In my last article I discussed some last-minute tax law changes that were expected. They indeed came through in December, and they are not earth-shattering. Teachers can deduct $250 in expenses, and college tuition gets a $4,000 deduction or a tax credit, whichever you prefer. And mortgage insurance premiums are now deductible.
Another mortgage-related change is a big deal. It is called “exclusion from income for discharge of mortgage debt,” and here is what it means: Say you are underwater in your mortgage, owing the bank more than what your residence is worth. The mortgage company might “write off ” some of the debt, and you now officially owe less principal. Normally, if someone forgives debt that you owe him, you have to claim the forgiven amount as income. This included home mortgages that were renegotiated, which could become a disaster. This new provision saves people who are in that situation.
Common Oversights
Let’s make a list of common mistakes on taxes.
1) Marriage: The timing of tying the knot can make a big difference. Run the numbers both ways. It is pretty easy to time a marriage license. Filing as “married separate” will usually cause your taxes to go up, not down.
2) Children: Yes, you can deduct your children. However, once they turn 19 (24, if a fulltime student), they cannot earn more then $3,950 a year. You can blow that one if they earn one dollar too many!
3) Wages: If you are incurring work expenses, you can generally not deduct them. It is therefore better for your boss to pay them and for you to keep a separate calculation, so they remain off your W2.
4) Medical expenses: Obamacare has devastated medical tax-deductible tricks. Cafeteria plans only allow you to set aside $2,500 for medical, better then nothing. If your employer does not offer a cafeteria plan, he needs advice, because if he understood it, he would probably offer it. If you have high-deductible insurance, you should open a bank account called a health savings account, an HSA.
5) Medical insurance: This one really took a direct hit. Your employer cannot reimburse you for health insurance that you shopped for yourself. It must be a group plan. This is a major ouch! However, if you are self-employed, you can deduct your premiums. If being self-employed is a possibility, you need serious advice on how to structure this.
6) Daycare: Daycare provides a 20 percent tax credit on money spent. There is a maximum of $6,000 of daycare expenses per year ($1,200 savings plus more from the state) if two children receive care, and only $3,000 for one child. The money does not need to be evenly spent, however. Therefore, if one child has incurred over $3,000, make sure that the second child receives care as well. If you spend even $10 on child two, your limit will double. Also, if you go over $6,000 one year and under $6,000 the next, your timing did not work. A little calendar watching and tracking with Quicken can save you hundreds.
Paying daycare expenses from a cafeteria plan will not save you a lot of money vs. taking the credit yourself. But it can have a very helpful effect. To clarify: If daycare expenses are paid by a cafeteria plan, you will not save a lot of money, but your W2 will be for a lower amount, since the daycare came off the top. This makes your income smaller for all income-based programs, such as food stamps and college aid.
7) Selling stocks: You will pay taxes on your profit, but this can skew everything. If your income pushes up, all kinds of changes happen. You had better weigh your options. Let us imagine that grandparents are selling stock to help a grandchild in college. If grandparents sell the stock, their social security income can become taxable, causing an unexpected tax increase. As an alternative, consider whether they should gift those shares to someone else to sell. Crunch those numbers and options.
8) Side business: If you are running a business of any significance and you do not have an accountant, then you are losing money. I know this sounds self serving, but it is the truth.
9) Itemizing deductions: If your itemized deductions are a bit under the limit then you could benefit from fancy footwork called bunching. Essentially you give all your charity and real estate taxes every other year. It sounds complicated, but it’s not, and it can give you a serious savings every two years.
10) College expenses: There is a lot to say here. For the first four years, you can get a credit worth $2,500 if you spend at least $4,000 on tuition fees and supplies. Anything spent over $4,000 is not helpful, so watch your expenses and the timing.
You need to be enrolled at least half-time. This is easy, since there is a check box on the tax form that the college gives out. Actually, it is not so simple. What about mini-mesters and summer college? Can those credits be added to spring or fall to make you half-time, or are those stand-alone semesters?
You also need to be pursuing a degree. This is a pretty crazy rule, if you ask me. What does that requirement demand of you? Is it a question of what you are thinking when you enroll? No one knows; even the official IRS form, called a 1098-T, does not have a check box for the pursuing a degree question.
Some further confusion: There are two separate four-year rules here. The simple rule is that you can claim the credit for a maximum of four years. The second rule is that you can claim it for the first four years of college. This is not clear. What if you went to college 20 years ago and are now going back to a college that does not accept those credits. Do your four years start over? It seems they do.
There is a separate college credit called the lifetime learning credit, which saves you 20 percent of college expenses of up to $10,000 per family. It does not include books and supplies. For this one, you do not need to be half-time or four years.
11) The earned income credit: This is the ultimate “you blew it” item. The earned income credit is a money handout to low-income working families with children. To get this fantastic credit, your investment income must be below $3,350. One dollar over and you could blow more than $7,500: yep, a loss of $7,500 for one dollar too high.
12) Pensions: This is another easy-to-blow-it-big item. Putting money into a pension plan is tax deductible. If your employer offers a matching pension plan, you had better participate, since the boss only puts in money if you do. Not participating would have to be called bizarre.
13) Nanny tax: If you have household employees, you might have to make them official employees. Check the wage limit. If you stay under the legal limit, you can ignore this headache.
14) State of Maryland taxes: You really want to try to itemize on your federal tax return. Otherwise, you can lose upwards of $500 on your Maryland state return. I have no doubt that many have lost that one without realizing that they missed something.
15) Maryland college investment plan: Here is one item I have never discussed. You can open a special account at T. Rowe Price called the Maryland college investment plan. It allows you to put aside $2,500 for each child and get a tax deduction on your Maryland tax return, only. Each parent can open an account and deduct contributions of $2,500 per year. And it seems to me that you can leave the money there for one day. Thus, you can put the money in on Monday and take it out on Tuesday. This strategy means an extra 8 percent reduction on college expenses. All money spent on college tuition should therefore be run through this account. The fee is $10 a year per account. You get an annual deduction of $5,000 if both parents participate. Spend one hour opening this account and save $400 per year. But, realize that doing this will make the federal tax credits more complicated. This is beyond the scope of this article.
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 lower income might increase your eligibility for certain programs. Hopefully, with a little planning you will not have to pay any more than you have to.
Eli Pollock, CPA, can be reached at elipollock2@yahoo.com.
Income Taxes 2015
by Eli Pollock
In my last article I discussed some last-minute tax law changes that were expected. They indeed came through in December, and they are not earth-shattering. Teachers can deduct $250 in expenses, and college tuition gets a $4,000 deduction or a tax credit, whichever you prefer. And mortgage insurance premiums are now deductible.
Another mortgage-related change is a big deal. It is called “exclusion from income for discharge of mortgage debt,” and here is what it means: Say you are underwater in your mortgage, owing the bank more than what your residence is worth. The mortgage company might “write off ” some of the debt, and you now officially owe less principal. Normally, if someone forgives debt that you owe him, you have to claim the forgiven amount as income. This included home mortgages that were renegotiated, which could become a disaster. This new provision saves people who are in that situation.
Common Oversights
Let’s make a list of common mistakes on taxes.
1) Marriage: The timing of tying the knot can make a big difference. Run the numbers both ways. It is pretty easy to time a marriage license. Filing as “married separate” will usually cause your taxes to go up, not down.
2) Children: Yes, you can deduct your children. However, once they turn 19 (24, if a fulltime student), they cannot earn more then $3,950 a year. You can blow that one if they earn one dollar too many!
3) Wages: If you are incurring work expenses, you can generally not deduct them. It is therefore better for your boss to pay them and for you to keep a separate calculation, so they remain off your W2.
4) Medical expenses: Obamacare has devastated medical tax-deductible tricks. Cafeteria plans only allow you to set aside $2,500 for medical, better then nothing. If your employer does not offer a cafeteria plan, he needs advice, because if he understood it, he would probably offer it. If you have high-deductible insurance, you should open a bank account called a health savings account, an HSA.
5) Medical insurance: This one really took a direct hit. Your employer cannot reimburse you for health insurance that you shopped for yourself. It must be a group plan. This is a major ouch! However, if you are self-employed, you can deduct your premiums. If being self-employed is a possibility, you need serious advice on how to structure this.
6) Daycare: Daycare provides a 20 percent tax credit on money spent. There is a maximum of $6,000 of daycare expenses per year ($1,200 savings plus more from the state) if two children receive care, and only $3,000 for one child. The money does not need to be evenly spent, however. Therefore, if one child has incurred over $3,000, make sure that the second child receives care as well. If you spend even $10 on child two, your limit will double. Also, if you go over $6,000 one year and under $6,000 the next, your timing did not work. A little calendar watching and tracking with Quicken can save you hundreds.
Paying daycare expenses from a cafeteria plan will not save you a lot of money vs. taking the credit yourself. But it can have a very helpful effect. To clarify: If daycare expenses are paid by a cafeteria plan, you will not save a lot of money, but your W2 will be for a lower amount, since the daycare came off the top. This makes your income smaller for all income-based programs, such as food stamps and college aid.
7) Selling stocks: You will pay taxes on your profit, but this can skew everything. If your income pushes up, all kinds of changes happen. You had better weigh your options. Let us imagine that grandparents are selling stock to help a grandchild in college. If grandparents sell the stock, their social security income can become taxable, causing an unexpected tax increase. As an alternative, consider whether they should gift those shares to someone else to sell. Crunch those numbers and options.
8) Side business: If you are running a business of any significance and you do not have an accountant, then you are losing money. I know this sounds self serving, but it is the truth.
9) Itemizing deductions: If your itemized deductions are a bit under the limit then you could benefit from fancy footwork called bunching. Essentially you give all your charity and real estate taxes every other year. It sounds complicated, but it’s not, and it can give you a serious savings every two years.
10) College expenses: There is a lot to say here. For the first four years, you can get a credit worth $2,500 if you spend at least $4,000 on tuition fees and supplies. Anything spent over $4,000 is not helpful, so watch your expenses and the timing.
You need to be enrolled at least half-time. This is easy, since there is a check box on the tax form that the college gives out. Actually, it is not so simple. What about mini-mesters and summer college? Can those credits be added to spring or fall to make you half-time, or are those stand-alone semesters?
You also need to be pursuing a degree. This is a pretty crazy rule, if you ask me. What does that requirement demand of you? Is it a question of what you are thinking when you enroll? No one knows; even the official IRS form, called a 1098-T, does not have a check box for the pursuing a degree question.
Some further confusion: There are two separate four-year rules here. The simple rule is that you can claim the credit for a maximum of four years. The second rule is that you can claim it for the first four years of college. This is not clear. What if you went to college 20 years ago and are now going back to a college that does not accept those credits. Do your four years start over? It seems they do.
There is a separate college credit called the lifetime learning credit, which saves you 20 percent of college expenses of up to $10,000 per family. It does not include books and supplies. For this one, you do not need to be half-time or four years.
11) The earned income credit: This is the ultimate “you blew it” item. The earned income credit is a money handout to low-income working families with children. To get this fantastic credit, your investment income must be below $3,350. One dollar over and you could blow more than $7,500: yep, a loss of $7,500 for one dollar too high.
12) Pensions: This is another easy-to-blow-it-big item. Putting money into a pension plan is tax deductible. If your employer offers a matching pension plan, you had better participate, since the boss only puts in money if you do. Not participating would have to be called bizarre.
13) Nanny tax: If you have household employees, you might have to make them official employees. Check the wage limit. If you stay under the legal limit, you can ignore this headache.
14) State of Maryland taxes: You really want to try to itemize on your federal tax return. Otherwise, you can lose upwards of $500 on your Maryland state return. I have no doubt that many have lost that one without realizing that they missed something.
15) Maryland college investment plan: Here is one item I have never discussed. You can open a special account at T. Rowe Price called the Maryland college investment plan. It allows you to put aside $2,500 for each child and get a tax deduction on your Maryland tax return, only. Each parent can open an account and deduct contributions of $2,500 per year. And it seems to me that you can leave the money there for one day. Thus, you can put the money in on Monday and take it out on Tuesday. This strategy means an extra 8 percent reduction on college expenses. All money spent on college tuition should therefore be run through this account. The fee is $10 a year per account. You get an annual deduction of $5,000 if both parents participate. Spend one hour opening this account and save $400 per year. But, realize that doing this will make the federal tax credits more complicated. This is beyond the scope of this article.
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 lower income might increase your eligibility for certain programs. Hopefully, with a little planning you will not have to pay any more than you have to.
Eli Pollock, CPA, can be reached at elipollock2@yahoo.com.
Income Taxes 2015
by Eli Pollock
In my last article I discussed some last-minute tax law changes that were expected. They indeed came through in December, and they are not earth-shattering. Teachers can deduct $250 in expenses, and college tuition gets a $4,000 deduction or a tax credit, whichever you prefer. And mortgage insurance premiums are now deductible.
Another mortgage-related change is a big deal. It is called “exclusion from income for discharge of mortgage debt,” and here is what it means: Say you are underwater in your mortgage, owing the bank more than what your residence is worth. The mortgage company might “write off ” some of the debt, and you now officially owe less principal. Normally, if someone forgives debt that you owe him, you have to claim the forgiven amount as income. This included home mortgages that were renegotiated, which could become a disaster. This new provision saves people who are in that situation.
Common Oversights
Let’s make a list of common mistakes on taxes.
1) Marriage: The timing of tying the knot can make a big difference. Run the numbers both ways. It is pretty easy to time a marriage license. Filing as “married separate” will usually cause your taxes to go up, not down.
2) Children: Yes, you can deduct your children. However, once they turn 19 (24, if a fulltime student), they cannot earn more then $3,950 a year. You can blow that one if they earn one dollar too many!
3) Wages: If you are incurring work expenses, you can generally not deduct them. It is therefore better for your boss to pay them and for you to keep a separate calculation, so they remain off your W2.
4) Medical expenses: Obamacare has devastated medical tax-deductible tricks. Cafeteria plans only allow you to set aside $2,500 for medical, better then nothing. If your employer does not offer a cafeteria plan, he needs advice, because if he understood it, he would probably offer it. If you have high-deductible insurance, you should open a bank account called a health savings account, an HSA.
5) Medical insurance: This one really took a direct hit. Your employer cannot reimburse you for health insurance that you shopped for yourself. It must be a group plan. This is a major ouch! However, if you are self-employed, you can deduct your premiums. If being self-employed is a possibility, you need serious advice on how to structure this.
6) Daycare: Daycare provides a 20 percent tax credit on money spent. There is a maximum of $6,000 of daycare expenses per year ($1,200 savings plus more from the state) if two children receive care, and only $3,000 for one child. The money does not need to be evenly spent, however. Therefore, if one child has incurred over $3,000, make sure that the second child receives care as well. If you spend even $10 on child two, your limit will double. Also, if you go over $6,000 one year and under $6,000 the next, your timing did not work. A little calendar watching and tracking with Quicken can save you hundreds.
Paying daycare expenses from a cafeteria plan will not save you a lot of money vs. taking the credit yourself. But it can have a very helpful effect. To clarify: If daycare expenses are paid by a cafeteria plan, you will not save a lot of money, but your W2 will be for a lower amount, since the daycare came off the top. This makes your income smaller for all income-based programs, such as food stamps and college aid.
7) Selling stocks: You will pay taxes on your profit, but this can skew everything. If your income pushes up, all kinds of changes happen. You had better weigh your options. Let us imagine that grandparents are selling stock to help a grandchild in college. If grandparents sell the stock, their social security income can become taxable, causing an unexpected tax increase. As an alternative, consider whether they should gift those shares to someone else to sell. Crunch those numbers and options.
8) Side business: If you are running a business of any significance and you do not have an accountant, then you are losing money. I know this sounds self serving, but it is the truth.
9) Itemizing deductions: If your itemized deductions are a bit under the limit then you could benefit from fancy footwork called bunching. Essentially you give all your charity and real estate taxes every other year. It sounds complicated, but it’s not, and it can give you a serious savings every two years.
10) College expenses: There is a lot to say here. For the first four years, you can get a credit worth $2,500 if you spend at least $4,000 on tuition fees and supplies. Anything spent over $4,000 is not helpful, so watch your expenses and the timing.
You need to be enrolled at least half-time. This is easy, since there is a check box on the tax form that the college gives out. Actually, it is not so simple. What about mini-mesters and summer college? Can those credits be added to spring or fall to make you half-time, or are those stand-alone semesters?
You also need to be pursuing a degree. This is a pretty crazy rule, if you ask me. What does that requirement demand of you? Is it a question of what you are thinking when you enroll? No one knows; even the official IRS form, called a 1098-T, does not have a check box for the pursuing a degree question.
Some further confusion: There are two separate four-year rules here. The simple rule is that you can claim the credit for a maximum of four years. The second rule is that you can claim it for the first four years of college. This is not clear. What if you went to college 20 years ago and are now going back to a college that does not accept those credits. Do your four years start over? It seems they do.
There is a separate college credit called the lifetime learning credit, which saves you 20 percent of college expenses of up to $10,000 per family. It does not include books and supplies. For this one, you do not need to be half-time or four years.
11) The earned income credit: This is the ultimate “you blew it” item. The earned income credit is a money handout to low-income working families with children. To get this fantastic credit, your investment income must be below $3,350. One dollar over and you could blow more than $7,500: yep, a loss of $7,500 for one dollar too high.
12) Pensions: This is another easy-to-blow-it-big item. Putting money into a pension plan is tax deductible. If your employer offers a matching pension plan, you had better participate, since the boss only puts in money if you do. Not participating would have to be called bizarre.
13) Nanny tax: If you have household employees, you might have to make them official employees. Check the wage limit. If you stay under the legal limit, you can ignore this headache.
14) State of Maryland taxes: You really want to try to itemize on your federal tax return. Otherwise, you can lose upwards of $500 on your Maryland state return. I have no doubt that many have lost that one without realizing that they missed something.
15) Maryland college investment plan: Here is one item I have never discussed. You can open a special account at T. Rowe Price called the Maryland college investment plan. It allows you to put aside $2,500 for each child and get a tax deduction on your Maryland tax return, only. Each parent can open an account and deduct contributions of $2,500 per year. And it seems to me that you can leave the money there for one day. Thus, you can put the money in on Monday and take it out on Tuesday. This strategy means an extra 8 percent reduction on college expenses. All money spent on college tuition should therefore be run through this account. The fee is $10 a year per account. You get an annual deduction of $5,000 if both parents participate. Spend one hour opening this account and save $400 per year. But, realize that doing this will make the federal tax credits more complicated. This is beyond the scope of this article.
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 lower income might increase your eligibility for certain programs. Hopefully, with a little planning you will not have to pay any more than you have to.
Eli Pollock, CPA, can be reached at elipollock2@yahoo.com.
