Don't Get Mad, Just Get Educated
March 25 2015
April 15th is right around the corner, and with it, the due date to pay your taxes! If you're floundering at the last minute to get your paperwork together (it happens to the best of us, we know) you may be in the market to file for an extension. Don't get too comfortable though, just because your tax extension gives you an additional six months to submit, you still must estimate how much tax you owe and pay it by April 15th, otherwise you may face IRS late-filing penalties.
Now if you've done your homework, you should be safe, but if you aren't a seasoned tax specialist, you may not understand all of the regulations. The last thing you want is to rest in a false sense of security after filing, only to have the IRS knocking on your door with a few questions a few months down the line. Here are a few painful pitfalls that you may not know about that can help you avoid some unwanted attention:
Social Security
We've all seen the same tax article taken out of every pay stub from our first part-time job until the last paycheck before retirement. If you are retiring and collecting your social security is your only form of income, then prop up your feet, relax and enjoy a cold beer knowing that you won't have to pay any taxes on your newly minted social security check. However, if you have other income you must report to the government, as much as 85% of your government checks may be taxable (we're sorry, but semi-retirement in this case, does not quite pay). If you intend to collect social security while working, contact the Social Security Office and request a withholding after you calculate how much you owe. In calculating how your social security benefits are reduced, the government incorporates bonuses, commission, and vacation pay, but not investment income, interest, and pensions. Do a bit of homework before your settle in for retirement, so you can enjoy your retirement in peace!
Income from Abroad
If you've recently acquired a work visa abroad or acted as an employee for your company overseas, your earnings are still subject to US income tax regulations. Regardless of the country of your work, your worldwide annual income is US income tax (even if you pay local income tax in the country of your residence). You are granted an automatic-2 month extension to file your return and pay without having to request an extension. All of your tax filings must be expressed in US Dollars, so if you've been paid in yen, pounds-sterling, euros, yaks, goats, gold, land, or oxygen; you must file your return in dollars, so start calculating for exchange rates!
Alimony and Support Payments
Currently, the divorce rate in the United States is still about 50% of the annual rate of marriage. If you are one of the unlucky ones to end a marriage in divorce, hopefully you managed to get a good settlement out of the whole affair. Regardless of how much you received from your ex-cohabitation companion, all of your monthly checks are taxable from the government (Child support is not taxable, just want to make that very clear). Calculate your estimated income owed on your alimony payments (not child support) and make sure you file on time. However if you are paying for spousal support, you can write off those payments as a tax-break (find the silver lining in everything I guess).
Capital Gains Tax
If you've been particularly lucky on the stock, bond, or private equity markets, I hate to be the buzz-kill, but before you enjoy that 20% return-on-investment; you'll need to calculate for Capital Gains Tax. You do not have to pay for any equity that you own, only when you sell it. Capital gains is calculated based on the difference between the purchase price your bond,stock, etc and your selling price. Short term gains on stock investments are taxed at your regular tax rate, long term gains are taxed at about 15% for most tax brackets (and 0% for the lowest two brackets). Before you throw on your Gordon Gecko halloween costume, adjust your reported income to include all annual capital gains and pay all remaining estimated tax owed.
Unemployment Benefits
Yes! You heard me, unemployment benefits are taxable. It seems kind of counter-intuitive (or completely backwards) to receive money from the government in benefits only to report and pay back in in taxes, but much like on a first date, we aren't here to argue government politics. Consider having some of your benefits withheld by filling out a federal W-4V (Voluntary Withholding Request). Taxes are withheld at about 10% for each unemployment check.
Student Loan Deductions
Attention Students! If you are working and owe taxes to the government, you may be eligible for a refund based on the ever increasing pile of student loans that are mounting behind your "future site of my diploma" hanging in back of your mind. Student loans tax deductions are based on whether you earn less than $80,000 annually and are accruing interest on your loans. The loans must have been taken out solely to pay for qualified educational expenses (tuition, room/board, books, etc). You can write off the interest payments on your loans per year up to a maximum of $2,500. And if you have children that are currently enrolled in a university, do a bit of research on Higher Education Tax Credits, such as the American Opportunity Credit and the Lifetime Learning Credit, which can save you about $4,500 per student per year for the first four years they are in school!
At this point you may be red in the face and may now know a few additional bits you need to file for and deduct from your payments. Hopefully these few tips helped resonate a bit with you. The IRS isn't very responsive to the "I didn't know" argument. Make sure to educate yourself ahead of time or find some additional consultation if you have any more questions.
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