing jointly) with three or more qualifying children
· $44,454 ($49,974 married filing jointly) with two qualifying children
· $39,131 ($44,651 married filing jointly) with one qualifying child
· $14,820 ($20,330 married filing jointly) with no qualifying children
Tax Year 2015 maximum credit:
· $6,242 with three or more qualifying children
· $5,548 with two qualifying children
· $3,359 with one qualifying child
· $503 with no qualifying children
Monday, January 11, 2016
Affordable Care Act - How does it have to do with taxes?
One of the most significant changes in the last two years is the Affordable Care Act, also known as Obamacare. This law was very controversial and has provisions that affect a number of different entities.
According to the IRS website, The Affordable Care Act contains comprehensive health insurance reforms and includes tax provisions that affect individuals, families, businesses, insurers, tax-exempt organizations and government entities. These tax provisions contain important changes, including how individuals and families file their taxes. The law also contains benefits and responsibilities for other organizations and employers.
As an individual, the law requires you and your dependents to have healthcare coverage. You could have secured healthcare through your place of employment, or you might live in a state that has a Health Insurance Marketplace. If your employer does not offer insurance or if the insurance is found not to qualify, then you might get the insurance through the Marketplace.
The health care law will bring some changes to the 2015 federal income tax return that individuals file in 2016. This year marks the first time that taxpayers may receive multiple information forms that they can use to complete their tax return and will keep with their tax records.
The information forms are:
As you can see, the Affordable Care Act added a few more forms to filing taxes. It is especially important to keep good records, especially if you have received the premium tax credit. You are required to file a tax return if only to reconcile the premium tax credit against the cost of the insurance and any payments you made during the year;
According to the IRS website, The Affordable Care Act contains comprehensive health insurance reforms and includes tax provisions that affect individuals, families, businesses, insurers, tax-exempt organizations and government entities. These tax provisions contain important changes, including how individuals and families file their taxes. The law also contains benefits and responsibilities for other organizations and employers.
As an individual, the law requires you and your dependents to have healthcare coverage. You could have secured healthcare through your place of employment, or you might live in a state that has a Health Insurance Marketplace. If your employer does not offer insurance or if the insurance is found not to qualify, then you might get the insurance through the Marketplace.
The health care law will bring some changes to the 2015 federal income tax return that individuals file in 2016. This year marks the first time that taxpayers may receive multiple information forms that they can use to complete their tax return and will keep with their tax records.
The information forms are:
- Form 1095-A, Health Insurance Marketplace Statement
- Form 1095-B, Health Coverage
- Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.
As you can see, the Affordable Care Act added a few more forms to filing taxes. It is especially important to keep good records, especially if you have received the premium tax credit. You are required to file a tax return if only to reconcile the premium tax credit against the cost of the insurance and any payments you made during the year;
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