What follows is a true story. A story with a sad ending. But one that has a lesson for everyone. Stick with the story, with a high degree of certainty most tax surprises can be identified with a little help.
The ingredients Background. Back in the 1970s, U.S. Savings Bonds were a popular savings alternative. Grand parents purchased them for kid’s college. Many used them to build funds for retirement. Even better, you paid ½ the face value and later (usually 20 years) the bonds matured at twice what you paid for them. So a $1,000 investment yielded $2,000 when it reached maturity. Our ingredients. In our case, this tax bomb had the following ingredients:
The bomb is set Joe purchased Series E saving bonds each year in the 1970s. With half down and promise of double value upon maturity, Joe amassed a nice $140,000 retirement fund. After 20 years the bonds matured. Joe did not yet need the money, so he converted them to Series H savings bonds. This effectively deferred the interest income on the old, Series E, bonds since the bonds were not cashed. With the new Series H savings bonds, Joe paid federal income tax each year on the interest earned. Meanwhile the taxable interest from the series E bonds continued to be deferred. The result? Joe thought he was paying tax on the interest each year...BUT there was a sleeping tax bill on interest of $70,000 just waiting until Joe cashed in his series H bonds! The bomb explodes Joe received word that his series H bonds would no longer pay interest. So he tells his grandson to go to a bank and cash in the bonds. Heck, why have bonds that no longer pay interest? And...it’s no big tax deal because he has been paying tax on his Series H bond interest each year. The grandson has financial power of attorney so he does as his grandfather asks. Surprise! He receives a notice from the IRS saying he owes them $24,000! This includes plenty of penalties and tax. Lessons for all of us
Because neither the bank nor federal taxing authorities believe it is part of their duty to help you make knowledgeable tax decisions, you are on your own. This one-way street of knowledge makes having an expert on your side more important than ever! "Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs. We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com. Mia Verc, CPA; Janice Papais, CPA
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There are a lot of positive things about getting married, but the IRS' marriage penalty isn't one of them. The marriage penalty occurs when you pay more tax as a married couple than you would as two single filers making the same amount of money. It pops up again and again in the federal tax code. Thankfully, legislation in recent years is shrinking the problem, but it still exists. Here is what you need to know.
Tax Social Security benefits Probably the worst example of the ongoing marriage penalty is imposed on older couples. Talk about insult! You make it to retirement as a couple and then get your Social Security taxed more quickly. This occurs because two single seniors start getting their Social Security retirement benefits taxed when their income exceeds $25,000. So the married threshold should be $50,000, right? Nope, it is $32,000. When you consider up to 85% of this benefit is taxable, is it a marriage penalty on couples that can least afford it! Accelerating phase-outs The tax code is filled with various income phaseouts for benefits, credits and deductions. Thankfully most now have the marriage penalty taken out, but it still exists in things like the Adoption Credit and Roth IRA contribution limits. But probably the worse example is that the earned income tax credit (EITC) phase-outs favor single versus married taxpayers. A single mother of three in 2021 can qualify for the EITC with income less than $51,464, while a married couple loses the EITC with combined income over $57,414. This is often one of the driving reasons for not marrying when you have lower income and children are in the home. Affordable Care Act piles onto the marriage penalty The Affordable Care Act also penalizes married couples with lower thresholds on its 0.9 percent wage surtax and 3.8 percent investment income tax. The income thresholds for these surtaxes are $200,000 for single filers and $250,000 for married couples filing jointly. As a result, singles who each earn $125,000 to $200,000 can get hit with the extra tax after they marry. Even Itemizing deductions favors single taxpayers One of the new provisions in the tax code that limits itemizing deductions is the $10,000 upper limit on taxes, like property taxes and sales taxes, that can be used for itemizing deductions for a single taxpayer. The limit for a married couple? Not $20,000. It is the same $10,000! Congress must not think a family may need a bigger place to stay or need to spend more for the extra family members. The tax rate problem is now better However, there is some good news on the marriage penalty front. Prior to law changes in 2017, most married couples paid higher tax rates than if they were two single people. This penalty is now eliminated for all but the highest earners. The marriage penalty now comes into play in the 34% tax bracket that begins with combined incomes well over $200,000. Most of us can see the results of this penalty in the news as celebrities conduct their tax planning and delay or avoid tying the knot. The most import part of the marriage penalty is awareness of the problem. By knowing the tax pitfalls you can plan around them, and perhaps influence a change for the future. Every year the IRS mails letters or notices to taxpayers for many different reasons. Typically, it’s about a specific issue with a taxpayer’s federal tax return or tax account. A notice may tell them about changes to their account or ask for more information. It could also tell them they need to make a payment. This year, people might have also received correspondence about Economic Impact Payments or an advance child tax credit outreach letter.
Here are some do's and don'ts for anyone who receives mail from the IRS:
"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs. We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com. Mia Verc, CPA; Janice Papais, CPA If you work remotely in another state or are thinking about changing your residence from one state to another, you may be caught in the middle of a major state tax audit. If you keep a home in your original state or you later decide to return, you could have even more tax problems. State tax authorities may argue you never really left, and that you owe them a big tax bill for all the income you earned while away. Here are tips to ensure this does not happen to you.
Understand domicile Tax residency is usually based on the concept of domicile. You may have many homes, but you can only have one domicile. A domicile is the place you intend to be your permanent home, and where you intend to return after being away. When these cases go to court, they are often decided by determining a person's intentions regarding their domicile. Consider this hypothetical example: Illinois resident Steve Seeyoulater moves to an apartment to pursue a lucrative job opportunity in Arizona leaving his wife and children behind in St. Paul, Minnesota to finish the school year. Steve reasoned that since he spent more than 70 percent of his time in Arizona, he could file his state return there and take advantage of its lower tax rate. The state of Minnesota could easily disagree with Steve's assumption, since on the surface Steve may intend for his permanent home to remain where his family is, in Minnesota. In this case, both states will have a claim on Steve's income. Know the rules before you move Before moving or working remotely, research the residency rules in your home and destination states. They often vary from state to state. Some states have specific guidelines on the number of days its residents must be in the state. Others are less exact. Keep good records If you say you are in a state for a certain period of time, be ready to support your claim. If during an audit your credit card receipts conflict with where you claimed to be at the time, you will have problems. Demonstrate your intentions If you're going to file as a resident of a new state but also have a potential tax claim in another state, you have to be able to demonstrate your sincere intent to change your domicile. Here are some things you can do:
The last thing you want is a call from a state auditor looking for income tax. By being prepared, you can greatly reduce the risk of a surprising tax bill. Reach out if you'd like to discuss your unique situation. "Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs. We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com. Mia Verc, CPA; Janice Papais, CPA As your children grow older, you can easily be surprised by a larger tax bill. To help ease the possible burden, consider these tax implications as your dependent children age. A higher tax bill in your future At age 6: Loss of excess Child Tax Credit. In 2021, the Child Tax Credit is $3,600 for children under the age of 6. This is an extra $600 that will go away after your child ages out of the benefit. Even more important this benefit is currently scheduled to disappear after 2021. At age 13: loss of your Dependent Care Credit. If your children are in daycare and you offset some of this cost with the Dependent Care Credit you will lose this benefit when they reach age 13. The impact: a 50% credit against up to $16,000 in qualified daycare expenses in 2021. The good news here is that your children may no longer need the care as they get older. At age 17 or 18: loss of the Child Tax Credit. While children under the age of 6 get an extra $600, after the age of 17 the balance of this credit goes away. This could amount to a tax bill increase of $2,000 to $3,000 per child, depending on your income. But stay tuned, Congress is actively looking to change this tax benefit. At age 19 (24 if a full-time student): loss of the Earned Income Tax Credit (EITC). The EITC pays a potential credit worth up to $6,728 for people with three or more qualifying children. Children stop being counted when they turn 19, or when they are 24 if they are full-time students. What to do Many of the child-related credits and deductions are meant to offset the cost of raising a child. Prepare now for the inevitable change in your tax situation that occurs when they go away. Here are some ideas:
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs. We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com. Mia Verc, CPA; Janice Papais, CPA Mutual funds benefit from the long-standing belief that they allow investors to diversify their holdings without buying individual stocks. But to the unwary investor, tax surprises are abound. From a tax planning viewpoint, here are some great mutual fund tips. Most of these tips assume your mutual fund investment is not in a retirement account like a 401(k) or traditional IRA, unless otherwise noted.
"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs. We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com. Mia Verc, CPA; Janice Papais, CPA |
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June 2023
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