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3 Things to Know About Summer Job Taxes

Summer brings warm weather, fun outdoor activities and new opportunities to earn some additional income. However, taxes on seasonal income need to be handled with care, whether they’re related to your child’s first job or an extra income opportunity for you. Here are some tips to help you manage the taxes on your summer earnings:

  1. Students should take advantage of tax-free earnings limits. If you anticipate making less than the annual standard deduction ($12,200 for single in 2019), none of your earnings are subject to federal taxes! If possible, earn at least that amount each year to maximize your tax-free earnings. Remember, if you can be claimed as a dependent on someone else’s tax return, the limits for tax-free unearned income such as interest and dividends are lower.

    Tip: If your annual earnings will be less than the standard deduction, you can claim EXEMPT on your Form W-4. That prevents federal income taxes from being withheld from your paycheck.

  2. Independent contractors need to make estimated payments. As an independent contractor, you are responsible for paying all the taxes on your earnings. To do this, you make quarterly estimated tax payments to the IRS using Form 1040-ES. In addition to federal and state taxes, independent contractors need to pay a self-employment tax of 15.3 percent of earnings.

    Tip: Track your expenses and save receipts. By doing this, you can subtract eligible expenses like mileage, supplies and uniforms from your gross earnings. Use this lower income number to calculate your self-employment tax and correctly estimate your income tax obligation.

  3. Closely monitor tax withholdings. As an employee, your employer withholds taxes based on what you claim on Form W-4. Unfortunately, the tax tables used by this form to calculate your withholdings do not account for seasonal jobs. This typically results in paycheck withholdings being too low for supplemental income workers and too high for students working during the summer.

    Tip: If you anticipate earnings in excess of the standard deduction, you will need to request proper withholdings. A safe approach to determine the correct amount is to claim 0 or 1 on your Form W-4 and see what your first paycheck looks like. From there, a tax forecast that involves your entire year’s earnings will help you adjust this amount up or down.

With a little tax planning, you can ensure that your summer job provides the income you are looking for without the disappointment of unexpected taxes. Please call if you have any questions.

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The $500,000 Homeowner Tax Break

Understand the rules now to avoid a tax surprise later

There is large tax break that allows you to exclude up to $250,000 ($500,000 married) in capital gains on the sale of your personal residence. But making the assumption that this gain exclusion will always keep you safe from tax can be a big mistake. Here is what you need to know:

The basics

To qualify for the capital gain tax exclusion when you sell your home, you need to pass three hurdles:

  1. It’s your main home. It can be a traditional home, a condo, a houseboat, or mobile home. Main home also means the place of primary residence when you own two or more homes.
  2. You pass the ownership test. You must own your home during two of the past five years.
  3. You pass the residency test. You must live in the home for two of the past five years.

In addition, there are some additional quirks to know, including:

  • You can pass the ownership test and the residence test at different times.
  • You may only use the home gain exclusion once every two years.
  • You and your spouse can be treated jointly OR separately depending on the circumstances.

When to pay attention

You have been in your home for a long time. The longer you live in your home the more likely you will have a large capital gain. Long-time homeowners should check to see if they have a capital gains tax problem prior to selling their home.

Two homes into one. Often newly married couples with two homes have a potential tax liability as both individuals may pass the required tests on their own property but not on their new spouse’s property. Prior to selling these individual homes, you may wish to create a plan of action that reduces your tax exposure.

Selling a home after divorce. Property transferred as a result of a divorce is not deemed a sale of your home. However, if the ex-spouse that retains the home later sells the home, it may have an impact on the amount of gain exemption available.

You are helping an older family member. Special rules apply to the elderly who move out of a home and move into assisted living and nursing homes. Prior to selling property it is best to review options and their related tax implications.

You do not meet the five-year rule. In some cases you may be eligible for a partial gain exclusion if you are required to move for work, disability, or unforeseen circumstances.

Other situations. There are a number of other exceptions to the home gain exclusion rules. These include foreclosure, debt forgiveness, inheritance, and partial ownership.

Recordkeeping is key

The key to obtaining the full benefit of this tax exclusion is in retaining good records. You must be able to prove both the sales price of your home and the associated costs you are using to determine the gain on your property. So keep all sales records, original home purchase records, improvement costs, and other documents that support your home’s capital gain calculation.

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Improve Next Year’s Tax Situation Now!

Whether you receive a big refund or pay taxes on tax day, taking action now can ensure next year’s tax bill is optimized by not paying a dollar more than necessary.

  1. Update paycheck withholdings and forecast estimated tax payments. Reviewing and updating withholdings now gives you several months to spread out the tax impact on your daily finances. Adjust your paycheck withholdings using Form W-4 with your employer to either increase or decrease your anticipated refund. If you are self-employed, you can simply adjust your quarterly estimated payments. Other factors will change your 2019 tax liability, but using your 2018 refund or tax bill as a baseline to update withholdings is a good first step. Just make sure your withholding will cover 90 percent of this year’s tax bill or you may be subject to an underpayment penalty (110 percent if your income is over $75,000 for singles or $150,000 for married couples).
  2. Organize last year’s tax records. Create a file to hold your completed tax return, supporting schedules and documentation. Organize the file so it matches the flow of the new Form 1040 — income documents first, followed by deductions, credits and estimated payments. Doing it this way allows for easy access to your records in the event of an audit. Once you finish with last year’s file, create a checklist of expected documents and a new file for 2019. This will help you keep track of your tax paperwork during the year and speed up the tax filing process in 2020.
  3. Schedule a tax planning appointment. Midyear tax planning is essential to ensure the proper roadmap is in place to realize your tax goals. Using your 2018 tax return is a good starting point for your plan, but it’s not enough. Getting married or divorced, planning for retirement, having or adopting a child, buying a house, paying for college, starting a new job, or getting a raise are just some of the life changes that can dramatically change your tax situation.

Most of us want to forget the hassle of tax season as soon as the form is filed, but the savvy taxpayer uses this time to prepare and plan for a better tax result next year. Please call if you’d like assistance.

Newsletter

Reminder: First Quarter Estimated Taxes Now Due

Now is the time to make your estimated tax payment

If you have not already done so, now is the time to review your tax situation and make a 2019 estimated quarterly tax payment using Form 1040-ES. The first quarter due date is now here.

First-quarter due date: Monday, April 15, 2019

Remember, you are required to withhold (prepay) at least 90 percent of your current tax obligation, or 100 percent of last year’s federal tax obligation throughout the tax year.* A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a quarterly payment might be necessary in addition to what is being withheld from any paychecks. Here are some things to consider:

Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. So a quick payment at the end of the year may not help avoid the underpayment penalty.

W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may be able to adjust your W-2 wage withholdings to make up the difference.

Self-employed. Self-employed workers must account for the need to pay Social Security and Medicare taxes as well. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter to pay your estimated taxes.

Use your refund? An alternative option to pay your first-quarter estimated tax is to apply some or all of your prior-year tax refund towards this year’s tax bill.

Pay more in the first quarter. By paying a little more than necessary in the first quarter you can then adjust your payments later in the year. This helps reduce the risk of an underpayment penalty based on the timing of your estimated payments.

Not sure if you need to make a quarterly payment? Take a quick look at your recently filed tax return to see the amount of tax you paid last year. Divide the tax by the number of paychecks for the year. Is enough being withheld from your paycheck? Consider adjusting your withholdings with your employer if you think it is necessary to cover last year’s tax bill.

If your income is more than $150,000 ($75,000 if married filing separate), you must pay 110 percent of last year’s tax obligation to be safe from an underpayment penalty.

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Owe Taxes? Make Payment Arrangements Now!

If you owe taxes on your 2018 tax return, the due date to make the payment is Monday, April 15. Miss this deadline by just one day and the IRS will charge you interest and penalties! Don’t risk adding unnecessary dollars to your tax bill. Review the payment options below and make a plan now to ensure your payment arrangements are completed before the deadline.

Options to pay immediately

  • IRS direct pay. This free service allows you to pay your balance online using a checking or savings account.
  • Electronic Federal Tax Payment System (EFTPS). This free service also allows payment from a checking or savings account, but you can pay online OR by phone.
  • Debit or credit card payment. The IRS has three authorized third-party processors to accept payment by debit or credit card, but they charge a fee. Debit card transactions have flat fees that range from $2 to $4. Credit cards are more costly at 2 percent of the entire transaction.
  • Check or money order. These payments can be made either in person or through the mail. Make the check or money order payable to the United States Treasury.
  • Cash payments. Cash payments are accepted at some IRS offices or participating PayNearMe locations. Do not send cash through the mail!

Options if you can’t pay the full amount

If you are unable to make the full payment, it’s recommended that you pay as much as you can now, and set up a payment plan to handle the remaining balance. If you are in this situation, here are your options:

  • Online payment agreement. If you owe $50,000 or less in total taxes, interest and penalties, you can apply online for a payment agreement. Often times, this can be set up in just a few minutes. Setup fees, interest and penalties will be added to your outstanding balance.
  • Installment agreement. With an installment agreement, payments can be withheld as a payroll deduction or taken directly from your bank account. Acceptance is less restrictive for installment agreements, so if you aren’t eligible for an online payment agreement, you might still be able to get an installment agreement. Setup fees, interest and penalties still apply.
  • Delaying collection. If the IRS determines you are unable to pay, it may temporarily delay collection of the tax debt. A delayed collection does not change the amount due, it simply allows time for your situation to improve before you are required to make the payment. Penalties and interest will continue to accrue until the payment is made in full.
  • Offer in compromise. If you meet certain criteria, you may be able to settle your tax bill for less than the amount you owe. The IRS considers your ability to pay, income, expenses and asset equity when determining if you qualify. You can use the pre-qualifier tool to see if you are a candidate.
Newsletter

The Tax-Free Retirement Savings Option

Is a Roth IRA right for you?

If you are looking for tax-free income and more flexibility during retirement, perhaps you should look into investing in a Roth IRA. While Roth IRA contributions are not sheltered from current taxes like contributions to traditional IRAs, they offer other tax benefits during retirement.

The Roth IRA advantage

  • Retirement withdrawals (including earnings) are tax-free. As long as you wait to take distributions until you are 59 ½ or older, the full amount of your Roth account is tax-free!
  • Save taxes on other earnings. During retirement, withdrawals from traditional IRAs increase your taxable income. This can bump other earnings into a higher tax bracket and potentially increase the taxability of your Social Security benefits. Conversely, Roth withdrawals are not reported as income, keeping tax rates as low as possible.
  • More flexibility during retirement. Once you turn 70 ½, the IRS requires that you take required minimum distributions (RMDs) from traditional IRAs. If you don’t, you’ll get hit with a 50 percent penalty! There is no such requirement for Roth IRAs. You can leave (and even contribute) funds to grow in the account as long as you want.
  • Contributions can be withdrawn tax-free at any age. If you have financial hardship and need to make an early withdrawal, only the earnings in a Roth are subject to a 10 percent early withdrawal penalty. Meaning, Roth contributions can be withdrawn tax-free and penalty-free at anytime. This is because you use after-tax funds to make your original Roth contributions. This is not the case with traditional IRAs — the full withdrawal is subject to the penalty if you make it before you turn 59 ½.

The Roth IRA is not for everyone

While there are many reasons to consider contributing to a Roth IRA, they are not for everyone. Here are some factors to consider:

  • Income limits. While there are no income limits if you wish to roll funds from other accounts into a Roth IRA, there are income limits to contribute to a Roth IRA. For 2018 they are $135,000 single ($137,000 in 2019) and $199,000 married ($203,000 in 2019).
  • 5-year account requirement. To receive the full tax-free benefit of Roth investment earnings, you must have your Roth account for five years before making withdrawals.
  • Future tax uncertainty. While no one knows what the future holds, keeping tabs on tax trends is an important aspect of retirement planning. Increasing or decreasing tax rates may ultimately determine the best type of retirement investment for you. In addition, the government has the power to change the taxability of your IRA if they deem it necessary.

If you are looking to maximize your savings for 2018, you still have until April 15, 2019 to contribute into an IRA.

Newsletter

Where’s My Refund?

The popular “Where’s My Refund” feature on the IRS website allows you to see the status of your refund after filing your income tax return.

What you should know

  1. Refunds of e-filed returns usually take 10 to 21 days to process. Paper returns take longer than e-filed returns. The IRS states that 90 percent of refunds are processed within this 21-day time period.
  2. Original refund processing projections can change. This can be due to processing backlogs, or errors in your tax return.
  3. Sometimes a delay is a good thing. The IRS acknowledges there is a huge increase in identity fraud as thieves try to steal tax withholdings. The IRS is using their data match programs to catch as much of this illegal activity as possible. Because of this, if the IRS is suspicious there is fraudulent activity, they will hold up processing your refund.
  4. No shutdown delay. The recent government shutdown did delay many IRS activities, but refunds are expected to be issued within the normal timeframe.

Checking your refund status

In the meantime, if you wish to check on the status of your refund this is what you should know.

Go to: www.irs.gov/refunds and click on “Check My Refund Status”

When to check

  • 24 hours after an e-filed tax return confirmation
  • 4 weeks after a mailed tax return is sent

What you need to provide

  • Social Security number
  • Filing status
  • Exact refund amount

Remember, the information provided to you by the IRS is not a guarantee of payment. So please fight the urge to spend your refund before you receive it. Unfortunately, no amount of calling or checking will change the speed of returning your money. With 150 million tax returns processed each year, sometimes all you can do is wait.

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