Welcome to the Tax Blog

News, information, and opinions about:

  • Federal, State, and Virginia Beach Taxes
  • The Tax Preparation Business
  • Tax Planning

If you have a question or comment, please drop me a line. Paul @ PIM Tax.

18 August 2015

Inheritances are generally not taxable to the recipient. When due, estate taxes should be paid by the estate before the beneficiary receives the assets. An exception to this rule is with traditional Individual Retirement Arrangements (IRAs) when inherited by someone other than the spouse of the deceased. When a traditional IRA is inherited by a non-spouse the recipient must pay income taxes on it for the year they take a distribution of the money from the IRA.

Roth IRAs are different. If the inherited IRA is a Roth IRA then the money should be tax free for the beneficiary to withdraw at any time. (The exception would be if the Roth IRA was less than 5 years old when the original owner died.)

Given that spouses can inherit IRAs tax free, and Roth IRAs can also be inherited tax free, the rest of this post is about non-spouses inheriting traditional IRAs.

When a non-spouse inherits a traditional IRA there are some choices to be made - and those choices may have significant tax consequences. The beneficiary chooses whether to liquidate the IRA right away, or turn it into a "stretch IRA" by taking Required Minimum Distributions (RMDs) each year. The amount of the RMD each year is calculated using IRS actuarial tables for life expectancy on this handy worksheet.

If the decedent was over 70 1/2 when they died the beneficiary has a choice between taking the RMD based on their own age, or taking the RMD based on the decedent's age. The younger the person taking the RMD is, the lower the RMD they must take each year. Lower RMDs mean a longer stretch of the IRA. The chart below summarizes the options for the beneficiary. (I stipulated individuals because the rules are different if the beneficiary of the IRA is an estate or trust.)

inherited IRA virginia beach tax service

The most tax efficient option is to stretch the distribution of the inherited IRA for as long as possible. Distributions from an inherited IRA are counted as income. Liquidating the IRA within 5 years triggers income taxes on the distributions in the year(s) they are received. If the IRA is sizable you may find yourself paying taxes in a higher tax bracket than you ordinarily pay. If your normal AGI is $50K and you take $100K out of an inherited IRA, your AGI will jump to $150K that year, resulting in a much higher tax bill. Additionally, you lose the tax-deferred growth opportunity of leaving the bulk of the money in the IRA. Liquidating an inherited IRA should only be done if you have an urgent need for the money.

If the Deceased was over 70 1/2 when they died and you elect to stretch the IRA by taking RMDs, you can choose to take RMDs based on your age or the age of the Deceased. The most tax efficient choice is to take RMDs based on the age of the younger person. If you were older than the Deceased when they died, then you would use the Deceased's age to calculate RMDs. Otherwise, use your own age.

If you intend to stretch the IRA and take RMDs, you are on the clock. If you fail to take an RMD before 31 December of the year following the year the person died, then you are forced to liquidate within 5 years.

I have prepared the taxes for a few people who had liquidated an inherited IRA and were shocked to discover they had given themselves a substantial tax bill as a result. The states with income taxes will also tax IRA distributions. Even military service members need to beware. Your home of record might not tax your military pay, but they may very well want a piece of that inherited IRA.

If you have questions the time to ask is before you select how you want to handle the inherited IRA. Once you have received the distribution it is generally too late.

 

16 August 2015

The Child and Dependent Care Credit (CDCC) provides a tax credit to taxpayers who purchase daycare for a young child or a family member/dependent with a disability. You can claim up to $3,000 of expenses for the daycare for one qualifying person who needs care, and up to $6,000 of the expenses if you are paying for the daycare of more than one qualifying person.  Unfortunately, the actual tax credit is not the same as the expenses you can claim. The credit is somewhere between 20% and 35% of your qualifying expenses, depending on your EARNED income.

There are quite a few rules and stipulations regarding the CDCC.

  • The person you are providing daycare for must be:
    • A Qualifying Child on your tax return under the age of 13. (You can still get the credit for the part of the year your child was under 13 if they turned 13 during the tax year.)
    • OR your disabled spouse
    • OR any disabled person you can claim as a dependent, EVEN IF they made over $4,000 or filed a joint tax return (You cannot normally claim someone who is not your child as a dependent if they earned more than the personal exemption amount ($4,000 in 2015). There is an exception to that rule for the purpose of claiming CDCC.)
  • The taxpayer must:
    • File single, jointly, head of household, or qualifying widower. If you are married filing separately you generally cannot take the credit unless you also meet the conditions of being considered unmarried.
    • AND work, look for work, or attend classes full time. If you file jointly, both spouses must meet this requirement. (You cannot take the CDCC to do volunteer work or to have a 'play day'. You must have a job or be a student.)
    • AND have earned income.
    • AND not claim the credit if the person paid to provide daycare was your spouse or dependent, or the parent of your child.
    • AND provide the required information about the daycare provider.
  • Qualifying Expenses are the lesser of:
    • Actual Expenses
    • $3,000 for one dependent, $6,000 for two or more
    • The amount of earned income of the tax payer (lowest paid spouse if filing jointly).
  • Fees for overnight camps, private schools, or tutoring programs are NOT qualified expenses.

Tax Tip: You can take up to the $6,000 in qualifying expenses for one child in daycare, as long as you have two (or more) qualifying dependents.

Example: Tina works and has two children ages 4 and 12. The 4-year-old goes to Sunshine Valley Daycare Center during the day while Tina works. The cost of Sunshine Valley Daycare Center is $9,000 per year. The 12-year-old goes to school during the day. After school the 12-year-old rides with a friend and the friend's mother to a scouts meeting, which is not a qualifying daycare provider. Tina picks the 12-year-old up from the scouts meeting on her way home from work. Although she is only paying daycare for one child, for the purposes of the CDCC Tina has two qualifying children. Therefore she can use the $6,000 limit on qualifying expenses when she figures her CDCC.

Most people with child or dependent care expenses roll their eyes when they find out the qualifying expenses are limited to $3,000 for a single child. The actual expenses for most daycare are considerably higher. I'd like to see the limit on allowable expenses raised, but that will take an act of Congress. Until we get one we will take what we can get and work to get the largest child and dependent care credit  the law allows.

11 August 2015

Unlike the federal and state authorities, Virginia Beach does not have an income tax. This doesn't mean Virginia Beach doesn't collect taxes, of course. Like any government the city of Virginia Beach needs revenue to provide services such as police and fire protection, snow removal, trash collection, etc.

Looking at the chart of revenue streams below you can see Virginia Beach has quite a few sources of income. The two I am going to discuss in this post are the two that can be itemized on Schedule A of the federal individual income tax return; real estate taxes and personal property taxes. Together these two taxes account for nearly 36% of the revenue for the city of Virginia Beach.

tax prep virginia beach revenues

It is not uncommon for people to confuse real estate taxes with personal property taxes. Most of us consider our home to be personal property - and it is - but for tax purposes real estate is taxed differently than other types of personal property. Therefore we have real estate taxes on real estate and personal property taxes on taxable property other than real estate.

Most of the local governments like to describe the tax rates for real estate and personal property in terms of dollars/$100, and Virginia Beach is no exception (i.e. the personal property tax rate on cars is listed as $4/$100). I am going to convert these rates to a percentage because I find that easier to work with. Just realize that makes the rates I am posting unofficial.

Virginia Beach taxes personal property at the following rates:

 Type of Personal Property Annual Tax Based on Assessed Value 
Cars, trucks, trailers (work), motorcycles, and aircraft  4%
Privately owned recreational watercraft (boats)  0.000001%
All other boats  1.5%
RVs, campers, horse trailers 1.5%
Vehicles for elderly or disabled 3%
Vehicles for disabled veterans 1.5%
Mobile Homes 0.93%

To qualify for the reduced rate on vehicles for the elderly and disabled the Virginia Beach resident must be age 65 or over by December 31 of the previous year OR permanently and totally disabled AND combined gross annual income (including social security) may not exceed $29,500. The reduced rate is only applicable to one vehicle. Additional details here.

Veterans who are permanently and totally disabled due to a service-connected event can qualify for a reduced personal property tax rate on one vehicle. Additional details here.

Elderly and/or disabled residents of Virginia Beach can get an exemption from the mobile home tax if over 65 by December 31 of the previous year OR permanently disabled AND gross household income is $64,675 or less. More details here.

The 0.000001% tax on recreational boats is a placeholder. There is essentially no tax charged on recreational boats at this time, but if the city decides to collect such a tax in the future they don't have to change the law - they just have to change the rate.

Military personnel stationed in Virginia Beach can obtain an exemption from personal property taxes by mailing a copy of a current LES to the Virginia Beach Tax Assessor's office.

You can appeal the assessed value of your personal property if you believe the tax assessor's valuation is too high. Details can be found here.

Virginia Beach Real Estate Taxes

Location in Virginia Beach  Tax Rate on 100% of Assessed Value 
General  0.99%
Sandbridge  1.05%
Central Business District South  1.44%
Old Donation Creek 1.174%
Bayville Creek 1.353%
Shadowlawn 1.1494%
Chesopeian Colony 1.2813%
Harbour Point 1.069%
Gills Cove 1.053%
Hurds Cove 1.428%

The named areas are known as Special Service Districts (SSDs). The city is charging the waterfront homeowners in the SSDs a higher real estate tax rate to pay for dredging operations to maintain beaches and navigable water channels.

Elderly and/or disabled residents may qualify for an exemption for some or all of their real estate tax if they are over 65 OR permanently and totally disabled AND their household income is not more than $50,668 (disabled residents get a $10,000 income exclusion allowance). Additionally, you can't have more than $350,000 in assets. You must reside in the Virginia Beach home to get the exemption for the real estate taxes (second/vacation homes do not qualify). Additional details here.

There are also real estate tax breaks for energy efficient buildings as well as buildings listed in the Virginia Landmarks Register. Find additional details here.

If you itemize deductions on your federal income tax return you can deduct your real estate and personal property taxes (unless you are paying AMT).  This effectively removes them from your Virginia state income tax return as well. It turns out to be a substantial deduction for most people. For example, a Virginia Beach home valued at $300,000 would generate real estate taxes of $2,970. A taxpayer in the 25% top marginal rate for federal taxes (and 5.75% for Virginia) would knock $913 off his/her combined federal and state income tax bill for the year by itemizing that $2,970 as a deduction on Schedule A. Paying $913 less (or getting $913 more refunded) is pretty good money for filing your taxes properly. See me if you have questions.

8 August 2015

It sounds promising, doesn't it? Alternative Minimum Tax. Two of those words convey a sense of hope. Alternative - like you have options. Minimum - like you could pay a smaller amount of tax.

I hate to burst your bubble, but neither is true. Alternative Minimum Tax (AMT) is misleadingly named. There is no option - if you owe it, you pay it. Likewise, it does not minimize anything - if you owe AMT your tax bill will be larger as a result. Perhaps it should have been named the Required Higher Tax.

There are many conditions (26 or 27) that may trigger AMT, but the most common are large Schedule A deductions for other taxes (state, real estate, personal property) and/or a mortgage interest deduction for a loan used for something other than buying or improving your home. (You took a home equity loan to buy a sailboat or fund your child's education.)

The Alternative Minimum Tax (AMT) is treated like an 'additional tax' by the IRS, but in reality it is a parallel tax system to the 'regular' federal tax system. Everyone's federal income tax is figured under both systems and whichever way the tax bill is higher, that's the one you pay.

AMT is calculated on form 6251, and I made the graphic below to show how it works (relative to the 'regular' tax system). The AMT system follows the 'regular' system right up until you have taken your Schedule A deductions, then it goes in a different direction. At the end it throws the results back into the 'regular' system on form 1040 line 45. However, if you look at how the math works you can see that it is really a separate tax system known as the Tentative Tax System.

Virginia Beach Tax AMT vs regular2

With AMT, after taking your deductions you must add back any of the 26 things listed on form 6251 you had previously taken off your taxes, starting with the taxes, mortgage interest (not used for acquisition or improvement of the home), and miscellaneous deductions you took on Schedule A. There are 23 more add-backs on form 6251. (Notably: accelerated depreciation of business assets. AMT uses a different (slower) depreciation schedule.) Adding those 26 items back produces your Alternative Minimum Tax Income (AMTI). The Tentative Tax System equivalent of AGI.

After calculating the AMTI you are allowed an AMT Exemption (if you qualify). For 2014, the AMT exemption starts at $52,800 for single and HoH, $82,100 for MFJ, but each of those exemption amounts decreases above certain AMTI thresholds. If you're MFJ your AMT exemption drops to $0 when your AMTI reaches $484,900.  It zeroes out at $328,500 for single and HoH. If you qualify for an AMT exemption you can subtract it from AMTI. That gives you the amount of income exposed to the AMT tax rates.

Figuring your tax is as convoluted as the rest of it. You pay 26% on the amount up to $182,500, and 28% on the rest. UNLESS you had capital gains and/or qualifying dividends. Then there is a worksheet for figuring your tax with the lower capital gains rates worked in. Either way you have now arrived at the Tentative Minimum Tax. You subtract your 'regular' base tax from Tentative Minimum Tax to get your AMT. The AMT is then added to your form 1040 on line 45, where the 'regular' base tax is immediately re-added to it. This subtracting and then re-adding the 'regular' base tax is why the AMT is really a parallel tax system. You're either paying the 'regular' tax or you're paying the Tentative Minimum Tax - whichever is higher.

If you're paying AMT and you have children in college you may want to look at not claiming their exemption(s) on your tax return. If you're paying AMT you're not getting anything for the exemption (note how it is missing from the calculation of Tentative Minimum Tax. It is actually possible to have so many exemptions that you trigger AMT!). Your child may not be able to claim their own exemption, but they may be able to claim some education credits on their tax return(s) if you don't claim their exemption.

The bottom line is that you want to plan to avoid paying AMT if at all possible. There are some ways to manipulate your deductions that may make AMT avoidance possible. Every situation is different, so we'd have to look at all the variables to know for sure. AMT is extremely complex. If you have questions please contact me.

04 August 2015

Readers should be aware the tax law signed by the President on 22 December 2017 made many of these provisions obsolete.

Virginia Beach Tax Above The LineCheck out my oversimplified diagram of the federal income tax process. It shows the general flow of IRS Form 1040 so you can visualize where each of the tax terms I use fits into the actual process. I color-coded it to make it easier to follow (hopefully). In the blue we have various terms for income. In the green we have all things I call tax benefits (adjustments, deductions, exemptions, credits). In the red are the taxes.

When we are talking about adjustments or adjustments to income we are essentially talking about tax benefits that can reduce adjusted gross income (AGI). Most tax benefits (deductions, exemptions, and credits) are limited by AGI (or modified AGI (MAGI)). In other words, if your AGI is above a certain level you are disqualified from using that tax benefit. Adjustments can reduce your AGI, making you eligible for additional tax benefits. I am a big fan of adjustments.

You will sometimes hear adjustments referred to as above the line deductions. "The Line" being the point before AGI is calculated. It's an accurate term. Adjustments are essentially bonus deductions that can be taken in addition to the standard deduction or the Schedule A itemized deductions. But given their ability to reduce AGI I prefer to call them adjustments (to income).

Let's look at some of these adjustments in detail.

Educator Expenses. If you're a teacher and you spend money on supplies for your classroom you can claim an adjustment of up to $250. Married teachers filing jointly can claim up to $500. You can't have been reimbursed by the school to claim the adjustment. Expenses for home schooling do not qualify.

Certain Business Expenses of Reservists, Performing Artists, and Fee-Basis Government Officials. Virginia Beach reservists take note: if you travel more than 100 miles from home to perform your duties you can claim an adjustment for your expenses.

Health Savings Account Deduction. If you (not your employer) contributed to your HSA this year, you can claim an adjustment for it.

Moving Expenses. Did you move to Virginia Beach for a new job? If you had unreimbursed moving expenses you can take an adjustment for expenses you incurred. (If your employer paid for the move you don't qualify.)

Self Employed Adjustments - If you have your own business you can take adjustments for part of your self-employment tax, your retirement plan, and your health insurance premiums.

Penalty on Early Withdrawal of Savings. Needed to get your money out of a CD for an unforeseen expense? If the bank levied a fee for the early withdrawal you can write it off your taxes as an adjustment.

IRA Deduction. If you made qualified contributions to a traditional IRA you can take it off your taxes as an adjustment. You must have earned income to contribute to an IRA. Military members can count untaxed combat pay as earned income for taking this adjustment.

Student Loan Interest Deduction. With so much student loan debt this is a big one. You can deduct up to $2,500 for student loan interest you paid. This adjustment goes away when MAGI goes above $80K for individuals, $160K for joint filers. Married filing separately do not qualify for this adjustment. You must be legally responsible for the loan. In other words, paying off your grandchild's loan does not qualify you for this adjustment unless your name was on the loan documents.

Tuition and Fees Deduction. This one is rarely used because the American Opportunity Credit and Lifetime Learning Credits are usually more valuable. However, there is a narrow niche where it makes sense to take this adjustment. Most tax software will automatically compare the benefits between this adjustment and the tax credits for education and give you the best one, but check to make sure you are getting the best tax benefit.

Line 36 (Miscellaneous). This is a potpourri of various rarely used adjustments for things such as forfeited jury duty pay, reforestation expenses, and attorney fees for unlawful discrimination lawsuits. If you have a strange situation, ask your tax preparer, you might qualify for a miscellaneous adjustment.

The ability to reduce your AGI with adjustments can have a snowballing effect in reducing your total tax bill. Not only does it lower your taxable income, but it can also qualify you for additional deductions and credits on your tax return. Make sure you're claiming all of the adjustments for which you are eligible.

 

 

31 July 2015

The IRS levies two requirements on taxpayers. The first is that we pay our taxes. The second is that we file an accurate income tax return by the specified due date. Failing to file your tax return on time and failing to pay your taxes when due can both result in penalties from the IRS. You might think failing to pay would result in the larger penalty than failing to file, but that generally isn't true. Failing to file your tax return can result in a penalty of 5% of the tax owed per month, up to 25% of the total tax owed. Failing to pay your taxes can result in a penalty of 0.5% of the tax owed per month, up to 25% of the total tax owed. The IRS will also charge interest on overdue taxes owed. Technically interest isn't a penalty, but don't try to tell that to someone who is paying it. It sure feels like a penalty.

Note, though, the penalties are assessed on taxes owed. Therefore if you don't actually owe any taxes, there is no penalty for failing to file your tax return on time. You're still supposed to - you might even be entitled to a refund - but the IRS can't penalize you for not filing unless you also owe tax.

Penalties are sometimes undeserved. It's not uncommon for a taxpayer to believe they are complying with the law, but an error on the tax return triggers penalties. For example, tax forms get mailed to an old address, or an employer does not send the required tax documents and the taxpayer does not realize s/he has a missing form at tax time. They think they have all the forms needed to complete their tax return, but they don't. Fortunately, taxpayers are not always stuck paying a penalty just because the IRS demands one.

Taxpayers can challenge the IRS's decision to impose a penalty for failing to file or failing to pay in a timely manner under a program known as First Time Abatement. The taxpayer must meet two criteria in order to qualify for First Time Abatement. They must not have any overdue tax returns or outstanding taxes owed. This is known as filing and payment compliance. The taxpayer must be up to date on all filings and tax payments. The second condition is the taxpayer must not have been assessed an IRS penalty in the three previous tax years. This is known as having a clean penalty history.

That's it - if you're currently compliant with your tax filings and payments and you have a clean penalty history for the last three years you can have failure to file and failure to pay penalties imposed by the IRS abated. There is no guarantee your penalties will be abated, but the onus is on the IRS to demonstrate a good reason to not abate your penalties if you qualify for this program. 

First Time Abatement can be requested via telephone, through the IRS website, or in writing. You can also authorize your tax preparer to apply on your behalf.

If you've never heard of this program there may be a good reason for it. The IRS does not advertise it. They suspect if taxpayers knew about penalty abatement that more taxpayers would attempt to cheat the system. Fear of penalties keeps many of us on the straight and narrow. They are probably right about that, but there's no reason taxpayers should pay penalties if they qualify for First Time Abatement. Just like deductions and credits, it is a form of tax relief that should be utilized whenever available.

28 July 2015

A long time ago, in a galaxy far, far away...

Nearly everyone got married, settled down, had a few kids, and stayed together forever. That's how the story goes, anyway. That 'traditional' model still happens, but in the world I woke up in this morning things are very different for many people. Sometimes parents never marry. Sometimes they divorce. Sometimes they remarry. Sometimes they don't. One thing remains constant, though - regardless of our personal circumstances we are required to pay taxes on income, and a complex personal situation can add complexity to an income tax return.

To demonstrate this I am going to tell you a true story from right here in Virginia Beach. I did the 2014 tax returns for these folks. I have changed the names to protect their privacy.

Jerry and Janet are married - just not to each other. Jerry separated from his wife in 2012 and Janet separated from her husband in 2013. Jerry and Janet lived together for all of 2014 with their 5 children - all minors. Two are Jerry's from his marriage, three are Janet's from her marriage. Jerry had wages of about $30,000 in 2014. Janet worked part-time and had wages of about $9,000. They asked me if I could help them find the most advantageous way to file their taxes.

Despite the fact they were both still married the IRS has a provision that allows them to be considered unmarried for tax purposes. They both met the requirements for that provision, and there were no legal constraints in place, so we didn't have to consider their soon-to-be-former spouses for tax purposes in 2014. They could both be single, however, Jerry paid for more than half the upkeep on the home (and his children lived with him), so he could file as Head of Household. Janet's income was below the filing threshold, and she was not required to file. However, she had taxes withheld from her pay and her earned income gave her the potential for some refundable tax credits, so it was in her best interests to file. She did not pay for more than half the upkeep of the home, so she filed as single. Now, what to do about all those kids?

There were basically two ways to go:

1) Jerry could claim all five of the children as dependents on his tax return. His two natural children are his qualifying children under IRS rules. He could also claim Janet's three children as qualifying relatives because they lived with him ALL year AND he paid for more than half their support AND because Janet would only be filing to get back the taxes that had been withheld from her paychecks. Janet cannot claim the refundable credits in this scenario, but Jerry would have 6 exemptions (himself plus the 5 kids).

2) Jerry claims his two children on his tax return and Janet claims her three children on her tax return. Janet CAN claim the refundable credits in this scenario.

Both situations are permissible under the law. Jerry and Janet were interested in receiving the largest combined refund, so I calculated their taxes both ways. As it turned out, it was more beneficial for Janet to claim her three children on her return. Jerry's tax bill was slightly higher that way, but the refundable credits Janet received more than compensated for Jerry's lost exemptions

Modern blended families can be complex. In an effort to keep up with every possible situation the IRS rules for dependents, exemptions, and tax credits are just as complex. If you have a blended situation you may have multiple legal ways to file. If you want to find the one that is most beneficial to you, come see me. We'll figure it out.

25 July 2015

If you saw the Harry Potter movies you might recall Mr. Olivander telling Harry, "The wand chooses the wizard, it's not always clear why." Something similar happens in tax preparation - the tax form chooses you. Or, rather, the software chooses the best tax form for you based on your tax situation. In either case, the taxpayer doesn't choose which form to file. Although, each year I have a few who try. They note the 1040-EZ is the cheapest option to have me prepare and tell me to go ahead and use that form for their taxes. It is my sad duty to crush their dream of saving a few bucks on tax preparation for the year by informing them their tax situation is too complex for the 1040-EZ.

It's getting harder and harder to qualify to use the 1040-EZ. To help clarify the requirements the IRS provides this handy 11-item checklist the taxpayer can use to see if they can file their taxes on Form 1040-EZ. ALL of the items in the checklist must apply.

  • Your filing status is single or married filing jointly
  • You do not claim any dependents
  • You do not claim adjustments to income.
  • You claim no other tax credits than the EIC.
  • Under the age of 65 and not blind.
  • Taxable income is less than $100,000.
  • Taxable interest is less than $1,500.
  • Tip income is included on W2.
  • No household employees.
  • Not in Chap 11 bankruptcy.
  • Did not receive advanced premium tax credit.

That's quite a list of qualifications to let a taxpayer use the EZ form!

The next step up from the 1040-EZ is the 1040A. With the 1040A you can claim more sources of income, some of the adjustments to income, and many of the tax credits. Your taxable income still has to be less than $100,000 and you can't itemize your deductions. To itemize you'll need form 1040 and a schedule A. You must also use form 1040 if any of the following are true:

-You received any of the following types of income:

    • Income from self-employment (business or farm income).
    • Certain tips you did not report to your employer.
    • Income received as a partner in a partnership, shareholder in an S corporation, or a beneficiary of an estate or trust.
    • Dividends on insurance policies if they exceed the total of all net premiums you paid for the contract.

-You can exclude any of the following types of income:

    • Foreign earned income you received as a U.S. citizen or resident alien.
    • Certain income received from sources in Puerto Rico if you were a bona fide resident of Puerto Rico.
    • Certain income received from sources in American Samoa if you were a bona fide resident of American Samoa for all of the tax year

-You have an alternative minimum tax adjustment on stock you acquired from the exercise of incentive stock optios.

-You received a distribution from a foreign trust.

-You owe the excise tax on insider stock compensation from an expatriated corporation.

-You owe household employment taxes. (Schedule H)

-You are claiming the adoption credit or received employer-provided adoption benefits.

-You are an employee and your employer did not withhold social security and Medicare tax.

-You had a qualified health savings account funding distribution from your IRA.

-You are a debtor in a bankruptcy case.

-You must repay the first-time home buyer credit.

-You had foreign financial assets in 2014

-You owe Additional Medicare Tax or had Additional Medicare Tax withheld.

-You owe Net Investment Income Tax.

-You have adjusted gross income of more than $152,525 and must reduce the dollar amount of your exemptions.

-You received a Form W-2 that incorrectly includes in box 1 amounts that are payments under a Medicaid waiver program, and you cannot get a corrected W-2, or you received a Form 1099-MISC that incorrectly reported these payments to the IRS.

Another atrociously long list. Is it any wonder most people are quite happy to have the software select the correct tax form for their tax situation? If you have any questions please contact me.

 

 

21 July 2015

I enlisted in the Navy from my home state of Ohio back in 1987, making Ohio my official home of record for military pay purposes. At that time Ohio would tax my Navy income even though I wasn't living in Ohio. I didn't care for that, so when I was stationed in Florida I marched my behind down to the Duval County courthouse and became a legal permanent resident of Florida - one of the handful of states that do not have a state income tax.

Many service personnel do what I did and change their home of record to a state without an income tax. However, there's a secondary effect that goes along with changing your home of record that many military members fail to take advantage of on their federal income taxes. Probably because it is a little complex...

Taxpayers can take a deduction on Schedule A for state (and local) income taxes OR sales taxes. If you are a resident of a state that doesn't have an income tax, then you should be taking the deduction for the sales tax. You take the sales tax deduction based on the area where you live, not your state of legal residence or home of record. Military members stationed in Virginia can deduct the Virginia sales tax from their federal taxes, even if their home of record is Texas or Florida.

There are two ways to figure the Virginia sales tax deduction. The first is to actually track the sales tax you pay all year. That level of record keeping sounds quite horrible to me, but I do know one person who does it that way and he gets a somewhat larger deduction as a result. The second way is to estimate your sales tax deduction based on your income. The IRS has a handy online calculator to assist with this. 

This next part is important, so read it twice:

While some of your compensation (like BAH) is not exposed to income taxes, the IRS recognizes that you are paying sales taxes when you spend that money. Therefore, you can add your untaxed income into the calculation for the sales tax deduction. It gets you a larger deduction.

The higher your income, the more sales tax you are presumed to have paid and the higher the deduction you'll be able to claim. You'll want that deduction to be as large as possible, so be sure to include all of your BAH and BAS for the tax year, as well as any pay you received in a tax-free zone. I find it helpful to have an LES from the tax year when preparing a tax return for a military member.

The sales tax rate in Virginia Beach is 6%. That includes the 4.3% statewide rate plus the additional 1.7% rate we pay in Hampton Roads. Some software has you enter those numbers separately and some has you enter just the 6% number.

It's a valuable deduction. Last year a Warrant Officer asked me to look over his taxes after he had done them himself. He is a Florida resident living in Virginia and itemized his deductions on schedule A. The blank spot for the deduction for state income or sales tax jumped off the page at me. Adding that deduction increased his refund by a little over $200. If you're eligible for it, but not claiming it, you are paying more in federal taxes than you are required to pay.

 

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, the National Association of Personal Financial Advisors (NAPFA), and The Tidewater Real Estate Investors Group. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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