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Income Tax Return Considerations

2016 Considerations in Filing Income Taxes

There were no major tax law changes in 2015. But there some things to keep in mind for filing your taxes in 2016.

Targeting of identity thieves

In response to the growing issue associated with identity theft, 20 new pieces of data will be used to validate tax returns in 2016. It is expected this step will help validate the authenticity of taxpayers and tax return data. However, this additional step will likely slow the IRS processing. So be patient, it could mean some delays in issuing refunds.

New tax deadlines

The federal holiday Emancipation Day is celebrated on April 15 pushing the usual due date for annual 1040 filings to Monday, April 18. Taxpayers in Maine and Massachusetts have until April 19 to file their federal returns because offices there will be closed on the 18th for Patriots’ Day.

Obamacare tax penalties, credits

As a result of the Affordable Care Act, penalties begin for not having minimal essential medical coverage. The amount is based each month on the A household of 3 or more could face a maximum penalty of $975. The maximum penalty for the 2016 tax year increases substantially to $2,085.

A federal premium tax credit is available to eligible taxpayers, regardless of whether they bought their coverage on the federal exchange or through state marketplaces. However, individuals who are eligible to enroll in certain employer-sponsored coverage or government health coverage, like Medicare, Medicaid, or TRICARE, are not eligible for the premium tax credit.

Same-sex state tax filing

Due to the U.S. Supreme Court ruling in June 2015, on the tax front, that means gay and lesbian married couples now can file joint tax returns on the state level just like on the federal level. It could be financially beneficial for same-sex couples to check with their state tax departments about the potential of amending prior-year returns that were filed as single state taxpayers.

Harder to hide international money

The Foreign Account Tax Compliance Act, or FATCA, was enacted in 2010 and requires foreign financial firms to report account data for their U.S. account owners or face stiff penalties. It now is automatically exchanging digital financial account information with tax authorities abroad. So penalties and potential criminal prosecution may be avoided by disclosing any such obligations now.

Proving education tax break eligibility

It is never too late so you might be taking classes. If so, good for your! Do you depend on federal tax breaks to help pay for your higher education?

Starting with the 2016 tax year, you’ll have to prove you’re actually in class with Form 1098-T to get any tax break. Your school should send you this form.

MyRAs and ABLE accounts open

As of Nov. 4, 2015 a myRA account became available to lower-income earners as a retirement savings plan with minimal contributions and no fees. There are no immediate tax benefits, but the account grows tax-free. In addition as of Jan 1, 2015, The Achieving a Better Life Experience (ABLE) account option became available to help people with disabilities save and pay for disability-related expenses. These accounts are not tax-deductible, but withdrawals for qualified expenses are free from federal taxation.

Fantasy sports fallout

Maybe you have become a fan of the new craze, Fantasy Football. Be aware, the IRS now considers the money made on fantasy sports as taxable hobby income. If or when the games are determined to be gambling, there will be a change how you are able to deduct any of the costs and losses against winnings.

Persistent tax scams

Scams continue to be a problem but are of particular concern for seniors who may be more vulnerable. Scams such as fake IRS agent phone calls, email phishing and other identity theft attempts may grow during tax season. And these criminals find new ways to scam people every year. Protection includes your diligence in protecting your tax data.

Do I Need to File Taxes?Income tax return breaks, write-offs and deductions for senior citizens

Per IRS publications, if you are unmarried senior citizen at least 65 years of age, then you must file an income tax return if your gross income is $11,500 or more. If you are married and file a joint return with a spouse who is also 65 or older, you must file a return if your combined gross income is $22,900 or more. If your spouse is under 65 years old, then the threshold amount decreases to $21,700. Keep in mind that these income thresholds only apply to the 2014 tax year, and generally increase slightly each year.  Your taxable income can vary based on IRS guidelines.

If the only income you received during 2014 was your social security or the SSEB portion of tier 1 railroad retirement benefits, your benefits generally are not taxable and you probably do not have to file a return. If you have income in addition to your benefits, you may have to file a return even if none of your benefits are taxable.
Worksheet 2-B.A Quick Way To Check if Your Benefits May Be Taxable:

A. Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include
the full amount of any lump-sum benefit payments received in 2014, for 2014 and
earlier years. (If you received more than one form, combine the amounts from box 5
and enter the total.)
Note. If the amount on line A is zero or less, stop here; none of your benefits are
taxable this year.
B. Enter one-half of the amount on line A B.
C. Enter your taxable pensions, wages, interest, dividends, and other taxable income C.
D. Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income for:

  • Interest from qualified U.S. savings bonds,
  • Employer-provided adoption benefits,
  • Foreign earned income or foreign housing, or
  • Income earned in American Samoa or Puerto Rico by bona fide residents D.

E. Add lines B, C, and D and enter the total E.
F. If you are:

  • Married filing jointly, enter $32,000
  • Single, head of household, qualifying widow(er), or married filing separately and you
  • lived apart from your spouse for all of 2014, enter $25,000
  • Married filing separately and you lived with your spouse at any time during 2014,
  • enter -0-

G. Is the amount on line F less than or equal to the amount on line E?

□ No.None of your benefits are taxable this year.
□ Yes.Some of your benefits may be taxable. To figure taxable benefits, see Which Worksheet to Use – below

A worksheet to figure your taxable benefits is in the instructions for your Form 1040 or 1040A. However, you will need to use a different worksheet(s) if any of the following situations applies to you.

1) You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse were covered by a retirement plan at work. In this situation, you must use the special worksheets in Publication 590-A to figure both your IRA deduction and your taxable benefits.

2) Situation (1) does not apply and you take one or more of the following exclusions.

  • Interest from qualified U.S. savings bonds (Form 8815).
  • Employer-provided adoption benefits (Form 8839).
  • Foreign earned income or housing (Form 2555 or Form 2555-EZ).
  • Income earned in American Samoa (Form 4563) or Puerto Rico by bona fide residents.
  • In these situations, you must use Worksheet 1 in Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to figure your taxable benefits.

3) You received a lump-sum payment for an earlier year. In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in Publication 915. See Lump-Sum Election , later.

Base Amount

Your base amount is:

$25,000 if you are single, head of household, or qualifying widow(er) with dependent child,

$25,000 if you are married filing separately and lived apart from your spouse for all of 2014,

$32,000 if you are married filing jointly, or

$0 if you are married filing separately and lived with your spouse at any time during 2014

If you do earn other income, then you must determine whether the total exceeds $11,500. If you are married and file a joint return with a spouse who is also 65 or older, you must file a return if your combined gross income is $22,400 or more. If your spouse is under 65 years old, then the threshold amount decreases to $21,200.  This information is for 2013 tax year, and generally increase slightly each year.  Be sure to confirm thresholds for filing every year.

Marriage

It happens all of the time.  You have lost your spouse late in life and eventually found a partner to live out the remainder of your golden years.  If you are going to file a joint return and use your new last name (if you decide to change it), your Social Security card must reflect your married name. If you fail to change your name it can cause a processing or refund delay, or your personal exemption may be canceled, meaning a higher tax due.  File Form SS-5, Application for a Social Security Card at the local SSA office to formally change your name. Be sure to bring your original marriage license as proof of your name change.  Deciding whether to file tax returns as married filing jointly or married filing separately should involve a number of considerations.   These include:  Tax Rates, Deductions, Phase-out of IRA limits, social security taxation, home sale issues, allocation of tax due and tax refunds, passive loss limits, home mortgage interest, beneficiaries, title to property, wills, and capital gains.  Read more at xxx.  You should be aware that whether you were married on Jan 1 or Dec 31st, you still file as a married individual for the entire year.

Job Loss

If you recently lost a job, review Publication 4128, Tax Implication of a Job Loss for tax tips on the taxability of unemployment and severance packages, the tax impact of early IRA distributions, deductible expenses of searching for a new job, and more.

Get a New Job

A new job means that you can adjust your income tax withholding.  If you had a retirement plan with your last company, you’ll have to decide what to do with it when you land a new job. Cashing in on your plan is likely taxable.  If you’re relocating for a new job, you can deduct some of the moving expenses that your new employer isn’t paying for.  Also, you might be eligible for special employee tax deductions.

Medical Transportation and Expenses

You may be able to deduct the cost of transportation to and from visits to the doctor’s office. If you drive your own car, you can claim the mileage deduction, as well to any tolls and parking fees that you may incur. If you take public transportation to and from a doctor appointment, you may deduct those expenses as well.

Other medical expenses you can deduct include payments made to doctors, hospitals, nurses or laboratory fees, acupuncture treatments or inpatient treatment for alcohol or drug addiction, participation in weight-loss programs for specific diseases if diagnosed by a physician, prescription drugs, false teeth, eye glasses, eye surgery, wheelchairs, crutches, and guide dogs for the blind or deaf.  On your federal return, you qualify to deduct medical care expenses that exceed 10% of your adjusted gross income.  This deduction can only be taken if you itemize your deductions on Form 1040, Schedule A.   Even if you do not qualify for this deduction on your federal return, you may gain a tax advantage on your state return.  I suggestion you enter the data to be sure you take advantage of available tax benefits.

Disaster or Personal Loss

While enduring a loss may not seem to have any silver lining, the IRS has allowances for victims of federally declared disaster areas and those who have suffered personal or property losses.  You can claim disaster-related casualty losses on your tax return and may deduct disaster-related personal property losses not covered by insurance.  Go to IRS.gov for more information.

Tax Breaks for Homeownership

Homeownership provides many tax breaks.  Interest paid on your primary residence mortgage, up to $1 million dollars, is deductible as an itemized expense. If you take out a home equity loan or line of credit, interest on them, up to $100,000, is also deductible. Even the interest on a second home mortgage is tax deductible.  Property taxes you pay annually on your main house and any other residences you own are also deductible.

The tax benefit of a home gets even better when you sell it. Up to $250,000 in sales gain ($500,000 for married joint filers) on your home is tax-free as long as you owned the property for two years and lived in it for two of the five years prior to the sale.

Many home improvements, such as major additions, kitchen modernization, and landscaping, can increase the value and cost basis of your home (your investment in the home). A larger cost basis results in less profit that might be taxable.  And even some home upgrades, such as installing solar energy systems, get you an immediate tax credit which offsets some of your upgrade investment.

Tax Breaks in Divorce Situations

While you would not expect to go through a divorce in your golden years, it does happen.  Understanding how this event affects your taxes is important.  Like marriage, your filing status is determined on the last day of the tax year. If your divorce is final Dec. 31, then you are considered unmarried for the full year.

Either the husband or wife is typically given sole ownership of the family home in the divorce settlement. This could introduce a tax issue for the sole owner. Following divorce, when a single persons sells a home, the amount of profit exempt from capital gains is just $250,000 versus the $500,000 that married couple filing jointly can exclude. For this reason, some couples sell the house before the divorce and split the tax-free profits.  Alimony also has tax implications. It is taxable income to the recipient and can be deducted by the payee.

The legal costs associated with divorce, separation or support are typically considered nondeductible personal expenses since the costs are not incurred in the production or collection of taxable income.  However, the part of legal fees applied to producing taxable alimony is deductible by the alimony recipient.  Your attorney should identify what part of the fee relates to alimony.  You are subject to a 2% of adjusted gross income for this miscellaneous deduction.

General

Social Security benefits generally are tax-free as long as you don’t have a lot of other income.  And if you do have to file a tax return when you’re older, you can claim a larger standard deduction amount simply because you’re age 65 or older.  Tax implications of estate assets, including IRAs, is fairly complicated.  It is recommended you work with a financial advisor regarding the impact on your return and the proper data to enter.

Death

Upon the death of a taxpayer, an executor/executrix takes charge of the estate property and associated financial obligations.  The requirements for filing a return for a deceased taxpayer are basically the same as if the taxpayer was still alive.  Generally, if the taxpayer was married at the time of death, you should still file a joint return.  Otherwise, you should file as an unmarried individual, single or head of household, if you qualify.  Post-death income is taxable to the estate or trust, but is generally passed on to the taxable income of the beneficiary(s).

• Medical Expenses – Medical expenses paid before death are claimed on the final return as an itemized deduction as usual.  Medical expenses not deductible on the final return become liabilities of the estate and are deducted on the estate tax return.

• Charitable Contributions – Charitable contribution carryovers are lost if not used on the final return.

• Exemptions – The full value of the deceased tax payer’s exemption is claimed on the final return.

• Unrecovered Investment in Pensions – If a retired person dies before recovering the entire basis in a pension or annuity (with a start date after 1986), the unrecovered portion is allowed as a deduction on the retiree’s final return.  If the annuity is for both the retiree and a designated beneficiary, the deduction would apply to the final return of the last one to die.  Otherwise, it would be allowed on the final return.

• Funeral Expenses – Funeral expenses are NOT deductible on the final or survivor’s income tax returns.  If an estate tax return is required to be filed, funeral expenses are an allowed deduction on it.

• Subsequent Years – In the years following the death of a spouse, and assuming the surviving spouse has not remarried, he or she would file as follows:

• Head of Household – This filing status is significantly more beneficial than filing as a single individual.

• Single – If the surviving spouse does not qualify for head of household, then you would be required to file as a single individual.

Inheritance Issues

Most people believe that inheritances are taxable.  That may or may not be true depending upon what is inherited.  The duty to file a tax return rests with the heirs.

Other tax considerations regarding inheritance include:

  • Inheritance advancement can be made by a living person pays to heirs but inheritance tax must be paid.
  • Any surviving spouse or live in partner does not have to pay inheritance tax but other heirs do and will have to fill in a inheritance tax form.•When the property of the deceased are assessed for inheritance tax, the tax base shall be the market value on the day of death. Real estate is valued in accordance with the real-estate assessment value.•Outstanding debts, funeral expenses and necessary costs associated with estate settlement, including anticipated taxes, will be deducted before inheritance tax is calculated.•A surviving spouse or live in partner may apply for cancellation or a reduction of certain taxes and levies from the Directorate of Internal Revenue, the local tax director and from the local municipality.  There is no guarantee the request will be approved.

Executors generally are eligible to receive compensation for their work, payable from the estate’s assets, but it is taxable. In some states, the compensation is based on the value of the estate and may equal that paid to the attorney hired to take care of the estate’s legal matters.  There would be a greater net tax benefit if you receive the executor’s fee, pay tax on that income, and the estate takes a deduction for the fee.

Life Insurance

Life insurance proceeds that you receive because of the insured’s death are not taxable to you unless the policy was turned over to you for a price. This applies even if the proceeds are paid under an accident or health insurance policy or an endowment contract.

Donating Decedent’s Property to Charity

Post-death donations are not deductible on the decedent’s final income tax return, and do not qualify to be deducted on the estate tax return unless the deceased tax payer’s will identified the charity to which the donation was to be made.  If you received personal property from the deceased’s estate and then donated it to a qualified charitable organization, you may be able to claim a charitable deduction as an itemized deduction on your income tax return.

Moving Out of State

Make sure that you check state residency rules. You might have to file as a part-time resident from the state you left and the one you moved to. Among the deductions that you might qualify for: amount paid to pack and store your household goods and amount it costs to travel from your old home to your new home.

As noted above, you might also qualify for a deduction on moving expenses if the move is work-related and it passes certain tests measuring how far you moved and the amount of time you spent on the job.