Tag: Save Money

Posted on

Tied the Knot? Your Taxes Just Got Interesting!

So you got married. Now what?  Easy there, this isn’t that type of article.  We will keep our marriage advice and recommendations strictly to the tax realm

via GIPHY

But seriously though, I’m sure, right at the top of your concerns is how getting married will impact your taxes.  The first thing is that you can’t file as single status anymore.  If you are married on December 31st, you have to file with one of the married status designations – jointly or separately.  What’s the difference you ask?  With a married filing jointly (MFJ) status, you file one return together, reporting both of yours and your spouse’s income and deductions together.  Under married filing separately (MFS), you will each file a separate return, reporting your share of income and deductions on your own separate returns.

Next Question: why does it matter?  There are a couple of different reasons why it matters.  MFJ filing status generally has better tax rates across the board than MFS.  If you are looking at only tax savings, MFJ is almost always the way to go because you will pay less combined tax.  If you take a look at the tax brackets and how they increase as income increases, MFJ gets broader tax brackets that go up more slowly than MFS.  MFJ also gets a higher standard deduction than you would get as MFS.  MFS also has to choose the same deduction method – standard or itemized- regardless of which one works best for each taxpayer.  

So why would someone choose MFS then?  It is usually for a reason that falls outside pure dollars and cents.  When you file MFJ, both you and your spouse are liable for the full tax obligation and what is reported on the return.  It isn’t split 50/50, you both are legally required to be sure the full amount is paid. If there is potential fraud on the return, both taxpayer and spouse can be liable. Maybe that isn’t what you want.  Sometimes, taxpayers will choose to file separately for student loan repayment reasons to keep payments lower based on income. If one spouse had significant medical expenses, it could make sense to file separately if that spouse would have a lower AGI, allowing more of those medical expenses to be deducted since expenses have to be over 7.5% of your AGI.  MFS is often a good option for spouses who are going through a divorce that is not finalized yet.  It largely allows each spouse to file a return mostly independent of the other.

This choice can also be important for how it impacts many of the tax credit we discussed in our last installment.  Do a quick dive HERE .  In general, the earned income credit is eliminated for MFS taxpayers, since all income could in theory be on one spouse’s return while one taxpayer reports below poverty level income.  The Child and Dependent Care Credit is also virtually eliminated with a few narrow exceptions.  Education credits and Adoption credits are also largely disallowed

via GIPHY

So, think carefully when choosing to file separately if you are married.  The tax man can bite you.  

Here are some real like examples of when married filing separately might make sense: One Spouse has significant medical expenses – perhaps one taxpayer is undergoing cancer treatments and has significant out-of-pocket medical expenses of $25,000+ but has low taxable income from being unable to work.  Since medical expenses are an itemized deduction and only expenses in excess of 7.5% of AGI qualify, this might be a place where married filing separately makes sense, to maximize itemized deductions.

You want to keep tax liability legally separate: Perhaps one spouse owes significant back taxes, has defaulted on student loans, or has a tax lien.  Filing separately allows the spouse of the taxpayer to maintain separate legal liability and protect her/his refund from the IRS.  If the couple were to file jointly, the IRS would claim any refund entitled to the spouse to satisfy the outstanding debts.

So, how do you change your filing status?  If you are going from joint to separate, you can simply file 2 separate tax returns reporting each share of your income and deductions.  You split any items that are reported jointly, in most cases.  You will also need to both choose the same deduction method as mentioned earlier – either you both take the standard deduction or you both itemize your deductions.  If you are going from separate to joint status, you file one return, check the MFJ box and report all of your income and deductions together on one return.  To go back and change prior years, you have to file amended tax returns.  Generally, you can go back and amend from MFS and change to a joint return, however, you are not permitted to amend a joint return and change to MFS once the due date of the original return has passed.  

In conclusion choosing how you will file your tax returns is an important decision that can make a major financial difference but at the same time, can also expose you to risks, depending on your circumstances.  As a general rule, married filing jointly produces a better tax result but there could be other financial and legal factors that may drive your decision to file separately.  As usual, this is a blog and not tax advice.  If you have questions about what filing status makes the most sense for you, consult a tax professional who is experienced in these conversations.  They will be able to help you weigh the various factors and put to numbers to paper regarding what make the most sense for your particular set of circumstances.

via GIPHY

Posted on

Top Tax Credits to Save You Money This Year

In our previous installment we talked about the difference between tax deductions and tax credits.  You can check that out here {Blog Post Link}.  In short summary, tax credits reduce your tax liability dollar for dollar where deductions reduce the income your tax is calculated on. The world of tax credits is vast and varied.  In this particular post we will hit on some of the most popular/claimed credits, how much they can make a difference, and some of the qualifications to claim them.  This will be a primer and is certainly not an exhaustive list.  Even I don’t want to sit and read an exhaustive list of tax credits.  I might do it, but it isn’t the most interesting reading in the world.

via GIPHY

To kick things off, we will start with maybe one of the most mis-claimed or misunderstood credits – the Earned Income Credit (EITC).  The EITC is a tax credit intended to provide benefit to lower income tax payers and can actually be refundable.  What does “refundable” mean?  It means that even is your don’t actually owe tax or have withholding, you can still get a tax refund of this credit. {Sweet} The credit is based on a percentage of your earnings and factors in other financial information, like your filing status, how many dependents you have, what kinds of income that you have, and some other specific tax items.  If you make over $68,075 and file a joint return or $61,555 filing as single/head of household, you won’t be eligible for this one.  For 2025, the maximum credit is about $8,000 and is also fully refundable.  To claim the credit, you can file a Schedule EIC along with your annual Form 1040 – you know, your annual tax form.

Another popular credit is the Child Tax Credit (CTC).  The CTC is easy to identify.  It is a flat per dollar amount per child that you have under the age of 17.  

via GIPHY

In July of 2025, President Trump’s One Big Beautiful Bill (OBBB) – could we have any more abbreviations? – increased the 2025 credit amount to $2,200 per eligible child, indexed the credit to increase with inflation, and added some requirements about the parent and child having valid social security numbers.  You must have earned income to claim the credit and if you make over $200,000 as a single filer or $400K for jointly filers, you aren’t able to claim the credit.

Next up on the list of credits you never knew you wanted to know about are Educational Tax Credits.  There are 2 different credits designed to support taxpayers with post-secondary education costs – the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).  Both credits are designed to help with higher education costs.  The AOTC is the more generous credit of the 2, designed to help only with the first 4 years of college tuition.  You must be at least a half-time student and the student can be you, a spouse or a dependent.  The maximum credit amount is $2,500, with 100% of the first $2000 being eligible for the credit and 25% of the next $2,000.  Up to 40% of the credit can also be refundable.  For the LLC, the qualifications are lower.  The eligible student is required to only be enrolled in one course during the calendar year.  The LLC is available for all years of post-secondary education, including masters and beyond courses, for an unlimited number of years.  The maximum credit annually is $2,000 but is calculated at 20% of your tuition costs up to $10,000.  It is not refundable.  As with most credits, if you make over $90K as a single filer or $180K married filing jointly, you can’t claim the credits.

via GIPHY

The last group of credits we will discuss are energy credits that help the environment. You can claim small credits related to energy efficient improvements to your main home as long as that home is in the US.  The credits are based on how much you spend and are generally capped at $200-$500 but various items can qualify like new windows, insulation, interior and exterior doors, HVAC systems, or hot water heaters.  If you decide to install larger energy items, like solar panels or a geothermal heating system, you can actually claim a tax credit up to 30% of the cost of the improvement.  You want to be sure you check and make sure whatever you are doing meets the requirements, but don’t miss out since they can make a difference.

This list is by no means exhaustive and primarily touches on a few common credits available to individuals.  Business owners have access to a host of other credits like the Research & Development Tax Credit, various employer/employee related credits, retirement plan credits and many others.  

You may be thinking, “Great – now what do I do?”  How do I get these credits?  Are they on a card or something?  To claim these credits, you file and report the required info on various forms as a part of your annual Form 1040 tax return.  Each credit type will have a corresponding form or Schedule and outline what information you need to include in order to properly claim and support the credit.  Be sure that you maintain any documentation necessary to support your credit claim in the event the IRS asks for it, particularly if regarding the EV vehicle credit.  This isn’t one we talked much about due to changing laws, but as with all credit, be sure you can back up the claim.

A few things to keep in mind, if you think you may be eligible to claim any tax credit, be sure that you either consult a qualified professional or thoroughly review the instructions to be sure you meet requirements of the credit.  You don’t want to be claiming credits that you don’t actually qualify for.  If the IRS catches it, your credit claim could get denied and you might end up owing penalties too.  Nobody wants that. This wraps up our discussion on credits.  Be sure when filing your return that you are maximizing everything available to you. Don’t let the G’men be keeping your money.

via GIPHY

Posted on

What is a Tax “Write-Off” Anyway? Is It the Same as a Tax Credit?

For this friendly tax installment, we are going to reverse course from being in the tax weeds and bring it back to things that are basic.  This installment is going to cover Tax Deductions and Tax Credits, what the difference is, and how they work.

I’m sure you have heard of a tax “write off”

via GIPHY

Maybe you have a friend that offers to pay for meals and says, “I can just write it off” or something to that effect.  What does that even mean? Can you invite me to these lunches?

A more technical term for a tax write off is a tax deduction.  All right, got it.  Tax Deduction = Tax write off.  Now what?

via GIPHY

Tax deductions are generally quite broad and cover a wide array of expenses given your specific set of tax circumstances.  First we will start with how your tax is determined.  Calculating tax starts with your income – the amount of money you earn, not necessarily the cash that hits your account.  Once you have your income tabulated, you subtract or “deduct” expenses that are allowed under our tax laws to reduce your income.  This is sometimes referred to as net income or taxable income.  Your tax is then calculated based on your taxable income. So deductions reduce the amount of income that you are required to pay tax on.

Some common deductions for most individuals who are employees might be retirement plan contributions, HSA account contributions, student loan interest, or itemized deductions.  Many individuals take advantage of the increased “standard deduction” rather than itemize those deductions.  Taxpayers who own a business are permitted to deduct from their gross business income a much broader range of expenses – travel, payroll, advertising, and other expenses deemed to be necessary trade or business expenses.

Great, so if I can deduct it, that means the government is paying for it right, by reducing my tax, right?

via GIPHY

Going back to the above, your deductions reduce the income used for calculating your tax not your actual tax directly.  If you spend $3,000 as a deduction, that does not translate to $3,000 in less tax.  You have to look at your tax rate.  If you are in the 20% marginal tax bracket, then that deduction would save you $600 in tax ($3,000 x .2).  If you are in a higher bracket, then your deduction will reduce your tax more.  You can think of deductions as buying things at a discount that is variable from taxpayer to taxpayer based on your tax bracket.  You still have to spend the money, you just save some in tax later when you file your return.

So what are tax credits then?  Is that even a real thing?

via GIPHY

Tax credits actually directly reduce your tax owed instead of the income on which your tax is calculated.  They are factored in after the tax is calculated and reduce it dollar for dollar.  You may be thinking “Well that sounds way better, lets just do that instead”.

That’s because it is better, but tax credits are limited by the government on purpose for this reason.  You have to be eligible to qualify for them, and they are limited to specific circumstances.  For example some prominent credits for individuals are the child tax credit, the earned income credit, the dependent care credit, and the American Opportunity tax credit.  Each of theses credit will reduce your tax directly by the amount of the credit.  Most of them have income limitations and/or other qualifications so that the credit is limited to the targeted groups.  However, definitely take legal advantage of them if you can.  

Business owners have other credits available to them as well on a host of things.  The research and developmental expenditures credit is a big one meant to incentivize businesses to engage in new technology development or processes.  In recent years, many environmental based credits have been opened up for both businesses and individuals to encourage investments in technologies or products deemed good for the environment.

One credit that has been in the news lately is the Employee Retention Credit.  While in theory it was a great credit for business owners to retain employees throughout the pandemic, it was so throughly abused by fraudsters that the IRS shut the credit down and stopped processing new claims.

So, now you know the difference between tax credits and tax deductions.  Tax credits are in effect much better but on the down side, much more limited in applicability.  While tax deductions don’t reduce tax by the same degree as a credit, they are so much broader in availability that they can not be neglected.

I hope this helps the next time you are chatting with you friends about taxes (everyone does this right?) You will be able to throughly the discuss the merits of writing off that Starbucks Latte or new iPad.

As always, if you have specific questions about expenses that could be deductible or credits of which you could take partake, consult a qualified tax professional.  This is a blog, not tax advice.

Posted on

Reducing Taxes – Standard vs. Itemized Deductions

What’s the difference and why should you care?

So it is tax filing time. You have all your income documents and withholding ready to go.  You are cranking through ready to wrap this up and get back to the things you like doing, which taxes are definitely not a part of, and you get to this question: Would you like to use the Standard Deduction or Itemize your Deductions?

via GIPHY

You may be tempted to select whichever option gets you done the fastest.  Stop! Unless it is April 15th (or October 15th) at 11:59pm, the fastest choice may not be the best choice.  Why you ask? Have no fear, faithful reader, I am here to set you down the right path.

Why it Matters

The short answer is that either one of the options save you money.  Deductions reduce your taxes.  How? They reduce the amount of money on which you have to pay tax.  If you make $50K, a tax deduction of $10K would have you pay tax on $40K, which might save you $1,000 in tax if you didn’t have the deduction.  Tax Credits work a little differently and I have dig into that in this fancy post here.

The Standard Deduction

So what is the “standard” deduction.  Your mama always said you were special, and you are.  The standard deduction is a base level tax deduction offered to all taxpayers.  The amounts fluctuate primarily based on your filing status. We can cover filing status in another post.  Often your age can increase the standard deduction you are eligible to claim as well.  You  are permitted to claim the standard deduction no matter how much money you make.  The amount changes from year to year.  The 2017 Tax Cuts and Jobs Act basically doubled the standard deduction amounts and reduced a lot of the need for itemized deduction filing.

Itemizing Deduction

The alternative to utilizing the standard deduction is to itemize out your deductions.  The IRS Code allows taxpayers to deduct 5 broad categories of deductions, when combined, are your Itemized Deductions: Medical Expense, State and Local Taxes, Interest Expenses, Charitable Contributions, and Miscellaneous.  There are nuances and details to all of these deductions that would need to be covered in separate posts like Explaining the Mortgage Interest Deduction. When Itemizing your deductions, you add the totals of each of these five categories and the total is your deduction.  With itemizing deductions, your income matters.  With the passage of the One Big Beautiful Bill, it reintroduced certain income limitations that factor into how much of your itemized deductions that you are permitted to deduct. 

Pros and Cons

The biggest benefit of the standard deduction is that it is the simplest which also means quickest.  You take the deduction allotted to your filing status.  The downside is that you could be leaving money on the table.  Conversely, the biggest benefit of itemizing your deductions is that you could save more tax dollars.  The con of itemizing is the additional time it takes to gather documentation of your expenses and calculate each deductible amount.  Depending on how you file your return, there could also be additional filing cost if your tax preparer charges extra to prepare Schedule A, the extra form you file to report your deductions, or your tax software may charge more to calculate it.

So How Do You Decide?

You may be feeling like you want to pull your hair out at this point. when comes to figuring out which deduction to you use. Usually, you just take the biggest…except when you don’t.

via GIPHY

 It doesn’t always come down to picking the biggest.  In most cases, it will. There are a couple of other items to keep in mind though.  If your filing status is married filing separately, you are required to use the same deduction method as your spouse.  You both have to either take the standard deduction or itemize.  You can’t split.  Another item to consider is state tax filings.  In some instances, it could provide a better combined federal and state result to take a lower itemized deduction on the federal return so that you can take a larger itemized deduction on the state return.  States generally follow IRS guidelines, but individual state standard deductions vary greatly, and they often have different thresholds for limitations on itemized deductions.

The IRS has tools to help you in calculating your itemized deductions and most tax softwares will help you optimize which is best on the federal return.  

Summary

Here is a quick checklist to help you in your decision:

Filing Status – to determine the amount of your standard deduction

Information for potential itemized deductions: 

Form 1098 for mortgage interest and maybe real estate taxes

W-2 for State income taxes paid

Documentation for major charitable deductions

How does your state standard deduction or itemized deduction vary from the federal?

There is your basic primer on taking the standard deduction or choosing to itemize.  As always, this is a blog post and not intended to be considered tax advice.  Taxes are highly dependent on your own personal situation and this post is just to point you in the right direction.  Please consult and engage with a tax professional for recommendations regarding your own personal specific circumstances.

Until next time…