Your Guide to Some of the Latest Income Tax Changes

2020 was a year greatly affected by the Coronavirus pandemic and its implications. Thus, it just makes sense that some relevant tax changes were made for 2021, as well as some general, non-COVID changes. Regardless of the reasons for the latest tax revisions, it’s important for you to be aware of these changes and how they may affect you so that, when possible, you can use them to your advantage.  

Get Rewarded for Being Charitable  

In the recent past, charitable donations only counted for a federal tax deduction if you itemized your deductions. For 2021, however, all taxpayers are eligible to deduct for financial donations up to certain amounts. Those who take the standard deduction can deduct up to $300, while those who itemize don’t face the same caps they have in previous years.  

These changes are a direct result of the coronavirus and the increased need for more people to donate and help others.  

Changes to Marginal Income Tax Brackets  

There have also been some changes to the income tax brackets, which is common and not directly related to the pandemic. However, it’s important for you to check these new brackets, in relation to your filing status and income, to determine if you’re in the same bracket or a different bracket than you were last year. Due to COVID, many people may find themselves in a lower tax bracket, which would mean lower taxation.  

Contributions to Health Savings Accounts

If you were hoping to contribute a little more to your health savings account, you’re in luck! Contribution limits were raised this year.

Those with self-only coverage can now contribute $3,600, instead of last year’s $3,550. And, those with family coverage can now contribute an extra hundred dollars, for a total contribution limit of $7,200.

While this might seem like a lot of changes, it barely scratches the surface! To ensure you are aware of all tax changes and how they may affect you, work closely with a tax professional. This is the best way to offset any changes that might affect you negatively and to take advantage of any and all changes that could affect you positively.

How the Estate Tax Exemption Changed for 2021

If you own property you want to pass on after you die or if you are the heir to a property, it’s important to know about the federal estate tax, as well as the estate tax exemption. Essentially, an estate tax is a tax that is charged when a deceased person’s estate is transferred to someone else. The good news, for many, is that there are exceptions to the rules that may keep a transfer from being subjected to this tax. 

Changes for 2021

As mentioned, one such exception or exemption to the federal estate taxes is that estates valued under a certain amount do not qualify for the federal estate tax. In 2020, as long as an estate was valued at under $11.58 million, it was not subject to this tax. And, for 2021, the exemption amount is even higher: $11.7 million. As such, the vast majority of estates are not going to be subject to this tax.  

When You’re Not Exempt . . .  

As you might imagine, the vast majority of estates are not going to be valued at $11.7 million or more. But, on the off chance that you inherit an estate above that amount, expect to be taxed quite a bit.  

Generally, the first $1 million of the estate is taxed at a lower amount, between 18% to 39%, depending on how much it exceeds the exemption amount. Then, anything remaining after that first million is taxed at a whopping 40%.

Seeking Help

If you’re like most Americans, the federal estate tax probably won’t be something you’ll ever have to contend with. However, if you’re planning to transfer or accept an estate, it’s still wise to prepare properly, ideally with the help of a financial professional. That way, you can ensure your estate gets passed on exactly as you had planned or that you can accept an estate with no ugly financial surprises in store.

And, if you are ultimately subject to the estate tax, it’s even more important to get help managing your overall financial situation and tax bill to stay out of tax trouble!

Charitable Gifts and Your 2020 Taxes

Everyone has items that they don’t need taking up space in their homes. And, the right thing to do isn’t to toss them in the trash, but to donate them! Thankfully, when you do donate these items, you may qualify for a tax deduction, but it’s not as simple as deducting the value of the item. Instead, there are tricky rules that you must navigate to help you make your decision.  

The Fair Market Value Question  

When you give an item, you have to take into consideration its current condition when determining its value, as well as what the average person would generally and reasonably pay for this item. Age and the overall shape the item is in play a big role in helping you to make this decision, but even with all those things considered, deciding on a value that the IRS would agree with can be tricky.  

That’s why it’s best to speak with a tax professional to help you find ways of reasonably determining value or, at the very least, to use an up-to-date tax program that can help you to come up with a safe value for deductions.  

When in Doubt, Opt for an Appraisal  

While fair market value can be helpful in determining the approximate value of basic items, like used clothing or home appliances, it doesn’t really work with more valuable things, such as cars or expensive artwork.  

In these cases, it’s a good idea to have a professional appraisal or other valuation process performed. For some items and some values, the IRS may even require it. At the very least, having an appraisal, whether it’s required or not, provides you with some protection in the event of an audit. But, really, in cases like these, professional tax help is strongly recommended to ensure you’re as protected as possible.  

Ultimately, giving charitable gifts is a wonderful thing. But, if you’re going to deduct the worth of those gifts from your taxes, you’ll need a little help, or at least a little research and effort, to ensure you report everything correctly.

Selling Stocks? What You Should Know

 If you have stocks, there may come a time in which you wish to sell some of them. But, what does selling stocks mean for your tax bill? Well, it depends on whether you gain money or lose money on the transaction.

When You Earn Money

Earning money on your stocks is a good thing! It’s why you bought the stocks in the first place. But, unfortunately, the money you earn will be taxed. More specifically, you’ll owe a capital gains tax. To determine your capital gain, subtract what you paid for the stocks from what you earned.

This is the amount you report as income and get taxed on. Note that the taxation amount will vary based on how long you’ve had the stocks in question. If you had them for more than a year, the taxation rate is the same as the taxation rate on your normal income. Or, if you owned the stock for longer than a calendar year, your tax rate will be based on the capital gains tax bracket you fall into.  

When You Lose Money  

Sadly, stocks can be unpredictable. And, sometimes, despite your best efforts, you may lose money on the sale of a stock. When that happens, you can use the loss to offset any gains you may have experienced. Just make sure you use the same kinds of losses with the same kinds of gains, short-term or long-term, when possible. You are actually required to do this first if you can. If you can’t, however, then you may use the loss to offset another type of gain.  

You can also simply subtract the loss, up to $3000, from your regular income.  

As you can see, just like with any investment, tax rules do apply to stocks and to the money you earn or lose as a result of them. To ensure you invest in the best possible stocks, that you sell at opportune times, and that you manage both gains and losses as effectively as possible, don’t underestimate the power and helpfulness of a knowledgeable tax professional.

What and When is the Tax Calendar Year?

 

The term “tax year” may seem simple, but it actually causes a lot of confusion for a lot of people. However, if you put in a little effort to properly understand what it is and when it occurs, you can save yourself a lot of hassle.   

It Really is a Calendar Year . . .  

First of all, know that the tax year really is just a standard calendar year, at least for most people. Just like the regular year, it runs from January 1st to December 31st. The only difference is that, when you file on your tax deadline, you’re filing for the previous year. So, when you file in 2021, for example, you’re actually filing your 2020 taxes, which makes sense because 2021 isn’t even halfway over at that point!  

But It Doesn’t Necessarily Have to Be  

While most taxpayers will file and pay their taxes based on the calendar year, you don’t necessarily have to do it that way. If you prefer, you can file using the fiscal year formula. In this situation, your fiscal year can end on the last day of any month except December since that day reflects the calendar year formula.  

Organizations—this option is not generally used by individual taxpayers—have various reasons for using the fiscal year formula. If you think it could be right for you, you’ll need to talk the option over with a tax professional, and you’ll also need to go through the required steps to get approval from the IRS for filing your taxes this way.  

The Rules Do Change  

Hopefully, some of your confusion over what constitutes a “tax year” has been cleared up. But, there are still a few other things to understand. For one, know that tax rules do change from year to year, and you’ll need to keep the most current set of rules in mind when you file your annual taxes.  

For this reason, it’s highly advisable to use tax software that’s up to date and that can factor in changes for you or, even better yet, to work with a professional accountant who knows the ins and outs of tax laws and the most recent changes to these laws.  

Yes, taxation can be confusing. But, taxes aren’t something that ever go away, so you must do your best to regularly educate yourself and to seek the right help when necessary. After all, calendar year after calendar year (or fiscal year after fiscal year, as the case may be), you’ll have to keep right on filing no matter what!

Phone Calls from the IRS: Proceed with Caution

Imagine this scenario: you’re sitting at home and the phone rings. You answer, only to be told that the caller on the other end is an IRS agent who needs to speak with you urgently. Your caller ID might even seem to verify that the IRS is calling. But, don’t be too quick to hand out information, such as your

Social Security number or your credit card number. More often than not, phone calls from the IRS aren’t really from the IRS at all, but from scammers. Here are some warning signs of a fraudulent caller that can keep you from getting tricked.  

Warning Sign #1: You’ve Had No Prior Communication  

The first thing to think about is whether or not you’ve had any recent contact, via official mail, not email, with the IRS. If you haven’t, then you’re likely not talking to a real IRS agent. The IRS handles almost all of its communications via regular postal mail. They typically won’t call you to tell you that you owe money or anything of the sort. And, they definitely won’t call you out of the blue without any prior notice. If you’re still unsure, tell the caller you’d prefer to hang up and to dial the official IRS number for yourself. If they protest, do it anyway! The real IRS cannot penalize you for protecting yourself in this way.  

Warning Sign #2: You’re Asked to Pay in an Odd Way  

You can also tell if you’re dealing with a scammer if they demand you pay a tax bill immediately and in a nontraditional way. Most scammers will order you to head to your local Western Union to send a wire transfer or to buy a prepaid debit card and give them the numbers. That’s definitely not legitimate as the IRS only accepts funds via official online or mail-in payment options, which are detailed on their official website.  

Warning Sign #3: You’re Threatened  

The way that scammers trick most people is by scaring them. They may tell you that if you don’t pay right away they’ll have you arrested, deported, or sued. Don’t panic, and don’t let those threats get to you. If the IRS was going to take some action against you, it would do so legally and with due process, and typically only after a lot of warnings and official communication.  

Sadly, there are many scammers in the world who try to dupe unsuspecting people out of their hard-earned money. Don’t be one of these victims. Never provide personal information over the phone, and ensure all your contact with the IRS happens via official channels. 

The IRS: What's it All About?

If you live in America, chances are that you have heard of the Internal Revenue Service, more

commonly referred to as the IRS. This is the agency that insists you file and pay your taxes each year. But, what do you really know about this federal giant? Before you write that next check or fill out your next tax form, why not take a moment to understand the big picture of this agency?  

The IRS: A Basic Definition  

While different people have varied views on the IRS and how it fits into the structure of this country, it is not designed to just be some evil entity that takes your money. Instead, it’s a federal agency that has been taxed (pun intended) with collecting tax revenue from individuals and businesses, which it then hands over to the federal government. The IRS has a lot of power, especially when it comes to its main job: collecting taxes. Thus, like it or not, you do have to follow the rules and policies it sets forth. Otherwise, you could find yourself in a whole lot of trouble.  

What the IRS Does  

While collecting taxes is the IRS’ main job and, of course, what it is known for, it has other duties as well. It’s responsible for processing tax returns, providing helpful information to taxpayers, sending out refunds and stimulus payments when they’re owed, and enacting investigations and audits. The IRS does these things for just about every working adult in the country, so it's really no surprise that it’s often very busy and that you might have to wait a while when you call the IRS with a question.  

The Bottom Line  

Without the IRS, people wouldn’t have to pay taxes. But, without taxes, Americans wouldn't enjoy many of the protections and conveniences they currently take for granted. So, while you might still grumble the next time you have to pay taxes, remember that the IRS is responsible, at least in part, for a lot of the comforts Americans enjoy, and, like it or not, it has an important role to play in modern society.

 

Understanding Medicare Taxes

If you’ve been working for a while, you’ve probably noticed that some money is automatically

deducted from your regular paycheck. That money, however, doesn’t just disappear into thin air. At least a portion of it goes to fund the Medicare program, but what is this program, and why must you pay into it?  

What is Medicare?  

Medicare is a federal program that collects money from American taxpayers. This money is then used to help pay for the health care expenses of elderly individuals who are at a financial disadvantage. Sadly, there are many such people living in America today, so many that tax dollars alone aren’t enough to adequately care for them. That’s why other funding methods exist, such as special premiums and government revenue. And, while it may not feel good to see money deducted from your paycheck, you should feel glad that the money is going toward hospital expenses and medical costs for the individuals who need it most.  

Why Was I Taxed More Than Usual?  

Sometimes, taxpayers are surprised to find that they are paying more Medicare taxes than usual. When this happens, it is due to the Additional Medicare Tax, which has been in place since 2013, though the income thresholds that determine who is subject to the tax do change.  

As of 2020, any single filer earning over $200,000 per year will face this tax. Married filers must earn more than $250,000 a year to be subject. Unfortunately, though, if you’re married but filing separately, you’ll face this tax if you earn over $125,000 annually. Ultimately, most people probably wouldn’t say that they enjoy paying Medicare taxes. But, when you see the good that Medicare does, it’s hard not to feel like you’re making a difference through your tax dollars.  

However, if Medicare and other taxes are leaving you without enough money to live on, then you may need to look to other options, such as having your returns professionally prepared, taking advantage of credits and deductions, or finding other ways to legally cut your tax bill. After all, helping others via Medicare and various programs is great, but you have to help yourself as well!

 

Get Real Tax Help from the IRS

Let’s face it. Filing your taxes, knowing how much you owe, and even paying your taxes can be incredibly stressful. What’s even worse is when you feel as if you’re forced to go through this stress all on your own. The good news, though, is that you’re not. There are many wonderful resources available

to help you, and that includes the IRS itself. This federal agency has many duties, and one of them is to be helpful to taxpayers. And, in honoring that duty, the IRS has many easy ways for you to get in contact with it.  

Go Online  

Despite what you may have heard, the IRS isn’t stuck in the stone age! It does have a real, legitimate website: IRS.gov. It’s important that, in your online dealings with the IRS, you connect only through this official website since, sadly, there are some scam sites out there. On the legitimate site, though, you’ll find forms, publications, information, and more, all designed to inform and assist you.  

Give Them A Call  

What happens when you can’t find the help you need on the IRS website? In that case, there’s always the telephone! The IRS has several different phone numbers, all of which are free to dial. Each phone line is dedicated to a specific need, and you can find a complete directory on the official site. Unfortunately, calling the IRS does often mean long wait times, but you should eventually be able to connect with a real, live person who can assist you.  

Visit In Person  

Finally, when nothing but in-person help will do, set up an appointment with your local Taxpayer Assistance Center. You can find a list of local centers on the IRS website, as well as details on the type of help that can be provided, and information about what you’ll need to do to secure that help.  

As you can see, the IRS has lots of great resources to assist you. But, many of them do require long waits and lots of patience. For this reason, it may be in your best interest, especially if you’re struggling with a complex tax issue, to enlist the help of a professional accountant or tax preparer. Doing so can get you the same help the IRS would provide but much faster and in a way that’s geared specifically toward benefitting you. No matter how you secure your tax help, though, the main thing is to secure it and to use it to your advantage as much as possible.

What You Need to Know About the Effective Tax Rate

As a taxpayer, you probably hear and see a lot of terms. And, with so many terms being thrown around, it’s very easy to get confused. However, one important term you shouldn’t be confused about is what is known as your “effective tax rate.”   

This rate can be defined as the percentage of your taxable income that you pay via taxes. And, since it relates to what you actually pay in taxes each year, it’s important to understand it fully. Of course, this rate does not determine how much tax you owe, but it can enable you to comprehend whether you are likely paying too much in taxes.  

Effective Tax Rates for Individuals  

One of the first things to understand is that an effective tax rate is defined differently for individuals than it is for businesses.For individuals, it’s simply the average taxation rate for their earned income. Thus, if you don't own a business and don’t have to file business taxes, your effective tax rate is fairly easy to understand.  

Effective Tax Rates for Businesses  

Of course, if you own a business, things get a bit more complex. In this case, your effective tax rate is based on your pre-tax profits.  

Is Effective Tax Rate the Same as Marginal Tax Rate?  

Whether you are a business filer or an individual filer, make sure you do not confuse your effective tax rate with your marginal tax rate. Generally, an effective tax rate is more correct since marginal rates are based on the highest possible tax bracket a person or entity could fall into.  

Does Your Effective Tax Rate Actually Matter?  

With so many tax rate definitions, does your effective tax rate actually matter? The answer is both yes and no. This rate is essentially just a way to see how you fare in terms of other similar taxpayers. But, it can be helpful for planning your budget and knowing where you stand. 

Thus, if you’re unsure about your effective tax rate, how it may affect you, or what it says about the decisions you should be making, do not hesitate to contact a tax professional for guidance and advice. 

How a Tax Levy Can Affect You

“Tax levy” is probably one of the most dreaded phrases in the English language, and, once you understand what it is, it’s easy to see why. A tax levy is a measure enacted by the IRS to collect on money that you owe. It can take different forms, such as the garnishment of your wages, or the seizure of an asset you possess, like a piece of property or the money in your savings account. In order to be affected by a levy, you’d first have to owe unpaid back taxes, but, once you do, and once you’ve been notified as such, watch out! Tax levies are serious business.  

It Won’t Happen Out of the Blue  

The good news is that a tax levy shouldn’t catch you completely unaware. As long as your contact information is current with the IRS, you should have received plenty of warning that a levy was possible. In fact, the IRS can’t and won’t issue a levy unless it has first informed you that you owe money and then, upon your lack of payment, sent a notice of intent to levy. Even after this notice, you still have a month to appeal the IRS’ decision. But, if you don’t act, then a levy is entirely possible and likely.  

Paying is the Easiest Way Out  

As you can imagine, a tax levy can be incredibly devastating. But, there is one easy way out: pay your tax debt in full. If you can’t do that, then your next best option is to contact the IRS to try and work out an installment agreement or other solution. However, the IRS is more likely to work with you if you contact them before a levy has actually been enacted, so the quicker you take action, the better. Of course, that information doesn’t help you much if you’re already facing a levy and its consequences. In this case, reach out to a tax professional who can help you to explore different options to lift the levy. Or, if you've simply received notice of the intent to levy, work with an expert to keep the levy from actually happening. Remember, the IRS uses a levy as a last resort, so it’s always best to not let one occur in the first place. 

How Long Does the IRS Have to Conduct an Audit?

Many taxpayers worry greatly about the risk of facing a tax audit. And, a lot of them breathe a sigh of relief once their taxes are filed and they don’t immediately receive correspondence from the IRS.

Unfortunately, though, these individuals may be ceasing their worries prematurely. The IRS typically has up to three years after a return is filed to decide it wants to audit it.  

How Are Those Three Years Calculated?  

So, you may be wondering, how does the IRS calculate the three-year audit window? Typically, it’s based on the day that your taxes were originally due. Thus, if you file late without a formal extension, you don’t get to just count based on the day you filed. With a formal extension, on the other hand, the audit deadline does move to your approved, extended filing date unless you file before that date. In that case, your audit deadline is based on the day you actually filed.  

Omissions of Income  

If three years, as calculated by the IRS, have passed since you filed a tax return you’re worried about, you may be breathing a little easier. But, don’t breathe too easy just yet!If you omitted income on the return in question and if that income is more than 25% of what you reported, the IRS has longer to audit you. In these instances, it doubles its deadline to a full six years.  

Undisclosed Foreign Assets  

The extended, six-year deadline also applies to tax years in which the taxpayer failed to report foreign financial assets of over $5000.  

Fraudulent Returns  

Finally, if you filed a return that was fraudulent, according to the IRS, there is no statute of limitations on how long it has to conduct an audit.   And, since the IRS gets to determine what constitutes a “fraudulent” return or not, you are basically never in the clear if you’ve been dishonest on a return. 

The Bottom Line  

The IRS holds a lot of power and jurisdiction when it comes to audits. So, even if you think you might be “safe,” you can never fully know for sure. That’s why it’s best to file all returns correctly and thoroughly, ideally with the help of a professional, and also to have a tax expert on your side who can assist you if the IRS does decide that you’re due for an audit.

Did You Miss Out on a Tax Refund?

Everyone likes money, and no one likes missing out on money that’s owed to them. Unfortunately,

though, this happens to a lot of people each year. The money that’s owed to them, in most cases, isn’t from an employer but from the IRS. The good news is that the IRS won’t purposefully try to withhold money that you’re owed. But, if you wait too long, it will, and it’s within its legal rights to do so!  

The Three Year Rule 

Generally, there’s a three year time limit on claiming funds owed to you by the IRS. This deadline is based on the date that your original tax return was due. So, if your tax return was due on April 15th of a given year, you have until three years from that exact date to claim any related refunds for that tax year. 

Extensions  

During some tax years, you may have a valid reason for why you are unable to file by the deadline. In these cases, the IRS may grant you an extension, which legally provides you with more time to file your taxes. In these instances, any refund to which you are entitled will not become uncollectible until three years from the extended due date. If, though, you file your taxes ahead of the extension date, that does change things. In these cases, your refund will expire three years from the date on which you actually filed.

The Seven Year Exception

As is the case with many IRS matters, there are some exceptions to these rules.

If, for example, your refund is owed due to deductions related to worthless securities or bad debt, you have more time to file and claim your refund. In fact, you have a full seven years!

You are also granted immunity from the three-year rule if you can prove that you were unable to claim your refund due to a mental or physical issue that caused incapacitation.

Ultimately, you should always claim any IRS refunds owed to you as soon as possible. After all, the sooner you do, the sooner you get your money! But, if you’re unsure about whether you’re owed money, if the statute of limitations has passed, or if you are a rare exception to the rule, don’t delay! The clock is always ticking with the IRS, and the sooner you take steps, such as enlisting the help of a professional, to claim the money you’re owed, the more likely it is that you’ll actually get it.

Get Familiar with Your W-4

 

If you’ve ever worked a traditional job a day in your life, or if you’re planning to, then you need to be familiar with Form W-4. You’ll see it a lot! Basically, Form W-4 is titled the “Employee’s WIthholding Certificate,” and it’s exactly what it sounds like. It’s used to tell your employer how much to withhold from your pay.  

Thankfully, though, you do have some control over how much is withheld. You choose how to “declare” yourself, and you can also decide if you want extra money withheld from your taxes so you face a smaller bill come tax time.  

Determining Withholdings  

So, you may be wondering, outside of your own control, what determines how much is withheld from your taxes? Well, to start with, your filing status counts for a lot. Typically, for example, if you’re filing jointly as a married person, less will be withheld. The same goes for if you have dependents, whether you’re married or not. Single people, especially those with no dependents, typically have the most withheld, which means they tend to get smaller paychecks.  

Taxes are also withheld for your Federal Insurance Contribution Act taxes. That money goes toward Social Security taxes and Medicare taxes, which could help you later in life.

Special W-4 Forms

In addition to the basic W-4 Form, there are also some specialized versions of this form, which you may or may not encounter in your life depending on your circumstances. These include:

●       Form W-4 (SP): This is the exact same W-4 as the traditional one, except that it’s in Spanish. Request this form if English isn’t your first language

●        Form W-4S: This form can be used if you’d like taxes withheld from your sick pay.

●       Form W-4P: Use this form for withholding taxes from an annuity or a pension.

While the W-4 Form, even with its different variations, is relatively standard, it’s easy to fill it out in a way that doesn’t benefit you. You might, for example, withhold too much and then live with unfairly small paychecks. Or, you might not withhold enough and then be hit with a big, impossible bill at tax time. For help filling out your W-4 in just the right way, don’t hesitate to reach out to a tax professional. After all, that’s what they’re there for!

Selling Your Home and Taxes

 Are you planning on selling your home in the near future? Or, maybe you’ve sold it already and are unsure what you can expect in terms of taxes. It really all depends on a lot of factors, such as whether you’re married or single and on whether or not the home counts as your primary residence.  

If You’re Single . . .  

If you’re single, you’ll be glad to know that you can exclude as much as $250,000 from the capital gains tax when you sell your primary personal residence.  

If You’re Married . . .  

Married people can shield even more from the capital gains tax—up to a cool $500,000. Of course, the residence must qualify as their primary residence in this case too.  

What Qualifies as a “Primary Residence?”  

If you own more than one property, you may be wondering which properties, exactly, can count as your  “primary personal residence.” Well to start with, the property must be somewhere that you actually lived, not a property you used solely as an investment. You also need to be able to demonstrate that you have lived in the home for at least two of the previous five years. Those five years are counted from the date of the home’s sale. Remember, though, that you can’t claim the exclusion more than once every two years.  

Ownership Matters  

Furthermore, know that just living in a property for a minimum of two of the last five years isn’t enough. You also need to have actually owned the property for at least two of those years. Often, people will have rented a property before purchase and are upset to find that, because they didn’t own the property for at least two years, they don’t qualify for this exclusion.  

As you can see, selling your home and then dealing with the related taxation can be quite tricky. It gets even more tricky when things like divorce or special circumstances come into play. If you’re feeling confused about how to report your home sale on your taxes or about if and how you qualify for the capital gains tax exclusion, remember that you can (and should!) always call on a tax professional for help and support.

What You Need to Know about Bonuses

 

Everyone loves finding out that they’ll be getting a bonus at work. After all, it basically seems like free, extra money. Unfortunately, however, bonuses aren’t truly “free,” at least not when it comes to taxes. The IRS considers them as “supplemental wages,” which means that, just like severance pay or overtime, they’ll be taxed.  

Big Bonuses  

While most bonuses are small and run of the mill, sometimes you might get lucky enough to earn a truly big bonus, like $1 million or more. If you’re fortunate enough to have this happen to you, you’ll first be hit with a 22% withholding rate. Then, money received over $1 million takes you to a 37% withholding rate. That type of taxation is pretty steep, but, hey, it’s still better to get a bonus than to not get one at all, right?  

Average Bonuses  

What about more average-sized bonuses, like those under (or even well-under $1 million)? All bonuses under $1 million can be taxed at a flat 22% if your employer chooses to use the percentage method. Alternately, your employer could choose to utilize the aggregate method, in which your withholding would be calculated on your regular pay and on your bonus. Your employer basically uses your normal withholding rate and subtracts it from the total withholding to determine how much to withhold from your bonus.  

As you can imagine, all of this can get a bit confusing. However, don’t let taxation, which is just a fact of life, get you down. Learn how to make the most of your bonus and better understand how it’s taxed by working with a tax professional. After all, if bonuses are going to be a regular part of your life (and hopefully they will be!), you want a professional who can show you how to put that extra money to work for you.

Understanding the Foreign Earned Income Exclusion

Do you pay taxes in the United States, but live in another country? If so, then you may qualify for the foreign earned income exclusion. Under the rules of this exclusion, you may be able to exclude some or, in some cases, even all of your income, from United States taxation. 

Are You a Real Resident?  

One way to qualify for the foreign earned income exclusion is by being a legitimate resident of a foreign country. What does that look like under IRS rules? Well, for one thing, you must have lived in that country for a full tax year. You are allowed to have visited other countries, including the United States, briefly, providing they were truly “trips” and that you intended, at all times, to return to your country of residence.  

Were You Physically Present?  

If you don’t count as a resident of a foreign country, then you may still be able to enjoy the foreign earned income exclusion. If you lived in the country for a minimum of 330 days in a twelve-month period, then you’re likely eligible. The nice thing about the IRS’ “twelve-month period” wording is that it means you do not have to choose a calendar year as your eligibility period. You can choose any 12 month period.  

With that said, however, if you go this route, you may need to space your exclusion amount over different tax years, which would require you to prorate the maximum exclusion allowed for each year based on the number of days you were present in the foreign country.  

Not All Income Counts  

Of course, you must bear in mind that not all income is necessarily eligible for this exclusion. According to the IRS, all eligible income must be earned income, meaning money you made as the result of being an employee or an independent contractor.  

As you can probably already tell, the rules related to the exclusion can be a bit tricky. If you’re having a hard time understanding them, knowing if you qualify, or determining how to claim the exclusion, don’t hesitate to contact a tax professional. In fact, this is highly recommended in any instance where you’re claiming a less common exclusion such as this one.

What You Need to Know about Unemployment Income

Losing your job is a terrifying thought. Yet, it happens to people often, especially during these troubled times. If you were to lose your job, hopefully you would be able to seek out unemployment income. But, what you might not realize is that, in most instances, even this income is considered taxable. After all, as the old saying goes, death and taxes are the two things in this life that are inescapable.  

A Flat Rate  

Since unemployment income is, as far as the IRS is concerned, still income, it is taxed just like regular income in most cases. You are able to choose to have tax withheld from your unemployment compensation benefits to help you avoid a large bill come tax time, but you are not able to choose how much is withheld. Instead, a flat rate of 10% is applied. This is helpful if this taxation rate is less than what your employer was withholding from your pay, but potentially harmful if it’s more.  

Reported Income 

Just as your employer would report your earnings to the IRS, the state employment agency will do the same. It will use Form 1099-G to report what you’ve made via unemployment, as well as any withholdings. Because both you and the IRS get a copy of this form, you are expected to report the income fully and accurately on your tax forms.  

The Right Help  

As you can imagine, getting terminated from your job is very unfortunate. And, many taxpayers are further disheartened to find that they then have to pay taxes on their unemployment income. However, with the right help, you can keep yourself from being financially devastated by such a situation.  

A skilled tax professional can help you to grow your savings and make plans just in case you were to be unemployed. They can also show you ways to stay afloat if the unthinkable happens and to reduce your tax liability, even when your income is coming solely or mostly from unemployment.  

The key is to seek help before unemployment happens. That will put you in the best financial situation possible. However, if it’s too late and you’ve already become unemployed, still do not hesitate to seek professional guidance. After all, even late help is better than no help at all!

Can You Take an IRA Deduction?

 Do you have an IRA? If so, you should know that, in some cases, you may be able to take a nice tax deduction for some of the money you contribute to it. With that said, however, like all things with the IRS, there are some rules and restrictions in place.   

The No Roth Rule  

First of all, understand that only traditional IRA contributions are eligible for deductions. If you have a Roth IRA, the deductions won’t apply to you. That’s because any withdrawals you make from your Roth are tax-free after retirement. You can’t have both that benefit and the benefit of a tax break at the time of contribution. The IRS just isn’t that nice, unfortunately.  

Limitations  

The IRS is also known for letting taxpayers benefit . . . but not too much from its allowed deductions, and the IRA deduction is no exception. If you’re 49 years of age or younger, you can enjoy a deduction for as much as $6000 in contributions. Add an extra thousand once you reach 50 or more.  

Also remember that, regardless of your age, you cannot contribute more to any IRA than you earn each year and still qualify for a deduction.  

Company Sponsored Plans  

What about if you also contribute to a company-sponsored plan? Unfortunately, if you meet these qualifications, you won’t be eligible for an IRA deduction:  

●       You’re single or filing as head of household and have more than $75,000 in modified adjusted gross income.

●       You’re married and filing jointly or are a qualified widower and have more than $124,000 in modified adjusted gross income.

Receiving Your Deduction

If, despite the many rules and limitations, you still qualify for an IRA deduction, you’ll be glad to know that it’s fairly easy to claim. You don’t even have to itemize deductions, unless you want to.

Just enter the deduction on Form 1040’s Schedule 1 Form, and you should be good to go!

Of course, with so many stipulations in place, it can be difficult to know if you qualify for this deduction or not. In some cases, you may qualify for a lesser deduction. To ensure you do qualify and, if so, for how much, and then to guarantee you file everything correctly, remember that it’s always best to seek the help of a qualified tax professional.

Facing Foreclosure?

Having your home foreclosed upon is a truly awful thing, and, even worse yet, it can happen to anyone. Falling behind on your mortgage, especially during these troubled times, is not uncommon, and all it takes is a few missed payments to trigger the foreclosure process.  

To make matters worse, the IRS treats a foreclosure as if you had sold your property. This means that, depending on the circumstances, you could be forced to pay a capital gains tax, as well as income tax on any forgiven or cancelled mortgage debt. While that may seem entirely unfair, it’s a reality you may have to live with if your home is foreclosed upon.  

Focus on Prevention First  

Since foreclosure and the subsequent taxation that can go along with it are such terrible things, your best bet is to avoid them if at all possible. The second you realize you are struggling financially, start working with both your lender and a financial professional. With these resources on your side, you may be able to come up with a solution that can help you to avoid foreclosure altogether and, even better, to get you back on the right financial track.  

After Foreclosure  

If it’s too late to take preventative action, then understand how a foreclosure may affect your taxes. Basically, your home will come with a sales price, even though it wasn’t one that you planned or agreed to as in a traditional home selling arrangement.  

This price will typically be the fair-market value of your home or the loan balance you owe. Which it will be depends on the type of mortgage that you had, which will also affect what amount will be taxed and to what degree.  

Seek Help, No Matter the Stage  

Obviously, this type of situation is unpleasant all around. But, the most important thing is that you do not go through it alone. As mentioned, if it’s still possible to repair the situation, act quickly by working with a professional.  

If the foreclosure has already happened, however, or cannot be stopped, then you still need to work with a financial expert to understand how it will affect your taxes, how best to handle the situation, and what future steps you should take to improve your overall financial standing and credit.