MAY 28TH, 2009
By CPA SAM
Q. I know you get a lot of questions about this, but I think I may have not been allowing myself the number of allowances that I am qualified to receive. I am 33, single, have 2 homes in a separate state, both are rented. Should I be able to claim an allowance of 3, for tax and interest and depreciation for those homes?
A. The question of the “right” number of allowances to claim is a tough one. For most people, it simply involves completing the Form W-4 as correctly as possible using any the necessary worksheets on the back side of the form. For others, because of some extra factors that are not handled in the W-4, finding that number is an interesting problem. In your case, the two homes in other states that are rentals are most likely considered a passive investment meaning you probably cannot fully deduct any losses that occur. The best way for you to determine how many allowances to claim is to sit down with your tax advisor or CPA and go through last year’s tax situation.
On a side note, make sure you have mentioned the 2 rental homes. By maintaining homes in other states from your resident state, you likely will need to complete a tax form for those states even if you have no actual tax liability. Often, sales tax is required on the rental price of your homes along with the normal property taxes. Make sure you check with the taxing jurisdictions where your homes are located. You don’t want to be caught by surprise with sales taxes.
MAY 13TH, 2009
By CPA SAM
Happy National Small Business Week! This happens to be the illustrious week designated for increased awareness of issues surrounding the small business community. In honor of this week, I wanted to highlight three very big issues facing small employers.
1. Health Care Costs – The Obama administration is looking to find a way to cover everyone with health insurance. While arguments could be made either way of the necessity of this proposal, it could take shape as mandatory coverage provided by employers. It could also look like a removal of pre-tax health insurance benefits with everyone receiving a credit on their tax return for all or part of premiums paid throughout the year. Because health insurance is one of the biggest expenses in business, owners and managers need to keep close tabs on this one.
2. Taxes – Self-employed business owners need to make sure they are reporting all income and expenses incurred in the operation of the business. By under-reporting income or exagerating expenses, individuals are cheating the system and not paying their fair share. A reputable accountant or tax preparer can help with keep things above board by asking the right questions.
3. Human Resources – Issues relating to employee retention, discipline, training and compensation all are equally important. Being in the payroll industry, it is my opinion that most employers simply don’t take the payroll function seriously enough. Employers are the first line of “defense” in ensuring that taxes are paid. By withholding and remitting the proper amounts, employees can make the best tax planning decisions possible. Employers should be keeping up with tax changes in the appropriate jurisdictions. They should also be referring their employees to online tools for employees to be educated about their checks. One good place is PaycheckCity.com which has free paycheck calculators. I use these frequently in planning my check as well.
MARCH 25TH, 2009
By CPA SAM
Q. My paycheck increased this week for some reason. My payroll department says it is because of the Stimulus package that was just passed. They can’t find any details. What changed?
A. This was supposed to be so easy. Congress passed legislation giving single individuals a $400 credit for the year and married folks $800 per year. Media outlets broadcasted the news of the tax credit. It seemed that everyone was talking about it from the time it was signed until early March. The IRS was to implement this through a reduction in withholding rates. So…new tables were published in Publication 15-T. Employers were required to implement the new tables by April 1. Most payroll service bureaus have already implemented the change. Hopefully most employers not using payroll providers have the new rates and can begin withholding using the reduced rates.
Now, as the credit actually begins hitting paychecks, employees are wondering, “why am I getting more money?” The credit works out to around $13 less per week being withheld for single filers. For married filers, the credit works out to about $26 per week. There is a free calculator available to help your employees understand the effect of the credit on their paycheck. You can find it here. I encourage everyone to play around with the tool to understand these changes. For more information, you can read the IRS press release about it here.
The credit does not mean you will owe more taxes at the end of the year for federal purposes. When completing your 1040 form, you will determine the amount of tax liability, then subtract the credit amount as a payment against that liability just like the child tax credit. In situations where both spouses work, it will be very important to check with your tax advisor regarding this credit. If you both claim married on your Form W-4, you will both be given the credit in your paychecks. This has the potential to greatly under-withhold tax for your situation.
MARCH 4TH, 2009
By CPA SAM
The IRS just released it’s taxpayer statistics for the 2006 tax year. With all the press dedicated to analyzing the new administration’s tax proposals, I thought it would be good to look at just who is paying taxes these days.
First, the average tax rate paid on all returns was 13.8%, which is slightly higher than the year before. There were 138.4 million tax returns filed that year of which 67% had some level of income tax reported. This is line 61 of the 1040, line 28 from the 1040A and line 11 of the 1040EZ form. I think if more people looked closely at how much tax is assessed for their situation, they would be stunned.
Back to the statistics, the top 1% of taxpayers paid 39.9% of the tax paid that year. The top 5% of taxpayers paid 60.1% of the total tax. The top 5% of taxpayers includes those with Adjusted Gross Income of at least $153,542. That means 95% of the taxpayers only pay 40% of the taxes on returns.
What does this mean? There is only so much money that can be squeezed from the population of taxpayers. If one takes into consideration the total Federal, Social Security, Medicare, State, Local, sales and property tax that each person in this country pays, it is truly a staggering number that in some cases could exceed 50% of income.
As I have stated before on this blog, individual consumers must find a way to live within their means. No person can continue to spend more than they take in. Eventually, they must repay the debts. Invariably, in the lives of ordinary taxpayers, we have unforeseen issues occur that require we maintain a “slush fund”. If no financial cushion is available, the average person would be forced into bankruptcy. Let’s hope our federal, state and local governments can learn this principle soon as well.
FEBRUARY 23RD, 2009
By CPA SAM
I thought this news warranted a special release. The new withholding tables related to the recently signed Stimulus package, called the “American Recovery and Reinvestment Act of 2009″ have been released. You can download a copy here. These will ultimately be incorporated in Publication 15-T when that is released to the IRS website. The significant changes include”
- increasing the amount at which withholding begins to $7,180 for single filers and $15,750 for married filers.
- changes to the income amounts for the 10%, 15%, 25% and 28% bracket
- changes to the calculation of the Earned Income Credit, but not the maximum amount of the credit.
There is no change to Social Security and Medicare withholding and no change to the value of an allowance. The instructions indicate that employers should begin using the new withholding guidelines as soon as possible but no later than April 1, 2009. This will increase the amount of take home pay in most paychecks by reducing withholding. It should be interesting to see follow up comments on this issue. The change was pushed through so quickly that there are bound to be problems with implementation and certain employers not being notified of the new rates.
NOVEMBER 26TH, 2008
By CPA SAM
Q. I had a question about my W-4 form. I received my paycheck and it seems that I am paying almost 30% of taxes and since I am making only 30K a year, the taxes seem ridiculously high. I was wondering what I should fill out in the W-4 form that would lower my taxes. I am claiming myself as a dependant on my domestic partner. So please let me know what information I should fill out to make sure that I am taxed in the right bracket (which should only be 15-20%).
A. This is another very common question. Your tax bracket or marginal rate is a fictional number arrived at by dividing total taxes paid by total income. To correctly determine your tax bracket though, you need to look at what taxes go into that number to get an accurate picture. First, Social Security and Medicare are part of the taxes that everyone pays until they reach $102,000 of taxable income (for 2008). These taxes together account for 7.65% of your income. The tax bracket that you speak about does not include these taxes normally. Now we are left with around 22% for federal and state taxes. You did not identify your state so there is no way to figure out this number. However, for federal purposes, domestic partners can be classified as dependents only if you provide the majority of the support for them. Someone who is single making around $30,000 per year with one dependent would pay around $3600 of taxes. This equates to about 12%. Your state income tax will add to this. If you live in Maryland, Pennsylvania, New York, Ohio, Kentucky, Michigan or Indiana (plus a few others), you also are required to pay local taxes. Other states have similar additional taxes. When you add them all up, the combination of Federal, Social Security, Medicare, State and potentially local taxes, the number gets to be quite high. This could be as much as 30% or more!
There is a second part to your question though. The object is to match your payments (withholding) with your liability (calculated on the 1040 form). If you find that every year you continue to get large federal and/or state tax refunds, you may wish to adjust your W-4 accordingly. Claiming more allowances on the W-4 reduces federal withholding. Claiming less allowances increases withholding. Keep in mind that you will need to sign a statement before handing the form to your payroll rep that declares you are entitled to the number of allowances claimed.
AUGUST 13TH, 2008
By CPA SAM
Q. I received a check yesterday for winnings from a game show on which I recently appeared. They took non-resident California tax out of my prize money. Do I have to pay that tax AND Arizona (my resident state) tax AND federal tax on the money? I have heard that there might be a way to get the California tax back (it was 7 percent). Is this possible?
A. This topic stirs up such strong feelings in people. Remember Richard Hatch? He won Read more »
JULY 16TH, 2008
By CPA SAM
Q. My employer says I have to complete a new W-4 every year. Is this true? How often do I have to do this? It’s always the same.
A. I’m amazed at how many questions come in regarding the Form W-4. This deceivingly simple Read more »
JULY 9TH, 2008
By CPA SAM
Q. I am drawing Social Security and have a part-time job with my old company. They are withholding taxes from my check. Is this legal? I thought once you were on Social Security that all wages were tax free.
A. This is one of the biggest misunderstandings amongst the Read more »
JULY 2ND, 2008
By CPA SAM
Q. I looked at the Stimulus payment schedule and mine was due almost 2 weeks ago. What do I do?
A. The answer to this lies somewhere deep within the bowels of the IRS. While most people are getting direct deposits and checks according to schedule, it was a huge undertaking to get that much money to that many people in that short of a time frame. That being the case, there have been Read more »
