September 30, 2010
Tax rates are scheduled to go higher next year, with the top rate once again hitting 39.6%. For a look at tax rates over the years, here’s a partial history of our federal income tax rates for individuals since the income tax was created in 1913.
Federal Income Tax Rates Since 1913
Year Lowest bracket Top bracket
1913-1915 1% 7%
1918 6% 73%
1923 3% 56%
1925-1928 1.5% 25%
1936-1939 4% 79%
1944-1945 23% 94%
1964 16% 77%
1971-1981 14% 70%
1982-1986 12% 50%
1988-1990 15% 28%
1993-2000 15% 39.6%
2003-2010 10% 35%
September 27, 2010
Got college-bound kids? Then you might have questions about the kiddie tax, since these federal rules can apply to the unearned income of full-time students up to age 24.
Here’s an overview of the rules.
* The basics. The kiddie tax affects how much you’ll pay on part of the investment income your child receives, such as interest or dividends. When the rules come into play, this “unearned income” is taxed using your rates.
* How the tax is applied. For 2010, the first $950 of your child’s unearned income is tax-free. Tax is calculated on the next $950 using your child’s federal tax rate, which can be as low as 5%. Unearned income over $1,900 is taxed at your federal income tax rate, when that rate is higher than your child’s.
For an 18-year-old, the kiddie tax applies when your child’s earned income — that is, money received from wages, salary, tips, commissions, and bonuses — is less than half the cost of providing necessities such as food, clothing, and shelter.
The same 50% support exception applies when your child is a full-time student and age 19 through 23.
* Planning tip. Consider hiring your college student in your family business. Wages are earned income and can lessen or eliminate the kiddie tax.
Still have questions about the kiddie tax? Give us a call. We have answers, information, and planning strategies.
September 24, 2010
If nothing else, the recent financial meltdown provided an important learning experience and reinforced time-tested concepts about risk in investing. None of these lessons will comfort investors. However, we can still evaluate investment risks, at least on a relative scale.
Conservative investors fear loss of principal above all. They flock to lower-risk vehicles, such as Treasury bonds, CDs, and money market funds, which are comparatively well known and easy to understand. They’re willing to accept a lower ceiling on their potential earnings in exchange for a lower risk of losing principal. However, this reasoning ignores or underrates a different but no less serious risk: that inflation will outstrip the earning power of the investor’s savings, causing the principal to lose value even when achieving its maximum rate of return. In the worst case, conservative investors can outlive their investments.
Aggressive investors have no problem with risky investments if the investments carry a high profit potential. The more rational risk-takers recognize a corresponding loss potential and accordingly risk no more principal than they can afford to lose. Less rational people may continue to risk everything until little or nothing remains.
The wisest investors take a balanced approach. Since most have neither the time nor the resources to analyze individual investments in depth, they generally refer to advice and analysis provided by outside sources. They also diversify their holdings so that if one investment fails, their portfolios are not irreparably damaged.
The mix of assets in your own portfolio should reflect your risk tolerance, but it also should be tempered by an awareness that both extreme caution and excessive risk-taking can be pathways to ruin. In general, no one stock or other single investment (excluding mutual funds, which are bundles of investments) should comprise a major part of your portfolio. Varying the types of assets in your portfolio (foreign vs. domestic stocks, bonds, mutual funds, Treasury bills) can provide an additional margin of safety.
You can’t escape risk in the world of investments, but you should try to choose the investments that fit both your risk comfort level and your personal financial situation.
September 21, 2010
From time to time, some of you are lucky enough to win a shilling or two at your local casino, the track, or your state lottery. How will that gambling income impact your taxes?
All gambling winnings are taxable. This is true for cash winnings and for the fair market value of any non-cash prizes you might win (e.g., a car, vacation, etc.). Depending on your other income and the amount of your winnings, your federal tax on such winnings can go as high as 35%. You don’t receive any capital gains rate break for gambling winnings, nor is there any income averaging to help lower your tax bill.
However, you are entitled to a tax deduction for gambling losses. These are taken as an itemized deduction and your losses can’t exceed your winnings. In other words, if you report no gambling income, you can’t report gambling losses. When you gamble and lose, you must keep documentary evidence of your losses (canceled checks, credit card charges, losing tickets, ATM receipts, etc.). Many casinos keep track of your wins and losses for electronic games if you belong to their player clubs.
But gambling deductions might not be all that beneficial. You can’t simply “net out” your winnings and losses. Instead you must report your entire winnings as income, and use your losses as itemized deductions. In many cases (especially for older taxpayers with little income other than social security benefits, and with very few itemized deductions), the losses might not be tax beneficial. If you take the standard deduction rather than itemizing deductions, you will receive no tax benefit whatsoever. However, the winnings could have a significant impact on your income and may cause you to pay additional taxes (such as making some of your social security benefits taxable when they otherwise wouldn’t be)
September 17, 2010
The new health care law is confusing to many, and the con artists are wasting no time in taking advantage of people’s uncertainty about the new rules. State insurance commissioners warn that con artists are calling, e-mailing, and even showing up at people’s doors trying to sell insurance policies they say are required under the new law.
The facts are that the requirement to have health insurance doesn’t begin until 2014, and there is no jail sentence involved for those who don’t carry insurance.
Scam artists are preying on people who are uninformed or confused about the new health care law. To protect yourself, become familiar with the main provisions in the law. And be sure to follow the general guidelines to avoid becoming a victim of fraud: Don’t give your credit card, bank account, or social security numbers to anyone you don’t know, and don’t sign up for anything without checking its legitimacy.
September 14, 2010
On August 10, President Obama signed into law the “Education Jobs and Medicaid Assistance Act of 2010.” The law will fund the jobs of an estimated 140,000 teachers who would otherwise have lost their jobs, and it will help states with Medicaid costs.
To pay for these provisions, the law makes a number of changes to the foreign tax credit and eliminates the advance payment option for the earned income credit.
If you need details of provisions that affect you or your business, contact our office
September 10, 2010
All nonprofit organizations (except for churches and church-related groups) must file an annual return with the IRS. Failure to do so for three consecutive years results in the loss of the organization’s tax-exempt status. The filing deadline for the 2009 return was May 17, 2010, and thousands of small charities hit the three-year failure to file point on that date.
The IRS had conducted an extensive notification program to remind charities of their filing obligation, but large numbers still have not filed. Now the IRS has extended the filing deadline to October 15, 2010, hoping that small charities will bring their filings up to date and avoid losing their tax-exempt status.
If you are responsible for a nonprofit organization and need details or filing assistance, give our office a call.