MARCH 4TH, 2011
By CPA SAM
A great question this week comes from one of my readers. Which Form 1040 am I supposed to use? As a professional tax preparer, I always recommend you let a professional handle the complicated task of determining your tax liability. However, there are people who choose to go it alone with Turbo Tax or another of the myriad of self-help tax prep solutions. But which form do you need to file? How do you know the software is picking the correct one? It’s obvious when you look at the 1040, 1040EZ and 1040A that two of them are much simpler to complete. The 1040 is very complex and is meant to be flexible enough to handle all personal tax situations. From a recent IRS Tax Tip, here is the answer you are looking for.
Here are some general rules to consider when deciding which paper tax form to file.
Use the 1040EZ if:
* Your taxable income is below $100,000
* Your filing status is Single or Married Filing Jointly
* You and your spouse – if married — are under age 65 and not blind
* You are not claiming any dependents
* Your interest income is $1,500 or less
Use the 1040A if:
* Your taxable income is below $100,000
* You have capital gain distributions
* You claim certain tax credits
* You claim adjustments to income for IRA contributions and student loan interest
If you cannot use the 1040EZ or the 1040A, you’ll probably need to file using the 1040. Among the reasons you must use the 1040 are:
* Your taxable income is $100,000 or more
* You claim itemized deductions
* You are reporting self-employment income
* You are reporting income from sale of property
This year, the IRS stopped mailing paper books to taxpayers in an effort to save some money. It’s even more important that tax payers pay attention to which form meets their needs now that they have to make the choice themselves.
On a side note, make sure you adjust your W-4 if you are getting a large allowance. Paycheck City has a great tool for making changes to your w-4 here. Next week, I’ll discuss the logic behind the Form W-4. If you complete it correctly, your refund will shrink and give you access to your own money throughout the year.
JANUARY 29TH, 2010
By CPA SAM
Q. I just started as a temp through an agency. I work full-time and just received my first paycheck. I want to ask about the OASDI and the NY 2010-NYCNY withholdings. I was taxed heavily for the OASDI. What is the NYCNY withholding? Most importantly, I wanted to ask you is there any way to check whether I had overpaid for taxes in a paycheck?
A. The items that came out of your check look completely appropriate. The most common questions from employees to payroll departments about paychecks come from the cryptic descriptions of deductions shown on the paystub. In your case, OASDI is the abbreviation for “Old age, survivors, and disability insurance.” This is the official name for Social Security. It is calculated as 6.2% of taxable wages up to a maximum of $106,800. This means, you can pay up to $6,621.60 this year towards this tax. Your employer(s) will also match 6.2% of your taxable wages. For lower income individuals, this tax can be the highest amount taken from the paycheck. There is another tax that is closely associated with this called Medicare. It is 1.45% of all taxable wages.
NYCNY looks like New York City Tax. All residents of New York City get to pay an extra tax. Rates on this tax range from 1.9 to 4% depending on your level of income.
As for your last question, there are only three ways to determine the correct amount of withholding. First, you download withholding formulas from each jurisdiction in which you owe tax and run hand calculations to see what is correct. Since that is time consuming and too difficult for most of us, I recommend the second method. PaycheckCity.com has a free Salary Calculator that calculates all your taxes for you using the formulas from each jurisdiction. You simply need to know what settings are on the W-4 Form you gave to the payroll department.
Most importantly, if you have specific questions about your paycheck, your payroll department should be able to assist you as long as you are not asking for tax advice.
JANUARY 15TH, 2010
By CPA SAM
Q. My payroll person told me that the filing status on the W-4 doesn’t necessarily mean the same thing as my marital status. Is that true? What is filing status?
A. Filing status on the W-4 and filing status on your tax return are not necessarily the same thing. The W-4 drives withholding only. The withholding formulas issued by the IRS come in only two flavors, married and single. Any other situation is handled by the number of allowances claimed. Other situations include head of household, children and multiple jobs. In certain situations, if married folks claim married on their W-4s, they will not have enough withholding. By switching over to the single withholding formula, additional withholding takes place. Some companies use the W-4 to determine the marital status of their employees. This is not a good policy. In fact, if an employer receives a lock-in letter for a specific employee, he/she may be directed to withhold at Single with zero allowances regardless of the marital status of the employee.
On your tax return, the rules are different. You are only allowed to claim married if you are in fact married. If you are married, you cannot claim single. There is a special status called married filing separately for those who wish to use it. Certain situations may warrant this for better tax treatment. The key here is that your marital status on the last day of the tax year determines your status for the tax return for that year.
I hope this helps.
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.
FEBRUARY 11TH, 2009
By CPA SAM
Q. As a payroll person, I often see highly-compensated employees come to my office with advice from their accountant. “If you withhold exactly this amount every period, you won’t owe or need to be refunded very much on income taxes.” Because the accountant may take into account things that would not be known to a payroll system, they think this will be more accurate. I thought withholding was based on allowances and filing status.
A. The answer to this dilemma for all payroll departments is clear in Publication 15. Here it is: “The amount of any federal income tax withholding must be based on marital status and withholding allowances. Your employees may not base their withholding amounts on a fixed dollar amount or percentage. However, an employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4.” What does that mean? It does NOT say if you are an executive or highly compensated that the accountant can choose my withholding method. It DOES say to base withholding on the Form W-4 values, filing status and number of allowances.
Here is an example. Let’s say I make $110,000 per year, am married with two kids under 12 and have a substantial mortgage and some charitable giving. My accountant says I should have $19,000 in withholding for the year. Since I am paid semi-monthly, that means 19000/24 or about $791 per check in federal withholding right? Wrong. To properly calculate this, visit the free Paycheck Calculator at PaycheckCity.com. Plugging in the numbers, and playing around with the allowance value and filing status, I see that if I claim single with 2 allowances, I will get around $19,000 in federal withholding for the year. Thus, I will complete my W-4 with those values. It’s really a handy tool and it solves the dilemma presented above.
On a side note, just because you are married, you are not required to have taxes withheld using the married filing status. The object is to get your payments (withholding) and liability (tax return) to match using the tools provided on the Form W-4.
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.
JUNE 19TH, 2008
By CPA SAM
Q. My employer did not withhold any federal or state tax last year, just Social Security and Medicare. What do I do?
A. This is really a serious problem. However, the number of ways you could get into this problem are many. First lets tackle the federal issue. Check with your employer to see what the W-4 says that they have on file for you. Did you submit a Form W-4 to your employer that was marked as “exempt”. If so, you basically told them not to withhold. Does your Form W-4 have a high number of Read more »
