Category Archives: Tax planning

Apr 11

Ten Tips on Making IRA Contributions

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The IRS has 10 important tips for you about setting aside money for your retirement in an Individual Retirement Arrangement.

1. You must be under age 70 1/2 at the end of the tax year in order to contribute to a traditional IRA.

2. You must have taxable compensation to contribute to an IRA. This includes income from wages, salaries, tips, commissions and bonuses. It also includes net income from self-employment. If you file a joint return, generally only one spouse needs to have taxable compensation.

3. You can contribute to your traditional IRA at any time during the year. You must make all contributions by the due date for filing your tax return. This due date does not include extensions. For most people this means you must contribute for 2012 by April 15, 2013. If you contribute between Jan. 1 and April 15, you should contact your IRA plan sponsor to make sure they apply it to the right year.

4. For 2012, the most you can contribute to your IRA is the smaller of either your taxable compensation for the year or $5,000. If you were 50 or older at the end of 2012 the maximum amount increases to $6,000.

5. Generally, you will not pay income tax on the funds in your traditional IRA until you begin taking distributions from it.
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6. You may be able to deduct some or all of your contributions to your traditional IRA.

7. Use the worksheets in the instructions for either Form 1040A or Form 1040 to figure the amount of your contributions that you can deduct.

8. You may also qualify for the Savers Credit, formally known as the Retirement Savings Contributions Credit. The credit can reduce your taxes up to $1,000 (up to $2,000 if filing jointly). Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the Saver’s Credit.

9. You must file either Form 1040A or Form 1040 to deduct your IRA contribution or to claim the Saver’s Credit.

10. See Publication 590, Individual Retirement Arrangements, for more about IRA contributions.

Apr 09

Eight Tax-Time Errors to Avoid

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Continuing my posts related to tax planning, the IRS released the following, which I am re-posting.

If you make a mistake on your tax return, it usually takes the IRS longer to process it. The IRS may have to contact you about that mistake before your return is processed. This will delay the receipt of your tax refund.

The IRS reminds filers that e-filing their tax return greatly lowers the chance of errors. In fact, taxpayers are about twenty times more likely to make a mistake on their return if they file a paper return instead of e-filing their return.

Here are eight common errors to avoid.

1. Wrong or missing Social Security numbers.  Be sure you enter SSNs for yourself and others on your tax return exactly as they are on the Social Security cards.

2. Names wrong or misspelled.  Be sure you enter names of all individuals on your tax return exactly as they are on their Social Security cards.

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4. Math mistakes.  If you file a paper tax return, double check the math. If you e-file, the software does the math for you. For example, if your Social Security benefits are taxable, check to ensure you figured the taxable portion correctly.

5. Errors in figuring credits, deductions.  Take your time and read the instructions in your tax booklet carefully. Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit and the standard deduction. For example, if you are age 65 or older or blind check to make sure you claim the correct, larger standard deduction amount.

6. Wrong bank account numbers.  Direct deposit is the fast, easy and safe way to receive your tax refund. Make sure you enter your bank routing and account numbers correctly.

7. Forms not signed, dated.  An unsigned tax return is like an unsigned check – it’s invalid. Remember both spouses must sign a joint return.

8. Electronic signature errors.  If you e-file your tax return, you will sign the return electronically using a Personal Identification Number. For security purposes, the software will ask you to enter the Adjusted Gross Income from your originally-filed 2011 federal tax return. Do not use the AGI amount from an amended 2011 return or an AGI provided to you if the IRS corrected your return. You may also use last year’s PIN if you e-filed last year and remember your PIN.

Apr 05

Get tax credit for making your home energy efficient

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If you made your home more energy efficient last year, you may qualify for a tax credit on your 2012 federal income tax return. Here is some basic information about home energy credits that you should know.

Non-Business Energy Property Credit

  • You may claim a credit of 10 percent of the cost of certain energy saving property that you added to your main home. This includes the cost of qualified insulation, windows, doors and roofs.
  • In some cases, you may be able to claim the actual cost of certain qualified energy-efficient property. Each type of property has a different dollar limit. Examples include the cost of qualified water heaters and qualified heating and air conditioning systems.
  • This credit has a maximum lifetime limit of $500. You may only use $200 of this limit for windows.
  • Your main home must be located in the U.S. to qualify for the credit.
  • Not all energy-efficient improvements qualify, so be sure you have the manufacturer’s credit certification statement. It is usually available on the manufacturer’s website or with the product’s packaging.
  • The credit was to expire at the end of 2011. A recent law extended it for two years through the end of 2013.

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Residential Energy Efficient Property Credit

  • This tax credit is 30 percent of the cost of alternative energy equipment that you installed on or in your home.
  • Qualified equipment includes solar hot water heaters, solar electric equipment and wind turbines.
  • There is no limit on the amount of credit available for most types of property. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.
  • You must install qualifying equipment in connection with your home located in the United States. It does not have to be your main home.
  • The credit is available through 2016.

Apr 03

ATRA Income Tax Planning

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I received this from the OSU Tax Newsletter and thought I would share.

ATRA Income Tax Planning

    In the American Taxpayers Relief Act of 2012, there was very little “relief” for upper income taxpayers.  Many of those individuals with larger resources feel that they were a target of that tax act.  The Joint Committee on Taxation estimates that these upper-income taxpayers will pay approximately $620 billion of increased taxes over the next decade.
The tax amounts that are raised are the result of increasing the top income tax rate to 39.6% and the top capital gains rate to 23.8%.  There also are phase-outs of personal exemptions and a 3% floor on itemized deductions.  With the major changes in ATRA that increased taxes on taxpayers with higher incomes, there are compelling reasons for these individuals to reduce their adjusted gross income (AGI).

Single Persons

There are multiple levels of income that will lead to potential tax increases.  The 2013 alternative minimum tax exemption of $51,900 is gradually phased out for incomes over $115,400.  A single person with AGI over $200,000 is subject to the 3.8% Medicare tax on passive income.
With AGI over $250,000, the 3% floor on itemized deductions is applicable.  Excess income over that amount is multiplied by 3% and up to 80% of itemized deductions may be lost due to that floor.
Finally, single persons with taxable incomes over $400,000 are subject to the top 39.6% income tax rate and 23.8% capital gains tax rate.  These individuals who have passive income will also be subject to the Medicare tax for a total tax on passive income of 43.4%.

Married Persons

Married persons will also be subject to higher taxes as income increases.  The alternative minimum tax exemption of $80,800 for 2013 is phased out starting at incomes of $153,900 and above.  At $250,000 in AGI, the 3.8% Medicare tax applies to passive income.  Over $300,000 in AGI, the 3% floor on itemized deductions applies and the personal exemption is phased out.
Finally, with $450,000 of taxable income, a married couple pays 39.6% income tax and 23.8% capital gains tax.  In addition, a high income person with passive income will also pay the Medicare tax for a total 43.4% tax rate.

General Income Tax Planning

Upper-income persons will be discussing various planning strategies with their CPAs and other advisors.  First, the recommended strategy will be to fund retirement plans to the maximum levels.  Second, the capital gains tax rates are still much lower than ordinary income rates and therefore it is preferable if possible to receive income taxable as capital gain.
Finally, tax-free income through municipal bonds will continue to be an option.  However, with the current very low interest rates on bonds and the potential for inflation over the next decade to reduce bond principal values, this is not a highly attractive investment.

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Apr 02

Five Tax Credits to Lower Your Taxes

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As we have just reached April and taxes are due in less than two weeks, it is important to review a few items that could help you lower the amount you have to pay to the government. A tax credit reduces the amount of tax you must pay. A refundable tax credit not only reduces the federal tax you owe, but also could result in a refund.

Here are five credits the IRS wants you to consider before filing your 2012 federal income tax return:

1. The Earned Income Tax Credit is a refundable credit for people who work and don’t earn a lot of money. The maximum credit for 2012 returns is $5,891 for workers with three or more children. Eligibility is determined based on earnings, filing status and eligible children. Workers without children may be eligible for a smaller credit. If you worked and earned less than $50,270, use the EITC Assistant tool on IRS.gov to see if you qualify. For more information, see Publication 596, Earned Income Credit.

2. The Child and Dependent Care Credit is for expenses you paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent. The care must enable you to work or look for work. For more information, see Publication 503, Child and Dependent Care Expenses.
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3. The Child Tax Credit may apply to you if you have a qualifying child under age 17. The credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return. You may be required to file the new Schedule 8812, Child Tax Credit, with your tax return to claim the credit. See Publication 972, Child Tax Credit, for more information.

4. The Retirement Savings Contributions Credit (Saver’s Credit) helps low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or a retirement plan at work. The credit is in addition to any other tax savings that apply to retirement plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).

5. The American Opportunity Tax Credit helps offset some of the costs that you pay for higher education. The AOTC applies to the first four years of post-secondary education. The maximum credit is $2,500 per eligible student. Forty percent of the credit, up to $1,000, is refundable. You must file Form 8863, Education Credits, to claim it if you qualify. For more information, see Publication 970, Tax Benefits for Education.