Tax Credits, Postage Stamps, And Obamacare, Oh My!

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

Guess what? The cost of a stamp increased. Again. First class increased from 46 cents to 49 cents, and postcards increased from 33 cents to 34 cents. Also, the New York State minimum wage increased from $7.25 to $8 an hour and, of course, tax rates increased and benefits decreased.

Welcome to 2014.

Receiving The Obamacare Credit?

If you are one of the millions whose income is less than 400 percent below the poverty line and taking the subsidy to buy insurance, you need to be financially proactive to avoid a tax bill next April.

Changes in your life will affect your subsidy. If you have less income, then you may receive more of a refund next year. However, the changes I am referring to include a divorce, marriage, a promotion, a new job, more overtime, or anything else that brings more income into your home. These could result in your paying back that subsidy, meaning less of a refund, or even a balance due. So, if you were counting on that refund, it might mean financial problems.

The new health care requires you to notify your health care exchange provider of changes.

Suggestion: If you can afford not to, don’t take the “advance” credit option.

Should You File Separately Or Jointly?

If you are married, you can file separately from, or jointly with, your spouse. The question always arises, “Which is better?”

Many file jointly, just because it is most convenient, whereas some file jointly just because they are married and it wouldn’t be proper to file separately. But this may not be the best tax option. When preparing a tax return, both ways should be considered, especially if one has high medical expenses, or high miscellaneous business expenses (outside salesman, policeman), or if one lives in one state but works in another.

If one of you earns a higher income, you’ll pay less tax filing jointly because that income is basically being “split” between the two of you. Also, filing jointly gives you access to a number of tax deductions and credits (noted below).

However, if both of you have taxable income, and one has high medical expenses, personal casualty loss, or investment or business expenses, filing separately may save some tax dollars because these are all reduced by a percentage of your adjusted gross income, which lowers the deduction. In addition, if you feel your spouse has some questionable activities, you may not want to file together.

Filing separately means that you will also lose a number of benefits, including:

• A reduction in amounts of exemption and itemized deduction
• Possible higher tax rate
• Not eligible for the child and dependent care expense credit
• Not eligible for the earned income credit
• Not eligible for the education credit, student loan interest deduction or tuition deduction
• Reduction in child tax credit
• Reduction in retirement savings contribution credit
• Cannot claim the standard deduction if spouse itemizes deductions
• Standard deduction is reduced by half
• Not eligible for the disabled or elderly tax credit
• If collecting Social Security, a much larger percentage is taxable
• The capital loss deduction is limited to $1,500, and only for the owner of the stocks
• Not eligible to deduct interest income from U.S. savings bonds used for higher education

As stated, however, even with all the lost benefits, you may end up with more in your pocket filing separately. Always check by preparing the tax return both ways.

No software package is a substitute for knowledge of the Tax Code, and no tax software package is a substitute for a competent, experienced tax professional.

QUIP: It’s too bad for the middle income person. They earn too much to avoid paying taxes and make too little to afford paying them.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.