Cheese sticks and Capital Gains

Almost any personal asset that you own has a cost associated with it.  Typically, this is the amount you pay the cashier while they silently judge you for your obsession with mozzarella sticks.  In the case of more durable objects, there is the potential that someone in the future might pay you more than your purchase price to take them off your hands, provided they weren’t put in the air fryer for six minutes. The most common examples are stocks, bonds, and real estate, but can include goods ranging from cars to stamps.  The amount you paid for the asset is the basis, which is typically static but can be adjusted by things like improvements or depreciation.  When the asset is sold, you subtract the basis from the sale price to come up with the capital gain. How that capital gain is taxed by the IRS is dependent on two things. The first is how long you owned the asset in question.  If you held it for a year or more, you’re going to pay long-term capital gains tax, which is a preferential rate.  If you held it for a less than a year, you’re going to pay ordinary income tax, just like you would on any wages, pension, or IRA income. The second factor is your adjusted gross income, and to explain how that works we need to briefly explain how tax brackets work.  Tax brackets are kind of like a row of buckets.  Any income you receive in a year goes into the buckets in order; first the 10% bucket, then the 12% bucket, and so on.  You have to fill up each bucket before income “spills over” into the next one.  You pay the 10% rate on the amount in the 10% bucket, and pay the 12% rate only on the income in the 12% bucket.  In no case does earning extra income cause all of your… | Read More »

Post tax season moves to make now

With the IRS deadline to file taxes just past, you may be tempted to relax, pull a Scarlett O’Hara and think about next year’s taxes tomorrow. While that attitude is perfectly understandable, it will cause you to miss an excellent opportunity to make your 2018 tax season much less stressful and more efficient. First, review the tax form you just filed. Should you be making adjustments? Are you paying too much in taxes? Should you be adjusting your withholdings? Should you be paying estimates? If so, are you calculating your estimates correctly? Are you maximizing your deductible IRA contributions? If you are unsure about any of these answers, contact us. We’d be happy to answer any questions you have. Now is also a good time to set up an organizational system for next year’s taxes. Create a file in which you can collect receipts and other tax documents. Label your receipts manually, or categorize them electronically in real time so you don’t have to go back months later and try to figure out which expenses qualify for tax deductions or exemptions. Keep track of any changes in your life that might affect your withholdings and/or credits including marital status, children, home ownership, educational expenses, etc. If you ended up with a particularly jarring tax bill, you can request and submit an Installment Agreement Request Form that will allow you to stretch out your payments.  After you do so, sit down with a professional to figure out what adjustments you can make to prevent a large bill in the future. Lastly, be sure to track changes in the tax laws as they will affect not only your return next year, but also some of the financial decisions you make throughout the year.  We’ll be writing more posts that note some of the upcoming changes and how they will affect you, so be sure to check back in the coming weeks. With… | Read More »

Three ways you can lose money by filing your taxes

With the April 17 deadline fast approaching, many people are scrambling right now to file their taxes on time. While there is both plenty of time to file a traditional return and the option to file an extension, it is critical to proceed with caution. Any missteps probably will wind up costing you money. Here are three ways you can actually lose money by filing your taxes. You file an extension but fail to pay the taxes you owe. All tax payers have the right to a six-month extension to file their taxes, they just need to submit Form 4868. They can also file an extension request online. But you still have to pay the taxes you owe on time. The extension only applies to the paperwork, not the payment. If you fail to pay by midnight on April 17, you’ll face a penalty and you’ll also have to pay interest on the rest of the money you owe. You make a mistake on your return. Typos can cost you a lot of money. The three most common errors are math mistakes (less likely with available tax software but still a concern), an incorrect Social Security number, and the failure to sign or date the tax return. At best these mistakes will delay your refund, at worst they’ll result in penalties. Do not file in haste. If you’re running out of time, file an extension, pay if you owe, and either complete your return carefully yourself or, even better, hire a tax preparer to complete it for you. You don’t claim your refund in time. You have three years to claim a refund. If you file your tax return more than three years after it is due, you forfeit your right to your refund in most cases. In this case, procrastination could cost you a significant amount of money. The IRS offers many helpful tips on its website. If you… | Read More »

An apples to apples explanation of taxes

Ah, spring.  Can you feel it?  The sweet chorus of chickadees chirping; “Sun’s up in an hour. Hey. HEY! Fifty-nine minutes now.”  The gentle tingle of an afternoon breeze radiating warmth, hope, and the seeds of renew…ah-Choo! Can you ah pass ah me Choo…a Kleenex?   The mysterious migration from glen to glen of the species taxicus collecticus signaling subtly, almost imperceptibly that: “You can use Form 1040A if your income is only from wages, salaries, tips, interest, ordinary dividends, capital gain distributions, pensions, annuities, IRAs…” Hey!  Stay with me. Taxes aren’t as simple as April showers, so it’s only natural to find them confusing.  To some they’re like a treacherous forest, where one dollar or step too far can lead you over a cliff.  You’ve probably heard the notion: “If I pick up more hours it will push me into a higher tax bracket, and I’ll end up with less money than if I hadn’t taken overtime in the first place.”  To put it simply, that’s almost never true.  It’s important to remember that as taxable income (minus deductions and exemptions) pushes into higher brackets it is subject to a “graduated rate” that applies specifically to…to… You fell asleep, didn’t you? All right, forget all that.  We’re not learning about taxes.  No “alternative minimum” this, no “federal withholding” that.  It’s spring.  So let’s talk about strawberries. My family goes strawberry picking every year in my uncle’s humongous strawberry patch.  He loves strawberries.  Loves ‘em so much he thinks everyone should have some.  But he also wants everyone to see the “fruits of their labor”.  So instead of splitting ‘em all evenly, or letting everyone keep what they pick, he came up with a system of colored buckets and freezers. Yeah, he’s kind of crazy.  But here’s how it works: First, everyone gets a white bucket.  The white bucket is special.  Every strawberry you put into the white bucket you get… | Read More »

Senate offers good, not great, news about your taxes

While they did not make them permanent, members of the Senate did vote last night to extend several tax breaks, which is good but not great news for charities and the tax payers who support them. The temporary extensions will expire after Dec. 31, 2014, unless Congress votes further extensions in the next session. Effective immediately, though, donors who want to make an IRA charitable rollover for the 2014 tax year can do so. The charitable IRA rollover was designed to encourage older American tax payers to donate from their Individual Retirement Accounts. IRA owners age 70 ½ or older can exclude up to $100,000 a year from income if the IRA funds are paid directly to qualified charities. The amount also is considered as the required minimum distribution, or part of it depending on your individual circumstances. Without this exemption, IRA owners would have to withdraw the funds, pay taxes on them, and then contribute to the charity before claiming the deduction. This offered less incentive for these types of charitable contributions, especially for tax payers who normally don’t itemize their deductions. While the temporary extension is a hassle for tax planning, which normally is most effective when effected two years out, it does allow for some immediate deductions including: 1)      Teaching expenses, up to $250, for those who purchase their own supplies. 2)      Tuition fees and deductions 3)      State and local sales tax as an option for itemized deductions if the amount is greater than the state income taxes paid. 4)      Mortgage insurance premiums as an itemized deduction. Additionally, attached to the extender bill is the Achieving a Better Life Experience (ABLE) Act, which allows people who were disabled before the age of 26 and their family and friends to contribute up to a combined total of $14,000 a year to an ABLE account. Earnings would grow tax free and the money would not disqualify the disabled person… | Read More »