If your taxable income is exceptionally low this year, or even if you expect not to be required to file a tax return this year, a number of tax opportunities may be available to you. But time is running short, since these opportunities will require action on your part before year’s end.
However, before we consider actual strategies, let’s look at key elements that govern tax rates and taxable income.
It is quite common for teachers to spend their own money on classroom supplies – so common, in fact, that a few years back, Congress created a special deduction that allowed teachers to deduct up to $250 above-the-line for classroom supplies. “Above-the-line” means the deduction can be claimed whether or not the taxpayer itemizes their deductions. Although the $250 amount is subject to an inflation adjustment, there has been no increase to the limit, at least through 2018.
Eligible educators are those who work in a school as teachers of kindergarten through grade 12, instructors, counselors, principals, or aides for at least 900 hours during a school year. Because of the 900-hour requirement, many substitute teachers do not qualify for this above-the-line deduction.
But $250 is not much, and even if the teacher is in a tax bracket as high as 24% (most are in lower brackets), the deduction will only net them a tax savings of $60. A $60 tax savings is nothing to write home about, and the $250 special deduction was nothing more than a token gesture by Congress. Many conscientious teachers spend far more than $250 for classroom supplies every year.
Remember the IRS’s promise about being able to file your income tax return using a postcard?
The reality of the new 1040 form is a far cry from a postcard. Although the administration insists that it has simplified the process of preparing your tax return, a few minutes of comparing the old 1040 to the new draft version shows that the redesign did little more than change it from the previous two-page form to two half-size pages – with six schedules provided separately. All but four of the 79 lines from the old version remain on the new one; they’re just divided up differently. Unless all of your income comes from wages, interest, dividends, pensions and Social Security, you will now have more schedules to fill out than you did before, and you still have a lot of work ahead of you.
This is a common question: How long must taxpayers keep copies of their tax returns and supporting documents?
Generally, taxpayers should hold on to their tax records for at least 3 years after the due date of the return to which those records apply. However, if the original return was filed later than the due date, including if the taxpayer received an extension, the actual filing date is substituted for the due date. A few other circumstances can require taxpayers to keep these records for longer than 3 years.
The statute of limitations in many states is 1 year longer than in the federal statute. This is because the IRS provides state tax authorities with federal audit results. The extra year gives the states adequate time to assess taxes based on any federal tax adjustments.
If you have been procrastinating about filing your 2017 tax return or have not filed other prior year returns, you should consider the consequences, including the penalties, interest, and aggressive enforcement actions. Plus, if you have a refund coming for a prior you may end up forfeiting it.
If you haven’t filed your return and you owe taxes, you will be subject to both a late payment and a late filing penalty. You should file a return as soon as possible and pay as much as possible to reduce the penalties and interest.
Years ago, to prevent parents from transferring their investment accounts into their children’s name to avoid taxes, Congress created what is referred to as the kiddie tax. This counteracted the strategy of taking income from the parents’ higher tax bracket and shifting it to their children’s lower tax bracket.
The kiddie tax plugged that tax loophole by taxing the child’s unearned income (income not from working) at the parent’s top marginal rate.
That has all changed under the new tax reform. Beginning in 2018, children’s tax rates are no longer based upon their parents’ top marginal rates.
Tax reform has changed the way most taxpayers need to think about and plan for their taxes. It is no longer business as usual, and those who think it is are in for a rude awakening come tax time next year.
For most taxpayers, the most significant change is the increase in their standard deduction, which on the surface seems like a big benefit. But don’t overlook the fact that the same tax reform that nearly doubled the standard deduction took away the personal exemption as a deduction. So, for example, under old law for 2018, a married couple’s standard deduction would have been $13,000, and their two personal exemptions would have been $8,300 (2 x $4,150), for a total deduction of $21,300. Under the new law, they will be able to deduct $24,000, the new standard deduction for 2018. So, their total increase over what they would have gotten under prior law is only $2,700. If they have four children, their deductions for 2018 under prior law would have been $37,900 ($13,000 plus 6 x $4,150), as compared to the new law’s $24,000. However, for individuals with children under age 17, the child tax credit for 2018 was increased to $2,000 (with $1,400 being refundable) from the prior $1,000, in many cases making up for the loss in the exemption deduction. Note that a credit is a dollar-for-dollar reduction of the tax, while a deduction reduces the income that is taxable.
Taxpayers are often confused by the differences in tax treatment between businesses that are entered into for profit and those that are not, commonly referred to as hobbies. We cover the differences in this week’s article and how it might apply to your small business.
The only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest. If you are like so many others with large consumer debt, such as credit cards and car payments, you are paying high interest rates that are not deductible. If the amount of consumer interest you pay each year is substantial and you itemize your deductions, you may want to consider converting that nondeductible interest into tax-deductible interest by paying off the consumer debt with a home equity line of credit. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to planned large consumer purchases, such as a car or motor home. Using a home equity line to purchase these items will make the interest deductible.
Whether you already own a home or are considering buying one, you should be aware of the many tax benefits that go along with home ownership. There are plenty of reasons for owning a home, including the potential for capital appreciation and the fact that many of the costs are tax deductible, while rent is generally not.