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.

07 January 2017

panic2Money is tied to most of the decisions we make in life. Where we work, if we work, which schools our children attend, the car we buy, the house we live in, how and when to retire, where we eat, what clothes we wear - money is a factor in all these decisions and many many others. Anything so intricately entwined in our lives will influence our emotions. It cannot be escaped. I don't look at this as a good or bad situation. It simply is.

On paper taxes are all about numbers. There are columns of numbers to be added and subtracted until you get to the final answer. There shouldn't be anything emotional about it. In the real world, however, there can be a tremendous amount of emotion surrounding the preparation of a tax return. These emotions are natural, but I have witnessed them influence people's behavior in a variety of ways that cost them money. I believe that's OK as long as they understand that is what they are doing. I could save money by changing the oil in my car myself, but I don't want to. That's my choice, and I know why I am making it.

Below are some of the emotions I frequently see and the results they can have that cost people money.

1. Reluctance to See a Professional Tax Preparer. Hiring a professional to prepare your taxes is going to save you time and if your tax situation is even a little complex it will likely save you money. Yet, many people are reluctant to hire a professional to prepare their taxes. I see several emotions behind this:

A. Fear of Looking Ignorant and/or Disorganized. In our society money is one way we keep score. If you have more money, you are winning the rat race. Even more valued than having lots of money is the perception of being shrewd and efficient with your money. Mr. Money Mustache has made a career out of demonstrating his ability to live well on very little money. Many people don't want to use a professional tax preparer because they fear looking ignorant and inefficient with their money. They avoid that feeling by avoiding professional tax preparers. It is probably costing them money.

B. Overconfidence. Some people find this difficult to believe, but we humans are naturally more confident than we should be. Evolution bred lack of confidence out of us long ago. Picture a nomadic tribe during a drought thousands of years ago. They have been walking for weeks looking for water. They get to the top of a hill and they see nothing but another hill on the horizon. The confident ones set out for that next hill, certain they will find water if they keep looking. The ones lacking confidence sit down and perish. We have evolved to be confident. That's why I yell instructions at the Browns' quarterback on my TV on Sundays in the fall. In my fervor I somehow believe I know more about football than someone who made it to the NFL. At tax time a lot of people think they know a lot about taxes. They are determined to prepare their own tax returns, and it is probably costing them money.

C. We're All a Bunch of Crooks. Some people had a bad experience with a tax professional in the past. Or someone they know did. Or they read about it in the paper or saw it on the news. It's a legitimate fear. There are scoundrels in every profession and tax preparation is no different. There aren't as many as you think, though, and there are easy ways to tell the good ones from the bad ones. Don't let your bias against tax professionals cost you money.

2. Immediate Gratification. Some people are just not very patient when it comes to pleasure. Getting money can be a pleasurable experience, and some people can't seem to wait a week or two to experience it. They want their refund and they want it right now! That's why refund anticipation loans (RALs) and refund anticipation checks (RACs) are so popular. They provide instant gratification to the taxpayer - you can walk out of your tax preparer's office with a check or a direct deposit to your bank account already on the way. But make no mistake, those RALs and RACs are expensive. There might be a good reason why you can't wait a week or two for your tax refund, but most of the time people are just feeling an urgency to have the pleasure of getting their refund, and it is costing them money.

3. Fear of Owing the Government at Tax Time. Behavioral economists call it loss aversion. It is the concept that losses feel about twice as bad as gains feel good. In other words, losing $100 has about the same amount of psychological impact as finding $200 - just in the opposite direction. With respect to taxes people react to loss aversion by allowing the government to withhold excessive taxes from their paychecks throughout the year so they can get a refund when they file their tax returns. There is no logical reason to do this. It is your money. A tax refund check is not a bonus from the government. They are simply returning the money they took out of your paychecks all year to cover your tax bill. If you get a refund it is because they took more than was necessary to pay your taxes and they are returning it to you. I don't think anyone would voluntarily overpay their Cox Cable or Dominion Power bills every month just so they could get some of it returned at the end of the year. Yet millions of Americans overpay their tax bill every paycheck so they can get a refund when they file their taxes, and it's because writing a check to the government feels twice as bad as getting a refund feels good. That is an emotional decision, not a logical one. If you are providing the government with an interest free loan it is costing you money.

Make Informed Decisions About Your Taxes

I am not trying to convince you that we should all make the same decisions about money. Money impacts emotions and different people react differently to money situations. We all have our own comfort level. Some of us lay awake at night because we didn't do the most logical thing with our money, and some of us lay awake at night because we did. Each of us has to make decisions that leave us relaxed enough to sleep. The point of this article was to raise awareness that many people (maybe you) are making decisions regarding their taxes based on emotion, and that they might not be aware that they are. Most people would prefer to pay the absolute minimum amount of tax they are required to pay, but many people are not paying the lowest possible tax because they are unknowingly making emotional rather than logical decisions.

Like everyone, I get emotional about my money. I try to limit it, but it is unavoidable. However, if we are talking about your money I will be the calm, rational person in the discussion. If you would like a calm, rational perspective on your tax situation you should give me a call.



Virginia beach tax preparation form1095

27 January 2016

Form 1095 has started to show up in people's mailboxes and judging from the questions I am fielding (and the colorful choice of words unexpected tax documents inspire) some people are confused about what the form means and what they should do with it. Somehow the confusion and trepidation I am observing reminded me of Boromir from Lord of the Rings. But then again, I am a huge nerd. Back to the taxes...

The short answer from me is to hang onto that form 1095 (A/B/C) because you might need it to prove to the IRS you don't owe a penalty tax! You probably don't need it to file your taxes (although some people will), but it might just save you a heap of trouble one day if the IRS comes knocking.

Now I'm going to try to explain this beast in single blog post. No small feat given the complexity. 

The 1095 series (A/B/C) are new tax forms this year. (Actually, the 1095-A debuted last year.) The 1095 series is related to the Affordable Care Act (ACA) (you know...that government policy people either love or hate... sometimes known as "ObamaCare").

It's a little misleading that the 1095 gets sent to you, because it's not really for YOU. It's for the IRS. As you are (hopefully) aware, the ACA requires all Americans to have health care insurance or pay a penalty tax. The form 1095 is sent by employers or insurers to the IRS, and tells the IRS who had health care insurance in 2015. The copy sent to you is mostly for information purposes, although those with a 1095-A will probably need it to prepare their tax return.

The flavor of 1095 you receive (A, B, or C) depends on how you acquired your health care insurance.

1095-A: If you received your health care insurance via the online marketplace/exchange, then you get a 1095-A. If you are eligible for the Premium Tax Credit, then you will need your 1095-A in order to correctly calculate your taxes. (In reality, it would be possible to get health care insurance through the exchange and calculate your taxes without the 1095-A, but if you can do that you should be writing a tax blog, not reading one!) The Premium Tax Credit is government assistance to purchase health care insurance. Eligibility for the Premium Tax Credit is based on income and family size. I could write paragraphs on this topic, but I won't because the immediate issue isn't the 1095-A. That came out last year. This year the new and concerning issue is the 1095-Bs and Cs.

1095-B: You get a 1095-B if you get your health care insurance through the government or directly from an insurance company (meaning you bought a policy directly from an insurer without going through your employer or the exchange). Military personnel and their families covered by TriCare should receive a form 1095-B. Veteran's receiving their health care insurance through the Veteran's Administration should also receive a form 1095-B.

1095-C: If you work for an employer with 50 or more full-time employees, the employer is now required to provide an affordable health care insurance plan to their employees or pay a penalty tax. There have been lots of news stories of late about what constitutes an employer with 50 employees, and what constitutes full-time employment. I could also write paragraphs about that, but lets assume you work for one of the majority of Applicable Large Employers who will simply comply with the law. You will receive a form 1095-C.

Taxpayers receiving a form 1095-A should receive their forms by 1 FEB.

Those of us receiving a form 1095-B or C might not get it until 31 March. This is the first year employers have to provide this form, so the government gave them an extension this year to get the forms out to employees. Many people are getting them now (my 1095-Bs from the VA and DoD are already received), but employers have the extension this year so they will probably continue to trickle out for most of tax season. In the future employers have until 1 FEB to send the forms to taxpayers (and the IRS).

You don't need to wait until you have your 1095-B or C to file your tax return. You might want to, but you don't need to. The only reason I can think to wait for your 1095-B or C is because you can't remember which months you had insurance due to non-continuous employment or coverage. In that case you may want to wait to make sure your tax return information matches the information provided to the IRS on form 1095-B or C. You really want that to match. The IRS will likely have questions for you if it doesn't.

Remember - the purpose of this form is to have employers and insurers tell the government who had (or was at least offered) health care insurance in 2015. The government is essentially using employers and insurers to help them police individual compliance with the mandate to have health care insurance. Any month that you or your dependents were not insured generates a tax penalty. Last year you could just say you had health care insurance. This year you have to prove it.

You do not send a copy of the form 1095 as part of your income tax return. However, I would verify the form 1095-B/C you received is correct, and keep a copy for 7 years. You want to have your documentation in order if the IRS comes knocking. The ACA penalty tax is large and growing. You want to be able to prove you don't owe it, and that 1095-B/C stating you had coverage all year is your ticket to  prove you were covered. Keep track of it.

There are still ways to get exempted from the requirement to have health care insurance. If you think you might qualify for an exemption or you have additional questions, please contact me.

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.

Virginia beach tax breaks section121 exclusion

06 August 2017

The Section 121 Exclusion is one of the biggest, best, most widely-used tax breaks in the Internal Revenue Code. It is the exclusion of capital gains taxes from the sale of a primary residence. The Department of Treasury estimates this tax break will save US Taxpayers more than $66 Billion in taxes in 2017.

Whenever we are discussing taxes the government is involved. So, of course, there are rules, restrictions, and limitations on how much gain can be excluded and who qualifies to take the exclusion. Then there are some exceptions to those rules – several of which apply specifically to military personnel. The purpose of this article is to help clarify some of the rules so you can make decisions on your home sale that put you in the best position to take advantage of the Section 121 tax break.

What Is It?

If you sell something for more than you paid for it, you have made a profit known as a capital gain. The federal government considers capital gains a form of income and taxes them. Fortunately (in terms of taxes) not many things we buy for personal use increase in value. Nearly everything we buy decreases in value as soon as it is purchased. Don’t all of us have a crusty Uncle who gives advice like, “Never buy a new car! You lose thousands of dollars just for driving it off the lot!” Uncle Crusty is referring to the fact that cars decline in value quickly in the first year of ownership. Most things we buy (clothes, furniture, kitchenware, etc.) follow a similar pattern. You are never going to be able to resell them for anything close to the price you paid for them.

Houses (including condos, townhomes, etc) are the rare exception. Houses often increase in value over time. Selling them generates a capital gain for the seller, and that capital gain would be taxable except for the Section 121 exclusion.

Section 121 says you can exclude up to $250,000 of capital gains from the sale of your home as long as all the following apply:

1. You owned the home for at least 2 years of the 5 year period ending on the date of the sale
2. You used the home as your primary residence for at least 2 years of the 5 year period ending on the date of the sale
3. You have not used the Section 121 exclusion for the sale of another property in the last 2 years.

If you are married and filing a joint return, you can exclude up to $500,000 of capital gain from the sale of your home as long as
1. At least one spouse owned the home for at least 2 years of the 5 year period ending on the date of the sale
2. BOTH spouses have used the home as their primary residence for at least 2 years of the 5 year period ending on the date of the sale
3. NEITHER spouse has used the section 121 exclusion for the sale of another property in the past 2 years.

Those are the basics – you can exclude up to $250,000 ($500,000 for married filing jointly) as long as you own and live in the property for 2 out of the previous 5 years and have not used the exclusion for at least 2 years. Now let’s look at some specific scenarios to discuss limitations and exceptions.

Transfer of Ownership and Residence Time to Surviving Spouse

Ginger marries Thurston and moves into the house Thurston has owned and lived in for 10 years. 1 month later Thurston dies and Ginger inherits the house. Ginger wishes to sell the house 2 months later. She has only owned it for 2 months and has lived in it for 3 months, but Ginger still qualifies for a $500,000 exclusion. Under Section 121 a surviving spouse inherits the deceased spouse’s time of ownership and use along with the house. Although Ginger is now technically single, she can use the full $500,000 exclusion if she sells the house within 2 years.

Period of Non-Qualified Use

George Jetson buys two houses in 1999. He lives in House A and uses House B as a rental property. In 2017 he moves into House B. He uses House B as his primary residence for 2 years and then sells it in 2019. Even though George meets the “2-in-5” ownership and primary residence tests, George has created a “period of non-qualified use”. Any time you owned the house, but were not using it as a primary residence PRIOR TO the last period of time you used the house as a primary residence is considered a “period of non-qualified use”. In this case George can only take the Section 121 exclusion on the ratio of his ownership time that was ‘qualified’ for Section 121. He had 2 years of qualified time and owned the house for 20 years total. Therefore, he can exclude 2/20 or 10% of his capital gains from the sale of House B.

Ten-Year Extension for Military Personnel

Greg and Marcia are on active duty with the US Navy. They buy a house in Virginia Beach, and live in it for 4 years before receiving PCS orders to Jacksonville. Thinking they may return to Virginia Beach one day, they decide to turn their home into a rental property. They end up spending the rest of their Navy careers down in Jacksonville (6 years) and decide to remain there permanently. They owned the home for 10 years total, and lived in it for the first 4. In the 5 year period ending on the date of the sale they had not lived in the property at all. However, Greg and Marcia still qualify to exclude $500,000 of the capital gains when they sell the house. Section 121 allows military personnel transferred more than 50 miles from their home to add up to 10 years to the 5 year period. Instead of living in the home 2 of the previous 5 years Greg and Marcia only need to have lived in the house 2 of the last 15 years. They meet that criteria and qualify for the exclusion.

Military Personnel Exception to Period of Non-Qualified Use

Similar scenario as above – Greg and Marcia buy a house in Virginia Beach, live in it 4 years, get transferred to Jacksonville, and live there for 6 years. In this scenario after the 6 years in Jacksonville they move back to their Virginia Beach house for 2 years and then sell it. Greg and Marcia still qualify for the full $500,000 exclusion. George Jetson had created a period of non-qualified use by living in his property after not using it as a primary residence, but there is an exception in Section 121 for military personnel. Greg and Marcia DID NOT create a period of non-qualified use by living in their home after using it as a rental property because Section 121 makes an exception for military personnel who received PCS orders more than 50 miles from their homes.

These rules are complicated. I have only touched on the high points in this article, trying to focus on the most common scenarios I see. If you have additional questions about the Section 121 exclusion of capital gains for your primary residence, please contact me.



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.

09 December 2015

If you want to make yourself crazy this tax season, call around to different tax preparation places and try to get a straight answer over the phone about how much they will charge to prepare your taxes. It's pretty rare to get one. The most common answer is "we charge by the form, so it really depends on which forms you need to file your taxes." I know this because I gave that answer quite often when I was working for one of the large tax preparation firms.

I wanted to give a straight answer, but I couldn't. The truth is that I didn't know how much the company was going to charge. The rates were set by the corporate office in another state, and I didn't know what they were. Sometimes I would use my experience with other clients to provide an estimated range to the person calling. "I think your tax preparation fees are going to be between $200 and $250." I had to give up trying to do that, though, after I had guessed low a few times. The customer would rightfully be irritated when I told him on the phone I thought it would be $250 and it turned out to be $400. It was easier to deal with a customer's frustration of not getting a straight answer than it was to deal with a customer who felt like I lied to them on the phone.

One thing that made estimating the fee for tax preparation difficult was the game most tax preparation firms play with their fees. The fees being charged change throughout the tax season. At higher volume times the price goes up. At lower volume times the price goes down. I suppose that's just supply and demand, but try to tell that to a single mom who had to schedule her tax preparation appointment around everything else going on in her life. She doesn't always have time to consider the timing of her tax appointment to coincide with the best pricing opportunities. She needs to get in and get it done before the sitter goes on overtime.

Below is a graphic I made showing how the tax fees at most tax preparation firms tend to change throughout the tax season. I also added my impression of the corporate attitude at the peaks and valleys. You can use it to help you plan your tax appointment with the large tax preparation firms.

tax preparation virginia beach fee games2

Or you can just come see me. I don't play that game. My prices are fixed at the start of tax season and remain constant throughout. You won't have to guess how much I'll charge, either. I post my prices on this website. If you know which forms you'll need you can figure out your tax prep fees before you ever decide to call.

If you don't know which forms you'll need, call me. I'd be happy to discuss it with you.

05 July 2015

I am commonly asked whether it is more advantageous for a married couple to file their tax return(s) jointly or separately. It's a good question. It shows two things; the person asking it is considering legal options to minimize their tax burden, and the person has knowledge that there are filing status options within the tax code. I like to work with thinking people.

Unfortunately, my answer almost always disappoints. It is usually more advantageous to file jointly. This answer disappoints because the person asking it has been filing jointly, and he or she hoped that filing separately would lower their taxes in the future. Sorry to say joint returns are almost always the way to go.

Filing separately reduces or eliminates eligibility for several adjustments, deductions, and credits and normally results in a higher amount of tax being owed. Filing separately adversely impacts the following tax benefits:

  1. In most cases you cannot claim the credit for Child and Dependent Care Expenses.
  2. You cannot claim the Earned Income Credit.
  3. You cannot claim any education credits.
  4. You cannot claim the adjustment for Student Loan Interest.
  5. You cannot claim the exemption for interest on EE bonds used for education.
  6. Your Child Tax Credit is half what it would be on a joint return.
  7. Your Capital Loss limit is cut in half.
  8. Your Saver's Credit is cut in half.
  9. You cannot claim losses on real estate rental property (if you still live with spouse)
  10. Your Alternative Minimum Tax Exemption is cut in half.
  11. Your standard deduction is cut in half.
  12. If your spouse itemizes you can't take the standard deduction at all.
  13. You expose more Social Security to being taxed.
  14. You cannot claim the adoption credit, and if you received adoption benefits from your employer they are now taxable.
  15. Not really a tax benefit, but if you file separately your tax preparer will charge you for preparing two returns. Jointly, just one.

That's quite a list. Just looking at it makes it clear to me that if you are married the government wants you to file jointly.

There are, however, some circumstances that make filing separately more advantageous. The most common scenarios for this are when:

  1. One spouse has a lien against his or her tax refund(s) for failing to pay past taxes, non-payment of child support, or defaulting on federal student loans. When spouses file jointly they assume mutual responsibility for each others taxes. If one spouse has a lien against their taxes the refund from both spouses will go to pay off that debt if they file jointly. Filing separately protects the refund of the spouse without the tax lien.
  2. You suspect your spouse is cheating on their taxes. If you file jointly both spouses sign the return and are liable for its accuracy. If you suspect (or know) your spouse is filing fraudulently you should file a separate return to protect yourself from penalties.
  3. In rare circumstances a smaller tax (larger refund) can occur. This can happen when there is a large disparity between the spouses' incomes and there are significant deductions. For example, A surgeon (AGI $300,000) and a school teacher (AGI $55,000) are married. The school teacher has $25,000 in medical bills. If they file jointly the medical bills do not exceed 10% of their combined AGI ($35,500) and are therefore not deductible. If the school teacher files separately and claims all of the medical bills then the amount over $5,500 (10% of AGI) is deductible (a deduction of $19,500). Depending on the rest of their tax situation this could lead to a lower overall tax bill for this married couple.

As I said, there are significant tax incentives for married couples to file jointly, so it is most often in the best financial interests of spouses to file a joint tax return. There are some circumstances where filing separately is more advantageous. If you think this might apply to you it is best to consult a tax professional to discuss your situation.

06 January 2016

virginia state flagThe states with income taxes (currently 44 of them) do not have uniform rules for their treatment of military personnel. They are all different to one degree or another. Many service members find the state treatment of taxes confusing. You shouldn't find it alarming if you do. I study taxes and I find it difficult to understand some of the different rules. They use words like resident, non-resident, and domicile, and they sometimes don't mean the same thing from one state's laws to the next.

When it comes to state taxes, I deal most frequently with Virginia. Fortunately, I find the Virginia instructions easier to understand than most of the other states. Virginia taxes income somewhat aggressively (fewer deductions), but at least you don't need a law degree to understand the instructions on their website.

The biggest concern military families face when living in Virginia are the residency laws. I'll try to explain Virginia's residency treatment of military personnel as succinctly as possible.

Residency: In Virginia you are classified as either a resident or a non-resident. Residents pay taxes. You can live here and not be a resident. If you are in the military it depends on your official "Home of Record". Usually this is the state you were living in when you joined, unless you changed it at some point. When I first joined my home of record was my home state - Ohio. When I was stationed in Florida I changed my home of record to Florida (one of the states with no income tax). Then I moved to Virginia, but I remained a Florida resident until I retired from active duty. The Soldiers and Sailors Civil Relief Act prevents the states from automatically making military personnel residents and taxing them.

Military spouses are a little trickier. When we first moved here in 2001 my wife was considered a Virginia resident as soon as she was employed. Although we were married in Florida and she was a Florida resident when we moved, she was not covered by the Soldiers and Sailors Civil Relief Act.

Things have changed since Tade and I moved here. In 2009 Congress passed the Military Spouses Residency Relief Act. Under those rules Tade would have remained a Florida resident. Under Virginia law, as long as the spouse has the same legal state of residence as the service member, they are considered non-residents and do not pay Virginia state income taxes.

Note that caveat - must have the same state of residence as the military member. If I kept Ohio as my Home of Record, married Tade in Florida and moved her to Virginia, she would not be protected by the Military Spouses Residency Relief Act. Since she was not an Ohio resident she would become a tax-paying Virginian. 

It is typically more advantageous for married persons to use the married filing jointly (MFJ) filing status on their federal tax return. When one spouse must pay income taxes in Virginia and the other does not the most advantageous way to file the Virginia return is to use the married filing separately (MFS) filing status. AS I have previously written, most tax software does not like it much when you file your federal and state returns using different filing statuses. Many people run into problems with that scenario - and, frankly, it isn't even terribly complex.

Consider this couple. A sailor from Florida gets stationed in Illinois. While there he marries an Illinois resident. Then they PCS to Virginia. She owns a house in Illinois, which she rents out while they are living in Virginia. She gets a job in Virginia. Because she does not have the same state of residence as her husband Virginia considers her a Virginia resident, and Virginia state income taxes are withheld from her pay.

Husband owes no state income taxes, but wife owes state taxes in both Virginia and Illinois (for the rental income). They file their federal taxes MFJ. She files a Virginia return MFS. Illinois law also allows MFS filing for spouses that file MFJ federally (http://www.revenue.state.il.us/Publications/Pubs/Pub-102.pdf).

That was one of those returns that takes quite a while to prepare because of the intricacies of the state tax laws and the inflexibility of the software. If you have a return like that, bring it to me, we'll figure it out.

Updated August 2020 (originally posted Feb 2016)

virginia beach tax prep love deductionsA conversation I have frequently during tax season:

  • Taxpayer: How much do you charge?
  • Paul: Do you use the standard deduction or itemize?
  • Taxpayer: What's that mean?

I am about to tell you what that means.

In addition to raising revenue, the federal government also uses the tax code to influence our behavior. One of the things the government does is encourage homeownership. Homeownership is good for the economy. When people buy homes it creates jobs for home builders, landscapers, real estate agents, bankers, etc. The government wants to encourage Americans to buy homes, so they allow money spent on things like mortgage interest and real estate taxes to be deducted from a taxpayer's income before the tax is calculated. Buying a house can create tax deductions, thus providing a way to pay lower taxes. This provides a financial incentive for people to buy houses. 

But what about the people who aren't in the right place in their lives to buy a house? Can't they get a deduction? Are they stuck paying taxes on all of their income? The government has determined that would not be fair, so they created the standard deduction. The standard deduction is an amount anyone can remove from their income before they calculate the tax owed. The amount of a taxpayer's standard deduction is based on their filing status: married filing jointly, single, head of household, married filing separately, or qualified widow(er). For 2020 the standard deduction amounts are as follows:

Filing Status  2020 Standard Deduction 


Married Filing Jointly $24,800
Married Filing Separately $12,400
Qualifying Widow(er) $24,800
Head of Household $18,650

Any taxpayer can use the standard deduction, or they can calculate the amount of each individual deduction for which they qualify, total them, and use the total of the individual deduction items instead. As always, we are interested in the result that is LAMA (legal and most advantageous) to the taxpayer. This will almost always be whichever provides the larger deduction. To know if you itemize or take the standard deduction you need to understand the things that qualify for deductions.

Typical Deductions on an Individual Return


Other taxes you pay. The state and local income taxes you pay can be deducted from your federal tax return. If you are a resident of a state with no income taxes you can deduct your sales taxes instead. Local taxes refer to the income taxes some cities place on their residents. (See my article on Alternative Minimum Tax for a big exception to Uncle Sam's generosity regarding not getting double-taxed.

You can also deduct the real estate taxes you pay. For most taxpayers, this refers to the taxes paid on their residence. If you pay real estate taxes on a property you rent to someone else you don't itemize those on Schedule A. You deduct those when you figure out your rental property's operating expense on Schedule E. 

Personal property taxes paid can also be deducted. In Virginia Beach, that's the lovely little blue sheet that comes from the city every year telling you how much you owe because of your vehicle (or boat or trailer). People sometimes get real estate taxes and personal property taxes confused. For federal tax purposes, real estate is land and buildings. Personal property is everything else you own.

Since 2018 the total amount of state and local income taxes, real estate taxes, and property taxes that can be deducted from the federal tax return is limited to $10,000. If your state and local, real estate and personal property taxes add up to more than $10,000, then you simply deduct $10,000. Taxpayers are encouraged to put the actual values into their tax software even if the amount will be limited to $10,000. Many stater are not following the federal rules on itemizing and you may get full credit for taxes paid on your state income tax return.


After taxes, the largest deduction for which many people get a good benefit is loan interest. Specifically because mortgage interest is usually a big number and it's deductible.

Points paid on a mortgage are deductible, but you usually can't take them all in the year they are paid. Points paid must be amortized (spread out) over the life of the loan. If you paid $3,000 in points for a 30-year loan, then you can essentially take $100/year in your deduction for points.

Mortgage insurance premiums may deductible to taxpayers with an AGI below $110,000. The law allowing this must be voted on by Congress each year, so it could go away at any time.

Charitable Donations

Donations to charity are generally deductible if you itemize your taxes. There are a lot of rules about this, but the one most taxpayers should remember is SAVE YOUR RECEIPTS. There is a common misperception the IRS doesn't require receipts below a certain level. Not true. If you are audited you have to account for every dollar. 

Side Note: It's common for people to hand me a receipt from Goodwill or Habitat for Humanity that lists a few items and the date of the donation. Then I ask the person what was the value of the items donated and they have trouble recollecting. When you get the receipt write down the value of the items donated while it is still fresh in your mind. (Not the value of the items when they were new - the amount they can reasonably be expected to sell for as used items.)

Unreimbursed Job Expenses

The unreimbursed job expenses of an employee are no longer deductible. This category of deductions was removed by the Tax Cuts and Jobs Act. However, the provisions of the TCJA are set to expire in 2025, so they may be back one day!

Medical Expenses

As part of the Affordable Care Act (a.k.a. Obamacare) the threshold for claiming medical expenses was raised to 10% of adjusted gross income (AGI). That means if your AGI is $50,000 your medical bills are not deductible until they total over $5,000 (10% of  $50,000). Congress moves this number often. Some years it is 7.5%, some years it is 10%. Make sure you are using the latest and greatest numbers if you're itemizing medical expenses.

Standard Deduction or Itemize? The House is Usually the Key.

When trying to determine if a taxpayer is going to take the standard deduction or itemize their deductions, I will typically ask the taxpayer if they own their home or rent. Without the deductions for mortgage interest or real estate taxes, it is unusual that itemizing makes financial sense. If you don't own a house (and a mortgage) you will have to give a lot of money to charity to make itemizing more beneficial than just the standard deduction.

It is rare for military families who do not pay state income taxes to itemize their federal deductions. It happens, but it is rare.

Deductions are a great thing to have if you are trying to minimize your tax bill. Getting the largest deduction possible might be something I can help you with. If you have any questions, please contact me.


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 founding member of the Military Financial Advisors Association, as well as a 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 XY Planning Network. Paul is the Director of the CFP Board-Registered Program at The Regent University School of Law where he also teaches the Capstone Course in Financial Planning. 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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