Be sure to pay your January state estimated tax payment by December 31st to get the Federal deduction for this year’s tax return. This has two benefits, it decreases the tax for the current year and decreases the Federal estimates due for the following tax year. Note: If you believe your income has increased and you will owe taxes with your State return in April, you should increase your 4th quarter estimate for payment in December. However, keep in mind if you are subject to AMT there may be no benefit to prepaying your state taxes.
Paying electronically is the easiest way to pay your federal taxes. Go to www.irs.gov/Payments for payment options. IRS allows you to pay directly from your checking account, or use a credit or debit card to make a payment.
Each year you are allowed to deduct $3,000 of net capital losses against ordinary income. Any net losses in excess of $3,000 will be carried forward to offset future capital gains. If you have stocks with losses, you may want to consider selling those for the loss. However, keep in mind the "wash sale" rules. A "wash sale" occurs if a taxpayer sells stock or securities at a loss and, within 30 days before or after the sale, directly or indirectly buys or trades for substantially identical stock or securities. Call us if you have questions on these rules. Note: You should never let taxes affect good investment decisions.
If you make substantial charitable contributions in cash while holding investments (stocks and bonds), consider gifting investments that have increased in value instead of cash. A double benefit results: the gain on the investments is not taxed and the fair market value is deductible. Conversely, if you hold an investment that has decreased in value, you should sell it and give the cash proceeds. By doing so, you can deduct the loss (up to $3,000) and deduct the cash contribution.
The "Kiddie Tax" taxes a child's unearned income in excess of a certain threshold at the parents' rate. Unearned income is income from investments, such as interest or dividends. For this year’s threshold, see “Annual Updated Tax Numbers” under Resources on our website. A child that is considered a full-time student, under the age of 24 at the end of the tax year is potentially subject to the Kiddie Tax. A dependent child, under the age of 24, who has unearned income in excess of $2,000 and whose earned income does not exceed one-half of their support, would be subject to the Kiddie Tax.
If your income is up significantly, contact us in November or early December to prepare an estimate of taxes you will owe for the year. Knowing the taxes due will allow you to prepay your State taxes to reduce your current year Federal taxes (if AMT does not apply), set your mind at ease and plan your cash needs. If we do not prepare an estimate of taxes, we suggest you get your information to us early in tax season so we can prepare your returns well before April 15th. If tax is due, you will have plenty of time to accumulate any additional cash needed by April 15th.
If your business activities are more profitable this year, be sure to hold back additional cash to cover the related tax due. For most people, a reasonable percentage to set aside is 40% of the increase in NET profit (revenue less expenses). For those taxpayers in the 33% or lower tax bracket, you should consider withholding 40% to 50%. This estimated percentage includes both Federal and State income taxes and self-employment taxes. If would like a more accurate percentage or are in the top tax bracket(s) you should contact us to prepare a tax projection for you.
A Medicare surtax of 3.8% is charged on the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over a set threshold amount. The threshold is $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all other filers.
Net investment income includes the following items of income reduced by applicable expenses: interest, dividends, capital gains, annuities, royalties, and passive rental and business income. It excludes tax free interest and retirement plan distributions.
Employees must pay an additional 0.9% Medicare tax on earnings that exceed a certain threshold. Thus, raising their top Medicare Tax rate to 2.35%. Self-employed individuals will also owe an additional 0.9% on all self-employment income in excess of the threshold. The threshold is $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all other filers.
North Carolina previously provided a tax credit for education expenses for children with disabilities. This credit has been repealed, however, in its place, a scholarship grant has been provided to fund services for these children in a nonpublic school setting, including homeschools. In order to be eligible for a scholarship, the student must be under age 22 and meet certain criteria. Applications must be made with the North Carolina State Education Assistance Authority. More information can be obtained at www.ncseaa.edu/CDSG.htm.