Monthly Archives: August 2013

IRS Will Recognize All Legal Same-Sex Marriages – Regardless of State of Residence

29 Thursday Aug 2013

Posted by in Financial Planning, Marriage, RDP Tax Returns, Taxes

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The IRS announced today that all legal same-sex marriages will be recognized for Federal Tax purposes.  The looming question about whether the IRS would use the state of domicile or the state of celebration to define “legal marriage” has been answered.  They have chosen the state of celebration which means IRS marriage recognition will be based on where the marriage license came from, not where you live.  This isn’t surprising since it makes the most sense for all parties and lessens the burden to both taxpayers and the IRS. Additionally, it ensures consistent federal taxation to all same-sex married couples (SSMCs)

If you are a SSMC, you are now able, and required, to file as Married Filing Joint (MFJ) or Married Filing Separately (MFS) for tax year 2013. The IRS is also allowing, but not requiring, SSMCs to amend prior year returns to MFJ/MFS.[i]  The change in tax status will have varying impacts on taxpayers.  Those couples in which one spouse earns a majority of the income will likely see a benefit while those couples in which both spouses are high earners may see an increase in tax.

For tax purposes, you will be treated as married for the entire year regardless of what date you were married.   Here are some of the things that should be considered in your tax planning:

W-2 Withholdings

Now that you can file MFJ, adjustments to your W-2 withholding for federal income tax may be needed. Whether and how to adjust your withholding will depend on your particular tax situation. You can use the IRS withholding tables to estimate what your withholding should be as a MFJ taxpayer.  Comparing these amounts with your year-to-date withholding from your pay-stub will help you to determine what withholding is needed for the rest of the year.  Wage withholding is only one piece to the puzzle, though. Talk to your tax preparer to plan for your overall tax picture.

Employer Provided Health and Other Benefits Covering Your Spouse

Before the DOMA decision, and today’s IRS announcement, certain employer-provided benefits covering same-sex spouses have been included in taxable income.  Thankfully, this is no longer a correct treatment of these benefits.  If this situation applies to you, a conversation with your employer may be warranted.  Find out if and when they will stop withholding tax on these benefits.  Make sure to ask them whether you can take advantage of any available benefits immediately or if you’ll have to wait until the next open enrollment period.

IRA Contributions

Now that same-sex spouses are actually considered spouses by the IRS you may be newly eligible to make tax-deductible contributions to a Traditional IRA.  Late last year I posted about your prior inability to do this.  If you have no earned income (taxable compensation) and have thus been ineligible to contribute, you can now use your spouse’s earned income to qualify you for this benefit.  There are other applicable restrictions, however.  Here is a link to more information on Traditional IRA contributions.

Amended Returns

Those couples who will benefit from filing as MFJ should consider amending their prior open-year returns.  An “open-year” return is a return for a year that has not yet passed the  three-year statute of limitations for amending. The three years begins on the date the return was filed.  For most taxpayers this means that 2010 will be as far back as you can go. Luckily, those who will not benefit from MFJ status are not required to amend prior year returns at all.

[i] If you have a legal marriage and your 2012 return is still on extension, you can file MFJ/MFS for tax year 2012.

5 Commonly Missed Business Deductions for Sole Proprietors

23 Friday Aug 2013

Posted by in Self-Employment, Taxes

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New business owners are often unprepared for the tax that comes along with self-employment income.  With wages, which are subject to federal income tax, Social Security (SS) tax and Medicare tax, the burden for the SS and Medicare is split between the employee and employer.  Those who are self-employed must pay both portions and it can come as a big surprise if you don’t plan ahead.

It is important to document your deductible expenses to protect yourself in the case of an audit.  Knowing what is deductible in the first place will help you make sure that your expenses are documented appropriately.  Here are some business deductions that are frequently missed.

Deduction for Business Use of the Home (Home Office Deduction)

If you use a portion of your home exclusively for business[i], you can take a business deduction for various expenses.  If you use the traditional method, you are able to deduct a portion of expenses such as insurance, utilities, mortgage interest and property taxes. The deductible amount is a percentage of total expenses and is based on square footage of the home office as compared to the total square footage of the home.

For 2013, a new “simplified” method is available for the home office deduction.  The new method allows for a flat $5 per square foot of home office space, up to 300 square feet maximum.  This new method lessens the administrative burden for the taxpayer.  A second benefit of the simplified method is that you can take the $5/square foot and claim 100% of your home mortgage interest and property taxes along with your other itemized deductions.

Under either method, a taxpayer will receive a home office deduction of $1,500 or less. The real benefit of establishing a home office is an increase in deductible vehicle expense (mileage).  When tracking business miles, commuting miles don’t count. Business miles only include travel from the main office to a secondary work location, or between multiple work locations. Travel from home to main office doesn’t qualify. But, if you have a home office, travel between home and the office is now travel between two offices.

Food and Meals on Premises

Business owners can deduct the cost of “Meals and Entertainment (M&E)” with clients, prospective clients and employees.  This category of expenses includes any meal and entertainment expense incurred during, directly preceding or directly following conducting business and they are 50% deductible. There is a similar deduction called Food and Meals on Premises (FM), except these expenses are deductible in full.  The distinction is location; on premises refers to in office.  Below are some examples of each of these expenses.

  • Meals and Entertainment

♦ Lunch with a potential client at a local restaurant to discuss your services

♦ A concert with a client immediately after a business meeting

  • Food and Meals on Premises

♦ Coffee and cookies purchased for your office reception are

♦ Food provided for a required in-office staff meeting

Small Employer Health Care Credit

Considering the coming implementation of the Affordable Care Act, this is one credit employers must know about.  For tax years 2010-2013 eligible employers can get a credit of up to 35% of premiums paid for employee health care. The maximum credit amount is scheduled to increase to 50% in 2014 and to apply to premiums paid to a Small Business Health Options Program (SHOP) Marketplace.

You may be an eligible employer if you pay 50% of the cost of single coverage for your employees and you have fewer than 25 full-time employees who are paid an average of less than $50,000/year. If you aren’t able to realize a benefit from the credit, you are allowed to carry the credit forward to a future year.

Charitable “Contributions” that are actually Marketing Expenses

Charitable contributions are a personal itemized deduction going against ordinary income.  Don’t confuse this with marketing expenses, a common and costly mistake. If you receive any benefit in return for your donation it is not charitable it is marketing, and that’s a good thing. Marketing is a business expense going against self-employment income which is taxed at a higher rate than ordinary income. In other words, a business deduction (marketing) is more beneficial than a personal deduction (charitable contribution).

For example, if you give money to a non-profit and they put your name on a banner or in a brochure, that’s an advertising expense, despite the fact that the money was given to a charitable organization.  Deduct this on your business’ Schedule C, not on your Schedule A for itemized deductions.

Self-Employed Health Insurance

Self-Employed taxpayers are allowed an above the line deduction for qualified health insurance premiums paid for the taxpayer, spouse, or dependents.[ii]  Above the line means that the deduction is calculated before arriving at Adjusted Gross Income (AGI). While the deduction is limited to the net profit from the business, most taxpayers do not reach that limit.

The ability to deduct the cost of health insurance as an adjustment to income, instead of an itemized medical deduction on Schedule A, is highly advantageous. Medical expenses deducted as itemized deductions are subject to a much steeper limitation. They are only deductible to the extent that they exceed 7.5% of AGI. For most taxpayers, the 7.5% rule means benefit is only realized in years where an unusually large medical expense such as surgery is incurred.

[i] There are some exceptions to the exclusivity requirement.

[ii] The IRS has not yet made comment on the Windsor decision about how they will define “spouse” for 2013 and beyond.

5 Commonly Missed Tax Deductions for Individuals

22 Thursday Aug 2013

Posted by in Taxes

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The complexity of the code leaves many Americans feeling hopeless and confused when filing their tax returns. Many of us view tax returns as no more than expensive and tedious tasks to get out of the way at year-end, like renewing vehicle tabs. This common experience of unknowing, apathy and dread causes millions of missed tax deductions every year.

Those who are familiar with the code find all kinds of ways to lower tax. But, you don’t have to be a high-income earner utilizing complicated “loopholes” to reduce your tax liability. There are many easy to claim deductions and credits available. Here are some of the ones you might not know about.

Educator Expenses – An above the line deduction

Above the line deductions are those that are deducted before arriving at adjusted gross income (AGI).  These are nice deductions since many credits are calculated, or phased out, based on your AGI.  The Educator Expense deduction is small in comparison to many other deductions, but basically any teacher qualifies.

If you spend 900 hours or more teaching kindergarten through grade 12 you are eligible for this deduction. The IRS will allow a deduction of up to $250 for expenses such as books, supplies, equipment and other materials. Let’s face it, pretty much any teacher spends at least this amount each year.[i]

Retirement Savings Contribution Credit

This credit exists to encourage lower-income taxpayers to set aside money for retirement.  It is available to Single taxpayers whose AGI is below $28,750 or married couples with AGI below $57,500.[ii]  Depending on your AGI, you can get a credit ranging from 10% to 50% of your retirement contributions, up to a maximum credit of $1,000.

Qualifying contributions are those made to a Traditional or Roth IRAs and elective deferrals to 401k, 403b, 457, SEP or SIMPLE plans. The credit amount is reduced by any distributions from similar plans during the year the credit is claimed.

Residential Energy Credit

There are really two credits under this umbrella term: the Nonbusiness Energy Property Credit and the Residential Energy Efficient Property Credit. Both credits vary in amount depending on the eligible expense or property.  For both credits, manufacturer certification is required and for some expenses they must meet or exceed the Energy Star requirements.

The Nonbusiness Energy Credit is available for energy-efficient improvements such as windows, doors and insulation that are designed to reduce heat gain or loss. The qualifying costs and maximum credit depend on what type of property is purchased or improved.

The Residential Energy Efficient Property Credit is available for expenses such as solar heating and power or geothermal heat pumps.

Sales Tax Deduction for Large and Unusual Purchases

The IRS allows an itemized deduction for either state income tax or state sales tax.  In a state with no income tax sales tax is always deducted.  While some people may save receipts and add them up at year-end, most just take the deduction using the IRS table.  The deduction for sales tax is calculated based on your AGI and is often equally or more beneficial than what you would come up with after adding up all your receipts.

What many don’t know is that you can add additional sales tax on large and unusual purchases to the amount from the IRS table.  The table amounts are an estimate of sales tax for yearly average sales tax on regular purchases. As such, they do not take into account large amounts of sales tax incurred when purchasing a vehicle or remodeling a home.  For this reason, the IRS will allow you to add tax on such large and unusual purchases to the sales tax table amount.  You can also add local taxes to the table amount.

Miscellaneous Itemized Deductions

There is a section on Schedule A (where you deduct itemized deductions) for ”Miscellaneous Itemized Deductions.” These deductions are limited so that only the amount of expense that exceeds 2% of your AGI is deductible.  To put that in perspective, let’s say your AGI is $25,000 and you have $750 of miscellaneous deductions. In this scenario, only $250 of the $750 is deductible (2% of $25,000 is $500 so only the amount exceeding $500 is deductible).

Here are the most common miscellaneous itemized deductions:

  • Investment expenses – up to the amount investment income
  • Unreimbursed employee expenses such as travel, professional/union dues and safety equipment and tools.[iii]
  • Tax preparation fees
  • Certain legal expenses

[i] The expenses are not deductible if reimbursed by your employer.

[ii] These are the 2012 amounts.

[iii] These expenses are claimed by filing Form 2106.