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

Reads from Last Week. . . .

Posted by Bruce Mc on Nov 29, 2009 in Information, Opinions, Week in review | 1 comment

         Hey, another Sunday and a lot of Post to read. I am throwing in a lot of articles about Finance and such because it is that time of year, and I love Christmas. Yea, December and the holiday cheer. Anyway without further chattedly  conversing, “. . .and here we go.” 

          Compensating audited taxpayers: an idea whose time has come? Now I have always wondered if anyone has thought of this but never really realized so many have. I like the idea and have noticed that many in my field also think highly of this idea, “that the government pay taxpayers whose returns are selected for audit, especially taxpayers subjected to random exhaustive audits the IRS may conduct purely for research purposes.” Yet, there is one who thanks to Mary I know wonder about, as he is opposed the idea, to the point of accusing two highly recognized Economist of smoking, well something of unknown origins. I have enjoyed reading Mary’s post on several topics and suggest this one is a great one for all to read then consider talking to your congress people about it.

          I also enjoyed this Public finance puzzle also from Mary over at Bed buffaloes in your tax code. 

          Kay Bell writes “The investment tax is back! A few months ago, the possibility of a tax on investment transactions was floated. It didn’t go too far then. Treasury Secretary Timothy Geithner even noted that he “hadn’t seen a version of the tax that’d make much sense.” Now, however, with ballooning deficits, war costs to pay and health care financing about to dominate the waning days of this Congressional session, the transaction tax idea has resurfaced.

         From The IRS Hitman IRS Tax Debt: Income Dropped? Two ways to Get out From Under Tax Debt and Tax Debt Myths: Real Ways to Stop an IRS Tax Levy, and Myths to Avoid. 

            War tax? Why stop there? A great one from Joe over at the Tax Update Blog. 

        If you use Paypal or another service to process credit card payments Stacie posted on the proposed regulations, something you need to know, please read her post Have You Heard About Form 1099K? Also from Stacie on her tax tips blog make sure to catch Some More Info on The Homebuyer Credit. 

            I haven’t, in the past, mentioned much from the Taxgirl, always just thought everyone read her stuff every day.  I have since learned better of that. She always writes such wonderful pieces and easy for all to get. I still need to make better mention of this great tax blogger. Getting to the point if you are about to undergo an audit or even about to here are 7 Audit Lessons (or How I Learned to Stop Worrying and Love the IRS) Okay “Love the IRS might be a bit out there but still a worthy and informative post.

             Monica hits the nail on the head in her post Just to make a point. Come on guys lets do something a bit more productive. Please? 

            My blogging friend and I’d dare to say mentor into the same world, Robert Writes in his Saturday buzz “Back at the ROTH AND COMPANY TAX UPDATE BLOG, Joe Kristan’s post “New Business? How Do You Go About It?” led me to “Get It Right the First Time” by Chris Branstad at IOWABIZ.COM.

          It is great to have one’s professional advice supported by peers. Both Chris and Joe echo my advice on incorporating.” I couldn’t agree more. One other “Must Read” from TWTP is TAX PLANNING AND THE AMERICAN OPPORTUNITY CREDIT. 

         If you are not a regular reader of TickMarks please make yourself familiar with the writings there. Every year host and is Coming Soon! The Fifth Year of “Twelve Blogs of Christmas”  Last week there was Twelve Blog Update: New Blogs Added. Where it was mentioned of the new site address here. Thanks Dan. 

         Ever wonder, 3 Reasons Why Inflation Will Not Be Stopped? Another post I found very interesting as I dive deeper into the PF world of things, Your Electric Bill – Your Price to Compare Can Mean Savings! Also posted over at A Personal Finance Guide, a great blog put together by Susan K.. 

          You Need a Budget Pro Giveaway over at Cash Money Life. I recommend YNAB regularly so get entered to win asap. Great giveaway Patrick. I also liked his post Shopping Responsibly on Black Friday. 

        I wrote a post about Black Friday last year called The Idea behind the term “Black Friday” 

        If Black Friday wasn’t your thing I’d like to point you to Black Friday and Cyber Monday 2009 – If You Must Go Shopping, Plan Ahead. Great post Kevin. 

          Homemade gifts – yea or nay? A good look at this. I plan to do a few gifts that are “homemade”, anyone else out there planning this? Especially this year? 

         In the same light of things here are 28 Thoughtful Homemade Gift Ideas. 

         Here are 5 Ways to Save this Holiday Season. 

         Also from Living Almost Large be sure to check out Budget billing worth it? If you are considering such a thing make sure not to miss this. In case anyone is interested, I have all my utilities set up this way, at least the ones that offer it. 

         Two great articles from my friend over at Saving to Inve$t 401k Cash-Out For Loans vs. Hardship Withdrawals – Penalties and Taxes and Taxes and Gains I Can Exclude When Selling My Home. I love it when Andy writes about tax stuff, He does a great job and keeps me from having to add anything to what he writes. I hope Andy sticks around for a long time. 

         In closing I’d like to mention a fond welcome to Kim (aka Kimmer). She made her debut here in the Personal Finance arena of blogging. I am glad she has joined me here at The Missouri taxguy. Her first post Personal Finance 101: Budgeting – it doesn’t have to hurt was looked at long enough to register 786 times as of the time of my finishing this Post. Good job Kim, keep the information coming.

If you are wondering, the picture is my home/office.

A brief overview of the alternative minimum tax (AMT).

Posted by Bruce Mc on Nov 17, 2009 in AMT, History, Opinions, Things forgotten | 0 comments

          The Alternative Minimum Tax (or AMT) is an extra tax some people have to pay on top of their regular income tax. Okay that sounds pretty messed up, doesn’t it?

          In recent years, the AMT has been under increased attention. Why? Well, put simply, because the AMT is not cataloged or set up for inflation, thus because of recent tax cuts, an increasing number of middle-income taxpayers have been finding themselves subject to this tax. Until recently, the AMT affected less than 1% of all individual taxpayers. However, since the year 2000, the AMT has steadily grown, hitting roughly 3% of all taxpayers in 2005.  Moreover, if left unchanged, the AMT will penalize nearly 20% of taxpayers by 2010. Almost 95% of all married filing joint couples. 

          The number of taxpayers affected by the Alternative Minimum Tax (AMT) is expected to exceed 30 million in 2010. Now that is really messed up. 

          So, lets back up a bit further. The original idea behind the AMT was to prevent people with very high incomes from using special tax benefits to pay little or no tax. The name comes from the way the tax works. The AMT provides an alternative set of rules for calculating your income tax. In theory, these rules determine a minimum amount of tax that someone with your income should be required to pay. If you’re already paying at least that much because of the “regular” income tax, you don’t have to bother with the AMT. Sadly on the other side of this issue, if your regular tax falls below this “minimum”, you have to make up the difference by paying an alternative minimum tax.

Okay, it is still messed up.

Some History

          The AMT was introduced by the Tax Reform Act of 1969 and became operative in 1970. Why Was the AMT Enacted? Well, Congress enacted the AMT in 1969 following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 during tax year 1967 (In inflation-adjusted terms, their (the 155 people) 1967 incomes would be roughly $1.5 to 2 million in today’s dollars.), had paid zero federal income tax on their 1967 tax returns.

           This tax avoidance by these “few” high-income taxpayers was widely perceived as unfair. Rather than directly addressing the problem by eliminating their deductions and credits in the tax code that were leading to the tax avoidance in the first place, Congress laid an additional layer of complexity over the regular income tax in the form of the AMT. 

Again, It was intended to target 155 high-income households.

           The Tax Equity and Fiscal Responsibility Act of 1982 holds the foundation for the present day individual alternative minimum tax, somewhat. Enough anyway for this article.

          The alternative minimum tax operates in effect as a parallel tax system, with its own definition of taxable income, exemptions, and tax rates. Taxpayers compute tax owed under the “regular” and AMT systems and are liable for whichever is higher. The AMT system has in general a broader definition of taxable income, a larger exemption, and lower tax rates than the regular system.

         In 1969 the minimum tax was a 10 percent flat rate. Over the years the AMT has evolved and increased in complexity. As of the latest revision, there is a two tier system: 26 percent and 28 percent for individuals.

          There is an AMT for those who owe personal income tax, and another for corporations owing corporate income tax. Only the AMT for those owing personal income tax is described here.

History of the Alternative Minimum Tax  

• Tax Reform Act of 1969 – Introduced the “add-on” minimum income tax of 10% in excess of an exemption of $30,000.
• Excise, Estate, and Gift Tax Adjustment Act of 1970 – Allowed deduction of the “unused regular tax carryover” from the base for the minimum tax.
• Revenue Act of 1971 – Imposed minor provisions regarding foreign income.
• Tax Reform Act of 1976 – Raised rate of minimum income tax to 15% and lowered exemption to $10,000 or half of regular taxes.
• Tax Reduction and Simplification Act of 1977 – Reduced minimum tax preference for intangible costs of drilling oil and gas wells.
• Revenue Act of 1978 – Introduced AMT alongside minimum income tax and moved certain itemized deductions and capital gains to AMT. AMT had graduated rates of 10%, 20%, and 25%, and an exemption of $20,000.
• Economic Recovery Tax Act of 1981 – Lowered AMT rates to correspond with reductions in rates of regular income tax.
• Tax Equity and Fiscal Responsibility Act of 1982 – Repealed “add-on” minimum tax. Made AMT rate a flat 20% of AMT income after exemptions of $30,000 for individuals and $40,000 for joint returns.
• Deficit Reduction Act of 1984 – Made minor changes concerning investment tax credit, intangible drilling costs, and other items.
• Tax Reform Act of 1986 – Raised AMT rate to 21%. Made high-income taxpayers subject to phase-out of exemptions. Increased number of tax preferences. Allowed an income tax credit for prior year AMT liability.
• Revenue Act of 1987 – Made technical corrections related to Tax Reform Act of 1986.
• Technical and Miscellaneous Revenue Act of 1988 – Made technical corrections related to Tax Reform Act of 1986.
• Omnibus Budget Reconciliation Act of 1989 – Made further technical amendments.
• Omnibus Budget Reconciliation Act of 1990 -  Raised AMT rate to 24%.
• Energy Policy Act of 1992 – Changes regarding intangible costs of drilling oil and gas wells.
• Omnibus Reconciliation Act of 1993 – Introduced graduated AMT rates of 26% and 28%. Increased exemption to $33,750 for individuals and $45,000 for joint returns. Changed rules about gains on stock of small businesses.
• Taxpayer Relief Act of 1997 – Changes regarding depreciation and farmers’ installment sales.
• Tax Technical Corrections Act of 1998 – Adjusted AMT for new capital gains rates.
• Tax Relief Extension Act of 1999 – Changed rules about nonrefundable credits.

My next post, I hope to cover a bit more of, how to know if you need to bother with this AMT thing, and go over a little bit about how it works.

“See ya’”

Form 1040 “New for 2009, Filing”

Posted by Bruce Mc on Oct 29, 2009 in Form 1040 Information, Information, Tax Preparation | 0 comments

            Well the IRS has released its “draft” of the 2009 Form 1040. Clicking the photo on the right will take you in a new window so you can see it if you like. 

The only change in the “Income” section is line 19. It is still for “Unemployment compensation”, but they added the phrase “. . . in excess of $2,400 per recipient (see page 27)” This is done so that those who are not aware (and prepare their own returns) that this is something new. If you need clarification, please visit Unemployment Compensation at the IRS site for Tax Changes for Individuals. 

            In the section for “Adjusted Gross Income”, line 23 now reads, “Educator expenses (see page 29)”. So, what used to be there is “Archer MSA deduction. Attach Form 8853” is no more. For more information on Archer MSA deduction please see Publication 696. 

            Line 34 now reads “Tuition and fees deduction. Attach Form 8917”, it used to be, “Jury duty pay you gave to your employer” This is not something new, just reworded from last years form. 

            Those are the only notable first glance changes to page one. Now . . .

 Page two.  (I did that in my best Paul Harvey voice I could muster.) 

            In the “Tax and Credits” area, line 39c from last year is gone (if you’ll remember this was a “check box” if you increased your standard deduction using your real estate taxes). 

         Line 40 is now “a” and “b”. “A” is the standard “Itemized deductions (from Schedule A) or tour standard deduction” which, as normal is listed on the left side of the form. Now part “b”. This reads “If you are increasing your standard deduction by certain real estate taxes, new motor vehicle taxes, or a net disaster loss, attach Schedule L (a new Form) and check here (see page 35)” and has a corresponding check box.

(I’ll talk more about the new schedules in other upcoming post) 

         Line 42 is the same ol thing but now reads “Exemptions. If line 38 is $125,100 or less and you did not provide housing to a Midwestern displaced individual, multiply $3,650 by the number on line 6d. Otherwise, see page 37” 

         Lines 47 through 55 are the same with two notable differences. This is the credit section of this part. They are rearranged (what was line 47 is now down on line 50 and such). The credit for the elderly or disabled is no longer listed there. Schedule R Although that line has been omitted altogether, the credit has not, it is still a viable credit. You’ll just enter it on line 53 and put a check in the box for other credit forms (this is “c”). 

Okay now for “Other Taxes”, well nothing new in that section. 

In the “Payments” section line 63 reads “Making work pay and government retiree credits. Attach Schedule M”. Again, I’ll talk more about the new schedules in other upcoming post.

          Line 66 “Refundable education credit from Form 8863, line 16” this is new for the American Opportunity Credit.

          So there are the basics of the new form and what is new and so forth. To further prepare yourself for the upcoming filing season please view the instructions for the new 2009 return.

photo credit: nalilo

Welcome to the new site address. .

Posted by Bruce Mc on Oct 27, 2009 in Information, News Flash | 1 comment

            Welcome to my new site for this blog. As you can see I have changed it around a bit. Okay a lot. 

            Reason for the change is, well, not sure. Basically just decided the place needed remodeled. That is what has been taking so long. Locating a theme and then tweaking it to something that is enjoyable on the eyes and easy to move around in. 

            I don’t have all the bugs worked out of a few things so if you experience problems please let me know.

             The design here, is one that I am hoping has a faster load time.  I also have added a few things and removed a few more. I won’t be advertising other than for other Blogs. 

Things that are still missing:

           As with all new things, it takes awhile to get them rolling correctly. To that end please not that my blog rolls are not yet posted but will be. My quotes didn’t make the move so I need to re enter those by hand, and will do so as time permits.

          I haven’t figured out how to change the feed from the old to the new. I have a feed for this site, just not sure how to guide my feed readers here from the old. A work in progress and a plea for help. If you know the feedburner way to do this pleas email me from my contact page. 

What’s New: (aside from the obvious) 

           I have a new widget “Related Posts” that will announce other post within this site that may be related to whatever current subject I have written about. It is active now and has added to past post. If this works out for all, this feature will be staying. 

         In an effort to spruce things up a bit (let us face it, taxes can get a bit boring/dull), I have added a plug-in that will help me find and inset pictures into my post. 

          There is a widget on the side that allows me to let everyone keep tabs on what book I may be reading. . . This seems somewhat bothersome but if the feedback is good, it will be something to keep using. 

         I have entered a lot of new spam blockers (spam in the comment section is very annoying). At the bottom there is a small counter showing how much spam is being blocked. 

         You will notice a link at the bottom to share post on facebook. I have become a big facebook fan. Mostly playing the games (three of them anyway), but also as a communication tool.

          Below that you will see “Share and Enjoy” this is a plug in that will allow you to share post via your favorite social network. If you don’t see yours please contact me and I’ll add it.

For now that is about it. I am still tweaking things trying to get them just so, Please have a little patients with the re birth of the site. If there is some trick or gadget you would like to see here please let me know.

 Thanks and enjoy. 
photo credit: fontplaydotcom

Bruce

“Why, Eckhardt, you oughta think about the future.”

Posted by Bruce Mc on Jun 8, 2009 in Estate, Opinions, Retirement thoughts, Things forgotten | 0 comments

. . . Eckhardt merely scoffs at the statement, “You’re an A-1 nut-boy, and Grissom knows it.” Later as things had changed, he is told again, “Eckhardt! Think about the future.” Of course then Eckhardt is killed.

            Avoid the ‘Death Tax’.

            As a fan of the Batman movies, I am interested in its characters and those who play them. However, this post isn’t about Batman.

            Recently, a big Estate I have been working on for well over a year (short considering the dispute that had started in probate) closed. Happily things turned out for the best for my client. Although after legal fees court costs, and other assorted costs she lost out on some of her due inheritance. 

            I recently learned that actor Heath Ledger had no previsions in his will for his infant daughter. A family battle ensued over his assets.

            The more I thought about the above the more I came to wonder about how things are for most people. My conclusions have sparked this post.

            Those with small estates should read this well, as should those of you with large estates. When you leave this world, most have it in their mind that family members will see that “things will be handled” as to your wishes. Don’t bet on it. We all know you can’t take it with you. You can however, try to preserve as much of your estate possible for your children and even try to control how they spend it. (65k in the hands of an 18 yr old could be wasted on frivolous expenditures.)

            What you can do to see that things are truly handled to your wishes is create an estate plan and keeping it updated, no matter your net worth. Keeping you estate plan updated is critical. Poor planning can destroy a family with strife and bitter feuds among those who are or think they should be beneficiaries.

            Yes, we all want to avoid the taxman, but first, and foremost, consider the emotional impact of your decisions on your children and other beneficiaries. When dividing your estate take into considerations earlier gifts you’ve made. Your children will recall them and factor them into their mindset about whether they were treated fairly or not by your inheritance plan.

Don’t just leave a child an outright inheritance. This leaves them no protection of the inheritance. If the child files for bankruptcy, has an accident, or gets a divorce they stand to lose their whole inheritance.

            What you leave your children should be divided equally. If you give less to a child who has been very successful in their life and more to their sibling/s who are barely making ends meat you will create animosity.

Now let’s avoid the taxman, if we can.

Giving money away can reduce the value of your taxable estate. You can give any number of individuals up to $13,000 each year without any tax penalty.  Over this amount and the gift will be subject to the gift tax.

Purchase a life insurance policy that will cover the taxes on your estate. Give money to your kids and have them take out life insurance on you. When you die the life insurance company will write the kids a check tax-free.

One of the most popular tools for reducing estate tax is a Trust. These can be expensive averaging between $2,000 to $5,000 to set up and are complicated.

The best thing you can do is to find and retain the services of an estate planner. Lawyers can do this. However, as I always point out when looking for a pro, find one that specializes in what you’re looking for.  (Don’t hire a bankruptcy lawyer to handle your estate planning.)

Then stay on top of it, keep it up to date. Once you have a plan, update it regularly to reflect changes. (e.g. revised tax laws, asset value, executor -they die first or may even fall out of favor- marriage or birth. . .)

Nobody wants to talk about death or money. Estate planning is like planning a big party that you’ll not be able to attend. Nor will you be around to fix anything that goes wrong. Remember when you die your children will no longer act like your children. Instead, what you’ll see are just everyday people dividing free money. Usually when money becomes involved, family loyalties fly right out the window.

So please, create an estate plan.

            Also, a good friend on mine reminds us to be sure and name an alternate Executor/Executrix.

Other resources:

            Where There’s an Inheritance – information to buy book

Deciding if Your Kid Is Trust-Worthy

Making Work Pay tax credit

Posted by Bruce Mc on May 4, 2009 in Exemptions, Filling Status, Form 1040 Information, News Flash, Stimulus payments, Tax Preparation | 0 comments

April 1^st was implementation day for the Making Work Pay tax credit, and it wasn’t an April Fool’s joke. The American Recovery and Reinvestment Act of 2009 (ARRA), Congress’ most recent effort to “stimulate” our economy, contains this new tax credit, which will affect everyone when filing your individual return. You may be able to take advantage of an income tax credit of as much as $400 ($800 for a married couple) on your personal tax return for the next two years.

The Making Work Pay tax credit served as centerpiece of the tax reduction provisions of the ARRA. President Obama strongly pursued its inclusion in the legislation because it would put money back into the pockets of working people. The annual tax credit (available in 2009 and 2010) is equal to 6.2% of earned income, to a maximum credit of $400 for an individual ($800 for a married couple filing jointly). The Key is “a maximum credit of $400 per working individual”. Dependants have no bearing on this.

Technically, taxpayers will receive the tax credit when they prepare and file their tax returns a year from now for 2009 (and then for 2010 the next year). However, practically speaking, taxpayers that receive wages from employment in 2009 will receive the tax credit in small increments throughout the year. How? The IRS in late February issued a new set of withholding tables structured to informally pay the amount of the tax credit over the course of the year by reducing required withholding amounts on payroll.

The Issue

The new withholding are designed to save employees roughly $10 per week for the rest of the year (40 weeks x $10 = a $400 tax credit). This isn’t working out for a lot of people.  Several of my clients have called me because they are having more taken out then the ten dollars, some are even getting as much as forty-three dollars more a week.

This is a problem and will affect refunds and or amount due/s. Why, because you aren’t having as much withheld, and tax tables on your income haven’t changed. Withholdings went down, not income tax on your earnings.

The IRS produced new withholding tables in February and asked employers to implement them by April 1. But, withholding tables are a blunt instrument, unable to precisely assess taxes for everyone’s unique situations. Employers who use the tables don’t know workers’ complete situation, such as whether an employee has a second job or is married to someone who also works. That means some workers will end up with more cash than they’re eligible for under the new credit.

Adjustments may have to be made by individuals to make sure they’re not over- or under-withheld.

Again, the lower withholding may cause some unwanted results for taxpayers with more than one job, two-earner married couples, and high-income taxpayers.

The Fix

The IRS is aware of this issue and warns taxpayers that they (individual taxpayers) are responsible for making sure their withholdings are correct. This means that you are ultimately responsible for making sure you have enough withheld from your checks using your form W-4.

The first thing you can do is make sure your employer has these new tables. The new tables and instructions are found in IRS Publication 15-T. The next thing to do would be to Contact your tax professional and discuss this with them.

If that isn’t a viable option you can contact me I will be glad to help.

Beware, though, because the credit is phased out as your adjusted gross income exceeds $75,000 for individuals ($150,000 for married couples filing jointly). If your income exceeds $95,000 ($190,000 for married couples filing jointly), then you will not be able to receive any benefit from the Making Work Pay tax credit.

Timing is everything, especially with taxes … and tax information.

The IRS has an online calculator that reflects the new stimulus act withholding tables to help you get your amount just right. Armed with your most recent tax return and paycheck stub, you can in 10 minutes or so fill in the required information and get instructions on filling out a new W-4. You should use the calculator now. Then again, later in the year to ensure your assumptions are on track (around the end of October). You can always make a tweak or adjustment with your very final paychecks for the year so you don’t have any penalty or big surprise.

If you don’t have the time to run through the calculator — it involves entering various tax-related figures, including expected credits and the like — there’s another way: Submit a new W-4 filled out the same way as your old form but with one exception: On line 6, add the extra dollar amount to be withheld from each paycheck. See Form W-4 on IRS site (PDF).

The easiest way might be to leave the number of allowances alone, see how much they’re reducing your withholding by and then on line 6 write in that you want them to withhold an extra amount.

But remember: That W-4 stays in effect until you file a new one. If you don’t want the same additional amount to be withheld starting in January, file a new W-4.

There’s a third option: Don’t worry about the credit now, and just wait until you file in 2010 to pay the bill.  Not recommended by me unless your checks are exactly $10.00 more per week.