It’s that time of year again. If you have not already submitted them, you will soon be up against the clock to get your taxes completed.
While unraveling the mysteries of the tax code is an endeavor best saved for CPAs, there are certain aspects of taxes that are important to understand.
Taking a closer look at a typical paycheck is one way to not only gain a greater understanding of where your money goes, but also to create a list of things to watch out for, and other considerations when filing.
Payroll taxes, income tax withholding, Social Security and Medicare taxes. While you earn a wage, you contribute to the Social Security and Medicare systems through payroll taxes. In 2016, employees contributed 6.2 percent on wages up to $118,500 (the “wage base”) and 1.45 percent (the Medicare portion) on all wages — employers match those amounts (self-employed pay both halves.) Note, in 2017 the “wage base” increases to $127,200.
Federal income tax withholding (and state, if applicable) from your paycheck will also reduce take-home pay. However, the amount withheld may or may not be enough to cover your federal income taxes due. You can file a W4 with your employer to change the number of exemptions you claim, which would change the amount of your federal income tax withheld.
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Keep an eye on your income tax withholding to make sure you have enough withheld to meet your projected income taxes. Talk to your tax advisor to make sure you have enough income tax withheld to avoid an additional tax for failure to pay enough tax through withholding or through estimated tax payments. In addition to the taxes taken out of your paycheck, you should know how your wages will affect your taxable income level. Your income level will determine what exemptions and deductions are available to you; keep an eye on it, as it may have changed from the previous year. Also, watch out for Social Security overpayment. If you changed jobs in 2016 and earned greater than $118,500 (or if you end up changing jobs in 2017 and then earn more than $127,200) you are at risk for overpaying.
Income tax rates. For 2016 and for 2017, the federal income tax rates continue to be 10 percent to 39.6 percent, depending on filing status and taxable income. Income in 2016 that was above the $415,050 to $466,950 threshold is taxed at a rate of 39.6 percent, which is up from the 2012 rate of 35 percent. In 2017, the income thresholds will be $418,400 to $470,700.
If your taxable income is close to the next tax rate bracket, it could make sense to avoid certain transactions that might push your taxable income up to a higher income tax bracket. Talk to your CPA or tax advisor about managing your tax bracket. Keep in mind that Congress may potentially change these income tax brackets in 2017 so it is very worthwhile to watch for any new developments.
Also, if you got a raise at work, don’t forget to check your 401(k) contributions. If you are able to raise the percentage of your contribution to a pre-tax 401(k), you have less income on which tax is withheld. This could ultimately keep you from moving into a higher tax bracket.
Alternative minimum tax. If you are a high-income earner, you may need to know about the alternative minimum tax when you file your taxes. It was originally created to ensure the wealthy couldn’t avoid significant amounts of taxes by using certain deductions, exemptions, losses and credits.
In 2012, the American Taxpayer Relief Act permanently increased the AMT exemption amounts and automatically indexed them for inflation to try and decrease the burden to the middle class.
The AMT is a separate way to calculate federal income taxes depending upon your annual income. After federal income taxes are calculated as usual, the AMT calculation is done separately by adding back some deductions and subtracting the AMT exemption resulting in the AMT taxable income amount. The AMT tax rates are then applied to come up with your AMT. Once the AMT is determined, compare the AMT to the tax calculated first under the regular income tax system. Your federal income tax will be the greater of those two numbers. Check with your CPA or tax advisor for all the details on this calculation.
[See: 7 Dividend Stocks to Benefit From Trump Tax Changes.]
Personal exemptions, itemized deductions, and phase-outs. For individuals with taxable income above a certain threshold, their personal exemptions and itemized deductions may be phased out.
For 2016, the thresholds were $259,400 for single; $311,300 married, filing jointly; $285,350 head of household; and $155,650 married, filing separately. For 2017, those thresholds are $261,500 for single; $313,800 for married, filing jointly; $287,650 head of household; and $156,900 married, filing separately.
You’ll want to check with your tax advisor or CPA to see where you land when considering the possibility of being subject to these phase-outs. If your income is close to the threshold amount for your filing status, you may wish to avoid having additional taxable income in the year.
Other considerations to keep in mind:
For those with individual retirement accounts, don’t forget that contributions to an IRA for 2016 can be made up until April 18, 2017, the deadline for filing your 2016 income tax return.
Don’t forget medical expenses. For 2016, those 65 and older with medical expenses that exceed 7.5 percent of their adjusted gross income are eligible for deductions. However, in 2017, those medical expenses must now exceed 10 percent of their adjusted gross income to be eligible for deductions, just like anyone younger than 65.
Last, if you or a dependent are going to school, make sure to check on tax credit options for tuition.
While taxes can be complex and even a source of angst, being armed with a little knowledge both now and in the future may go a long way in helping to ensure that you are able to put your money to work for you during tax time.
[See: 10 Tips to Boost Your IRA Balance.]
This article is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal or tax advice. Clients should consult their tax advisor or attorney.
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Your Paycheck Tells the Tax Tale originally appeared on usnews.com
