News & Articles

Ten Sources of Tax-Free Income

Posted on Mon, Nov 06, 2017

There are still ways to earn income that is free from federal income tax. With the various tax increases that have taken effect in recent years, tax-free income opportunities are more valuable than ever.

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Tags: Roth IRA, Gifts, Income, Tax-free Income, Life Insurance

Will You Have to Pay Tax on Social Security Benefits?

Posted on Wed, Nov 01, 2017

Some people are under the misconception that Social Security benefits are always free from federal income tax. However, depending on how much income you have from other sources, you may have to report up to 85% of your benefits as income on Form 1040 and pay the resulting federal income tax.

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Tags: Social Security, Income, Federal Income Tax

Capital vs. Ordinary: Classifying Income and Losses Affects Your Taxes

Posted on Thu, May 18, 2017

Most of the time, how to classify gains and losses from selling an asset is fairly straightforward. But there are some gray areas that require a closer look at the facts and circumstances, especially when real estate is involved, as a couple of recent cases demonstrate.

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Tags: Real Property Tax, Income, Capital Gains, Ordinary Gains

Don't Overlook a ROTH IRA if You are Self-Employed

Posted on Mon, Dec 12, 2016

Saving for retirement on a tax-advantaged basis should be on nearly everyone's financial "to do" list. Making contributions to a Roth IRA is one tax-wise way to save, because you can take withdrawals after age 59 1/2 that are free from federal income tax, assuming you've had at least one Roth account open for more than five years. Of course, Roth contributions are nondeductible, but they are valuable because you reap tax savings on the back end of the deal.

However, if you're self-employed and fairly affluent, you may have dismissed the idea for two reasons:

1. You figure your income is too high to qualify for Roth contributions.

2. You figure a Roth IRA is not that attractive because you believe you're in a higher tax bracket now than you'll be in during retirement. Instead, you make maximum deductible contributions to a traditional tax deferred retirement arrangement such as a simplified employee pension (SEP) plan, solo 401(k), or a defined contribution or defined benefit Keogh plan.

In this article, we'll examine why both assumptions may be wrong and why a Roth IRA is a smart way to build a substantial federal-income-tax-free retirement fund -- even if you have another retirement plan.

Think Your Income Is Too High? You May Be Wrong

It's true that the ability to make Roth IRA contributions is phased out, or completely eliminated, if your modified adjusted gross income (MAGI) exceeds certain levels. For 2017, the phase-outs start at the amounts listed below. MAGI is the adjusted gross income (AGI) amount reported on the bottom of page one of your Form 1040 with certain add-backs that may or may not apply in your situation.

Income Limit

For 2017

Unmarried individual MAGI phase-out range $118,000 (up from $117,000 in 2016)
Married joint filer MAGI phase-out range $186,000 (up from $184,000 in 2016)

At first glance, these figures do make it look like a self-employed person with a robust income is unlikely to be eligible for contributions. But take another look.

A self-employed individual's modified adjusted gross income is likely to be considerably lower than the MAGI of another person who is in roughly equivalent circumstances and who is an employee. Reason: Successful self-employed taxpayers usually have hefty deductions for:

  • Certain expenses incurred in the business (such as deductions for rent, an office in the home or a computer system).
  • Contributions to a tax-deferred retirement plan (typically, a SEP, a defined contribution Keogh plan or a solo 401(k) plan).
  • Health insurance premiums.
  • The write-off for 50% of self-employment tax.

These deductions, along with others, are available to self-employed people and are subtracted in arriving at MAGI. Therefore, a self-employed person can have relatively high gross income from his or her business while having a much lower MAGI.

Bottom Line: Many self-employed individuals qualify for Roth IRA contributions without even realizing it.

Think a Deductible Plan is the Only Way to Go? You Could be Wrong

Clearly, it's a good idea to deduct contributions to a tax-deferred retirement plan (such as a SEP) set up for your self-employed business. However, that doesn't necessarily mean such contributions

More Roth IRA Advantages

  • At age 70 1/2, you must begin to take withdrawals from a traditional IRA or face steep penalties. But with a Roth IRA, you don't have to take withdrawals at any age, meaning the account can continue to grow tax free.
  • Contributions can be made as long as you have earned income, no matter how old you are.
  • A Roth IRA can be passed on to your heirs, who can take tax-free withdrawals for decades if certain steps are taken.

are preferable to contributing the same amounts to a Roth IRA. The best way to evaluate the issue in your situation is to look at two assumptions:

Assumption #1: You will always take the tax savings from making a deductible retirement plan contribution and either invest the money in a taxable retirement savings account or use the money to make a bigger deductible retirement plan contribution.

Assumption #2: You expect to be in a lower tax bracket during your retirement years, which means you're generally well advised to make a deductible contribution to a tax-deferred retirement plan, instead of a Roth IRA.

In real life, though, you may not be disciplined enough to follow through with the first assumption. And the second assumption can also be problematic when you consider the federal budget deficit and politics. If it turns out that you will actually pay higher tax rates during your retirement years because tax rates go up, you'll wish you had made Roth contributions when you had the chance.

Key Point: Even if both of the above assumptions are true, you should still make Roth IRA contributions if you have cash left over after making the maximum deductible contributions to a tax-deferred retirement plan. In other words, don't just do one or the other. Contribute to both! Talk with your EHTC Tax Advisor if you are unsure.

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Tags: Roth IRA, Income, Roth

Get Up and Running After a Disaster

Posted on Thu, Sep 29, 2016
If your business is hit by a hurricane, windstorm, blizzard, or other natural disaster, or if it falls victim to arson or terrorism, you might have to close up shop for a while. As a result, you could suffer a major loss of income.

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Tags: Income, Crisis Management, Losses, Damage, Disaster

Ten Tax Breaks Available for Parents

Posted on Wed, Jan 14, 2015

How much money do you need to raise a child? According to an estimate from the U.S. Department of Agriculture, it will cost a middle-income couple roughly $245,000 to raise a child born in 2013 to the age of 18. This is up 1.8 percent from the prior year. Plus, the estimated average cost is much higher in certain parts of the country. For example, high-income families living in the urban Northeast are projected to spend almost $455,000 to raise a child for 18 years.

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Tags: Tax, EHTC Article, Income, Tax Breaks, Articles, Children

Ten Ways to Receive Tax-Free Income

Posted on Fri, Jan 09, 2015

There are still ways to earn income that is free from federal income tax. With the various tax increases that have taken effect in recent years, tax-free income opportunities are more valuable than ever.

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Tags: Tax, EHTC Article, Income, Nontaxable, Newsletter, Articles

Ten Year-End Tax Planning Ideas for Individuals

Posted on Tue, Oct 28, 2014

Another year is winding down. Before the hustle and bustle of the holidays sets in, it's a good time to brainstorm ideas to lower your 2014 tax bill. Here's an overview of what's happening in the world of tax -- and 10 simple tax-saving strategies that you can implement before year end.

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Tags: EHTC Article, Tax Planning, Income, Year-End, Tax Rates, Newsletter, Articles, Tax Return, Taxes

Answers to Questions about Wage Garnishment

Posted on Wed, Oct 22, 2014

More than one in ten working Americans between the ages of 35 and 44 had their wages garnished in 2013, according to a recent study performed by payroll service company ADP. Many people associate wage garnishment with "deadbeat dads" who owe spousal and child support. But ADP's study found that many debtors were delinquent on taxes, credit cards, medical bills and student loans -- not support payments.

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Tags: EHTC Article, Employers, Income, Wage Garnishment, Newsletter, Articles, Payroll, Taxes, Employees