Understanding Your W-2

March 12, 2016

Your W-2 is a statement of your wages and withholdings sent to you from your employer. You will need this form in order to fill out your tax return, but it’s important to understand all of the information contained within.

Box 1- the total of your wages, tips, bonuses, prizes, and compensatory benefits. The first box doesn’t indicate are elective deferrals for retirement funds, payroll deductions, or benefits taken prior to taxation.

Box 2 – amount of federal tax withholdings for the year.

Box 3 – reports the amount of income subject to Social Security taxation. This is taxed prior to any deductions, which means the amount can be more than what is stated in box 1. In the case of a high wage earner, box 3 may report lower than the total of box 1, as it can’t exceed the Social Security wage base, which is $118,500 for 2015.

Box 4 –this is the actual amount of taxes withheld for Social Security taxes, subject to a rate of 6.2%. This should be the number listed in box 3 multiplied by 6.2

Box 5 – lists the amount of income subject to taxation under Medicare. Typically, these taxes aren’t inclusive of pretax deductions, and will include most benefits eligible to be taxed. There is no maximum cap, which means this box can list amounts higher than either Box 3 or 4. (more…)

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Taxpayers who are married have the option to file a single return or to separate their income and deductions and file separately. It’s likely simpler to file jointly if one spouse earns the majority of the household income. However, in situations where both parties earn similar amounts of income, filing separate returns may prove to be the better option for the couple, as their tax liability may lessen. It’s worthwhile to figure out the entire return using both methods to determine which is most beneficial.

In most cases, couples who file separately are taxed at a higher rate. The way this can benefit couples is that taking a multitude of deductions can actually increase savings at tax time if you file separately. Doing so allows you to claim a greater amount of medical expenses, casualties, and other expenses, because your adjusted gross income requirement is lowered. In most cases, the rates for filing separately and jointly are close, though if one spouse earns a large portion of the couple’s income, the rates may vary.

Separate returns are a great option for a taxpayer who doesn’t want to be responsible for their spouse’s tax liability. In doing so, you aren’t held accountable for interest, penalties, taxes, misrepresentation of income amounts or ineligible deductions. If you do file separately, your spouse is also required to do so. The same is true for whether or not you chose to itemize your deductions. If your spouse takes the standard deduction, $6,300 for 2015, then so must you. Likewise, if you chose to itemize using a Schedule A of Form 1040, then your spouse is required to as well, even if the total is less than $6,200.

Categories: Filing Status Tags: , ,

The Fabulous Five

March 10, 2016

Your marital status, as well as number of dependents are two of the biggest factors to determining which of the five filing statuses you should use to file your tax return. They are, in no particular order:

  1. Single
  2. Married, filing jointly
  3. Married, filing separately
  4. Head of household
  5. Qualifying widow(er)

Married couples can choose whether they want to combine their income and deductions and file one return, or each file an individual return. Married taxpayers may qualify for head of household if they have a child who lived with them for the whole year, in a residence separate from their spouse for the final six months of the tax year. If you qualify, it’s likely in your best interest to file this way, as it generally lowers your tax liability.

Taxpayers who aren’t married are usually considered single, unless they meet the strict rules for Head of household or qualifying widow(er). With the exception of dependent parents, in order to qualify as head of household, you must have provided over half the expenses for a home in which you have a child who has resided there the full year. Parents are not required to live with you.

For 2015, a taxpayer whose spouse passed away in 2014 or 2013 may be eligible to file as qualifying widow(Er) if they maintain the household expenses for themselves and a dependent child.

Deductions, credits, and exemptions are all affected by the filing status you chose, as well as the rate of taxation. This is why its extremely important to choose the most appropriate status in order to maximize benefits at tax time.

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Tax-Time Marital Status

March 9, 2016

When it comes to filing your tax return, you need to be clear about your marital status, which is dependent on your legal definition as of December 31st. It doesn’t matter when you got married, or if you are divorced or separated, when the decree of separation was effective, as you will be considered either married or unmarried for the entire year based on your status on the final day of the year. If you are divorced or separated, you will file your tax return using the Single status, unless your eligible for the Head of Household status, in which you would have a qualifying dependent child or parent.

The IRS considers you married even if you are living separately from your spouse on December 31st, or do not have a legalized separation decree. The only way you can file unmarried is if you meet the requirements to use the Head of Household status, as you care for a child. Otherwise, you’ll have to file as married, either jointly or separately from your spouse. Remember, if you file separately, both you and your spouse have to use the same deduction option – either standard or itemized.

If common law marriage is legal in your state of residence, and you and your partner meet the criteria, then you are considered married by the IRS. Spouses who become deceased during the tax year are still liable as married for the entire tax year. It doesn’t matter when your spouse passed away. You should file a joint return for the year in which the spouse died, provided you haven’t remarried by the end of December.

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While there are many joys that come with marriage, one of them is not tax time. Though you may be eligible for certain tax deductions and credits if you filed married, there are some cases where married couples may have to pay a penalty for filing jointly. This occurs if the couples total tax liability is greater than that which they would pay if they filed single status. Generally, this occurs when both parties contribute large portions to the couple’s combined income.

The federal government has created legislation which has helped reduce the amount of the penalty. Couples can file jointly and claim a standard deduction that is double the amount offered to single filers, as well as a 15% tax bracket, also double the rate for singles.

Married couples whose situation allows only one spouse to contribute the largest portion of the total income can benefit from filing jointly. Otherwise you may have to pay a penalty for filing as single person, because a joint return will net a lower tax than both spouse’s liabilities if they were to file single.

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If your spouse passed away during the tax year, you are still eligible to file using the Married status. However the following two years after, you may file using the qualifying widow(er) status. In doing so, you are offered the same tax rates as if you filed jointly. You must meet additional rules in order to use the qualifying widow(er) status:

  • You have not remarried for the two years after your spouse passed away. For example if your spouse became deceased during the 2015 tax period, this means you must remain unmarried until the end of 2017 to take full advantage of the status’ tax rates.
  • You have a qualifying dependent when you file. Dependents can be children, stepchildren, or adopted child in which you have supported and paid household expenses during the entire length of the tax year. Exceptions are made for school, hospital stays, and vacations. Foster children do not qualify as a dependent.
  • When your spouse deceased, you were eligible to file jointly during that tax year. It only matters if you were eligible, not if you actually did.

If you meet all of these rules, and you didn’t use a Schedule A to itemize your deductions, you are eligible to use the standard deduction available to all married couples filing jointly.

 

Categories: Filing Status

Have You Refinanced?

March 6, 2016

If you get a mortgage loan in order to buy a home, you may be able to deduct any points you spend in order to accrue some significant tax savings. The same is true for homeowners who chose to refinance.

In most cases, refinancing forces the homeowner to take away loan points over the course of the term. If you chose to refinance in order to improve or upgrade your home, the points you subtracted may be deductible for the tax year in which you paid them. The remaining points then have to be deducted over the term of the loan. The same is true for home equity lines of credit and loans, as they adhere to the general guidelines for deducting mortgage points.

You can deduct points if the purpose of refinancing is used for either college expenses or automobile purchases, although you can’t deduct them instantly as one large sum. You’ll have to spread the deduction over the loan term.

To determine the deduction, you should divide the number of points you paid by the number of payments you are required to make to satisfy the loan. You may need to seek information specifically from your lender, though the calculation is relatively simple. An Example: $3000 paid in points can be deducted as $100 annually, provided the loan was refinanced for 30 years.

Categories: Deductions Tags: ,

Employee business expense deductions can mean a little extra cash in your pocket at tax time, as long as you have an actual legitimate expense as an employee that is not reimbursed by your employer.

If you use your personal vehicle, for example, for business purposes, you are eligible to deduct either the actual cost of operating the vehicle or you can choose the easier method of the standard mileage rate. Traveling to and from work doesn’t count as an operational expense, and therefore cannot be deducted.

If you’re required to travel away from your standard workplace, your expenses may be deductible as long as your employer didn’t cover the costs. In addition to mileage and lodging (should you need it), you can deduct 50% of the cost of meals while away on business. You’ll need your receipts for proof of the expenses.

Another common employee expense is related to the purchase of specific uniforms. If you are required to wear a uniform to perform your job, and the uniform is not suitable to be worn as street clothes, then you may qualify to deduct the upkeep and purchase of said uniforms.

Additionally, if you are required to pay for any training or classes associated with your career, you may be eligible to deduct the costs incurred. Courses that maintain your skills related to your industry, as well as mileage to and from the training center are typically deductible.

If you subscribe to journals, magazines or other publications that are related to your line of work, you may deduct the costs of these materials. Resume fees and agency expenses incurred while searching for a job in the same line of work that you are currently in are also deductible, as well as the cost of traveling to interviews, as long as you were responsible for the expenses.

 

 

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As you’re now probably aware, the Affordable Care Act imposes strict penalties for taxpayers who don’t have health insurance. However, exemptions apply in some circumstances, which can excuse the penalty from taxpayers who meet the requirements. Form 8965, Health Care Exemptions, can be filed with a tax return and used to claim a hardship exemption or another qualifying exemption. This form allows the uninsured to avoid a penalty assessment.

It’s important that you request specific exemptions at the right times. Depending on which exemption you qualify for, you either need to request it through the Marketplace or when you file your taxes. Some can be requested at any time, so you need to know which is which.

Marketplace Exemptions

First, you need to apply and then receive the exemption certificate number, so you can complete your tax return. These exemptions are:

  • Members of a religious organization declared by the Social Security Administration to be against insurance.
  • Coverage is not affordable due to estimated household income amounts
  • Medicaid exemption for those in a state where the eligibility requirements have not yet been revised to meet greater patient demand
  • Non-renewal of current coverage, and other options are not economical
  • You do not qualify for a Marketplace insurance plan due to extenuating circumstances.

Form 8965 Exemptions

Claim these exemptions when you file your return using Form 8965:

  • Health insurance coverage is unaffordable based on income
  • A short gap in coverage applies
  • Total income for the household is less than the required threshold
  • Individual is not currently residing in the US.

Other Exemptions

Exemptions that can be requested through any method at any time are as follows:

  • Incarceration
  • Member of a health sharing ministry that is recognized by the federal government
  • You are of Native American or Alaskan Native descent, or a spouse of someone of this descent, and are eligible to receive health coverage through a special provider
  • You are a Native American Tribe member
  • Coverage is unaffordable
  • you have a temporary lapse of coverage in the beginning of the tax year but have received Marketplace coverage.
Categories: General

Head of household status can be extremely beneficial to taxpayers if they qualify. The two qualifiers – marital status and household expenses – must both be met in order to file your tax return using HOH. In order to determine your eligibility, read the following rules based off the qualifying factors:

Marital Status:

You’re required to be unmarried, or considered unmarried by the IRS standards. The IRS rules for being unmarried are:

  • As of December 31st, 2015, you are single.
  • Your spouse became deceased before the tax year began. In these cases, you may consider filing as a qualifying widow(er), as it may result in greater tax savings. You are still considered married if your spouse died during the current tax year, and you can’t qualify for head of household, as you’ll need to file a joint return.
  • A finalized decree exists as of December 31st 2015, in which you are legally divorced or separated.
  • You and your spouse have lived separately for the final six months of the year. If you are responsible for the expenses for your household and dependent child, and your spouse had a different residence, you may be considered unmarried and therefore qualify for head of household. The child can be one of the following relationships: step-child, adopted child, or biological child.

Household Expenses:

Head of household filing status requires the taxpayer to have paid expenses amounting to more than 50% of the total cost of maintaining a household for themselves and a qualifying dependent.

  • The dependent is any child or relative whom you can claim the dependency exemption for.
  • The household you claim has to be your primary residence for yourself and the dependent, who is required to live there the entire year, unless they are your parent. Dependent parents do not have to reside in the same household, but you are still responsible for over 50% of their household expenses.

Included expenses range from rent, property taxes, mortgage and interest, and insurance, to utilities, maintenance fees and supplies such as groceries and necessities for the household.

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