Marriage can be a wonderful milestone in life. But in the midst of planning a wedding and a future with your significant other, you may not be thinking about how your new union will affect your tax bill. One critical tax factor to examine is the concept of marriage bonuses and marriage penalties. These terms refer to how marriage can affect a couple’s tax liability. In this post, we will look at the fundamentals of marriage bonuses and marriage penalties, as well as how they might affect a couple’s tax situation as a whole.
What is a marriage bonus?
A marriage bonus happens when a married couple’s combined tax liability is less than the sum of their individual tax liabilities if they filed as single individuals. This is most common when one spouse earns much more than the other. By combining their wages, the couple can take advantage of reduced tax brackets, tax credits, and deductions that they might not have had access to as single filers.
Here’s an example. Let’s say an unmarried couple has a combined income of $120,000, one person earning $0 and the other earning $120,000 in 2023. As single filers, the first person would have a $0 tax liability, while the second higher-earning person would have a tax bill of $18,876. If this same couple got married and filed jointly, their combined tax liability would be just $10,921 because they would be able to claim a larger standard deduction and would be taxed at a lower marginal tax rate.
What is a marriage penalty?
Conversely, a marriage penalty arises when a couple’s combined tax liability as a married couple is higher than their total tax liability if they were still filing as single individuals. Because merging incomes in joint filing can drive both spouses into higher tax brackets, couples with similar incomes are more likely to pay marriage penalties than couples with one spouse earning the majority of the income.
Another factor to consider when calculating the marriage penalty for high-income earners is the net 3.8% investment income tax. This tax is levied on single filers with an adjusted gross income of $200,000 or more, as well as married filers with an adjusted gross income of $250,000. In addition, these same taxpayers will also be subject to an additional Medicare tax of 0.9% on earnings over $200,000 for single filers, and over $250,000 for married couples filing jointly.
Beyond federal marriage penalties, some states also impose their own marriage penalties, including California, Georgia, Maryland, Minnesota, New Mexico, New Jersey, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin.
How can I avoid a marriage penalty?
Understanding your tax situation as a married couple is essential for efficient tax planning. For example, you can always calculate different scenarios to estimate your tax liability before filing. Filing separately rarely results in a more advantageous outcome for couples, but you may find yourself under these special circumstances. You should also explore all eligible deductions and credits to reduce your overall tax liability. Married couples who file jointly have access to several tax credits, including the Earned Income Tax Credit, education credits, and the Child and Dependent Care Tax Credit. Be aware of phase-out limits that might affect your eligibility. If you’re still unsure how to navigate marriage penalties and bonuses, consider consulting a tax professional. Doing so can provide valuable insights tailored to your specific situation. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers just like you.
Optima CEO David King and Lead Tax Attorney Philip Hwang are back from their trip to Washington D.C., where they met with members of Congress and the IRS’s new leadership to discuss what’s new in the tax world. Here is Phil and David’s recap of Optima’s visit with the IRS, including the IRS’s Strategic Operating Plan, 5,000 new customer service agents, the changes the agency’s new commissioner has already implemented and what you as a taxpayer can expect moving forward.
Before 2021, college athletes had a few ways to earn money. These were typically from scholarships, grants, part-time jobs, or possibly even help from their parents. Since then, the National Collegiate Athletic Association (NCAA) has allowed these athletes, including high school level athletes, to engage in NIL, or Name, Image, and Likeness, activities. This has created many financial opportunities for college athletes. However, it has also created more responsibilities for these first-time tax filers. Here, we will break down NIL income, including what types exist and how to report it during tax time.
What is NIL Income?
NIL income is the revenue earned by high school and collegiate athletes through the use of their name, image, and likeness. How much these athletes can earn typically depends on their social media presence, the sport they play and other factors. Currently, basketball and football players earn the most NIL income compared to other sports. The top NIL earner in 2023 is none other than 18-year-old basketball star Bronny James, son of superstar LeBron James. His NIL valuation is between $6.8 million and $7.6 million. Both his NIL valuation and social media following of nearly 13 million are comparable to many professional athletes who have been in the game much longer. While all this sounds fantastic for the emerging superstar, NIL income is taxable, meaning he and his fellow NIL earners will have financial responsibilities during tax time.
How is NIL Income Earned?
NIL income can be earned through various ways, including:
Guest appearances
Autograph signings
Sponsorships
Endorsements
Content creation
NFTs
Gifts
Vacations
Apparel and athletic equipment
How is NIL Income Taxed?
To avoid surprises during tax season, it’s critical to understand the tax implications of NIL income. NIL income earners are technically considered independent contractors, which means they would receive Form 1099-NEC at the beginning of each year if they earned at least $600 in NIL income the previous year. This includes crypto payments. If they were paid through a third-party payment network, like Venmo or PayPal, they will instead receive Form 1099-K. Gifts or free items with values of $600 or more will be reported on Form 1099-MISC. If they also worked a job that gives Form W-2, this income should also be reported. Remember, the IRS receives all 1099s and W-2s from employers, so all income should be reported on your tax return if you are an NIL income earner.
If an NIL earner has net income of $400 or more, they must file a tax return. Since they are considered self-employed, they will also need to pay estimated quarterly tax payments if they expect to owe $1,000 or more in taxes. In addition, they will be responsible for paying self-employment taxes, which equals 15.3% of their income.
Tax Help for NIL Earners
Earning money for your name, image, and likeness is an amazing opportunity for high school and college athletes. However, paying taxes on this income may not always be a first instinct which can lead to financial troubles. A good way for these earners to save money during tax time is to take advantage of tax-deductible expenses available, including plane fare, hotel bills, vehicle expenses, marketing and agency fees, and more.
Meanwhile, there are also education tax credits and the student loan interest deduction for those who qualify. Also, keep in mind that each state has their own set of tax rules and regulations. It is critical to become acquainted with your state’s specific rules in order to understand how NIL income is taxed and what deductions or credits may be available to you. Keeping good records, planning ahead, staying informed, and consulting with a knowledgeable tax professional can make the biggest difference in this complex process.
If You Need Tax Help, Contact Optima Tax Relief Today for a Free Consultation
Purchasing a home is an exciting milestone in life as it represents a significant investment. However, beyond the joy of becoming a homeowner, it’s crucial to understand the tax implications that come with this major financial commitment. In this blog post, we’ll explore the various tax considerations related to buying a home, providing you with valuable insights to help you navigate this aspect of homeownership confidently.
Itemizing Deductions
Purchasing a home may be the first opportunity you receive to start itemizing your deductions during tax time. While itemizing can require much more work, it could result in a larger refund. If you want to claim any expenses related to your home, you must itemize your deductions. This might include expenses such as mortgage interest or real estate taxes. Consulting with a knowledgeable tax professional can give you a better understanding of your best option is.
Mortgage Interest Deduction
If you have a home loan that originated after December 16, 2017, you can deduct mortgage interest, up to $750,000. Any loan with an origination date before this qualifies for a mortgage interest deduction of up to $1 million. To qualify for this deduction, you must itemize your deductions on your tax return and meet certain eligibility criteria. Every January, your home lender should send you Form 1098, Mortgage Interest Statement. This reports mortgage interest of $600 or more you paid during the year. If you paid less than $600 in mortgage interest, you can still deduct it during tax time.
In addition to mortgage interest, your 1098 will also show much you paid in mortgage points during the year. Mortgage points are a form of payment made to obtain your mortgage. They are generally defined as a percentage of your loan amount. For instance, let’s assume you paid three points, or 3%, on your $500,000 mortgage, for a total of $15,000 (3% of $500,000). The IRS will typically allow you to deduct the entire amount of your points in the year they were paid. You should note that the deductible amount should be shown on your 1098 form.
Real Estate Tax Deduction
As a homeowner, one of your expenses will be real estate taxes. The IRS allows you to deduct only the actual real estate tax amounts paid during the year. However, you can also deduct local property taxes as well. If you pay these taxes through your lender, this amount should be shown on Form 1098. If you just purchased a home, you may have reimbursed the seller for their real estate tax payments. In this case, you will be able to deduct this amount through the real estate tax deduction too. Remember to keep records of any payments you made. Beginning in 2018, the total amount of state and local taxes you can deduct, including property taxes, is capped at $10,000 per year.
Home Energy Credits
Homeowners can also claim tax credits by making some energy efficient upgrades to their home. Specifically, the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit are great tax credits for those who recently made home improvements that help conserve energy. Some examples include energy-efficient windows, exterior doors, furnaces, air conditioners, solar panels, and more.
Mortgage Interest Credit
The IRS allows lower-income and moderate-income taxpayers to claim the Mortgage Interest Credit if they received a mortgage credit certificate (MCC) from their state or local government. An MCC is usually given to first-time homeowners, and it allows you to claim the credit of up to $2,000 of the mortgage interest paid per year. Taxpayers should note that this credit is completely separate from the mortgage interest deduction that uses Form 1098. The Mortgage Interest Credit can be claimed using Form 8396.
Tax Help for Homeowners
The tax benefits of homeownership can provide notable savings and financial advantages. By familiarizing yourself with the tax deductions and credits available, making informed decisions about how to file your taxes can be a little easier. However, navigating complex tax rules and regulations can be overwhelming. Therefore, it’s highly recommended to consult with a qualified tax professional who can provide specific guidance tailored to your individual situation. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
We are told that filing for bankruptcy should be the very last resort when dealing with extreme financial hardship. This is because it has long-term effects. For example, it will leave a negative impact on your credit score for up to 10 years. It will result in decreased access to credit, loss of assets, and sometimes forfeiture of tax refunds. In addition, bankruptcies are public information, so employers, customers, family, and just about anyone can access this information. Filing for bankruptcy must be a calculated decision and one that takes all factors into consideration, including the tax implications. In this blog article, we’ll look at the tax consequences of Chapter 13 bankruptcy and provide useful information to help individuals and companies make informed decisions.
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy is often known as the wage earner’s bankruptcy, including self-employed individuals and sole proprietors. This is because it is for those who have income but have fallen behind on payments for items purchased on credit. In Chapter 13 bankruptcy, your debts are reorganized, and a payment plan is established. A court-appointed trustee will supervise you and collect and distribute your payments. As long as you satisfy the terms of the repayment plan issued by the bankruptcy court, you should be allowed to keep your house after Chapter 13 bankruptcy. Under Chapter 13, you have 3-5 years to pay off your obligations while devoting all of your disposable income to debt repayment. That implies simple living. However, the Chapter 13 option allows you to erase unsecured debt, such as credit card bills, while catching up on home payments.
What happens to tax debt after filing for Chapter 11 bankruptcy?
Tax debts cannot usually be discharged (wiped away) in Chapter 13 bankruptcy. You instead repay your tax debts over the course of your Chapter 13 repayment plan. This could take three or five years. Typically, during bankruptcy, debts will be classified as priority or nonpriority. These tax debts need to be paid in full during the repayment period. This can include income taxes, FICA, some employment taxes, penalties, and others. On the other hand, nonpriority debts are usually combined with unsecured debts you have, such as credit card debt. These are the debts that are likely to be settled with creditors for less than what you owe. However, if you still have remaining taxes due when your repayment period ends, you must pay them in full. Any outstanding tax debts will not be discharged, and you will be obligated to pay them.
Filing Tax Returns After Bankruptcy
Like the other two chapters, it is imperative that you still pay your taxes while in Chapter 13. It is critical to keep up with your tax duties during your bankruptcy process, including timely filing of tax returns and payment of any taxes owed by the due date. While in bankruptcy, you can technically still receive tax refunds. However, they might be delayed or utilized to pay off tax debts.
Tax Help for Bankruptcy Filers
It can be difficult to pay taxes while in Chapter 13 bankruptcy. You may confront a variety of difficulties. Some examples are managing all payments, paying down interest and penalties on your tax debt, changing your repayment plan to incorporate tax liabilities if it hasn’t been done already. Taking care of both tax payments and overdue tax bills during Chapter 13 can be overwhelming, but it really is crucial to not only understand your tax obligations but also figure out how to manage your debt during your repayment plan. Rest assured, working with experienced bankruptcy lawyers and tax professionals can help mitigate the situation and help you successfully navigate the bankruptcy process. If you need tax help, Optima Tax Relief is here.
