When Teens Need to File Their Own Tax Returns

Teens work a variety of jobs for extra money, they may be employed in the family business, or have unearned income from interest or dividends. In 2022, any child that earned $1,150 or more in unearned income is required to file a return. Tax laws surrounding teens, their income, and the type of income are complex. If in doubt, it’s best to hire a tax professional.

Earned Income

Anyone earning $12,550 or more is required to file a federal tax return and that includes teens. A minor that earns $400 or more in wages or tips working full- or part-time must file a tax return. Even if the teen isn’t required to file a return, it’s a good idea to do so if the employer withheld federal income tax from earnings.

Dependents

However, there are some important elements attached to the question of teen tax returns. It will depend on if the teen is 19 or younger, age 24 and a student, or permanently disabled. Another consideration is if the parent provided 50 percent or more of their support and how many months of the year the teen lived with their parent. If any of those situations apply, the teen may still qualify as a dependent.

Unearned Income

A teen that qualifies as a dependent and has unearned income of more than $1,100 must file a return. However, if the teen only had unearned income, parents may be able to include that income on their own tax return. The disadvantage is that it might propel parents into a higher tax bracket.

Earned & Unearned

Teens that have both earned and unearned income, will need to file their own return if they have more than $1,100 of unearned income, over $12,550 in earned income, or if the combined total is the larger of $1,100 or earned income of up to $12,200 plus $350.

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Tax
posted by Mark Battalini
November 20, 2022

Who Uses Irrevocable Trusts

An irrevocable trust isn’t something that most people consider. The average individual won’t have any need for such an arrangement, nor would they want one. It commits assets forever, can never be changed, and once the trust is established individuals have no control over it at all – it’s managed by a trustee.

The trust has 3 involved parties. The first is the creator of the trust. The second is the trustee. The third is the beneficiary of the trust. There are only 3 reasons that an individual should establish an irrevocable trust.

Minimize Estate Taxes

This is an opportunity for the wealthy to purchase life insurance that can be used to help them avoid paying probate fees and estate taxes when they die. It can also provide an individual with a steady stream of tax-free income for a set amount of time, with any remaining funds going to a charity of their choice.

Government Program Eligibility

An irrevocable trust is particularly beneficial for the disabled. Individuals receiving Medicaid or Supplemental Security Income have very specific limits on the money and assets a person has. Exceeding those limits means they lose government benefits. An irrevocable trust isn’t counted as income or assets, allowing an individual to continue receiving benefits from government programs.

Protect Assets From Creditors

Individuals that owe significant amounts of money or those that are at risk of frequent lawsuits can obtain protection through an irrevocable trust. That includes medical professional, lawyers, accountants, and public servants, to name a few.

The Disadvantages

An irrevocable trust doesn’t isn’t a good option unless an individual has a very sizeable estate. There’s also no guarantee that a court won’t be able to claim some of those assets if a judge thinks the individual may have anticipated a lawsuit. Many states require that a trust own funds for at least two years before they’re considered protected. The trusts can also represent considerable cost, since it will require the serves of an accountant.

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Tax
posted by Mark Battalini
November 20, 2022

Will Estate Planning Ensure Financial Security for Loved Ones?

Estate planning is an essential element of preparing for the future. It addresses issues ranging from end-of-life care to who inherits assets. It also helps individuals minimize the tax burden of inheritors. Estate planning is appropriate at any age, for singles and those with life partners. It’s especially critical for those that have children. It’s never too late to create a comprehensive plan to ensure the financial security of loved ones.

Financial assets and circumstances change over time and so do the needs of individuals. An effective estate planner will help clients create a plan that provides flexibility as their assets grow and family circumstances evolve. Estate planning allows individuals to dictate what will be done with their assets.

An estate plan accomplishes multiple goals. Without an estate plan, the court system will make decisions for an individual and they can be far different than what the owner intended.

Guardianship

Prioritize the guardianship of minor children during estate planning. The guardian must be a trusted person who will give precedence to the children and their needs. It’s a good idea to designate a second guardian if the first is unable to carry out their responsibilities.

Will

Estate planning includes making a will that clearly states who inherits assets and names an executor to ensure those instructions are carried out when an individual dies. Beneficiaries will be of primary importance. A will also confers power of attorney to a specific individual, states end-of-life care, can establish a trust, and make provisions for the funds to pay for a funeral, final expenses and taxes.

Estate planning is a crucial element for every individual, even those with modest estates. Individuals work a lifetime to accrue assets and care for their loved ones. Estate planning ensures their financial wellbeing and that assets are distributed in the manner the manner the client desire.

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IRS Information, Tax
posted by Mark Battalini
October 9, 2022

Why E-Filing is the Best Way to Get Your Refund

When you’re entitled to a refund at tax time, it’s understandable that you want to receive it as quickly as possible. E-filing your tax return is efficient, reduces errors, and it’s the quickest way to get your refund.

Speedy Refunds

By e-filing your tax returns, you can typically expect your refund within 3 weeks or less and choosing direct deposit further facilitates the process.

Quick Confirmation

When you e-file your returns, you’ll receive a text within 24-48 hours that your state and/or federal return has been accepted. Conversely, if for some reason an error has occurred, you’ll have the opportunity to go back and fix the problem before resubmitting via e-file.

Fewer Mistakes

According to the IRS, there’s only a 1 percent error rate on returns that are filed electronically, compared to a 20 percent error rate with paper returns. There are numerous online options for completing tax returns that will walk individuals through every step of the filing process and check for mistakes that can be rectified before sending the return.

Direct Deposit

Choosing the direct deposit option ensures your refund is deposited directly into your bank account. You won’t have to worry about having a refund check lost or stolen from your mailbox. It’s a common problem around tax time and once a paper check is gone, there’s no way to retrieve it. If you use one of the many cash apps available, you can also have your refund deposited into your cash app account.

Money and Deadlines

Depending on the taxpayer, some individuals can complete and e-file their taxes for free. Shop around to find the best option. Many companies advertise low-cost tax preparation and e-filing, but individuals only find out upon completion that they owe nearly as much as if they’d taken their taxes to a tax professional.

If you’re among the millions of people that procrastinate on their taxes, e-filing is an excellent way to ensure you beat filing deadlines and avoid penalties. You’ll still be able to receive your tax refund in 3 weeks or less.

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Tax
posted by Mark Battalini
September 26, 2022

What’s the Difference Between 1099 and W-2?

The U.S. tax system is complicated, complex, and the IRS has hundreds of forms to account for different reporting needs. One of the biggest confusions for individuals is the difference between Form 1099 and the W-2. Both are important, absolutely required, but serve very different purposes.

Form 1099

There are multiple types of Form 1099. The most common is used to report various types of payments that are made by a business or individual that’s not an individual’s regular employer. The person that made the payments completes the appropriate details and sends a copy to the payee and the IRS at tax time.

A Form 1099-MISC is used by the government to report income such as Medicare earnings. It’s also used to report prizes and awards, fishing boat proceeds, medical and healthcare payments, and crop insurance proceeds. Form 1099-MISC is also utilized to report earnings from direct sales of at least $5,000.

W-2

In comparison, individuals complete a W-2 when they start a new job. It tells the employer how much money to withhold in federal, state and Social Security (FICA) taxes from each paycheck. The IRS utilizes that information to track each person’s earnings and income every year from employment. IRS rules state that employers must provide individuals with their W-2 by Jan. 31^st of each year.

The form is used each year when an individual files their annual income tax returns. The W-2 shows the amount of any benefits that may have been paid by the employer on an employee’s behalf that encompasses items ranging from health savings accounts (HSA) and number of dependents to insurance benefits.

If there are any errors such as name misspellings, incorrect Social Security number, or an incorrect amount, individuals should contact their employer for a corrected copy of their W-2. Independent contractors should receive a 1099-NEC instead of a W-2.

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Tax
posted by Mark Battalini
September 25, 2022

What is Capital Gains Tax?

There’s some confusion for some about what the capital gains tax is, especially if they’ve sold an asset or they’re new to trading. It’s a tax that’s levied on the profit an individual makes when they sell an asset or investment. The asset can range from real estate to stocks and bonds. The amount of tax is determined by how much the asset has appreciated in value during the time it was held by the owner.

The rate of tax is also dependent on the filer’s income bracket. The tax can range from 0% to 15% or 20%. A long-term capital gains tax is assessed if an individual has owned the asset for a year or more. Short-term capital gains taxes will apply if the investment has been owned for less than a year and will be taxed according to the individual’s normal tax rate.

Unrealized capital gains refer to unsold investments. It doesn’t matter how much in assets an individual has, how long they’re held, or how much they’ve increased in value. Purchasing or investing in an asset and keeping it over the long term is a way of building wealth that can be passed on to heirs.

Maximizing profitability and minimizing capital gain taxes requires careful, well-though out strategies. For tax purposes, a purchased asset is typically treated the same as if was a salary or wages. The same is true of dividends derived from an asset.

An increasing number of people are using software applications to trade online. The thrill of buying and selling can override any benefits if they’re not aware of the capital gains taxes they’ll have to pay or if they don’t understand IRS laws.

However, taxable gains can be offset by capital losses. A maximum tax of $3,000 per year is levied on net losses. Leftover losses can be carried forward into following tax years.

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Tax
posted by Mark Battalini
August 28, 2022

Why do the Wealthy Pay Fewer Taxes?

The Office of Management and Budget reports that between 2010 and 2018, the wealthy paid an average of 8.2 percent of their income from their wealth, and a large part of their wealth went untaxed. There are 22 different tax brackets in 2022, with the highest rate at 37 percent, making the taxation system confusing at best.

That estimate is at odds with millionaire Warren Buffett’s statement in 2013, who famously said he pays lower taxes than his secretary. The wealthy pay less in taxes for multiple reasons. The first is that their income is derived from dividends, stocks, and capital gains from investments, rather than wages, that are taxed at a lower rate of 20 percent.

Additionally, a tax code feature called “stepped up basis,” says gains on an asset is never subject to income tax if an asset isn’t sold during the owner’s lifetime. That continues when the wealthy pass it on to their heirs.

That means that a significant amount of the wealthy’s income will never appear on their income tax return. A study by the White House in Sept. 2021 showed that the wealthy paid an average of 8.2 percent in actual taxes, while the typical middle-class family paid 13.3 percent.

Taxes are just one component of a highly complicated and complex tax code that enables the ultra-rich to pay a small fraction of taxes on their actual wealth. They use legal loopholes that includes depreciation, hiring their children, deducting business expenses, and rolling forward business losses.

Other legal methods of avoiding income taxes are deducting interest payments on debt, claiming investment losses, and like-kind exchanges of property. The wealthy also claim a deduction when they transfer money to their own philanthropic foundations.

For millions of Americans, the avenues used by the wealthy aren’t available to the average taxpayer. It’s also interesting to note that in the 1950s and 1960s, the federal income tax rate was 91 percent for the wealthy, down from 94 percent in 1944-1945. The tax rate for the wealthy has steadily been decreasing since then.

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Tax
posted by Mark Battalini
July 26, 2022

Understanding Tax Relief

For those that don’t have the money to pay their tax bills in full, the IRS offers tax relief programs. The initiatives help taxpayers settle tax-related debts for less than the total amount, thereby preventing liens from being placed on their assets. They typically utilize a monthly repayment plan.

Tax relief programs won’t eliminate the money owed to the IRS, but it will help make it easier to repay. The IRS will charge interest on any unpaid taxes, along with a setup fee for its programs. To qualify for a long-term repayment plan of more than 120 days, individuals must owe $50,000 or more in taxes, penalties and interest.

Individuals that have been affected by natural disasters have access to tax relief initiatives. People should consult a tax specialist that’s knowledgeable in the regulations and forms required to take advantage of specific programs.

The IRS is currently offering tax relief programs to victims of wildfires, straight line winds, landslides and mudslides, flooding, tornadoes and hurricanes in certain areas. The tax relief initiatives provide extra time for taxpayers to file their federal return, pay their taxes, and file any required forms.

Another initiative of the IRS is penalty relief/interest abatement. Under the program, the IRS may forgive any penalties charged to the person’s tax bill, providing they meet certain criteria. Individuals will still owe their taxes, but eliminating penalties can save a substantial amount of money.

There are also companies that negotiate with the IRS on behalf of a client. Their fees can run into thousands of dollars and there’s no guarantee that they’ll be successful. Individuals should be wary of upfront fees, undesirable refund policies, and default billing if they decide to cancel.

The best option for those seeking tax relief is to engage the services of a qualified tax professional that has the authority to represent individuals with the IRS. Those include a CPA, attorney, or federally authorized tax practitioner.

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Tax
posted by Mark Battalini
July 26, 2022

How is Mortgage Tax Calculated?

Not to be confused with interest rates on a mortgage or ongoing property taxes to be paid each year, a mortgage recording tax is used to document a loan transaction. It’s a fee that’s paid when someone takes out a mortgage. There are currently eight states that charge a mortgage tax and one of those is Florida. Numerous lending institutions offer online mortgage tax calculators that perform the financial calculations.

Individuals can do the math themselves by taking the total amount being borrowed and dividing it by 100. Then round up that number to the nearest whole number. Local laws may allow for a deduction to reduce the amount.

Florida residents pay 35 cents per $100, based on the amount of debt being incurred on the mortgage. However, that amount can vary among counties and a surtax may also apply. It’s customary for the seller to pay the tax, though that isn’t a mandate. The real estate agent is responsible for securing a check for the amount before the deed is recorded.

Failure to pay the amount promptly can result in the state assessing a monthly penalty fee. A floating interest rate may also be placed on any unpaid document. Parties exempt from the tax include state and federal government agencies, political subdivisions, and Florida counties and municipalities. When an entity is exempt from the tax, the other party must pay it.

Many types of deeds require this documentation, including warranty and quit claim deeds, easements, and contracts for mineral, timber, gas and oil rights. A mortgage tax is also collected if an individual refinances. However, a mortgage reassignment can transfer the original mortgage tax to the new lender. Not all lending institutions will do this, but if the lender agrees to do so, it can save individuals a significant amount of money.

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Tax
posted by Mark Battalini
April 17, 2022

Biggest Tax Credits You May Qualify For

Everyone is looking for ways to reduce their tax liability. There are dozens of ways business owners can reduce their taxes, but not necessarily for the average person. The following are 5 big tax credits that you may qualify for without even knowing it.

Earned Income Tax Credit (EITC)

The EITC is one of the best-known credits. It can range from a few hundred to several thousand, depending on the number of children you have and your filing status. The credit will factor in your adjusted gross income, investment income and earned income. You won’t qualify if you can be claimed as a dependent on someone else’s taxes, lived outside the U.S. for 6 months or more, or earned more than $10,000 in investment income. You may be able to claim children up to 24 years of age if certain criteria are met.

American Opportunity Tax Credit (AOTC)

Formerly known as the Hope Credit, the AOTC helps if you’re paying for college expenses that includes tuition and course materials. The allowable amount is determined according to your modified adjusted gross income. Students must be enrolled at least half time and the credit is available on a per-student basis.

Lifetime Learning Credit (LLC)

You can claim this to help offset the costs of post-secondary education, even if you’re not pursuing a degree. It’s available to those within specific income brackets.

Child and Dependent Care Credit (CDCC)

The credit is available to help mitigate the costs of child care services for children under age 13 so parents can work. The credit also encompasses caring for a spouse, parents, or other individual that’s mentally or physically incapable of caring for themselves.

Savers Tax Credit (STC)

Previously known as the Retirement Savings Contributions Credit, it provides a credit if you contribute to retirement plans encompassing a 401(k), investment retirement accounts, and some other types of retirement plans. Age, along with dependent and student status will be factored in.

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