Getting ready for a new year

Just prior to enjoying our November 28^th celebrations, final regulations were passed on the new 3.8% healthcare tax which you can view online by Googling ”TD 9644.”  It now appears that all tax regulations are set for us to proceed with our 2014 filing season for 2013 tax returns.  As providers of tax services, we would like to inform you of significant changes in the tax law as well as expiring provisions.

If you are looking to lower your 2013 tax liability, there is still time to act.  There are some year-end tax strategies that may work for you.  As I always remind you at this time of year, the easiest way to reduce your tax – as well as clean your house – is to donate all the clothes that you have not worn in the last year or those household items that you no longer need.  Get signed receipts from the charitable organization.

Based on the myriad of tax law changes affecting us, I have attended numerous education seminars.  In October, I attended the MA Chapter of the National Association of Tax Professionals’ annual event where Kathryn Keene presented on the following topics and the nuances based on the new laws:

1)  The first part of the day focused on foreign asset reporting requirements, foreign tax credits and foreign earned income exclusion.  As our world shrinks into one global community, the IRS is increasing compliance on assets and income for which you have control.

2)  The Affordable Care Act and its application was the second focus of the seminar.  The Act created an additional Medicare tax of .9% on compensation that exceeds $250,000 married filing joint, $125,000 married filing separate and $200,000 for all other filers.

Under the Act, the employer withholds the tax on an employee’s wages if they are greater than $200,000.  Since the employer is not aware of the spousal wages, taxpayers may be subject to the additional Medicare tax when their return is due.  Application of the Act also burdens taxpayers with modified adjusted gross income (which is income prior to deductions and exemptions of the aforementioned floors) with a 3.8% unearned income Medicare tax applied to investment income.  This tax will be applied when your return is prepared or prior to April 15^th.  Also, as part of the Act, the floor to deduct medical expenses has increased from 7.5% to 10% unless you are 65 or older.

Tomorrow I plan to attend a seminar on enhanced 1099 reporting and the following week, I have scheduled a seminar on the DOMA Act as same sex spouses will be filing federal taxes as married couples for the first time.  As well, keep in mind the phase-out of itemized deductions for 2013, higher tax brackets and the expiration of the teacher expense deduction and the energy credit.  You may want to order that new storm door after you read this, but make sure it is energy efficient.  Please schedule an appointment to discuss tax planning issues that could lower your tax.

Happy Holidays from all of us at Fillo Financial

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Check your withholding to avoid a tax surprise

Was your last year’s tax refund larger than you expected?  Or, were you surprised that you owed more taxes than you expected?  When either of these situations occurs, it’s a good idea to check your federal tax withholding or payments.  Doing so now can help avoid a tax surprise when you file your 2013 tax return next year.

Below are some tips that the IRS suggests to help you bring the tax you pay during the year closer to what you will actually owe.

Wages and Income Tax Withholding

• New Job.   Your employer will ask you to complete a Form W-4, Employee’s Withholding Allowance Certificate. Complete it accurately to figure the amount of federal income tax to withhold from your paychecks.
• Life Event.  Change your Form W-4 when certain life events take place. A change in marital status, birth of a child, getting or losing a job, or purchasing a home, for example, can all change the amount of taxes you owe. You can typically submit a new Form W–4 anytime.
• IRS Withholding Calculator.  This handy online tool will help you figure the correct amount of tax to withhold based on your situation. If a change is necessary, the tool will help you complete a new Form W-4.

Self-Employment and Other Income

• Estimated tax.  This is how you pay tax on income that’s not subject to withholding. Examples include income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets. You also may need to pay estimated tax if the amount of income tax withheld from your wages, pension or other income is not enough. If you expect to owe a thousand dollars or more in taxes and meet other conditions, you may need to make estimated tax payments.
• Form 1040-ES.  Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you need to pay estimated taxes on a quarterly basis.
• Change in Estimated Tax.  After you make an estimated tax payment, some life events or financial changes may affect your future payments. Changes in your income, adjustments, deductions, credits or exemptions may make it necessary for you to re-figure your estimated tax.
• Additional Medicare Tax.  A new Additional Medicare Tax went into effect on January 1, 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual’s filing status.
• Net Investment Income Tax.  A new Net Investment Income Tax went into effect on January 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts.
• To see more on this topic, check out IRS Publication 505, Tax Withholding and Estimated Tax.

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Education Tax Benefits

College is expensive, so make sure that you take advantage of the tax relief that that you are entitled to.  The IRS recently offered tips about education tax benefits that can help offset some college costs.  We are presenting some of them here, so you and your student can consider whether they fit your situation.

• American Opportunity Tax Credit.  This credit can be up to $2,500 per eligible student. The AOTC is available for the first four years of post secondary education. Forty percent of the credit is refundable. That means that you may be able to receive up to $1,000 of the credit as a refund, even if you don’t owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment.  A recent law extended the AOTC through the end of December 2017.
• Lifetime Learning Credit.  With the LLC, you may be able to claim up to $2,000 for qualified education expenses on your federal tax return.  There is no limit on the number of years you can claim this credit for an eligible student.

The IRS lets you claim only one type of education credit per student on your federal tax return each year.  If you pay college expenses for more than one student in the same year, you can claim credits on a per-student, per-year basis.  For example, you can claim the AOTC for one student and the LLC for the other student.

To make it easier, you can use the IRS’s Interactive Tax Assistant tool to help determine if you’re eligible for these credits.  The tool is available at IRS.gov.

• Student loan interest deduction.  Other than home mortgage interest, you generally can’t deduct the interest you pay.  However, you may be able to deduct interest you pay on a qualified student loan.  The deduction can reduce your taxable income by up to $2,500. You don’t need to itemize deductions to claim it.

But note, these education benefits are subject to income limitations and may be reduced or eliminated depending on your income.  If you would like  more information, contact Mary Ellen Fillo at Fillo Financial LLC to set up an appointment to review the tax relief that might be available, based on your particular situation.

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Additional Medicare Tax goes into effect

Starting in 2013, a 0.9% Additional Medicare Tax will apply to individuals’ wages, other compensation, and self-employment income over certain thresholds.  For married persons filing jointly the threshold is $250,000, for married persons filing separately the threshold is $125,000, and for all others the threshold is $200,000. Employers are responsible for withholding the Additional Medicare Tax from wages it pays to individuals in excess of $200,000 in a calendar year, without regard to the individuals’ filing status tax or wages paid by another employer.  An individual may owe more than the amount withheld by the employer, depending on the individual’s filing status, wages, compensation, and self-employment income.  In that case, the individual should make estimated tax payments and/or request additional income tax withholding using Form W-4, Employee’s Withholding Allowance Certificate. To additional information including answers to many of your questions, check out the Basic FAQs and Individual FAQs on the IRS website.

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Financial Documents to Keep on File

There are five kinds of financial documents you should keep in a safe place. We list all them here.

1. Retirement Forms:

• Form 8606 – reports nondeductible contributions to traditional IRA’s
• Form 5498 – Fair Market Value statements
• Form 1099-R – Reports IRA Income Distributions

2. Investment Forms:

• Form 1099-INT – Reports interest income
• Form 1099-DIV – Reports dividend income
• Form 1099-B – Reports proceeds from Broker Exchange Transactions
• Retain any records of your original investment in stocks or funds

3. Mortgage Documents:

Retain any documents pertaining to your mortgage for the period you own the property plus an extra seven years.

4. Insurance Policies:

Retain these for the life of the policy plus an extra three years.

5. Tax Returns:

Retain your tax returns for at least three years and up to seven years if you want to be really safe.

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The Massachusetts Homestead Act

A Declaration of Homestead allows the owner/owners to protect against attachment, seizure, execution on judgment, levy, or sale for the payment of debts up to an amount of $500,000, per residence, per family.

Massachusetts General Law, Chapter 188, Sections 1-10

Under M.G.L. c. 188, §§1-10, the owner/owners of a home, who reside in the home as their principal residence, can obtain homestead protection by filing a Declaration of Homestead, with the registry of deeds in the county in which the property is located.

Homestead protection has long been available on Massachusetts, but the Homestead Act was recently amended. As of March 16, 2011, the homestead law was amended in the following ways:

• (1)  Without filing a declaration of homestead an owner receives only an automatic homestead protection of $125,000, which is certainly better than nothing, but not likely to be enough to protect the full value of your home;
• (2)  A property that is owned by a trust is now eligible for homestead protection, as a holder of a beneficial interest in a trust is now considered an “owner” under the law. The trustee of the trust should execute a declaration of homestead on behalf of the beneficiary or beneficiaries.
• (3)  There are additional protections for spouses that are not listed as owners – for example neither divorce nor remarriage will affect the homestead protection of the spouse who still primarily resides in the home.
• (4)  Elderly persons, defined in the statute as people over age 62, and disabled persons, will be personally exempt up to $500,000. If there are two owners over the age of 62 both owners can file homestead declarations and the aggregate coverage will be $1,000,000.

 

From Strategic Planning Group, Inc. – The Retirement Report

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