Benjamin Franklin once said, “Nothing is certain but death and taxes.” He managed to name two of the things that people loathe and fear the most. What makes taxes so unpleasant is the fact that you have to hand over some of your hard-earned money to the government, and the other is that it can be so difficult to figure out how to fill out the forms – and which one to use.
The rule of thumb for choosing your personal income tax form is to try to go with the one that is easiest to understand, but that being said, you also need to be sure that it is the one that is correct. The government provides three forms – the 1040, the 1040A, and the 1040EZ – and all are meant to help you pay the amount that you owe. Each form has a different purpose, and choosing the wrong one can end up meaning that you either pay more than you owe or pay fines for not paying enough.
The simplest form is the one known as the EZ, while the long Form 1040 is the most complicated. Though it may be tempting to go for the one that takes the least amount of time to complete, if you simply jump for the fastest way through your filing responsibilities, you may end up cheating yourself of the opportunity to take some of the tax breaks to which you’re entitled. That’s because the more detail the form asks for, the more chances there are for you to provide information that may entitle you to a write-off.
The Affordable Care Act Might Preclude the Use of the EZ – Many people who were formerly able to file Form 1040EZ may find that they are no longer eligible to use this short form. This is because those who purchase health insurance through a state or federal exchange under the Affordable Care Act have the option to receive advance payment of the premium tax credit, which helps pay some of the costs of the insurance. In order to ensure that you receive the appropriate amount of credit, the taxpayer is required to submit all appropriate information on Form 8962, which cannot be filed with the 1040EZ – it can only be submitted with Form 1040 or 1040a. Though this means that taxpayers have to do a bit more paperwork, but it ensures that the proper amount of credit is taken and also provides the opportunity for the government to reimburse you if not enough of a credit is provided.
How Using The EZ May Be A Mistake – In some cases, using the 1040EZ can end up costing you money. This is because the short form, which is often the one selected by taxpayers who believe that their uncomplicated finances make it the most appropriate for them, does not provide the opportunity to take advantage of tax breaks you may be entitled to. For example, a recent college graduate who was just hired by his first employer would naturally assume that his taxes are so simple that there’s no need to fuss with a longer form. But doing so eliminates the possibility of taking a write-off for any interest that he paid on a student loan. Similarly, if he was wise and started setting aside money into a traditional IRA upon learning that his new employer offered no retirement plan, then his contributions would be deductible – but the short form doesn’t even ask that question. He might end up in a lower tax bracket by using the long form and would be able to pay just fifteen percent on taxes rather than 25 percent, simply based on these two deductions. Another deduction that can be taken on a 1040 or 1040A but not on a 1040EZ is the Lifetime Learning tax credit for courses taken to improve job skills – and there are many more. Form 1040EZ has the advantage of being simple, but it can end up working against you if you want to get the greatest possible deduction.
Reviewing the Three Tax Returns – It can be difficult to know which of the three tax returns is the right one for you and your particular situation. Here is some basic information on each one to provide you with a better sense of which you should choose.
Form 1040EZ – This simplest of all of the IRS forms is open to people who meet the following criteria:
- You are filing as either single or as married filing jointly
- You are younger than 65. If you are filing a joint return with your spouse, then your spouse must also be younger than 65. If your 65th birthday (or your spouse’s 65th birthday) falls on January 1 of the tax year, then you are considered to have turned 65 in the previous year, and will become ineligible to use the form.
- Neither you nor your spouse (if filing jointly) can have been legally blind during the tax year.
- You cannot have dependents and use this form.
- Your interest income must be less than $1,500.
- Your income (or joint income if filing with your spouse) must be less than $100,000.
Though the 1040 EZ does make things easier by being just one page long, it minimizes the amount of deductions that you are able to take. The 1040EZ limits taxpayers to taking just the earned income tax credit, and it may end up cheating you of deductions to which you are entitled. For that reason, it makes sense to consider the other forms that are available.
Form 1040A – Form 1040A is available regardless of what the taxpayer’s filing status is. Those who file as single, married filing either separately or jointly, head of household, or qualifying widow or widower can all use this form. In addition to having this advantage, it also provides the opportunity to claim more than just the earned income tax credit. Taxpayers are also able to take advantage of tax credits for their children, education, dependent care, retirement savings credits, and elderly or disabled care. All of these deductions are available using the 1040A, but not the 1040EZ. Additional criteria for using the 1040A include:
- You must have taxable income (or combined incomes) below $100,000.
- You cannot itemize deductions.
- You can have capital gain distributions but cannot have capital losses or gains.
There are other adjustments allowed for those using Form 1040A. These are known as above-the-line deductions, and they reduce the total gross income counted against you for tax purposes. By using these adjustments, you are able to reduce your overall tax burden. These adjustments include some IRA contributions, educator expenses, college tuition and fees, and student loan interest.
Form 1040 – For those who have higher incomes, need to itemize their deductions, or have investments and income that require a more complicated tax preparation, the appropriate form is the 1040. The 1040 generally requires additional documentation and forms, but using it is often the only way to get the additional savings that are due to the taxpayer. Some of these credits include deductions for taxes paid in a foreign country, deductions for the cost of adopting a child, and a number of above-the-line deductions that are not available with the other forms. The purpose of having these other adjustments available is to provide people with the greatest opportunity to reduce their gross income, thereby reducing the overall tax burden. People who use Form 1040 are able to take deductions for self-employment taxes that have been paid, moving taxes, alimony payments, and more. There is no need to use a form Schedule A, as the available deductions are already listed on the front page of the 1040 – however, certain forms or schedules may need to be completed and attached.
Although any taxpayer can use the 1040, it is most generally used by taxpayers:
- Who itemize their deductions,
- Who are self-employed, or
- Who have capital gain income from the sale of stocks or other assets.
If you are still uncertain as to which form is most appropriate for you, IRS Publication 17 provides many answers and details, including special circumstances and specific examples.
It is important to remember that just because a form was appropriate for you in the past, it may not be in the future, and there is no requirement that you use it again. It may be appropriate for you to consult with a professional tax preparer, like us at Dagley & Co., to ensure you receive all the tax breaks and benefits you are entitled to.
Image via Dagley & Co.
On this hot, hot hot shopping and sales weekend, you may be looking everywhere for the best Black Friday and Small Business Saturday deals. There’s another way to save yourself a lot of money – potentially thousands of dollars – and that is by hiring an accountant from Dagley & Company to do the taxes of you, your family, and/or your small business.
For starters, our founder, Dan Dagley, has an exceptional track record with taxes and clients. He was a top-10 CPA with TurboTax’s Pro program, which is currently undergoing a makeover. You can read hundreds of his glowing reviews on our testimonials page. If you miss this TurboTax Pro service, Dagley & Company can help fill your need. Get started by getting in touch with us; you’ll find our contact information at the bottom of this screen.
If you’re one of those people who has never filed for taxes and hasn’t heard from the IRS, then it’s probably because you’re leaving money on the table. Each year, the IRS reports about $1 billion in unclaimed refunds for individuals who did not file a tax return – and about half of them are for amounts greater than $600! You could literally turn a profit simply by dropping us an email, so what are you waiting for?
Many people are handy at filing their own taxes, but our clients who decide to pivot to our team are consistently amazed at the money they save. It’s unlikely that you know all of the tax credits and benefits you are entitled to! There are credits for those who generate their own renewable energy, there are credits for those paying for education, there are credits for those who are taking care of elderly/disabled relatives, there are tax deductions for start-up businesses, and so many more. Let us sit down with you to see just how much of your own money you’re entitled to keep this year.
Finally, Dagley & Company is about as convenient as it gets. Yes, we are located in Washington, D.C., but we serve clients all over the United States, as well as a few scattered all over the globe. Best case scenario for you and us is you keep good records on Quickbooks or another digital program, and we can help you file the most accurate, succinct tax forms you’ve ever seen. Whether you prefer email or a personal phone call, we’re here to work with you to save you time and money.
We hope this has helped you make a decision about the best way to file your taxes – and happy shopping on this Black Friday!
Image via public domain
All of us at Dagley & Co. have filed away our October 15 extended tax deadline clients, and now we’re looking at finishing the year off strong. Now is a great time to make sure you have your accounting up-to-date, as it sure will make “tax season” easier for everyone!
If you’re in need of a an accountant for your personal or business finances, think about setting an appointment with Dagley & Co. Don’t just take our word for it: read all of our glowing reviews from our clients over the last two years!
Solid tax savings can be realized by taking advantage of tax breaks that are still on the books for 2015.
For individuals and small businesses, these include:
- Capital Gains and Losses – You can employ several strategies to suit your particular tax circumstances. If your income is low this year and your tax bracket is 15% or lower, you can take advantage of the zero percent capital gains bracket benefit, resulting in no tax for part or all of your long-term gains. Others, affected by the market downturn earlier this year, should review their portfolio with an eye to offsetting gains with losses and take advantage of the $3,000 ($1,500 for married taxpayers filing separately) allowable annual capital loss allowance. Any losses in excess of those amounts are carried forward to future years.
- Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting your traditional IRA into a Roth IRA. Even if your income is at your normal level, with the recent decline in the stock markets, the current value of your Traditional IRA may be low, which provides you an opportunity to convert it into a Roth IRA at a lower tax amount. Thereafter, future increases in value would be tax-free when you retire.
- Recharacterizing a Roth Conversion – If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the value of those assets may have declined due to this summer’s market drop; and, as a result, you will end up paying more taxes than necessary on the higher conversion-date valuation. However, you may undo that conversion by recharacterizing it, which is accomplished by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA. This must be done via a trustee-to-trustee transfer. You can later (generally after 30 days) reconvert to a Roth IRA.
- Don’t Forget Your Minimum Required Distribution – If you have reached age 70 1/2, you must make required minimum distributions (RMDs) from your IRA, 401(k) plan and other employer-sponsored retirement plans. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.
- Take Advantage of the Annual Gift Tax Exemption – Although gifts do not currently provide a tax deduction, you can give up to $14,000 in 2015 to each of an unlimited number of individuals without incurring any gift tax. There’s no carryover from this year to next year of unused exemptions.
- Expensing Allowance (Sec 179 Deduction) – Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2015, the expensing limit is $25,000. That means that businesses that make timely purchases will be able to currently deduct most, if not all, of the outlays for machinery and equipment. Note: There is a good chance the Congress will increase that limit before year’s end and after this newsletter has gone to press, so watch for further developments.
- Self-employed Retirement Plans – If you are self-employed and haven’t done so yet, you may wish to establish a self-employed retirement plan. Certain types of plans must be established before the end of the year to make you eligible to deduct contributions made to the plan for 2015, even if the contributions aren’t made until 2016. You may also qualify for the pension start-up credit.
- Increase Basis – If you own an interest in a partnership or S corporation that is going to show a loss in 2015, you may want to increase your investment in the entity so you can deduct the loss, which is limited to your basis in the entity.
Also keep in mind when considering year-end tax strategies that many of the tax breaks allowed for calculating regular taxes are disallowed for alternative minimum tax (AMT) purposes. These include deduction for property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for mortgage interest, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, accelerating payment of these expenses that would normally be made in early 2016 to 2015 should – in some cases – not be done.
We hope you will consider Dagley & Co. as the tax season approaches. You’ll find our contact information at the bottom of this screen.
Image via public domain
Each year, the IRS reports about $1 billion in unclaimed refunds for individuals who did not file a tax return. The plot thickens: If you are one of the over 1 million individuals who received an Obamacare health insurance premium subsidy last year and haven’t yet filed your 2014 tax return, you are risking your opportunity to receive a subsidy in 2016. That’s right: Doing your taxes can mean more money in your pocket!
The subsidy, which is paid by the government to your insurer to reduce the premiums you owe, is actually an advance payment of the premium tax credit (PTC) based upon your “estimated” income for the year. Your actual PTC is based on your “actual” income as determined on your tax return. If the advance PTC (subsidy) was less than the actual PTC as determined on your tax return, you are entitled to the difference. On the other hand, if your actual PTC is less than the advance amount, you may owe Uncle Sam some or all of the difference.
Whether you are entitled to additional PTC or owe some back cannot be determined without filing your return. The IRS estimates that 710,000 individuals who received an advance PTC have yet to file a 2014 return or did not file an extension. Add that to the approximately 360,000 taxpayers who received an advance PTC and have filed an extension, and there are over 1 million individuals who need to reconcile their 2014 PTC who have not yet filed.
Because the Marketplace will determine eligibility for advance PTC for the 2016 coverage year during the fall of 2015, if you haven’t filed your 2014 return yet, you can substantially increase your chances of avoiding a gap in receiving this help if you file your 2014 tax return as soon as possible, even if you have an extension until October 15th.
Navigating the complicated Obamacare forms developed by the IRS is difficult for many taxpayers, and most seek professional assistance. The IRS is currently sending letters to individuals who received advance PTC subsidies and have yet to file. The letter encourages taxpayers to file within 30 days of the date of the letter in order to avoid a gap in receiving advance payments of the PTC in 2016.
It is never a good idea not to file, even if you owe and can’t pay. The IRS will get more aggressive as time goes on. So whether you don’t feel you can do your own return, are afraid you may owe some of the PTC back, or think you may be subject to penalties for failing to have health insurance coverage, we encourage you to get in touch with us at Dagley & Co so we can try our best to straighten everything out for you. There are penalty exceptions for being uninsured, or if you owe a PTC repayment there’s a possibility it can be reduced, and it may all work out OK. Procrastinating isn’t going to change the outcome and could put your 2016 advance PTC at risk.
Who knows; you may even be entitled to more PTC and a refund.
Image via public domain
Taxpayers with disabilities, and parents of children with disabilities, may qualify for a number of tax credits and benefits. Listed below are several tax credits and other benefits we have put together that are available if you or someone else listed on your federal tax return is disabled.
- Increased Standard Deduction – If a tax return filer and/or spouse are legally blind, they are entitled to a higher standard deduction on their tax return.
- Exclusions from Gross Income – Certain disability-related payments, Veterans Administration disability benefits, and Supplemental Security Income are excluded from gross income.
- Impairment-Related Work Expenses - Employees, who have a physical or mental disability limiting their employment, may be able to claim business expenses in connection with their workplace. The expenses must be necessary for the taxpayer to work.
- Credit for the Elderly or Disabled – This credit is generally available to certain taxpayers who are 65 and older, as well as to certain disabled taxpayers who are younger than 65 and are retired on permanent and total disability.
- Earned Income Tax Credit – EITC is available to disabled taxpayers as well as to the parents of a child with a disability. If you retired on disability, taxable benefits that were received under your employer’s disability retirement plan are considered earned income until a minimum retirement age is reached. The EITC is a tax credit that not only reduces a taxpayer’s tax liability but may also result in a refund. Many working individuals with a disability who have no qualifying children, but are older than 25 and younger than 65, may qualify for EITC. Additionally, if the taxpayer’s child is disabled, the age limitation for the EITC is waived. The EITC has no effect on certain public benefits. Any refund that is received because of the EITC will not be considered income when determining whether a taxpayer is eligible for benefit programs, such as Supplemental Security Income and Medicaid.
- Child or Dependent Care Credit – Taxpayers who pay someone to come to their home and care for their dependent or disabled spouse may be entitled to claim this credit. For children this credit is usually limited to the care expenses paid only until age 13, but there is no age limit if the child is unable to care for him- or herself.
- Special Medical Deductions – In addition to conventional medical deductions, the tax code provides special medical deductions related to disabled taxpayers and dependents. They include:
- Learning Disability – Tuition fees paid to a special school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders can be included in medical expenses. A doctor must recommend that the child attend the school. Tutoring fees recommended by a doctor for the child’s tutoring by a teacher who is specially trained and qualified to work with children who have severe learning disabilities might also be included.
- Impairment-Related Expenses – Amounts paid for special equipment installed in the home, or for improvements, may be included in medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may only be partly included as a medical expense.
- Drug Addiction – Amounts paid by a taxpayer to maintain a dependent in a therapeutic center for drug addicts, including the cost of the dependent’s meals and lodging, are included in medical expenses.
- Exclusion Of Qualified Medicaid Waiver Payments –Payments made to care providers caring for related individuals in the provider’s home are excluded from the care provider’s income. Qualified foster care payments are amounts paid under the foster care program of a state (or political subdivision of a state or a qualified foster care placement agency). For more information please call our office – you can find our contact information at the bottom of this page.
- ABLE Accounts – Qualified ABLE programs provide the means for individuals and families to contribute and save for the purpose of supporting individuals with disabilities in maintaining their health, independence, and quality of life.
Federal law enacted in 2014 authorizes the States to establish and operate an ABLE program. Under the ABLE program, an ABLE account may be set up for any eligible state resident, which would generally be the only person who could take distributions from the account. ABLE accounts are very similar in function to Sec 529 plans. However, they should not be considered as estate planning devices, as is sometimes the case with 529 plans; the main purpose of ABLE accounts is to shelter assets from means testing required by government benefit programs. Individuals can contribute to ABLE accounts subject to Gift Tax limitations. Distributions to the disabled individual are tax free if the funds are used for qualified expenses of the disabled individual. These accounts are new and must be established at the state level before taxpayers can start making contributions to them. Call the office for more information.
For more information on tax credits and benefits available to disabled taxpayers, please consult us at Dagley & Co.
Image via public domain
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