Taxes

5 Tax Breaks You May Have Overlooked

January 3, 2020 By Tamila McDonald Leave a Comment

When a typical person or couple files their taxes, they are usually eligible for at least a few tax breaks. The trick is, deductions and credits aren’t typically applied automatically. In many cases, you have to choose to pursue that tax deduction on your return. If you don’t, then you end up overpaying.

Most Overlooked Tax Breaks

There are certain tax breaks that people are fairly familiar with, regardless of whether they apply to their tax situation. For example, most people know about the child tax credit and earned income credit, even if they don’t personally qualify.

However, there are many others that aren’t as widely known. As a result, tax filers may miss them simply because they don’t realize the deductions or credits are available.

By understanding which tax deductions are frequently overlooked, you can decrease your odds of overpaying. See if any of the situations apply to you and, if so, make an effort to secure that tax break.

Here is a look at five tax breaks that taxpayers frequently miss.

1. Gambling Losses

Whether you live in a state with casinos, spent some time at the track, played the lottery, or took a trip to Las Vegas in 2019, you might be eligible for a tax break. Gambling losses are deductible in some situations.

If you want to claim the deduction, you do have to itemize. In some cases, that approach won’t make sense. But, if you are itemizing anyway, it could help you lower your tax bill.

Additionally, the deduction is limited to how much you report as gambling winnings as part of your taxable income. As a result, it could help you offset how much you owe if you happened to come out ahead when gambling.

2. Jury Pay Given to Your Employer

If you work for a company that pays you your usual wage when you’re on jury duty but requires you to hand over your jury duty pay to them, then you are eligible for a small tax break. Jury pay has to be reported as taxable income. But, if you had to give that check to your employer, you can deduct that amount.

3. Child Care Expenses

Through the Child and Dependent Care Tax Credit, you might be to reduce your tax bill. You can get between 20 and 35 percent of up to $3,000 or $6,000 of your dependent or child care costs back as a credit if you qualify.

Eligibility is based on a few factors. First, you have to be using the service so that you can work. Second, for child care, the child must be under the age of 13. For spouses’ or parents’ or other dependents’ care, they must be deemed incapable of self-care and live with you for more than half of the year.

The size of the credit decreases for higher-income households, though it never disappears completely. While the credit isn’t refundable, it can help you reduce your liability significantly.

4. Dependent Tax Credit

Even if a dependent no longer qualifies you for the child tax credit, that doesn’t mean you can’t get a break. Older children, including college-aged kids, as well as aging relatives who you are providing care for in your home, can make you eligible for a dependents credit of $500.

This tax credit does phase out for higher-income households. If your adjusted gross income is above $200,000 ($400,000 if you are married filing jointly), you’ll fall in that category.

5. Student Loan Interest Paid by Parents

If a parent is paying back your student loans, you are the one who can legally claim the student loan interest deduction. Only the person who is responsible for the debt can deduct the interest, regardless of who is actually paying the bill. This includes adult children who aren’t being claimed as dependents by their parents.

The best part about this deduction is you don’t have to itemize to claim it. That makes it significantly more accessible. Additionally, you aren’t taking a deduction from your parents, as they can’t legally claim it anyway.

Claiming a Tax Break

In most cases, the federal government doesn’t just take your word when you say you are eligible for a tax break. Instead, it requires some form of evidence or proof.

Depending on the deduction or credit, what you need to support your claim varies. You might need details from a specific tax document, like a 1098-E for student loan interest. For the child care tax credit, you have to provide information about the care provider and have proof that you incurred the expenses.

Incorrectly claiming a tax break has consequences. If you aren’t sure you have what you need to claim a deduction or tax credit, it’s wise to review the IRS website. It will outline what you need in each scenario. You can also speak with a tax professional, as they are typically well aware of what it takes to qualify.

Do you know of any other tax breaks people accidentally overlook? Share them in the comments below.

US Expat taxes – Who, What, When, and How

December 30, 2019 By Susan Paige Leave a Comment

Did you think the IRS was going to let you escape the joy of filing your annual Form 1040 just like that?

Sorry, it doesn’t work like that.

Who Has to File an Annual US Tax Return?

Screenshot source

Pretty much every American ex-pat must file an annual Form 1040, exactly the same as you used to at home. The IRS is remorseless in pursuing non-filers.

Screenshot source

You might think that paying tax in the UK would be enough, and you probably won’t have to pay any American federal taxes. However, the IRS insists that you send them a tax return if your pre-tax income is higher than the appropriate line in the table above.

What Do You Have to Tell the IRS?

Your Form 1040 is only the beginning: You also have to send them details of all your non-US bank accounts.

The Bank Secrecy Act (BSA) gives the Department of Treasury the authority to collect information from United States persons, including ex-pats, who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the United States.

The BSA requires that a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the maximum values of the foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year

Source: Joshua Ashman (CPA and CEO of Expat Tax Professionals)

You must also fill in and send Form 8938 Statement of Foreign Financial Assets (FATCA reporting) as an attachment to your Form 1040.

Joshua Ashman (CPA) also tells us that there are many other forms you need to send if you have investments or other financial activities outside the US:

Form 5471: must be filed by certain shareholders of foreign corporations

Form 8621: must be filed by certain shareholders of passive foreign investment companies (such as foreign mutual funds)

Form 3520: must be filed to report transactions with foreign trusts (including foreign pension plans treated as foreign grantor trusts) and receipt of certain foreign gifts

Form 8865: must be filed for each controlled foreign partnership in which the taxpayer is a 10% or more partner

Not only, but also . . .

Some US states are reluctant to change your status as a taxpayer, so you must also file state-level tax returns until you can convince them that you have moved away and cut all ties with the state. Most notable in this regard are; California, New Mexico, South Carolina, and Virginia.

When are the Deadlines?

Your deadline at home was 15th April following the end of the calendar year. Your deadline as an ex-pat is the same, 15th April. Any tax that is due and that is unpaid at that date is subject to interest.

As a foreign resident US citizen, you get an automatic file-forming extension to 15th June, and you can file a request for a further automatically-granted extension to 15th October.

Penalties for late or non-filing are pretty hefty, so it is worth your while to get your paperwork in on-time.

What if You Have Missed a Deadline?

It will always cost less to file late than not at all, so get it done sooner rather than later.

If you have just realised that you should have filed last year and the years before that. Don’t panic.

The penalties for non-filing of foreign bank information are especially horrendous at $10,000 per account per year, but the IRS will forego any penalties if you apply for forgiveness under their Streamlined Procedures. You still have to send them three years’ tax returns and six years’ FBARs, but you pay no late filing penalties, and you don’t have to send 1040s and FBARs going back to the year dot.

Joshua Ashman (CPA) tells us:

In recent years, the IRS has made it clear to taxpayers that it is more interested in disclosure than in punishing late filers or non-filers. Back in 2014, the IRS expanded the Streamlined Procedures, allowing taxpayers to participate if they can explain in a written statement how their delinquency was not intentional.

The Quick-Read Version

The IRS has long arms and will come after you if you omit to file. It might not be this year or next year, but they will come.

As an American, you must file annual tax returns with the IRS and some states’ tax authorities, even if you have lived abroad your entire life, and even if all your UK income is taxed at source by HMRC.

You have until 15th June 2020 to file your 2019 Form 1040 and associated declarations. Penalties for non-filing should give you an incentive to prioritise the task over the coming months. Good luck.

Gather These Tax Documents Now for Your Upcoming Tax Filing

December 27, 2019 By Tamila McDonald 1 Comment

In 2019, over 155 million individual income tax returns were filed with the Internal Revenue Service (IRS). To make that happen, most filers have to collect a variety of tax documents before each filing. That way, they can provide the IRS with accurate information and make sure that they are paying their fair share or getting any refund due. Whether you plan to handle your taxes on your own or want to hire a professional, having the right documentation is a must. If you aren’t sure what you need, here’s an overview that you can use as a checklist.

Personal Information

When you complete your taxes, you have to provide certain personal information. This includes details about you and potentially your spouse, children, or anyone who may qualify as a dependent.

If you want to make sure that what you list is accurate, certain documents can help. Here are some that are worth gathering before you start your tax return:

Government-Issued ID Cards or Driver’s Licenses
Birth Certificates
Social Security Cards
Tax ID Number

Income

In order to file your taxes, you need to be able to record information about your income during the previous year. That means you’ll need specific documents that show what you earned in 2019.

In most cases, you’ll receive tax documents from employers, companies you contracted for, or certain other individuals. This can include:

W-2 Forms
1099-MISC
1099-K

Additionally, there are other forms of income that create tax documents. If you have investments, you may receive:

1099-B for broker-handled transactions
1099-S for stock sales
1099-INT for interest earnings
1099-DIV for dividends
1099-R for distributions

Individuals who receive certain government benefits also receive tax forms. This can include the following forms:

1099-G
1099-SSA
1099-RRB

However, not all income sources will automatically provide you with a document. If you have earnings that won’t be reported on a W-2 or 1099, then you may need other records, including (but not limited to):

Bank Statements
Payment Management Transaction Records (PayPal, Venmo, etc.)

Deductions

If you want to claim certain deductions, you may need certain documents. Exactly what you need depends on your situation.

In some cases, you’ll receive forms from another entity, such as your mortgage or student loan lender or your educational institution. However, some deductions may require you to gather up bills or bank statements.

Here’s a look at what you’ll need in various scenarios:

Retirement Accounts: W-2 for 401(k)s or TSPs and IRS Form 5498 for IRAs
Educational Expenses: IRS Form 1098-T for school costs and IRS Form 1098-E for student loans
Medical Deductions: Medical bills and bank statements
Health insurance: IRS Form 1095-A, 1095-B, or 1095-C
HSA Contributions: 5498-SA
Mortgage Interest: IRS Form 1098 from the lender
Property Taxes: IRS Form 1098 from your lender (if they are handling your property taxes) or property tax bills and bank statements
Charitable Donations: Bank statements and receipts
Business Expenses: Receipts, bills, and bank statements
Work Driving: Mileage records
Home Office Deduction: Measurement of the size of the home office
Childcare: Provider’s tax ID, bills, and receipts

Payments

If you work for an employer who provides you with a W-2, your tax payment information will be on that document. However, if you are self-employed and have been making estimated tax payments, you’ll need those records as well. That means you’ll need to gather your 1040-ES. Usually, it is available through the IRS website. By viewing your IRS account, you can retrieve those details.

Could You Need to Gather Other Documents?

While the information above will cover most tax filers, there are situations where additional documents could be necessary. For example, those who were impacted by a federally-declared disaster might need records that document their property losses, repair costs, insurance claims, FEMA assistance details, and similar information.

Similarly, educators are allowed to deduct up to $250 of classroom supplies. As a result, to claim that deduction, a qualifying educator would need receipts that reflect those costs.

There can be other situations where more documentation is also helpful. If you are concerned that you may overlook an important document, it may be wise to consult with a tax professional. They can examine your personal situation and see what additional information may be relevant, beneficial, or necessary to complete your taxes properly, record all of your income, and give you access to credits or deductions that you may be owed.

Can you think of any other tax documents people should gather in preparation for their upcoming tax filing? Share your thoughts in the comments below.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Here are the 2020 Income Tax Brackets

December 6, 2019 By Tamila McDonald Leave a Comment

While 2019 has yet to formally come to a close, many people still want to look forward. As they begin to prepare their taxes for the 2019 tax year, filers who want to get ahead for the 2020 tax year should start planning. By understanding the 2020 income tax brackets, you can make wise choices regarding your income, possible deductions, retirement plan contributions, and more. Here’s a look at what 2020 has in store.

How Tax Brackets Work

Many people wrongly assume that their tax bracket dictates the rate they pay on all of their income. However, that isn’t how the tax system works. Instead, the rate only applies to the income within that particular range. For example, single filers who have $12,000 in taxable income during the 2020 tax year mistakenly believe that they owe 12 percent on all of it – which would make their owed tax total $1,440 – but that isn’t the case.

In 2020, the person above will pay 10 percent on the first $9,875 of their taxable income, even if they earn more. That $9,875 falls into the first tax bracket, which has a 10 percent rate. They only owe 12 percent on the taxable income above $9,875 up to the $40,125 mark, as the amount above $40,125 goes into the next higher bracket).

A person who earns $12,000 during the tax year will pay 10 percent of the first $9,875, or $987.50. Then, they owe 12 percent on the remaining $2,175, or $225. That makes their total $1,242.50.

This makes tax brackets look fairly complex. However, once you understand how they work, it’s possible to handle the calculations, allowing you to plan.

2020 Income Tax Brackets for Single Filers

If you aren’t married during 2020 and don’t qualify as a surviving spouse or head of household, the following tax brackets will apply:

Income from $0 to $9,875 – 10 percent
Income from $9,875 to $40,125 – 12 percent
Income from $40,125 to $85,525 – 22 percent
Income from $85,525 to $163,300 – 24 percent
Income from $163,300 to $207,350 – 32 percent
Income from $207,350 to $518,400 – 35 percent
Income above $518,400 – 37 percent

2020 Income Tax Brackets for Head of Household Filers

If you aren’t married but provide financial support or a home to a qualifying relative – such as a child or parent – you may qualify as a head of household. This gives you a different filing status, and you’re tax burden will align with the brackets below:

Income from $0 to $14,100 – 10 percent
Income from $14,100 to $53,700 – 12 percent
Income from $53,700 to $85,500 – 22 percent
Income from $85,500 to $163,300 – 24 percent
Income from $163,300 to $207,350 – 32 percent
Income from $207,350 to $518,400 – 35 percent
Income above $518,400 – 37 percent

2020 Income Tax Brackets for Married Filing Jointly Taxpayers

If you are married and you are filing jointly with your spouse, you’ll use these brackets. Additionally, surviving spouses may be able to use these brackets for a period following the death of their spouse:

Income from $0 to $19,750 – 10 percent
Income from $19,750 to $80,250 – 12 percent
Income from $80,250 to $171,050 – 22 percent
Income from $171,050 to $326,600 – 24 percent
Income from $326,600 to $414,700 – 32 percent
Income from $414,700 to $622,050 – 35 percent
Income above $622,050 – 37 percent

2020 Income Tax Brackets for Married Filing Separately Taxpayers

Married couples do have the option of filing separate returns. If you choose this route, here are your tax brackets:

Income from $0 to $9,875 – 10 percent
Income from $9,875 to $40,125 – 12 percent
Income from $40,125 to $85,525 – 22 percent
Income from $85,525 to $163,300 – 24 percent
Income from $163,300 to $207,350 – 32 percent
Income from $207,350 to $311,025 – 35 percent
Income above $311,025 – 37 percent

2020 Trust and Estate Tax Brackets

Not everyone is aware that trusts and estates pay income taxes, but they do. Any retained income (money that isn’t distributed to beneficiaries) are taxed based on the following brackets:

Income from $0 to $2,600 – 10 percent
Income from $2,600 to $9,450 – 24 percent
Income from $9,450 to $12,950 – 35 percent
Income above $12,950 – 37 percent

Why Do Tax Brackets Change from One Year to Another?

There are several reasons why a tax bracket may change. In some cases, they are adjusted for inflation, reflecting the shift in the buying power of a dollar. In others, Congress and the President pass legislation that alters the brackets. For example, the tax reform efforts that happened as 2017 drew to a close are affecting the 2020 tax brackets. That legislation will keep having an impact until the start of 2026 unless new action is taken prior to that time.

Planning for Your 2020 Taxes

By referring to the brackets above, you can estimate your 2020 tax bill. However, if you do decide to perform the calculations, it’s important to remember that these brackets apply to your taxable income, not all of the money you make. You’ll need to account for any deductions you may receive to determine what your taxable income will look like in the coming year to get a more accurate picture.

It’s also possible to use the tables above to see how certain financial moves impact your tax bracket and rates. Certain deductions, like contributing to tax-deferred retirement accounts, reduce your taxable income, and are under your control, at least to a degree. For example, you can see how contributing various amounts (up to the maximum) to a tax-deferred retirement account impacts your tax bill, allowing you to decide how you want to fund that account in 2020.

Ultimately, the brackets above are a potential planning tool. It allows you to make wise choices that could lower your tax burden or understand how certain financial situations will affect what you owe. That way, you can have more control over what you pay or, at least, be prepared for the bill that will inevitably come.

Do you worry about your tax bracket? Why or why not? Share your thoughts in the comments below.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Lower Your Tax Bill With These 5 Moves

December 5, 2019 By Tamila McDonald Leave a Comment

While the new year is on the horizon, that doesn’t mean your tax bill is set in stone already. There are certain moves that you can make now that will reduce what you owe. However, you may need to act quickly if you want to benefit from those financial choices this tax year. Here’s a look at five moves that can help you lower your upcoming tax bill.

1. Fully Fund a Tax-Deferred Retirement Account

If you have reached the maximum contribution limit on your tax-deferred retirement account, you still have time. By fully funding your 401(k) or traditional IRA, you are reducing your taxable income, lowering your tax burden.

In 2019, you are allowed to contribute up to $6,000 in an IRA and up to $19,000 in a 401(k). Those over the age of 50 can also make catch-up contributions, essentially increasing the maximum they can sock away in those accounts and the associated tax benefit. For IRAs, the catch-up is an additional $1,000. For a 401(k), it’s an additional $6,000.

By maxing out your contributions to a 401(k) and an IRA, if you’re 50 years old or younger, you could reduce your taxable income by $25,000. Those over 50, you could potentially reduce it by $32,000 by maxing your contributions and adding in the catch-ups.

2. Don’t Overlook Itemizing

While the standard deduction amount means many tax filers won’t benefit from itemizing their deductions, that isn’t the case for everyone. If you want to find out which route is best for you, you’ll need to do the math.

If you’ve had medical expenses that exceed 10 percent of your income, have donated a significant amount to charity, or have enough potential deductions that could push you over the threshold if you itemize, then it’s worth seeing if this approach could benefit you. Additionally, if you realize that you are very close to the standard deduction when you itemize, you could potentially make financial moves to push your itemized total over the threshold (such as donating more to charity or handling a medical issue you’ve been putting off), allowing you to claim a bigger deduction.

This option might be particularly beneficial to those who can handle certain deductible actions for 2020 before 2019 ends. For example, if you usually donate a certain amount to charity each year and you did so in 2019, then consider making 2020’s donation now if it will push you over the line.

3. Claim Every Deductible Business Expense

Many business owners and self-employed individuals have a wide range of deductions they can claim. However, many people miss out on some because they didn’t realize it was an option. Additionally, some filers forgo a deduction because they are worried they’ll get audited, even if it would be completely legal.

As long as a taxpayer is following the rules laid out by the IRS, they should never skip a deduction. If the deduction is legitimate, even if they are audited, they should come out on the other side without a penalty. Just make sure you are ready to prove that you are complying with the laws, which typically isn’t as difficult as it sounds, by being aware of the requirements, preserving the right records, and otherwise having evidence regarding why your action was legit.

4. Unload Losing Investments

If your portfolio is being weighed down by some losing investments, now might be the time to unload them. By selling, you may be able to deduct the losses, effectively offsetting a portion of your taxable gains on your other investments.

It’s important to note that selling an investment solely for a tax deduction isn’t typically a smart choice. If you wanted to get that stock back within 30 days, the IRS could actually take back your deduction, altering your tax bill. As a result, it’s best only to sell investments that no longer work for your portfolio.

5. Stash Cash for College

If you need to save for your education or a child’s future schooling, putting the money into a 529 plan can lower your tax burden on the state level. While there isn’t a federal deduction for investing in a 529 college savings plan, if you live in a state that has an income tax, this can be a smart move for reducing your overall burden.

Just be aware that, if you aren’t the beneficiary, you could encounter gift tax consequences when you contribute to a 529 plan. If the amount you put in the account along with the value of any other financial gifts exceeds $15,000, gift taxes could kick in, creating a different kind of tax burden.

Ultimately, all of the tips above can help you lower your tax bill this year. Consider all of the options above and see if any would benefit you.

Do you know of other ways a household can lower their tax bill? Share your thoughts in the comments below.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

How the Secure Act Could Change Heir Rights

November 29, 2019 By Tamila McDonald Leave a Comment

The Secure Act has been languishing in the Senate for some time. However, that doesn’t mean it won’t pass and, if it does, it could have a significant impact on your retirement accounts. While many would consider the changes beneficial, others aren’t so sure. If approved, the Secure Act changes how inherited IRAs would be managed, and not everyone is thrilled about it.

How the Secure Act Changes Heir Rights

If the Secure Act goes into effect, it will fundamentally alter how non-spouse heirs of an IRA can handle the money. Under current law, a non-spouse beneficiary has the ability to stretch out over the course of their life expectancy the minimum required distributions; an approach often referred to as the “stretch IRA.”

The current approach allows more of the money to remain in the account, giving the IRA the ability to grow tax-deferred for longer. Plus, since the withdrawal sizes would potentially be smaller, it provides the heir with a chance to reduce their tax liability each year.

However, if the Secure Act becomes law, the stretch IRA method won’t be available. Instead, non-spouse heirs would have to empty the account within ten years. This means, for heirs who would usually have spread the withdrawals out over a longer period, they have to remove more money annually than they would under the old law. Since the withdrawals will be larger and are taxable, their tax burden goes up accordingly.

Plus, the increase in the heir’s tax bill might not just impact the withdrawals. It could also affect their earned income, making larger payments even more costly.

Estate Planning for the Secure Act

Since the Secure Act would alter non-spouse heir rights for IRA, it may fundamentally change how a person handles estate planning. The new rule could be a burden on the original IRA owner’s family, so they might choose a different tactic.

Under current law, younger heirs get a significant benefit. They can make smaller withdrawals over the course of their life, allowing them to benefit substantially from compounding. In some cases, it may make leaving an IRA to a child – say, to help fund a grandchild’s college education – a less viable option.

Not All Heirs Impacted

It is important to note that not all heirs would be impacted by the change. Aside from spouses, beneficiaries who are 10 years (or less) younger than the account holder, the minor child of the account holder, or are chronically ill or disabled aren’t affected by this part of the Secure Act (if it becomes law). However, an heir that falls into every other category would be, so account holders may choose to leave their IRA to another family member who would get the most benefit instead of the person they would prefer.

The Secure Act hasn’t passed yet, and it’s possible that it never will. But, by understanding how it can impact an inheritance, account holders can make plans now. That way, if the Secure Act becomes law, they can adjust their strategy if necessary.

Do changes to heir rights worry you? Why or why not? Share your thoughts in the comments below.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.