Showing posts with label Taxes. Show all posts

Article below has been written for US residents.

Generally, income can be received in three ways: money, services and property:

PROTIP:  File your taxes ASAP as that starts your Audit timeline early
If your tax return does have errors, the timeframe in which the government has to prove your fault starts decreasing earlier.


Compensation:

  • Wages
  • Salaries
  • Commissions
  • Strike pay
  • Rental Real Estate
  • Farm Income or (Loss)
  • Partnerships, Estates, Trusts, Etc.
  • Alimony Received (for divorce decrees finalized before financial year started)
  • Royalty payments
  • Taxable Amounts of IRA Distributions, Pensions and Annuities
  • Stock options, dividends and interest
  • Capital gains tax on the sale of your primary residence if profit exceeds >$250k
  • Capital gains tax on the sale of your primary residence if you haven't owned and lived in the home for at least two of the past five years.
  • Capital gains tax on sale of any real estate property (such as land or buildings) you own if you didn't reinvest it into another real-estate property
  • Self-employment or Business income / (loss)
  • Income not yet in your bank account (uncashed checks)
  • Moving expenses paid for by your employer
  • Unemployment compensation (amount beyond initial $10,200 per spouse) provided your modified adjusted gross income (AGI) is lesser than $150,000


Income from fringe benefits for you/spouse:

  • A company-paid off-site gym membership
  • A company vehicle for personal use
  • Holiday gifts in the form of cash or gift certificates from your employer
  • A certain portion of employer-paid dependent care
  • Company-paid tuition fees over a certain amount
  • Company-paid financial counseling fees
  • Employer-paid group life insurance over a certain amount


Miscellaneous income (may be taxable):

  • Employer contributions to an unqualified retirement plan
  • The fair-market value of property received for your services
  • Disability retirement payments from an employer-paid plan
  • Sickness and injury payments from an employer-paid plan
  • Property and services for which you bartered
  • Money and income from offshore accounts
  • The remaining amount of a debt or loan that is canceled or forgiven



Other income or payments (1099):

  1. Form 1099 is a type of informational return; you will get a 1099 form in the mail if you received certain types of income or payments (other than wages, salaries, or tips) during the year. 
  2. Generally, you will have to report the information from a 1099 on your tax return. If you did not receive a 1099 form when you were supposed to, contact the issuer of the form.
    They can generally provide more information and/or give you a copy. 
  3. They can generally provide more information and/or give you a copy. The recipient (payee) of Form 1099 is not required to submit this form to the IRS and/or state tax agency when e-filing a tax return.
  4. That is, unless the particular Form 1099 includes a report for federal income tax withheld by the payer on behalf of the payee from the related income payments.
  5. However, as with all related tax documents, a copy of any tax return related forms and receipts should always be kept by the payer and payee. 
  6. That is, unless the particular Form 1099 includes a report for federal income tax withheld by the payer on behalf of the payee from the related income payments.
  7. However, as with all related tax documents, a copy of any tax return related forms and receipts should always be kept by the payer and payee. 
  8. What if you did not receive a 1099 form? It is possible that you were paid such a small amount that the payer is not required to issue you a 1099. Regardless, you are still required to report any taxable income you received.
  9. You can enter the information on the appropriate 1099 section even if you do not have an actual paper form. If you should have been sent a 1099 but were not, you may be able to use Form 4852 as a substitute.
  10. We do recommend reaching out to the payer to receive this form as it provides important tax information. If you are unable to get it, you should report the missing form to the IRS and ask for their guidance on how to proceed.
  11. We do recommend reaching out to the payer to receive this form as it provides important tax information. If you are unable to get it, you should report the missing form to the IRS and ask for their guidance on how to proceed.

The dollar amount or maximum earnings to issue a 1099 vary based on the type of form. The table below shows the 1099 forms, the types of income reported, minimum income reporting requirements, and due dates to the recipient and IRS:

Form
Description
Issuer/Payer
$?
Due Date?
1099-A
Acquisition or Abandonment of Secured Property
Independent Contractor
$10,000
01/31
1099-B
Proceeds From Broker and Barter Exchange Transactions
Independent Contractor
Any Amount
02/15
Cancellation of Debt
Creditor
$600
01/31
1099-CAP
Changes in Corporate Control and Capital Structure
Corporation
$100 million
01/31
1099-DIV
Dividends and Distributions
Payer
$10 or $600 for liquidations
01/31
1099-G
Certain Government Payments
Payer 
$10
01/31
1099-H
Health Coverage Tax Credit (HCTC) Advance Payments
Issuer
Any amount
01/31
1099-INT
Interest Income
Payer
$10 ($600 for some business-related interest)
01/31
1099-K
Merchant Card and Third Party Network Payments
Filer
$20,000*
$600
01/31
1099-LTC
Long-Term Care and Accelerated Death Benefits
Policyholder
Any amount
01/31
1099-MISC
Miscellaneous Income
Payer
$600 for non-employee compensation
($10 for royalties and most other sources)
01/31
1099-NEC
Nonemployee Compensation
Payer
$600 for non-employee compensation
($10 for royalties and most other sources)
01/31
1099-OID
Original Issue Discount
Payer
$10
01/31
1099-PATR
Taxable Distributions Received From Cooperatives
Payer
$10
01/31
1099-Q
Payments From Qualified Education Programs
Payer/Trustee
Any amount
01/31
1099-R
Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Payer
$10
01/31
1099-S
Proceeds From Real Estate Transactions
Filer
$600
01/31
1099-SA
Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
Trustee/Payer
Any amount
01/31
RRB-1099
Railroad Retirement Board Statement
Railroad Retirement Board
Any amount
SSA-1099
Social Security Benefit Statement
Social Security Administration
Any amount
01/31



Disclaimers:
  1. All info listed above is for informational and educational purposes only.
  2. Info may change from year to year. Info listed here might be out-of-date.
  3. This list is not comprehensive. It is provided to you with the understanding that we are not engaged in rendering tax advice. 
  4. The information provided is not intended to be used to avoid federal tax penalties. 


Hashtags:
#personalfinances #retirement #401k #retirementplanning #financialplanning #employeebenefits #tax #lifeinsurance #pensions #taxes #taxdeductions #taxlaws #insurance #healthinsurance #pension #taxbill #taxincentive #finance


References: 

https://www.efile.com/form-1099/

https://www.efile.com/how-to-e-file-form-1099-misc-k-int-ssa-irs-tax-reporting-instructions/
https://www.efile.com/how-to-file-1099-online-irs-form-1096/

Disclaimers:
  1. All info listed above is for informational and educational purposes only.
  2. Info may change from year to year. Info listed here might be out-of-date.
  3. This list is not comprehensive. It is provided to you with the understanding that we are not engaged in rendering tax advice. 
  4. The information provided is not intended to be used to avoid federal tax penalties. 


Following are all the points to remember for the 529 Post Tax Education investment account:

  1. A 529 plan is a tax-advantaged savings account designed to be used for the beneficiary's education expenses. 
  2. Your after-tax contributions in mutual funds or similar investments grows on a tax-free basis and can be withdrawn tax-free for qualified expenses.
  3. Your after-tax contributions in mutual funds or similar investments grows on a tax-deferred basis and can be withdrawn by paying taxes + penalties on the withdrawal for non-qualified expenses.
  4. To create an effective 529 funding strategy, you’ll need to determine how much is needed to fund the lesser of the total tuition liability, or the maximum allowable withdrawal amounts so that you will end up with a $0 account balance after paying the final year of college. 
  5. Prepaid tuition plans:
    In-state public college: These plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges.
    Private College: a separate prepaid plan only for private colleges.
  6. You can use your education savings to pay for college costs at any eligible institution, including more than 6,000 U.S. colleges and universities and more than 400 international schools. 
  7. You must be a US resident, age 18 or over, with a US mailing and legal address, and a Social Security number or Tax ID.
  8. Beneficiary can even be the same person who sets up the account.
  9. You may not have to report anything on your federal income tax return. investment earnings in your account are not reportable until the year they are withdrawn.
  10. 529 plans don’t limit how long money can remain in the account. The only rule is that the account must have a living beneficiary. 
  11. If the funds were spent on qualified education expenses or rolled into another 529 plan you don’t have to report anything.
  12. If 529 funds spent on purchases that do not fall into one of these two categories will be considered taxable withdrawals.
  13. Expenses at accredited schools nationwide in addition to tuition expenses at Vocational and trade school, university, college, online college courses, private, public and parochial elementary, high schools, K-12, certain registered apprenticeship program expenses, and student loan repayments.
  14. There is a $10,000 annual limit on qualified K-12 withdrawals at an elementary or secondary school. This includes public, private, and parochial schools. 
  15. If you have leftover money in your 529 college savings plan after you graduate, you can use that money to pay off all or part of your student loan debt under a $10,000 lifetime limit on student loans.
  16. Not all states give tax deductions on contributions, and some consider K-12 tuition a non-qualified distribution, limiting state-tax benefits.
  17. If you live in one of these states – Alaska, California, Illinois, Indiana, Kansas, Kentucky, Nebraska, or Texas – you can probably use funds from your 529 plan to cover certain homeschooling expenses that meet the same criteria as tuition.
  18. College only expenses: books and supplies, Computers, “peripheral equipment” (like a mouse or speakers), software and internet access, course textbooks, lab materials, safety equipment, or anything else mandatory for your coursework. Special needs equipment for students with disabilities or other special needs to attend college or university. 
  19. Room and board is considered a qualified expense if the student is enrolled at least half-time in a college, which most colleges and universities consider to be at least six credit hours per term. student must also be studying towards a degree, certificate, or another recognized credential.
  20. For on-campus residents, qualified room-and-board expenses cannot exceed the amount charged by the college for room and board. For students living off-campus, qualified room and board expenses are limited to the ‘cost of attendance figures provided by the college. 
  21. Room and board costs incurred for abroad programs count as long as it’s approved for credit by your home college or university. 
  22. You can’t use prepaid tuition plans like the Private College 529 Plan to pay for room and board.
  23. 529 plans dont cover costs for a student’s Extracurricular activity fees, College application and testing fees, private tutoring costs, health insurance and transportation costs are not qualified expenses, unless the college charges them as part of a comprehensive tuition fee or the fee is identified as a fee that is “required for enrollment or attendance” at the college.
  24. 529 plans dont cover Expenses used to generate federal education tax credits such as the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Tax Credit (LLTC)
  25. If you made non-qualified purchases last year, you will need to review your 1099-Q, which breaks out the basis portion and the earning portion. 
  26. The basis/initial-principal portion will never be taxed or subject to penalty because it is made up with the amount you originally contributed with after-tax dollars. 
  27. 529 plan withdrawals must happen in the same tax year as the expenses that are incurred. 
  28. Once you’re ready to start taking withdrawals from a 529 plan, most plans allow you to distribute the payments directly to the account holder, the beneficiary, or the school. 
  29. Unlike a custodial account, with a 529 plan the account owner maintains ownership of the account, can make investment decisions, and can even change the beneficiary if plans change until the money is withdrawn.
  30. As long as the money stays in the account, no income taxes will be due on earnings. 
  31. When you take money out to pay for qualified education expenses, those withdrawals may be federal income tax-free—and, in many cases, free of state tax too.
  32. You may also qualify for a state tax benefit, depending on where you live. More than 30 states offer state income tax deductions and state tax credits for 529 plan contributions. 
  33. You can invest in any 529 plan that is considered to be a nationwide plan. You do not have to be limited to the plan sponsored by the state where you live.
  34. Nearly all (30) states sponsor 529 plans to offer a full or partial tax credit or deduction that are managed by a variety of financial partners. Most states only offer this benefit to residents who use their home state’s plan
  35. Most states offer nationwide plans where anyone can open an account. A handful of 529 plans are only for state residents; applicable to: Florida, Louisiana, New Jersey, South Carolina, South Dakota, and West Virginia.
  36. Some states offer their Residents a state income tax deduction when they contribute to any state’s 529 plan; applicable to: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania 
  37. Each state also has an aggregate contribution limit for 529 plans, which ranges from $235,000 to $550,000. This amount is based on the price of attending an expensive college and graduate school program, including textbooks and room and board.   
  38. Withdrawals from a 529 plan account can be taken at any time, for any reason. But, if the money is not used for qualified education expenses, federal income taxes may be due on any earnings withdrawn. A 10% federal penalty tax and possibly state or local tax can also be added.
  39. There are exceptions to the 10% penalty—for instance, if the beneficiary receives a scholarship or attends a US military academy or The account beneficiary dies or becomes disabled. earnings/profits would still be subject to federal income tax and any state and local taxes.
  40. The penalty on non-qualified 529 plan distributions is 1-3% of the distribution amount – no worse than investing in a taxable savings account.
  41. Taxable/Penalized earnings = Total Earnings - Non-Taxable Earnings = Total Earnings - ((Qualified Expenses)/(Total Distribution)) x (Earnings Portion)
  42. Assets held in the 529 plan receive favorable treatment on the Free Application for Federal Student Aid (FAFSA), and distributions are not reported. 
  43. There may be a greater impact on aid eligibility when a grandparent or other third party owns the 529 accounts. In this case, assets are not reported, but distributions used to pay for college are considered cash support to the student. This can reduce the student’s eligibility for need-based aid by as much as 50% of the amount of the distribution. 


Plan ahead!



Hashtags:
#personalfinances #retirement #529 #retirementplanning #financialplanning #employeebenefits #tax #lifeinsurance #pensions #taxes #taxdeductions #taxlaws #insurance #healthinsurance #pension #taxbill #taxincentive #finance


References:


BASIC STEPS:

  1. After you have paid taxes on your income, you get an in-hand post-tax income/profit.
  2. From this amount, you can contribute a maximum of $6k/yr = $0.5k/month into your Roth IRA account.
  3. Good Roth IRA account providers allow investments in crypto/stocks/bonds/ETFs, etc.
  4. Choose the investment of your choice and start making monthly or yearly contributions.


WITHDRAWL RULE for INITIAL INVESTMENT (PRINCIPAL):
You can withdraw your principal/initial contribution penalty free & tax free ANYTIME


WITHDRAWL RULES for Roth IRA PROFITS:
  1. pay both penalty+tax: age < 59½ & its NOT been 5years since your contribution
  2. penalty+tax free: age 59½+ & its been 5years since your contribution
  3. pay taxes only: age 59½+ & its NOT been 5years since your contribution


EXCEPTION WITHDRAWL RULES for Roth IRA PROFITS:

  1. penalty+tax free for exceptions: age < 59½+ & its been 5years since your contribution 
  2. pay taxes only for exceptions: age < 59½+ & its NOT been 5years since your contribution 

EXCEPTION WITHDRAWLS ALLOWED:
  1. First-time home purchase (up to a $10,000 lifetime total maximum withdrawl allowed)
  2. Qualified education expenses (college, etc.)
  3. Birth or adoption expenses
  4. You become disabled or pass away
  5. Medical expenses not reimbursed by your Health Insurance
  6. If unemployed, then health insurance costs

PROTIP: 
  1. How to Get all your Traditional/Roth IRA money for 60days once a year:
  2. Request Traditional/Roth IRA Transfer (nontaxable rollover)
  3. Request check be made payable to you,
  4. Now you have up to 60 days to deposit that check into another IRA 
  5. This process has no taxes or penalties and is useful when you need liquid cash quickly.


Disclaimers:
  1. All info listed above is for informational and educational purposes only.
  2. Info may change from year to year. Info listed here might be out-of-date.
  3. This list is not comprehensive. It is provided to you with the understanding that we are not engaged in rendering tax advice. 
  4. The information provided is not intended to be used to avoid federal tax penalties. 


Hashtags:
#personalfinances #retirement #401k #retirementplanning #financialplanning #employeebenefits #tax #lifeinsurance #pensions #taxes #taxdeductions #taxlaws #insurance #healthinsurance #pension #taxbill #taxincentive #finance

Following are all the ways in which you can reduce your yearly taxable income:


PROTIP Section 0: Use your standard deductions
This depends on your marital status and number of dependents.
File your taxes ASAP as that starts your Audit timeline early
If your tax return does have errors, the timeframe in which the government has to prove your fault starts decreasing earlier.


PROTIP Section 1: Maximize Pre-Tax & Post-tax Contributions


A) Retirement plan (PRE-TAX) for yourself:
401k from employer &/or self created IRA for self: 
If you are age <50: $23k/yr = $2k/month
If you are age >50: You can contribute an additional $6k/yr = additional $0.5k/month


B) Retirement plan (PRE-TAX) for your non-working spouse:
Self created IRA for spouse (not via employer or government):
If you are age <50: $6k/yr =  $0.5k/month 
If you are age >50:  You can contribute an additional $1k/yr


C) Health Savings account (PRE-TAX) for healthcare expenses:

HSA from your health insurance company:
If you dont have a family and are of age <55: $4k/yr = $305/month
If you do have a family and are of age <55: $8k/yr = $600/month
If you are age >55: You can contribute an additional $1k/yr


D) Roth IRA (POST-TAX) for Forever tax free profits:
Never pay taxes on profits from Roth IRA (crypto/stocks) by contributing:
$6k/yr = $0.5k/month from your PostTax paycheck
Remember; You can withdraw your principal/initial contribution for free ANYTIME.
For Withdrawl rules on profits click here.


FINALLY; After all deductions (401k, Spouse-IRA, HSA, Roth IRA) -
  1. Your PostTax income will reduce by a total of $29k/year = $2.4k/month
  2. This reduces your total tax load by $8.7k/yr which yields a profit of 40%+ 😎
  3. This 40% profit is achieved by paying $8.7k/yr lesser taxes vs only a $20.3k reduction in post tax income.
  4. Every dollar saved in taxes is equal to 1.3x in salary terms. $8.7k saved means ($8.7*1.3x) = $11.3k of salary gained/saved.
  5. By having untaxed money in these old-age/health accounts, you maximize your principal/initial investment to gain profits from these as much and as early as possible.

OTHER PRE-TAX DEDUCTIONS:
  1. Healthcare, Dental & Vision Insurance Cost 
  2. Medical Expenses and Flexible Spending Accounts
  3. Life & Supplemental Insurance Coverage
  4. Short-Term & Long-Term Disability
  5. Child Care Expenses
  6. Commuter Benefits


PROTIP Section 2: Maximize your Non-taxable income
(no need to add these to your tax return)

  • Inheritances, gifts and bequests
  • Cash rebates on items you purchase from a retailer, manufacturer or dealer
  • Alimony payments (for divorce decrees finalized after 2018)
  • Child support payments
  • Most healthcare benefits
  • Money that is reimbursed from qualifying adoptions
  • Welfare payments
  • Money you receive from a life insurance policy when someone dies 
  • Money from a qualified scholarship for non-personal expenses
  • Credit card bonuses/cashbacks
  • Retail gift cards


PROTIP Section 3: Get Married
(If you're legally married as of December 31 of the tax year, the IRS considers you to be married for the full year.)

A) Reduce Taxable income by filing taxes jointly to get a Marriage Bonus:
if the taxpaying spouses have substantially different salaries, or if only one spouse earns; the lower one can pull the higher one down into a lower bracket, reducing the couples' overall taxes. 

B) Use Spouse's business loss as a tax write-off on a jointly filed tax return:
Spouse who’s losing money – say, in business - may not be able to take advantage of some deductions, including those dealing with the house.  The spouse who’s making money may be able to take those unused tax deductions and claim the other’s loss as a tax write-off on a joint return.

C) Use Spouse's income to increase Total IRA contributions:
Couples filing jointly can make contributions to two separate IRA accounts – one for each spouse where the unemployed spouse (taxpayer with SSN), can contribute to an IRA using their spouse's income.

D) Increase primary residence sale tax-free profit limit from $250,000 to $500,000:
To qualify for the larger $500,000 tax-free gain, both spouses must have lived in the home for at least two of the last five years, and at least one spouse must have owned the home for at least two of the last five years.


BONUS: Potential tax-related drawbacks after getting married:

1) If filing jointly:

  • Marriage penalties typically occur when the tax brackets, standard deductions, and other aspects of the tax code available to married couples aren't double those available to single taxpayers.
  • Once you sign the joint return, you are fully responsible for every number that’s in it. If your spouse fudges a figure, you’re equally liable for the consequences. 
  • However, you aren’t responsible for your spouse’s mistakes or deliberate omissions if they happened in the years before you married or if you can prove that you didn’t know about them.
  • It might be harder to reach the higher minimum percentages of income necessary to be able to deduct medical expenses (in 2022, it must be greater than 7.5% of Adjusted Gross Income), given the combined income, unless one or both of you had significant health care expenses.
  • If there’s a garnishment for an unpaid loan or child support against a spouse, a refund could be delayed or blocked.
2) If filing separately:


PROTIP Section 4:Other lesser-known Deductions:


A) Deduct your house loan interest payments:
CONDITION 1: You need to have a house loan active in USA.
CONDITION 2: You need to be making payments towards your loan interest for this deduction.
CONDITION 3: You can only deduct the loan interest paid in the previous/taxable calender year 


B) Claim both your parents as dependents:
CONDITION 1: Your parents/dependents will need their ITIN numbers for you to claim this deduction.
CONDITION 2:If your parents/dependents are immigants, they have to stay with you at your home for minimum 6 months for you to list them as dependents on your tax return for that year):


C) S corp deductions:
CONDITION 1: Only If you are a consultant or have your own firm/business.
CONDITION 2: You can only deduct your work related expenses and firm/business losses from your taxable income.
CONDITION 3: If you have made taxable profits from your firm/business, you need to find the net loss/profit and report the same to the IRS.


D) Section 1031 exchange: Defer capital gains taxes on the sale of real estate
CONDITION: if you reinvest the proceeds into another piece of real estate of equal or greater value.

E) Section 121 exclusion: Exclude $250k-$500k of capital gains tax on the sale of your primary residence 
CONDITION: if you have owned and lived in the home for at least two of the past five years.



PROTIP Section 5: Other tax-deferred growth basis investments:
  • U.S. savings bonds: U.S. savings bonds are a type of government bond that offers tax-deferred growth. When you buy a U.S. savings bond, you pay a discounted price, and the bond matures at a higher price. The difference between the purchase price and the maturity value is the interest you earn on the bond. Interest on U.S. savings bonds is not taxed until the bond matures or you cash it in.
  • Series EE savings bonds: Series EE savings bonds are a type of U.S. savings bond that offer a guaranteed rate of return. The rate of return is fixed when you buy the bond, and it does not change over time. Series EE savings bonds are a good option for investors who are looking for a safe and secure investment with a guaranteed rate of return.
  • Series I savings bonds: Series I savings bonds are a type of U.S. savings bond that offer a variable rate of return. The rate of return is composed of a fixed rate and a variable rate that is indexed to inflation. Series I savings bonds are a good option for investors who are looking for an investment that will keep pace with inflation.
  • Treasury Inflation-Protected Securities (TIPS): TIPS are a type of U.S. government bond that is indexed to inflation. The principal amount of a TIPS bond increases with inflation, and the interest payments are also adjusted for inflation. TIPS are a good option for investors who are looking for an investment that will keep pace with inflation.
  • Municipal bonds: Municipal bonds are bonds issued by state and local governments. Interest on municipal bonds is typically exempt from federal income tax, and it may also be exempt from state and local income tax. Municipal bonds are a good option for investors who are looking for a tax-advantaged investment.
  • Real estate investment trusts (REITs): REITs are a type of investment that invests in real estate. REITs can be a good option for investors who are looking for a tax-advantaged investment that can provide income and growth by offering a qualified (lower) dividend tax rate. To qualify for the qualified dividend tax rate, the dividends must be paid by a U.S. company or a REIT. 
    1. 0% for taxpayers in the 10% or 12% tax bracket.
    2. 15% for taxpayers in the 22% or 24% tax brackets
    3. 20% for taxpayers in the 32%, 35%, or 37% tax brackets



Plan ahead!



Disclaimers:
  1. All info listed above is for informational and educational purposes only.
  2. Info may change from year to year. Info listed here might be out-of-date.
  3. This list is not comprehensive. It is provided to you with the understanding that we are not engaged in rendering tax advice. 
  4. The information provided is not intended to be used to avoid federal tax penalties. 


Hashtags:
#personalfinances #retirement #401k #retirementplanning #financialplanning #employeebenefits #tax #lifeinsurance #pensions #taxes #taxdeductions #taxlaws #insurance #healthinsurance #pension #taxbill #taxincentive #finance



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