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Our client portal will be unavailable from 9PM MST, April 26 until 9PM MST April 28th due to a scheduled maintenance.
Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
Our client portal will be unavailable from 9PM MST, April 26 until 9PM MST April 28th due to a scheduled maintenance.
Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
The wedding bells are ringing, waves are crashing onshore at your honeymoon in Hawaii, and then it hits you! How is getting married going to affect my taxes? Okay, so maybe no one is thinking about taxes on their honeymoon, but it is something that every couple should understand. The tax system of the United States is setup so that combined tax liability of a married couple may be higher or lower than their combined tax bill if the couple had remained single.
This is where the idea of marriage penalty and marriage bonus comes from. The marriage penalty often affects taxpayers that have very high and very low incomes, and the marriage bonus affects several middle-income couples who have disparate incomes. The extent to which the marriage penalty or bonus affects a given couple depends on factors such as the level of their combined income, the proportion of their individual incomes being similar, and how many children they have.
A marriage bonus typically occurs when one individual with a higher income marries and files a joint return with an individual who has a much smaller income, and the additional income is not usually enough to push the combined income into a higher tax bracket. Married couples fall into the married filing joint tax brackets, which are wider in terms of income limits and result in a lower tax bill.
A marriage penalty occurs when two individuals with equal incomes marry and relates to individuals who have very low and high incomes. A high-income couple falls into this trap because income tax brackets for married couples at the top of the income tax schedule are not twice as wide as the equivalent brackets for single filers.
An example is the 33% tax bracket, which for 2016 single filers starts out at $190,151, but for married filing joint filers it starts out at $230,451. Two high incomes when combined could easily put a couple’s income into a higher bracket than filing as single, thus resulting in a penalty.
Another item to consider for the marriage penalty with high-income earners is the new 3.8% investment income tax. This tax is imposed on single filers who have adjusted gross income of $200,000 or more and for married filers with gross income of $250,000.
Two individuals who both made $150,000 would not be subject to the net investment income tax if filing as single. But if these two filed as married they would be subject to the additional tax, which is the lesser of their net investment income or the amount of their adjusted gross income over the threshold, times 3.8%.
A marriage penalty can also occur when two low-income individuals file as married. Two individuals who file single can be eligible for a large earned income credit depending on how many children they have to claim. The other advantage of claiming a dependent is the opportunity to file as head of household instead of just single. Head of household tax brackets are wider and there is also a larger standard deduction. Filing married eliminates the benefits of head of household and could potentially lower the amount of earned income credit available due to the combined incomes.
The idea of a marriage penalty or bonus causing a couple to tie the knot or to wait it out seems extraordinary, but it could affect one’s decision to work, work less, or not work at all. A married couple could have one individual who makes $40,000 and falls into the 25% tax bracket filing single, but who would fall into the 15% tax bracket filing married. The reverse could be true for the other spouse who didn’t work as single and would have been in the 0% bracket, but then married if they decided to work could possibly be in the 15% to 25% bracket.
There are ways to eliminate the marriage penalty and bonus, but it would require large changes to the US tax code. The US tax code is designed to be progressive in nature, but to also be equal in treatment among married and unmarried couples. If the United States adopted a flat tax and removed all provisions, then the marriage penalties and bonuses could be elmiminated. The United States could also eliminate the marriage penalty and bonus by keeping the progressive tax structure, but requiring everyone to file single. Without a major overhaul of the United States tax code, solutions such as widening the tax brackets for high-income earners filing joint and a permanent extension of the marriage penalty relief of the Earned Income Tax Credit will have to suffice as potential short term solutions.
Have you thought about how you are going to save for your children’s education? There are many available options, but the most well known college savings program is the 529 savings plan. This type of plan has been around since 1996 and is very popular for two main reasons:
The income tax benefit to this type of plan (besides tax-free earnings) is the potential to reduce your taxable income on your state tax return by subtracting the amount of your contribution. For instance, with the Colorado income tax rate at 4.63%, a contribution of $25,000 could save you almost $1,200 in Colorado taxes!
Please contact us if you would like to know more or to discuss how a 529 savings plan could benefit both you and your student.
The wedding bells are ringing, waves are crashing onshore at your honeymoon in Hawaii, and then it hits you! How is getting married going to affect my taxes? Okay, so maybe no one is thinking about taxes on their honeymoon, but it is something that every couple should understand. The tax system of the United States is setup so that combined tax liability of a married couple may be higher or lower than their combined tax bill if the couple had remained single.
This is where the idea of marriage penalty and marriage bonus comes from. The marriage penalty often affects taxpayers that have very high and very low incomes, and the marriage bonus affects several middle-income couples who have disparate incomes. The extent to which the marriage penalty or bonus affects a given couple depends on factors such as the level of their combined income, the proportion of their individual incomes being similar, and how many children they have.
A marriage bonus typically occurs when one individual with a higher income marries and files a joint return with an individual who has a much smaller income, and the additional income is not usually enough to push the combined income into a higher tax bracket. Married couples fall into the married filing joint tax brackets, which are wider in terms of income limits and result in a lower tax bill.
A marriage penalty occurs when two individuals with equal incomes marry and relates to individuals who have very low and high incomes. A high-income couple falls into this trap because income tax brackets for married couples at the top of the income tax schedule are not twice as wide as the equivalent brackets for single filers.
An example is the 33% tax bracket, which for 2015 single filers start out at $189,301, but for married filing joint filers it starts out at $230,451. Two high incomes when combined could easily put a couple’s income into a higher bracket than filing as single, thus resulting in a penalty.
Another item to consider for the marriage penalty with high-income earners is the new 3.8% investment income tax. This tax is imposed on single filers who have adjusted gross income of $200,000 or more and for married filers with gross income of $250,000.
Two individuals who both made $150,000 would not be subject to the net investment income tax if filing as single. But if these two filed as married they would be subject to the additional tax, which is the lesser of their net investment income or the amount of their adjusted gross income over the threshold, times 3.8%.
A marriage penalty can also occur when two low-income individuals file as married. Two individuals who file single can be eligible for a large earned income credit depending on how many children they have to claim. The other advantage of claiming a dependent is the opportunity to file as head of household instead of just single. Head of household tax brackets are wider and there is also a larger standard deduction. Filing married eliminates the benefits of head of household and could potentially lower the amount of earned income credit available due to the combined incomes.
The idea of a marriage penalty or bonus causing a couple to tie the knot or to wait it out seems extraordinary, but it could affect one’s decision to work, work less, or not work at all. A married couple could have one individual who makes $40,000 and falls into the 25% tax bracket filing single, but who would fall into the 15% tax bracket filing married. The reverse could be true for the other spouse who didn’t work as single and would have been in the 0% bracket, but then married if they decided to work could possibly be in the 15% to 25% bracket.
There are ways to eliminate the marriage penalty and bonus, but it would require large changes to the US tax code. The US tax code is designed to be progressive in nature, but to also be equal in treatment among married and unmarried couples. If the United States adopted a flat tax and removed all provisions, then the marriage penalties and bonuses could be elmiminated. The United States could also eliminate the marriage penalty and bonus by keeping the progressive tax structure, but requiring everyone to file single. Without a major overhaul of the United States tax code, solutions such as widening the tax brackets for high-income earners filing joint and a permanent extension of the marriage penalty relief of the Earned Income Tax Credit will have to suffice as potential short term solutions.
If you receive a notice from the Internal Revenue Service (IRS), don’t panic! The IRS frequently sends notices and they are usually very easy to address.
One situation we want to make you aware of is that the IRS has prematurely sent notices regarding the late filing of S-Corporation returns. This is simply a mistake within their system of one office not communicating with another. These notices are being generated from the first office before the second office has processed the extension of time to file the tax return. The notice usually lists the number of shareholders and shows a penalty for each shareholder of $195 multiplied by the number of months the return is shown as late. A penalty may be accessed for up to 12 months per shareholder.
If your S-corporation filed an extension yet you received a late filing notice, this issue can be handled by a call to the IRS or simply mailing a letter with proper documentation to refute their claim. You can handle this yourself or promptly forward the notice to your CPA and they can determine the best way to respond. If you choose to write a response yourself, please be sure to make copies and provide that detail to your CPA. It is important to reply within the allotted time frame to avoid further notices or penalties and interest on any balance due.
Often times the IRS sends notices that don’t require any response. If you receive a notice and are uncertain of what is required or you want assistance responding to the notice, contact your CPA promptly and they can help you understand what is needed and respond appropriately.