This will be the last post in this year’s tax series!
Before we move on to a new series, I wanted to summarize what we have covered throughout the last 11 posts.
The basic federal income tax formula is the foundation for understanding other tax topics. The formula is: income – adjustments = adjusted gross income (AGI) – deductions = taxable income * calculate using brackets = tax before credits – credits = tax after credits – payments made = amount due / refund.
Deductions reduce table income. A taxpayer will deduct the greater of their standard deduction or their itemized deductions.
The standard deduction is a set amount that can be deducted based on the taxpayer’s filing status. Itemized deductions are certain expenses or other financial transactions that are deductible, such as: state/local taxes, mortgage interest, and charitable gifts.
Cost basis is the investment in an asset that is used to calculate the gain or loss when the asset is sold. Cost basis typically starts with the purchase price, then adjustments can be made.
The Energy Efficient Home Improvement Credit provides tax credits for various qualifying energy efficient improvements to a taxpayer’s primary residence, such as: energy efficient doors, windows, insulation, air conditioners, water heaters, boilers, heat pumps, and more.
A capital gain comes from selling a capital asset for more than its cost basis. The holding period determines how the gain is taxed. Long-term capital gains (assets held for more than a year) are taxed at special rates – they are typically taxed federally at 15% for most moderate income earners.
Dividends are distributions of a portion of a company’s earnings.
Qualified dividends receive special tax treatment. In order for a dividend to be qualified, it must: (1) not be specially excluded, (2) the payer must be a U.S. corporation or foreign corporation that meets certain requirements, and (3) the holding period requirement must be met. Qualified dividends receive the same special tax rates as long-term capital gains.
Au pairs have to pay federal and state income taxes while they are in the United States. In most circumstances, au pairs are considered nonresident aliens and cannot claim the standard deduction. However, certain itemized deduction can be claimed if they are related to the U.S. income.
The basic formula for rental income is: rents – expenses = income (loss). The net rental income is taxed at regular income tax rates. A variety of expenses can be claimed, including deprecation. Depreciation is the when the cost basis (typically the purchase price) of the property is divided over a number of years.
When just renting out a room, expenses must be split between the rental part of the property and the personal use part of the property. Certain expenses attributable to the personal use part of the property can still be deductible as itemized deductions.
Certain investment accounts have contribution deadlines that line up with the tax filing deadline (for tax-year 2022, it was April 18, 2023). The contribution deadline is different from the applicable tax-year. Investment accounts with contribution deadlines that line up with the tax filing deadline, include: traditional IRA, Roth IRA, and health savings account (HSA).
The 2022 federal income tax deadline for most individual taxpayers was April 18, 2023. Filing an extension was an option before the deadline, if a taxpayer needed additional time to prepare the return. Some states have slightly different deadlines for their state income taxes. However, most states line up with the federal deadline.
If you have any comments, questions, or ideas for future posts, please let me know
I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.
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