Nov 06

For Tax Geeks like me, it’s an exciting time when the new tax tables are announced by my friends at the IRS. If you’ve been reading this blog for a while, you know how taxes work, more or less. The tables aren’t the actual tax you pay on gross income, but on taxable income which is gross less a number of items, including the personal exemption which rises to $3,950 in ’14 and the standard deduction for single $6,200 or joint $12,400. 

I’ll be referring back to this article over the next year whenever the tax table is part of the conversation. Check out the new rate table and start planning for 2014.


Taxable income is over But not over The tax is Plus Of the amount over
$0 9,075 $0.00 10% $0
9,075 36,900 907.50 15% 9,075
36.900 89,350 5,081.25 25% 36,900
89,350 186,350 18,193.75 28% 89,350
186,350 405,100 45,353.75 33% 186,350
405,100 406,750 117,541.25 35% 405,100
406,750 118,118.75 39.6% 406,750

Married Filing Jointly
Qualifying Widow(er)

Taxable income is over But not over The tax is Plus Of the amount over
$0 18,150 $0.00 10% $0
18,150 73,800 1,815.00 15% 18,150
73,800 148,850 10,162.50 25% 73,800
148,850 226,850 28,925.00 28% 148,850
226,850 405,100 50,765.00 33% 226,850
405,100 457,600 109,587.50 35% 405,100
457,600 127,962.50 39.6% 457,600

written by Joe \\ tags: , ,

Jul 02

A Guest Post from Ryan -

Being in college, the whole money-management and doing your own taxes thing can feel cumbersome. You may get the “final exam” feel while doing it, but the difference here is that this test involves money. However, with a bit of research and preparation from your end can make things easy and help you make the most out of this “test”. So how do you go about making this tax exam easier? Let’s find out:

#1: File

Don’t make much money? It still makes sense to file even if you don’t have to. Not having a lot money shouldn’t stop you from filing because if you have had cash withheld from past paychecks then you will see a refund coming your way. This might seem like a simple tip but it will work in your favor in the long run.

#2: Begin Early

Don’t worry if you haven’t got your W-2s yet. You’ll find the needed tax information (how much you earned and how much was withheld) with your final pay stub. If you feel like you need a helping hand then you may want to check with your college’s account department. There you should find students offering to help with taxes for free to gain practice in “real life” returns. Don’t wait too long for seeking on-campus help because the closer April 15th gets, the more difficult it is to find help.

#3: Take Your Time

It’s a good idea to give yourself a weekend to fill out your forms. Will it take that long? No, of course not. But the ample amount of time you have on weekend will give you the space to take breaks when and if needed and double or triple check everything before you mail your return. If you want to take a safer route, do your returns on a leisurely weekend, then seek outside help/ask any questions the following week and then finally send it the next weekend after checking your numbers one last time.

#4: Practice on Paper

If you choose to file taxes online, it is better to go through the paper forms, fill them out and get rid of any bugs before taking the final step. Your aim here is to ensure that the whole filing process goes smooth without any obvious mistakes that can be avoided with some practice. Remember, clarity is the key to getting things right the first time.

#5: Know About Your Family’s Financial Picture

Talking to your parents about money and finances is not easy for any college student. But then it’s important that you learn about their financial situation in order to plan who should be claiming as their dependent and using your education deduction or credit. Keep in mind that if your parents are taking care of fifty percent of your expenses, then you can be listed as a dependent on their taxes.

Every college student knows the importance of money, and so should you. But what’s more important than that is understanding how to manage your finances and get them in order so that you can study with peace of mind.

written by Joe

May 07

After I wrote The Step Transaction Doctrine at my companion site, RothMania, I received a number of emails asking about situations where this might apply. Here’s an example of another disallowed series of transactions:

A) A son and wife are in a high tax bracket. Enough so the AMT effect causes there long term capital gain to be taxed at 22.5% (really 15% plus extra due to AMT). They gift the son’s parents $50,000 in appreciated stock.
B) The parents, who are in a low bracket, sell the shares and have no tax due as there’s no cap gain tax if you are in the 10 or 15% bracket.
C) Parents then gift their son and his wife $50,000, the proceeds of the sale.


In a Q&A a few years back my favorite IRA author Ed Slott offered a definition of the Step Transaction Doctrine:

The step transaction doctrine can be a bit complicated, but essentially, when applied it treats what are actually several independent steps as if they were a single transaction for tax purposes. 

There are three different tests which have been used to determine if the step transaction doctrine should apply. One test, commonly referred to as the “binding commitment test” applies when there is a commitment to complete a later step in an overall transaction at the time the first step is made. Since an IRA contribution (deductible or not) does not require that one convert the contribution to a Roth IRA, this test is a non-factor here.  

Another test that is used to determine if the step transaction doctrine should be applied is the “mutual interdependence test.” This test looks at each step in an overall series of steps and determines if a specific step is meaningless unless the later step(s) actually occurs. Since a non-deductible IRA contribution is clearly beneficial (read “not meaningless”) on its own, this test is also a non-factor.  

The third and final test, known as the “end result test,” is the most applicable for this discussion. Under the end result test, the steps in a transaction are looked at to see whether the series of steps were really just predetermined steps of a single, overall transaction, aimed at achieving a specific outcome. Do clients make IRA contributions with the idea that they will later convert them? Sure. So is it possible for IRS to raise issues with this strategy in the future? Yes, but it’s not a likely scenario.

You can see that each of these events, taken alone, is perfectly legitimate. It’s only when they are combined in this way that the IRS combines the transactions and would go back to our Yuppie couple along with a tax bill.
The key thing to ask yourself is whether each event was legitimate, and in this case, there’s really no bona fide gift to anyone, the transactions are simply tax avoidance. Will you get caught? That’s the wrong question. You see, once you start asking what your chances are, it’s a slippery slope. Best to avoid deals that look like this regardless of what your ‘advisor’ tells you. At RothMania, a reader’s brother has a tax attorney who was encouraging him to skirt this rule, either that or the lawyer was completely ignorant of it. In either case, I’d stay clear of any advisor who makes such proposals.  If it sounds too good to be true, it might just be tax evasion.

written by Joe \\ tags: , ,

Apr 08

A pre-taxday guest post from Home Daddys’ Mike Freidberg -

Save yourself time and money

April is upon us, and as usual, a majority of Americans are scrambling to get their taxes figured out so they can file on time. As we near the big day, here are 10 of the most common mistakes made by Americans that you shouldn’t be making.

Filing late

One of the biggest mistakes Americans seem to make every year is that they file their taxes late. It’s one of the most talked about dates during the year, rivaling Christmas and New Years in media attention every season. While exact numbers of how many Americans forget to file on time is hard to pin down, the IRS apparently thinks it’s a big enough issue that last year they decided to increase the penalty for filing late, and hire scores of new employees to help enforce it.

Avoiding filing because you can’t pay

You should know that the IRS sets the penalty for not paying and the penalty for not filing separately—meaning even if you can’t pay, you can avoid significant penalties by applying for an “offer in compromise”, or making monthly installments on your tax bill. None of these options are particularly attractive, so you’re better off saving up for tax day, but there’s never a good reason to put off filing.

Under-reporting your income

Whether you use a W-2 or a 1099, there’s absolutely no point in reporting less earnings than you actually received. Your employers and clients have to report what they’ve paid you, and they’ll be sure to declare every penny to keep their own taxes low—so if your numbers don’t match theirs, the government won’t have any trouble finding out about it. Snag every possible deduction you can, but never lie to the IRS.

Incorrect business deductions

The IRS spells it out pretty clearly on their website what can be used as a deduction for your business. Take some time to review it and figure out what deductions apply to you. If you do operate your own business, be prepared by ensure that whoever you use for your merchant card services provides you with annual or quarterly statements for your records.

Claiming phony dependents

It’s hard to see your children leave the home and head off to college, but it’s even harder a couple years later when you realize you can’t claim them anymore. It’s not difficult for the government to cross check your tax returns with those of your dependents, so do yourself a favor and stop claiming them they start paying their own income taxes.

Missing charitable contributions

Turns out America is a pretty generous country when it comes to charitable giving, but many filers forget or neglect to fill out this portion of their taxes. It’s an easy write off and a great way to ensure your money is going to the exact causes you want. Be sure to include any donations you make to Goodwill, as well as any religious organizations or non-profits you support.

Getting your math wrong

Use a calculator. Better yet, e-file. Bad math can not only cost you on getting back all your refund, but it can even spur an audit if you mess up badly enough. Have someone else double check your figures before you file.

Mike Freiberg is a staff writer for HomeDaddys, a resource for stay-at-home dads, work-at-home dads, and everything in between. He’s a handyman, an amateur astronomer, and a tech junkie, who loves being home with his two kids. He lives in Austin.

written by Joe \\ tags: ,

Mar 14

Note – this ‘letter’ is to my mother-in-law, whom I sometimes just call ‘mom,’ even though she’s fine with my using her first name. She’s a widow, and in her 80′s.

Dear Mom,
It’s no burden for me to do your taxes, in fact, I enjoy the process. After you and dad (who passed away almost 8 years ago) told me what you were paying for your tax guy, I thought I could save you that money to spend on something else. The fact that the tax guy wasn’t really a financial planner also gave me the opportunity to offer some advice that would help save on your tax bill each year.

I just looked at the folder of paper to start doing this year’s return. Wow. A lot more than we really need. Here’s why – you don’t itemize. To take any deduction for medical expenses, you need to be out of pocket more than 7.5% of your adjusted gross income. Even though your bills feel like they were in the thousands, the amount you had for copayments didn’t even add up to $1000. Your standard deduction is $7400. Your Condo property tax and interest (you own your unit, but there’s a master mortgage on the property) along with your donations aren’t anywhere near this. A few years ago, when you had one really large donation we used a Qualified Charitable Distribution from your IRA. Since you were going to make that donation anyway, by using money from your Required Minimum Distribution (RMD), it made that distribution tax free. I thought that was pretty cool, but this year it was pages of small donations, so we agreed to pass on the QCD trick.

All in all, there are a handful of numbers to enter. Your pension, dad’s pension you still receive, social security, and the transactions from your brokerage accounts. What makes it even easier is that TurboTax (disclaimer, right here, for FTC, this is an unpaid mention) will pull the yearend data from your Schwab (FTC – ditto) account, so I don’t even type those numbers in.

The other thing I do for you is to convert a bit of you IRA each year to your Roth account. This way you pay 15% on the money, and it keeps growing tax free. If we didn’t do this, your RMDs would keep increasing each year and you might be pushed into the 25% bracket. You’re not even spending your RMD, and the girls and I keep telling you that you should spend more on yourself. But, if you need to withdraw more than your RMD and should start to hit the 25% bracket, you can use the Roth money. If I did two thing right for you, it was this – a balance of stocks and CDs so you were buying in at the bottom, and rebalancing at the tops. You have more now than you did 10 years ago, even after withdrawals. And keeping your tax rate right at 15%. This is one strategy that’s perfect for someone in your situation, just enough income to let you convert a bit each year to top off that bracket.

I hope you understand a bit better why I don’t need all that other stuff every year, but I’m pretty sure it will all be there next year when I look at your 2013 return. And I’ll explain again, ‘you don’t itemize!’

written by Joe \\ tags: , , , ,