by Jim Magary | Mar 3, 2016 | Tax Help
Early Retirement Distributions and Your Taxes
Many people find it necessary to take out money early from their IRA or retirement plan. Doing so, however, can trigger an additional tax on top of the income tax you may have to pay.
Here are a few key points to know about taking an early distribution:
1. Early Withdrawals.
An early withdrawal normally means taking the money out of your retirement plan before you reach age 59½.
2. Additional Tax.
If you took an early withdrawal from a plan last year, you must report it to the IRS. You may have to pay income tax on the amount you took out. If it was an early withdrawal, you may have to pay an additional 10 percent tax.
3. Nontaxable Withdrawals.
The additional 10 percent tax does not apply to nontaxable withdrawals. They include withdrawals of your cost to participate in the plan.
Your cost includes contributions that you paid tax on before you put them into the plan.
A rollover is a type of nontaxable withdrawal.
A rollover occurs when you take cash or other assets from one plan and contribute the amount to another plan. You normally have 60 days to complete a rollover to make it tax-free.
4. Check Exceptions.
There are many exceptions to the additional 10 percent tax. Some of the rules for retirement plans are different from the rules for IRAs.
5. File Form 5329.
If you took an early withdrawal last year, you may need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with your federal tax return.
See Form 5329 and its instructions for details.
6. Use IRS e-file.
Early withdrawal rules can be complex. IRS e-file is the easiest and most accurate way to file your tax return.
The tax software that you use to e-file will pick the right tax forms, do the math, and help you get the tax benefits you’re due.
Seven out of 10 taxpayers qualify to use Free File, which is only available through the IRS website at IRS.gov/free file.
by Jim Magary | Mar 2, 2016 | Tax Help
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by Jim Magary | Mar 2, 2016 | Tax Help
Keep Track of Miscellaneous Deductions
Miscellaneous deductions can cut taxes.
These may include certain expenses you paid for in your work if you are an employee.
You must itemize deductions when you file to claim these costs.
So if you usually claim the standard deduction, think about itemizing instead. You might pay less tax if you itemize.
Here are some IRS tax tips you should know that may help you reduce your taxes:
Deductions Subject to the Limit.
You can deduct most miscellaneous costs only if their sum is more than two percent of your adjusted gross income.
These include expenses such as:
• Unreimbursed employee expenses.
• Job search costs for a new job in the same line of work.
• Some work clothes and uniforms.
• Tools for your job.
• Union dues. • Work-related travel and transportation.
• The cost you paid to prepare your tax return.
These fees include the cost you paid for tax preparation software. They also include any fee you paid for e-filing of your return.
Deductions Not Subject to the Limit. Some deductions are not subject to the two percent limit. They include:
• Certain casualty and theft losses. In most cases, this rule applies to damaged or stolen property you held for investment. This may include property such as stocks, bonds and works of art.
• Gambling losses up to the total of your gambling winnings.
• Losses from Ponzi-type investment schemes.
There are many expenses that you can’t deduct. For example, you can’t deduct personal living or family expenses. You claim allowable miscellaneous deductions on Schedule A, Itemized Deductions. For more about this topic see Publication 529, Miscellaneous Deductions.
You can get it on IRS.gov/forms at any time.
Additional IRS Resources:
• Tax Topic 508 – Miscellaneous Expenses
• Interactive Tax Assistant tool – Can I Claim My Expenses as Miscellaneous Itemized
Deductions on Schedule A (Form 1040)?
by Jim Magary | Mar 2, 2016 | Tax Help
Home Energy Credits Save Money and Cut Taxes
You can trim your taxes and save on your energy bills with certain home improvements. Here are some key facts to know about home energy tax credits:
Non-Business Energy Property Credit
Part of this credit is worth 10 percent of the cost of certain qualified energy-saving items you added to your main home last year. This may include items such as insulation, windows, doors and roofs.
The other part of the credit is not a percentage of the cost. It is for the actual cost of certain property. This may include items like water heaters and heating and air conditioning systems. The credit amount for each type of property has a different dollar limit.
This credit has a maximum lifetime limit of $500. You may only use $200 of this limit for windows.
Your main home must be located in the U.S. to qualify for the credit.
Be sure you have the written certification from the manufacturer that their product qualifies for this tax credit.
They usually post it on their website or include it with the product’s packaging. You can rely on it to claim the credit, but do not attach it to your return. Keep it with your tax records.
You may claim the credit on your 2015 tax return if you didn’t reach the lifetime limit in past years.
Under current law, this credit is available through Dec. 31, 2016.
Residential Energy Efficient Property Credit
This tax credit is 30 percent of the cost of alternative energy equipment installed on or in your home.
Qualified equipment includes solar hot water heaters, solar electric equipment, wind turbines and fuel cell property.
There is no dollar limit on the credit for most types of property. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.
The home must be in the U.S. It does not have to be your main home, unless the alternative energy equipment is qualified fuel cell property.
This credit is available through 2016.
Use Form 5695, Residential Energy Credits, to claim these credits. For more information on this topic, refer to the form’s instructions. You can get IRS forms anytime on IRS.gov/forms.
by Jim Magary | Mar 2, 2016 | Tax Help
What is the Additional Medicare Tax and Who Pays It?
Some taxpayers may be required to pay an Additional Medicare Tax if their income exceeds certain limits.
Here are some things that you should know about this tax:
• Tax Rate. The Additional Medicare Tax rate is 0.9 percent.
• Income Subject to Tax. The tax applies to the amount of certain income that is more than a threshold amount. The types of income include your Medicare wages, self-employment income and railroad retirement (RRTA) compensation. See the instructions for Form 8959, Additional Medicare Tax, for more on these rules.
• Threshold Amount. You base your threshold amount on your filing status. If you are married and file a joint return, you must combine your spouse’s wages, compensation or self-employment income with yours. Use the combined total to determine if your income exceeds your threshold.
The threshold amounts are:
Filing Status
Threshold Amount
Married filing jointly
$250,000
Married filing separately
$125,000
Single
$200,000
Head of household
$200,000
Qualifying widow(er) with dependent child
$200,000
• Withholding/Estimated Tax. Employers must withhold this tax from your wages or compensation when they pay you more than $200,000 in a calendar year. If you are self-employed you should include this tax when you figure your estimated tax liability.
• Underpayment of Estimated Tax. If you had too little tax withheld, or did not pay enough estimated tax, you may owe an estimated tax penalty. For more on this, see Publication 505, Tax Withholding and Estimated Tax.
If you owe this tax, file Form 8959, with your tax return. You also report any Additional Medicare Tax withheld by your employer on Form 8959.
Visit IRS.gov for more on this topic.
You can also get forms and publications on IRS.gov/forms anytime.
