Tax Tips

(Read Carefully – Lots of Tips – Updated 10/15/2020)

Reduce W2 Earnings (1) pay for medical and dental insurance with pre-tax dollars; (2) use an employer health spending account to pay all medical costs including over the counter medications; (3) use employer dependent care assistance plan to pay for child care – max $5,000 exclusion; (4) employer 401k savings plan, maximum contribution is $19,500 plus an additional $6,500 catch up contribution if over 50.

Net Investment Tax – 3.8% tax on interest, dividends, rents, capital gains, royalties, and income from other passive activities for some taxpayers (single 200K, married 250K)

Additional Medicare Tax – .9% tax on wages and se income for some taxpayers (single > 200K, married > 250K)

Deductions Eliminated – Personal deductions, Moving expenses, Miscellaneous deductions, Alimony (new agreements after 12/31/2018), Casualty losses except for federally-declared disaster, Domestic production deduction

New Tax Brackets – (see Newsletter)

AMT Tax  – exemption raised (single 71,700 to 72,900, married 111,700 to 113,400) few people will be affected

Child Tax Credit$2,000 for each child under 17 (phase out begins at 400K married, 200K single), $500 for other dep

Teacher Expense Deduction$250 deduction from gross income 

Education Tax Credits – American Opportunity Credit – (phase out at 160-180K married, 80-90K single).

$2,500 maximum per eligible student (1st four years), 100% of first $2,000 and 25% of next $2,000

Lifetime Learning – $2,000 (20% of up to $10,000) per family (phase out 118-138K married, 59-69K single)

Tuition and Fees Deduction – Married- $4,000 less than 130K,  $2,000 less than 160K, Single < 65K < 80K

Student Loan Interest $2,500 is deductible (phase out at 140-170K married, 70-85K single) 

Energy Tax Credit – limited to $500, equals 10% of energy saving improvements to principal residence, like a new heating system, windows, insulation, doors, central air, and others. Credit reduced by $ taken before.

Sale of Personal Residence

  • Married taxpayers can exclude a gain of either $250,000 or $500,000 (single $250,000).
  • Seller owned and used home as principal residence for at least 2 of the last 5 years and had no sale of residence during the last 2 years.  There are exceptions allowed for job changes, health, and other reasons.

Capital Gain Rules           12 Months and Less             Greater than 1 YR   

Federal Tax Rate (%)       10, 12, 22, 24, 32, 35, 37           zero, 15, also a new 20% rate since 2013 

Mass    Tax Rate (%)                                  12                                   5.0  

Dividend Tax Rates are zero or 15% on most corporate stock if held 60 days, also a new 20% rate

IRAs (please call if you have questions)

  • Non working spouse or spouse not in a company sponsored retirement plan may be eligible to contribute $6,000 to a deductible Regular Ira. (Phase out at $196,000-$206,000)
  • Non ded contribution of $6,000 to a Roth IRA (phase out at $196,000-$206,000) married and $124,000-$139,000 single)
  • Maximum contribution to Roth Ira or Regular Ira is $6,000. (You must choose.)
  • For age 50 and over, additional catch up contribution of $1,000 allowed

Small Business Tips

  • 20% business pass thru deduction (lots of rules)
  • 100% of Self Employed Health and most of Long Term Care insurance is deductible from Gross Income.
  • Business Equipment write off maximum is $1,040,000 
  • 100% First Year Bonus Depreciation for first use depreciable assets purchased after 9/27/2017-12/31/2022 
  • Business Use of Home Office Deduction –rules relaxed, only taxed on depreciation taken when home sold.
  • SEP IRA – contribute up to 20% of net business income or
  • Profit Sharing and 401k plan – contribute up to 20% of net business income to profit sharing and $19,500 to 401k plan (maximum contribution $57,000) and if over age 50 an additional $6,500 allowed to 401k

State Tax Reminders

  • Tax rate reduced to 5.00%
  • Capital Gain rates see above
  • Personal deductions: married $8,800, single $4,400, head of house $6,600.  The deduction depends on having health insurance.  Bring your health insurance cards or form MA 1099-C.
  • Child care deduction is $4,800 per child (maximum 2 children). –Children under age 12 deduction is $3,600 per child or parent over 65 (maximum of 2). –Rental deduction is ½ of rent paid up to $3,000
  • Commuter Deduction – maximum $750/person (fast lane and transit passes)
  • 529 Contribution Deduction – married $2,000, single $1,000 has to be a Mass Plan
  • Senior circuit breaker tax credit, maximum $1,150  (bring your real estate and water bills).