The Marriage Penalty: Alive and Well in the Tax Code

 

Experienced Tax Accountant – Couples filing jointly still get the short end of the stick

There are a lot of positive things about getting married, but the IRS' marriage penalty isn't one of them. The marriage penalty occurs when you pay more tax as a married couple than you would as two single filers making the same amount of money. It pops up again and again in the federal tax code. Thankfully, legislation in recent years is shrinking the problem, but it still exists. Here is what you need to know.

 

Tax Social Security benefits

Probably the worst example of the ongoing marriage penalty is imposed on older couples. Talk about insult! You make it to retirement as a couple and then get your Social Security taxed more quickly. This occurs because two single seniors start getting their Social Security retirement benefits taxed when their income exceeds $25,000. So the married threshold should be $50,000, right? Nope, it is $32,000. When you consider up to 85% of this benefit is taxable, is it a marriage penalty on couples that can least afford it!

 

Accelerating phase-outs

The tax code is filled with various income phaseouts for benefits, credits, and deductions. Thankfully most now have the marriage penalty taken out, but it still exists in things like the Adoption Credit and Roth IRA contribution limits. But probably the worse example is that the earned income tax credit (EITC) phase-outs favor single versus married taxpayers. A single mother of three in 2021 can qualify for the EITC with income less than $51,464, while a married couple loses the EITC with combined income over $57,414. This is often one of the driving reasons for not marrying when you have lower income and children are in the home.

 

Affordable Care Act piles onto the marriage penalty

The Affordable Care Act also penalizes married couples with lower thresholds on its 0.9 percent wage surtax and 3.8 percent investment income tax. The income thresholds for these surtaxes are $200,000 for single filers and $250,000 for married couples filing jointly. As a result, singles who each earn $125,000 to $200,000 can get hit with the extra tax after they marry.

 

Even Itemizing deductions favors single taxpayers

One of the new provisions in the tax code that limits itemizing deductions is the $10,000 upper limit on taxes, like property taxes and sales taxes, that can be used for itemizing deductions for a single taxpayer. The limit for a married couple? Not $20,000. It is the same $10,000! Congress must not think a family may need a bigger place to stay or need to spend more for the extra family members.

 

The tax rate problem is now better

However, there is some good news on the marriage penalty front. Prior to law changes in 2017, most married couples paid higher tax rates than if they were two single people. This penalty is now eliminated for all but the highest earners. The marriage penalty now comes into play in the 34% tax bracket that begins with combined incomes well over $200,000. Most of us can see the results of this penalty in the news as celebrities conduct their tax planning and delay or avoid tying the knot.

The most important part of the marriage penalty is awareness of the problem. By knowing the tax pitfalls, you can plan around them, and perhaps influence a change for the future. Stay tuned for more information to follow.

Considering a Tax Professional? For no obligation free consultation contact us today!

Tax Problems Resolution

Amare Berhie, Senior Tax Accountant

amare@abataxaccounting.com

651-300-4777

Jan. 31 filing deadline for employers, other businesses to file wage statements, independent contractor forms

With just a few days remaining until the deadline, the Internal Revenue Service reminds employers and other businesses that Jan. 31 is the filing deadline for submitting wage statements and forms for independent contractors with the government.

Employers must file their copies of Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration by Jan. 31. The Jan. 31 deadline also applies to certain Forms 1099-MISC, Miscellaneous Income, filed with the IRS to report non-employee compensation to independent contractors.

This deadline helps the IRS fight tax fraud by making it easier to verify income reported on individual tax returns. The IRS no longer grants an automatic extension of time to file Form W-2. Requests for more time to file must be submitted before the due date. Only certain reasons, such as a death or natural disaster are allowed. Details can be found on the instructions for Form 8809, Application for Extension of Time To File Information Returns.

Failure to file these forms correctly and timely may result in penalties. The IRS recommends employers and other businesses to e-file as the quickest, most accurate and convenient way to file these forms.

Taxpayers: Steps to take if no W-2

Most taxpayers get their Form W-2, Wage and Tax Statement, by the end of January. Taxpayers need their W-2s to file accurate tax returns, as the form shows an employee’s income and taxes withheld for the year.

Taxpayers who haven’t received their W-2 by the end of February should, as a first step, contact their employer. Taxpayers should ask their current or former employer for a copy of their W-2. Be sure the employer has the correct address.

Please do not hesitate to call me, if you have any other questions or need further guidance. Call us for a free consultation at 651-300-4777.

Amare Berhie, Senior Accountant           

CEO, ABA Tax Accounting

CFO Services http://youtu.be/EYJdQtbPZAI

http://abataxaccounting.com/salestaxproblem.php

amare@abataxaccounting.com   

(651) 300-4777

Good recordkeeping is just good business

Experienced Tax Accountant –Recordkeeping is an important part of running a small business. In fact, keeping good records helps business owners make sure their business stays successful.

Here are some things small business owners should remember about recordkeeping:

• Good records will help business owners:

1. Monitor the progress of their business
2. Prepare financial statements
3. Identify income sources
4. Keep track of expenses

• Prepare tax returns and support items reported on tax returns
• Small business owners may choose any recordkeeping system that fits their business. They should choose one that clearly shows income and expenses. Except in a few cases, the law does not require special kinds of records. 
• How long an owner should keep a document depends on several factors. These factors include the action, expense and event recorded in the document. The IRS generally suggests taxpayers keep records for three years. 
• A good recordkeeping system includes a summary of all business transactions. Businesses usually record these transactions in books called journals and ledgers, which business owners can buy at an office supply store or keep them electronically. All requirements that apply to hard copy books and records also apply to electronic business records. 
• The responsibility to validate information on tax returns is known as the burden of proof. Small business owners must be able to prove expenses to deduct them. 
• Business owners should keep all records of employment taxes for at least four years. 
• Businesses that keep paper records should keep them in a secure location, preferably under lock and key, such as a desk drawer or a safe. 
• Businesses that keep records electronically on a computer should always have an electronic back-up, in case the hard drive crashes.

Good recordkeeping is just good business. Questions? Give us a call. We're happy to help!

Amare Berhie, Senior Accountant     

CEO, ABA Tax Accounting

CFO Services http://youtu.be/EYJdQtbPZAI

http://abataxaccounting.com/salestaxproblem.php

amare@abataxaccounting.com         

(651) 300-4777

Get Ready for Taxes: Important things to know about tax credits

Experienced Tax Accountant – With the tax filing season quickly approaching, the Internal Revenue Service recommends taxpayers take time now to determine if they are eligible for important tax credits.

Earned Income Tax Credit - The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for working people with low to moderate incomes who meet certain eligibility requirements. Because it’s a refundable credit, those who qualify and claim EITC pay less federal tax, pay no tax or may even get a tax refund. EITC can mean a credit of up to $6,557 for working families with three or more qualifying children. Workers without a qualifying child may be eligible for a credit up to $529. To get the credit, people must have earned income and file a federal tax return — even if they don’t owe any tax or aren’t otherwise required to file. Taxpayers can use the EITC Assistant to find out if they are eligible for EITC, determine if their child or children meet the tests for a qualifying child and estimate the amount of their credit.

Child Tax Credit - Taxpayers can claim the Child Tax Credit if they have a qualifying child under the age of 17 and meet other qualifications. The maximum amount per qualifying child is $2,000. Up to $1,400 of that amount can be refundable for each qualifying child. So, like the EITC, the Child Tax Credit can give a taxpayer a refund even if they owe no tax. The qualifying child must have a valid Social Security number issued before the due date of the tax return, including extensions. For tax year 2019, this means April 15, 2020, or if a taxpayer gets a tax-filing extension, Oct. 15, 2020. The amount of the Child Tax Credit begins to reduce or phase out at $200,000 of modified adjusted gross income, or $400,000 for married couples filing jointly.

Credit for Other Dependents - This credit is available to taxpayers with dependents for whom they cannot claim the Child Tax Credit. These include dependent children who are age 17 or older at the end of 2019 or parents or other qualifying individuals supported by the taxpayer.

Education Credits - Two credits can help taxpayers paying higher education costs for themselves, a spouse or dependent. The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are claimed on Form 8863, Education Credits. The AOTC is partly refundable. To get either credit, the taxpayer or student usually must receive Form 1098-T, Tuition Statement, from the school attended. Some exceptions apply. See the instructions to Form 8863 for details.

Questions? Give us a call. We're happy to help!

Amare Berhie, Senior Accountant           

CEO, ABA Tax Accounting

CFO Services http://youtu.be/EYJdQtbPZAI

http://abataxaccounting.com/salestaxproblem.php

amare@abataxaccounting.com   

(651) 300-4777

Why it’s important for taxpayers to know their filing status

Experienced Tax Accountant – When a taxpayer files their tax return, they need to know their filing status. What folks should remember is that a taxpayer’s status could change during the year. So, any time is a good a time for a taxpayer to learn about the different filing statuses and which one is best for them.

Knowing the correct filing status can help taxpayers determine several things about filing their tax return:

·  Is the taxpayer required to file a federal tax return or should they file to receive a refund?

·  What is their standard deduction amount?

·  Is the taxpayer eligibility for certain credits?

·  How much tax they should pay?

The taxpayer’s filing status generally depends on whether they are single or married on Dec. 31 and that is their status for the whole year.

Here’s a list of filing statuses and a description of who claims them:

·  Single. Normally this status is for taxpayers who are unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.

·  Married filing jointly. If a taxpayer is married, they can file a joint tax return with their spouse. When a spouse passes away, the widowed spouse can usually file a joint return for that year.

·  Married filing separately. Alternatively, married couples can choose to file separate tax returns. It may result in less tax owed than filing a joint tax return.

·  Head of household. Unmarried taxpayers may be able file using this status, but special rules apply. For example, the taxpayer must have paid more than half the cost of keeping up a home for themselves and a qualifying person living in the home for half the year. Taxpayers should check the rules to make sure they qualify.

·  Qualifying widow(er) with dependent child. This status may apply to a taxpayer if their spouse died during one of the previous two years and they have a dependent child. Other conditions also apply.

More than one filing status may apply and taxpayers can generally choose the filing status the allows them to pay the least amount of tax.

Amare Berhie, Senior Accountant           

CEO, ABA Tax Accounting

CFO Services http://youtu.be/EYJdQtbPZAI

http://abataxaccounting.com/salestaxproblem.php

amare@abataxaccounting.com   

(651) 300-4777