Author: Lance Aligo

Adjusting Your Income Tax Withholding

Adjusting Your Income Tax WithholdingWhen should you revise your tax withholding?

If you receive a large refund from the IRS when filing your income tax return, or owe the IRS a substantial amount when filing, you should consider adjusting your income tax withholding.

Your income tax withholding is based on the number of allowances you claim on your Form W-4, Employee’s Withholding Allowance Certificate. This form is typically filled out when you first start a job with your employer. This determines the amount of income tax that comes out of your paycheck each pay period.

If your withholding is too high, you are, in effect, giving the IRS an interest free loan. Although the overpaid tax will be refunded when you file your return, it would have been better for you to have access to these funds throughout the year. In this case, you should reduce the amount your employer withholds to increase your pay in your paycheck.

Do you owe the IRS too much?

On the other end, there are taxpayers who owe the IRS large balances when filing their taxes. Yes, they have access to their money all year long, but they will have to pay this back on April 15th. Most of the time, this repayment comes with tacked-on interest and penalties from the IRS.

It is your responsibility to change your withholding with your employer. At any time, you can provide them with an updated Form W-4 and adjust your withholding.

When to review your withholding

You should check your withholding anytime there is a significant financial change in your life, including the following:

– You getting married, divorced, or having children.
– Increase or decrease in working wages.
– You or your spouse start or stop working, start a second job.
– Changes in deductions such as: buying house, paying for child care, medical expenses.

It is never too late to change your withholding for the current year. If you believe that you may be substantially over or under withheld, you can make the necessary adjustments to correct that. This is one of the more complex issues that a taxpayer faces.

We’ve got your back.

If you think your situation calls for a withholding adjustment, please contact us today. Contact KRS manager Lance Aligo, CPA, MAS at [email protected] or 201-655-7411.

Pay off Your Student Loans

Pay off Your Student LoansIt is payday and you see your paycheck hit your bank account just in time to pay your student loans.  How depressing.

Paying your student loans may seem like it will last forever, but there are ways improve your repayment plan and pay off your loans faster.

Pay more than the minimum payment

This is one of the fastest ways to relieve your student loan debt.  These days, most payments are done online. You can simply go online each month and pay your minimum payment, plus an additional payment.  This additional payment can be whatever amount you feel comfortable paying at that time. Some months you may want to make a larger additional payment than other months.  For instance, in a month where you get a bonus or a money gift, you may want to put this “found money” towards your student loans.

It is important to ensure that all extra payments are applied to principal and not the next month’s minimum payment.  Some lenders may require a written letter specifying that any additional payments made are applied to principal of the loan.  Other lenders may have an option online when a payment is made to categorize the extra payment towards principal. By doing this, you can reduce the interest on your loans.  Keep in mind that most lenders reduce your interest rate by setting up automatic payments. You should also always pay towards your highest interest loans first as interest accrues faster on these loans.

Consolidate and refinance your loans

Interest rates on student loans can vary from 4% to 9%.  If you’re like the average graduate, with three to six different loans with differing interest rates, and you are a good candidate refinancing at a lower interest rate. By consolidating, you also free yourself of the burden of making multiple monthly payments.  Your consolidated loan will have one monthly payment.

This approach is not for everyone.  You would only want to refinance if you can reduce your interest rates.  Right now, refinancing rates on student loans are as low as 3%. Banks that offer student loan refinancing and relief include NerdWallet, Sofi, and Citizens Bank.  Each bank and lender offer different programs and individualized rates, which are usually based on credit history and annual income.

Student loan interest deduction

Don’t wait to pay your student loans.  If you are in loan deferment, a grace period, or in school, make payments sooner.  During these periods where you are not paying your loans, interest is accruing which increases your overall loan obligation.

Some good news: the IRS offers a student loan interest deduction of up to $2,500 per year.  Keep in mind that you may not be able to deduct the full $2,500, as this deduction phases out between $65,000 and $80,000 for a single taxpayer, and $130,000 and $160,000 for a married filing jointly taxpayer.

When filing your taxes, there is no need to look through your loan statements to calculate the interest paid.  Your lender will provide you with Form 1098-E, which will show the total student loan interest paid in the current year.  You will receive one form for each loan.  If you are married, you can also deduct student loan interest paid by your spouse if you file a joint tax return.  The only requirement is that you must be legally obligated to repay the loan.  This means that you or your spouse must be the responsible party for the loan.

We’ve got your back

It is important to tackle student loans early in your career.  By doing so, you will improve your credit, become student loan debt-free, and start saving for your future.

Lance Aligo, CPA, MSA, is a senior accountant at KRS CPAs, LLC, located in Paramus, NJ.  You can reach him at [email protected] or 201-655-7411.

Filing Taxes as a Married Couple

Filing Taxes as a Married CoupleIf you were married this past year, congratulations!

Getting married is a big step in your life and along with it comes many changes.  One change is filing taxes as a married couple for the first time. This advice can help you get started.

First, you must determine your filing status. Your status depends on your marital status on the last day of the year. If you were legally married as of December 31, you are considered to be married for the full year and must either file a Married Filing Joint or Married Filing Separate tax return.  Filing status is important for determining your standard deduction, whether you qualify for various deductions and credits, and the amount of tax is owed.

Filing Alternatives

If you choose to file a Married Filing Joint tax return, you must include all your and your spouse’s income, deductions, and credits on one tax return.  The standard deduction in 2018 for filing a Married Filing Joint tax return is $24,000. If you choose to file a Married Filing Separate tax return, each of you will report your respective income, deductions, and credits on separate tax returns.

The standard deduction for a Married Filing Separate tax return is $12,000 each. Married Filing Separate will rarely produce a lower tax liability. Most tax preparing software will provide you with an analysis on whether filing separately makes sense.  If using a self-preparing software or if you work with a tax preparer, be sure to ask which way produces a lower liability for your family.

When filing a separate tax return, there are some tax deductions that may be unavailable to you:

  • If you itemize your deductions, your spouse must also itemize their deductions.  You may not mix and match the itemized deduction and the standard deduction.
  • The Earned Income Credit is unavailable.
  • The Child and Dependent Care Credit is generally unavailable.
  • You cannot deduct interest paid on student loans.
  • Adoption Credit is generally not allowed.
  • Reduction of Child Tax Credit is unavailable.

Considerations for Working Couples

For couples who both work, both spouses will need to adjust the tax withholding from their paychecks.  One of the biggest mistakes of newlywed couples and taxes is the under withholding of income tax from their paychecks.  Because your income will be taxed together, this may push you into a higher tax bracket and when it’s time to file your tax return, there will be a surprise balance due.  Be sure to sit down with your spouse and properly fill out each of your Form W-4s Employee’s Withholding Allowance Certificate correctly.  Form W-4 worksheets are available to walk you through the process of matching tax due with withholdings.  The goal here is to match these as close as possible so that there is not a large balance due or large refund.  This way you have the most money in your pocket all year long.

Name and Address Changes

One other thing to keep in mind is filing with the correct names and addresses.  If there are any name changes, be sure to use the correct name on your married tax returns.  If there is an address change, you should change your address with the IRS by filing Form 8822 Change of Address and mailing it to the address on the form.  You should also update your address with your local post office.  If you have any children, be sure to include them as well on your tax return with their full name and social security number.  Retirement accounts and beneficiary information should also be updated accordingly if your spouse is the beneficiary.

Considerations for Home Sales

Planning on selling your home? Your taxable gain exclusion on your personal residence doubles from $250,000 to $500,000 once you are married.  This is only the case if you own the home and both you and your spouse have lived in the home the past 2 out of 5 years.  If you sold your home before you were married, the $250,000 would still apply.

Keeping these tips in mind can help make your first tax season together go a bit more smoothly.

Lance Aligo, CPA, MSA, is a senior accountant at KRS CPAs, LLC, Paramus, NJ.  You can reach him at [email protected] or 201-655-7411. Check out KRSCPAS.com for more tax tips, checklists, blogs, and other resources to help you succeed.

What Tax Topics Do Millennials Care About?

What Tax Topics Do Millennials Care About?
From left to right: Bret Kaye, a certified financial planner at AEPG Wealth Strategies, Diane Pineda, senior accountant at KRS CPAs, and Lance Aligo, CPA, senior accountant at KRS CPAs

On July 25, 2017, senior accountants Lance Aligo and Diane Pineda participated in an NJBIA panel presentation focusing on personal finances for young professionals. The first few years following college can be very challenging and it’s important for YPs to understand the tax implications of life changes.This panel covered topics such as marriage, job changes, first time home buyers, and starting a family.

One tax topic discussed was the difference between filing a “married filing joint,” “married filing separate” and “single” tax return.

Whether a couple is married on January 1 or December 31, they are considered to be married for the full year for income taxes and are required to file a “married” tax return.

An audience member posed the question,

When is it beneficial for a couple to file a married filing joint tax return compared to married filing separate?

Here’s what the panelists noted:

  • When married filing joint, the couple will complete one shared tax return and take full responsibility for the income and tax that is owed.
  • When married filing separate, the couple will each report their own income and be responsible for their own tax liability.
  • Filing separate can limit or disqualify tax credits and deductions. Each couple is unique and depending on their situation, both ways should be considered.
  • It is important to keep in mind that married filing separate is not the same as filing as a single person. Most of the time, a couple will pay less tax when filing a married filing joint return.
  • A married couple filing separate will lose the following credits and deductions (geared towards the young professional):
    • Traditional IRA deductions
    • Child and dependent care tax credit
    • College tuition expense deduction
    • American opportunity credit and lifetime learning credit
    • Student loan interest deduction
    • Earned income credit
  • If married filing separate, both taxpayers must claim either the standard deduction or itemized deduction. If one spouse is itemizing, the other must too.

Situations where married filing separate may benefit the taxpayer:

  • When filing separately, you will be responsible for the accuracy and completeness of only your return and have no responsibility for your spouses.
  • It’s possible that your overall tax bill could be lower as a couple when filing separate due to one spouse having significantly high itemized deductions. Specifically, itemized deductions limited by your adjusted gross income.
    • Medical expenses, unreimbursed employee business expenses, investment expenses, fees for tax preparation, charitable contributions.
  • Since adjusted gross income is lower on married filling separate returns, the limited itemized deductions listed above may be higher if you file separately reducing a couple’s overall tax liability.

If a couple is married, it is important to consider each unique situation and then determine which method, joint or separate, provides you with the lowest tax liability.

Standard vs. itemized tax deductions

Another topic discussed was standard vs. itemized deductions. The standard deduction for 2017 for a single individual is $6,350 and for a married couple $12,700 ($6,350 for married filing separately).

Itemized deductions are a group of eligible expenses that an individual can claim on their federal income tax return that potentially reduce their taxable income.  These deductions are reported on Schedule A of Form 1040.  A taxpayer may claim itemized deductions and receive a benefit from them when their total itemized deductions are larger than the IRS standard deduction.

What are some of the itemized deductions and how can they be tracked?

First-time homeowners should be aware that they are paying real estate taxes which are tax deductible as an itemized deduction. If the homeowner is paying a mortgage, the interest portion of the payment is tax deductible as an itemized deduction.

These deductions are tracked by the bank where you have your loan.  At the end of the year you will receive a Form 1098 which reflects the mortgage interest that was paid for the year.  Typically, Form 1098 will also reflect the amount of real estate taxes that were paid for the year.  If it does not, you should refer to quarterly or semi-annual tax statements from your town.

Taxes paid to any state jurisdiction are tax deductible. If you are working as a W-2 employee, state taxes are being withheld from your paycheck.  These taxes will be reported to you on your Form W-2 reflecting what taxes were withheld and what can be deducted as an itemized deduction.  If you are self-employed and pay quarterly estimates, a great way to track your payments is to keep copies of the checks you write as well as proof from your bank statements.

Charitable contributions are also itemized deductions. Cash and non-cash items qualify for this deduction as long as they are donated to a recognized charitable organization.  The organization that you donated to will provide you with a receipt of what was received and the value of the gift.  If donating a non-cash item valued more than $5,000, a special appraisal needs to be completed and in writing to submit to the IRS with your Form 1040.

Other itemized deductions that are common to the young professional include medical expenses, unreimbursed employee expenses, job search costs, union dues, investment expenses, continuing education, and tax preparation fees. To claim these deductions, the taxpayer should retain receipts for any expense incurred.

We’ve got your back

As a young professional myself, I understand the challenges we face. If you have any questions relating to tax topics relevant to YPs, contact me at [email protected] or 201-655-7411.