Your Individual Income Taxes

You may think you have no control over your taxes, but there are a number of strategies that can be employed to reduce or delay your tax bite. To take advantage of these possibilities requires knowledge of what strategies are available.

You are encouraged to read this guide so that you will have a basic understanding of the income tax structure, recent changes in tax law, how the various rules and changes might affect you, and the options and strategies that are available.

Even though you have your returns professionally prepared, a little tax planning in advance may yield benefits down the road. It is a far better approach than waiting until your return is prepared to find out whether you owe, get a refund, or could have done something to alter the final outcome.

This Tax Planning Guide is an abbreviated summary of our complex tax system, and you are encouraged to contact this office so we can review your unique tax situation before employing any of the options or strategies included in the guide.

Understanding Your Tax Basics

No matter what the season or your unique circumstances, when it comes to your taxes, planning usually pays off in a lower tax bill. The following is provided so that you may have a basic understanding of taxes before you discuss filing options and strategies.
  • Filing Status - Except for a surviving spouse, or married individuals who have lived apart for the entire year, your filing status depends on your marital status at the end of the tax year. Generally, if you are married at the end of the tax year, you have three possible filing status options: Married Filing Jointly, Married Filing Separate, or if you qualify, Head of Household. If you were unmarried at the end of the year, you would file as Single status, unless you qualify for the more beneficial Head of Household status.

    Head of Household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND:

    • Pay more than one half of the cost of maintaining as his or her home a household which is the principal place of abode for more than one half the year of a qualifying child, or an individual (relative) for whom the taxpayer may claim a dependency exemption, or

    • Pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year.

    A married taxpayer may be considered unmarried for the purpose of qualifying for the Head of Household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year.

    Surviving Spouse (also referred to as Qualifying Widow or Widower) is a rarely used status for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. The joint tax rates are used, but no exemption is claimed for the deceased spouse. In the year the spouse passed away, the surviving spouse would file jointly with the deceased spouse if not remarried by the end of the year.

  • Adjusted Gross Income (AGI) - AGI is the acronym for Adjusted Gross Income. AGI is generally the sum of a taxpayer's income less specific subtractions called adjustments (but before the standard or itemized deductions and exemptions). Many tax benefits and allowances, such as credits, certain adjustments and some deductions are limited by a taxpayer's AGI.

  • Taxable Income - Taxable income is your AGI less deductions (either standard or itemized) and your exemptions. Your taxable income is what your regular tax is based upon using either the IRS tax tables or the tax rate schedule.

  • Marginal Tax Rate - Not all of your income is taxed at the same rate. The amount equal to the sum of your deductions and exemptions is not taxed at all. The next increment is taxed at 10%, then 15%, etc., until you reach the maximum tax rate. When you hear people discussing tax bracket, they are referring to the marginal tax rate. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 25% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $250 in Federal tax ($1,000 x 25%). Your marginal tax bracket depends upon your filing status and taxable income. Find your marginal tax rate using the table below.

    When using this table, keep in mind that the marginal rates are step functions and that the taxable incomes shown in the filing status column are the top value for that marginal rate range.

    • 2016 MARGINAL TAX RATES
      TAXABLE INCOME BY FILING STATUS
      Marginal
      Tax Rate
      Single

      Head of Household

      Joint*
      Married Filing Separately
      10.0%
      9,275
      13,250
      18,550
      9,275
      15.0%
      37,650
      50,400
      75,300
      37,650
      25.0%
      91,150
      130,150
      151,900
      75,950
      28.0%
      190,150
      210,800
      231,450
      115,725
      33.0%
      413,350
      413,350
      413,350
      206,675
      35.0%
      415,050
      441,000
      466,950
      233,475
      39.6%
      Over
      415,050
      Over
      441,000
      Over
      466,950
      Over
      233,475
      * Also used by taxpayers filing as Surviving Spouse

    • 2017 MARGINAL TAX RATES
      TAXABLE INCOME BY FILING STATUS
      Marginal 
      Tax Rate
      Single

      Head of Household

      Joint*
      Married Filing Separately
      10.0%
      9,325
      13,350
      18,650
      9,325
      15.0%
      37,950
      50,800
      75,900
      37,950
      25.0%
      91,900
      131,200
      153,100
      76,550
      28.0%
      191,650
      212,500
      233,350
      116,675
      33.0%
      416,700
      416,700
      416,700
      208,350
      35.0%
      418,400
      444,550
      470,700
      235,350
      39.6%
      Over
      418,400
      Over
      444,550
      Over
      470,700
      Over
      235,350
      * Also used by taxpayers filing as Surviving Spouse 
  • Taxpayer & Dependent Exemptions - You are allowed to claim a personal exemption for yourself, your spouse (if filing jointly) and each individual who qualifies as your dependent. The amount you are allowed to deduct is adjusted for inflation annually; the amount for 2017 is $4,050 (same as 2016).  Please call the office for other years.
  • Dependents - To qualify as your dependent, an individual must be your qualified child or pass all five dependency qualifications: (1) Member of the Household or Relationship Test, (2) Gross Income Test, (3) Joint Return Test, (4) Citizenship or Residency Test, and (5) Support Test. The gross income test limits the amount of income a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support.

    Qualified Child - A qualified child is one that meets the following tests:

    (1) Has the same principal place of abode as you for more than half of the tax year except for temporary absences.

    (2) Is your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual.

    (3) Is younger than you.

    (4) Did not provide over half of his or her own support for the tax year.

    (5) Is under age 19 or under age 24 in the case of a full-time student, or is permanently and totally disabled (any age).

    (6) Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund).

  • Deductions - Taxpayers generally can choose between itemizing their deductions and using the standard deduction. The standard deductions, which are inflation adjusted annually, are illustrated below for 2017.

    Filing Status
    Standard Deduction
    Single
    $6,350
    (up from $6,300 in 2016)
    Head of Household
    $9,350
    (up from $9,300 in 2016)
    Married Filing Jointly
    $12,500
    (same as in 2016)
    Married Filing Separately
    $6,350
    (up from $6,300 in 2016)

    The standard deduction is increased by multiples of $1,550 for unmarried taxpayers who are over age 64 and/or blind. For married taxpayers, the additional amount is $1,250. Those with large deductible expenses can itemize their deductions in lieu of claiming the standard deduction.

    Itemized deductions include:

    (1) Medical expenses (only if total exceeds 10% of your AGI for the year). Note: the reduction rate is 7½% for seniors age 65 and older through 2016;

    (2) Taxes consisting primarily of real property taxes, state income (or sales*) tax and personal property taxes;

    (3) Interest on qualified home debt and investments; the latter is limited to net investment income (i.e. the interest cannot exceed your investment income after deducting investment expenses);

    (4) Charitable contributions are generally limited to 50% of your AGI, but in certain circumstances the limit can be as little as 20% or 30% of AGI,

    (5) Miscellaneous employee business expenses and investment expenses, but only to the extent that they exceed 2% of your AGI;

    (6) Casualty losses in excess of $100 per occurrence plus 10% of your AGI; and

    (7) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.

    *The option to deduct state and local sales tax instead of state and local income tax does not apply for 2014 and subsequent years, but there is a chance Congress may reinstate the provision retroactively. Please check with this office for updates.

  • Alternative Minimum Tax (AMT) - The Alternative Minimum Tax is another way of being taxed that taxpayers frequently overlook. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments paid at least a minimum tax. However, unlike the regular tax computation, for many years the AMT was not adjusted for inflation, and years of inflation drove most taxpayers’ income up to the point where more and more taxpayers were being affected by the AMT. Congress finally changed the law to allow annual inflation-adjustment of the amount of income exempt from the AMT, and raised the amount of AMT taxable income at which the higher of two AMT tax rates applies. These changes have helped limit the number of additional taxpayers subject to the AMT. A full overhaul of the AMT law is yet to come from Congress. Meanwhile, your tax must be computed by the regular method and by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.

    - Personal and dependent exemptions -are not allowed for the AMT. Therefore, a separated or divorced parent should be careful not to claim a dependent’s exemption if they are subject to the AMT and instead allow the other parent to claim the exemption. This strategy can also be applied to taxpayers who are claiming an exemption under a multiple support agreement.

    - The standard deduction – is not allowed for the AMT and a person subject to the AMT cannot itemize for AMT purposes unless they also itemize for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT.

    - Itemized deductions:
    Medical deductions – only allowed in excess of 10% of AGI, now the same as for regular tax (except the reduction rate is 7½% for taxpayers age 65 or older). This difference for seniors will end when the AGI threshold percentage increases for them to 10% in 2017.
    Taxes – are not allowed at all for the AMT.
    Interest – Home equity debt interest and interest on debt for non-conventional homes such as motor homes and boats are not allowed as AMT deductions.
    Miscellaneous deductions subject to the 2% of AGI reduction are not allowed against the AMT.
     
    - Nontaxable interest from Private Activity Bonds – is tax-free for regular tax purposes but some are taxable for the AMT.

    - Statutory Stock Options (Incentive Stock Options) when exercised produce no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) is income for AMT purposes in the year the option is exercised.

    - Depletion Allowance – in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.

    The AMT exemptions are phased out for higher-income taxpayers. The amounts shown are for 2017.

    AMT EXEMPTION PHASE OUT
    Filing Status
    Exemption Amount
    Income Where Exemption Is
    Totally Phased Out
    Married Filing Jointly
    $84,500 (up from $83,800 in 2016)
    $498,900 (up from $494,900 in 2016)
    Married Filing Separate
    $42,250 (up from $41,900 in 2016)
    $249,450 (up from $247,450 in 2016
    Unmarried
    $54,300 (up from $53,900 in 2016)
    $337,900 (up from $335,300 in 2016)


    2017 AMT TAX RATES
    AMT Taxable Income
    Tax Rate
    0 – $187,800 (1)
    26%
    Over $187,800 (1)
    28%
    (1) $93,900 for married taxpayers filing separately

    Your tax will be the higher of the tax computed the regular way or the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation. and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom line tax and raise a question of possible AMT. Tax Tip: If you were subject to the AMT in the prior year, itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be includable in the regular tax computation. To the extent you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not includable in the subsequent year’s income.

  • Tax Credits - Once your tax is computed, tax credits can reduce the tax further. Credits are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to the succeeding years. Although most credits are a result of some action taken by the taxpayer, there are two commonly encountered credits that are based simply on the number of your dependents or your income.

    Child Tax Credit - The child tax credit is $1,000 per child. If the credit is not entirely used to offset tax, the excess portion of the credit, up to the amount that the taxpayer's earned income exceeds a threshold ($3,000 2011 through 2017) is refundable. Taxpayers with three or more qualifying dependent children may use an alternate method for figuring the refundable portion of their credit. The credit is allowed against both the regular tax and the AMT for each dependent under age 17. The credit begins to phase out at incomes (AGI) of $110,000 for married joint filers, $75,000 for single taxpayers and $55,000 for married individuals filing separate returns. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the thresholds.

    Earned Income Credit -This is a refundable credit for low-income taxpayers with income from working, either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI and the number of qualifying children. A taxpayer, in 2017, who has investment income such as interest and dividends in excess of $3,450 (up from $3,400 in 2016) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available.


    2017 EIC PHASE-OUT RANGE
    Number of
    Children
    Joint Return
    Others
    Maximum
    Credit
    None
    $13,930 - $20,325
    $8,270 - $14,880
    $510
    1
    $23,740 - $44,846
    $18,190 - $39,296
    $3,400
    2
    3
    $23,740 - $44,846
    $23,930 - $53,505

    $18,190 - $39,296
    $18,340 - $47,955

    $5,572
    $6,269
  • Residential Energy-Efficient Property Credit – This credit is generally for energy-producing systems that harness solar, wind or geothermal energy including solar electric, solar water heating, fuel cell, small wind energy and geothermal heat pump systems.  These items qualify for a 30% credit with no annual credit limit. Small wind energy and fuel cell credits end with 2016, while solar credit continue though 2019 at 30% and phase out at 26% for 2020 and 22% for 2022. Unused residential energy-efficient property credit is generally carried over through 2022.
     
  • Withholding and Estimated Taxes - Our “pay-as-you-go” tax system requires that you make payments of your tax liability evenly throughout the year. If you don't, it's possible you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer's payroll department to take out the right amount of tax, based on the withholding allowances shown on the Form W-4 you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of: 

    (1) 90% of the current year’s tax liability; or
    (2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing Married Separate), 110% of the prior year’s tax liability.
If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date.


Bunching Your Deductions Can Provide Big Tax Benefits

If your tax deductions normally fall short of itemizing your deductions or even if you are able to itemize, but only marginally, you may benefit from using the “bunching” strategy.

The tax code allows most taxpayers to utilize the standard deduction or itemize their deductions if that provides a greater benefit. As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions.

If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next.

For the most part, itemized deductions include medical expenses, property taxes, state and local income (or sales*) taxes, home mortgage and investment interest, charitable deductions, unreimbursed job-related expenses, and casualty losses. The “bunching strategy” is more commonly associated with medical expenses, tax payments and charitable deductions, although there are circumstances in which the other deductions might come into play. There are many opportunities to bunch deductions, and the following are examples of the bunching strategies most commonly used:

Medical Expenses
– You contract with a dentist for your child’s braces. The dentist may offer you an up-front, lump sum payment or a payment plan. By making the lump sum payment, the entire cost is credited in the year paid, thereby dramatically increasing your medical expenses for that year. If you do not have the cash available for the up-front payment, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes. If you use a credit card, you must realize that the credit card interest is not deductible, and you need to determine if incurring the interest is worth the increased tax deduction. Another important issue with medical deductions is that only the amount of the total medical expenses that exceeds 10% (7.5% if age 65) of your adjusted gross income (AGI) is actually deductible. If you are caught by the Alternative Minimum Tax (AMT), then only the amount that exceeds 10% of your AGI is actually deductible. So, there is no tax benefit in bunching medical deductions if the total is less than your AGI threshold.

If the current year is an abnormally high-income year, you may, where possible, wish to put off making medical expense payments until the subsequent year when the 10% (7.5%) threshold is less.
  • Taxes – Property taxes on real estate are generally billed annually at mid-year, and most locales allow the tax bill to be paid in semi-annual or quarterly installments. Thus, you have the option of paying it all at once or paying in installments. This provides the opportunity to bunch the tax payments by paying one semi-annual installment or two quarterly installments and a full year’s tax liability in one year and only paying one semi-annual installment or two quarterly installments in the other year. In doing so, you are able to deduct 1-½ year’s taxes in one year and 50% of a year’s taxes in the other. If you are thinking of making the property tax payments late as a way to accomplish bunching, you should be cautious. The late payment penalty will probably wipe out any potential tax savings.

    If you reside in a state that has state income tax, the state income tax paid or withheld during the year is deductible as a federal itemized deduction. So, for instance, if you are paying state estimated tax in quarterly installments, the fourth-quarter estimate is generally due in January of the subsequent year. This gives you the opportunity to either make that payment before December 31st, and be able to deduct the payment on the current year’s return, or pay it in January before the January due date and use it as a deduction in the subsequent year.

    A word of caution about the itemized deduction for taxes! Taxes are only deductible for regular tax purposes. So, to the extent you are taxed by the AMT, you derive no benefits from the itemized deduction for taxes.

  • Charitable Contributions – Charitable contributions are a nice fit for “bunching” because they are entirely payable at the taxpayer’s discretion. For example, if you normally tithe at your church, you could make your normal contributions during the year and then prepay the entire subsequent year’s tithing in a lump sum in December of the current year, thereby doubling up on the church contribution one year and having no deduction for charity in the other year. Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to make the contributions at the end of the current year or simply wait a short time and make them after the end of the year. If you mail a check to a charity it will be deductible in the year that you mail it; contributions you charge to a credit card are deductible in the year you make the charge; and contributions you make by text message are deductible in the year the contribution is charged to your phone or wireless account.  
If you think a “bunching” strategy might benefit you, please call this office to discuss the issue and set up an appointment for some in-depth strategizing.

*The option to deduct state and local sales tax instead of state and local income tax does not apply for 2014 and subsequent years, but there is a chance Congress may reinstate the provision retroactively. Please check with this office for updates.




Avail Yourself of Your Employer's Tax-Advantaged Plans

  • Dependent Care Benefits - A taxpayer who works and incurs child care expenses, should check to see if their employer has a dependent care program. If the employer does provide dependent care benefits under a qualified plan, the taxpayer may be able to exclude up to $5,000 ($2,500 if Married Filing Separately) of child care expenses from his or her wages, which generally provides a greater tax benefit than the child care credit. 
  • 401(k) or Similar Retirement Plans - If an employer has a 401(k) plan, the employee can elect to defer (pre-tax) a maximum of $18,000 for 2016 and 2017.  If age 50 or older, the maximum is increased to $24,000.. These plans are especially beneficial when the employer provides a matching contribution.
     
  • Flexible Spending Accounts - Some employers provide health flexible spending accounts (FSA), which allow an employee to make contributions on a pre-tax salary reduction basis to provide coverage for medical and dental expenses. The maximum allowed for 2015 is $2,550 (up from $2,500 for 2014. The participant generally must use the contributed amounts for the qualified expenses, or else forfeit any amounts remaining in the account at the end of the plan year. However, some plans allow a 2 ½ month grace period, and a plan may allow up to $500 of any year-end health FSA balance to be carried over to pay or reimburse qualified medical expenses incurred in the next year. Medical expenses paid for or reimbursed through pre-tax plans cannot be deducted as part of itemized deductions. 
     
  • Education Assistance Programs - If you are receiving educational assistance benefits through an educational assistance program provided by your employer, up to $5,250 of those benefits can be excluded from income each year. 
     
  • Stock Purchase and Option Plans - A variety of plans available to employers are designed to allow the employees to invest in the employer’s stock. The most commonly encountered are: 
(1) Employee stock ownership plan (ESOP); 
(2) Nonqualified stock option; and 
(3) Incentive Stock Options (ISOs). Note: Because of the tax ramifications, it may be prudent for you to consult with this office prior to exercising a stock option, especially an ISO. 

  • Tax-Free (Income excludable) Employee Fringe Benefits – Provided the employer provides them, the law allows an exclusion from taxable income for the following benefits:

(1) The cost of up to $50,000 of group term life insurance.
(2) $255 (in both 2016 and 2017) per month for qualified parking.
(3) $255 (in both 2016 and 2017) per month for transit passes, and commuter transportation.
(4) $20 per month for bicycle commuting expenses.





Are You Supporting Your Parents?

If you are helping support your parents, you may be having difficulty showing that you provided over half of the support for both of them, thus failing to qualify for the dependency exemptions (and for the beneficial head of household filing status if you are an unmarried taxpayer).

You may overcome this problem by designating the support to only one of your parents. This may allow you to claim at least one of them as your dependent and, if you are unmarried, allow you to file as head of household. 

To qualify for the head of household filing status, a taxpayer must maintain a household that constitutes one or both of his or her parents' principal abode, and at least one of the parents must be the taxpayer's dependent, i.e., must individually have gross taxable income for the year of less than the personal exemption amount $4,050 for 2017 (for same as 2016) and receive over half of his or her support from the taxpayer. The taxpayer himself need not reside in the household he or she maintains for the parents. The home could even be a retirement home or facility. 

To accomplish this, the taxpayer must be able to provide proof that the support is for one of the parents only. Otherwise, the support will be designated as a “fund” equally allocated to both. According to the IRS, written statements contemporaneous with the expenditures of support funds setting forth the amounts and purposes of such expenditures are entitled to great weight in supporting the designation to a specific individual. Thus, a notation on a check may be an acceptable designation procedure as long it designates who it is for and the purpose of the funds.

Although having no effect on filing status, when several people together provide over 50% of support, all who provide more than 10% of the support can agree about which of them will claim the dependent. Of course, the agreeing parties must also otherwise qualify to claim the dependent. Each person who is relinquishing the dependent exemption must complete an IRS-required form for attachment to the return claiming the dependent.

If you are supporting both parents and would like to discuss how the foregoing might apply to your specific situation, please give this office a call.

Upload Documents


Securely send/receive Quickbooks files and other important documents.

Client Login

Contact Us


Phone
: (305) 445-7956
Fax: (305) 448-5173

Address
7900 N.W. 155 Street
Suite 201
Miami Lakes, Florida 33016

Certifications



Administrator Login