There is more to your tax puzzle than just your income and expenses. Your investments, pensions and other financial holdings are also factors. We have created this section to help you sort through your tax obligations and how to possibly reduce them. Please contact us today (firstname.lastname@example.org) with any additional questions you may have.
Do you want to contribute to your Individual Retirement Arrangement (IRA) for the last tax year, but fear you’ve run out of time? Relax. The IRS allows you to put money into your IRA or Roth IRA until April 15 when you file your taxes for last year. This does not include extensions. Make sure you tell the IRA trustee that your contribution should be applied to last year. If not, the trustee may assume it is for the current year.
Traditional IRAs—The IRS may allow you to take a tax deduction on contributions you’ve made to your IRA depending whether you or your spouse, if filing jointly, are covered by an employer's pension plan and your total income.
Roth IRAs—You cannot deduct contributions to your Roth IRA, but the earnings on it may be tax-free if you meet the conditions for a qualified distribution. In most cases, you can contribute a percentage of your earnings for the current year or a larger, catch-up contribution if you are age 50 or older.
If you qualify, you can fund a traditional IRA, a Roth IRA or both, but your total contributions cannot amount to more than $5,500 annually or $6,500 if you are age 50 or older.
You have the option to claim a deduction to your traditional IRA on your tax return before the contribution is made. However, the contribution must be made by the due date of your return, not including extensions.
If you report a contribution to a traditional IRA on your tax return, but fail to contribute to it by the deadline, you will have to file an amended tax return by using IRS Form 1040X, Amended U.S. Individual Income Tax Return. The amount originally deducted must be added to your income on the amended return.
Contact Mark S. Freedman, CPA, Inc. with any of your IRA contribution questions.
Capital Gains and Losses
What is a capital asset? Almost everything you own and use for personal purposes, pleasure or investment is considered to be a capital asset. When you sell a capital asset (e.g. stocks), the difference between the amount you sell it for and what you paid for it is a capital gain or a capital loss. You must report your capital gains to the IRS. If you have capital losses, you are only allowed to take a deduction on investment property, not on personal property.
A “paper loss”—a drop in an investment's value below its purchase price — does not qualify for a capital loss deduction. The loss must be realized through the sale or exchange of an asset.
The IRS classifies capital gains and losses as long-term or short-term, depending on how long you held the property before you sold it. If it’s been more than one year, your capital gain or loss is long-term. If you have held it one year or less, your capital gain or loss is short-term. IRS Publication 544, Sales and Other Dispositions of Assets offers more insight on these distinctions. If your capital losses are higher than your capital gains, the excess amount is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately). Unused capital losses may be carried over year after year and be used to balance out capital gains, but the annual limit still applies.
To report capital gains and losses use IRS Form 8949, Sales and Other Dispositions of Capital Assets, summarized on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.
Keeping track of your capital gains and losses can take up a chunk of your time. To stay on track with your finances and taxes, contact the accounting experts at Mark S. Freedman, CPA, Inc.
Coverdell Savings Accounts
If you have children and want to make sure you’ll have enough money to send them to college, you may want to consider a Coverdell Education Savings Account (ESA). This college savings account gives both parents and their children an incentive to save for educational purposes.
You cannot contribute more than $2,000 per year to your Cloverdale ESA if the beneficiary is younger than 18 years of age or has special needs. These accounts have gained in popularity because your beneficiary will not owe tax on the distributions if the distributions from an account are not more than a beneficiary's qualified education expenses at an eligible education institution for an entire year. This benefit applies to all levels of educational costs from elementary and secondary to college level.
Anyone can contribute to your ESA if their modified adjusted gross income (MAGI) is less than the annual maximum. To determine your maximum contribution to the fund, you may have to give back some of the deductions you took in your adjusted gross income calculations. The IRS offers a calculator on their site to help you with this. Your MAGI is the amount your AGI would have been had you not taken certain deductions. Cloverdale ESA contributions may be made until the due date of the contributor's return, without extensions.
To find out how to set up a Cloverdale ESA or other type of educational fund, or to calculate your IGA or MAGI, contact our team at Mark S. Freedman, CPA, Inc.
ROTH IRA Contributions
Confused about whether you can contribute to a Roth IRA? Here are the IRS rules pertaining to Roth IRAs.
Income: To contribute to a Roth IRA, you must have compensation (e.g., wages, salary, tips, professional fees, bonuses). Your modified adjusted gross income (AGI) must be less than:
Age: There is no age limitation for Roth IRA contributions. Unlike traditional IRAs, which do set an age limit, you can be any age and still qualify to contribute to your Roth IRA.
Contribution Limits: If your only IRA is a Roth IRA, the maximum current year contribution limit is the lesser of your taxable compensation or $5,500 ($6,500 for those 50 or over). The maximum contribution limit phases out if your modified adjusted gross income is within these limits:
Contributions to Spousal Roth IRA: You can make contributions to a Roth IRA for your spouse provided you meet the income requirements.
Please note that threshold amounts listed above are for the tax year 2015. They may or may not apply to future years tax returns.
For sound financial and tax advice contact Mark S. Freedman, CPA, Inc. today.
Deducting Mortgage Interest
You can claim a deduction for the interest paid on your home loan. To be deductible, the interest you pay must be on a loan secured by your primary or second home.
If you own a home, and you itemize your deductions on Schedule A, you can claim a deduction for the interest you’ve paid. According to the IRS, to be considered deductible, the interest must be on a loan secured by your main home or a second home (including a second home that is also rented out for part of the year, so long as the personal use requirement is met). The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. To be eligible, the loan must be secured by your home. However, the proceeds can be used for other than home improvements. You can refinance and use the proceeds to pay off credit card debt, go on vacation or buy a car and the interest will remain deductible. There are other financial reasons for not wanting to do this, but it will not disqualify the deduction.
The interest deduction for home acquisition debt (that is, a loan taken out after October 13, 1987 to buy, build, or substantially improve a qualified home) is limited to debt of $1 million ($500,000 if married and filing separately). The interest deduction from your home equity loan is also not unlimited. You are allowed to deduct interest you pay on the first $100,000 of a home equity loan. Debt incurred to buy, build or substantially improve your home in excess of the $1 million home acquisition debt limit may also qualify as home equity debt.
Points paid on the original purchase of your residence may also be deductible. If you pay mortgage insurance premiums, you may also be able to deduct this amount subject to certain income limits. For more information about the mortgage interest deduction, see IRS Publication 936 or contact Mark S. Freedman, CPA, Inc., with any questions you may have.
Tax Savings Techniques
Below are some financial planning tools to help you reduce your tax bill.
Roth IRAs: Contributions to a Roth IRA are not tax deductible. However, the qualified distributions, including earnings are tax-free.
Municipal Bonds: The interest earned on municipal bonds is tax-exempt.
Charitable Giving: Do you own appreciated long-term securities? Instead of selling them, consider donating the stock. It will allow you to avoid tax on an unrealized gain and get a charitable tax deduction for the fair market value of the stock.
Own a home: The interest on mortgages up to $1,000,000 is tax deductible. When the property is sold, you may exclude up to $250,000 ($500,000 if Married Filing Jointly) of the gain.
Health Savings Accounts (HSAs): HSA’s are great ways to save in taxes and to put away money for your medical expenses. If you have a high deductible medical plan, you can make tax-deductible contributions to an HSA site. Unlike flexible spending arrangements (FSAs), HSA contributions can carry over for medical expenses in future years.
Retirement Plans: Participate in your employer sponsored retirement plan, especially if there is a matching component. You will receive a current tax deduction and the tax-deferred compounding can add up to a large retirement savings.
Mark S. Freedman, CPA Inc.
8949 Reseda Blvd., Suite 123
Northridge CA 91324