What is the marriage penalty? How does it work and who has to pay the marriage tax penalty?

The marriage tax penalty exists when married couples have to pay more than double the taxes they would if they were two single people. This increased tax burden after marriage became known as the marriage tax penalty. It’s one of a handful of the financial consequences of marriage.

The marriage tax penalty doesn’t apply to everyone; it’s based on the income of both spouses. Depending on your income, some couples see a marriage penalty tax and some see a marriage tax break. Some married couples see no change to their tax liability.

Let’s take a look at the marriage tax penalty, an often confusing and overused term, to see what it really means and some of the typical situations when it might apply.

Marriage Tax Penalty

What is the Marriage Tax Penalty?

Some married couples have to pay more than double the taxes they would if they were two single filers. Owing more tax as soon as you married became known as the marriage tax penalty.

The marriage tax penalty exists because tax brackets for married couples are not exactly double the tax brackets for single filers for all income levels. Currently, the tax brackets are aligned for the bottom two tax brackets (10% and 15%), but not the other tax brackets.

When Does the Marriage Tax Penalty Apply?

The amount of tax penalty or tax benefit you see will vary based on your situation. In general, there are a few distinct categories of couples who see marriage tax benefits and marriage tax penalties.

Currently, couples with very different incomes often see a marriage tax benefit, sometimes called a marriage tax credit, under the current rules. Those taking the biggest hit as a marriage tax penalty are couples with similar high incomes and couples who previously had children.

Examples of Marriage Tax Penalties and Bonuses

Before we look at a few examples, you may want to review How Do Tax Brackets Work? To understand the tax penalty, you need to know that our progressive tax structure means you do not pay the same tax rate on all of your income.

Now, let’s take a look at some examples:

Spouses with Different Incomes. If two spouses marry with different incomes, there’s a possibility of a bonus. If a couple who earns $20,000 and $80,000 marry, their total tax bill on $100,000 of income will be lower. The spouse with the higher income will be able to fill in the unused lower tax bracket of the spouse with the lower income. In this example the couple would see a tax savings of over $2800.

Spouses with Similar Incomes. If two spouses with similar incomes marry, we need to look at income levels to see what the outcome will be.

  • Lower incomes. Usually there’s no penalty or bonus. If both couples earn $50,000 and marry, their tax bill will be almost exactly double their single tax bills and they won’t see a penalty or a bonus.
  • High incomes. However, when both couples earn higher incomes, the combined tax will be more than double their single tax. For example, a married couple earning $200,000 jointly will pay more than double what they paid in tax as two singles earning $100,000 each. In this example they would see roughly an $800 higher tax bill.

Spouses with Children. Historically, one of the culprits of the marriage tax penalty was a standard deduction that was only larger than, but not double, the single deduction. However, that was fixed and the married standard deduction is now exactly double the single standard deduction.

Although, if one spouse had children and was filing as a head of household and marries a single filer, their new married standard deduction will be lower than the sum of their previous standard deductions. A lower deduction often results in a higher tax bill.

Note that in the examples above, we are just looking at tax brackets and standard deductions. Once you add in the actual disparities in income and income level, the number of children you will claim as dependents on your tax return, and whether or not you itemize deductions each situation could be completely different!

How to Calculate Your Marriage Penalty Tax

To calculate a rough marriage penalty tax or marriage tax break to try to predict how it will impact your family, you can use the marriage penalty tax calculator from the Tax Policy Center.

For a very detailed impact of your tax situation you can use our full tax calculator. To use it as a marriage penalty calculator, fill it out twice, once as single and once as married to see the differences.

Marriage Tax Penalty History

When the 2001 Bush tax cuts were put in place, the marriage penalty tax was eliminated for most taxpayers by doubling the single standard deduction for married taxpayers. The tax brackets were also aligned accordingly at the lower tax brackets, so there wouldn’t be any additional taxes just for getting married in the bottom two income brackets.

However, the marriage tax penalty treatment is not consistent across all income levels, nor is it consistent with the treatment for families with children.

Married Filing Separate

Usually, married filing jointly is still the lowest tax for most couples. Using the filing status married filing separately is not a solution to get around a marriage tax penalty.

Unless you live in some specific states, you won’t see a benefit to filing separately. However, in some states, like Ohio, it’s often beneficial for spouses to use the married filing separate rather than to file joint as they have more tax savings.

To see if this applies in your state, you can calculate your tax liability both ways, joint and separate, to see which method will have the biggest tax savings. Before filing your tax return, input both scenarios in TurboTax to see the lowest tax liability based on filing status.

Managing Money in Your Marriage

Obviously, the marriage tax penalty shouldn’t drive your reasons for marriage or divorce. However, it’s important to understand the financial impact of marriage and discuss finances before marriage.

For helpful financial tips in your marriage see How to Manage Money in Your Marriage and Financial Management For Newlyweds.

If two spouses have very different incomes here are some ideas on How to Split the Bills When Spouses Have Unequal Pay.

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How long do you need to keep records? What about bank statements and tax records? A helpful guide on how long to keep all important papers.

How long do you need to keep records? When we don’t know how long to keep something, we end up keeping it forever… or not at all.

Being organized is not the same thing as keeping all papers and financial records forever!

How long do you need to keep bank statements? How long do you need to keep tax records? What about all the copies of paper checks after they were deposited?

How Long Do You Need to Keep Records?

It’s time to take the paper trail and purge all the extra records you don’t need anymore! Here’s how long we should be keeping those important papers:

How long do you need to keep records?

Forever

  • Birth Certificates
  • Marriage Certificates
  • Divorce Certificates
  • Death Certificates
  • Military Documents
  • Immunization Record
  • Employment Records (Why)
  • IRA Contributions (Why)
  • Social Security Card
  • Tax Returns: The IRS can audit your returns from 3 years ago; 6 years if you grossly under reported; indefinitely if you filed a fraudulent return or did not file. So you could pitch your returns after 7 years… however, if they claim you didn’t file, and you pitched it… well, now you know why I put tax returns on the indefinite list! You can also request copies or transcripts of past tax returns. For more details on how long to keep tax records, see the specifics on how long to keep tax returns below.

Keep During Ownership

  • Car Titles and Service Records
  • Receipts, Manuals, and Warranty Information for Appliances
  • Receipts for Major Purchases like Jewelry, Furniture, and Computers

Ownership Plus 7 Years

Even after you sell investments or real estate, you’ll still need to keep the gain or loss documentation for tax purposes.

  • Stocks, Bonds, and Investment Records
  • Savings Certificates
  • Home Improvement Documentation
  • Real Estate Records

7 Years

Many of the following will contain information that supports tax returns. Therefore it’s best to keep the following for seven years:

  • Canceled Checks
  • Credit Card Statements
  • Old Bank Statements
  • Retirement Plan Contributions
  • Supporting Documentation for Tax Returns

Until Specified Date

  • Annual Retirement Statements: Until retirement and funds are exhausted.
  • Insurance Policies – Until property is sold, policy expires, and all claims are settled.
  • Wills: Until replaced by a new one.

Throw Away

  • Receipts not used for Warranties, Taxes, or Insurance
  • Paycheck Stubs: Once you get your W-2, you can toss them
  • Phone Bills not needed for taxes
  • ATM Receipts
  • Grocery Receipts

How Long Do You Need to Keep Tax Records?

Special rules exist when it comes to your tax records. According to the IRS, here are the guidelines on how long to keep tax records:

Keep Tax Returns Forever

  • If you filed a fraudulent return, keep your tax returns forever.
  • If you did not file a return, keep your tax records forever.

Keep Tax Returns for 7 Years

  • If you claimed a worthless security loss or deducted a bad debt, keep your tax records for 7 years.

Keep Tax Returns for 6 Years

  • If you grossly underreported your taxable income (more than 25% of the gross income on your return), keep your tax return for 6 years.

Keep Tax Returns for 3 Years

  • If the above don’t apply, keep your tax returns for 3 years.
  • If you filed an amended tax return, keep your tax return for 3 years or 2 years from when you paid the tax if it’s later.

Other Tax Records to Keep
In addition to keeping your tax return, you’ll also need to keep information that supports those tax returns including:

  • Canceled Checks
  • Credit Card Statements
  • Old Bank Statements
  • Retirement Plan Contributions

More Ways to Get Organized





Did you recently start your own business and you need to learn how to calculate your self employment tax to file your tax return before the tax deadline?

If you are an individual who is self employed, you have many advantages over people who are employed by companies. Of course, you get to set your own hours and rates, which is something many other employees cannot do.

However, at the same time, you are required to pay your own self employment taxes, which can be somewhat complicated if you have never done so before. But don’t worry; once you walk through it, it’s pretty painless. Let’s walk through how to calculate self employment tax.

How to Calculate Self Employment Tax
How to Calculate Self Employment Tax

What are Self Employment Taxes?

People who are self-employed differ from those employed by an outside company in that they do not have a portion of their salary deducted from their pay. Therefore, there is no withholding of money toward taxes or for Social Security or Medicare. If you work for an outside company, the company pays half and the individual pays half of the Social Security and Medicare taxes. However, when you are self-employed, you must pay the entire amount of Social Security and Medicare taxes yourself. This is known as self-employment tax.

Self employment tax is separate from and in addition to state and federal income tax rates. Self-employment tax must be paid in addition to your regular income taxes. Self employment tax is applicable at any age, and you are still responsible for paying self employment tax, even if you are already receiving Social Security benefits or if you are a minor.

Self Employment Tax Rate

The self employment tax rate for 2016 is 15.3%. (12.4% for Social Security tax and 2.9% for Medicare tax). Since 2013 there is also an additional 0.9% Medicare Surtax that applies to earnings over the threshold for high earners.

How to Calculate Self Employment Tax

Calculating your self-employment tax is not as difficult as it may seem. Once your net earnings from self-employment are at least $400 (or church employee income of at least $108.28), you are responsible for paying self-employment taxes and filing a tax return. Here is how to calculate the self employment tax:

  1. Determine your net income. The net income for your business is income minus any of your expenses related to your work. For instance, if you have purchased a laptop and printer for your business, you are entitled to tally up the costs of them and other work related expenses and deduct them from your income. For a list of common expenses see Tax Deductions for the Self Employed.
  2. Calculate Net Earnings from Self Employment. To do this, multiply the net income by 92.35 percent.
  3. Calculate Self Employment Tax. Next, for any income less than the social security wage base (2015 and 2016: $118,500) multiply the amount by 15.3%. For any amount over the wage base, multiply by 2.9%. Add the two figures together to arrive at your self employment tax.

Self Employment Tax Calculator

If you don’t want to calculate your self employment tax by hand, you can use the tax calculator to calculate it automatically. In addition, if you are using tax software like TurboTax, the software will also calculate your self employment tax automatically.

Self Employment Tax Form to Use

When you are ready to file your taxes, you will need the Schedule SE for self-employment taxes. The self employment tax form is in addition to your regular Form 1040 and business Schedule C for profit or loss; they are all due on the same tax deadline.

Self Employment Tax Deduction

In addition to paying the self employment tax, you also get a personal tax deduction for paying it! You can deduct half of the self employment tax, which will lower your adjusted gross income, and lower your income tax.

More Self Employed Topics





I know, when it comes to taxes, most of us want to run the other way. But I am here to tell you that instead of running from taxes, you should embrace taxes. Am I crazy? I’m not sure as I’ve never been tested. But since taxes make up such a large part of our expenses, it’s important that you take the time to understand them.

taxes

You Don’t Need an Advanced Degree in Taxes

Before I get into the various reasons as to why you need to understand taxes, let me make one thing clear: you don’t need to become a tax expert. I am not asking you to get an advanced degree in tax accounting or even work in the tax accounting field. What I am asking is that you have a basic understanding of taxes.

This applies to both the basic idea of taxes as well as current and new tax law. Unless you’ve been living under a rock, tax law changes all of the time. Deductions and credits are modified to take into account inflation, as are exemptions.

Luckily, at the end of the year, publications have stories on all of the new and expiring tax laws coming in the new year. When you see a tax article in the newspaper or online, take the five or ten minutes to read through it. Heck, I’ll even settle for you skimming it and picking up pieces of information here and there along the way.

So why do I suggest you understand the basics of taxes along with some current and new tax laws? Here are three things to consider.

You Work Hard for Your Money

The number one reason as to why you should learn about taxes is because you work hard for you money. What’s the point of working 40 hours per week each and every year if you are going to give away more than you should in taxes? There isn’t much point. By learning the basics of tax accounting you will have a greater sense of comfort and control over your money.

Read More: How Do Tax Brackets Work?

Keep as Much as You Can for Yourself

You work hard for your money and you should work hard to keep it. I’m not suggesting you take part in tax evasion, but rather tax avoidance. Tax avoidance is simply doing the necessary steps to pay the least amount of income tax possible, legally. In other words, taking every deduction and credit you qualify to take.

By staying on top of new tax laws, you can run ideas by your tax accountant to see how you might be able to take advantage of them and save more of your money.

Read More: How to Calculate Self Employment Tax

No One Cares About Your Money as Much as You Do

Many of us use professionals to handle our taxes. But how certain are you that your tax preparer is applying every credit and deduction that you qualify for in your tax situation? If you have no clue about taxes, you cannot be certain at all. Trust me when I say that ignorance is no excuse.

I’m not putting down tax preparers when I say this, but they are stressed and have a lot of work to do during tax season. With all of the hustle and bustle and stress, it’s only natural that they might miss a credit or deduction here and there. After all, they are only human.

By understanding some basic principles of tax accounting, you can help yourself by asking intelligent questions without coming off as accusatory. You can simply ask, “I read about so-and-so deduction. Do we qualify for that”? That gives your accountant the chance to explain why or why not you qualify and if it was taken care of, assuming you do qualify.

Here’s one other reason: I’ve worked in a tax accounting firm. Many times, the smaller returns, as in the households without much income, or many deductions and credits, are given to the junior accountants and then reviewed by the senior accountants. When this is done, there are mistakes that can be made.

When I would put financial plans together for clients, I wouldn’t sit in the meetings; I would go off of the advisors notes. But if he didn’t write something down, I had no idea to include it in the plan. Same applies with the above. If the junior accountant misses something and the senior accountant doesn’t have the papers to see that it was missed, how would he catch the missing deduction? Chances are he won’t.

Read More: Do the Rich Pay More or Less in Taxes?

Final Thoughts

NBC sometimes runs little public service commercials on their channel entitled “The More You Know”. Understanding taxes is the same idea. The more you know about a subject, the better off you are. The more you know about taxes, the more you can strategically invest your money and save money so that you pay the smallest amount of tax legally possible.

As I mentioned before, you work hard for your money, so why are you willing to be so lax in keeping it? Make it point to learn a little bit about taxes so that you can be smarter with your finances and keep more of it. The more you keep, the more you can grow it and enjoy it.

Use TurboTax to work through your tax situation this year on your own. Did you get the same numbers as your tax preparer?

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Do your kids need to file taxes? Usually filing taxes for the kids is an afterthought. Only after people scramble to finish filing in time for the tax deadline do they realize they didn’t even think about the kids.

Will you remember to file taxes for your kids?

If your kids earn interest and dividends, or have a job, check out the requirements for filing taxes.

2016 Kids Tax Filing Requirements

If you claim your child as a dependent on your return, the kids need to file taxes if ANY of the following are true for tax year 2016 (due in 2017):

  • Earned income, from a job for example, is more than $6,300.
  • Unearned income, including dividends or interest, is more than $1050.
  • Self employment net earnings are more than $400.
  • Earned and unearned total income is more than the larger of $1050 or earned income plus $350.

Also, if interest, dividends and other investment income are more than $2,100 in 2016, you’re going to get hit with the kiddie tax (which means you’ll pay your tax rate on part of your child’s income).

Filing a Child’s Tax Return

You can file your child’s taxes for free at TurboTax.

If you want, you can also attach it to your return if the income is less than $10,500 and only from interest or dividends. This option is available to children under age 19 (or a full time student under 24) who are not filing a joint return using Form 8814.

A word of caution though, qualified dividends or capital gains may be taxed at a higher rate if you attach it to your return instead of filing the child’s return separately.

Before you file, use our tax calculator to estimate your child’s tax refund.

More Filing Requirements

There are other circumstances when children must file a tax return. For more information see Publication 929, Tax Rules for Children and Dependents.

For more information when others must file, see minimum income to file taxes.

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Wouldn’t it be great to not have to worry about taxes during retirement? As great as that sounds, the reality is you are going to be paying taxes until the day you pass away. As the old saying goes, the only two certainties in life are death and taxes.

But what taxes will you pay? Are there any ways to lower your taxes in retirement?

lower your taxes in retirement

(Photo Credit: stevepb/Pixabay)

3 Ways to Lower Your Taxes During Retirement

Luckily there are some strategies to help you save money on taxes. I am going to walk you through 3 things you can do to help lower the amount of tax you pay. But before you run out and start doing any of these things, make sure you speak to both your investment advisor and your tax accountant to make sure they make sense for your personal situation. The last thing you want to do is pay more taxes now or worse, make a move that will cause your retirement nest egg to not provide enough income for you through your golden years.

  1. Convert to a Roth IRA

    When you have money in a traditional IRA or a 401k plan, the tax law states you must start taking withdrawals once you reach age 70 ½. And since your contributions to your traditional IRA and 401k grew tax deferred, this means you will be paying taxes every year on these required distributions.

    On the other hand, there is the Roth IRA. With a Roth IRA, you make contributions after-tax, meaning that when you withdraw the money, you don’t pay any taxes. Plus, you aren’t required to take the money out when you reach a certain age. If you wanted, you could never touch the money and will it to your children or grandchildren.

    An option is to convert some or all of your traditional IRA or 401k plan balance over to a Roth IRA. You should do this before you reach 70 ½ years old so you don’t have to bother with required minimum distributions. The catch to this is that you will have to pay tax on the amount you convert.

    You might be wondering how this will lower your taxes in retirement. If you expect to be in a higher tax bracket at retirement, then doing this can make sense for you and save you money on taxes. For example, let’s say that your spouse still plans on working part-time and with your required minimum distribution and Social Security you will have taxable income of $80,000. That puts you in the 25% tax bracket (depending on how much of your social security is taxed). But right now, before you are taking your required minimum distribution, you have $50,000 of taxable income. This means you are only in the 15% tax bracket. Paying the tax now on a conversion could be less than the future tax on a required distribution.

    Again, you should talk to your tax accountant to understand where you stand now and where you will stand if you were to not convert and get taxed on your required distribution amount. For some, paying the tax now could mean a tax savings. Also see Should you do a Roth Conversion?

    And one final point if you do decide to go this route. Don’t use your retirement funds to pay the taxes due. Use any cash you have sitting on hand to cover the tax bill. The more money you keep in your retirement account, the more compounding and growth can occur.

  2. Donate to Charity

    We all know that donating to charity is a good thing. And doing so can also lower your taxes in retirement. Let’s assume making a conversion to a Roth IRA is not for you. You can instead make a qualified charitable distribution from your IRA.

    This means that instead of receiving the cash from a required minimum distribution, you can just donate the money instead and get the tax write off that it provides. In many cases, your investment custodian has the paperwork to do this so the process is easy.

    On the other hand, if you are making the conversion to a Roth IRA, you can still reduce the taxes on the conversion by making a charitable donation during the same year. The only catch here is that the donation has to come from outside a retirement account. Since you are simply moving from a traditional IRA to a Roth IRA, the donation cannot come from this account. But making a sizable donation can help to offset some taxes that you would otherwise owe.

    Finally, another option is to donate stocks or mutual funds you have in a taxable account to charity. In this case, you can simply donate the appreciated asset to the charity of your choice. The reason for doing this is that you can avoid paying any capital gains tax if the stock appreciated in value and take a charitable deduction. Reader Mark points out:

    Any big gains can be directly donated to a favorite charity rather than selling it to get the double benefit of a charitable deduction and the avoidance of capital gains. To me, that is one of the biggest tax benefits of investing since a double benefit is realized.

    There is a limit to how much you can donate when it comes to appreciated assets, so be sure to talk things over with your tax accountant.

  3. Take Retirement Withdrawals Sooner

    A final option for you to lower taxes in retirement is to start withdrawing money from your traditional IRA account once you reach 59 ½ years old. By taking withdrawals at this age, you accomplish a couple of things.

    • You lower your future required minimum distribution amount. Your RMD is based on your age and account balance. By having a lower account balance, your future RMD will be lower and thus you will pay fewer taxes.
    • You can put off taking Social Security. By waiting to take Social Security benefits, you will receive a larger benefit. The catch here is that once you reach your maximum social security age, your benefit will not grow any longer, so it makes sense to begin taking it at this time.

    Of course, as with the other options listed, you need to talk things over with your tax accountant to make sure you aren’t pushing yourself into a higher tax bracket now, just to save money on taxes later. Once you withdraw the money see What to Do With Your Required Minimum Distribution.

Final Thoughts

While taxes are inevitable, you want to make sure you lower your taxes in retirement. This is because many things like the tax you pay on Social Security benefits and your Medicare premiums are all tied to your income. The more income you have in retirement, the more taxes you pay and in the case with Medicare, the higher the healthcare premiums you will pay.

Take the time to sit down with your accountant and walk through various scenarios. Ideally, your financial picture in retirement will be a simple one and you won’t have to take any steps to ensure your taxes are minimized. But in the event you do have to take steps, these 3 options are worth looking into.

What suggestions do you have to lower your taxes in retirement?

More on Taxes





We know that if you want to grow your money for the long term, investing in the stock market makes the most sense. While there is risk involved, taking on little to no risk with bank savings accounts will not allow our money to grow at the rate we need in order to reach certain financial milestones.

But there is another benefit to investing that many investors overlook. This benefit is saving on taxes. Yes, there are tax benefits from investing.

tax benefits from investing

(Photo Credit: FirmBee/Pixabay)

5 Tax Benefits from Investing

I am going to walk you through 5 such tax benefits from investing. You will see how investing will not only grow your money long term, but will also shelter some of it from Uncle Sam. And the more money you keep invested, the more it can compound and grow into larger sums of wealth. So what are these tax benefits from investing? Let’s get started and take a look.

  1. Lower Income Taxes

    When you contribute to your 401k plan at work, the contribution is made pre-tax. This means that the money is invested in your retirement account before Uncle Sam gets his hands on it. Let’s say you are single and earn $40,000 a year. This puts you in the 25% tax bracket. You’d pay $5771 in taxes (not $10,000 because of how tax brackets work).

    However, if you were to contribute $3,000 to your 401k plan, your taxable income would drop to $37,000. You would save $750 in taxes at the 25% tax bracket.

    Note that I am just keeping this basic here for you to follow along and ignoring exemptions, dependents, etc. There are many other factors that end up determining your tax bill, but this example will give you an idea of how investing in your 401k plan saves you money on taxes.

  2. Health Savings Account

    If you are covered by a high deductible insurance plan at work, you most likely have a health savings account. This is an account you put money into to cover you for medical bills. The great thing about a health savings account is that like a 401k plan contribution, a contribution to your health savings account is also made at the pre-tax level.

    If you contribute to both your 401k plan and your health savings account, you can really reduce your taxable income. But the tax benefit for health savings accounts doesn’t end there.

    In addition to being pre-tax, you can avoid taxes altogether on the money you put in the account. When you use the money on qualified medical expenses, you don’t have to pay any taxes on the money. It is completely tax free!

    Another benefit to a health savings account is that you can invest a portion of this money as well. The benefit of doing this is that first, you contribute pre-tax to avoid any taxes. Second, your investments grow tax free, meaning you won’t pay taxes on any dividends or capital gains, and third, if you use the money from your investment health savings account for qualified medical expenses, you can avoid taxes here too. The money is completely free from tax!

    This is why many people are using their health savings account as a hybrid Roth IRA. They save and invest the money now and plan to use the money for qualified medical expenses in the future.

  3. Write Off Losses

    Another one of the tax benefits from investing is the ability to write off losses. Let’s say you invested in a stock and you lost $1,000 when you sold. In the same year you invested in another stock and made $500 when you sold it. During this tax year you don’t owe any tax on the gain of $500. This is because you are able to write off the gain against the loss you took. Even better, if you don’t have any other gains, you can use the remaining $500 to write off against your earned income

    As exciting as this sounds, there are some limitations. You first have to match short term losses with short term gains to get a net short term gain or loss. Then you have to do the same thing with long term gains and losses. After that, you can use short term losses to offset long term gains and vice versa.

    From there, any unused loss that you have can be applied to earned income, up to $3,000 per year. In the event you have more than $3,000 in losses, you can carry forward the loss to future years and use the write off then. For example, let’s say in 2016 you had losses of $5,000 and no gains to offset. You can take $3,000 and offset it against earned income and carry forward the remaining $2,000 into 2017. If you have any gains in 2017 you use the $2,000 to offset them and if any loss remains, use it against earned income.

    It sounds tricky, but once you get the hang of it, it is actually fairly straightforward. For more see 3 Benefits of Tax Loss Harvesting and Tax Loss Harvesting.

  4. Invest In Tax Exempt Bonds

    Bonds are a great way to lower the risk in a stock portfolio and still earn a decent return. The problem with bonds lies with the interest you earn. The IRS considers bond interest to be ordinary income. This means it gets taxed at your earned income tax rate and not a lower investment tax rate.

    To overcome this, many investors put bond holdings in their retirement accounts. Since income, dividends and capital gains in retirement accounts such as a traditional IRA or a 401k plan are tax deferred, you don’t have to worry about paying any taxes on bond interest. The same holds true for a Roth IRA, the only difference being is that you won’t pay any tax at all.

    Still, sometimes investors want bond exposure in their taxable accounts. What are your options? The best option is to look at tax exempt bond funds. Most times you can invest in treasury bonds and avoid taxes at the federal level. However, many states will still tax the interest income on these bonds.

    Another option is to invest in municipal bonds from the state you reside in. Doing so will avoid state income taxes on the interest income, but in some rare cases, you will owe tax at the federal level.

    Also note that the discussion only applies to taxing the income from a bond. When you sell a bond, you could owe capital gains taxes even though the bond is tax exempt.

    The bottom line is that owning bonds in a taxable account while trying to limit taxes is tricky. Talking it over with your investment advisor or tax accountant is a good first step.

  5. Savers Credit

    The last of the tax benefits from investing is the savers credit. If you are a low to moderate income taxpayer, the savers credit can help you avoid paying some taxes. All you have to do is contribute money to a retirement plan.

    The credit is worth 50%, 20% or 10% depending on your adjusted gross income and is limited to the first $2,000 you contribute to a retirement account.

    Doing the math, this means a $1,000, $400 or $200 tax credit just for putting $2,000 into your retirement account.

    And the best part about the savers credit is that it works in addition to the tax savings by making a contribution in the first place that we outlined in the first point. So really you are double dipping here.

Final Thoughts

There you have 5 tax benefits from investing your money. The easiest one to take advantage of is saving for retirement, followed by the heath savings account contribution if you are covered by a high deductible health plan. And of course, if your income is low enough, just saving for retirement could shield an additional $1,000 from taxes.

At the end of the day, the more money you keep for yourself and invest, the more it can grow over time and improve your financial picture. Don’t pay tax when you can legally get around it. These options are simple to use and can save you a significant amount of money on your taxes.

Tax Filing Online

You can file your tax return online with TurboTax.

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The 2017 tax deadline for your 2016 tax return is on April 18, 2017.

Why is the Tax Deadline Not on April 15?

Weekend Days. The tax deadline is extended when the traditional April 15 deadline falls on a Saturday or Sunday. In this case it would be on the next business day (Monday).

Emancipation Day Holiday. In addition, sometimes the tax deadline is delayed due to the Emancipation Day holiday. This year the tax deadline is extended for everyone even though all states do not observe the holiday. Emancipation Day is on April 16 this year and will be celebrated on April 17.

This year, the tax deadline is extended for both Emancipation Day and weekend days.

Tax Deadline Postmark

Whether or not you meet the tax deadline is based on the postmark on your taxes. You must have your taxes postmarked by the deadline, but the IRS doesn’t need to receive your taxes by the 2017 tax deadline. If you are using TurboTax, and plan to mail your taxes, deliver it to the post office before closing time on April 18, 2017.

Make sure you check the address if you mail your return on tax day 2017. The IRS changed the mailing address for many taxpayers a couple years back.

If you efile, you’ll also need to submit your return electronically by April 18.

Tax Extensions

How to File for a Tax Extension. If you file for an extension, your tax return will be due six months after the April tax deadline. The tax deadline for extended returns this year is October 16, 2017. You can file Form 4868 to get an automatic extension. However, you still have to pay the tax due by the original tax deadline on April 18.

Tax Deadline Extras

While you are working on your tax return, there are some other deadlines that fall on the same day as the tax deadline.

Retirement Contributions. The tax deadline is also the deadline for making contributions to your IRA and Roth IRA.

Estimated Tax Payments. If you make estimated tax payments, the April tax deadline is also the same day that that estimated tax payments are due for first quarter.

More Tax Filing Information

Tax Refund Dates. Once you file your tax return, see the tax refund cycle chart to find out when to expect your refund.

Refund Delays. Stay updated on refund delays and keep it in mind when you file.

Tax Filing Online

Now that you know when the 2017 tax deadline is, you can file your tax return online with TurboTax.

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How much money do you have to make to file taxes? What is the minimum income to file taxes?

Let’s take a look at the requirements for the minimum income to file taxes in 2016 (and due in 2017).

2016 Minimum Income Requirements

The IRS released the minimum income to file taxes in 2016.

For the 2016 tax year, you will need to file taxes if your gross income meets the minimum income for your filing status and age. Here are the minimum income limits for the 2016 tax year.

How Much Money Do You Have to Make to File Taxes 2016

 
Filing Status Minimum Gross Income
(under 65)
Minimum Gross Income (65+)
Single $10,350 $11,900
Head of Household $13,350 $14,900
Married Filing Jointly $20,700 $21,950 (one spouse)
$23,200 (both spouses)
Married Filing Separately $4,050 $4,050
Widow with Dependent Child $16,650 $17,900

This table does not apply to dependents. See When Do Kids Need to File Taxes? for minimum income to file taxes for children.

Once you find out if you meet the minimum income to file taxes, you can determine your tax rate using the current tax brackets.

Social Security Income

Gross income doesn’t include social security benefits.

However, there is an exception to this rule if half of your social security benefits plus your other gross income is more than $25,000 ($32,000 if married filing jointly). Once that happens, you’ll need to file a 2016 tax return. Married filing separate also have different social security rules. For more information, see Do You Have to Pay Income Tax on Social Security?

Other Income Sources

There are special rules for self employment earnings and church earnings. You must file taxes if your:

  • Self employment net earnings are greater than $400.
  • Church earnings are greater than $108.28 and are exempt from employer Social Security and Medicare.

If you are self employed, you will also need to file and pay self employment tax.

Filing Requirement for Health Care Responsibility

The filing requirement for health insurance continues this year. If you received advancements of the health insurance premium tax credit to pay for health insurance, you will need to file a tax return. Here’s how to reconcile your payments and Claim the Health Insurance Premium Tax Credit. In addition, you will also report any penalties for no health insurance on your tax return.

More Tax Filing Requirements

Optional filing. Even if you are not required to file a tax return, you can choose to file one. You may want to file an optional tax return if you had any federal withholding or are entitled to tax credits, like the earned income tax credit or the Health Insurance Premium Tax Credit and want to get a refund.

Other filing requirements. In addition to the income requirements, there are other circumstances when you must file a tax return. One example is if you sold your home. For all the requirements, see Publication 17.

When to file. If you earn enough money to file a tax return, you must file your tax return by the tax deadline. However, you cannot file before the first day to file taxes.

After you file. Once you file, you can see How Long Does it Take to Get Your Tax Refund Back?

2016 Tax Calculator

If you are under the minimum income to file taxes, and are unsure whether or not filing your taxes will benefit you, use our Tax Calculator to compute your tax liability and refund.

Tax Filing Online

Now that you know how much money you have to make to file taxes, go ahead and file your free federal and state taxes online with TurboTax!

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It’s time for end of year tax planning! This is your annual reminder to get your financial house in order for tax season!

What could be more fun than taking a break from holiday festivities and shopping to start thinking about taxes? Does anyone else need a distraction from watching the Amazon Lightning Deals?

It seems like every year when we do our taxes, there are a few things we wish we would have done in December to reduce our tax bill just a little more. Sound familiar?

That’s where a little end of year tax planning results in great rewards!

Here’s an updated list of money moves to make before the new year.

Year End Tax Moves

  1. Run a preview. Before the end of the year run an estimate using Turbo Tax. If you wait until the new year, it’s often too late to go back and make changes. Start running projections now before the year end! We will also update our tax calculator shortly to help you with your projections.
  2. Bump up contributions to retirement plans. Contribute more to your 401k by the end of the year to reduce your taxable income and your tax bill.
  3. Plan for health insurance changes. The penalty for no health insurance goes up each year. If you qualify for the Health Insurance Premium Tax Credit here’s How to Claim the Health Insurance Premium Tax Credit on your tax return.
  4. Take your losses. Did you lose money on your investments? If so, you might as well sell them and take the capital loss. Commonly referred to as tax loss harvesting, losses (that exceed gains) are capped at $3,000, but you can carry them forward into future tax years. To understand why you might do this, here are 3 Benefits of Tax Loss Harvesting.
  5. Take your gains. Once again, you can pay 0% long term capital gains if you are in the 10% or 15% tax bracket. If you are planning to sell, you might as well do it before year end if you fall in this tax bracket!
  6. Review investment tax rules. Don’t forget about the 3.8% Investment Tax on investment income, including capital gains and dividends, that kicks in for high income filers. If you are subject to the investment tax pay close attention to your end of year strategy to realize gains and losses.
  7. Prepay your mortgage and real estate taxes. Even if your payments aren’t due until January, you can pay them in December to deduct this year, if you itemize. Should you pay this year or wait? For more information, see how to determine if you should accelerate your property tax deduction into the current year.
  8. Give away your money. If you were planning to give a lot of money to someone special, utilize your annual gift exclusion of $14,000. More than that and you are subject to the gift tax.
  9. Use your flex spending money. The use-it-or-lose it rule makes your money disappear if you don’t use it. Check your plan for the deadline to incur costs and submit reimbursement requests. If you don’t know what to spend your money on, see the list of ways to use all of your flex spending account. It’s also a good time to remember to enroll in your 2017 flexible spending account if you haven’t done so already. The $2,600 flex spending plan limit will increase for 2017.
  10. Donate. We all know we can donate clothes, books, and household stuff to Goodwill. But dig deeper and you might be able to find more ways to make a charitable donation. For example, I like to remind newlyweds that you can donate wedding dresses and attire to take a tax deduction. Be sure to research the charity to make sure you know how your donations will be used.
  11. Finalize your records. If you plan to deduct mileage on your personal car make sure your mileage logs are complete. Remember you will save yourself time by being organized! Review how long you need to keep your paperwork before throwing out any records.
  12. Review your checklist. I keep an end of year tax planning and finance checklist. The checklist comes in handy to determine what needs to be done each year to keep our finances in order. If you don’t have an annual list, now is a great time to make one. Just write everything down as you go.
  13. Make 529 plan contributions. If your state has a deduction for 529 plan contributions, make your contribution before year end.
  14. Do an AMT analysis. If there’s a chance that you will be subject to AMT, analyze your deductions to see if you are better off waiting to make some of the above moves.
  15. Close your IRA. While this one is very extreme, I keep it in the list to remind you to review the performance of your IRA. If you carefully evaluated the pros and cons, and decided to take a loss on an IRA, you must close your account before year end to claim your loss on your taxes this year.
  16. Fund your IRA. You have until the tax deadline to maximize your Roth IRA contributions. However, if you’re getting an end of year bonus, it might be a good time to stash it away!
  17. Convert your IRAs. After running our tax estimates, I determine if it makes sense to make a Roth IRA Conversion. If you need to make one, don’t forget it needs to be done by the end of the year. In addition, if you are planning to use the Backdoor Roth IRA strategy this year, you also need to determine if you want to make your conversion by the end of the year.

Determine if You Need to Pay Tax or File

Finally, after you’ve reviewed all the end of year planning, review the requirements for filing and paying taxes. Finding out in April that you need to pay tax on unemployment, you made over the minimum income to file taxes, your kids need to file taxes or that your social security benefits are taxable aren’t usually welcome surprises. Do yourself a favor and review the requirements before the end of the year.

What additional moves are you planning to make for 2016 end of year tax planning?

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