Marriage can be a wonderful milestone in life. But in the midst of planning a wedding and a future with your significant other, you may not be thinking about how your new union will affect your tax bill. One critical tax factor to examine is the concept of marriage bonuses and marriage penalties. These terms refer to how marriage can affect a couple’s tax liability. In this post, we will look at the fundamentals of marriage bonuses and marriage penalties, as well as how they might affect a couple’s tax situation as a whole.
What is a marriage bonus?
A marriage bonus happens when a married couple’s combined tax liability is less than the sum of their individual tax liabilities if they filed as single individuals. This is most common when one spouse earns much more than the other. By combining their wages, the couple can take advantage of reduced tax brackets, tax credits, and deductions that they might not have had access to as single filers.
Here’s an example. Let’s say an unmarried couple has a combined income of $120,000, one person earning $0 and the other earning $120,000 in 2023. As single filers, the first person would have a $0 tax liability, while the second higher-earning person would have a tax bill of $18,876. If this same couple got married and filed jointly, their combined tax liability would be just $10,921 because they would be able to claim a larger standard deduction and would be taxed at a lower marginal tax rate.
What is a marriage penalty?
Conversely, a marriage penalty arises when a couple’s combined tax liability as a married couple is higher than their total tax liability if they were still filing as single individuals. Because merging incomes in joint filing can drive both spouses into higher tax brackets, couples with similar incomes are more likely to pay marriage penalties than couples with one spouse earning the majority of the income.
Another factor to consider when calculating the marriage penalty for high-income earners is the net 3.8% investment income tax. This tax is levied on single filers with an adjusted gross income of $200,000 or more, as well as married filers with an adjusted gross income of $250,000. In addition, these same taxpayers will also be subject to an additional Medicare tax of 0.9% on earnings over $200,000 for single filers, and over $250,000 for married couples filing jointly.
Beyond federal marriage penalties, some states also impose their own marriage penalties, including California, Georgia, Maryland, Minnesota, New Mexico, New Jersey, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin.
How can I avoid a marriage penalty?
Understanding your tax situation as a married couple is essential for efficient tax planning. For example, you can always calculate different scenarios to estimate your tax liability before filing. Filing separately rarely results in a more advantageous outcome for couples, but you may find yourself under these special circumstances. You should also explore all eligible deductions and credits to reduce your overall tax liability. Married couples who file jointly have access to several tax credits, including the Earned Income Tax Credit, education credits, and the Child and Dependent Care Tax Credit. Be aware of phase-out limits that might affect your eligibility. If you’re still unsure how to navigate marriage penalties and bonuses, consider consulting a tax professional. Doing so can provide valuable insights tailored to your specific situation. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers just like you.
Selling a home can be a huge financial decision with numerous factors to consider. One of the most important factors might be the tax implications. While most might be eager to make a huge profit from selling their home, it is critical to understand the tax rules and regulations that apply to this transaction in order to be prepared and make informed decisions. In this post, we will look at the primary tax implications of selling a house. This will include potential capital gains taxes and exemptions, as well as crucial homeowner concerns.
What are capital gains taxes?
Some may be shocked to learn that not every home sale needs to be reported to the IRS. That said, if you’re not exempt from reporting your home sale to the IRS, the potential capital gains tax is one of the most important tax implications of selling a house to worry about. Capital gains taxes are taxes paid on the profit made when an investment is sold. These investments can include stocks, bonds, NFTs, jewelry, and of course real estate. Capital gains taxes are extremely complex. Therefore, here we will only be focusing on the capital gains taxes paid after the sale of a home.
Do I have to pay taxes on the profit I made from a home sale?
Whether you’ll have to pay taxes on the profit you earned from the sale will depend on two factors. These are how much profit you earned and how long you owned and lived in the home before the sale.
If you owned and lived in the home for at least two of five years before its sale, you may exclude up to $250,000 of the profit from your taxable income. This amount increases to $500,000 if you are married filing jointly. If your profit exceeds the limit ($250,000 or $500,000 for married couples filing jointly), then the excess will be subject to capital gains taxes reported on Schedule D.
There are some important things to note when determining your eligibility for this tax break. First, you do need to live in the home for two years out of five before its sale. However, those two years do not need to be consecutive. Therefore, the home must‘ve been your primary residence for two out of the five yearsbefore selling it. Finally, you can only exclude this profit from your taxable income if you have not excluded the gain on the sale of another home within two years before this sale.
How does capital gains tax work in the sale of real estate?
Let’s look at a few scenarios on how to calculate capital gains tax. Assume you as a single filer purchased a townhome for $350,000 and used it as your primary residence for five years. After five years, you decided to sell the home for $450,000. No capital gains tax would be due because the profit of $100,000 does not exceed the single filer’s exempt amount of $150,000.
Here’s another example. Assume you are a single filer who purchased a home for $400,000. After living in the home for two years, you decide to rent it out. Three years pass and you decide to sell the house for $550,000. Because you lived in the home for two of the previous five years and because the profit earned on the house does not exceed the $150,000 exempt amount, no capital gains tax is owed.
Now let’s assume you and your spouse file jointly. You purchase a home for $300,000 and many years later you decide to downsize. You sell your home for $1 million, earning a profit of $700,000. Since this amount exceeds the exempt amount of $500,000 for married couples filing jointly, you and your spouse will owe capital gains tax on the excess amount of $200,000 ($700,000 – $500,000).
2023 Capital Gains Tax Rates
Your capital gains rate will depend on your taxable income in the year the home is sold. In 2023, these rates are:
Filing Status
0% Tax Rate
15% Tax Rate
20% Tax Rate
Single
Up to $44,625 in taxable income
$44,626 to $492,300 in taxable income
Over $492,300 in taxable income
Head of Household
Up to $59,750
$59,751 to $523,050
Over $523,050
Married Filing Jointly andSurviving Spouses
Up to $89,250
$89,251 to $553,850
Over $553,850
Married Filing Separately
Up to $44,625
$44,626 to $276,900
Over $276,900
Let’s assume that same couple had a combined income of $300,000 in 2023, the year their house was sold. This would subject them to the 15% capital gains tax rate. This would then result in $30,000 in capital gains tax due (15% of $200,000 profit).
How do I figure out my actual gain or loss on a home sale?
While the above scenarios are helpful in understanding how capital gains tax works, these really are the simplest of examples. Finding out the actual cost of your home and actual gain or loss can quickly become a complex task. Determining your actual cost involves calculating the amount invested into the home through capital investments, like a new roof, updated HVAC, or a remodeled bathroom. Adding these expenses, along with any special tax assessments paid or expenses paid to restore damage after a disaster, to your purchase price will give you what’s called your adjusted basis. Your adjusted basis will help you decrease the amount of gain on the sale since it can increase the cost of your home.
From there, you will need to subtract credits received from your home. These can include:
After factoring in all these costs and credits, you’ll be able to figure out the adjusted basis that can be subtracted from your sale price to find your actual gain or loss.
Tax Help for Homeowners
It goes without saying that selling a home can be a very complex process, especially when factoring in the tax implications that can follow. If you are not familiar with the tax implications of selling a home, especially at a large profit, it is highly advisable to reach out to a qualified tax professional. Taking a chance and handling things on your own can quickly result in costly errors on your tax return and unwanted encounters with the IRS. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Saving for higher education tuition can be overwhelming. However, it can be a little easier with the help of a college savings account. By saving earlier and more efficiently, you can increase your savings for education, whether it is for your children, a family member, or even yourself. One of the most popular types of college savings accounts is a 529 plan because of its tax benefits. Here is an overview of 529 plans, including what they are, how they work and other important information.
What is a 529 plan?
A 529 savings plan is a tax-sheltered investment account created exclusively for qualified higher education expenses. These plans are named after Internal Revenue Code Section 529 and are offered by states or educational institutions. Like a Roth 401(k) or Roth IRA, 529 plans enable families to invest after-tax contributions that not only grow tax-free but can be withdrawn tax-free if the funds are used to pay for qualified expenses.
What is a qualified higher education expense?
Qualified higher education expenses include tuition, fees, books, computers, equipment, internet services, and room and board for students who are at least half-time. Any withdrawals made to pay for these expenses must happen in the same year the expense is incurred. The IRS has also recently allowed 529 plan funds to pay for up to $10,000 of K-12 tuition as well as up to $10,000 in student loan debt. Purchases made with 529 plan funds that are not qualified expenses will be subject to a 10% penalty, plus regular income taxes.
Another thing to keep in mind when making withdrawals from your 529 plan is that you’ll want to avoid “double-dipping.” In other words, you are not allowed to use more than one tax benefit for the same expense. For example, if you used $3,000 from your 529 plan to pay for your child’s tuition, you may not also use this same expense to qualify for an education tax credit, like the American Opportunity Tax Credit. This is also the case if someone else paid for your child’s tuition with their own 529 plan. Another example is if your child receives a tax-free scholarship of $10,000 to put towards their $15,000 tuition bill. Because $10,000 was received, you may only withdraw up to $5,000 for this expense. Withdrawing more will result in a penalty.
What are the tax advantages of 529 plans?
Contributions to 529 plans are made with after-tax dollars, which means they are not federally tax-deductible. Some states allow you to deduct contributions. 529 plans, however, do grow tax-free, which means any earnings generated are not taxed, as long as the funds are ultimately used for qualified education expenses. This means your investments can grow faster with less effort on your part. Investing in a tax-deferred account, like a 529 plan, can yield thousands of dollars more than a taxable account.
529 plans can also be great for estate planning. For tax purposes, contributions to a 529 savings plan are considered completed gifts. Individuals can reduce their taxable estate and perhaps reduce estate taxes by contributing to a 529 plan. This is especially advantageous for those with significant assets who want to pass wealth down to future generations while minimizing the impact of taxes on their estates. These contributions are not taxed unless they exceed the annual gift tax exemption amount of $17,000 (in 2023).
What else should I know about 529 plans?
Sometimes, things don’t go as planned. If the funds are no longer necessary for higher education, but you still have leftover money, you have a few options. You can change the beneficiary on the account to another family member. You can also make yourself the beneficiary if completing higher education is a goal for you. Your 529 college plan can also be converted to a 529 ABLE plan, a savings account for people with disabilities. Finally, beginning in 2024, you will be able to roll over up to $35,000 of 529 funds into a Roth IRA, as long as the account has been open for at least 15 years.
Like Roth accounts, 529 plans have a lot of tax advantages. However, it’s crucial to follow all tax laws when making withdrawals and reporting education expenses during tax time. Keeping good records of qualified expenses and the amount of tax-free money received can help ensure that you stay compliant. As you can imagine, improper usage of this tax-deferred account can result in penalties that can cause financial hardship. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Purchasing a home is an exciting milestone in life as it represents a significant investment. However, beyond the joy of becoming a homeowner, it’s crucial to understand the tax implications that come with this major financial commitment. In this blog post, we’ll explore the various tax considerations related to buying a home, providing you with valuable insights to help you navigate this aspect of homeownership confidently.
Itemizing Deductions
Purchasing a home may be the first opportunity you receive to start itemizing your deductions during tax time. While itemizing can require much more work, it could result in a larger refund. If you want to claim any expenses related to your home, you must itemize your deductions. This might include expenses such as mortgage interest or real estate taxes. Consulting with a knowledgeable tax professional can give you a better understanding of your best option is.
Mortgage Interest Deduction
If you have a home loan that originated after December 16, 2017, you can deduct mortgage interest, up to $750,000. Any loan with an origination date before this qualifies for a mortgage interest deduction of up to $1 million. To qualify for this deduction, you must itemize your deductions on your tax return and meet certain eligibility criteria. Every January, your home lender should send you Form 1098, Mortgage Interest Statement. This reports mortgage interest of $600 or more you paid during the year. If you paid less than $600 in mortgage interest, you can still deduct it during tax time.
In addition to mortgage interest, your 1098 will also show much you paid in mortgage points during the year. Mortgage points are a form of payment made to obtain your mortgage. They are generally defined as a percentage of your loan amount. For instance, let’s assume you paid three points, or 3%, on your $500,000 mortgage, for a total of $15,000 (3% of $500,000). The IRS will typically allow you to deduct the entire amount of your points in the year they were paid. You should note that the deductible amount should be shown on your 1098 form.
Real Estate Tax Deduction
As a homeowner, one of your expenses will be real estate taxes. The IRS allows you to deduct only the actual real estate tax amounts paid during the year. However, you can also deduct local property taxes as well. If you pay these taxes through your lender, this amount should be shown on Form 1098. If you just purchased a home, you may have reimbursed the seller for their real estate tax payments. In this case, you will be able to deduct this amount through the real estate tax deduction too. Remember to keep records of any payments you made. Beginning in 2018, the total amount of state and local taxes you can deduct, including property taxes, is capped at $10,000 per year.
Home Energy Credits
Homeowners can also claim tax credits by making some energy efficient upgrades to their home. Specifically, the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit are great tax credits for those who recently made home improvements that help conserve energy. Some examples include energy-efficient windows, exterior doors, furnaces, air conditioners, solar panels, and more.
Mortgage Interest Credit
The IRS allows lower-income and moderate-income taxpayers to claim the Mortgage Interest Credit if they received a mortgage credit certificate (MCC) from their state or local government. An MCC is usually given to first-time homeowners, and it allows you to claim the credit of up to $2,000 of the mortgage interest paid per year. Taxpayers should note that this credit is completely separate from the mortgage interest deduction that uses Form 1098. The Mortgage Interest Credit can be claimed using Form 8396.
Tax Help for Homeowners
The tax benefits of homeownership can provide notable savings and financial advantages. By familiarizing yourself with the tax deductions and credits available, making informed decisions about how to file your taxes can be a little easier. However, navigating complex tax rules and regulations can be overwhelming. Therefore, it’s highly recommended to consult with a qualified tax professional who can provide specific guidance tailored to your individual situation. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
We often discuss IRS tax audits, but you can just as easily be audited by your state. Like an IRS audit, state tax audits can be stressful and intimidating for taxpayers. But what triggers a state tax audit? Is it less severe than an IRS audit? Would a state tax audit result in an automatic IRS audit? Here’s what you need to know about state tax audits.
What is a state tax audit?
A state tax audit is an audit performed by your state’s Department of Revenue because they believe there is a discrepancy on your state tax return. It is no less severe than an IRS audit and can result in financial and legal consequences. During the audit, your state will review your state tax return to verify that your reported income and deductions are correct. Typically, your state will send you a written notice in the mail to inform you of the audit. The notice should include the tax years they plan to review. It will also note any information you will need to provide and their contact information. You can opt to have an accountant or tax attorney represent you during the audit or proceed without one.
Once the audit is completed, your state will send you a written notice of the results. The results can lead to the acceptance of your state tax return with no further action needed. However, it can also result in taxes and penalties owed. The taxpayer may be entitled to appeal the judgment if they don’t agree with the audit results. Depending on the state, the appeals procedure may include a hearing before an administrative law judge or an appeals board.
What triggers a state tax audit?
You should be aware of frequent errors that can result in a state tax audit. These can include:
Failing to record all income. You are required to report all income, including self-employment, rental, and investment income. Not doing so is one the fastest ways to trigger an audit.
Being a nexus.If your business is a nexus, or a company that has a presence in one or more states, you might be at risk of a state audit. Each state will want to ensure you are complying with their individual tax laws.
Failing to report use tax. If you purchase taxable items in one state and intend to use, store, or consume them in another state, you must pay use tax in your own state. For example, if you purchase a car in a state that does not charge sales tax, but plan to use the car in a state that does, you must pay use tax on the purchase price of the car in your state.
Being a sole proprietor. If you are a sole proprietor and prepare your own tax returns, you may be viewed as more likely to make a mistake when filing.
Misreporting data, math mistakes, incomplete state tax forms, excessive deductions, and failing to file your state tax return on time are some more common reasons for state audits.
Will a state tax audit result in an automatic IRS audit?
Your biggest worry when being audited by your state Department of Revenue is whether you will also trigger an IRS audit. While there is no certainty of this happening, it definitely is a possibility since both state and federal taxing agencies communicate with each other. Large mistakes on your state return will likely result in an IRS audit, but small mathematical errors may not. In some cases, your state might require you to amend your state return, which can impact your federal tax return, thus getting the IRS’s attention. It goes without saying that the best way to avoid a state or federal tax audit is to submit complete and accurate tax returns. Facing an audit can be stressful and intimidating but having audit representation can have a positive impact. Optima Tax Relief has over a decade of experience representing clients during both state and IRS tax audits.
