Monthly Archives: January 2017

10 Key Tax Terms To Help You Cut Through The Jargon

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

tax terms

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The tax field has its own lingo, which adds to the complexity of the tax filing task. But don’t despair. Knowing these 10 key tax terms can help you cut through the jargon and have you talking taxes in no time.

1. AGI

Adjusted gross income, or AGI, is all the income you receive over the course of the year, including wages, interest, dividends and capital gains, minus things such as contributions to a qualified IRA, some business expenses, moving costs and alimony payments. AGI is the first step in calculating your final federal income tax bill.

2. Tax credits

Tax credits are much like credits you get from a store. After you calculate your tax bill, you can use the credit to reduce the amount that you owe to Uncle Sam. Tax credits are more valuable than tax deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income. A $200 credit, for example, will turn a $1,000 tax bill into only $800. A few credits could even give you a refund you weren’t expecting.

3. Tax deductions

Tax deductions are expenses the Internal Revenue Service allows you to subtract from your AGI to arrive at your taxable income. In most cases, the lower your income, the lower your tax bill. If, for example, a single filer has income of $38,000 and $8,000 in deductions, then he would pay taxes on only $30,000. The IRS offers all filers a standard deduction amount (more on this later).

Some other deductions — such as student loan interest, moving expenses, deductible IRA contributions and alimony payments — also are listed directly on the 1040A or long Form 1040. The term “deductions” is most commonly associated with the itemized deductions (more on this later, too) that taxpayers who file Schedule A claim.

4. Standard deduction

This is a fixed dollar amount that taxpayers can subtract from their income. The standard deduction is available to all filers and is determined by the taxpayer’s filing status. The amounts change each year because of inflation adjustments. You can find the current standard deduction levels listed on each of the three individual tax forms. Most taxpayers use this deduction method, which eliminates the need to itemize actual deductions such as medical expenses, charitable contributions and state and local taxes.

5. Itemized deductions

These are expenses that can be deducted from your AGI to help you reach a smaller income amount upon which you must calculate your tax bill. Itemized deductions include medical expenses, other taxes (state, local and property), mortgage interest, charitable contributions, casualty and theft losses, unreimbursed employee expenses and miscellaneous deductions such as gambling losses. Some itemized deductions must meet IRS limits before they can be claimed. When you itemize, you must file Form 1040 and detail your tax deductions on Schedule A.

6. Exemption

This is an amount the IRS lets you subtract from your income to reflect all the people who count on your income. You can claim as tax exemptions yourself, your spouse and your dependents. The IRS allows a set amount for each exemption and, as with deductions, this total is subtracted from your AGI to come up with your final, lower earnings amount upon which you must figure your tax bill. Your personal exemption amount is in addition to any tax deductions, either standard or itemized, that you claim.

7. Progressive taxation

This is the system in which higher tax rates are applied as income levels increase. The U.S. tax system uses progressive taxation with tax brackets starting at 10 percent and rising to 39.6 percent for the wealthiest taxpayers.

8. Taxable income

Taxable income is your overall, or gross, income reduced by all allowable adjustments, deductions and exemptions. It is the final amount of income you use to calculate how much you owe in taxes.

9. Voluntary compliance

This describes the philosophy upon which our tax system is based: U.S. taxpayers voluntarily comply with the tax laws and report their income and other tax items honestly.

10. Withholding

Also known as pay-as-you-earn taxation, the withholding method enables taxes to be taken out of your wages or other income as you earn it and before you receive your paycheck. These withheld taxes are deposited in an IRS account and you are credited for the amount when you file your return. In some cases, taxes also may be withheld from other income such as dividends and interest.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Do you have to file taxes? The answer depends on your age, income and filing status

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

tax filing

 

Some people don’t need to file taxes every year, but this reprieve from tax duties generally applies to those whose earnings don’t meet certain thresholds.

You must consider three things when determining if you need to file a tax return: your age, your filing status and your income. Once you reach a certain income level, the law usually requires you to file taxes. The amounts are adjusted annually for inflation.

Tax-filing earnings thresholds for 2016 taxes

Tax-filing earnings thresholds for 2016 taxes

ACA premium credit claim

If you got health care coverage as required by the Affordable Care Act, also referred to as ACA or Obamacare, you might need to file a return.

This is the case if you qualified for federal help in buying your health care coverage through the health insurance marketplace. If advance payments of the ACA premium tax credit were made for you, your spouse, or a dependent who obtained such marketplace medical coverage, that amount must be reported by filing a Form 1040 tax return and Form 8962, Premium Tax Credit.

This will ensure that you got the appropriate tax credit in advance. If you received too much premium help, you’ll have to repay it with your return filing. If you did not get enough, you can collect the extra when you file.

Filing a return

As the table indicates, individuals younger than age 65 must file if they make certain amounts. The earnings threshold amounts go up a bit for older (65-plus) individuals.

Regardless of age, the earnings target is the same for married couples who file separate tax returns.

In most situations, your age for tax purposes depends on how old you were on the last day of the year. But when it comes to determining whether you have to file a return, the IRS says if you turned 65 on New Year’s Day, you are considered to be 65 at the end of the previous tax year. The one-day grace period allows you to use the higher income thresholds to determine whether you must file a tax return.

Dependents and filing

The IRS also has different rules for dependents who earn money. And even though it’s children we’re usually talking about, the IRS doesn’t make it easy, setting different earning standards for the two types of income — unearned or earned — that trigger filing requirements.

Generally, a child must file a return and pay tax due. But the amounts that trigger the filing depend on the type of income:

  • Earned, generally characterized as a salary, wages or tips. It also includes taxable scholarships and fellowship grants.
  • Or unearned, which includes investment interest or dividends, capital gains, unemployment benefits and some trust distributions.

The amount of each type of earnings that triggers a young person’s filing requirement is adjusted each year for inflation and is calculated using a formula that factors in the annual standard deduction amount.

Older individuals and persons of any age who are blind also must make some extra calculations to determine if they need to file a Form 1040.

Self-employment earnings

Don’t forget about self-employment earnings, whether you’re a teenager running a neighborhood lawn service or an adult with a 10-person manufacturing operation. This money counts toward determining if you have to file a return, regardless of whether it was your sole source of income or just an occasional side job to make a little extra cash.

If your annual gross self-employment income is at least as much as the income level for your filing status, you have to send in a Form 1040 and Schedule C or Schedule C-EZ reporting your earnings.

You also must file a Schedule SE to pay self-employment tax if your net earnings exceed $400.

When it pays to file

For those few who don’t legally have to file, it sometimes pays to send in a return anyway.

This is the case for individuals who don’t earn much but might be eligible for the earned income tax credit. This benefit is available to qualified individuals even if they owe no tax, meaning they would get money back from the federal government. Many people think the credit is available only to parents. It’s not. But the credit amount is greater for eligible low-wage taxpayers with children.

Plus, the IRS says that most individual taxpayers are due a tax refund. But those taxpayers must send in a Form 1040 or Form 1040A or Form 1040EZ to get that cash.

You can check out the filing requirements section of IRS Publication 17 for more details.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

The 10 best tips to prepare for the 2017 tax season

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

2017 tax filing season, tax tips

It’s hard to believe the 2017 tax season is already here, and you’ll be getting the information you need to settle up your 2016 tax return with Uncle Sam. Take advantage of the tax benefits available to you throughout the year.

First, think about getting organized. It’s important to have one place — a large envelope or a file folder — where you can accumulate tax information as it arrives. When it is finally time to fill out the tax return, a lot of information is required and every detail counts in making it a smooth process.

Read on for 10 savvy tips for tax-filing season.

1. Maximize retirement plan contributions

If your employer offers a 401(k) or other type of deferred pension plan, make every effort to contribute the maximum amount allowable — especially if your employer matches your contribution. Otherwise you are leaving money on the table that could benefit you in your retirement. Think of the employer match as an immediate 100 percent return on your money. Even if there is no match, all of the funds are tax-deferred and grow tax-free.

If your employer does not offer a retirement plan, then consider making a contribution to a traditional individual retirement account or a Roth IRA. The former potentially offers a tax deduction for the year the contribution is made, but both offer tax-deferred gains.

2. Adjust your withholding

Check your year-to-date withholding and consider changing the taxes withheld if you are expecting a large refund.

This is especially important if you are claiming the earned income tax credit, or EITC, or the additional child tax credit. Why? The IRS is now required by law to hold all refunds on those returns until Feb. 15. The new law was put into place to allow the agency additional time to detect and prevent tax fraud.

IRS Commissioner John Koskinen said in a statement: “It’s a personal choice if you want to have extra money withheld to get a bigger tax refund, but you have options available if you prefer to have a smaller refund next year and more take-home money now.” You will need to complete Form W-4, Employee’s Withholding Allowance Certificate, to adjust the amount of taxes withheld and submit it to your employer.

3. Protect your identity

Speaking of tax fraud, if you received an Identity Protection PIN, or IP PIN, in the past, then you must provide this number on your tax return not only this year but on all future tax returns. An IP PIN is a six-digit number assigned to eligible taxpayers that helps prevent fraudulent returns from being filed under your Social Security number. Remember, the IP PIN is your friend in getting the IRS to accept your tax return. However, this is no ordinary IP PIN, as it changes every year. You read that correctly: every year! If you do not receive the notification in the mail, you will need to go to the IRS website to retrieve it.

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4. Get what’s yours

According to the IRS, one out of every five workers fails to claim the very valuable earned income tax credit. If you worked and earned less than $53,505 in 2016 (the limit will be $53,930 in 2017), then use the EITC Assistant tool to determine if you qualify for the credit. You must file a return in order to receive the credit. Don’t miss out on this!

5. Declutter and reap a tax break

If one of your New Year’s resolutions is to simplify and declutter your life, now is the time to get going. You can make money by donating all of those things you no longer need or want in your life. There are many charitable organizations that accept items other than cash such as clothing, books, electronics and other household items. The deduction is limited to the item’s fair market value, and the items must be in good condition or better to be deductible. If the value of the noncash items is more than $500, then you must file Form 8283, Noncash Charitable Contributions, and fill it in with some details. But it is well worth the effort.

6. Cash in on scholarly tax breaks

If you, your spouse or dependents had higher education costs in 2016, there may be some tax savings for you. In fact there are multiple benefits available. The only difficult part is figuring out which one works best in your situation.

Basically there are three different benefits: the American opportunity credit, the lifetime learning credit and the tuition and fees deduction. There are various requirements that may limit the benefit, but the IRS once again offers a useful tool: the Interactive Tax Assistant tool to help you find your way through the maze. You should receive Form 1098-T, Tuition Statement, from your school with the information required by the IRS to complete Form 8863, Education Credits.

7. Get health coverage in order

Make sure you know what you need to report to the IRS on your health insurance. The shared responsibility provision requires that you and your family have minimum essential coverage or qualify for a health coverage exemption. Otherwise, you must make an individual shared responsibility payment for all months that you didn’t have coverage or an exemption.

Most taxpayers just need to do one thing: Check the box that indicates you had health care coverage for all of 2016. If that is not the case or you received advance payments of the premium tax credit on the marketplace, then you may need to fill out Form 8965, Health Coverage Exemptions, and Form 8962, Premium Tax Credit, to complete your tax return. For more information, visit the IRS page on the Affordable Care Act.

8. Know the rules about foreign accounts

Have a foreign bank account? Was the balance in the account(s) greater than $10,000 total? If the answer is yes to both, then you need to file what’s commonly referred to as an “FBAR,” a foreign bank account reporting form. The new name is FinCEN Report 114, FinCEN being an acronym for Financial Crimes Enforcement Network. As the name has the word “crime” in it, that should light a fire under your seat to make sure you’re in compliance as the penalties are very high for failing to report.

The requirements don’t stop there. If you maintain very high balances in your foreign accounts, you’ll have to file IRS Form 8938, Statement of Specified Foreign Financial Assets.

Also, if you meet certain thresholds of ownership in any foreign corporations or partnerships, or if you are the beneficiary of a foreign trust, you should be aware of the complex reporting requirements in those instances. Just a few of the pertinent forms are: Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations; Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. All are available at the IRS website.

9. Be generous without tax repercussions

Every so many years, the IRS changes the annual exclusion for gifts that you can give without having to file a gift tax return. If you gave more than $14,000 in cash, property or gifts to anyone, you must report the gift on Form 709. If you are married, you can give a combined $28,000 and remain under the radar.

Note that this applies to the person giving the gift; if you are receiving a gift, congratulations — you don’t have to do anything. That is, unless you receive a gift from a non-U.S. person. If you happen to receive such a gift that is greater than $100,000, you will have to report this on the IRS Form 3520.

10. Be smart when you file

When filing your return, the quickest and easiest way to receive your refund is to electronically file your return and use direct deposit. If you owe money, use IRS direct pay from your checking or savings account. And whatever else you do, please make sure you keep a copy of your filed tax return. Believe me, it saves so much trouble in so many ways in the event you do happen to need it.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.