Individual Tax

When it comes to filing taxes, married couples have the option to file either jointly or separately. Deciding which filing status to choose can significantly impact your tax liability and potential refunds. Understanding the benefits and drawbacks of each option is crucial for making an informed decision. Here’s a comprehensive guide to help you determine the best filing status for your situation.

Understanding the Basics

Married Filing Jointly (MFJ):

• Combines the incomes of both spouses on a single tax return.
• Both spouses share responsibility for the tax liability.
• Offers higher standard deductions and beneficial tax rates.

Married Filing Separately (MFS):

• Each spouse files their own tax return, reporting individual income and deductions.
• Spouses are responsible for their own tax liabilities.
• May result in higher tax rates and reduced eligibility for certain deductions and credits.

Benefits of Filing Jointly

• Higher Standard Deduction: For the 2023 tax year, the standard deduction for joint filers is $27,700, compared to $13,850 for separate filers. This higher deduction can reduce taxable income significantly.
• Tax Brackets and Rates: Joint filers generally benefit from more favorable tax brackets. For instance, in 2023, the 22% tax bracket applies to incomes up to $190,750 for joint filers, compared to $95,375 for separate filers.
• Eligibility for Credits and Deductions: Filing jointly can increase eligibility for tax credits such as the Earned Income Tax Credit (EITC), the Child Tax Credit, and education credits. These credits are often reduced or unavailable for separate filers.
• Simplified Filing Process: Filing jointly simplifies the tax preparation process by consolidating income, deductions, and credits on a single return.

Drawbacks of Filing Jointly

• Joint and Several Liability: Both spouses are equally responsible for the tax liability, including any penalties or interest. This can be a concern if one spouse has questionable financial activities.
• Potential for Higher Combined Income: Combining incomes can push the couple into a higher tax bracket, potentially increasing overall tax liability compared to separate filings with lower individual incomes.

Benefits of Filing Separately

• Separation of Liabilities: Each spouse is only responsible for their own tax liability. This can be beneficial if one spouse has significant deductions, unpaid taxes, or legal issues.
• Deduction of Medical Expenses: Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). Filing separately can make it easier to exceed this threshold if one spouse has high medical expenses relative to their individual AGI.
• Protection from Tax Issues: Filing separately can protect one spouse from potential tax issues of the other, such as audits or underpayment penalties.

Drawbacks of Filing Separately

• Lower Standard Deduction: The standard deduction for separate filers is half that of joint filers, which can lead to higher taxable income.
• Higher Tax Rates: Separate filers face less favorable tax brackets, potentially resulting in higher tax liability.
• Reduced Credits and Deductions: Many tax credits and deductions are reduced or unavailable for separate filers. For example, the Earned Income Tax Credit and the Child and Dependent Care Credit are significantly limited for MFS status.
• Phase-Outs and Limits: Income limits for phase-outs of deductions and credits are typically lower for separate filers, reducing eligibility.

When to Consider Filing Separately

• High Medical Expenses: If one spouse has significant medical expenses, filing separately might make it easier to meet the deduction threshold.
• Income-Based Repayment Plans: For student loans, filing separately can lower the AGI used to calculate repayment amounts under income-driven repayment plans.
• Legal and Financial Protection: If one spouse has potential legal issues or significant debt, filing separately can protect the other spouse from associated liabilities.

Conclusion

Deciding whether to file jointly or separately requires careful consideration of your financial situation. While filing jointly generally provides more tax benefits, there are circumstances where filing separately might be advantageous. Evaluate your income, deductions, credits, and potential liabilities to make the best decision for your family. Consulting with a tax professional can provide personalized advice and ensure you choose the optimal filing status for your unique circumstances.

Regular financial checkups give you an opportunity to identify where you can improve your overall tax situation. They also help identify areas of concern that may require more detailed attention. In a similar fashion, regularly reviewing your tax situation with a financial professional can identify opportunities to improve your tax picture and can often shed light on areas where you may be paying too much in taxes. Simple strategies that range from adjusting your withholding to timing the sales of securities can be employed to potentially reduce your tax bill.

Adjust Your Withholding

This is a simple and basic move. If you had too little tax withheld last year, you ended up paying the IRS what you owed when you filed your return and may incur a penalty. If you had too much tax withheld, you received a tax refund. You may regard a large tax refund as a plus — but the reality is that a large tax refund is simply an interest-free loan of your money to the government. It may make more sense to have less tax withheld up front and receive more in your paycheck. That way, you can save or invest the money and potentially earn interest, dividends, or perhaps enjoy a capital gain on your investments.

Time the Sale of Securities

How long you own a profitable asset before you sell it can impact how much income tax you pay on your gain. Holding on to an appreciated asset for more than one year before you sell it results in long-term capital gain. The tax rate on long-term capital gains is 0%, 15%, or 20% depending on your taxable income and filing status. For example, if you are married and filing jointly in 2021, the long-term capital gains rate is 0% with income of up to $80,800, 15% with income between $80,801 and $501,600, and 20% with income over $501,600. In contrast, short-term capital gains are taxed at higher ordinary income tax rates.

If you have capital losses, look into selling investments in your taxable accounts to generate capital gains that can be offset by the losses. You could also potentially reduce taxes by investing in municipal bonds. Interest on municipal bonds is generally exempt from federal income taxes and might be exempt from state and local income taxes as well. Of course, credit ratings should be analyzed before purchase.

Add to Your Retirement Plan

You could potentially lower your income tax liability by increasing the amount you contribute to your tax-favored retirement plan (limits apply). If you’re age 50 or older, and your plan permits, you may be able to add to your retirement account by making catch-up contributions in addition to your regular plan contributions.

Consider a Health Savings Account

A health savings account (HSA) can also be a good tax saving option. You can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own provided you are covered by a qualified high-deductible health plan. You can invest in an HSA and have it grow in a tax-deferred manner similar to an individual retirement account. And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.

Midyear is a good time to review your tax situation. You can make sure your estimated tax payments are on track and look ahead to see if there are any tax-saving opportunities you can take advantage of before year-end.¹

The Need to Estimate

The IRS requires individual taxpayers to make four quarterly installment payments of estimated tax (based on the amount of the “required annual payment”) to satisfy their tax liability for the year. Individuals also have the option of paying their income taxes throughout the year through payroll withholding.

To avoid penalties, payments must equal the lower of (1) 90% of the tax liability for the current year or (2) 100% (110%, for higher income individuals) of the tax liability on the prior year’s return. No penalty will apply if the tax shown on the return (after withholding) is less than $1,000.

Paying the Right Amount

Though you don’t want to underpay, you might not want to overpay either. A refund may be welcome, but it’s essentially an interest-free loan to the government.

If you need to change the amount being withheld from your paychecks, contact your payroll department and ask for IRS Form W-4 so you can make the appropriate adjustments. If you have additional nonwage income, you may need to increase your withholding or make estimated payments to avoid an underpayment penalty. If you are self-employed, you probably need to make estimated tax payments.

Save Taxes, Save for Retirement

Do you (or your spouse) have a retirement savings plan at work, such as a 401(k) plan or 403(b) tax-sheltered annuity? You can reduce your 2019 income tax liability by making pretax contributions to the plan. Permitted contribution levels for such plans are typically generous. For 2019, an employee may contribute up to $19,000 ($25,000 for those 50 and older) to either a 401(k) or 403(b) plan, unless a lower plan limit applies.

Capitalize on Lower Rates

You also might be thinking about selling an investment that has performed well. If the investment is held in a regular taxable account, your capital gain would potentially be subject to tax. However, long-term capital gains are taxed at lower rates (generally 15% or 20%) than your ordinary income.

Source/Disclaimer:

¹This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is unique. You should contact your tax professional to discuss your personal situation.

Matthew J. Rice CPA offers reliable and comprehensive tax planning and preparation services to help ensure that you take advantage of current tax laws, submit accurate and on-time tax returns, and put together a plan that may significantly reduce your tax liability. Call us at 704-609-1119 now or request a consultation online to learn more.

Donald Trump’s tax reforms have attracted, if nothing else, a lot of attention and the usual political controversy that follows his administration when he announces changes. However, the 2018 Standard Deduction is not reserved only for the wealthy and/or high-income earners. It covers 70% of all taxpayers. So, we’ve created a succinct overview of the implications posed by this new tax item, as a guide for you and your family.

The first thing to capture one’s attention is that the 2018 Standard Deduction has nearly doubled versus 2017, for all 3 primary categories of taxpayers. So, if you are a single filer, your deduction jumps from $6,350 to $12, 000; similarly, ahead of the household filer goes from $9,350 to $18,000, and joint filers enjoy a leap from $12,700 to $24,000.

As a rule, eye-popping changes like this come with a caveat. Very often apparent big benefits as outlined above are accompanied by a deletion or reduction of another tax allowance. And, that’s also the case here where the longstanding personal exemption has left the stage – effectively eliminating $4,050 for each member of the family. This naturally embraces not only the filer but also dependents such as children and elderly parents, thus making it a focal issue for large families. The removal of the personal exemption per individual (possibly multiple times on a single return) has the effect of pushing taxable income up – perhaps considerably depending on family circumstances.

We advise that you temper any excitement that the 2018 Deduction creates at first glance in favor of making a more sober assessment of the overall situation. Inevitably it means approaching things in a measured way by answering one important question: can the new Standard Deduction offset this clear disadvantage or even override it?

The answer is a little convoluted but comprehensible for most. It should be kept You’ll also want to keep in mind that the new tax laws have also introduced changes in child credit and lower tax rates across the board. Therefore, evaluating the opposite effects of improved deductions and removal of personal exemptions involves looking at things in a collective manner. All of these items end up coming together to converge on the bottom line, resulting in a net effect that varies substantially depending on your family size.

One big change of note: the 2018 Deduction law requires you to detail specific allowable deduction claims through Schedule A. This creates the opportunity to derive obtain extra savings and is a departure from simply relying on one’s filing status. The latter is still nonetheless an option available to filers, although relatively less accommodating if you’re looking to gain every possible tax advantage. The suggested Schedule A route involves more time and forethought but yields bigger tax reductions to make it well worth the effort.

In conclusion, the 2018 tax changes with special emphasis on the Standard Deduction seem, at first glance, to favor single filers and two-member family joint filers. However, larger families who make the effort to expand their overview of their taxable affairs should derive a net benefit as well; or at very least minimize potential tax increases.

It goes without question that the input of a tax professional can help to clear these muddy waters and will go a long way towards creating a good tax plan. For many, it will go further and propel them into the light at the end of this new twisty tax tunnel. So, give us a call today and see how we can help with your tax questions.

Matthew J. Rice CPA offers a variety of tax planning services to both businesses and individuals. Conscientious tax planning throughout the year can save you money and make tax time easier. Call us at 704-609-1119 and request a free initial consultation to learn more.

The Tax Cuts and Jobs Act (TCJA) raises many questions for taxpayers looking to plan for the coming year. Below are answers to some of them.

Do I need to adjust my withholding allowances, given that tax brackets have changed?

You may notice a change in your next paycheck as a result of the tax law, which alters tax rates, brackets, and other items that affect how much tax is withheld from your pay. The IRS has already issued new withholding tables, and your employer should adjust its withholding without requiring any action on your part. But you may want to take the opportunity to make sure you are claiming the appropriate number of withholding allowances by filling out IRS Form W-4. This form is used to determine your withholding based on your filing status and other information. The IRS suggests that you consider completing a new Form W-4 each year and when your personal or financial situation changes.

Can I take advantage of the new deduction for pass-through business income?

The new rules for owners of pass-through entities — partnerships, limited liability companies, S corporations, and sole proprietorships — allow them to deduct 20% of their business pass-through income. The 20% deduction is available to owners of almost any type of trade or business whose taxable income does not exceed $315,000 (joint return) or $157,500 (other returns). Above those amounts, the deduction is subject to certain limitations based on business assets and wages. Different deduction restrictions apply to individuals in specified service businesses (e.g., law, medicine, and accounting).

Can I still deduct mortgage interest and real estate taxes paid on a second home?

Yes, but the new rules limit these deductions. The deduction for total mortgage interest is limited to the amount paid on underlying debt of up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. Note that the new restriction will not apply to taxpayers with home acquisition debt incurred on or before December 15, 2017. Additionally, the deduction for interest on home equity loans (new and existing) is suspended and will not be available for tax years 2018-2025.

Note that the law also establishes a $10,000 limit on the combined total deduction for state and local income (or sales) taxes, real estate taxes, and personal property taxes. As a result, your ability to deduct real estate taxes may be limited.

Are there any changes to capital gains rates and rules that I should know about?

The rules concerning how capital gains are determined and taxed remain essentially unchanged. But since short-term gains (for assets held one year or less) are taxed as ordinary income, they will be taxed at the new ordinary income rates and brackets. Net long-term gains will still be taxed at rates of 0%, 15%, or 20%, depending on your taxable income. And the 3.8% net investment income tax that applies to certain high earners will still apply for both types of capital gains.

2018 Long-Term Capital Gains Breakpoints

Rate	Single Filers	Joint Filers	Head of Household	Married Filing Separately
0%	Below $38,600	Below $77,200	Below $51,700	Below $38,600
15%	$38,600-$425,799	$77,200-$478,999	$51,700-$452,399	$38,600-$239,499
20%	$425,800 and above	$479,000 and above	$452,400 and above	$239,500 and above

Can I still deduct my student loan interest?

Yes. Although some earlier versions of the tax bill disallowed the deduction, the final law left it intact. That means that student loan borrowers will still be able to deduct up to $2,500 of the interest they paid during the year on a qualified student loan. The deduction is gradually reduced and eventually eliminated when modified adjusted gross income reaches $80,000 for those whose filing status is single or head of household, and over $165,000 for those filing a joint return.

I have a large family and formerly got to take an exemption for each member. Is there anything in the new law that compensates for the loss of these exemptions?

The new law suspends exemptions for you, your spouse, and dependents. In 2017, each full exemption translated into a $4,050 deduction from taxable income which, for large families, added up. Compensating for this loss, the new law almost doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. Additionally, the child tax credit is doubled to $2,000 per child, and the income levels at which the credit phases out are significantly increased. Depending on your situation, these new provisions could potentially offset the suspension of personal exemptions.

I have been gifting friends and relatives $14,000 per year to reduce my taxable estate. Can I still do this?

Yes, you may still make an annual gift of up to $15,000 in 2018 (increased from $14,000 in 2017) to as many people as you want without triggering gift tax reporting or using any of your federal estate and gift tax exemption. But TCJA also doubles the exemption to an estimated $11.2 million ($22.4 million for married couples) in 2018. So anyone who anticipates having a taxable estate lower than these thresholds may be able to gift above the annual $15,000 per-recipient limit and ultimately not incur any federal estate or gift tax. Note, however, that the higher exemption amount and many of TCJA’s other changes to personal taxes are scheduled to expire after 2025, unless Congress acts to extend them.

Matthew J. Rice CPA offers a variety of tax planning services to both businesses and individuals. Conscientious tax planning throughout the year can save you money and make tax time easier. Call us at 704-609-1119 and request a free initial consultation to learn more.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. You should contact your tax professional to discuss your personal situation.

Although tax season might seem as if it’s a long way off, tax planning in the months before year-end allows you to take advantage of strategies that might help reduce your income tax obligation. Reviewing commonly used strategies will help you identify those that might be useful to you.

Capitalize on Winners

Your investments are a good starting point for implementing tax-saving strategies. You can benefit from favorable tax rates on long-term capital gains by selling and taking profits on appreciated securities you’ve held longer than one year. Long-term gains are currently taxed at a maximum rate of 15% for most taxpayers and 20% for taxpayers with taxable income of over $425,800 ($479,000 for joint filers) in 2018.

Cut Your Tax Bite With Losers

Investments that have lost value and have consistently underperformed a benchmark over time may be perfect sell candidates, particularly if you’re not confident of a turnaround. By selling your losers, you can use your losses to balance out gains on appreciated securities you’ve sold. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Any losses that you can’t deduct for 2018 can be carried over for deduction in future years, subject to the same limits.

Don’t make taxes your only reason for selling an investment. Many different factors should go into the decision to sell securities, including how the sale of a specific investment would affect your overall portfolio.

Curb Surtax Exposure

The 3.8% surtax on net investment income is a relatively new wrinkle for higher income taxpayers. The surtax comes into play when an individual filer’s modified adjusted gross income (AGI) is more than $200,000 ($250,000 on a joint return or $125,000 if married filing separately). The surtax applies to the lesser of net investment income or the amount by which modified AGI exceeds the threshold. For purposes of the surtax, net investment income includes taxable interest, dividends, annuities, royalties, rents, net capital gain, and income from passive trade or business activities. The surtax doesn’t apply to municipal bond interest or distributions from tax-deferred retirement plans.

A number of planning moves are available that may help reduce your exposure to the surtax. These include:

• Maximizing contributions to your employer’s qualified retirement plan. For 2018, you can contribute up to $18,500, plus an additional catch-up amount of $6,000 if you’re age 50 or older and your plan allows. Pretax contributions to a tax-qualified plan reduce your taxable income.
• Contributing to a traditional individual retirement account (IRA). Contributions are tax deductible if neither you nor your spouse actively participates in an employer-sponsored retirement plan. For 2018, the contribution limit is $5,500 ($6,500 with catch-up contribution).
• Investing in tax-free municipal bonds. Be cautious, however, about investing in private activity municipal bonds, which can increase your exposure to the alternative minimum tax (AMT).
• Deferring capital gains through the use of installment sales. The installment method lets you defer taxes on the sale of certain property by recognizing profit over more than one tax year.

Some strategies may not be appropriate for your situation. Check with your tax advisor.

From income tax preparation for individuals to complex corporate taxes for businesses, you’ll like working with us because we make filing taxes easy. Just send us your paperwork, receipts, and prior tax returns and Matthew J. Rice, CPA will take care of everything. Call 704-609-1119 or request a free consultation online.