Over the years as a tax professional, preparing taxes for gay and lesbian clients has always been more challenging than their hetero counterparts. With the legalization of same-sex marriage, the challenges diminished somewhat, but there are still some unique situations to consider when filing taxes. In my inaugural article for SWIM, I hope to provide a little guidance to some common tax questions.
If you’re married, you must choose a married filing status. You cannot pretend to be not married because it is better for your student loan payment. We asked for marriage equality and we received it, pitfalls and all. If you choose to file Married Filing Separately, be aware that if one person itemizes deductions, the other must also itemize.
What if you are not married and have a child together, then what do you do? One can file head of household with the qualifying child, while the other can file as Single and claim the child as a dependent. The head of household should usually be the breadwinner, but if incomes are relatively similar, choose the filing status that provides the larger tax benefit.
Unmarried couples that own a home together can decide which person claims the mortgage interest and itemized deductions, while the other can claim the standard deduction. Again, this option is not available with married couples.
Finally, unmarried couples where one person works and the other does not can benefit from having the working partner claim the non-working partner as a dependent. There are worksheets to determine income and support levels, so make sure you qualify before claiming your partner’s exemption.
All individuals are eligible to contribute to retirement plans each year. The amount you can contribute depends on your age and the type of plan you have. The thing to remember about retirement plan contributions is that you must be sure not to exceed the annual limits. There are hefty penalties and excise taxes for excess contributions.
Traditional IRA contributions are deductible on your tax return, but they are taxable when you withdraw the money later in life. Roth IRAs are not deductible when you contribute, but they are also not taxable when you take money out. The annual limit of contributions is $5,000 per year for individuals under age 50. People over age 50 can contribute up to $6,000 per year.
If you are self-employed, you have more retirement options. A SEP-IRA, which stands for Simplified Employee Pension, allows you to contribute up to 25% of your income. If you have a small business with employees, you must offer any retirement plans to your employees if you participate. They can decline the plan, but it must be offered.
SIMPLE IRAs is another type of retirement plan as well as a Solo 401(k). These offer more options to keep your money for retirement instead of paying in taxes.
Each of these plans have different rules and contribution limits. If you are unsure which is right for you, speak to your tax advisor or financial advisor for assistance. Contributing to your retirement not only secures your future, but also provides a nice tax savings.
One last item about retirement plans. If you contribute to a retirement plan whether through your self-employment earnings or an employer, and your income is below certain levels, there is a Saver’s Credit on your tax return in addition to the tax savings of your contributions. If you participate in a 401k at work, be sure to look into the Saver’s Credit when filing your taxes this year.
Article provided by Rayanne Buchianico, owner of ABC Solutions, LLC