Monthly Archives: November 2015

Itemized Deductions, Should I Itemize My Tax Deductions?

2015_11_25 Itemized Deduction graphicItemized deductions, what are the income limitations? Who qualifies for the standard deduction? Who is not allowed to use the standard deduction? How do I phase-out itemized deductions? All these questions may be running through your head. Don’t worry, we will walk you through this maze of itemized deductions.

Are you looking ahead to the filing season for this year’s tax returns? A frequent question is whether you should keep track of tax-deductible expenditures? Or should you simply settle for the standard deduction amount.

Itemized Deductions versus Standard Deductions

Whether you can itemize deductions on your tax return depends on how much you spent on certain expenses during the year. Money paid for medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions. Miscellaneous deductions are usually job or investment related and can reduce your taxes. If the total amount spent on those categories is more than the standard deduction, you can usually benefit by itemizing.

The standard deduction amounts are based on your filing status, your age and whether or not you or your spouse is blind. The standard amounts are adjusted for inflation annually and for 2015 are:stamdard deductions, itemized deductions, tax deductions,

Single $ 6,300
Married filing jointly(1) $12,600
Head of household $ 9,250
Married filing separately $ 6,300

Additional amounts if age 65 or older and for those who are blind (2) (each taxpayer):

Married taxpayers filing jointly $ 1,250
Others $ 1,550

(1) Also applies to qualifying widows and widowers, may have had a dependent child and spouse die in 2013 or 2014.

(2) If a taxpayer or spouse of the taxpayer is both age 65 or over and blind the taxpayer or spouse gets two extra amounts. The extra allowance is not available for dependents. But, as with most taxes situations, it is not that simple. There are certain taxpayers who are precluded from taking the standard amount because of special circumstances, and they include:

Taxpayers Subject to the Alternative Minimum Tax (AMT)

The standard deduction is only used when computing your tax in the normal manner. You receive no benefit from the standard deduction to the extent you are taxed by the AMT.

Married Taxpayers Filing Separately

There is a rule that prevents one spouse from filing separately and claiming all of the couple’s deductions while the other takes the standard deduction. Simply stated, if one spouse itemizes deductions, the other spouse must also itemize and cannot claim the standard deduction.

Taxpayers Ineligible for the Standard Deduction

Certain taxpayers, by law, are not eligible for the standard deduction. They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months.When it comes to itemizing your deductions there are still more complications. First of all, not all of your deductions will be included in the final total that you compare against the standard deduction to decide whether you itemize or not. Certain ones are adjusted as follows:

Medical Deductions

They are only included to the extent that they exceed 10% (7.5% for taxpayers age 65 and over) of your adjusted gross income (AGI).

Taxes

Deductions for state income or sales taxes and real property tax are not limited by income, but they are not deductible at all for AMT purposes. Thus large tax deductions can result in the addition of an alternative minimum tax.

Interest

Deductible interest includes home mortgage interest and investment interest. However, home mortgage interest is limited just to the interest on up to $1 million of acquisition debt and $100,000 of equity debt. For AMT purposes, only acquisition debt interest is deductible, so the interest paid on equity debt to buy a motor home, boat, car, etc., is not deductible for the AMT.

Charitable Contribution Deductions

They are the same for both regular tax and AMT, and the total in any year is generally limited to 50% of your income (AGI). There are lower income limits for certain non-cash contributions.

Miscellaneous Deductions

They are where most employee business and investment expenses are deducted. Generally these deductions are only deductible to the extent that they exceed 2% your income (AGI).As if those complications were not enough, some of the itemized deductions for higher-income taxpayers are further limited by a formula. This limit applies to all itemized deductions except medical and dental expenses, casualty and theft losses, gambling losses, and investment interest if the adjusted gross income is more than the following:

  • $309,900 for a married couple filing jointly or qualifying widow or widower
  • $258,250 for single taxpayers
  • $284,050 for taxpayers filing as head of household, and
  • $154,950 for married-filing-separate taxpayers.

As you can see, the choice of whether to itemize or claim the standard deduction is not always clear. That is why it is necessary to save the documentation for itemized deductions throughout the year. This is so the two options can be compared and the best one selected. If you took the standard deduction last year and think you might have been able to itemize your deductions, an amended tax return can be prepared for a refund.

Click here if you would like to read more about Itemized Deductions versus Standard Deductions. Please give Alex Franch, BS EA  a call at 781-849-7200, and he will have the information you may need.

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Married to a Nonresident Spouse?

Nonresident Spouse or as the IRS puts it, a nonresident alien, what is that, you may wonder?  In this day and age, with businesses going global and worldwide travel being so easy, it is more and more common to see marriages occurring between a U.S. citizen/U.S. resident alien and a resident of another country. These marriages trigger significant tax consequences.

U.S. Resident Aliens

non-resident spouse, non-resident spouse, nonresident alien, non-resident alien, marriageIndividuals who have become permanent U.S. residents but are not U.S. citizens are classified as U.S. Resident Aliens. To be classified as a U.S. resident alien, the individual must be a “green card” holder or meet a “substantial presence test” that is based on time spent in the U.S in the current and prior two years. For U.S. income tax purposes, a resident alien is treated the same as a U.S. citizen and is taxed on worldwide income.

However, being married to a nonresident spouse complicates the selection of a filing status for U.S. tax return purposes and requires the couple to make one of two possible elections:

Married Filing Jointly

For a citizen/resident to file a joint return with a nonresident spouse, the taxpayers must include and pay U.S. taxes on the worldwide income of both spouses on their joint U.S. tax return, or

Married Filing Separately

If they choose not to file jointly, then the citizen/resident spouse files a married separate return without the income of the nonresident spouse and pays U.S. taxes on only his or her worldwide income. If the non-resident spouse has U.S. source income, the nonresident spouse may also have to file a U.S. income tax return using the married filing separate status on that return.

Filing Status Implications if You Are Married to a Nonresident Spouse

The choice of filing status has significant tax implications. If filing jointly, the taxpayers enjoy the lower tax rates of the married filing jointly filing status, have a higher standard deduction ($12,600 for 2015, as opposed to $6,300 for married individuals filing separately), and are able to claim the $4,000 personal exemption for both spouses. On the other hand, if the non-resident spouse has significant income, especially non-U.S. source income, it may be a better choice for the U.S. citizen/resident to file married filing separately without the non-resident spouse’s income.

Higher income taxpayers with investment income are subject to a 3.8% surtax on net investment income. This surtax has an income threshold of $250,000 for married taxpayers filing jointly and $125,000 for those filing as married filing separately. However, individuals filing as non-resident aliens are not subject to this surtax. Therefore, when weighing the pros and cons of making the election to treat a non-resident spouse as a U.S. resident, the effect of the 3.8% tax on the couple’s total tax picture must be analyzed.

Another issue to consider is that when one spouse is a non-resident alien, the earned income tax credit can only be claimed on a joint return.

To make the election to file jointly, both parties must make the election by attaching the required statement, signed by both spouses, to the joint return for the first tax year for which the choice applies. Generally this will require obtaining an individual taxpayer identification number (ITIN) for the non-resident spouse because the non-resident spouse generally will not qualify for a Social Security number.

Are You Married to a Nonresident Spouse?

Determining your best course of action for tax purposes when married to a non-resident alien can be complicated. If you need assistance in making the decision of whether or not to treat your non-resident spouse as a resident and/or obtaining an ITIN for your spouse, please call Alex Franch, BS EA  a call at 781-849-7200. To read more from the IRS on this subject matter, click here.

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Only One IRA Rollover Every 12 Months – Period!

Withdrawal, Transfer, Conversion, Retirement, IRA rollover, This subject of only one IRA rollover every twelve months has been brought up before. Yes, we are harping on the subject because of the profound tax consequences. This is a reminder that, beginning this year, we repeat, individuals are only allowed one IRA rollover in any 12-month period. This includes SEP and Simple accounts, traditional and Roth IRAs. That is, 12 months must have elapsed from the date a rollover is completed before another rollover can be made. Failure to abide by this rule can be expensive. And the rule applies no matter how many IRAs an individual owns.

Example

Joe makes an IRA rollover on March 1, 2015. He cannot roll over another IRA distribution, without penalties, until March 2, 2016.

If Joe, in the example, was to make another IRA rollover before March 2, 2016, that entire distribution would be treated as a taxable distribution. It would also be subject to the 10% early distribution penalty if Joe is under the age of 59-1/2 at the time of the distribution. Additionally, if Joe deposited the distributed amount into another IRA, or redeposited the funds into the same IRA, those funds are treated as an excess contribution. They are subject to a 6% penalty per year for as long as they remain in the IRA.

IRA Rollover versus IRA Transfer

That does not mean you cannot transfer funds between IRA trustees multiple times during the year. In a rollover, a taxpayer takes possession of the funds and then must redeposit them within 60 days to avoid being taxed on the distribution. In contrast, a transfer moves the funds directly from one trustee to another with the taxpayer never taking possession of the funds. Unlimited direct transfers are allowed, including moving traditional IRA funds to a Roth IRA. This is called a conversion.

What If the Trustee Makes a Mistake?

If, through no fault of yours, a trustee does not follow your instructions to make a transfer and instead distributes the funds to you, procedures are available to obtain relief. But it must be 100% an error on the part of the trustee.

Are you Planning an IRA Rollover?

If you are planning an IRA rollover, before taking the distribution, please check with your IRA trustee or call Alex Franch, BS EA  at this office a call at 781-849-7200 to ensure you are not violating the 12-month rule. A mistake could cost you a lot of money.

 

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Do Not Forget Your Retirement!

2015_11_04 Do Not Forget About RetirementRetirement may be years away for some people. And, it may not be the most pressing issue on your mind these days. But we urge you, do not forget your retirement contributions, especially when there are generous government incentives involved.

There are a variety of retirement plans available to small businesses that allow the employer and employee a tax-favored way to save for retirement. Contributions made by the owner on his or her own behalf and for employees can be tax-deductible. Furthermore, the earnings on the contributions grow tax-free until the money is distributed from the plan. Here are some retirement plan options:

Simplified Employee Pension Plan (SEP)

This plan was designed to avoid the complications of a qualified plan. Contributions to the plan are held in the beneficiaries’ IRA accounts; hence, the title “simplified.”  Deductible contributions for 2015 are limited to the lesser of 25% of the participant’s compensation (up to $265,000) or $53,000. A SEP can be established and funded after the close of the year.

Qualified Plan (Keogh)

Generally, the rules surrounding a Keogh are more complex. This type of plan may include a discretionary contribution profit sharing plan or a mandatory contribution money purchase plan, or a combination of these. SEP plans are favored over Keogh plans by most self-employed individuals. For 2015, deductible contributions are limited to the lesser of 25% of the participant’s compensation (up to $265,000) or $53,000. These plans must be established before the end of the tax year, but contributions can be made afterwards.

Savings Incentive Match Plan for Employees (SIMPLE Plan)

Under this plan, the business owner takes a deduction, and employees receive a salary deferral. For 2015, the contribution limit is $12,500 (per employer or employee), with an additional catch-up contribution limit of $3,000 for participants aged 50 or older. The employer can match the contribution up to 3% of compensation or make a non-elective contribution of 2% of compensation.

Individual 401(k) Plan

The individual 401(k) plan is similar to the traditional 401(k) plan with added benefits for the small business owner. For 2015, the owner can contribute and deduct up to 25% of compensation plus an additional $18,000 salary deferral, up to a $53,000 maximum $59,000 for those who are age 50 and over). For employees, the contribution and salary deferral limit is $18,000, with an additional $6,000 catch-up contribution available to those aged 50 or over. Employers can match employee contributions.

New Qualified Pension Plan

If you do establish a new qualified pension plan for your business, you may be entitled to the “small employer pension startup credit.”  The credit is equal to 50% of administrative and retirement-related education expenses for the plan for each of the first three plan years, with a maximum credit of $500 for each year. Plan-related expenses in excess of the amount of the credit claimed are generally deductible as ordinary expenses of the business.

The first credit year is the tax year that includes the date the plan becomes effective, or, you may elect, the preceding tax year. Examples of qualifying expenses include the costs related to changing the employer’s payroll system, consulting fees, and set-up fees for investment vehicles.

Are You Looking Forward to Retirement?

If you would like assistance in selecting a retirement plan for your business or to explore the tax benefits relevant to your particular circumstances, please give Alex Franch, BS EA a call at 781-849-7200. Or you may visit one of our locations.

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photo credit: DSC03448 via photopin (license)

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