Before answering the question for today – did you hear that, in an attempt to close the tax gap, the IRS will be increasing its audits of small businesses?
Q. Great website you have.
Here’s my question - To file jointly or separate? I’m a realtor and she’s a 9-5 state worker. I’ve been paying a whole lot each year at tax time by filing jointly with my commission-based income and her W-2 income. My broker does not withhold tax per commission check. We both make over $140k/yr.
Here’s my question - To file jointly or separate? I’m a realtor and she’s a 9-5 state worker. I’ve been paying a whole lot each year at tax time by filing jointly with my commission-based income and her W-2 income. My broker does not withhold tax per commission check. We both make over $140k/yr.
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What’s your opinion of filing separately? Should we stay the course and simply set aside tax dollars? What advantages are there if I set up separate business (for real estate services, write offs etc.)?
What’s your opinion of filing separately? Should we stay the course and simply set aside tax dollars? What advantages are there if I set up separate business (for real estate services, write offs etc.)?
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Thank you for your time & advice, Tax Pro!
Thank you for your time & advice, Tax Pro!
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A. Part One:
A. Part One:
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Generally, by filing separately you will pay the same or more in federal income taxes. But there are situations where filing separately can produce a lower overall combined federal and state tax. I discussed the issue in my postings “JOINT OR SEPARATE? THAT IS THE QUESTION! - PART ONE” and “JOINT OR SEPARATE? THAT IS THE QUESTION! - PART TWO”.
Generally, by filing separately you will pay the same or more in federal income taxes. But there are situations where filing separately can produce a lower overall combined federal and state tax. I discussed the issue in my postings “JOINT OR SEPARATE? THAT IS THE QUESTION! - PART ONE” and “JOINT OR SEPARATE? THAT IS THE QUESTION! - PART TWO”.
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Because of the 7½% of Adjusted Gross Income (AGI) exclusion for medical expenses and 2% of AGI exclusion for miscellaneous deductions, if one spouse has excessive deductions in either category applying the % exclusion to the separate AGI could produce a lower combined separate taxable income.
Because of the 7½% of Adjusted Gross Income (AGI) exclusion for medical expenses and 2% of AGI exclusion for miscellaneous deductions, if one spouse has excessive deductions in either category applying the % exclusion to the separate AGI could produce a lower combined separate taxable income.
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There are many situations where you will not be able to receive a specific tax benefit, or you will receive a reduced benefit, if you file separate 1040s. These were recently outlined in my post “SOME MORE STUFF TO THINK ABOUT”.
There are many situations where you will not be able to receive a specific tax benefit, or you will receive a reduced benefit, if you file separate 1040s. These were recently outlined in my post “SOME MORE STUFF TO THINK ABOUT”.
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As with any case where you are faced with options, you should do separate tax calculations to see which one will result in the lowest overall tax. In this situation you will need to calculate three (3) sets of federal and state tax liabilities - one for a joint return and one each for the husband and wife’s separate returns. Because the dreaded Alternative Minimum Tax (AMT) increases the AGI exclusion for medical expenses to 10% and does not allow a deduction for miscellaneous deductions you should calculate the AMT as well as the “regular” tax when doing your liability comparisons.
As with any case where you are faced with options, you should do separate tax calculations to see which one will result in the lowest overall tax. In this situation you will need to calculate three (3) sets of federal and state tax liabilities - one for a joint return and one each for the husband and wife’s separate returns. Because the dreaded Alternative Minimum Tax (AMT) increases the AGI exclusion for medical expenses to 10% and does not allow a deduction for miscellaneous deductions you should calculate the AMT as well as the “regular” tax when doing your liability comparisons.
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I have found that if a couple has qualified dependent children and their income causes the Child Tax Credit to begin to phase-out, allocating the dependency deduction(s) to the lower-earning spouse on a separate return may result in a greater Credit then they would be allowed to claim on a joint return. However, AMT could apply and wipe out any net tax savings.
I have found that if a couple has qualified dependent children and their income causes the Child Tax Credit to begin to phase-out, allocating the dependency deduction(s) to the lower-earning spouse on a separate return may result in a greater Credit then they would be allowed to claim on a joint return. However, AMT could apply and wipe out any net tax savings.
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Part Two:
Part Two:
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As a realtor with no tax being withheld by your brokerage you should be receiving a Form 1099-MISC to report your commissions. Even though you are, to a degree, “employed” by a specific Real Estate brokerage firm (i.e. Century 21, ERA) you are considered to be an independent contractor for tax purposes. You do not have to create a separate real estate business.
As a realtor with no tax being withheld by your brokerage you should be receiving a Form 1099-MISC to report your commissions. Even though you are, to a degree, “employed” by a specific Real Estate brokerage firm (i.e. Century 21, ERA) you are considered to be an independent contractor for tax purposes. You do not have to create a separate real estate business.
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You should already be filing a Schedule C to report your commission income and deduct your business expenses, such as auto mileage to show houses and meet with clients, your dues and fees, multiple listing books, entertainment and meals, gifts to clients, promotional materials, etc. Unfortunately you will be subject to “self-employment tax” (the equivalent of Social Security and Medicare tax) on your net earnings.
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And, as there is no tax withheld from your commission checks I trust you are paying quarterly estimated taxes.
And, as there is no tax withheld from your commission checks I trust you are paying quarterly estimated taxes.
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I hope I have been of help.
I hope I have been of help.
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TTFN
TTFN
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