Students – Don’t be in such a hurry to file your return that you cost your parents!
Students that work part-time jobs often have more tax withheld from their paychecks than the actual tax assessed when they file their return. They are then, understandably, in a hurry to file their return to get some spending money from their refund.
However, if they don’t fill their return out correctly and claim a personal exemption for themselves, their parents won’t be able to claim them. The parents often, not knowing the consequences of their student filing their return in January or February, rightfully claim the student as a dependent. Since this results in both parent and student claiming the same person (and SSN), the parents return is adjusted so that they don’t get credit for the refund. This could cost the parent approximately $1,500 to $2,000 depending on their tax bracket. Amended returns for both parent and student can be prepared but this is costly and no one wants to file amended returns if they don’t have to.
A better solution is to make sure the student holds off in filing their return until the parents file their own return or at least have a professional tax preparer determine that it is ok for the student to file.
Students that work part-time jobs often don’t earn enough to require filing a tax return but still have federal and state income taxes withheld from their paychecks. This can present a situation where they have to file a tax return just to get their money back. Often the cost of paying someone to prepare their return is more than they might get refunded so they don’t file a return at all (which is legal to do).
A better solution is to elect not to have any taxes (other than social security and Medicare which are not optional) withheld from their pay.
To make this election, request form W-4 from your employer for federal taxes and write EXEMPT in box 7. In order to be eligible to be EXEMPT from withholding, you basically must not have had any taxes owed the prior year and do not expect to have any taxes due for the current year.
For Georgia taxes, request form G-4 from your employer and read instructions on page 2 of the form and if eligible, check the box on line 8.
Of course, if it turns out that the student earned more than anticipated, a return might have to be filed and it is possible some taxes would be due. However, if that doesn’t happen the student will be able to keep all of their hard earned money and will not have to file a tax return JUST to get back income taxes that were withheld.
Here’s a quick review of some of the rules you can expect to encounter when you get ready to prepare your 2016 federal income tax return.
Income tax rates.For 2016, ordinary federal income tax rates range from 10% to 35% unless your taxable income exceeds $415,050 when you’re single or $466,950 if you’re married filing jointly. The rate on income above those amounts is 39.6%.
Tax breaks that are now permanent.Three tax breaks you’ll be able to take on your 2016 return, and on future returns: 1) The optional deduction for state and local sales tax in lieu of state and local income tax; 2) the $250 deduction for classroom supplies if you’re an educator; and 3) IRA-to-charity transfers of up to $100,000 when you’re 70½ or older.
Itemized deductions and personal exemption phase-outs.For 2016, itemized deductions and personal exemptions are limited when you file as single and your adjusted gross income (AGI) is above $259,400. The limitation begins with AGI above $311,300 for married couples filing jointly.
Alternative minimum tax.The exemption amount for 2016 is $53,900 for singles and $83,800 for married filing jointly.
Capital gains and dividends.Long-term gains are generally taxed at 15%. The rate is zero percent if you’re in the 10% and 15% ordinary income brackets, and 20% when you’re in the 39.6% ordinary income bracket.
Affordable Care Actsurtaxes. You’ll pay a Medicare surtax of 0.9% on wages and self-employment income exceeding $200,000 when you’re single and $250,000 when you’re married filing jointly. For unearned income, you’ll pay the 3.8% net investment income tax when you’re single and your modified AGI exceeds $200,000. If you’re married filing jointly, the net investment income tax is imposed when your modified AGI exceeds $250,000.
If you have questions about your 2016 tax return, please call our office and we’ll help you find the answers you need.
For 2017, the wage base for withholding social security tax from wages has increased to $127,200, up from $118,500 in 2016. The “wage base” is the amount of wages on which employers and employees must pay the 6.2% social security tax. The increased wage base means an additional $8,700 of your income is taxed.
The wage base does not affect the 1.45% Medicare payroll tax. Medicare tax is assessed on all wages and net income from self-employment, including amounts above the base. The 0.9% Additional Medicare Tax is not affected either. That tax applies to your compensation in excess of $250,000 when you’re married filing jointly ($200,000 when you’re single).
The federal payroll tax rate for employers and employees remains 7.65%, with social security tax withheld and paid at 6.2%, and Medicare tax withheld and paid at 1.45%.
Losses can be hard to take, so if you think your S-corporation will show a loss for 2016, now’s the time to plan to make sure you’ll get the full tax benefit.
The problem. The amount of the business loss you can deduct on your individual income tax return is limited to your basis in your S-corporation stock and certain corporate debt. This is true even if the loss reported to you on Schedule K-1 is greater than your basis.
Here’s how basis works. Typically, stock basis in an S-corporation begins with the capital contribution you make to get the company started. Note that when you receive stock as a gift, an inheritance, or in place of compensation, your initial basis is calculated differently.
At the end of each taxable year, your stock basis is adjusted to reflect your business’s operating results. Taxable income increases your basis, while losses reduce it. Basis is also increased by capital you put into your company and reduced by amounts you withdraw, such as distributions.
After your stock basis reaches zero, you may be able to deduct additional losses, up to the extent of your debt basis. That’s the basis you have in loans you make to your company. However, once your stock and debt basis are both reduced to zero, losses incurred are suspended, which means you get no current tax benefit. You can generally take suspended losses in future years, when you again have basis.
The solution. You can increase your basis – and your ability to take losses – by adding capital or making loans to your business.
Please call to discuss how basis affects your individual income tax return. We can guide you through the rules.
An important part of our service to you is helping you identify actions you can take before year-end to minimize your personal 2016 federal income tax bill. Accelerating or delaying income and deductions, contributing to retirement plans, and taking investment losses are just a few of the strategies you might want to consider. Here’s a checklist to help you get started.
Max out your 401(k) before year-end. For 2016, you can set aside $18,000 if you’re under age 50. If you’re 50 or older, you can contribute $24,000.
Get your investment planning in order. Year-end sell decisions, either to rebalance your portfolio at the lowest tax cost or to offset gains and losses, are only one aspect of investment planning. Another is keeping good records for the reinvested dividends of stocks you sell in 2016. Reinvested dividends add to your cost basis and reduce taxable gain or increase the deductible loss on the sale. Finally, consider the wash sale rule. This rule disallows a current-year loss when you purchase substantially identical securities within a 61-day period. If you plan to sell stocks to secure a loss, and intend to buy the stock back, don’t wait until the last moment.
Make gifts before year-end. The use-it-or-lose-it tax-free gifting allowance is $14,000 per donee for 2016. Remember, gifts to individuals are not tax-deductible.
Contribute to your Health Savings Account. Within limits, contributions are tax-deductible and can be used tax-free to pay unreimbursed medical expenses.
Keep an eye on the “kiddie tax.” This tax on your dependent child’s unearned income in excess of certain limits applies when your child is under age 19 (under age 24 if a full-time student).
We have more planning strategies that can save you tax dollars, depending on your individual situation. Contact us for a year-end review to make sure you’re taking advantage of all the ways you can to reduce your 2016 tax liability.
