When looking over your tax return, do you notice an amount on line 45? That amount is because you are subject to the alternative minimum tax. The Alternative Minimum Tax or AMT is an income tax that does not allow some of the tax preferences and deductions that regular tax computation allows. Basically, a punitive tax. When an AMT computation results in a higher tax, the higher tax applies. The additional tax from the Alternative Minimum Tax is added on line 45 of your return. Continue reading
Whether your Social Security benefits are taxable (and, if so, how much of them are) depends on a number of issues. The following facts will help you understand the tax of your Social Security benefits.
Social Security benefits, in this case, refers to the gross amount of benefits you receive, meaning the amount before reduction due to payments withheld for Medicare premiums. The tax treatment of Social Security benefits is the same whether the benefits are paid due to disability, retirement or reaching the eligibility age. Supplemental Security Income (SSI) benefits are not taxable under any circumstances. Therefore they are not included in the calculation.
How Much of Social Security Benefits Are Taxable
How much of your Social Security benefits are taxable depends on your total income and marital status. Of course, that is if any of the social security benefit is taxable.
- If Social Security is your only source of income, it is generally not taxable.
- If you have other significant income, as much as 85% of your Social Security benefits can be taxable.
- If you are married and filing separately, and you lived with your spouse at any time during the year, 85% of your Social Security benefits are taxable regardless of your income. This is to prevent married taxpayers who live together from filing separately, thereby reducing the income on each return. Thus reducing the amount of Social Security income subject to tax.
How do I know if my Social Security Benefit is taxable?
The following quick calculation can be done to determine if some of your benefits are taxable:
Step 1. Add one-half of the total Social Security benefits you received to the total of your other income. Include any tax-exempt interest and other exclusions from income.
Step 2. Compare this total to the base amount used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.
What Are the Base Amounts?
- $32,000 for married couples filing jointly;
- $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and
- $0 for married persons filing separately who lived together during the year.
Taxpayers can defer their “other” income from one year to another. They may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits from one year to the next. An example of this is taking Individual Retirement Account (IRA) distributions. However, the required minimum distribution rules for IRAs and other retirement plans must be taken into account.
Those may be missing an opportunity for some tax-free withdrawals are:
- Individuals who have substantial IRAs
- AND who are not required to make withdrawals OR are making their post age 70.5 required minimum distributions
- Without withdrawing enough to reach the Social Security taxable threshold.
Everyone’s circumstances are different. However, what works for one may not work for another.
Need More Information on how Social Security Benefits Affect Your Tax Return?
If you have questions about how social security benefits affect your tax returns, or if you wish to do some tax planning, call Alex Franch, BS EA at 781.849.7200 for additional information. He understands the details involved with the Earned Income Credit and the IRS requirements. Worthtax has locations in Quincy, Weymouth and Dedham.
Often the question comes up are legal fees deductible? The answer to that question can be both yes and no. It’s complicated and depends on the nature of the legal expense. This two part blog will discuss:
- Legal Fees Associated With Personal, Living, or Family Issues
- Legal Fees Associated With Business and the Production of Taxable Income
- Examples of Legal Fees and Their Deductibility
- The Tax Benefit of Legal Fee Deductions
- What does the Internal Revenue Code say About Legal Fees?
The Internal Revenue Code (IRC) is the body of tax laws written by the United States (U.S.) Congress and approved by the president in office at the time the law is created. The IRC tells us that except as otherwise expressly provided, such as itemized deductions, no deduction shall be allowed for personal, living, or family expenses. The IRC also says that, in the case of an individual, deductions are allowed for all of the ordinary and necessary expenses paid or incurred during the taxable year:
- For the production or collection of taxable income;
- For the management, conservation, or maintenance of property held for the production of income; or
- In connection with the determination, collection, or refund of any tax.
IRC Provisions for Legal Fees
Applying those IRC provisions will allow you to determine whether a legal expense you have incurred is deductible or not. The application can sometimes be complicated. It must take into account the Internal Revenue Service’s (IRS’s) interpretation of the law through rulings and regulations as well as the courts’ opinions on all of the above. Here are some situations that may involve legal expenses to be paid and how they should be handled:
Divorce – Legal costs, such as attorney fees and court costs, connected with divorce, separation, or support are non-deductible personal expenses. Non-deductible extends to legal fees incurred in disputes over money claims. However, legal and accounting fees paid for tax advice in connection with the divorce are deductible. This is provided the amounts for those services are clearly marked on the legal firm’s billings.
Taxable Alimony – The part of legal fees that qualify as producing taxable alimony is deductible by the person who receives the alimony. The attorney’s statement or invoice should stipulate what part of the fee relates to alimony. This ensures a deduction for the alimony recipient. Legal fees paid by the payer of the alimony are not deductible. Because child support payments are not taxable, fees paid to get those payments are not deductible.
Damages for Personal Injury or Sickness – In some cases, damages for personal injury or sickness can be excluded from income. Thus, the legal fees paid to secure such income are not deductible if the damage award is not taxable. However, to the extent that the damage award is taxable or accrued interest is paid on the settlement funds, the legal fees are deductible. Where the funds are partially taxable and partially excludable, the legal expenses have to be prorated in the same ratio as the income is.
Relating to Insurance Proceeds – Legal fees to collect on a claim related to a taxpayer’s business are currently deductible. Legal fees related to a personal loss are not deductible. However, where a loss is associated with a capital asset, such as a taxpayer’s personal home, the related expenses can be added to the home’s tax basis. This means that they can be used to offset any taxable gain in the future.
Producing or Collecting Taxable Income – Attorney fees, court costs, and similar expenses are deductible if incurred during the production or collection of taxable income. A reasonably close connection must exist between the legal expense and the production or collection of the taxable income.
Will and Trust Document Preparation – The cost of legal fees for preparing a will is considered a personal expense that is not deductible. In most cases, the legal cost of creating a living trust is similarly treated as a personal, nondeductible expense. However, if the attorney who prepares the trust on the billing statement the amount of the fee that is for tax planning or tax advice, the tax-related portion of the fee is deductible.
In our next blog, Part 2, we will talk about more business-related issues with debt. In the meanwhile, if you have any questions, you can call Alex Franch, BS EA at 781-849-7200.
Disabled Taxpayers may qualify for a number of tax credits and benefits. Parents of children with disabilities may also qualify. Listed below are several tax credits and other benefits that are available if you are disabled and listed on the federal tax return. This applies to any other dependent in your household who is listed on the tax return as well. Oh, and do not minimize any disability, as you may be surprised what qualifies an individual as a disabled taxpayer.
1. Increased Standard Deduction
If a tax return filer and/or spouse are legally blind, they are entitled to a higher standard deduction on their tax return.
2. Exclusions from Gross Income
Certain disability-related payments, Veterans Administration disability benefits, and Supplemental Security Income are excluded from gross income.
3. Impairment-Related Work Expenses
Employees, who have a physical or mental disability limiting their employment, may be able to claim business expenses in connection with their workplace. The expenses must be necessary for the taxpayer to work.
4. Credit for the Elderly or Disabled
This credit is generally available to certain taxpayers who are 65 and older. It is also available to certain disabled taxpayers who are younger than 65 and are retired on permanent and total disability.
5. Earned Income Tax Credit
EITC is available to disabled taxpayers as well as to the parents of a child with a disability. If you retired on disability, taxable benefits that were received under your employer’s disability retirement plan are considered earned income. This is until a minimum retirement age is reached. The EITC is a tax credit that not only reduces a taxpayer’s tax liability but may also result in a refund.
Many working individuals with a disability who have no qualifying children, but are older than 25 and younger than 65, may qualify for EITC. Additionally, if the taxpayer’s child is disabled, the age limitation for the EITC is waived. The EITC has no effect on certain public benefits. Any refund that is received because of the EITC will not be considered income when determining whether a taxpayer is eligible for benefit programs, such as Supplemental Security Income and Medicaid.
6. Child or Dependent Care Credit
Taxpayers who pay someone to come to their home and care for their dependent or disabled spouse may be entitled to claim this credit. For children this credit is usually limited to the care expenses paid only until age 13. However, there is no age limit if the child is unable to care for him or herself.
7. Special Medical Deductions
In addition to conventional medical deductions, the tax code provides special medical deductions related to disabled taxpayers and dependents. They include:
– Impairment-Related Expenses
Amounts paid for special equipment installed in the home, or for improvements, may be included in medical expenses. However, their main purpose must be for medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may only be partly included as a medical expense.
– Learning Disability
Tuition fees paid to a special school for a child who has severe learning disabilities caused by mental or physical impairments. These include nervous system disorders, and can be included in medical expenses. A doctor must recommend that the child attend the school. Tutoring fees recommended by a doctor for the child’s tutoring by a teacher who is specially trained and qualified to work with children who have severe learning disabilities may also be included.
– Drug Addiction
Amounts paid by a taxpayer to maintain a dependent in a therapeutic center for drug addicts. This includes the cost of the dependent’s meals and lodging, and are considered medical expenses.
8. Exclusion Of Qualified Medicaid Waiver Payments
Payments made to care providers caring for related individuals in the provider’s home are excluded from the care provider’s income. Qualified foster care payments are amounts paid under the foster care program of a state (or political subdivision of a state or a qualified foster care placement agency). You may want to call Alex Franch, BS EA at our office, 781-849-7200 for more details regarding this waiver, as it does get complicated.
9. ABLE Accounts
Qualified ABLE programs provide the means for individuals and families to contribute and save for the purpose of supporting individuals with disabilities in maintaining their health, independence, and quality of life.
Federal law enacted in 2014 authorizes the States to establish and operate an ABLE program. ABLE is an acronym for Achieving a Better Life Experience. Under the ABLE program, an ABLE account may be set up for any eligible state resident, which would generally be the only person who could take distributions from the account. ABLE accounts are very similar in function to Sec 529 plans. However, they should not be considered as estate planning devices, as is sometimes the case with 529 plans. The main purpose of ABLE accounts is to shelter assets from means testing required by government benefit programs. Individuals can contribute to ABLE accounts subject to Gift Tax limitations. Distributions to the disabled individual are tax free if the funds are used for qualified expenses of the disabled individual. These accounts are new and must be established at the state level before taxpayers can start making contributions to them. Call Alex Franch, BS EA, at 781-849-7200 for more information. For more information, you can read the March 23, 2015 letter about the Qualified Able Program published here.
Would You Like More Information About Disabled Taxpayers?
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Did you win the lottery? If you are reading this, I will assume you did. You are asking yourself whether to take the lump sum or the 20 year payout option. Our Weymouth office is on the opposite end of Columbian Street Lottery office so we get more than our fair share of lottery winners around our office. To be fair, most are lost and looking for directions.
Lottery Payment Options
If you won a large sum, say $1M or more, you have the option of taking a lump sum or a 20 to 30 year payout on your winnings depending on the lottery and state involved. I believe Massachusetts offers a 20 year payout. The 20 years are guaranteed so if you die, someone else gets to spend it.
The pros to the lump sum include a boatload of money right now! The cons are that you won’t get the full prize. You might get 60% of the prize money. In addition, you will be thrown into a higher tax bracket, This means a bigger chunk of money will go to taxes.
In this case, if you take annual payments, you do not have a boatload of money burning a hole in your pocket. You will eventually receive the full prize. And, you may save a chunk on money on taxes.
Which one is better?
On smaller prizes, say $1M to $3M, you may be better off with the payment option. It is very easy to spend the lump sum of money and paint yourself into a corner financially with a house and grown up toys that are too expensive to maintain. They payment option can provide an income stream for many years after your prize. Additionally, because the annual payments are smaller, they will be likely be taxed at lower rates.
On larger prizes, say greater than $20M, you may be better off with the lump sum. Even the reduced amount is difficult to spend down and should be able to provide an income stream on its own. Because the annual payments are larger, the tax becomes more equalized between the lump sum and the payment options.
I crunched a few numbers on a $2M prize and a $50M prize. I also made the following assumptions: 5% rate of return, $20K spent per year on the small prize and $120K per year spent on the larger prize. On the $2M prize, the payment option is better after year 13. On the $50M prize, the payment option does not catch up until year 16. That being said, the greater the rate of return, the better the lump sum is.
Other Lottery Considerations
How old are you? Remember, you cannot take it with you.
Do you still want to work? Are you working for the weekend, do you have a meaningful career, or would you prefer neither?
How responsible are you? Are you going to make it rain like you are insane in the brain, or would Homer chide you as ‘Boring!’?
Do you have questions about Winning the Lottery?
WorthTax can help you work through all the IRS and State rules. If you have any questions, please call Alex at 781-849-7200 and make an appointment today.
Do you feel like you are in a Snowpocalypse this year? If this winter keeps going as it has been and Massachusetts grinds to a halt, we might be reminded of a simpler time. Those olde tyme days when we might considering bartering by trading a bushel of wheat for a couple of chickens.
Nowadays, it might instead be agreeing to shovel or snowblow your neighbor’s driveway in exchange for designing a website. Just when you thought Snowpocalypse 2015 could not get any scarier, consider this: that type of exchange is barter income. Bartering is both reportable and taxable.
What is Bartering?
Bartering is an exchange of property or services. You must include the fair market value of the goods or services exchanged as income. Barter income can be taxed in a number of different ways. If you exchange a capital asset, the barter income could be taxed as a capital gain – think classic car for example. If the exchange of services involves your business or profession, it can fall into the self-employment category and thus be subject to Federal Income Tax, payroll taxes, and state taxes. If the exchange falls outside the scope of your typical business or profession, it might be reportable as ‘other income’ on line 21 of the 1040 Form. To learn more you can read IRS Topic 420 – Bartering Income.
Next time you are thinking about clearing out some snow for your 95 year old WW2 veteran neighbor, ask yourself this: Is the IRS watching?
Questions About Bartering and Snowpocalypse?
Did you have a bartering agreement with anyone last year? If you have questions, thoughts or concerns regarding how to file bartering income, WorthTax can review your taxes for you and advise you what is best for your tax filing status. We guarantee our pricing so you will never pay more than was discussed. Please feel free to contact us, leave your comments below or post to on our Facebook, Google+ or LinkedIn pages.
Tax Season is Here!
There are more ways to make money than just working or investing. If you come into some “funny money” – money won by bets, pools, gambling, illegal gains, or somehow, buried treasure – you can bet Uncle Sam still wants his share. Hey, it could happen.
Football Pool Winnings
My 9th place fantasy finish does not qualify me for funny money. However, if you actually won money in a fantasy football pool or league, this money is taxable income. In most cases, this would be considered gambling income and would be reported as Other Income on line 21. You could also deduct your gambling losses on Schedule A.
That is interesting, but many people are aware of this one. However, did you know that on your Massachusetts tax return, you can deduct the price of your wager? Depending on your pool or league, this can be more than a couple of bucks. You can do the same for those $30 scratch tickets. However, if that deduction happens to be greater than $20, you cannot take both the deduction and e-file your return.
My wife and I like to joke about stopping at Mohegan Sun to see an old crooner play whenever we are on I-95 in Connecticut. We might even have a go at the roulette or blackjack tables. In the event that we win, that income would be taxable at the Federal and State levels, and not just Massachusetts. If you have gambling winnings in Connecticut, Rhode Island, or virtually every other state that has casinos or a lottery, then you may be liable for income tax in that state. Depending on the amount of your winnings, you might have the privilege of filing an additional state tax return.
Any income from illegal activity is taxable income. It is recorded either on the Form 1040 as Other Income on line 21 or Schedule C income. Funny money from drugs, embezzlement, bribes, larceny, etc. are all earned income. This taxable income should be reported on your tax return, otherwise you might be charged with tax evasion in addition to whatever crime generated the income. Does the IRS rat you out to the coppers? The IRS will not comment on this. However, it is suspected that there are enough loopholes in the tax return confidentiality rules that the IRS likely does tip off other law enforcement agencies. Remember, that’s how they got Capone.
My son might be in trouble one day. He loves digging in the yard for buried treasure. I even planted a box of coins for him once. He has also found old whiskey bottles (circa 1920), farm tools, railroad track parts, and other tetanus carrying stuff in my 150 year old back yard. If he ever hits the mother lode, he would have to pay income tax on the treasure. He won’t have any taxable income when he sells it, but he will have to pay the tax when he finds it. I am hoping for a 1913 Liberty Head V Nickel to show up one of these days . . . then he can pay for his own college.
Questions About Taxable Income?
Maybe you have funny money of your own. Well, at the very least, maybe you have income you are not quite sure how to record on your tax returns. If you have thoughts, questions or concerns regarding how your taxes are filed, WorthTax uses a triple check accuracy system. We also though great lengths to protect your information on secured servers. Please feel free to contact us, leave your comments below or post to on our Facebook, Google+ or LinkedIn pages.