tax credit

7 Milestones In Life That Trigger Taxes: Birth, Marriage, Work, Homeownership and More

 

 

 

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

taxes

You were blissfully unaware of it, but taxes became a part of your life on the day you were born.

From that beginning as a spanking-new tax break for Mom and Dad, taxes have had an important role in all your major life events, from getting a job, saying “I do,” buying and selling homes, having kids of your own and even retiring.

In some cases, the involvement of the IRS is not such a good thing.

But in many ways, the tax code can be your best friend. You just need to know how it applies to your personal circumstances so you can take advantage of it. Read on to learn more about tax breaks for life’s big events.

Getting Your First Job

Uncle Sam gets a portion of your paycheck via payroll taxes. You do, however, have a bit of a say in how much comes out of your pay by adjusting your withholding.

If you have too much withheld, you’ll get a refund when you file. That’s not necessarily bad, but wouldn’t you rather have your own money year-round instead of giving the IRS an interest-free loan?

On the other hand, if you don’t have enough taken out, you could face a major tax bill, and possible underwithholding penalties, at filing time. Ask your boss for a new Form W-4 so you can run the numbers and adjust your withholding. You can change your withholding amount as often as you need to get your tax amount just right.

Your job likely offers several tax breaks. If your employer provides health care coverage, your medical insurance is a tax-free benefit to you. You’ll find out how much that’s worth on your W-2 earnings statement.

A flexible spending account, or FSA, also might be part of your job benefits. Here you can save pretax dollars to pay for medical care not covered by insurance.

You also want to take advantage of your workplace’s tax-deferred 401(k) retirement plan.

And if you move to take a job, even your first one, you can write off many of your relocation costs.

Getting Married

Uncle Sam probably wasn’t a guest at your wedding, but he becomes a big part of your life when you are a married taxpayer.

Most couples filed jointly because it generally produces the best tax result.

If both partners work, coordination of employer fringe benefits after marriage is key, says Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting.

Reassess your individual retirement accounts. Your new combined income could affect your retirement contributions. Income limits apply to tax-free Roth accounts and also to how much of a traditional IRA contribution you can deduct if you or your spouse put money into a workplace retirement plan.

Marriage also is one of the changes in family circumstances that allows you to revisit your tax-favored FSA. Newlyweds also should reevaluate how much each has withheld from their paychecks.

And what about your once-in-a-lifetime honeymoon? The tax code’s annual gift exclusion amount for 2017 is $14,000, the same as it was for 2016. It’s usually adjusted annually for inflation.

That means both a well-to-do mom and dad could give each newlywed $28,000 or a combined total of $56,000 to the wedded couple. That definitely would pay for an extravagant post-ceremony getaway.

Having Children

Congratulations on your new baby. Let Uncle Sam help cover some of your growing family’s costs.

A dependent youngster is an added exemption. Kids also allow parents to claim the child-tax credit as long as the youngster was 16 at the end of the tax year. Large families might be able to get money back from the IRS via the refundable additional child-tax credit.

If your family grew via an adoption, there’s a tax credit to cover some of the many costs of that process.

Working parents can use the child- and dependent-care credit to pay for some of the costs of caring for their kids while they are on the job.

And the tax code also offers several ways to save and pay for higher education costs, including 529 college savings plans, the Coverdell Education Savings Account and the American opportunity and lifetime learning tax credits.

Starting a Business

Once you decide it’s time to break out of the corporate cubicle and start a new business, the tax code can help.

Filing is relatively easy for sole proprietors. They report their income as part of their annual individual tax filing by attaching Schedule C to Form 1040. Schedule C also offers many ways for individual entrepreneurs to write off many of their business expenses.

Among the deductible small-business costs are home office expenses. Business use of a vehicle also is deductible, as are health insurance premiums and contributions to self-employed retirement plans. New businesses also are allowed to deduct thousands in certain startup costs.

If you have kids, putting them to work in your sole proprietorship could be a tax-smart move. Depending on how much you pay them, they might not owe income taxes and you can deduct the salary as a business expense.

But starting a business is not all about tax breaks. Sole proprietors also must pay self-employment taxes. These are the equivalent of the payroll taxes collected from wage-earning employees. As both the employer and employee, a sole proprietor has to pay the boss and worker components of Social Security and Medicare taxes.

And running your own business usually means you must file more tax forms, including estimated tax payments four times a year.

Buying a Home

Your home is probably your biggest investment. Homeownership also provides many tax breaks.

Interest paid on a primary residence mortgage up to $1 million is deductible as an itemized expense. If you take out a home equity loan or line of credit, interest on those loans up to $100,000 also is deductible. Even the interest on a second home is tax-deductible.

Property tax you pay on your main house — and any other residences you own — also is deductible.

The tax benefit of a home is even better when you sell it. Up to $250,000 in sales gain ($500,000 for married joint filers) on your home is tax-free, as long as you owned the property for two years and lived in it for two of the five years before the sale.

Many home improvements, such as structural additions, kitchen modernization and landscaping, can increase the basis in your home. This is essentially your investment in the home. A larger basis means less profit that might be taxable.

And some home upgrades, such as installing solar energy systems, also will get you an immediate tax credit to help offset the high cost of this type of improvement.

Dealing with Divorce

As with marriage, your filing status is determined on the last day of the tax year. If your divorce is final on Dec. 31, then you are considered unmarried for the full year.

One of the stickiest divorce issues is child custody. The parent who has physical custody of the children for most of the year usually gets to claim them as dependents. That means that parent gets the exemption, child-tax credit and child-care tax credit savings.

One spouse typically is granted sole ownership of the family home. This could, however, pose a problem for the solo owner. When the lone ex sells the property, the amount of profit exempt from capital gains is just $250,000 versus the $500,000 that married filing jointly homeowners can exclude. Because of that, some couples sell the house before they divorce and split the tax-free profits.

Similarly, take into account the cash the recipient partner will net after taxes when dividing other marital assets.

And note that alimony has tax implications for both ex-spouses. It is taxable income to the recipient and can be deducted by the paying ex. Child support, however, offers no tax breaks to the paying ex, as it is not deductible. However, to the recipient, it isn’t taxable.

Retiring

Your golden years will be more enjoyable if you take advantage of the many tax breaks afforded by retirement plans.

A traditional IRA contribution could produce a tax deduction when you file your tax return. Remember, though, that you’ll have to pay taxes on this account when you start taking out money in retirement.

With a Roth IRA, you put in already-taxed money, but that means eventual distributions from a Roth are tax-free. The biggest drawback to a Roth is that you can’t open or contribute to a Roth if you make a lot of money. However, regardless of your income, you can convert a traditional IRA to a Roth.

Workplace retirement plans, usually known as 401(k)s or Roth 401(k)s, offer similar retirement saving options, but with a nice bonus. Many employers match some of your plan contributions, which helps your retirement savings grow more quickly.

Social Security benefits generally are tax-free as long as you don’t have a lot of other income.

And if you do have to file a tax return when you’re older, you can claim a larger standard deduction amount simply because you’re age 65 or older.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Employers face deadline to claim tax credit for new hires

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

new hire

The Work Opportunity Tax Credit, or WOTC, gives employers a tax reason to hire people who’ve had a hard time finding work.

But like most tax matters, the WOTC comes with deadlines. One of those is fast approaching.

The due date for some companies that hired qualifying workers in 2015 and the first 8 months of this year is Wednesday, Sept. 28.

Special one-time deadline

Employers who have hired workers covered under one of the Work Opportunity Tax Credit’s employee categories must get those workers certified by the Internal Revenue Service. That’s the first step.

Once the tax agency certifies that a company has hired individuals who meet WOTC requirements, the business then can claim the WOTC on its income tax return.

But without first getting that official IRS imprimatur, the company can’t claim the WOTC.

Normally, that tax credit certification request by filing Form 8850 is required within 28 days after the eligible employee begins work.

But since Congress delayed extending the WOTC and its provisions were made retroactive, a new one-time deadline was created.

The IRS now is giving qualifying employers until Sept. 28 to file certification requests for eligible workers they hired any time in 2015 and during the first eight months of 2016.

Qualifying worker categories

The WOTC typically gets a lot of attention because it offers a tax break to companies that hire unemployed veterans, including disabled former members of the military.

But the renewal of the WOTC also now provides businesses a tax break when they put people on their payrolls who previously were out of work for at least 27 weeks and received state or federal unemployment benefits during part or all of that time.

The other categories of WOTC-eligible workers include:

  • Some recipients of Temporary Assistance for Needy Families, or TANF, benefits.
  • Former felons.
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties.
  • Vocational rehabilitation referrals.
  • Summer youth employees living in Empowerment Zones.
  • Long-term family assistance recipients.
  • Supplemental Security Income, or SSI, recipients.
  • Recipients of food stamps, known as Supplemental Nutrition Assistance Program, or SNAP.

Hiring tax help

Hiring employees is one of the most critical, and often one of the most risky, tasks a business takes.

But if your company is willing to take a chance on a person who is in a special category that sometimes makes it hard to find work, Uncle Sam thanks you, both figuratively and literally with the WOTC.

Make sure you don’t miss his indication of gratitude and file for qualifying WOTC worker certification by Sept. 28.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Premium Tax Credit: 3 ways to reduce the chance of owing taxes

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Taxpayer Advocate Service

ACA_NewsGraphic

This past filing season saw some people owing money at tax time that they didn’t expect. Why? Because they didn’t provide an accurate income estimate to the Marketplace when enrolling for health insurance or they forgot to report changes to the Marketplace immediately. Don’t let that be you next year!

Here are three ways to help lessen your chances of owing money at tax time, if you chose to have advance payments of the Premium Tax Credit paid to your insurer.

1) Make sure you include ALL your income in your estimate.

Remember that it’s more than just your paycheck that needs to be included. Pay special attention to these items:

  • Unemployment compensation
  • All household members’ income (not just yours)
  • Additional types of income, including interest income, capital gains, cash support, and alimony.
  • Most withdrawals and distributions from traditional IRAs and 401ks. (See IRS Publication 590-B Distributions from Individual Retirement Arrangements (IRAs) for more information.)

Some unexpected balances were due to a lump sum payment received or withdrawn during the year that was not included in the initial income estimate. Lump sum payments can be issued through retirement account distributions, Social Security or disability payments and awards from law suits. These amounts are reported to you on a IRS Form 1099.

Healthcare.gov’s “Get Answers” has many articles to help you estimate your income more accurately.

2) Consider having a lower amount of the estimated Premium Tax Credit paid directly to the insurer where possible.

When possible, opt to have less than 100% of the calculated credit used as advance payments. If you are eligible for a larger credit, you will receive the difference when you file your tax return. So if you can afford to take less, even a little bit, doing this will give you at least some cushion of safety should the unexpected happen or you miscalculated your income.

3) Report all income and life changes to the Marketplace immediately.

Don’t wait to report changes. The longer you wait to report changes to the Marketplace the larger the difference between the advance payments and the final allowable credit will be. Changes can also affect your insurance coverage.

Don’t know which changes to report? Healthcare.gov has information on which changes should be reported. Or see IRS Publication 5152, Report changes to the Marketplace as they happen (also available in Spanish).

Another handy tool is our Premium Tax Credit Change Estimator. The Premium Tax Credit Change Estimator can help you estimate how much your premium tax credit will change if your income or family size changes during the year. It won’t report those changes to the Marketplace, you must do that yourself, but it will give you a better idea of how those life changes affect the total amount of your premium tax credit.

Of course you never know what’s going to happen in the coming year. That’s why it’s so important to update your Marketplace information all year round whenever you have income or household changes that could affect your coverageand your taxes.

If you should you find yourself owing money to the IRS at tax time, but can’t afford to pay it all at once, there are options. See I can’t pay my taxes for more information.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

Earned Income Tax Credit for Certain Workers

Westchester NY accountant Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions! http://www.flickr.com/photos/86530412@N02/8264924343/Millions of Americans forgo critical tax relief each year by failing to claim the Earned Income Tax Credit (EITC), a federal tax credit for individuals who work but do not earn high incomes. Taxpayers who qualify and claim the credit could pay less federal tax, pay no tax or even get a tax refund.

Last year, an estimated 21 million taxpayers received approximately $37.5 billion in EITC. However, the IRS estimates that 25 percent of people who qualify don’t claim the credit and at the same time, there are millions of Americans who have claimed the credit in error, many of whom simply don’t understand the criteria.

EITC is based on the amount of your earned income and the number of qualifying children in your household. If you have children, they must meet the relationship, age and residency requirements. And, you must file a tax return to claim the credit.

Are you eligible for any of these tax credits?

Taxpayers should consider claiming tax credits for which they might be eligible when completing their federal income tax returns, advises the IRS. A tax credit is a dollar-for-dollar reduction of taxes owed. Some credits are refundable – taxes could be reduced to the point that a taxpayer would receive a refund rather than owing any taxes. Below are some of the credits taxpayers could be eligible to claim:

  • Earned Income Tax Credit This is a refundable credit for low-income working individuals and families. Income and family size determine the amount of the EITC. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. For more information, see IRS Publication 596, Earned Income Credit (EIC).
  • Child Tax Credit This credit is for people who have a qualifying child. The maximum amount of the credit is $1,000 for each qualifying child. This credit can be claimed in addition to the credit for child and dependent care expenses. For more information on the Child Tax Credit, see Pub. 972, Child Tax Credit.
  • Child and Dependent Care Credit This is for expenses paid for the care of children under age 13, or for a disabled spouse or dependent, to enable the taxpayer to work. There is a limit to the amount of qualifying expenses. The credit is a percentage of those qualifying expenses. For more information, see Pub. 503, Child and Dependent Care Expenses.
  • Adoption Credit Adoptive parents can take a tax credit of up to $13,170 for qualifying expenses paid to adopt an eligible child. For more information, see Pub. 968, Tax Benefits for Adoption.
  • Credit for the Elderly and Disabled This credit is available to individuals who are either age 65 or older or are under age 65 and retired on permanent and total disability, and who are citizens or residents. There are income limitations. For more information, see Pub.524, Credit for the Elderly or the Disabled.
  • Education Credits There are two credits available, the American Opportunity Credit (formerly called the Hope Credit) and the Lifetime Learning Credit, for people who pay higher education costs. The American Opportunity Credit is for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. The Lifetime Learning Credit is available for all post-secondary education for an unlimited number of years. A taxpayer cannot claim both credits for the same student in one year. For more information, see Publication 970, Tax Benefits for Education.
  • Retirement Savings Contribution Credit Eligible individuals may be able to claim a credit for a percentage of their qualified retirement savings contributions, such as contributions to a traditional or Roth IRA or salary reduction contributions to a SEP or SIMPLE plan. To be eligible, you must be at least age 18 at the end of the year and not a student or an individual for whom someone else claims a personal exemption. Also, your adjusted gross income (AGI) must be below a certain amount. For more information, see chapter four in Publication 590, Individual Retirement Arrangements (IRAs).

There are other credits available to eligible taxpayers. Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Armonk NY, Bedford Hills NY, Chappaqua NY, Katonah NY, Scarsdale NY, Bronxville NY, Tarrytown NY, Greenwich CT and beyond.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.