Is there anyone who hasn't heard of the dreaded "marriage penalty"? No, this is not a social commentary on the institution. It is a concept whereby the tax a married couple pays on a joint return exceeds the combined tax they would pay if they were single and filed individual returns. This "penalty" usually applies where each spouse earns a substantial share of the combined income. On the other hand, if one spouse has little or no income, there generally is a marriage bonus in that the spouse with most of the income pays a lower tax as a married person filing jointly than if he or she were single.
Finally, this year it can be reported that progress has been made by Congress in providing relief to couples struck by this "marriage penalty." This will be done by adjusting the standard deduction and tax brackets in a way that is more equitable to married taxpayers. This is, of course, good news. The bad news is that, unfortunately, these changes will not begin until 2005, and even then they will be phased in over four years, so that the final beneficial effect won't be fully felt until 2009.
We referred above to the term "standard deduction." Let's take a moment to explain this term. On your 2001 return, you are allowed a standard deduction that may be claimed regardless of your actual expenses. This deduction is fixed by law according to your filing status and age. To compensate for inflation, the standard deduction for 2001 has been increased.
The basic standard deduction is allowed if you are under age 65 and not blind. For 2001, the basic standard deduction has been raised to $7,600 if married filing jointly or a qualifying widow(er); $6,650 if filing as a head of household; $4,550 if single; and $3,800 if married filing separately. For persons over age 65 or blind, larger standard deduction amounts are allowed. In the weeks ahead, we will talk about the standard deduction and itemized deductions in greater detail and you will be able to choose which is best for you in your particular situation.
Paying Estimated Taxes
One of the most often asked questions we receive each year concerns the subject of "estimated tax payments." Let's say that you were paid for your services and you received the entire amount contracted for, meaning that no taxes or social security were withheld. How nice it is to see that check for the entire amount come in the mail. Well, don't be lulled into the thought that all that money belongs to you. The government will eventually receive its just portion, and by the time all is done, you could come away with as little as 50% or less. "Maybe so," you say, "but at least I'll earn the interest on the whole amount until I have to file my taxes." Not so fast. Rules are in place to prevent you from realizing that goal.
The government expects you to pay your taxes on a "timely basis." If you had a job where taxes were withheld and you didn't under-withhold, your employer most likely sent the correct amount of tax to the government on a "timely basis." If, however, no taxes were withheld, it is up to you to make sure that your taxes are paid. You do this by sending tax payments to the various governments (both Federal and State) every three months to cover the tax on the amount that you earned. This is called paying estimated tax. The reason it is called that is because you are required to estimate the amount that is due the government. A rule of thumb is roughly 30% to the Federal (assuming you are in the lowest tax bracket—15% for tax and 15% for Social Security) and 5% or 6% for most State taxes.
Payments for the tax year that just began should be made in 2002 by April 15, June 17, and Sept. 16, and in 2003 by Jan. 15. Your check should be mailed to a special government address set up to receive such payments. You should include a special Estimated Tax Payment Voucher with each quarterly payment. Make sure that you clearly place your social security number on each check and mark the check "Estimated Tax—2002."
By now you are probably saying to yourself, "It seems like quite a lot of work. What if I don't send in estimated tax payments?" If you don't, you most likely will be assessed a penalty for not paying estimated taxes. Usually the penalty more than negates any interest you might have earned by holding on to the money all year. You can get the correct mailing addresses and payment vouchers from the government, or you can ask your tax consultant to set you up. He'll know what to do.
Change of Name
If you changed your name because of marriage, divorce, or for professional reasons, make sure that you immediately notify the Social Security Administration so that the name on your tax return is the same as the one the SSA has on its records. This may prevent delays in issuing your refund and help safeguard future Social Security benefits. The name change is made simply by filing Form SS-5, which can be obtained at any SSA office.
Paid Off The Books
Have you ever heard the expressions "I was paid off the books" or "I was paid under the table"? During tax preparation season, these phrases are freely bandied about by clients. It seems a day doesn't pass without an actor sitting before us saying something to the effect of, "Well, I earned $550 from one guy, but since it's less than $600, I don't have to report it, do I." This is usually said as a declaration, not a question.
Well, the law is very specific regarding this one. Every person is required to report to the government every single dollar of earned income, regardless of the method of payment (i.e. W-2, 1099, or plain cash) and regardless of where it was earned (in the U.S. or abroad). Whether you receive a form from the person who hired you is irrelevant.
People confuse this with the rule that states that an employer is required to send you a 1099 if the amount you earned from him was above $600. Remember, folks, there is no free ride. "Under the table" and "off the books" have no meaning, especially to the IRS. Every dime of earned income is to be reported to the government.
Child Tax Credit
In our first column, we touched upon the Child Tax Credit. Here is what it means. The Child Tax Credit that was initiated three years ago is available again to those of you with dependent children. You may be able to claim a credit worth $600 for each child under age 17 at the end of 2001 whom you claimed as a dependent. The child may be your child, stepchild, grandchild, or great-grandchild. The credit is $600 times the number of children you claim. The credit will be raised every few years until it reaches $1,000 by 2010. This credit will reduce your tax liability dollar for dollar.
If, however, you are liable for Alternative Minimum Tax (AMT), your credit could be limited. To determine if this is the case, you should prepare a special IRS worksheet that will help you calculate the reduced credit. Also, be aware that if your modified adjusted gross income rises above certain threshold amounts, the Child Tax Credit will be phased out or even eliminated.