The story of Carolina Money has been one of seizing opportunities, much like the stories of the people it has covered. In the business and tech community, nothing would...
Tax Day is Fast Approaching: The Opportunities and Changes You Need to Know
With Tax Day, Monday, Apr. 18, the filing deadline for IRS tax returns, growing closer with every moment--even with three extra days to get your taxes in, many may still have some questions regarding filing 2015 taxes.
Carolina Money spoke with Rosemary Wright; a Senior Wealth Planning Strategist with Wells Fargo that covers the Columbia, S.C. area, about some changes and opportunities the average citizen may not be aware of this tax season.
First, as part of the Affordable Care Act, is that all Americans have health insurance, and if for whatever reason they are still uninsured, pay a tax penalty. In 2014, the penalties were 1 percent of household income, or $95 per person in your household, whichever was greater. This year, however, penalties greatly increased to 2 percent of household income or $325 per person.
“This is the first year that the penalties have gone to two percent and it’s really the first year that they are imposing the penalties. Last year was the unofficial grace period. To enforce it, they [IRS] have mandated that all employers send out a form to their employees that validates or verifies they have health insurance. If you can’t verify that you have health insurance you are subject to that penalty.” Wright explains.
The “alternative minimum tax” (AMT) can be very confusing to middle-class Americans. Essentially, since certain benefits or tax breaks can significantly reduce a taxpayer’s regular amount, the IRS created the AMT to set a limit on those benefits--and ensure a minimum tax burden on taxpayers. AMT ensures that taxpayers pay at least a minimum amount of tax.
According to Wells Fargo, the AMT exemption amount for tax year 2015 is $53,600 for individuals or $83,400 for joint filers. This is up slightly, about 1.5% from 2014. Also, for the new tax year starting in January, income tax thresholds have again been adjusted up for inflation. The highest tax rate of 39.6%, for instance, will now apply to single filers who make over $413,200 and married couples making $464,850. Both figures are up about 1.6% from tax year 2014.
“Alternative minimum tax is a scary term that suggests to everybody that you’re going to be hit with it, if you make over these amounts. The $83,400 for joint filers--a lot of people are afraid they’re going to get hit with AMT, if they make over that amount, but they may not be. Because it’s characterized by a combination of factors.” Wright says.
“It’s a combination of the deductions you get for the number of individuals in your household, the type of deductions you take- so it’s not as straight forward as saying everyone who has over $83,400 as joint filers will or will not be hit with AMT. You can have somebody in that income level who has 6 children, so they have the deduction of all those dependents. That factor could trigger AMT. Or if they have a significant amount of tax-free income, it could trigger AMT. It’s very difficult to generalize about it- people shouldn’t be as afraid of it as it might seem because it doesn’t really hit as many people as you might think.”
An opportunity when filing for your 2015 taxes is that the limit on employee contributions to a 401(k) plan will increase to $18,000, up $500 from 2014's cap. This means you can adjust up your contribution starting on the first of the year to ensure you save the maximum allowable in 2015, Wells Fargo says.
Also, the “catch-up” allowance for those older than 50 has also been increased, allowing for an additional $6,000 in contributions instead of the $5,500 cap previously in 2014. These new contribution levels are also applicable to 403(b) accounts and most 457 retirement plans, as well.
Wright suggests increasing the amount you contribute to your 401(k) and IRAs, getting as close to the maximum amount as possible. “For example in 2016, the 401(k) maximum is $18,000, but if you are 50 or older and can do the ‘catch-up,’ you can put another $6000 in there, which is good. Most people can’t max out on this until they get into that age bracket anyway because they are too busy paying for their kids to go to school.”
Something that is different this year that could potentially trip up taxpayers is that some of the new IRS rules are targeting individuals who withdraw funds from one IRA and place them in a new account--essentially creating their own short term, interest-free loan. Due to this new practice, you can only make one single rollover from an IRA in a 12-month period, a concern for those who looked to retirement funds as a quick source of money. You can still make as many “trustee-to-trustee” or plan-to-plan transfers as you wish, but to protect yourself, limit all rollovers to direct transfers in 2015, if you plan to move money more than once.
A final “catch-22” in the 2015 filing season is that for those who did not use all of their Flex Spending Account (FSA) amounts by the end of the year, as of 2013, could roll over $500 from an FSA into the next plan year. However starting this filing season, these individuals are ineligible to participate in a Health Savings Account (HSA) for the year they rolled over an amount from a general purpose FSA.
South Carolinians this tax season should know that adjustments at the federal level are also available at the state level, except for state income tax. For example, if you are an individual who is being penalized for not having health insurance or was affected by AMT, South Carolina offers some form of “off-setting” of those penalties.
“You may pay a penalty at the federal level, but they sort of add it back, so that it doesn’t impact you at the state level. South Carolina says that what is your federal adjusted income, we’re going to start from there; we might add back your state income tax, but we’re not going to penalize you uniquely in South Carolina--we’re going to track along with the federal.”
Rosemary Wright also highlights the importance of assessing damages due to the flood this tax season.
“If people had any losses pertaining to the flood back in October, they need to be sure to take advantage of anything in their taxes that they could get or claim a loss for uncovered disaster related expenses. South Carolina actually has something called a catastrophe savings account. That is something unique--if people have a high premium on their home owner’s insurance, within certain criteria, they can fund a catastrophe savings account.” says Wright.
“You can fund it and turn around and take the money out of it. If they have any uncovered losses from the flood, they can put a few thousand dollars into a catastrophe savings account and turn right back around and take it out and not have to pay state income taxes on it.”
New to filing your taxes?
“Use one of the tax preparation software that are out there.” Wright suggests. “They will walk you through those [deductions, penalties] and ask you those questions so you don’t have to be a numbers person, and you don’t have to remember all of the details of the law; you just have to answer the questions that the planning software asks you. It will walk you through and capture that information for you.”