Tax

Announcement: 2014 IRS Tax Brackets Are Out

Want to know what the 2014 IRS tax brackets look like? They came out in January and you can see a big difference in the way they’re structured compared to last year.  That’s because there’s a new tax bracket at the top for the very wealthy: 39.6%.   It’s a result of the Fiscal Cliff deals famously made at the last minute by Congress.  We were afraid we’d lose the lowest bracket (10%) but it was saved at the last minute.  Most taxpayers will stay  at or under 25% marginal tax rate, since the average annual income in the US is around $43,000.

2014 IRS Tax Brackets are for Tax Year 2013

Keep in mind that the 2014 IRS tax brackets are good for one year only: they’ll change again next January, of course.  They are for doing your taxes in 2014, which means tax year 2013.  They are not for doing your tax year 2014 taxes in 2015.  A lot of people get that all mixed up so make sure you know what a tax year means!

2014 IRS Tax Brackets
Filing Status: Married Filing Jointly
Marginal Tax Rate Taxable Income (AGI)
10.00% $0 – $17,850
15.00% $17,851 – $72,500
25.00% $72,501 – $146,400
28.00% $146,401 – $223,050
33.00% $223,051 – $398,350
35.00% $398,351 – $450,000
39.60% $450,001 and up
2014 IRS Tax Brackets
Filing Status: Married Filing Separately
Marginal Tax Rate Taxable Income (AGI)
10.00% $0 – $8925
15.00% $8926 – $36,250
25.00% $36,251 – $76,200
28.00% $73,201 – $111,525
33.00% $111,526 – $199,175
35.00% $199,176 – $225,000
39.60% $225,001 and up
2014 IRS Tax Brackets
Filing Status: Individual
Marginal Tax Rate Taxable Income (AGI)
10.00% $0 – $8925
15.00% $8926 – $36,250
25.00% $36,251 – $87,850
28.00% $87,851 – $183,250
33.00% $1983,251 – $398,350
35.00% $398,351 – $400,000
39.60% $400,001.00

 

Businesswoman calculating expenses

IRS Tax Tables & You: Evolving Together Through the Years

IRS tax tables change every year, and thank goodness for that or we’d all be taxed to poverty levels by the IRS.  One thing nobody can do is stop inflation- the price of everything creeps up a bit each year, the dollar is worth just a teensy bit less, and there’s nothing we can reasonably do to stop the process.  A loaf of bread was once five cents.  Now it’s four dollars.  But wages used to be twenty five cents an hour (1938) and now they’re $1007.25 an hour.  Hopefully, wages keep up with prices of things.

How IRS Tax Tables Change Over the Years

As wages rise, tax brackets shift as well.  Let’s go back to 1938.  Back then, you were rich if you made $56,000 a year.  Fabulously wealthy.  Therefore, with our progressive tax system, you were taxed at a higher rate than your poorer neighbors.  According to the IRS tax tables for 1938, a $56,000 salary put you into the 39% tax bracket.  Your marginal tax rate was 39%.

Since 1938 a whole lot of inflation has occurred so that nowadays, lots more taxpayers make that amount.  The average annual income by the way is around $43,000 so it’s slightly above average.  It’s just how things work, it’s inflation.  But if the IRS tax tables hadn’t shifted each year to keep up with inflation, everyone making $62,000 nowadays would be in the 39% tax bracket, which is a pretty hefty tax burden.

According to the IRS tax tables of today, you have to have an annual taxable income of over $400,000 to get bumped into the 39.6% tax bracket.  It’s the highest bracket on the whole table, and it’s reserved for the extra wealthy.  Most people are taxed at the 25% rate and lower (15%, 10%).  Needless to say, it’s pretty important to us that the IRS tax tables get adjusted each year for inflation.

Annual Inflation Adjustments

The IRS tax tables get adjusted each year for inflation, and so do a number of other tax figures related to federal income taxes.  The IRS posts them on their website around the beginning of the year, in early January.  Here’s a list of what important tax numbers get adjusted:

  1. the Personal Exemption.  This rises about $100 a year.  This is an amount that each taxpayer can lop off the adjusted gross income, and it lowers the tax bill.
  2. the Standard Deduction.  This also goes up about $100 or $150 each year.  Same idea: the higher the standard deduction the lower your tax bill.
  3. the Alternative Minimum Tax exemption amount also rises.  That means more people are exempt from this tax.
  4. the IRS tax tables get shifted.  That means more people can stay in their present tax brackets even though their annual income may have gone up.

 

photodune-653121-attractive-executive-at-work-xs

The 1040 EZ: A Reason to Smile

Are you untethered from most of life’s big responsibilities?  If so, the tax form you use might be the wonderfully simple 1040 EZ.  This is a stripped-down version of the regular IRS form 1040, which is  used by taxpayers with a little more complexity in their taxable lives.

What does this mean?  Well certain life events make taxes a bit more complicated, like having children, making tons of money, getting married, or reaching retirement age.  Also, your financial life determines whether you get to use the nice easy 1040 EZ form.  If you make lots of money from investments or interest then you’ll have to use the 1040A or the long 1040 form.  Also, if you are very poor you might qualify for some nice tax credits, but the 1040 EZ can’t handle such complexity so again, it’s the 1040A or the 1040 for you if any of these situations apply to you.  The 1040 EZ can handle only one credit: the Earned Income Tax Credit (EITC).

1040EZ Checklist

  • You are single or married filing jointly
  • You have no kids or other people living with you who depend on you financially
  • Your taxable income is not in the six figure range
  • You are under age 65
  • You had no household employees (i.e. maid, nanny, cook etc)
  • Your interest from savings accounts etc does not come to more than $1500
  • If you made tips, they’re already being reported by your employer on your W2
  • You did not file for bankruptcy
  • You are not claiming any tax credit except the EITC (see above)

Do You Qualify to Use the 1040 EZ?

If you do, then you should seriously consider doing your own taxes and saving yourself a bunch of money.  This is a reason to smile.  It’s such a simple easy form they had to call it the “ee-zee” form- get it?  Don’t take your taxes to a tax store if you qualify to use the 1040EZ.  You can fill it out yourself in about ten minutes.  Do you have a Facebook page?  Well if you can figure out how to set up a Facebook page then you’re going to be just fine filling out and submitting the IRS 1040 EZ and saving your self approximately $50 to $100 dollars.  Are you smiling now?  You should be!

How to File the IRS Form 1040EZ for Free

Any tax website like TaxAct or even the IRS website will let you fill out an IRS 1040 EZ form online and they will e-file it for you for free.  Why would they do this for you?  Because you will also have to do your State income taxes and those are not free.  They’re hoping you’ll buy their online state tax return service, and since you already gave them all your data it’s a no-brainer.  You probably will, and save yourself some time by not having to fill all that boring stuff out again.

 

 

Construction Laborer

Own a Business? Get to Know IRS Publication 535

We are a country of ideas: we have the freedom to act on them and form our own business if we choose.  Many of us have done so, which makes the United States a country of many small businesses.  You can structure your own business in several ways:

  • Sole Proprietorship
  • LLC
  • Partnership
  • Corporation
  •  S-Corportation

But no matter how you structure it, a business will have tax deductions, according to IRS tax code.  This is what IRS Publication 535 is all about.  It explains how to tell a personal expense from a business expense.  It tells you how to tell if a business expense is deductible, and how to claim the deduction.  If you own a business, chances are you  have some deductions to claim.  Pub 535 helps you sort through your business expenses and claim the deductions you can, no matter if you’re using Schedule C as a Sole Proprietor or you’ve formed a corporation and you use IRS Form 1120 to file income tax returns for your business.

Business Expenses: Ordinary & Necessary

First off the bat a business owner must sort through business expenses and separate the ordinary & necessary expenses from the ones that are neither.  These IRS terms are defined in Pub 535 as follows.

Ordinary Expenses

This would be an expenses that anybody in the same field as you might also have.  It’s to be expected.  For example, a restaurant owner would be expected to have cooking oil as an expense.  But 20 laptops?  Maybe not.

Necessary Expenses

This would be an expense that is helpful to the business but it doesn’t have to be absolutely necessary.  Maybe a laptop would be necessary if it  helps the chef to have his recipes handy on the counter.

Business Expenses: Cost of Goods Sold

Now, just because a business expense is necessary and ordinary, doesn’t mean it’s deductible yet.  Some expenses don’t count towards your deductions and these are called cost of goods sold.  These are expenses your business incurs to build up its inventory or keep the business running.  Examples would be storage of your inventory or expenses you have that go towards your labor who produce your product.

Let’s go back to our restaurant example.  Your product is the meals you prepare.  Your kitchen staff produce the product.  If you supply free meals to your staff, then the cost of those free meals gets included in  cost of goods sold.  Therefore, you cannot deduct the cost also.  The cost of goods sold of your business gets subtracted from your gross receipts so you’ve already used those costs for reducing your taxable income.  To also deduct them as business expenses would be double dipping.

Business Expenses: Capital Expenses

If something your purchase for your business is meant to last for more than a year (a new oven for your restaurant, for example) then it’s called a Capital Expense.  Capital expenses are not deductible either.  Another example would be a company car.  Meant to last a long time, this expense gets amortized or you can claim depreciation, both of which will help you out on your tax bill.

Go Straight to the Source for More Information

IRS Publication 535 is 50 pages of useful information.  Therefore, I’m going to refer you to the IRS website’s online version of Pub 535 here.  Business expenses are a major trip-up point for small business owners on their federal income tax returns, so the IRS loves to audit people who claim lots of business tax deductions.  This type of tax deduction is actually a red flag for “mistakes” so the IRS may select your tax return to be further scrutinized.  Usually this means nothing more than a delay in processing while the IRS looks more carefully at your return.  However, if you didn’t understand Pub 535 when you filled out your return, “mistakes” will cause problems.

 

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Calling All Procrastinators: The IRS Extension

Are you a functioning procrastinator?  Do you know yourself enough to know you’ll be late, and therefore make provisions for what will inevitably happen?  If so, then you probably should know about an IRS extension.  This is for procrastinators like you, who know they won’t be able to file their federal income tax return on time.  There are many out there just like you, and do you want to know what they do?  They file the extension automatically, every year, at the beginning of the tax season.  They know they’ll be late, so why fool around with penalties for not filing on time when all you have to do is submit a simple half-page form to the IRS and you get a whole six months more time to file?

An IRS Extension…of What?

You get six more months after the normal tax due date of April 15 to file your federal income tax return.  So, while all your friends are tearing their hair out on April 13-14 trying to finish up tax returns, you can hang out and watch reruns of Baywatch or take a light jog in the park if you want.  That’s because you filed an IRS extension and your due date is October 15, not April 15.

Why isn’t everyone doing this? you ask.

One simple reason. Well maybe two simple reasons.  One:  because not everyone is a procrastinator and some people would rather just get it over with and move on with life.  Two: because an IRS extension gives you more time to submit your tax forms but it doesn’t do anything for your bill.  If you owe money to the IRS on your income tax return, that bill is still due April 15.  If you should be getting an IRS refund, then no problem they’ll let you wait until October of course.  More money for them to play around with for an extra six months or so!

So, what have we learned?  An IRS extension gets you more time to file your taxes but not  more time to pay.  If you usually owe money then get your income tax return in by April 15.  If you don’t, and you don’t file an IRS extension, you’ll face interest charges on the amount you owe, and possibly some penalties as well.

An alternative, if you owe money on your taxes, is to file for the automatic six-month extension and pay some money when you file.  That way the IRS knows you are trying to make good on your bill.  They’ll waive penalties and interest if you do this.  But you should pay what you estimate you’ll owe.  You can’t just pay $10 and they’ll let you off for six months.  Not for $10!

Getting an IRS Extension Online

Thank goodness there are some employees at the IRS who see the beauty of the internet.  Not only has the IRS website become easier to navigate and understand lately, but many services are now available online.  One, thank goodness, is the IRS extension.  You can now request an extension through the IRS website by clicking on the FreeFile link.  That takes you to software through you which can electronically submit IRS form 4868, which is the form used to request an extension.

If I Don’t Have Time to File, How Do I Know How Much I Owe?

IRS Form 4868 has a space in which you can write your estimated your tax liability.  There are numerous tax estimators online.  One sanctioned by the IRS is at eFile.com.  Once you get an estimate, you’ll have to pay that amount when you file for the extension.