Tax News and Updates

Tax Tips for Parents of New Graduates

Parents of new graduates might not be eligible to claim their children as dependents anymore. The kids are grown up now and become "independent" for tax purposes upon reaching age 19 and no longer in school full-time or upon reaching age 23. Parents may want to review their tax projections to see the impact of having one less dependent and adjust their withholding or estimated tax payments accordingly. Along the same vein, any tax deductions or tax credits for higher education go with the person who was previously your dependent. So if your new grad is eligible for the American Opportunity credit, and she's going to be an independent taxpayer, then new grad rather the parents will take that tax credit on the tax return. (The reverse is also true, if the new grad is still eligible to be your dependent, then the person eligible to claim the dependent also takes any deductions relating to schooling.)

Parents may also want to review their section 529 college savings plan to see if there are any unused funds in the plan. If so, can the new grad use up those funds (for example by taking extra classes)? Or if the new grad is done with school for now, parents may want to consider choosing a new beneficiary for the remaining funds inside the 529 plan.

Even though the new grad might no longer be your dependent for income tax purposes, they might still qualify as your dependent for insurance purposes. The IRS allows parents to keep their sons and daughters covered through their health insurance plan up to age 27, even if that person isn't claimed as a dependent on your tax return.

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Tax Breaks for New Graduates

Persons who have just graduated from high school or college may be eligible for various tax deductions or tax credits to help lower their federal income tax on their 2012 tax return.

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New Grads: Employee Benefits That Help Keep You Tax-Efficient

New grads who are starting a new job may be eligible to receive employee benefits provided by their employer. Each employer customizes their benefits package, so the type of benefits offered will vary from employer to employer. Typical employee benefits include the opportunity to purchase coverage under a group health insurance plan, to purchase coverage under a group life insurance plan, or to receive subsidies for mass transit or college tuition. Some employers also offer a group retirement plan to foster long-term savings. Each of these benefits comes with tax incentives that help make these benefits more affordable to workers.

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Tax Planning Tips for New Graduates Starting a New Job

Persons graduating from high school or college may be starting to work for the first-time, or starting their first full-time job with benefits. This is a good time to learn (or to review) how wage income is taxed, what a paycheck is, how to read a paycheck, and how to set an appropriate level of tax withholding when starting a new job.

The types of taxes on wage income

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Documents to Retain after Filing Your Tax Return

After filing your tax return with the IRS and state tax agencies, you should keep copies of that return and any documents or data relating to that tax return. At minimum, the documents should be kept at least three years, or possibly longer depending on which states you filed in.

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How Long to Keep Tax Returns?

People should keep their tax returns, and any documents related to their tax returns, for at least three years, as that's the amount of time the IRS has to audit a tax return. This time period is called the statute of limitations, and sets a limit on how long documents need to be kept in order to prove the accuracy of a tax return.

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Tax Freedom Day 2012

Tax Freedom Day this year arrived on the same day as the filing deadline, April 17th. Unfortunately for me, I had forgotten all about tax freedom day in the hectic busyness of tax deadline day. But the folks at the Tax Foundation didn't forget.

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Proposed: the Paying a Fair Share Act of 2012

The Senate on April 16th, 2012, voted against a legislative proposal that would have implemented a 30% minimum effective tax rate on taxpayers reporting at least $1 million of income. The Paying a Fair Share Act (S. 2230) proposed that a surtax, in addition to the regular income tax and alternative minimum tax, be applied to any taxpayer (other than a corporation) whose adjusted gross income was in excess of $1 million (a threshold amount to be indexed annually for inflation).

The 30% surtax, called the "fair share tax," would be computed on a base amount of adjusted gross income less a prorated deduction for charity. The math for the proposed fair share tax looks something like this:

{30% x [ AGI - charitable deduction x (itemized deductions after limitation/itemized deductions before limitation) ] - (regular income tax + alternative minimum tax + payroll taxes - various tax credits) } x { [AGI - 1 million] / 1 million }

It appears the fair share tax here functions to increase the effective tax rate to at least 30%,  after taking into account all federal taxes such as the regular tax, AMT and payroll taxes. It also moves the tax calculation away from taxable income (after deductions) to adjusted gross income (after above-the-line deductions but before itemized deductions). There are also two prorations occurring in the fair share tax, a prorated amount of charitable donations are allowed in computing the 30% surtax, and the entire surtax is itself prorated to reflect the amount by which a person's adjusted gross income exceeds the $1 million threshold amount.

The Paying a Fair Share Act of 2012 would have raised about $46.714 billion in new tax revenues over a ten-year period according to estimates from the Joint Committee on Taxation (JCX-33-12).

Senators voted 51 in favor and 45 against the Paying a Fair Share Act, but because this bill required a 3/5ths majority, the bill was prevented from moving forward in the legislative process (Senate vote number 65).

Proposed: the Small Business Tax Cut Act

The House of Representatives on April 19th, 2012, voted in favor of passing the Small Business Tax Cut Act (HR 9).

The bill proposes a new tax deduction for small businesses with 500 or fewer full-time-equivalent employees. The proposed deduction would enable small businesses to take a deduction of 20% of net income, with the amount not to exceed 50% of wages paid to employees who are non-owners of the business. This would be a one-year only deduction for the first tax year of the business following December 31, 2011, that is for the year 2012 in most cases.

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Tax Day Resources

Today is the deadline for filing tax returns with the Internal Revenue Service. Here's a collection of resources to make tax day a little more efficient.

If you're worried about time, the first thing you should do is file an extension. This gives you extra time to finish your tax return. You can file your extension online in a few minutes, or you can download and mail in Form 4868. You can also use Form 4868 to mail in a check to the IRS.

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