There are some new developments in income taxes this year, and some of the changes are significant. First of all, several tax deductions ended with 2013, but experts think they will be voted in retroactively to the beginning of 2014. Here are the changes:
You no longer get the exclusion for cancelled home mortgage debt. This was the provision that if a bank forgave a loan, it is income to you, but you did not have to pay taxes on it. This occurred when the real estate market went down and people renegotiated mortgages. Let’s hope this one comes back.
Teachers no longer get a $250 deduction.
Charity: You can no longer give charity directly from your IRA.
Mortgage insurance is no longer deductible. As of now, the IRS form has the word “reserved” on the line where this is supposed to go. They include a caution: “Do not use this tax form,” so even the IRS is telling you that they are waiting for updates.
Business equipment: For those of you buying equipment for businesses, depreciation rules have gotten stricter.
The passage of the ACA, Obamacare, means that you are required to have health insurance. If you don’t, you have to pay a penalty. That is the bad news. The good news is that it is not too hard to get health insurance or Medicaid. There are also many exceptions to the penalty. The cost of health insurance is now dependent on your income. Yes, folks, if your income is low, you get a premium credit. This is the main “money grab” of Obama care.
A word regarding HSA, health savings accounts. If you have high deductible health insurance, you can open a special bank account called a health savings account. Any money put in will be deductible, even if you have no medical expenses. Folks, you need to ask your insurance person if your insurance plan is HSA eligible, and if so, open this bank account. If your health insurance is not HSA eligible, find out what it would take to fix that.
There is also a long list of lesser known issues, but 99 percent of income tax issues are the same this year. Here is my list of things to be careful of:
Checklist
Filing status: If you are legally married, you may not file as single. Filing as married will probably help you, but if you are about to tie the knot, run the numbers to see if your taxes are affected. If you are separated, you have some complicated questions. It is uncommon to recommend filing separately, but it might be advantageous if one spouse has high medical or other unusual issues.
Your children are deductible, however once they are over 18 (23, if full-time students), they might not be. Check the rules if you have questions. Sometimes we discover that a child is not a full-time student and blow a tax deduction. Other relatives could also be deductible.
Your wages are your most obvious income, but your wages are the area where you can save the most. Once you have a W2 in your hand, it is over, so you want to make sure that any money you receive from your employer that can be called something other then wages should be so designated. Especially now that so many tax goodies are dependent on your income, you want to keep your wages lower, if possible.
All other income is taxable, of course. This includes interest, dividends, unemployment, social security, and pensions, as well as prizes, gambling, bartering, fellowships, and even jury pay. You might have to claim your refund from state taxes received for last year’s tax filing! Use the worksheet to determine if you do. If you get a 1099-C for cancelled debt then you might have to pay taxes on it.
A common misconception is that you don’t have to report income under $600, if you are an independent contractor. Sorry, folks, you need to report all of your income, even for small jobs, where the employer is not required to send you a 1099.
Stocks: If you sold stocks, you need to know the “cost.” This means let’s-hope-you-have records. If a stock became worthless, the entire cost is deductible.
Lawsuit for non-physical damages: If you collect on such a suit, you have a complicated situation regarding how to address the third that the lawyer gets.
Income from a business or rental real estate: You need to keep careful records of your income and expenses. Comment: If you are starting a business, get advice on your “business entity” choice and recordkeeping skills.
Your level of income: Since many deductions and credits are linked to your income, it is important to make sure your income is as low as possible. This will also impact your health insurance premium credit.
Deductions
Your income is reduced for various expenses, such as teacher expenses (awaiting renewal), moving costs, student loan interest, deposits into health savings accounts, excessive medical expenses, real estate taxes, ground rent, mortgage interest, mortgage “points,” and, of course, charity. These are called deductions.
Did you refinance? If so, you had better review the settlement sheet for possible interest points and real estate taxes.
Important charity issues: If you gave $250 or more to one place, you need a receipt, and the receipt must be in your possession at the time you file your taxes. This rule is very strict. If you are audited, for instance, you cannot say “I’ll just go get it.” One more point regarding charity: If you use your car as a volunteer for a charity, you get a deduction for 14 cents per mile. This might apply if you have a volunteer job in shul, such as gabai, chazan, etc., and you drive to shul. (What about the second gabai, tzedada collector and the guys who do hagba and glilah, etc.? Hmm.) Of course, driving for the NWCP, driving patients to appointments, or delivering food for bikur cholim are classic examples of being able to claim the 14-cent-per-mile deduction.
Some people can save a lot with a strategy called bunching, which means you give all your charity every other year. You are still sending checks to the organizations you support once a year, but the timing of them could save you on your taxes. For instance, you could give everything at the beginning of January 2013, and again at the end of December, of 2013. You do the same in 2015. In the non-charity year, 2014, you claim the standard deduction. It is a little fancy footwork, but might be worth it.
Do not overlook the donations to Goodwill.
Miscellaneous expenses are deductible to the extent that they exceed two percent of your income. These miscellaneous expenses, as well as investing and job expenses, could include investment advisory fees.
Job expenses include anything you need for your job, such as travel and car, supplies, equipment (e.g., computers), education, entertainment, business gifts, cell phone, licenses, dues and subscriptions, insurance, and even the cost of a home office. Also in this category are tax preparation fees (money well spent and my favorite deduction!) and job hunting expenses. Important: Your job expenses are much more valuable if paid by your employer. If you are paying them, you are losing out. Medical expenses should be addressed through health savings accounts (HAS) and flex plans.
Gambling losses are deductible, and they are not subject to the two percent limitation.
Expenses that are itemized deductions, in general, should be timed to maximize the tax savings.
Tax Credits
Low earners can claim the earned income credit (the greatest money grab since the Communist revolution.) Comment: If your investment income exceeds $3,350, you blew it big time. You get no credit at all! This is serious, folks.
College: If any dependents are in college, you can get a valuable tax credit. The more valuable one, called the American opportunity tax credit, is limited to four years. Comment: Planning can be critical here, as you are juggling various expenses and various years. It is very easy to blow a few thousand dollars.
Daycare: This credit can save you $1,700 a year. To max it, you need two children being watched, up to but not including kindergarten (unless you have renamed kindergarten as pre-1A, in which case kindergarten does count). Day camp counts, but sleep-away camp does not. You must provide the provider’s name, address, and ID number. This credit ends when a child turns 13. Comment: Here, too, you are juggling kids, years, and date cut-offs. Be aware of your $6,000 maximum per year so you do not waste this one.
Pensions: This is the ultimate of all tax deductions. Better budget, or you will not have the funds to participate in this one. Jobs offer 401(k)s, and people can open IRAs. But you need to have the money available.
Household employees: If you pay for nannies or cleaning help, you might have to make them an employee. This is considered a headache and is mostly observed in the breach.
State of Maryland Taxes
Maryland follows the federal deductions but adds a few of its own. Deductions are allowed for part of your pensions and social security, and credits for long term care insurance, and continuing education for public school teachers. Maryland has its own earned income credit and dependent care credit. It also allows for deductions for money put into Maryland college funds.
Planning Is Important
Folks, all these details of taxes are important, for two reasons: First, doing it correctly keeps your taxes down. Secondly, keeping a low income might increase your eligibility for government handout programs. Hopefully, with a little planning you will not have to pay any more than you have to.
Income Taxes 2014
by Eli Pollock
There are some new developments in income taxes this year, and some of the changes are significant. First of all, several tax deductions ended with 2013, but experts think they will be voted in retroactively to the beginning of 2014. Here are the changes:
You no longer get the exclusion for cancelled home mortgage debt. This was the provision that if a bank forgave a loan, it is income to you, but you did not have to pay taxes on it. This occurred when the real estate market went down and people renegotiated mortgages. Let’s hope this one comes back.
Teachers no longer get a $250 deduction.
Charity: You can no longer give charity directly from your IRA.
Mortgage insurance is no longer deductible. As of now, the IRS form has the word “reserved” on the line where this is supposed to go. They include a caution: “Do not use this tax form,” so even the IRS is telling you that they are waiting for updates.
Business equipment: For those of you buying equipment for businesses, depreciation rules have gotten stricter.
The passage of the ACA, Obamacare, means that you are required to have health insurance. If you don’t, you have to pay a penalty. That is the bad news. The good news is that it is not too hard to get health insurance or Medicaid. There are also many exceptions to the penalty. The cost of health insurance is now dependent on your income. Yes, folks, if your income is low, you get a premium credit. This is the main “money grab” of Obama care.
A word regarding HSA, health savings accounts. If you have high deductible health insurance, you can open a special bank account called a health savings account. Any money put in will be deductible, even if you have no medical expenses. Folks, you need to ask your insurance person if your insurance plan is HSA eligible, and if so, open this bank account. If your health insurance is not HSA eligible, find out what it would take to fix that.
There is also a long list of lesser known issues, but 99 percent of income tax issues are the same this year. Here is my list of things to be careful of:
Checklist
Filing status: If you are legally married, you may not file as single. Filing as married will probably help you, but if you are about to tie the knot, run the numbers to see if your taxes are affected. If you are separated, you have some complicated questions. It is uncommon to recommend filing separately, but it might be advantageous if one spouse has high medical or other unusual issues.
Your children are deductible, however once they are over 18 (23, if full-time students), they might not be. Check the rules if you have questions. Sometimes we discover that a child is not a full-time student and blow a tax deduction. Other relatives could also be deductible.
Your wages are your most obvious income, but your wages are the area where you can save the most. Once you have a W2 in your hand, it is over, so you want to make sure that any money you receive from your employer that can be called something other then wages should be so designated. Especially now that so many tax goodies are dependent on your income, you want to keep your wages lower, if possible.
All other income is taxable, of course. This includes interest, dividends, unemployment, social security, and pensions, as well as prizes, gambling, bartering, fellowships, and even jury pay. You might have to claim your refund from state taxes received for last year’s tax filing! Use the worksheet to determine if you do. If you get a 1099-C for cancelled debt then you might have to pay taxes on it.
A common misconception is that you don’t have to report income under $600, if you are an independent contractor. Sorry, folks, you need to report all of your income, even for small jobs, where the employer is not required to send you a 1099.
Stocks: If you sold stocks, you need to know the “cost.” This means let’s-hope-you-have records. If a stock became worthless, the entire cost is deductible.
Lawsuit for non-physical damages: If you collect on such a suit, you have a complicated situation regarding how to address the third that the lawyer gets.
Income from a business or rental real estate: You need to keep careful records of your income and expenses. Comment: If you are starting a business, get advice on your “business entity” choice and recordkeeping skills.
Your level of income: Since many deductions and credits are linked to your income, it is important to make sure your income is as low as possible. This will also impact your health insurance premium credit.
Deductions
Your income is reduced for various expenses, such as teacher expenses (awaiting renewal), moving costs, student loan interest, deposits into health savings accounts, excessive medical expenses, real estate taxes, ground rent, mortgage interest, mortgage “points,” and, of course, charity. These are called deductions.
Did you refinance? If so, you had better review the settlement sheet for possible interest points and real estate taxes.
Important charity issues: If you gave $250 or more to one place, you need a receipt, and the receipt must be in your possession at the time you file your taxes. This rule is very strict. If you are audited, for instance, you cannot say “I’ll just go get it.” One more point regarding charity: If you use your car as a volunteer for a charity, you get a deduction for 14 cents per mile. This might apply if you have a volunteer job in shul, such as gabai, chazan, etc., and you drive to shul. (What about the second gabai, tzedada collector and the guys who do hagba and glilah, etc.? Hmm.) Of course, driving for the NWCP, driving patients to appointments, or delivering food for bikur cholim are classic examples of being able to claim the 14-cent-per-mile deduction.
Some people can save a lot with a strategy called bunching, which means you give all your charity every other year. You are still sending checks to the organizations you support once a year, but the timing of them could save you on your taxes. For instance, you could give everything at the beginning of January 2013, and again at the end of December, of 2013. You do the same in 2015. In the non-charity year, 2014, you claim the standard deduction. It is a little fancy footwork, but might be worth it.
Do not overlook the donations to Goodwill.
Miscellaneous expenses are deductible to the extent that they exceed two percent of your income. These miscellaneous expenses, as well as investing and job expenses, could include investment advisory fees.
Job expenses include anything you need for your job, such as travel and car, supplies, equipment (e.g., computers), education, entertainment, business gifts, cell phone, licenses, dues and subscriptions, insurance, and even the cost of a home office. Also in this category are tax preparation fees (money well spent and my favorite deduction!) and job hunting expenses. Important: Your job expenses are much more valuable if paid by your employer. If you are paying them, you are losing out. Medical expenses should be addressed through health savings accounts (HAS) and flex plans.
Gambling losses are deductible, and they are not subject to the two percent limitation.
Expenses that are itemized deductions, in general, should be timed to maximize the tax savings.
Tax Credits
Low earners can claim the earned income credit (the greatest money grab since the Communist revolution.) Comment: If your investment income exceeds $3,350, you blew it big time. You get no credit at all! This is serious, folks.
College: If any dependents are in college, you can get a valuable tax credit. The more valuable one, called the American opportunity tax credit, is limited to four years. Comment: Planning can be critical here, as you are juggling various expenses and various years. It is very easy to blow a few thousand dollars.
Daycare: This credit can save you $1,700 a year. To max it, you need two children being watched, up to but not including kindergarten (unless you have renamed kindergarten as pre-1A, in which case kindergarten does count). Day camp counts, but sleep-away camp does not. You must provide the provider’s name, address, and ID number. This credit ends when a child turns 13. Comment: Here, too, you are juggling kids, years, and date cut-offs. Be aware of your $6,000 maximum per year so you do not waste this one.
Pensions: This is the ultimate of all tax deductions. Better budget, or you will not have the funds to participate in this one. Jobs offer 401(k)s, and people can open IRAs. But you need to have the money available.
Household employees: If you pay for nannies or cleaning help, you might have to make them an employee. This is considered a headache and is mostly observed in the breach.
State of Maryland Taxes
Maryland follows the federal deductions but adds a few of its own. Deductions are allowed for part of your pensions and social security, and credits for long term care insurance, and continuing education for public school teachers. Maryland has its own earned income credit and dependent care credit. It also allows for deductions for money put into Maryland college funds.
Planning Is Important
Folks, all these details of taxes are important, for two reasons: First, doing it correctly keeps your taxes down. Secondly, keeping a low income might increase your eligibility for government handout programs. Hopefully, with a little planning you will not have to pay any more than you have to.
