Category: Tax and Life Changes

Life changes and your taxes go hand in hand; believe it or not. That being said, it’s easy to forget about your tax return as a newlywed or when you’re welcoming a newborn into the family. Be aware that many of these changes also make you eligible for deductions and credits on your tax return. In some cases, you may need to update your W-4 form as well. PriorTax will keep you up to date on what to do when these life changes occur. You won’t be left in the dark.

Check back here for answers to your questions about how these changes affect your taxes.

 

Archive for the ‘Tax and Life Changes’ Category

Obamacare VS. Trumpcare: 3 Ways Taxes Will Be Affected

Posted by admin on April 14, 2017
Last modified: April 14, 2017

Obamacare made it through the election. Will it stay on your tax return?

Every new president brings on a new aura for Americans to bask in, and while emotions run high, opinions begin to surface. Suddenly, cheerful holiday dinners turn into political debates. Some chime in while the rest of us are just trying to decide between pecan pie or pumpkin. One debate is the replacement of Obamacare, or the American Health Care Act. Lately, we’ve introduced a new word into our vocabulary that will likely stick; TrumpCare

 

Flexible Spending Account (FSA) for Over-the-Counter Medicine

According to the IRS in 2011, under the Affordable Care Act (aka Obamacare), “Distributions from health FSAs and HRAs will be allowed to reimburse the cost of over-the-counter medicines or drugs if they are purchased with a prescription.” This will remain accurate until Obamacare is no longer in effect. However, there are limits to the Flexible Spending Account. For example, the pre-tax dollars you can have contributed to your account adjusts each year depending on inflation. The FSA limit is currently $2,500.

The American Health Care Act (aka TrumpCare) having one foot in the door, we can expect to see a few changes. President Trump truly believes in the benefits of Health Savings Accounts (HSAs). Although these accounts have been available to eligible Americans for the past decade, they tend to attract mostly higher-income earners. TrumpCare will remove the $2,500 FSA limit for those who want to purchase a high deductible medical coverage plan. Therefore, for larger deductibles, HSAs come into play. The HSA contribution limit for individuals is $3,400.

Lower to middle-income earners are finding this new plan hard to swallow since HSAs require a high-deductible account and the money to fund it. Long story short, with the existing HSA guidelines, many will not qualify and will therefore not be able to use either of these accounts to purchase over-the-counter medication like they can now with FSAs.

 

Individual Shared Responsibility Tax Payment

We can all agree that the Affordable Care Act increased health care coverage among Americans, the statistics speak for themselves. However, the reason why might have to do with the tax penalty you would be subject to paying if you didn’t have any coverage at all. The Individual Shared Responsibility Tax Payment ensured that you (and each member of your household) would either have the minimum essential health coverage or pay a pretty penny out of your tax refund. The choice was yours but either way, you pay. As of 2016, the penalty had increased to the larger of:

  • $695 for each adult and $347.50 for each child without minimum coverage (maxing out at $2,085 per household), or
  • 2.5% of your household income above the tax return filing threshold for your filing status

President Trump’s plan repeals this tax penalty. There are rumors that Americans who have paid this penalty in the past will be able to amend their tax returns to accommodate for the repeal. 

 

Medical Itemized Deduction Threshold

Currently, Obamacare allows individuals who itemize medical expenses to deduct costs that exceed 10% of their AGI (Adjusted Gross Income).

Under the American Health Care Act, those who itemize their deductions would be able to write off medical expenses exceeding 5.8%, reducing the current threshold of 10% by almost half. This would allow those who have large, out-of-pocket medical expenses to deduct more on their tax returns for the year.

 

When one door closes, another one opens…even in the tax world.

Taxes and politics are two subjects that are the furthest from appetizing yet always seem to sneak into dinner table conversations. Get started filing your current or prior year taxes whichever political party or tax bracket you fall under. Create an account today or feel free to give us a call with any questions you have.

 

Obamacare

1099-C Defined: Handling Past Due Debt

Posted by Michelle O'Brien on November 15, 2016
Last modified: December 21, 2016

So you’ve accrued a bit of debt. It’s not the end of the world.

Debt is stressful, overbearing and can build up quickly. When this happens, you may need to eliminate it altogether. In a situation when you need to cancel your debt completely, you would contact your creditor and they’d issue you form 1099-C, as shown below.

What is form 1099-C?

The 1099-C is also known as the Cancellation of Debt. The most common reasons that you would receive this form are as follows:

  • You’ve not made any payment on a debt for at least three years and there has been no collection activity for the past year.
  • You negotiated a settlement to pay your debt for less than the amount you owed and the lender/creditor forgave the remaining amount.
  • You sold a home in a short sale where the lender/creditor agreed to accept less than the full amount due to them
  • You’ve owned a home that entered into foreclosure with a deficiency (the difference between the value of the home and your debt on it) which was forgiven or remains unpaid.

What does each box on the 1099-C mean?

Tax forms, in general, are intimidating to most of us. The tricky language and minuscule text paired with our immediate panic can send anyone into a frenzy. Let’s break this form down box by box and see if all your questions can’t be answered. (more…)

What Are Allowances on a W-4?

Posted by admin on October 18, 2016
Last modified: November 2, 2016

You must pay tax to the IRS but your W-4 form lets you decide when to pay it.

When beginning a new job, you may remember your employer handing over a W-4 form (along with the pile of other paperwork) to fill out. Your W-4 form determines how much tax is withheld from your income based on how many allowances you claim.
You can claim a certain number of allowances depending on your life situation. Allowances conclude how little or how much your employer will withhold from your paychecks throughout the year for taxes. In other words, the size of your tax refund or tax due to the IRS after filing your taxesYou can claim as little as zero allowances or as many as apply to you and your tax situation. The ideal situation is to break even; no tax owed and no tax refund.

How many allowances should you claim?

The details to your specific situation (such as your filing status, number of children, etc.) will determine how you complete your W-4.

If your parents claim you: 

If you’re being claimed as a dependent on someone else’s tax return, you’ll most likely want to claim zero allowances. This is because your parents are claiming you as an exemption, rather than you claiming yourself.

(more…)

Do Back Taxes Affect Your Credit Score?

Posted by Michelle O'Brien on April 5, 2016
Last modified: December 21, 2016

Credit and taxes are both pretty high up there on the adult responsibility ladder.

Putting them together kinda makes you want to hide under a rock. Don’t worry. You don’t need to know everything about credit (or taxes) in order to start taking steps in the right direction. You’ll learn what you need to along the way.

Let’s take a look at some of the initial questions you probably have about your tax debt and how it will affect your credit score.

Will a tax debt show up on my credit report?

Well, it could. The IRS will not automatically run off to the land of credit agencies and warn them about you if you have built up some tax debt over the years. However, if you owe over $10,000 in taxes and continue to do nothing about it, then a Notice of Federal Tax Lien is automatically filed against you. This lien has the potential to be pretty damaging to your credit score it will show up as a ‘seriously negative’ item on your credit report. If this has happened to you, don’t panic and keep reading. We’ll let you know how to remove this from your record and prevent this from happening to you in the future.

Can I remove a tax lien from my credit report?

You have a tax lien. This is a stressful situation, but you can only panic so much. Now you need to take baby steps toward fixing it. To do this, you’ll need to initiate repayment of your debt. Since this can stay put on your credit report up to seven years after the bill is paid, it is important to take action sooner rather than later. (more…)

How to Complete a W-4 if You’re Married

Posted by Michelle O'Brien on January 13, 2016
Last modified: November 2, 2016

Tie the knot in your life and also on your taxes.

The honeymoon is over and it’s back to reality. With such a huge change in your life, it’s important to pay attention to how it will affect your taxes. Once the wedding bells in your head subside, update your W-4 form with your employer.

Completing a W-4 form can be intimidating especially knowing that your paycheck depends on it. Don’t let your tax return take the fun out of your recent marriage. Let us help you fill out your W-4 so that you can still break even this tax season!

 

You just got married.

Congrats to all of you newlyweds out there! Once you’ve found a place in your cabinets for all of those trinkets on your Bed Bath & Beyond registry, make sure you speak with your employer. You may or may not know already but filing a joint tax return screams ‘tax benefits’!

You should update your W-4 form to reflect your married filing status ASAP. You’ll want to do this as soon as possible so that it reflects on your tax return when you file for the year.

As a married couple with two sources of income, your tax rate is bound to change. Be sure to sit down with your spouse and discuss the household income you’ll both be bringing in. If one of you makes significantly less income, your joint tax rate could be brought down. What if one spouse is earning significantly more? You could be entering into a higher tax bracket.

 

You’re married… and just had a baby!

Babies probably play the biggest role in tax benefits. Funny…considering they can hardly utter ‘W’ or ‘4’. When you have a baby, you can claim an additional allowance. As a married couple planning to file a joint return, it is recommended that the spouse earning the higher income claim the additional allowance(s). The other spouse will not need to update their W-4 form. You may also qualify for the Child Tax Credit or Child Care Tax Credit depending on your income.  

Claiming a higher amount of allowances on your W-4 form will allow for less to be withheld from your paychecks. If you leave your withholdings as-is, your tax refund may be larger than necessary. Plus, you’ll probably need a little extra for Pampers and ear plugs (kidding!) throughout the year.

(more…)

How to File your First Tax Return

Posted by Michelle O'Brien on November 13, 2015
Last modified: November 2, 2016

Filing your first tax return is a bit like doing your laundry.

You don’t want to do it. You’d prefer someone just did it for you. But if you don’t do it, you know there will be consequences. 

Unlike laundry, you’ll need to do a bit more sorting, as in sorting through of all those tax forms. And unlike laundry, you really should know the basics before you start. Don’t worry though: you’ll get through it and probably even get a refund afterwards.

 

Find out if you are being claimed as a dependent!

The first thing you should do is talk to your parents. Since they’ve been claiming you as a dependent since before you could even utter the words, ‘tax return’, make sure they know you are planning on filing for yourself to avoid being rejected by the IRS. Each and every person is allowed to claim a personal exemption for themselves or their dependent. However, only one exemption can be claimed per person.

Here’s a classic scenario:

Abby was just hired as a barista at that awesome new cafe downtown. She makes a decent income and her co-worker mentions that she could probably cash in on a nice refund come tax time. Being that Abby is only 17 and earning less than the threshold allotted by the IRS, her parents can still claim her as a dependent on their return. If Abby files a tax return and claims the personal exemption for herself, not noting that she is being claimed as a dependent, and then her parents claim the personal exemption for Abby on their return, the IRS will reject the last tax return submitted.

 

Do you know the age requirements to be claimed as a dependent?

Although your age doesn’t specifically determine if you need to file a tax return, it is a key player in whether or not you can be claimed as a dependent on someone else’s taxes. When it comes to age, you can only be claimed as a qualifying child dependent if one of the following is true: (more…)

Reporting Dependent Income on My Tax Return

Posted by admin on October 28, 2015
Last modified: October 28, 2015

Have you been claiming your kid as a dependent since they were in Pampers? If yes, read on…

Now your child just got their first job and is earning an income. Great news: you won’t have to pay them a weekly allowance for the sub-par chores they keep complaining about anymore. Not-so-good news: they’ve entered into the big bad world of taxes!

Don’t worry…it’s not that scary. Really. In fact, in some cases, your child may not even need to file their own tax return yet. 

Let’s take a closer look.

 

Should you report the income they’re now earning on your own return?

You can’t and you won’t. Plain and simple, you will never report any income your dependent earned on your own tax return. 

Take Frankie for example:

Frankie is 16 years old and was hired for the summer as an assistant camp councilor. He will be earning a little under $4,000 for the three months he is employed. When tax time rolls around, Frankie determined that he will not need to file a tax return of his own and will still be claimed as a dependent on his parent’s return. Although his parents are claiming him as a dependent, they will not report Frankie’s $4,000 summer income.

As seen in the example , although you cannot report the income they’re earning on your tax return, you can still claim them as a dependent.

 

How about their unearned income?

Unlike income earned from work, you can report your dependent’s so-called unearned income, such as income from interest and dividends or capital gains distribution, on your own tax return but only up to a certain amount. If the child’s unearned income exceeds that amount, then they will need to file their own tax return and specify that they are being claimed as a dependent.

(more…)

I’m Divorced: How Do I File My Taxes?

Posted by admin on October 21, 2015
Last modified: October 22, 2015

Filing your taxes should not be hard after you divorce.

Going through a divorce can be emotionally draining and a financial burden. The good news is that filing your taxes doesn’t have to be. Preparing your tax return is the very last thought on your mind right now. We’re here to help! You can prepare your tax return online with Priortax.

 

Filing Status

According to the IRS, you are considered married for tax purposes if you are still legally married on December 31st of that year. If your divorce is not finalized by the last day of the year, then you have the following options available to you:

  • File as married with a joint tax return
  • File as married with separate tax returns

If your divorce was finalized by December 31st of that year, then you are considered divorced for tax purposes. You have the following options available to you:

  • File as single
  • File as head of household**

**Please note that in order to file as head of household, you must meet all of the IRS requirements.

 

Alimony & Child Support

If you are paying alimony, you can claim a tax deduction on your tax return. This is allowed by the IRS even if you do not itemize your tax deductions. You will need to know your ex-spouse’s social security number. It will be reported on your tax return in order to claim the deduction. The spouse receiving alimony must pay tax on the payments.

It is important to keep in mind that in order for alimony to be taxable and deductible, it must be paid in cash to said spouse.

Unlike alimony payments, child support is not deductible or taxable. The spouse who is paying cannot claim it on their tax return as a tax deduction.

(more…)

What You Need to Know about Working Remotely Taxes

Posted by admin on December 9, 2014
Last modified: January 25, 2016

Working remotely taxes can be confusing, especially if you live in one state and work for a company located in another state.

For most, working remotely from home is much more convenient than commuting to a job. There’s no train rides, sitting in traffic or obnoxious co-workers to sit next to.

However, trading in your commute to the office for working from the comfort of your own home can come with a price, especially when it comes to filing taxes.

If you work remotely for a company that’s located in a different state than your resident state, you may be forced to file multiple state tax returns. Sound confusing? We’re here to help!

Tax-Free States

If you work remotely for a company in another state than where you live, you may forced to file both a resident tax return and a non-resident return.

However, some states are income tax-free, meaning you’re off the hook from filing state taxes. The 9 states without an income tax are as follows;

  1. Alaska
  2. Florida
  3. Nevada
  4. New Hampshire
  5. South Dakota
  6. Tennessee
  7. Texas
  8. Washington
  9. Wyoming

File a Return to Each States Listed on Your W-2

If both the state you live in and the state your company is located in falls within the list above of income-tax-free states, then you won’t need to file any state tax returns. Lucky you!

However, chances are the company you work for and/or your home is located in a state with income taxes. In this case you will have to file at the least, a resident tax return. (more…)

Why Did I Receive Form 1099-MISC?

Posted by admin on October 23, 2014
Last modified: October 6, 2016

You do not necessarily have to “have a business” to receive a 1099-MISC- you’re still considered “self-employed” by the IRS

If you opened up your mail to find a Form 1099-MISC rather than a W-2 form, you may think someone sent you the wrong paperwork.

Don’t throw it away. Don’t shred it. Don’t use it to write notes on.

You most likely received this form because you were paid to do freelance or contract work. Hold onto it.

Although you may not consider yourself “self-employed” or a business owner, you’re required to report this income listed on the 1099-MISC on a business tax return (a Schedule C).

What is Form 1099-MISC?

If you’re only familiar with your salary, wages and tips being reported to you on a W-2 Form,  then a 1099-MISC may be completely foreign to you. It’s actually not that complicated. Here’s what you should know;

  • the IRS requires any person or company to report certain types of payments on a 1099-MISC
  • 1099-MISC can cover a range of different payments such as independent contractor earnings, rent, royalties, prizes, & awards
  • if you’re a freelancer or independent contractor then you probably received a 1099-MISC
  • you’ll have to report the income listed on your 1099-MISC as self-employment income on a Schedule C tax return
  • since the employer isn’t taking out social security and medicare taxes from your pay, you’re liable to pay them

What to do with the 1099-MISC Form you received

Not sure what to do with the 1099-MISC form? You’ll need to hold onto it so that you can report the income on your tax return. (more…)