Archive for Individual Taxes

Married couples often wonder whether they should file joint or separate tax returns. The answer depends on your individual tax situation.

It generally depends on which filing status results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses, plus interest and most penalties. This means that the IRS can come after either of you to collect the full amount.

Although there are provisions in the law that offer relief, they have limitations. Therefore, even if a joint return results in less tax, you may want to file separately if you want to only be responsible for your own tax.

In most cases, filing jointly offers the most tax savings, especially when the spouses have different income levels. Combining two incomes can bring some of it out of a higher tax bracket. For example, if one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately can save $2,512.50 for 2020.

Filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. They’re less favorable than the single rates.

However, there are cases when people save tax by filing separately. For example:

One spouse has significant medical expenses. For 2019 and 2020, medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in larger total deductions.

Some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. You also can’t exclude adoption assistance payments or interest income from series EE or Series I savings bonds used for higher education expenses.

Social Security benefits may be taxed more. Benefits are tax-free if your “provisional income” (AGI with certain modifications plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate return (or $25,000 if the spouses didn’t live together for the whole year).

No hard and fast rules

The decision you make on your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There’s often no simple answer to whether a couple should file separate returns. A number of factors must be examined. We can look at your tax bill jointly and separately. Contact us to prepare your return or if you have any questions.

© 2020

The tax aspects of selling mutual fund shares

Perhaps you’re an investor in mutual funds or you’re interested in putting some money into them. You’re not alone. The Investment Company Institute estimates that 56.2 million households owned mutual funds in mid-2017. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.

Tax basics

If you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax.

When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One difficulty is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.

What’s considered a sale

It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout.

It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares.

Another example: Many mutual funds provide check-writing privileges to their investors. However, each time you write a check on your fund account, you’re making a sale of shares.

Determining the basis of shares

If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.

The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis.

  • First-in first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.
  • Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on June 1, 2015.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis.
  • Average basis. The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent.

As you can see, mutual fund investing can result in complex tax situations. Contact us if you have questions. We can explain in greater detail how the rules apply to you.

© 2020

There still might be time to cut your tax bill with IRAs

If you’re getting ready to file your 2019 tax return, and your tax bill is higher than you’d like, there may still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the Wednesday, April 15, 2020, filing date and benefit from the resulting tax savings on your 2019 return.

Do you qualify?

You can make a deductible contribution to a traditional IRA if:

  • You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or
  • You (or your spouse) are an active participant in an employer plan, and your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status.

For 2019, if you’re a joint tax return filer covered by an employer plan, your deductible IRA contribution phases out over $103,000 to $123,000 of modified AGI. If you’re single or a head of household, the phaseout range is $64,000 to $74,000 for 2019. For married filing separately, the phaseout range is $0 to $10,000. For 2019, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $193,000 and $203,000.

Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59 1/2, unless one of several exceptions apply).

IRAs often are referred to as “traditional IRAs” to distinguish them from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59 1/2 or older.

Here are a couple other IRA strategies that might help you save tax.

  1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2019? That may help you years down the road when you take tax-free payouts from the account. However, the contribution isn’t deductible. If you realize you need the deduction that a traditional IRA contribution provides, you can change your mind and turn that Roth IRA contribution into a traditional IRA contribution via the “recharacterization” mechanism. The traditional IRA deduction is then yours if you meet the requirements described above.
  2. Make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you manage the home front. In this case, you may be able to take advantage of a spousal IRA.

How much can you contribute?

For 2019 if you’re qualified, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over).

In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2019, the maximum contribution you can make to a SEP account is $56,000.

If you’d like more information about whether you can contribute to an IRA or SEP, contact us or ask about it when we’re preparing your return. We’d be happy to explain the rules and help you save the maximum tax-advantaged amount for retirement.

© 2020

Can you deduct charitable gifts on your tax return?

Many taxpayers make charitable gifts — because they’re generous and they want to save money on their federal tax bills. But with the tax law changes that went into effect a couple years ago and the many rules that apply to charitable deductions, you may no longer get a tax break for your generosity.

Are you going to itemize?

The Tax Cuts and Jobs Act (TCJA), signed into law in 2017, didn’t put new limits on or suspend the charitable deduction, like it did with many other itemized deductions. Nevertheless, it reduces or eliminates the tax benefits of charitable giving for many taxpayers.

Itemizing saves tax only if itemized deductions exceed the standard deduction. Through 2025, the TCJA significantly increases the standard deduction. For 2020, it is $24,800 for married couples filing jointly (up from $24,400 for 2019), $18,650 for heads of households (up from $18,350 for 2019), and $12,400 for singles and married couples filing separately (up from $12,200 for 2019).

Back in 2017, these amounts were $12,700, $9,350, $6,350 respectively. The much higher standard deduction combined with limits or suspensions on some common itemized deductions means you may no longer have enough itemized deductions to exceed the standard deduction. And if that’s the case, your charitable donations won’t save you tax.

To find out if you get a tax break for your generosity, add up potential itemized deductions for the year. If the total is less than your standard deduction, your charitable donations won’t provide a tax benefit.

You might, however, be able to preserve your charitable deduction by “bunching” donations into alternating years. This can allow you to exceed the standard deduction and claim a charitable deduction (and other itemized deductions) every other year.

What is the donation deadline?

To be deductible on your 2019 return, a charitable gift must have been made by December 31, 2019. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” The delivery date depends in part on what you donate and how you donate it. For example, for a check, the delivery date is the date you mailed it. For a credit card donation, it’s the date you make the charge.

Are there other requirements?

If you do meet the rules for itemizing, there are still other requirements. To be deductible, a donation must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.

And there are substantiation rules to prove you made a charitable gift. For a contribution of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the organization you donated to that shows its name, plus the date and amount of the contribution. If you make a charitable contribution by text message, a bill from your cell provider containing the required information is an acceptable substantiation. Any other type of written record, such as a log of contributions, isn’t sufficient.

Do you have questions?

We can answer any questions you may have about the deductibility of charitable gifts or changes to the standard deduction and itemized deductions

Answers to your questions about 2020 individual tax limits

Right now, you may be more concerned about your 2019 tax bill than you are about your 2020 tax situation. That’s understandable because your 2019 individual tax return is due to be filed in less than three months.

However, it’s a good idea to familiarize yourself with tax-related amounts that may have changed for 2020. For example, the amount of money you can put into a 401(k) plan has increased and you may want to start making contributions as early in the year as possible because retirement plan contributions will lower your taxable income.

Note: Not all tax figures are adjusted for inflation and even if they are, they may be unchanged or change only slightly each year due to low inflation. In addition, some tax amounts can only change with new tax legislation.

So below are some Q&As about tax-related figures for this year.

How much can I contribute to an IRA for 2020?

If you’re eligible, you can contribute $6,000 a year into a traditional or Roth IRA, up to 100% of your earned income. If you’re age 50 or older, you can make another $1,000 “catch up” contribution. (These amounts are the same as they were for 2019.)

I have a 401(k) plan through my job. How much can I contribute to it?

For 2020, you can contribute up to $19,500 (up from $19,000) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2020, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc. is $2,200 (up from $2,100 in 2019).

How much do I have to earn in 2020 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $137,700 for this year (up from $132,900 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2020?

The Tax Cuts and Jobs Act eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2020, the standard deduction amount is $24,800 for married couples filing jointly (up from $24,400). For single filers, the amount is $12,400 (up from $12,200) and for heads of households, it’s $18,650 (up from $18,350). So if the amount of your itemized deductions (such as charitable gifts and mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2020.

How much can I give to one person without triggering a gift tax return in 2020?

The annual gift exclusion for 2020 is $15,000 and is unchanged from last year. This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

Your tax picture

These are only some of the tax figures that may apply to you. For more information about your tax picture, or if you have questions, don’t hesitate to contact us

The IRS announced it is opening the 2019 individual income tax return filing season on January 27. Even if you typically don’t file until much closer to the April 15 deadline (or you file for an extension), consider filing as soon as you can this year. The reason: You can potentially protect yourself from tax identity theft — and you may obtain other benefits, too.

Tax identity theft explained

In a tax identity theft scam, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.

The legitimate taxpayer discovers the fraud when he or she files a return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the valid one, tax identity theft can cause major headaches to straighten out and significantly delay a refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected, rather than yours.

Note: You can get your individual tax return prepared by us before January 27 if you have all the required documents. It’s just that processing of the return will begin after IRS systems open on that date.

Your W-2s and 1099s

To file your tax return, you must have received all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2019 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2019 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).

If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

Other advantages of filing early

Besides protecting yourself from tax identity theft, another benefit of early filing is that, if you’re getting a refund, you’ll get it faster. The IRS expects most refunds to be issued within 21 days. The time is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.

Direct deposit also avoids the possibility that a refund check could be lost or stolen or returned to the IRS as undeliverable. And by using direct deposit, you can split your refund into up to three financial accounts, including a bank account or IRA. Part of the refund can also be used to buy up to $5,000 in U.S. Series I Savings Bonds.

What if you owe tax? Filing early may still be beneficial. You won’t need to pay your tax bill until April 15, but you’ll know sooner how much you owe and can plan accordingly.

Be an early-bird filer

If you have questions about tax identity theft or would like help filing your 2019 return early, please contact us. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you