How Tax Brackets Work

Tax BracketsWe can’t go through tax season without covering how federal income tax brackets work.  The U.S. has a progressive tax system.  While someone may be sitting in the 25% federal tax bracket, that doesn’t mean they actually pay that much in taxes.  It only means that 25% is the marginal tax rate.

The marginal tax rate represents the tax rate on the last dollar of your income earned.  It doesn’t represent the tax rate on your total taxable income.

To find the tax rate we pay on our total taxable income we need to find the average tax rate.  Which takes a bit of math.

The best way to explain it is with an example.  I’ll be using the 2012 federal tax brackets for a single person as a reference.  For our example we’ll assume this single person has a taxable income of $500,000.  Which is beyond average but I wouldn’t be able to use the entire table below that I labored over for hours. Continue Reading…

7 Tax Tips You Should Not Overlook

Tax TipsDoing your taxes every year is hard enough with the difficulties of the tax code.  It certainly doesn’t fit  the category of exciting weekend plans.  Which explains why most people put off the inevitable till the last-minute.  A great idea if you still owe taxes.  But if a refund is heading your way, this weekend is a great time to knock out your taxes and get that money in your hands quicker.

Here’s a few tax tips to help speed up the process, lower your tax obligation and get your return in before the tax deadline.

Use The Correct Filing Status

There are five filing statuses: single, married filing jointly, married filing separately, head of household and widow with dependent child.  You may qualify for more than one.  Choose the filing status that gives you the lowest tax obligation.  Also, your marital status on the last day of the year determines your status for the entire year.

Double-Check Your Info

Sending in the wrong information may be an honest mistake but it only slows down the tax filing process. Continue Reading…

New Cost Basis Reporting Changes For 2012

Cost Basis ReportingStarting January 1, 2012 new cost basis reporting changes will take effect regarding mutual funds, ETFs, and DRIPs (Dividend ReInvestment Plans).  Under the new changes, the IRS will require all brokerages and fund companies to track the purchase and sale price of these assets.  These are similar to the cost basis changes for stocks that were put into place at the beginning of 2011.

Cost basis, if you’re not familiar, is the original value (purchase price) of an asset.  This value is used by the IRS to determine your capital gains (losses) when you sell shares in a mutual fund, ETF, or stock.  Which is why it’s so important to track your investment purchases and sales closely.  Using a simple spreadsheet covering: purchase date, invested amount, shares purchased, and sales date, will get the job done.

Which Shares Will Be Impacted?

Every time shares of a stock, mutual fund or ETF are purchased, that transaction is given a share lot ID, also referred to as a tax lot ID.  Even if you already own shares, each new purchase is given a separate share lot ID.  If you invest money every month into a specific mutual fund, there will be separate share lot IDs for every purchase.

Starting in 2012, all new share purchases in non-retirement accounts will be affected by these cost basis reporting changes.  Any shares bought prior to January 1, 2012 will not be affected by these changes.  The reason retirement accounts are excluded from the changes is due to the tax advantages of those accounts. Continue Reading…

2012 Federal Income Tax Brackets Released By IRS

2012 tax bracketsThe IRS recently released the official 2012 inflation adjusted income tax brackets.  This is something the IRS must do each year so the tax rates keep pace with inflation.  These income tax bracket changes will affect your 2012 income and your 2013 income tax returns.  Just something to keep in mind when it comes time to filing your taxes.

If you remember back to 2010, Congress eventually voted on extending the Bush tax cuts through 2012.  So, not surprisingly, the income breakdown is very similar to the 2011 federal income tax brackets.  The only change for 2012 is the inflation adjustment to the income levels and deductions.

Though changes can still be made by Congress before the start of 2012, it’s highly unlikely.  Federal tax reform looks to be a big part of the 2012 presidential election campaigns.  Any changes now would spoil the future tax debate. Continue Reading…

Home Business Deduction Tax Tips

home business deductionsThe at-home business has become really popular over the years.  It offers people an opportunity to generate an additional source of income right from home.  By taking advantage of some home business deductions, you could significantly lower your year end income tax bill when you file your taxes.

Like any business, the home business has its expenses, but many of them you may have been paying before the business was started.  Things like rent or mortgage, internet or a phone line are an everyday occurrence in any home budget.  The IRS draws a fine line between personal and business expenses when it comes to a home business.  But some of those personal expenses may still qualify as home business deductions.

What’s Your Business Percentage?

If you qualify for the home business deductions, your first step is finding out your home business percentage.  You’ll then use this percentage to figure out the business part of those normal home expenses.  The IRS uses two examples to finding out your business percentage: Continue Reading…