Personal Exemptions, Standard Deductions and Tax Brackets

Posted by Bruce Mc on Feb 22, 2011 in Exemptions, Filling Status | 0 comments

In 2011, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation.

These inflation adjustments relate to eight tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Re-authorization and Job Creation Act of 2010 that became law on Dec. 17. New dollar amounts affecting 2011 returns, filed by most taxpayers in early 2012, include the following:

• The value of each personal and dependent exemption, available to most taxpayers, is $3,700, up $50 from 2010.
• The new standard deduction is $11,600 for married couples filing a joint return, up $200, $5,800 for singles and married individuals filing separately, up $100, and $8,500 for heads of household, also up $100. The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
• Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $69,000, up from $68,000 in 2010.
• The maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,751, up from $5,666 in 2010. The maximum income limit for the EITC rises to $49,078, up from $48,362 in 2010.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
• The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $102,000 for joint filers, up from $100,000, and $51,000 for singles and heads of household, up from $50,000.

Several tax benefits are unchanged in 2011. For example, the monthly limit on the value of qualified transportation benefits (parking, transit passes, etc.) provided by an employer to its employees, remains at $230.

Hiring Family Members For your Business

Posted by Bruce Mc on Jul 8, 2010 in Employee, Information | 0 comments

Employing your Child – A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child.

If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (aka Medicare or HI) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. accordingly, the child will not be required to pay the employee’s share of the FICA taxes and the business won’t have to pay its half either.  In addition, by paying the child, and consequently reducing the business’s net income.

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents.  However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.

Retirement Plan Savings – Additional savings are possible if the child is paid more (or works part-time past the summer) and deposits the extra earnings into a traditional IRA. For 2010, the child can make a tax-deductible contribution of up to $5,000 to his or her own IRA. The business also may be able to provide the child with retirement plan benefits, depending on the type of plan it uses and its terms, the child’s age, and the number of hours worked. By combining the standard deduction ($5,700) and the maximum deductible IRA contribution ($5,000) for 2010, a child could earn $10,700 of wages and pay no income tax.

Hiring Your Spouse – Reasonable wages paid to a spouse entitles the employer-spouse to a business deduction.  The wages are subject to FICA taxes, and the spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled.  In addition, the spouse may also be eligible to receive coverage under the business’ qualified retirement plan, and the employer-spouse may obtain a business deduction for health insurance premium payments made on behalf of the employed spouse.  While maintaining the same family coverage, the business deductions could be increased by providing the spouse with family health insurance coverage as an employee.

If the spouse was unemployed (worked less than 40 hours) during the prior 60-day period, the employer will qualify for exemption from the employer’s 6.2% share of the Social Security payroll tax on the spouse’s wages for the remainder of 2010.  If the spouse continues to work for an uninterrupted period of 52 weeks, the business would also be entitled to a retention credit of up to $1,000 in 2011. (Unemployed relatives such as children, siblings or parents whom you may hire are not qualified employees for this credit.)

Originally written for another blog.  Edited here by Sandi and republished for your information.

Itemizing deductions – Schedule A

Posted by Bruce Mc on Jan 4, 2010 in | 0 comments

Getting the Most out of Itemizing your deductions.

Itemizing deductions is an incredibly easy theory to understand, yet the strategies behind it all can be intricate and countless.

Free Quicken Online automatically categorizes your expenses.

The rule for when to itemize is simple = you do it if the total of your itemized deductions is greater than your standard deduction.

First of all, your tax is based on your “taxable income.” That’s your total income after you’ve subtracted above-the-line deductions like your Individual Retirement Account (IRA) or other qualified retirement-plan contributions, moving expenses or alimony payments, plus your personal exemption and either :

Your standard deduction or, Your itemized deductions.

Your itemized deductions are sometimes referred to as “below-the-line” deductions. (“adjusted gross income” -aka AGI- is “the line.”) Clearly, the more you can deduct, the less in tax you’ll owe.

Here are the standard deductions that apply to 2011 taxes:

Some taxpayers must itemize, even if their deductions are less than the standard deduction. You must itemize your deductions if:

• You are married, filing separately, and your spouse itemizes.
• You are a U.S. citizen who can exclude income from U.S. possessions.
• You are a nonresident or dual-status alien.
• You file a short-period return because of a change in your accounting period.
  • There are eight sections  On Schedule A. Seven of which are itemized expenses that you can deduct on your taxes:

Medical and Dental expenses.

Taxes. These include state and local income taxes, property taxes on real estate, intangible taxes (on the value of stocks and bonds you own) and on personal property taxes on such things as cars. 

Interest expenses. For most people, these are limited to home mortgage interest, points (interest that’s prepaid to buy a home), and some interest on investments and education expenses. For most taxpayers, the mortgage deduction is what lets them itemize. If you take out a 30-year, $140,000 mortgage at 6%, you will generate about $8,350 in deductible interest in the first year.

Charitable contributions.

• See also my Fair Market Value Guide. (recently updated for 2010 filing)

Casualty – Theft losses

Job & Misc. Expenses

Other Misc. Deductions

Total Deductions

The key, then, is to maximize the value of your itemized deductions. Here’s where planning can put dollars in your pocket. Ask your Tax preparer a list of deductions to see What You Can Itemize.

Dealing with the floors

Some itemized deductions — including medical expenses or miscellaneous deductions such as investment expenses, safe deposit fees, professional education, employee job-hunting expenses and tax-preparation fees — are not allowed until they exceed a certain “floor” amount.

The toughest floor to exceed is medical expenses. No medical expenses are allowed as itemized deductions except for the amount that exceeds 7.5% of your adjusted gross income. That means if you have an adjusted gross income of $100,000, the first $7,500 of your medical expenses doesn’t count. But sometimes, elective medical expenses can be accelerated or even deferred. Orthodontia payments for you or your dependents can often be extended. They always can be accelerated. These expenses are deducted in the year they are paid, not necessarily in the year the service is rendered.

If you can already pass the 7.5% test for allowable expenses or these expenses would put you over the minimum hurdle, you should consider accelerating them. If you lack the cash, consider charging the expenses.

On credit card charges, you are allowed the deduction in the year of the charge, not in the year that the charge is paid off.

Don’t automatically accelerate if it puts you over the 7.5% floor. Remember, your total itemized deductions must exceed your standard deduction before you get any real additional benefit from any of them. Allowable medical expenses are just one component of the package.

If you don’t exceed the 7.5% floor or your total itemized deductions don’t exceed your standard deduction this year, you should consider deferring your payments or any elective medical procedures. You get the use of the money — and any investment returns. In any case, you may be able to use the deductions in the subsequent year when you revisit the itemization question.

Miscellaneous itemized expenses are also deductible only after they exceed a minimum floor. In this case, it’s 2% of your adjusted gross income. So, with an adjusted gross income of $100,000, your first $2,000 of miscellaneous itemized deductions won’t count.

But here again, many of these deductions can be either accelerated or deferred. Miscellaneous itemized deductions such as those mentioned above often can be paid in the year of your choice. Many of my clients send my tax-preparation fees to me on Dec. 31 in order to get the deduction in the year the check was mailed. I don’t get the income until I receive the check — in the new year.

The rule here is the same as with medical expenses. First, qualify the expenses to be included in the deductible pot. Then, only if you expect to itemize, accelerate. If not, defer.

Interest and tax payments

Some interest and tax payments can be handled in the same way.

Let’s look at the interest you are paying. Your January payment on your mortgage includes the interest you accrued for December of the previous year.

Example: By making your January 2012 payment on Dec. 31, 2011, you have accelerated a full month’s interest deduction into 2011.

In the 25% bracket for 2011 on a $1,000 interest payment, that saves you an immediate $250 on April 15, 2012. By doing that each year, you have created an interest-free loan of that $250 in perpetuity or at least until the loan is paid off.

Unfortunately, you can’t prepay two or three months in advance because the interest deduction must relate to the year the money was used. But your Dec. 31, 2011 payment will be for the use of the money during December 2011.

You can accelerate some tax payments as well. If you don’t pay your real-estate tax in your mortgage, you have the opportunity to accelerate your real-estate tax payments. I am billed in the 4^th quarter of my real-estate taxes January of the following year. But I actually make my payment on Dec. 31 of the previous year. The technique is the same with estimated state income tax payments. I make my estimated state income tax payment, due in January in December.

Any voluntary expenditure can be accelerated or deferred. Your gifts to charity are the best example. Whether your $1,000 pledge to your church or synagogue is sent on Dec. 31, 2011 or Jan. 1, 2012 makes little difference to the charity receiving the money. However, in the 25% bracket for 2011, it can make a $250 difference to your tax bill — but again, only if your total itemized deductions exceed your standard deduction.

Personally, if I can qualify for itemizing my taxes, I want to accelerate my tax savings.

And my favorite quotes fits here:

“Not everything that counts can be counted, and not everything that can be counted counts”. – Albert Einstein