Credit

July 18 2018

Is Being Effective Better Than Being Marginal?

Credit, Credits, IRS, IRS Rules, Tax Planning, Tax Tips Credits, deductions, exemptions, tax rate, taxable

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The tax code is filled with terms we rarely use in everyday conversation. Two of the more common are Marginal Tax Rates and Effective Tax Rates. Knowing what they mean can help you think differently about your potential tax obligation.

Definitions

Marginal Tax Rate: This is the tax rate applied to the “next” dollar you earn. Since our income tax rates are progressive, the next dollar you earn could be taxed at as little as zero or as high as 39.6%!

Effective Tax Rate: This is the tax rate you actually pay. This is simply taxes you pay divided by your total taxable income. Said another way, after taking your income and then applying taxes, deductions, credits, exemptions, and other adjustments you are left with your true tax obligation. This obligation is a percent of your income.

A Simple Example

Consider two people; Joe Cool who earns $50,000 and Chuck Browne who earns $500,000. If we had a flat tax of 10%, Mr. Cool would pay $5,000 in tax and Mr. Browne would pay $50,000 in tax. Both of their Effective Tax Rates would be 10% AND their Marginal Tax Rates would also be 10% because each additional dollar they earn would be taxed at the same 10%. However it is a different picture when you apply our progressive tax rates:

If we use the 2017 U.S. tax table for a single filer, Joe Cool pays $8,239 and Chuck Browne pays $153,819 in federal tax. This is because tax rates applied to Joe Cool’s income are (10 – 25%) while Chuck’s income over $50,000 gets Marginal Tax Rates of (25 – 39.6%). Ignoring other tax factors, our two taxpayers’ tax rates are:

	Joe Cool	Chuck Browne	Diff +/-	Comment
Effective Tax Rate	16.5%	30.8%	+14.3	Chuck pays 30.2% of his income in tax; Joe 13.2%
Marginal Tax Rate	25%	39.6%	+14.1	The next dollar each earns will be taxed at this rate.

Why Care?

Calculating Returns. The true return you receive on any taxable investment will be determined by your Marginal Tax Rate. A $500 profit from a new investment could cost Joe Cool 25% in federal tax, but it could cost Chuck Browne 39.6% in federal tax.
Phase-outs can provide a dramatic impact on Effective Tax Rates. The simple examples above do not account for income limits applied to many tax benefits. Additional income could have a very dramatic impact on Joe Cool if it triggers losing things like an Earned Income Credit, or Child Tax Credit. This could increase your Effective Tax Rate while not touching your Marginal Tax Rate.
Extra work can help the taxman more than you. There have been cases where adding a second job can actually cost you money by not understanding the impact of the income on your Effective Tax Rate. This is especially true for retired workers receiving Social Security Retirement Benefits. That extra job may make your Social Security benefits taxable.
It’s not that simple. In addition to all the different income phase-outs for credits and deductions, your Effective Tax Rate could be impacted by the elimination of itemized deductions, reduction of exemptions, the Alternative Minimum Tax, and the marriage penalty.

It is a good idea is to understand your Effective Tax Rate and your Marginal Tax Rate. Look at last year’s tax return and calculate your Effective Tax Rate. Then look at your income and determine what your Marginal Tax Rate is if you earn additional income. If you anticipate an increase in earnings, consider forecasting the impact on your Effective Tax Rate.

Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.

July 11 2018

Credit card debt may be hazardous to your financial health

Credit, Money Management Credit Card, debt, Financial

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Have you been offered a credit card lately? The industry sends out billions of credit card offers each year, and the average household has several thousand dollars in credit card debt. Credit card companies make it very easy and very tempting to say “charge it.”

Unfortunately, like so many tempting things, credit card debt can be bad for your financial health. It is one of the most expensive ways to borrow money, and big balances on your credit report can hurt when you apply for a home loan or a car loan. Also, in today’s uncertain economy, the last thing you need is high-interest debt that can jeopardize your ability to keep up with payments.

That is why one of your smartest financial moves might be to start paying down your credit card debt. Some people do this by taking out a home equity loan; others try debt consolidation. Neither of these strategies is without risk. You might want to talk to a reputable nonprofit debt counseling service before you adopt a plan. You can receive impartial advice on your financial strategy and useful practical tips too.

One way to get a handle on your debt is to list the outstanding balance and the interest rate on each of your cards. Then make the largest monthly payment you can afford on the card with the highest interest, while keeping up the minimum payments on all your other cards. Once you have paid off the first card, don’t use it again. Repeat the process for the card with the next highest interest rate, etc. In the meantime, don’t hesitate to call your credit card companies and try to negotiate lower interest rates.

Paying off your credit cards will take time and will likely require a change in your spending habits. But the effect on your financial health will be well worth the effort.

July 2 2018

Summer’s a time for vacations and tax planning

Credit, Individual Taxes, IRS, Tax Law, Tax Planning, Tax Tips deductions, tax code, Tax Plam

It’s tempting to take a break from everything this summer, but you may regret it come tax season if you push off tax planning. Here are some tips to help you keep your head in the game even when your feet are in the pool:

If you are a sole proprietor with children, consider putting them on the payroll during the summer months. Wages paid to your children under age 18 are not subject to Social Security and Medicare taxes. What’s more, their earnings are not subject to federal unemployment tax until they turn 21.

If employing your children is not an option, you might still be able to score a deduction by sending them to summer camp. Day camp expenses for kids under 13 can provide a tax credit of up to 35 percent. Just remember, overnight camps do not qualify, and usually both parents must work to claim this credit.

Keep in mind that tax deductions for moving have been limited. The recent tax code changes have eliminated the moving expense deduction. That means most taxpayers will no longer be able to deduct moving expenses. There are exceptions to the new rule, so give us a call if you have questions.

Business and pleasure can mix – if you follow the rules. Perhaps your sights are set on some leisure travel. Tacking on a few fun days before or after a business trip might be a tax- and cost-efficient way to pay for a vacation. But you have to follow all the rules if you want your business travel to remain tax-deductible. Travel that is primarily for charitable work might also qualify you for a tax deduction.

No matter what your summer plans are, this is always a good time for a general tax checkup to ensure your withholdings and estimated tax payments are on target. For help with any of these issues, contact our office.

June 27 2018

Tips to Maximize Your Mileage Deduction

Credit, Credits, IRS, IRS Rules, Tax Law, Tax Planning, Tax Tips deductible, Medical Miles, mileage, Plan, Tax

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Each year standard mileage rates for business travel, medical driving, moving mileage and mileage rates for charitable driving are set by the IRS.

Too often this deduction is overlooked because proper documentation was not followed. Here are a few tips to ensure you receive the full benefit of this tax deduction.

Tip 1: Track your applicable mileage in an auto log. This log is required to ensure your deduction is not disallowed during the course of an audit. Please make sure the business/charitable/medical purpose, date and distance is clearly noted.

Tip 2: Also keep track of parking, tolls and other miscellaneous travel expenses. These can often be deducted in addition to the standard mileage rate.

Tip 3: Submit expense reports if your mileage can be reimbursed. Most employers will reimburse you for business mileage at the approved rate, but many employees fail to ask for reimbursement. Remember, your employer can deduct this reimbursed expense on their tax return as well.

Tip 4: Keep track of medical miles. Even though you need to surpass a percent of your income prior to taking medical expenses as an itemized deduction, still keep track of qualified medical miles. It often only takes one major medical bill to make all your other excess medical expenses deductible.

Tip 5: Plan your business trips to ensure your miles are deductible. Commuting miles to and from work is not deductible. However, if you stop off at a supplier first, then the mileage from the supplier to your workplace is a deductible expense.

Tip 6: Do not forget charitable miles. This deduction is one of the most often overlooked deductions. Do you drive for Meals on Wheels or for a school function? Do you volunteer as a coach for a non-profit sporting group? These miles add up over time and are often not properly documented.

June 25 2018

Getting summer help? Classify properly

Business Taxes, Credit, Credits, IRS, IRS Rules, Tax Break, Tax Law Categorize, employee, Summer

Don’t subject your business to tax penalties by misclassifying employees and independent contractors. You can avoid misclassification by understanding how the law defines employment (we can help you with this), and by creating and following work-habit guidelines. Thoroughly review your work arrangement not only at the beginning of professional relationships, but regularly to ensure both you and your employee are on the same page.

June 20 2018

Parents, Children, and Taxes

Credit, Credits, IRS, IRS Rules, Refunds, Tax Break, Tax Law, Tax Planning, Tax Tips 529 plans, Child Care, children, Credits, deductions, Education, k-12, Parent, Plan, Spouses, taxes

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Being a parent brings tremendous rewards, but also the challenge and responsibility of supporting and educating your child. Fortunately, the tax code has many ways to help ease a parent’s financial burden. Here’s an overview of the many ways that taxes can affect your decisions as a parent.

Exemptions and credits

Being a parent usually cuts your tax bill in at least two ways. You can generally claim a dependency exemption for each child under age 19, or under age 24 for full-time students. You can also claim a child tax credit for each child under age 17. This is a direct credit against taxes you owe, and it can be partially refundable.

Other credits include the adoption credit to offset expenses of adoption and the child care credit. This credit allows you to offset some of the costs of paying for child care so that both spouses can work or attend school full-time. Many of these tax breaks phase out for those at higher income levels.

Education expenses

One of the biggest challenges for a parent is funding a child’s college education. A variety of tax breaks can help with this major expense, including savings plans, tax credits, and tax deductions. These measures all have different rules and eligibility requirements.

There are two main types of savings plans for education expenses: Coverdell education savings accounts and Section 529 plans. Coverdell accounts work rather like an IRA. Contributions grow tax-free, and withdrawals are free of tax if used for qualified education expenses. Coverdell accounts can also be used to pay for K-12 expenses as well as college costs. Section 529 plans provide tax-free earnings and distributions for higher education expenses, and they generally have fewer restrictions than Coverdell accounts.

The American Opportunity credit and the Lifetime Learning Credit are two tax credits available for education expenses. Each has its own rules and income limits, and you cannot use both credits for the same child in the same year.

A limited tax deduction is available for student loan interest expense. In addition, interest on U.S. savings bonds can be tax-free if the bonds are used for education expenses.

Child tax issues

The “kiddie tax” is a rule that affects the investment income of children. A child’s unearned income above a threshold amount will be taxed at the parent’s highest rate until the child reaches a certain age. The intent is to stop a high-income parent from shifting large amounts of earnings to a child in a lower tax bracket.

A strategy of “income shifting” can make sense for a family once the child is old enough to escape the kiddie tax. Parents can gift income-earning assets to older children (subject to the annual and lifetime gift limits), and the children will pay tax on the income earned at their own (presumably lower) rates.

Another tax-cutting strategy is to employ your child in the family business. The business can take a deduction for wages paid, while the child often pays little or no taxes on his or her earnings. It must be a real job, though, and the wages must be reasonable for the work.

If your children have earnings from summer or after-school jobs, encourage them to open IRA accounts. The additional years of tax-free compounding can produce huge additional savings by the time your children reach retirement age.

Don’t overlook the role of grandparents. They can help pay college expenses, for example, either by contributing to education savings plans or by paying tuition bills directly. Also, by giving appreciated stock to their grandchildren, they may be able to boost the children’s savings while reducing overall taxes for the family unit.

Estate planning

For a parent, estate planning is especially important. The first priority is to make sure your children are protected in the event that something happens to you. Your estate plan should appoint guardians for your minor children, as well as provide for their financial well-being.

Early estate planning can also help to ensure that your assets pass to your children as you consider prudent. A variety of planning techniques can allow you to transfer assets to your children over the years, often while still leaving you with some control over the assets.

June 13 2018

Same-sex Couples Deemed Married for Federal Tax Purposes

Credit, IRS, IRS Rules, Tax Break, Tax Law, Tax Planning, Tax Tips IRS, Same-sex marriage, statute of limitations

The U.S. Treasury Department and the IRS issued ruling as a direct result of Supreme Court action regarding same-sex couples. In short:

Under the ruling any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, or a U.S. territory that recognize same-sex marriage will be treated as married for all federal tax purposes. This includes:

•filing status
•personal deductions
•dependency exemptions
•standard deductions
•employee benefits
•tax credits
•retirement plans and contributions

More importantly, this ruling applies regardless of where the same-sex couple currently lives. The ruling applies to originally being married in jurisdictions that legally recognize their marriages.

Other things to note:

Beginning in 2013, same-sex couples within this ruling must file either married filing jointly or married filing separately. You may no longer file as a single taxpayer.

You may choose to, but are not required to, file amended tax returns as being married for any prior tax years that are still open under the statute of limitations. This usually means three tax years.

This ruling DOES NOT apply to registered domestic partnerships, civil unions or similar formal relationships.

If you paid for same-sex health insurance coverage from an employer in after-tax dollars you may be able to shift these premiums into pre-tax dollars.

State laws are more complex and are currently evolving so try to keep informed of any new developments on this front.

June 6 2018

A new credit for small business owners

Business Taxes, Business Tips, Credit, Credits Credit, employee, wages

Starting this year, employers can take advantage of a new credit for paid family and medical leave created by the Tax Cuts and Jobs Act. Employers may claim the credit based on wages paid to employees while they are on leave for the birth of a child, a serious health condition, and other family and medical events.

The credit is a percentage (ranging between 12.5 percent to 25 percent) of the amount of wages paid to an employee while on family and medical leave for up to 12 weeks.

The credit is set to expire after the 2019 tax year, however, so keep this in mind for long-term planning.

June 4 2018

6 ways to avoid a credit card catastrophe

Business Taxes, Business Tips, Credit Credit Card, Pay off, Retail Stores

Credit cards should be a convenient short-term way to pay, not a source of regular spending. Unfortunately, some people have a hard time staying true to this concept. Instead of paying off the entire balance due on the card each month, they let it grow and pay only the minimum amounts.

If this sounds all too familiar, it’s time to stop what you’re doing and start following these rules:

1. Pay the entire balance due each month.

2. If a balance remains unpaid at month’s end, do not use the card again.

3. Do not use more than one credit card.

4. Do not accept credit cards from specific retail stores.

5. Do not pay off one credit card with another.

6. Do not purchase gifts for people with your credit card. It’s often too easy to let your generosity exceed your ability to pay.

Spending habit monitoring tip: Take your credit card charges and your canceled checks for the past year and sort each charge and canceled check into two piles. One pile is for the “must” payments such as utilities, taxes, medication, rent or mortgage payments. The other pile is for the optional spending, such as meals at restaurants, gifts for people, recreational events or equipment.

May 9 2018

How to handle a gap in health care coverage

Credit, Health Insurance, Insurance, IRS, Tax Law, Tax Planning, Tax Tips employer, Gap, Healthcare, insurance

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Health care coverage gaps happen. Whether because of job loss or an extended sabbatical between gigs, you may find yourself without health care for a period. Here are some tax consequences you should know about, as well as tips to fix a coverage gap.

Coverage gap tax issues

You will have to pay a penalty in 2018 if you don’t have health care coverage for three consecutive months or more. Last year the annual penalty was equal to 2.5 percent of your household income, or $695 per adult (and $347.50 per child), whichever was higher. The 2018 amounts will be slightly higher to adjust for inflation.

Example: Susan lost her job-based health insurance on Dec. 31, 2016, and applied for a plan through her state’s insurance marketplace program on Feb. 15, 2017, which went into effect on April 1, 2017. Because she was without coverage for three months, she owes a fourth of the penalty on her 2017 tax return (three of 12 months uncovered, or 1/4 of the year).

While the penalty is still in place for tax years 2018 and earlier, it is eliminated starting in the 2019 tax year by the Tax Cuts and Jobs Act.

Three ways to handle a gap

There are three main ways to handle a gap in health care coverage:

COBRA. If you’re in a coverage gap because you’ve left a job, you may be able to keep your previous employer’s health care coverage for up to 18 months through the federal COBRA program. One downside to this is that you’ll have to pay the full premium yourself (it’s typically split between you and your employer while you are employed), plus a potential administrative fee.

Marketplace. You can enroll in an insurance marketplace health care plan through Healthcare.gov or your state’s portal. Typically you can only sign up for or change a Marketplace plan once a year, but you can qualify for a 60-day special enrollment period after you’ve had a major life event, such as losing a job, moving to a new home or getting married.

Applying for an exemption. If you are without health care coverage for an extended period, you may still avoid paying the penalty by qualifying for an exemption. Valid exemptions include unaffordability (you must prove the cheapest health insurance plan costs more than 8.16 percent of your household income), income below the tax filing threshold (which was $10,400 for single filers below age 65 in 2017), ability to demonstrate certain financial hardships, or membership in certain tribal groups or religious associations.