Posts Tagged "deductions"

Is Being Effective Better Than Being Marginal?

Posted on Jul 18, 2018

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,...

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Summer’s a time for vacations and tax planning

Posted on Jul 2, 2018

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. 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...

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Parents, Children, and Taxes

Posted on Jun 20, 2018

  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...

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Don’t forget your midyear tax-planning

Posted on Jun 15, 2018

Can you believe 2018 is already half over? If you haven’t thought about your 2018 tax situation yet, it’s time to do so. At this point, you should have a good idea what your income and deductions will be. With all the big tax law changes that take effect this year, you need to start planning now if any of them will impact you. Don’t procrastinate or you could end up paying more tax in 2018 than necessary. Contact us to schedule your midyear review. 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...

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Don’t let scant tax records be your downfall

Posted on May 21, 2018

Tax records should be kept year-round, not hastily assembled just for your annual tax appointment. Without tax records, you can lose valuable deductions or have unsubstantiated items disallowed if you’re audited. Generally, returns can be audited up to three years after filing. However, if income is underreported by more than 25 percent, the IRS can collect underpaid taxes up to six years later. In other words, you need good records to verify what you report on your tax return, and you should hang on to those records for seven years. 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...

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