• Taxes, Birthdays and Milestones

    13 October 2015
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    Did you know that your age can affect your tax liability? That’s right – depending on the number of candles on this year’s birthday cake, you may get a gift from Uncle Sam when you file your tax return. In some situations, the gift may not be because you reached a certain age, but will be the result of the age your dependent(s) or spouse turned this year. Unfortunately, not all of Uncle Sam’s gifts will be welcomed, because some birthdays mark the end of eligibility for certain credits or exclusions of income and others signal the start of needing to include retirement benefits in income.

    Under common law, a person attains a given age on the day before his or her birthday, which can impact the taxpayer’s return for certain age-related tax issues. For example, a taxpayer whose 65th birthday is on January 1 is considered to be age 65 as of December 31 of the prior year, and eligible for an additional standard deduction amount for the prior year. However per an IRS ruling on several tax provisions—which are discussed in this article—involving children, the child attains a given age on the actual date the child was born, instead of the day before.

    If you or someone in your tax family attains one of the following ages this year, here’s how your tax return may be impacted:

    Age 0 – Well, OK, zero isn’t really an age; but, if your dependent is born in 2015, you can claim a $4,000 exemption allowance for the child. Exemptions are subtracted from your gross income to determine your taxable income, and your taxable income determines your marginal tax bracket. So, for example, if you are in the 25% tax bracket, each exemption allowance reduces your tax by $1,000.

    Age 13 – If you qualify to claim a credit for child care expenses that you pay so that you (or if married filing a joint return, you and your spouse) can work or look for work, and the qualifying child who is your dependent turns 13 years old in 2015, only the expenses for care up to the date of the child’s 13th birthday will be eligible for the credit. Similarly, if you receive dependent care benefits from your employer, the value of those benefits is excludable from your income only for care before the child turns 13. An exception to the age limit applies if the dependent child is not physically or mentally able to care for himself or herself.

    Age 17 – One of the requirements for the child tax credit is that the qualifying child be younger than 17 at the end of the tax year. Thus, if your child turns 17 during 2015, you will not be allowed to claim the child tax credit for this child for 2015 or any future year. The amount of the credit is $1,000 per eligible child, subject to a phase-out based on your adjusted gross income (AGI).

    Age 18 – To claim an adoption credit for expenses you paid to adopt a child, the child must have been younger than 18 at the time you paid or incurred the expenses. A child turning 18 during the year is an eligible child for the part of the year he or she was younger than 18. The age limitation does not apply if the person you adopted is physically or mentally unable to take care of himself or herself.

    Age 19 – To be a qualifying child for dependency purposes, the child must be younger than 19 as of the end of the year (or younger than 24 if a full-time student). So, if your child’s 19th birthday was in 2015 and he or she is not a full-time student for some part of at least 5 months during the year, you can’t claim the child as a dependent under the definition of a qualifying child. (Once again, the age limitation does not apply for a child who is unable to physically or mentally provide self-care.) Depending upon both the child’s income and who provided the majority of the child’s support, you may be able to use a different definition to claim the dependency.

    Age 24 – If you’ve been claiming your older-than-18 child as a dependent based on the child being a full-time student who doesn’t provide more than half of his or her own support, you won’t be able to claim the child’s dependency under that rule starting in the year the child has his or her 24th birthday. Depending on the child’s gross income and other factors, you may still be entitled to the dependency exemption, but under the “other” dependent rules and not the “qualifying child” rules.

    Age 25 – If you are a lower-income taxpayer who is at least 25 years old before the end of the year, and you do not have a qualifying child, you may be eligible for the earned income credit. If you are married, and file a joint return, either you or your spouse must meet the age requirement. This age requirement for the earned income credit does not apply if you have a qualifying child.

    Age 27 – There are various provisions of the Patient Protection and Affordable Care Act that apply to a child younger than 27 (i.e., one who has not had his or her 27th birthday) as of the end of the year. For example, your younger-than-27 child may be included on your health insurance plan, even if the child is not your dependent. If you are self-employed, the premiums you paid for the health insurance coverage of a child younger than 27 can be included as part of the above-the-line deduction of health insurance costs you may be able to deduct.

    Age 50 – If you are a qualified public safety employee, such as a police officer or fireman who separates from service after age 50 and takes a distribution from your government employer’s defined benefit pension plan, the 10% early withdrawal penalty will not apply.

    Age 55 – If you take a distribution from your employer’s qualified retirement plan after separation from service in or after the year you reach age 55, the distribution is not subject to the 10% penalty that usually applies when distributions are taken before age 59 1/2. To qualify for this exception to the penalty, you must be age 55 or older, and then separate from employment. This provision does not apply to IRAs.

    Age 59 1/2 – Once you’ve reached age 59 1/2, distributions from your qualified retirement plans and traditional IRAs are no longer considered to be early distributions and, therefore, are not subject to the 10% early withdrawal penalty. However, in most cases, all of the distribution amount is includible in your income and will be taxed.

    Age 62 – Many individuals opt to start receiving their Social Security benefits – albeit at a reduced amount than if they had waited until they reached full retirement age – when they first become eligible to receive the payments, generally at age 62. If this is your first year for collecting SS benefits (whether at age 62 or another age), you may be surprised to learn that part of the benefits may be taxable. Depending on your other income and filing status, 50% to 85% of the benefits may be taxable.

    Age 65 – As mentioned above, starting with the year you reach age 65, you are eligible for an additional standard deduction amount. For 2015, the extra amount is $1,550 for a taxpayer filing as single or head of household or $1,250 for those filing married joint, married separate or a qualifying widow(er). There is no extra deduction if you itemize your deductions. If you file a joint return, you and your spouse, if he or she is also age 65 or older, are each allowed the additional amount.

    Through 2016, if you itemize deductions and either you or your spouse – if filing a joint return – is age 65 by the end of the year, you need to reduce your medical expenses by only 7.5% of AGI instead of the 10% reduction rate that applies to other taxpayers. If you are subject to the alternative minimum tax, only medical expenses exceeding 10% of your regular AGI are deductible for the AMT computation.

    If you’ve been claiming the earned income credit without having a dependent child, you will no longer be eligible for the credit starting in the year you turn 65.

    Contributions to a health savings account (HSA) are not permitted once you are entitled to benefits under Medicare, meaning you are eligible for and have enrolled in Medicare. Most individuals become Medicare eligible and enroll at age 65. Contributions to the HSA may continue until the month you are actually enrolled in Medicare.

    Age 70 1/2 – If you turned 70 1/2 in 2015, distributions from your traditional IRA must begin by April 1, 2016; otherwise, a minimum distribution penalty can apply. You must continue to take distributions annually. Not only must you take distributions after turning 70 1/2, the law specifies how the minimum distribution is to be calculated. You may take a larger distribution, but the amount in excess of the required minimum distribution amount cannot be used to reduce future required distributions. You are considered age 70 1/2 on the date that is 6 calendar months after the 70th anniversary of your birth.

    In general, if you are or were an employee whose employer has a qualified plan, distributions from the qualified plan must begin no later than April 1 of the year following the year in which you attain age 70 1/2 or (except if you are a 5 percent owner), if later, you retire. This “retirement, if later” exception does not apply to IRAs.

    If you were required to take your first distribution in 2015 but delay the withdrawal until April 1 of 2016, you will then have two distributions to include in your 2016 income, since the regular 2016 distribution must be taken by December 31 of that year.

    You cannot make a contribution to a traditional IRA for the year in which you reach age 70 1/2 or for any later year. Contributions to Roth IRAs, however, are allowed regardless of age provided you have wages, self-employment income or alimony income.

    If you or a member of your tax family celebrated a milestone birthday (or half-birthday) this year and you have questions as to how the tax implications of that event will affect your return, please get in touch with us at Dagley & Co.

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  • October 2015 Tax Due Dates for Businesses

    5 October 2015
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    Last week, we covered the October 2015 tax due dates for individuals – and now we’re giving you the deadlines for businesses this month. Be sure to get in touch with us at Dagley & Co. if you need any of these deadlines clarified.

    October 15 – Electing Large Partnerships

    File a 2014 calendar year return (Form 1065-B). This due date applies only if you were given an additional 6-month extension. March 16 was the due date for furnishing Schedules K-1 or substitute Schedule K-1 to the partners.

    October 15 – Social Security, Medicare and withheld income tax

    If the monthly deposit rule applies, deposit the tax for payments in September.

    October 15 – Nonpayroll Withholding

    If the monthly deposit rule applies, deposit the tax for payments in September.

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  • ‘Where’s The Rest Of My Tax Refund?’ Answered

    24 September 2015
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    Sometimes the IRS keeps all or a portion of the federal refund a citizen was expecting. If you’re one of those people and you’re wondering why, it may be because you owe money for certain delinquent debts. If that is true, the IRS or the Department of Treasury’s Bureau of the Fiscal Service (BFS), which issues IRS tax refunds, can offset or reduce your federal tax refund or withhold the entire amount to satisfy the debt.

    Important facts you should know about tax refund offsets:

    1. If you owe federal or state income taxes your refund will be offset to pay those tax liabilities. If you had other debt such as child support or student loan debt that was submitted for offset, BFS will take as much of your refund as is needed to pay off the debt, and send it to the agency authorized to collect the debt. Any portion of your refund remaining after an offset will be refunded to you.
    2. The law prohibits the IRS from using liens or levies to collect any Affordable Care Act individual shared responsibility payment (the tax for not having required minimum essential health care coverage). However, if you owe a shared responsibility payment, the IRS may offset that liability against any tax refund that may be due to you.
    3. You will receive a notice if an offset occurs. The notice will reflect the original refund amount, your offset amount, the agency receiving the payment, and the address and telephone number of the agency.
    4. You should contact the agency shown on the notice if you believe you do not owe the debt or you are disputing the amount taken from your refund.
    5. If you filed a joint return and you are the spouse who is not responsible for the debt, but are entitled to a portion of the refund, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation If you know that your spouse has outstanding debts and anticipates an offset, you can attach Form 8379 to your original Form 1040, Form 1040A, or Form 1040EZ. Or it can be filed by itself after you are notified of an offset.
    6. If you file a Form 8379 with your return, write “INJURED SPOUSE” at the top left corner of the Form 1040, 1040A, or 1040EZ. IRS will process your allocation request before an offset occurs.
    7. If you are filing Form 8379 by itself, it must show both spouses’ social security numbers in the same order as they appeared on your income tax return. You, the “injured” spouse, must sign the form. Do not attach the previously filed Form 1040 to the Form 8379. Send Form 8379 to the Service Center where you filed your original return.
    8. If you reside in a community property state, overpayments (refunds) are considered to be joint property and are generally applied (offset) to legally owed past-due obligations of either spouse. There are exceptions, so please call for additional details if this rule affects you.
    9. The IRS will compute the injured spouse’s share of the joint return for you. Contact the IRS only if your original refund amount shown on the BFS offset notice differs from the refund amount shown on your tax return.

    For assistance with IRS withheld refunds or completing Form 8379, please get in touch with us at Dagley & Co.

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  • Tax Consequences After Gifting Money or Property

    14 September 2015
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    Have you ever thought about gifting money or property to someone – perhaps to one of your children or other family members – and wondered what the tax consequences could be? Gift and inheritance taxes were created long ago to make sure an individual’s assets are taxed as they pass on to future generations. Congress has frequently tinkered with these taxes, and currently the gift and inheritance taxes are unified with a top tax rate of 40%. However, the law does provide the following two exclusions from the tax:

    Lifetime exclusion – For 2015, $5.43 million per person is excluded from gift and inheritance tax. This amount is annually adjusted for inflation and applies separately to each spouse of a married couple. Where one of the couple dies and does not use the entire exclusion amount, the unused portion of the exclusion can be passed on to the surviving spouse by filing an estate tax return for the decedent, even if one is otherwise not required.

    Annual exclusion – The exclusion amount is periodically adjusted for inflation. For 2015 the annual gift exclusion is $14,000 per recipient. Thus, an individual can give up to $14,000 to as many recipients as he or she would like without creating a requirement to file a gift tax return. The $14,000 applies to each individual giver, so each spouse of a married couple can give $14,000, for a total per couple of $28,000 to any one person.

    If a person gives more than $14,000 for the year to any single individual, then a gift tax return is required, and the excess of the gifts over $14,000 reduces the lifetime exclusion. Once the annual limit and the lifetime limit have been exceeded, the excess becomes taxable.

    Gifts can take the form of cash or property. When property is given, the dollar value placed on the gift for gift tax purposes is the property’s fair market value (FMV) at the time of the gift. However, the gift recipient assumes the giver’s tax basis in the property, which means that if the giver’s property had built-in gains, the recipient becomes responsible for those gains when the recipient subsequently disposes of the property in a taxable event.

    Example: Earl gives his son, Jack, stock worth $14,000 that originally cost Earl $5,000. Later, Jack sells the stock for $16,000. Jack’s taxable gain from selling the stock will be $11,000 ($16,000 – $5,000).

    However, if Jack had inherited the stock from his father, Jack’s basis would have been the FMV of the stock at the date of his father’s death instead of what Earl had paid for the stock. Assuming the FMV was $14,000 at the time of Earl’s death and Jack subsequently sold the stock for $16,000, he would only have a taxable gain of $2,000 ($16,000 – $14,000).

    This example points to a mistake often made by elderly taxpayers. They will frequently sign over their assets, most commonly their home, to their heirs while they are still alive rather than waiting and allowing the heirs to inherit the property. By doing this, they create a large tax liability for the heirs since the basis of the gift is the giver’s basis, thus the heirs become responsible for the giver’s built-in gain rather than inheriting the property with the basis equal to the FMV at the time of the decedent’s death.

    Example: Mary signs over her home worth $500,000 to her son, John. Mary originally paid $100,000 for the home. If John immediately sells the home for $500,000 after Mary’s passing, he will have a taxable gain of $400,000. However, if John had inherited the property after Mary’s passing, his basis would be the FMV at date of death, or $500,000, and if he sold it for $500,000, he would have no taxable gain at all.

    Additional Exclusions For Gift Tax – In addition, certain medical and education expenses are also excludable over and above the $14,000 annual exclusion cap.

    Tuition Expenses – Tuition expenses paid directly to the qualifying educational institution are permitted without gift tax consequences. For example, a grandparent who wants to help out a college-bound grandchild can pay the student’s tuition directly to the college. Even if the amount is over $14,000, no gift tax reporting is required, and the grandparent’s annual gift exclusion with respect to the child and his or her lifetime exclusion are not affected.

    Medical Expenses – Medical expenses paid directly to the qualifying medical institution or individual providing the care or to the insurance company providing the medical coverage are also exempt from the gift tax and don’t affect the gift tax exclusions. The payments cannot go through the hands of the individual who incurred the medical expenses, but must go directly to the medical provider or insurance company.

    As you can see, gifting can be complicated and requires advance planning to fully take advantage of tax benefits. Please get in touch with us at Dagley & Co. if you need assistance planning your gifts or your estate.

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  • Back-to-School Tax Tips for Parents and Students

    4 September 2015
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    If you’re smart enough to seek an advanced education (and/or help your children seek it for themselves), be smart enough to take advantage of its tax breaks! Going to college – and figuring out how to pay for it – can be stressful for students and their families. Congress has provided a variety of new tax incentives to help defray the cost of education. Some of these require long-term planning to become beneficial, while others provide almost immediate tax deductions or credits. The benefits may even cover vocational schools.

    If your child is below college age, there are tax-advantaged plans that allow you to save for the cost of college. Although providing no tax benefit for contributions to the plans, they do provide tax-free accumulation; so the earlier they are established, the more you benefit from them.

    • Section 529 Plans—Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2015, you can contribute $14,000 without gift tax implications (or $28,000 for married couples who agree to split their gift). The annual amount is subject to inflation-adjustment. There is also a special gift provision allowing the donor to prepay five years of Sec 529 gifts up front without gift tax.
    • Coverdell Education Savings Account—These accounts are actually education trusts that allow nondeductible contributions to be invested for a child’s education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes, the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools (colleges). This is the only one of the educational tax benefits that allows tax-free use of the funds for below college-level expenses. A total of $2,000 per year can be contributed for each beneficiary under the age of 18. The ability to contribute to these plans phases out when the modified adjusted gross income is between $190,000 and $220,000 for married taxpayers filing jointly, and between $95,000 and $110,000 for all others.
    • Education Tax Credits—Two tax credits, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), are available for qualified post-secondary education expenses for a taxpayer, spouse, and eligible dependents. Both credits will reduce one’s tax liability dollar for dollar until the tax reaches zero. The credit is not allowed for taxpayers who file Married Separate returns.
      • The American Opportunity Credit—is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 for a student attending college on at least a half-time basis. Forty percent of the American Opportunity credit is refundable (if the tax liability is reduced to zero). This credit phases out for joint filing taxpayers with modified adjusted gross income between $160,000 and $180,000, and between $80,000 and $90,000 for others.
      • The Lifetime Learning Credit—is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer. In addition to post-secondary education, the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. For 2015 this credit phases out for joint filing taxpayers with modified adjusted gross income between $110,000 and $130,000, and between $55,000 and $65,000 for others. The credit is not allowed for taxpayers who file Married Separate returns.

    Qualifying expenses for these credits are generally limited to tuition. However, student activity fees and fees for course-related books, supplies, and equipment qualify if they must be paid directly to the educational institution for the enrollment or attendance of the student.

    You may qualify for this credit even if you did not pay the tuition. If a third party (someone other than the taxpayer or a claimed dependent) makes a payment directly to an eligible educational institution for a student’s qualified tuition and related expenses, the student would be treated as having received the payment from the third party, and, in turn, pay the qualified tuition and related expenses. Furthermore, qualified tuition and related expenses paid by a student would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer.

    • Education Loan Interest—You can deduct qualified interest of $2,500 per year in computing AGI. This is not limited to government student loans and this could include home equity loans, credit card debt, etc., if the debt was incurred solely to pay for qualified higher education expenses. For 2015, this deduction phases out for married taxpayers with an AGI between $130,000 and $160,000 and for unmarried taxpayers between $65,000 and $80,000. This deduction is not allowed for taxpayers who file married separate returns.

    We all know that a child’s success in life has a great deal to do with the education they receive. You cannot start the planning process too early. Please call Dagley & Co. if you would like assistance in planning for your children’s future education.

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  • September 2015 Tax Due Dates For Business Owners

    2 September 2015
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    A few days ago, you probably read our post about September tax due dates for individuals. As promised, here are the tax due dates coming up this month for business owners. Please contact us at Dagley & Co. if you need a CPA to walk you through these steps and smooth out the process. You’ll find our information at the bottom of this webpage.

    September 15 – Corporations

    File a 2014 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.

    September 15 – S Corporations

    File a 2014 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension.

    September 15 – Corporations

    Deposit the third installment of estimated income tax for 2015 for calendar year corporations.

    September 15 – Social Security, Medicare and withheld income tax

    If the monthly deposit rule applies, deposit the tax for payments in August.

    September 15 – Nonpayroll Withholding

    If the monthly deposit rule applies, deposit the tax for payments in August.

    September 15 – Partnerships 

    File a 2014 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.

    September 15 – Fiduciaries of Estates and Trusts

    File a 2014 calendar year return (Form 1041). This due date applies only if you were given an additional 5-month extension. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1.

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  • September 2015 Tax Due Dates for Individuals

    31 August 2015
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    A fresh month means a new list of deadlines. Here are the upcoming tax due dates for individuals for September 2015. Check back later this week for September deadlines for businesses.

    September 1 – Tax Planning

    Tax season is around the corner! Contact Dagley & Co. to schedule a consultation appointment. You’ll find our information at the bottom of this screen.

    September 10 – Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during August, you are required to report them to your employer on IRS Form 4070 no later than September 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

    September 15 – Estimated Tax Payment Due
    The third installment of 2015 individual estimated taxes is due. The United States’ tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include:

    • Payroll withholding for employees;
    • Pension withholding for retirees; and
    • Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

    When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

    Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the de minimis amount), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:

    • The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
    • The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

    Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

    However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

    This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.

    CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please contact Dagley & Co. for particular state safe harbor rules.

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  • August 2015 Tax Due Dates

    31 July 2015
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    A new month brings new tax due dates – but don’t stress. It’s August, and there aren’t too many you need to worry about, so we’ll quickly guide you through them below. Contact us at Dagley & Co. if you have any questions about these due dates.

    August 2015 Individual Due Dates

    August 10 – Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during July, you are required to report them to your employer on IRS Form 4070 no later than August 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

    August 2015 Business Due Dates

    August 10 – Social Security, Medicare and Withheld Income Tax

    File Form 941 for the second quarter of 2015. This due date applies only if you deposited the tax for the quarter in full and on time.

    August 17 – Social Security, Medicare and Withheld Income Tax

    If the monthly deposit rule applies, deposit the tax for payments in July.

    August 17 – Non-Payroll Withholding

    If the monthly deposit rule applies, deposit the tax for payments in July.

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  • You Need To Pay Taxes On Those Tips

    24 July 2015
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    Every year, Americans tip workers billions of dollars – and it doesn’t end there. Those tips should be taxed! If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes:

    • Tips are taxable — Tips are subject to federal income, social security, and Medicare taxes. The value of non-cash tips, such as tickets, passes, or other items of value, is also income and subject to taxation.
    • Include tips on your tax return You must include in gross income all cash tips received directly from customers, tips added to credit cards, and your share of any tips received under a tip-splitting arrangement with fellow employees.
    • Report tips to your employer If you receive $20 or more in tips in that month, you should report all of your tips to your employer. Your employer is required to withhold federal income, social security, and Medicare taxes. If the tips received are less than $20 in any month, they need not be reported to the employer. However, these tips are still taxable and must be reported on your tax return, as they are subject to income and social security taxes.
    • Tip-splitting and cover charges Tips you give to others under a tip-splitting arrangement are not subject to the reporting requirement, so you should report to your employer only the net tips you receive. Service (cover) charges, which are arbitrarily added by the business establishment, are excluded from the tip reporting requirements. The employer should add each employee’s share of service charges to each employee’s wages.
    • Employer allocation of tips Tip allocation is applicable to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport.” Underreporting occurs if an employee reports tips that are less than 8% of the employee’s applicable share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8%. If you are in this situation, your allocation amount will be noted on your W-2 form. These allocated tips will not have been included in the total wages box on your W-2, so they must be accounted for as additional wage income on your return, unless you have adequate records to show that the amount is incorrect. Because social security, Medicare, and Additional Medicare taxes were not withheld from the allocated tips, to the extent these tips are included in your income, you must report those taxes as additional tax on your return. The IRS frequently issues inquiries when the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return.
    • Keep a running daily log of tip income Tips are a frequently audited item and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee’s Daily Record of Tips and a Report to Employer for recording your tip income.

    If you are receiving tips and have any questions about their taxation, please get in touch with us at Dagley & Co.

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  • Love Wins – But What Are The Tax Implications?

    9 July 2015
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    Love Wins! On June 26, 2015, the US Supreme Court ruled that the 14th Amendment to the Constitution requires all states to license marriages between two people of the same sex and to recognize same-sex marriages performed in other states. This comes approximately two years after the Supreme Court overturned the Defense of Marriage Act (DOMA) enacted by Congress and signed by then President Bill Clinton. DOMA defined marriage as “legal union between one man and one woman as husband and wife.”

    All of us at Dagley & Co. are overjoyed at the ruling, and of course, we immediately want to dive into what this means for our taxes! This has wide-ranging implications for married individuals who reside in states that until now have not recognized same-sex marriage and for those who can now marry in their state, including employer-provided employee and spousal benefits, retirement issues, Social Security benefits, and of course tax issues.

    Since DOMA was overturned, legally married same-sex couples have been required to file their federal returns as “married,” but they have had to file their state returns as single or head of household status if their state did not recognize their marriage as legal. That will now change, and they will be filing using the married status for their state returns as well.

    Being married for tax purposes is not always beneficial, depending on a number of circumstances. The following are some of the tax breaks available to legally married same-sex couples:

    • The right to file a joint return, which can produce a lower combined tax than the total tax paid by same-sex spouses filing as single persons (but this can also produce a higher tax, especially if both spouses are relatively high earners or one or both previously qualified to file as head of household);
    • The opportunity to get tax-free employer-paid health coverage for the same-sex spouse;
    • The opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax;
    • The opportunity for the estate of the spouse who dies first to receive a marital deduction for amounts transferred to the surviving spouse;
    • The opportunity for the estate of the spouse who dies first to transfer the deceased spouse’s unused exclusion amount to the surviving spouse;
    • The opportunity to consent to make “split” gifts (i.e., gifts to others treated as if made one-half by each); and
    • The opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for nonspousal beneficiaries.

    There is a negative side as well. Many same-sex married couples, especially higher-income ones, may find that filing as married has unpleasant income tax ramifications. Divorcing before the end of the year can rectify that. However, before employing that strategy, a couple needs to consider the other financial benefits of being married. The following issues are commonly encountered by same-sex married couples.

    • A taxpayer who is married and living with his or her spouse cannot file using head of household filing So a same-sex spouse (or both) who previously qualified for and filed a federal return using the head of household status will no longer file as head of household. Instead, the same-sex couple will file as married using the joint or separate status, which will generally result in higher taxes.
    • When filing as unmarried, one individual can take the standard deduction and the other can itemize. As married individuals, they must choose between the two, which could substantially reduce their overall deductions. If a same-sex couple files married separate returns and one spouse claims itemized deductions, the other spouse cannot use the standard deduction.
    • As unmarried individuals, same-sex partners were able to adopt each other’s children and claim the adoption credit. As married individuals they can no longer do that.

    For those who are registered domestic partners (RDPs) in California, the Supreme Court’s recent ruling does not address the IRS’s position that these individuals are not legally married and therefore not eligible to file as married. Unless IRS changes its interpretation, RDPs will still not be able to file as married for federal purposes.

    If you are contemplating a same-sex union or live in a state that previously did not recognize same-sex marriages and wish to explore the tax consequences of now filing as married individuals, please get in touch with us at Dagley & Co. – we can’t wait to help!

    Image via public domain

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