Category Archives: Income Tax

Tax Tips for Students Working Summer Jobs!

A sign that reads: Summer Jobs

Summer jobs also bring tax responsibilities.

Well, well, well Summer is finally here. In addition to sun, beach, barbecues, and the end of school, summer provides a good opportunity for students to make some money. Along with establishing a good work ethic and building time and financial management skills, a summer job also means learning about the obligatory duty of paying taxes. Here are six tax tips for parents (and students) that I feel might be helpful for children working summer jobs:

1. Understand the Rules for Claiming Dependents

You may be wondering, since your child has a summer job, if you will still be able to claim him or her as a dependent on your own return. The answer is, “Yes.” A child under the age of 19 (or under the age of 24 and a full-time student) can make any amount of income and still be claimed as a dependent as long as you are still providing more than half their support. This includes food, shelter, clothing, entertainment, school expenses, vehicle expenses, etc. As “independent” as your child may feel now that they are taking on some responsibilities of their own, when you add up all of the expenses, it may be surprising to see how “dependent” working children still are on the support of their wonderful parents!

2. Filling Out Form W-4: Determine How Much To Withhold

Before your child begins a summer job, he or she will be required to fill out a federal Form W-4, and the equivalent state form, to instruct the employer how much to withhold for federal and state income taxes. To determine how much, if any, should be withheld, it is important to note the thresholds of when your child will need to file an income tax return. Estimate how much they will earn this summer based on their wages and expected hours to be worked. Regardless of amounts withheld for income taxes, Social Security and Medicare tax will be withheld at the regular 6.2% and 1.45% rate and is never available for refund.

3. If No Taxes are Withheld, Set Money Aside to Be Prepared for Tax Time

Your child may have a summer job when the employer does not take your child on as an official employee, but, rather, as an independent contractor for their temporary summer work. In this instance, your child’s paycheck will not include any deductions for Social Security and Medicare tax, nor will there be any withholding for federal or state income tax. If $600 or more is earned from this employer, your child should receive a 1099-MISC at the end of the year. Most likely the income will be shown as “Non-employee Compensation” in box 7 of the 1099-MISC. This is treated as self-employment income and is subject to self-employment taxes. In this case, your child must file a return if earnings were at least $400. Be aware that because the employer did not withhold and pay any taxes on behalf of your child, taxes may be owed when tax returns are filed the following spring. It will be a good idea for your child to set aside money from each pay check so that he or she can pay the tax when the returns are filed.

4. Know the Tax Implications of Employing your Child

Many of you may be exploring the idea of hiring your child for the summer. Giving your child a summer job may provide an opportunity for tax savings for you as the employer as well as for your child. There are tax benefits of having your child as an employee if your trade or business is a sole proprietorship or partnership in which you and/or your spouse are the sole owners or partners.

Wages paid to your child who is under the age of 18 are not subject to Social Security and Medicare taxes, or Federal Unemployment Tax (FUTA). Wages paid to your child who is 18 years or older, but under 21, are not subject to FUTA. Your child’s wages are a deductible business expense to your company, as long as your child is treated as a regular employee, wages are paid in dollars, and a W-2 is filed.

According to Laura Saunders, in her article “Tax Dos and Don’ts for Hiring Your Child” at, a Tax Court judge in Washington disallowed a business owner from deducting $15,000 in wages to her three children ages 15, 11, and 8 who helped their mom with tasks such as stuffing envelopes.

The business owner’s method of payment was regularly expected parenting expenses such as food, lodging and tutoring services. In other words, you cannot use pizza as a form of payment to your employee-child and use the value as a business deduction for wages. The IRS recommends you pay your employee-child via paycheck and have him or her deposit it into his or her own bank account. This will verify that your child received the funds.

5. Understand How Taxes Work With an Out-Of-State Summer Job

If you reside in Illinois and your dependent child gets a summer job out-of-state, your child is considered an Illinois resident and will need to file an Illinois return based on Tip #2 above. If the job is in Iowa, Kentucky, Michigan, or Wisconsin, a reciprocal agreement exists with Illinois. What is a ‘Reciprocal Agreement’? I’m glad you asked. Reciprocal agreements allow residents of one state to work in a neighboring state while only paying income taxes to their state of residency. This simplifies tax time for people who live in one state, but work in another by requiring them to file only one state tax return.  If the state where you work and the state where you live have a reciprocal agreement, you are exempted from income taxes on any wages earned in the state where you work.  You only have to pay taxes to the state where you live.

OK, that’s Illinois but what about New York and the Tri-State area? Well, unfortunately New York, New Jersey, and Connecticut do not have a reciprocal agreement with each other.  This means, for example, if you work in New Jersey and live in New York, you would have to pay New Jersey income taxes as a nonresident and also pay New York income taxes as a resident since you live in New York.  However, residents of New York (and most other states) can take a tax credit for taxes paid to other jurisdictions. Tax rules differ from state to state so it is a good idea to do your homework and understand the income tax filing requirements for the employer’s state.

6. Understand Roth IRA Eligibility and Benefits

Something else to think about if your child gets a summer job is that he or she will be eligible to start making Roth IRA contributions. While retirement may seem like light years away for your newly working teen, the power of compounding is amazing. In addition, the contributions can be withdrawn tax-free and penalty-free at any age and the earlier they begin contributing, the greater the earnings potential. There is a lot to keep-in-mind as your child begins exploring summer job opportunities since the tax implications can be complex.

If your child will be working this summer, let Solid Tax Solutions put them on the right tax track as well as put your mind at ease. You can contact us at: (845) 344-1040. We are also online at:


Bruce – Your Host at The Tax Nook

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A Bill on the Senate Floor Would Require Presidential Candidates to Release Their Tax Return. Even Donald Trump!

There is no law that says that a Presidential candidate must release their individual tax returns to the public, but at least one member of Congress thinks there should be. Senate Finance Committee Ranking Member Ron Wyden (D-OR) has introduced a bill which would require presidential nominees to release recent tax returns.

Donald Trump signing his tax returns

A New Senate Bill Would Require ALL Major Party Presidential Nominees to Release Their Tax Returns.

The bill, called the Presidential Tax Transparency Act, would require a Presidential candidate to release the most recent three years of filed tax returns (I think that it should be a minimum of the most recent ten years of their filed tax returns; but I digress) to the Federal Election Commission (FEC) within 15 days of becoming the nominee at the party convention (I would like to see this apply to all Presidential candidates who throw their hat into the ring, not just nominees at the party convention). This bill, as currently written, would apply to ‘Major Party’ candidates (Per the Internal Revenue Code Section 9002(6) a ‘Major Party’ is actually defined as “a political party whose candidate for the office of President in the preceding presidential election received, as the candidate of such party, 25 percent or more of the total number of popular votes received by all candidates for such office”). If the candidate refuses to comply, the Treasury Secretary would provide the tax returns directly to the FEC for public release.

Hmm……..just let that last part sink in for a minute.

Sen. Wyden said, about the bill, “Since the days of Watergate, the American people have had an expectation that nominees to be the leader of the free world not hide their finances and personal tax returns.”

I happen to agree with him.

Sen. Wyden went on to say, “Tax returns deliver honest answers to key questions from the American public. Do you even pay taxes? Do you give to charity? Are you abusing tax loopholes at the expense of middle-class families? Are you keeping your money offshore? People have a right to know.”

I happen to agree with him on that, too.

When presumptive GOP nominee Donald Trump suggests that the public has no interest in what’s in a candidate’s tax returns, saying “there’s nothing to learn from them,” I disagree. I believe that there is much that can be learned from a person’s tax returns.

So, why the secrecy? Because a tax return is not just a bunch of numbers. It’s a snapshot of your financial life. Not only do you have a better understanding of where taxable income comes from (like Warren Buffett, I suspect much of Donald Trump’s income is tax favored), you can see potential failures in losses and worrisome positions with investments and loans. You also have a picture of what a taxpayer might find important. When it comes to taxpayers who itemize, you can learn about charitable deductions (not simply how much but where it’s distributed), real estate taxes (abatements, for example), real estate holdings and more. You can also gather information about the existence of offshore accounts, household employees and other holdings.

That’s why we tend to keep our own returns private – we don’t want our neighbors knowing our business. But Presidential candidates play by a different set of rules. We want to know what’s important to them, where their money is coming from, and whether they are linked to or beholden to other people or entities. Under the Ethics in Government Act and Federal Election Campaign Act, certain disclosures are required for candidates for federal office (as well as other high-ranking officials and staff). Those disclosures include information about income, gifts, assets, liabilities, outside employment, trusts, and more (downloads as a pdf).

I do think that Trump’s refusal to release any of his income tax returns sets a dangerous precedent. Once one candidate refuses, I think it will embolden future candidates to do the same. And I think that’s very bad for the process.

But, I also understand why he is refusing to make his tax returns public (even though I don’t agree with his refusal). I think it’s clear that once the returns are made public, they’ll be picked apart by Trump’s competitor(s) and by the voters he’s currently seeking; it’s the equivalent of millions of armchair auditors.

Trump has also said about his tax rate: “It’s none of your business.” Again, I disagree with him. Voters want to know as much as possible about their candidates. That’s why, since the 1970s, most presidential candidates have voluntarily released their tax returns to the public.

By the way, if you are interested, you can see an archive of candidate and presidential tax returns right here.

Compelling the release of those tax returns by statute will be interesting. Currently, we have incredibly strict privacy laws when it comes to our individual tax returns. Those privacy protections extend to all taxpayers  – even presidential candidates. I don’t see the value in changing those rules. Voluntary disclosures “should” be enough. But Donald Trump has shown that by not “volunteering” to release his tax returns that can lead to a very slippery slope for future elections.

To be clear, I don’t want a police state but neither do I want a President with secrets.

So stay tuned boys and girls.

If you are really ‘geeky’ you can read the text of this Senate bill here.

Do you think this bill has a chance? Is Donald Trump is concerned about this bill?


Bruce – Your Host at The Tax Nook

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How Long Should I Keep My Tax Records?

Was that a question that you’ve ever asked?


I know that I get that question asked of me quite frequently. Whether from a new client, or attending a social gathering, or even at a baseball game (I was actually asked this at a Mets baseball game at Citifield by a fellow fan during casual conversation).

Now that we are in full swing of this year’s tax season, you are probably wondering what old records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why the records must be kept in the first place.

Generally, we keep tax records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we dispose of them.

With certain exceptions, the statute for assessing additional taxes is three years from the return due date or the date the return was filed, whichever is later (IRC section 6501(a) in case you feel ‘geeky’). However, the statute of limitations for many states is one year longer than the federal law (Note: in NYS the rule is: Three years after the date the tax return was filed). In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return (NYS is six years after the tax return was filed). And, of course, the statutes don’t begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return to evade taxes (same for NYS).

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded; add a year or so to that if you live in a state with a longer statute.

Examples – Susan filed her 2013 tax return before the due date of April 15, 2014. She will be able to dispose of most of the 2013 records safely after April 17, 2017 (April 15, 2017 falls on a Saturday). On the other hand, Bob files his 2013 tax return on June 2, 2014. He needs to keep his records at least until June 2, 2017. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The Big Problem!

The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. These need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into that category:

Stock Acquisition Data – If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit (or loss) you had on the sale.

Stock and Mutual Fund Statements (If you reinvest dividends) – Many taxpayers use the dividends they receive from stocks or mutual funds to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements at least four years after the final sale.

Tangible Property Purchase and Improvement Records – Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.

For example, when the large $250,000 and $500,000 home exclusion was passed into law several years back, homeowners became lax in maintaining home improvement records, thinking the large exclusions would cover any potential appreciation in the home’s value. Now that exclusion may not always be enough to cover sale gains, particularly in markets where property values have steadily risen, so records of home improvements are vital. Records can be important, so please use caution when discarding them.

What About The Tax Returns Themselves?

While disposing of the back-up documents used to prepare the returns can usually be done after the statutory period has expired, you may want to consider keeping a copy of your tax returns (the 1040 and attached schedules/statements plus your state return) indefinitely. If you just don’t have room to keep a copy of the paper returns, digitizing them is an option.

If you have questions about whether or not to retain certain records,
contact Solid Tax Solutions first. We are available year-round. Our phone number is: (845) 344-1040.

It’s better to make sure, before discarding something that might be needed down the road.


Bruce – Your Host at The Tax Nook

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Are You Thinking About a Lump Sum Pension Payout? How That Decision Can Affect Your Taxes!

The popularity of traditional pension plans is steadily declining as many employers make the switch to 401(k)s and other defined contribution plans. According to the Pension Benefit Guaranty Corporation, there are just 38,000 defined benefit pension plans still in operation, compared to a peak of 114,000 in 1985. One of the biggest motivators behind the decline is the cost of maintaining these plans. In an effort to improve their bottom line, a number of companies have opted to freeze or terminate their pension plans altogether and offer employees a lump sum payment of benefits. While getting a large amount of cash all at once can be appealing, there are some potential tax implications you need to be aware of.

How Pensions Are Taxed

Generally, your pension benefits are fully or partially taxable, depending on how your account
was funded. The IRS considers your benefits to be fully taxable if you don’t have any investment in the contract. You’re not considered to have an investment if you didn’t contribute anything to the plan, your employer didn’t withhold contributions from your salary or you got back all of your contributions tax-free in prior years. Since defined benefit pensions are traditionally funded solely by the employer, it’s likely that any money you receive from a lump sum would be
considered fully taxable. If your plan allowed you to put in after-tax dollars, then you wouldn’t have to pay taxes on the part of your benefits that represents a return of your initial  investment.

Lump Sum Distributions

lump sum distribution would generally be subject to your ordinary income tax rate as well as the 20 percent federal withholding requirement. This means that 20 percent of your benefits would automatically be withheld by the plan administrator. If you were born before January 2, 1936 the IRS allows you to use alternate methods to calculate your tax liability. If you qualify, you can report part of the distribution as a capital gain and the rest as ordinary income or you can use the 10-year tax option to figure out the taxes due. You could also defer any taxes due by rolling your lump sum payment over to another eligible retirement account.

Lump Sum Rollovers

There are two basic ways you can roll over a lump sum pension payment. The first option is a direct rollover, which means the plan administrator transfers the money to another retirement account for you. The benefit of doing a direct rollover is that it exempts you from having to pay the 20 percent federal withholding. If your plan doesn’t allow for direct rollovers, you can roll the money over yourself. The plan administrator will send you a check, minus the 20 percent withholding. Keep in mind that the amount that was withheld will be treated as a taxable distribution unless you make up the difference.
Once you receive the check, you’ll have 60 days to deposit it into your retirement account. After the rollover is complete, you won’t have to start paying taxes on your pension benefits until you start making withdrawals. If you don’t deposit the money within the 60-day time frame, then you’ll have to report the whole amount as a taxable distribution.

Early Withdrawal Penalty

If you decide not to roll your lump sum payment or you miss the 60-day window, you may have to pay an additional 10 percent early withdrawal penalty if you’re under age 59 1/2. The IRS allows exceptions to this rule in certain situations. For example, you may be able to avoid the 10 percent penalty if you had to cash out your pension because of a total and permanent disability.
In cases where your employer is offering the lump sum as part of an early retirement package, you may also be able to avoid the penalty if you’re age 55 or older at the time you retire.

Before you take a lump sum pension payout it’s important to weigh all the pros and cons. Understanding how your taxes can be impacted can help you avoid major financial headaches later on.


Bruce – Your Host at The Tax Nook

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I have to say that I love the tax world. And, the more that I delve into this environment the more I find something new. Sometimes what I find makes me shake my head and laugh. This is one of those times.

I was recently reading some Tax Court cases (yes, I do that type of thing) when I came upon this soap opera. Oh wait-a-minute, this actually happened.

The end result of this particular case was that payments that a woman received for agreeing to be faithful to her boyfriend are taxable.

So, in a nutshell, after dating for about a year, a couple pledged their fidelity to each other in writing. The “agreement” required him to pay her $400,000 (yes, you read that correctly). Later, he accused her of cheating. They broke up, and he sued her. He also filed tax form 1099-MISC, reporting the payment. A state court found that she defrauded him and required her to repay the $400,000. Still, the tax Court said that she owes tax on the amount. Ouch!

The case is Blagaich v. Commissioner of Internal Revenue and you can read that case here.

Please folks, if you get nothing else from this case, just realize that money and property transactions can have a tax impact on you even when you don’t think that there can be any tax implications resulting from that transaction.

So, before you engage in an any event involving money or property speak with a qualified tax professional.

If you have a transaction that you are considering, call Solid Tax Solutions. We are available to speak with you to help you make smart decisions. We can be reached at (845) 344-1040.


Bruce – Your Host at The Tax Nook

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The Billion Dollar Powerball Aftermath!

So just like millions of other people, I bought a Powerball ticket last week (well, maybe more than just one). Yes, I know, the odds of hitting the jackpot were 1 in 292 million. But I played anyway.

And guess what????

I didn’t win (feign shock). Oh well.

A picture that shows how to read a losing Powerball ticket

But I am ready, with my new ‘lucky’ set of numbers, for the next ‘billion’ dollar Powerball (whenever that is).

And now that the Powerball frenzy has quieted down I got to thinking about the amount of money that flowed into state coffers during this recent ‘billion’ dollar Powerball season and how this branch of the lottery tree came into being.

The history of the Powerball can be traced back to the Multi-State Lottery Association (now the MUSL) which was formed in 1987. When the MUSL began, only DC, IA, KS, OR, RI, WV participated. On April 22, 1992 the first Powerball drawing was held. Since then, states have gradually signed on. Today, Powerball is currently offered in 44 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. You can see if your state participates here.

Why have so many states signed on? The same reason Americans snatch up lottery tickets to begin with: money.

You already know that federal (and state, where applicable) income taxes are payable by the winner, whether winnings are taken in a lump sum or as an annuity. But what about those states that sell tickets and don’t produce a winning ticket? They’re still winners. While about 50% of ticket sales are paid out in the form of prizes, net profits (after expenses) are retained by the individual lotteries and used to fund projects approved by the respective legislature.

Twenty-seven states spend some of those profits on education, including New Jersey. As a state, New Jersey depends heavily on lottery dollars (as well as other gambling revenue). The New Jersey lottery is the fourth largest revenue producer for the state. In the last fiscal year, the lottery grossed over $2.9 billion in sales and sent nearly a third of that, $965 million, to the state’s coffers to help fund education.

Lottery proceeds in New York also support schools: the New York Lottery’s sole mission is to earn money for education. Last fiscal year, the Lottery contributed $3.11 billion, or about 14% of total state education funding, to local school districts. The New York Lottery touts itself as “North America’s largest and most profitable Lottery” earning over $54.7 billion since it began.

California lottery dollars are used to supplement funding to public education; since the 2000-2001 fiscal year, the Golden State has sent more than $1 billion a year to public education. Ditto for Georgia which uses proceeds to fund specific education programs including tuition grants, scholarships or loans at eligible Georgia colleges, universities, or technical colleges and pre-kindergarten programs. In 2015, the state used more than $980 million in lottery proceeds to fund education.

Oklahoma also directs lottery winnings to education. By law, 45% of lottery funds are used to support elementary and secondary education from compensation for public school teachers to technology upgrades for school systems. A whopping 39.5% of lottery funds are used to further higher education institutions via tuition grants, loans and scholarships for Oklahoma residents, endowed chairs for professors and renovations and expansions projects. The remaining money is used to boost technology centers and fund the Teacher’s Retirement System Dedicated Revenue Revolving Fund and the School Consolidation and Assistance Fund.

Arizona splits lottery revenues among four causes: the lion’s share goes to education with the remainder directed to health and human services, economic & business development and the environment. Nebraska also splits its lottery revenues – with a twist. In addition to funding educational and environmental causes, Nebraska sends 10% of its lottery revenue to the state fair (just over 1% goes to the Compulsive Gamblers Assistance Fund).

Colorado almost exclusively directs lottery winnings to the environment. In 1994, Colorado voters decided to fund projects from lottery winnings as follows: 50% to the Great Outdoors Colorado (GOCO) Trust Fund, 40% to the Conservation Trust Fund, and 10% to Colorado Parks and Wildlife. If GOCO funds exceed $60.3 million, the overage is redirected to the Colorado Department of Education, Public School Capital Construction Assistance Fund.

In Pennsylvania, lottery dollars benefit senior citizen programs; it’s the only state in the country that earmarks all lottery dollars specifically for this purpose. Last year, the Pennsylvania Lottery generated more than $1 billion in PA Lottery benefits to provide low-cost prescription drugs, free and reduced-fare transit, property tax/rent rebates, long-term living services and senior centers for older Pennsylvanians.

Wisconsin bucks the trend of using funds to fill in budget gaps: the money raised by the lottery is returned to taxpayers. Since 1988, the Wisconsin Lottery has generated more than $3 billion for property tax relief. Including winners, retailer rewards, staff and property tax relief, the Wisconsin Lottery estimates that it returns at least 95% of revenue to Wisconsin taxpayers.

But of course, as priorities change, so does funding. Prior to 1997, proceeds from the sales of lottery tickets in Texas were deposited in the general revenue fund. Since 1997, funds have been used largely to support public education. Vermont had a similar transition: for a period of 20 years, lottery profits were directed to the General Fund but in 1998, the Vermont Legislature mandated that all lottery profits instead be deposited in the state’s Education Fund.

States also benefit from sales tax boosts. While sales taxes are not imposed on the sales of lottery tickets, they are generally imposed on all of the extras you buy in addition to tickets. That might include the cup of coffee and a donut you buy while waiting in those long Powerball ticket lines. It might also include gasoline at the convenience store or a pack of cigarettes at the counter while you’re checking out – in those cases, the feds win, too, through the imposition of excise taxes on items like gas and tobacco. Convenience stores and other retailers report considerably more business when taxpayers are in a frenzy over a potentially huge jackpot. That translates into more sales of goods – and therefore more revenue for taxing authorities.

And what if the winning ticket isn’t claimed? It happens more than you think – especially when there are big jackpots. That’s because folks who buy tickets tend to check to see if they won the big prize and may forget to check to see whether they might have won a smaller prize. Those dollars add up. If unclaimed prizes aren’t collected within the allotted time frame, they’re kept by the state (or territory). About half of the lotteries are required by state law to put the money back into another game: the other half is required by law to turn the money over to the state’s general fund.

Whether relying on dollars brought in from what many consider to be legalized gambling is good policy for states might be a moral question. In terms of finances, however, there’s no question: while it’s fun to fantasize about winning Powerball, when it comes to filling those state coffers, everybody wins.

What do you think? Are the monies going to the right places?


Bruce – Your Host at The Tax Nook

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Sooooooooo were you a bit disappointed when you woke up this morning and found out that you will have to put that purchase of your private island on hold for just a little bit longer?

Well by now I’m sure that you know, that no one won the Powerball jackpot on Saturday night. The Powerball lottery is now up to,
$1.3 Billion (as of this writing), the largest jackpot in U.S. history.

The winner of the jackpot can choose to take the mega-millions over a lifetime or opt to take a lump sum (cash value) payment. The lump sum is currently valued at $806 million.

But (Spoiler Alert) if you hold the winning ticket and choose the lump sum, do not plan on spending all $806 million just yet. By law, lottery officials are required to withhold federal taxes from lottery winnings, whether you win a few hundred thousand, a few hundred million, or even over a billion dollars. The rule is this: you may be subject to withholding of 25% of your winnings for federal income tax purposes if the winnings minus the wager are more than $5,000 and are from a lottery. Different withholding rules apply to certain other kinds of gambling like bingo, keno, or slot machines and non-cash winnings – or if you’re subject to backup withholding (most taxpayers are not). Since, however, the Powerball will pay out in cash, you should expect to pay out
$201.5 million in withholding alone, leaving you with a check worth about $604.5 million.

Withholding is the amount that the federal government insists the lottery
authorities hold onto, not your actual tax liability. It’s the same principal as
what happens with your paycheck: a certain amount is withheld and remitted to
the U.S. Treasury on your behalf. When you file your income tax return and settle your tax bill the following year, you figure your tax, get credit for what was withheld  (plus any additional estimated payments you made along the way) and pay the difference (or you get a refund if you paid more than you owed).

So how much tax would you pay on $806 million? Somewhere in the neighborhood of $319 million. But OK, you want exact numbers. So it works out to $319,129,675 (using 2016 rates).

Lucky for you, the feds already have your $201.5 million, so, at tax time,
you’ll just have to write a check for $117,629,675 – plus potential underpayment
penalties if you didn’t pay any estimated payments, depending on your circumstances.

And no, for those of you who are wondering, the Net Investment Income Tax (NIIT), that extra 3.8% levy on certain investment income, doesn’t apply to lottery winnings.

But for full disclosure, I figured that amount for a single taxpayer, assuming no other income or deductions. You’ll have some of those – except forget about saving those medical receipts to use for deductions: you probably won’t even come close to the threshold of 10% of your Adjusted Gross Income (AGI).

And, I haven’t even mentioned legal and investment fees. You’ll pay those,
too. Fortunately, they’re also deductible.

There’s one more big deduction: state taxes. Like legal and investment fees,
state taxes are deductible on your Schedule A (i.e., the form used to itemize
your deductions). How much you’ll pay, however, depends on where you live.

There are 9 states, plus Puerto Rico, that will give you a pass on your lottery
winnings: California, Florida, New Hampshire, Pennsylvania, South Dakota,
Tennessee, Texas, Washington and Wyoming. That’s because those states either
don’t have a state income tax or they don’t impose a state tax on lottery
winnings. If you live outside of these states, be prepared to give up a chunk of
your winnings (Delaware used to exempt lottery winnings but no longer does).

Tax rates vary from state to state. Some states, like Utah, have a flat state
tax rate. Others, like Maryland, have a graduated tax rate, meaning that the
rate increases as income increases. And to make things even more complicated, three states have ten or more tax brackets. Most on that list? Hawaii, where you can pay anywhere from 1.4% to 11% – there are 12 brackets in all.

At the top end of the spectrum, California imposes a whopping 13.3% for high
incomes. But there’s a catch (of course there’s always a catch). California is one of those states that doesn’t impose a state tax on lottery winnings. If you take
California out of the equation, you’ll likely pay the most state taxes in Connecticut, Hawaii, Maryland, New Jersey, New York, North Dakota, Ohio, Vermont, and Wisconsin.

But don’t stop there, however. States aren’t the only ones that want a piece of
your winnings: local taxing authorities may want some, too. If you live in New
York state, you’ll pay 8.82%. But if you live in New York City, the local authorities will tack on an additional 3.876% to your state tax, bringing New York City residents to a top tax rate of 12.696%.

Be careful. Like the feds, New York State has a series of graduated brackets.
That means that you don’t pay a flat rate on your entire income but rather a
flat rate on each level of income. All single New Yorkers are subject to a state
tax of 4% on taxable income between 0 and $8,400 (2015 rate), whether you make $5,000 or $500 million and so on through the brackets. That means that the state tax payable on $806 million isn’t a flat 8.82%, or $71,089,200 but rather $71,088,503 (using 2015 rates). The New York City tax would subject you to an additional $31,240,129 (using 2015 rates) in tax on the same amount. The total tax for a New York City resident? $102,328,632.

The good thing is that you can deduct those state and local taxes on
your federal taxes, bringing your taxable income closer to $703,671,368. The
federal tax on that amount is $278,607,537. Add that to the state and local tax
for a New Yorker and after paying $89,336,989, you’ll still have just over
$438,055,474to play with. Again, that’s assuming that you’re single.

It’s worth noting that for the sake of keeping your head from exploding, I did
not reduce the deductions for the ‘Pease’ limitations, which would obviously
apply in the event that state and local taxes were due. The same goes
for the Alternative Minimum Tax (“AMT”).

That’s a lot of math. Here’s the math I’m guessing you really care about: your
chances of winning are 1 in 292.2 million.

One more thing:
 If you are the lucky winner, contact SOLID TAX SOLUTIONS.

We will help you keep more of your prize – (845) 344-1040.


Bruce – Your Host at The Tax Nook

Other Social Media Outlets: (or just click on the icon on right sidebar of this page).

Website: (or just click on the icon on right sidebar of this page).


Understanding Taxes on Year-End Bonuses

As the year winds down people (hopefully) are receiving their year-end bonus. It’s also at this time of year that I am oftentimes asked “I just got my bonus check and they took so damn much out in taxes. Why?”

Well let me try to clear this up.

There is generally some confusion as to how year-end bonus income is taxed. Many people mistakenly believe that the bonus they receive from their employer during the holiday season is taxed at a higher rate than regular income. Others believe that a year-end bonus could bump them into a higher income tax bracket, resulting in their being subject to a higher tax rate on their total income for the year. Fortunately, however, neither scenario is necessarily true.

Bonus Income is the Same as Regular Income

As far as the IRS is concerned, bonus income is the same as your regular income. Any bonus income that you receive is added to your W-2 income, and is calculated in the total income you report to the IRS on your federal tax return forms. Employers often treat bonus income differently in terms of how they withhold taxes from the payment. That is why some people have the mistaken believe that a bonus will increase their taxes.

While a year-end bonus may technically put you into a higher tax bracket, you must realize that since you are taxed on an incremental basis, you won’t be taxed at a higher rate for all of your earnings last year. So, for example, if you look at the
2015 Tax Brackets for taxes due April 18, 2016 (or April 19, 2016 if you live in Maine or Massachusetts) and your filing status is single, you’ll see that the 10% tax bracket is up to $9,225 in earnings. This means that if you earn $9,225, your tax rate is 10%, and if you earn more than that – let’s say $30,000 – you will be placed into the 15% tax bracket, meaning that you still pay 10% on the earnings up to $9,225 and then you pay 15% on the earnings from $9,226 to  $30,000. Therefore, your actual tax rate is not 15%, but rather a combination of the different rates for the tax brackets that you fall into throughout the year.

So, yes, it is possible that your year-end or holiday bonus can push you into a higher tax bracket, but that does not mean that you will pay more money on the income that you earned earlier in the year.

How Employers Handle Bonus Income

Another reason why people think that they will be taxed at a higher rate on the bonuses that they receive is because more money may be withheld by the employer for taxes.
However, it is all dependent upon the employee’s final income at the end of the year. A person who makes 90% of his income in bonuses compared to someone who makes 10% of his income in bonuses and earns the same amount of money with the same filing statuses and deductions will still actually pay the same taxes.

Regardless of which of the following three methods for withholding federal taxes from bonus income an employer uses, your bonus income and regular pay are added together and   reported the same on your income tax return. If you overpay taxes, you receive a refund; if you underpay, you will owe more money when you file:

  1. The bonus can be included in the employee’s paycheck. The sum of the regular paycheck and the bonus payment are added together, and the standard withholding is calculated. The amount of tax already withheld from the regular income payment is subtracted, and the difference is withheld from the bonus.
  2. The employer can elect to withhold 25% federal income taxes from the bonus, and 35% for any bonuses over $1 million.
  3. The bonus can be included in the employee’s paycheck with no difference between the two types of income, and taxes are calculated based on the total amount of the pay and bonus combined.

It may seem like your bonus check is being taxed more money than you are used to – and even cause you to fear receiving a bonus. While you may see more money withheld from your bonus pay than you are used to seeing from your regular paycheck, keep in mind that it will all even out when you file your income taxes.

Exceptions for Hedge Fund and Investment Managers

Hedge fund managers and other investment managers who receive bonuses are considered to receive “carried interest.” So if an investment manager receives a bonus from investment gains, they are taxed at a top tax rate of 23.8% (long-term capital gains rate topping out at 20% plus 3.8% net investment income tax), which is generally lower than their marginal tax rates that the rest of their income is taxed on.


Bruce – Your Host at The Tax Nook

Other Social Media Outlets: (or just click on the icon on right sidebar of this page).

Website: (or just click on the icon on right sidebar of this page).