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How to Know If I am Exempt from Federal Tax Withholding?

06 Aug 2021
SDG Accountants
Accounting, Tax
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Many Americans worry about whether they are eligible for a federal income tax exemption or if they must pay. Don’t worry, your Miami Tax Accountants, SDG Accountants, can assist you with a team of highly skilled tax advisors! Read this article to learn how to be exempt from federal tax withholding and if you qualify for an exemption.

What is Exempt from Federal Tax Withholding?

When you receive a paycheck from your employer, the business is required by law to deduct taxes and other deductions as directed by the government. One of these deductions is withholding, which is the amount that your employer is required to deduct from your paycheck for federal income tax purposes. You’ll usually notice this on your paystubs as well; there’s a section on your paystub that shows you how much federal income tax was deducted. Always go over your paystubs thoroughly and analyze every deduction you’ve made. Keep in mind that exemption excludes the Federal Insurance Contributions Act (FICA), as well as Medicare and Social Security. You will have to pay those taxes on every paycheck.

Let’s have a look at how refunds work. When tax season arrives, you review your paystubs and financial records to determine how much tax, or “income tax liability,” you owe for the year. Once you’ve determined your amount, compare it to the amount withheld by the government from your pay for the year. You obtain a refund if the amount on your paystubs is larger than the amount you calculated; otherwise, you must pay the remaining debt owed. You will see withheld taxes for state tax purposes on your pay stubs, and your refund will be calculated in the same way.

Both the government and the taxpayer benefit from withholding. For the government, withholding taxes ensures that the taxpayer does not avoid paying taxes and that the tax bill is paid on time each year. For the taxpayer, it decreases the amount of worry they will experience while filing their taxes because withholding lowers their annual tax payment by a certain amount. Individuals may find it difficult to manage and pay all of the money at once.

How does Exempt from Federal Tax Withholding Work?

You must verify a few things in order to be exempt from withholding. When you declare yourself exempt from federal withholding taxes, the government will not deduct any taxes from your paychecks. This isn’t something you can just claim; the IRS requires a few verifications before you may be exempt from federal income taxes. If you owe no federal income taxes the previous year and plan to owe no federal income taxes this year, you can qualify for an exemption.

How to Claim Exempt Status?

The IRS has provided taxpayers with a W-4 form that they can use anytime they change jobs or need to adjust their withholding amount. This form is completed by the employer and instructs them on how much to deduct from each paycheck. You can claim up to three allowances on the W-4 form. Your company will deduct less from your salary if you claim fewer allowances. To file a complete exemption, write exempt in the space below Step 4(c) on the W-4 form. To learn more about the W-4 form and how to file one, contact your Tax Preparer Miami.

Some taxpayers desire to claim exempt status for a limited time and then return to it later. It is possible to do so, and many taxpayers do so throughout the year. When you want to claim exemption, you must once again file a Form W-4. Your tax bill will not be postponed as a result of this; the amount owed will be paid during tax season. Fill out a new Form W-4 to resume withholding federal tax. It’s important to understand whether you’re eligible for withholding so you don’t end up paying fines if something goes wrong.

Filing as Exempt When I am Not Eligible:

Remember that filing an exemption does not reduce your taxes; rather, it causes you to pay your entire tax amount when filing your federal income tax. The IRS can levy fines for failing to withhold federal taxes in particular situations. Contact an experienced tax professional to ensure you fully understand the exemption and whether or not you are eligible.

Traditional Vs. Roth IRAs: Key Differences

05 Aug 2021
SDG Accountants
Accounting, Tax
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Many individuals take retirement for granted; the idea of no longer being useful to the industry in which you worked for years is ridiculous to consider. That emotion is unavoidable. You’re forced to abandon a field that used to be your passion when you were younger. After you retire, you’ll need a source of money to keep you afloat. Even in your 70s, after working your entire life to secure your future, you should not be required to work. Your best option is an automatic source of income, which you can obtain if you begin working for it as soon as you begin your profession. Individual Retirement Accounts (IRAs) are the best option for your financial future. In every manner, it’s correct. Many Americans begin saving in Individual Retirement Accounts (IRAs) as soon as they begin their careers since it is the most advantageous option. Traditional IRAs and Roth IRAs are the two most popular IRAs in the United States.

The Employee Retirement Income Security Act (ERISA) of 1974 established the Traditional IRA. On the other side, Sen. William Roth introduced the Roth IRA 23 years later, in 1997. The sponsors’ name was then added to the IRA. We’ll go through all the important distinctions so you can figure out which IRA is best for you.

Tax Breaks:

Traditional IRAs and Roth IRAs both offer the same tax breaks, but they do not allow individuals to pick when they can claim their payments. Let’s start with the traditional IRA. The traditional IRA reduces your taxable income by collecting tax before making a payment to you. Traditional IRA contributions are taxable on both the state and federal levels for the tax year in which they are made. The money you get when you retire, as well as any withdrawals, are all taxed at your marginal tax rate. All of this lowers your Adjusted Gross Income (AGI), making you eligible for various tax benefits such as the child tax credit.

Moving on to Roth IRAs, they deduct taxes from your contributions at the time of contribution, thus your AGI for that year will not be reduced. This strategy has the advantage of not requiring you to pay any taxes when you withdraw your money in retirement. Because you paid the tax when you made the contributions, your future will be tax-free.

To put it another way, with a traditional IRA, you pay taxes when you withdraw money at retirement, whereas with a Roth IRA, you pay taxes when you make contributions, so your withdrawals are tax-free.

Income Limits:

There are also income limits for both retirement accounts; you will be able to choose your retirement account based on your income. However, this is merely a restriction for one account; anyone with an earned income of any amount can contribute to a traditional IRA. Different tax rates may apply.

Roth IRAs, on the other hand, have income eligibility requirements. In 2020, singles must have a MAGI of less than $139,000, with payments phasing off at $124,000. Married couples must have modified AGIs of less than $206,000 to contribute to a Roth, and contributions begin to phase down at $196,000.

In 2021, singles must have a MAGI of less than $140,000, with contributions phasing off at $125,000. Married couples must have adjusted AGIs of less than $208,000 to contribute to a Roth, and contributions begin to phase out at $198,000.

IRAs Withdrawal Rules:

Another significant distinction between a regular IRA and a Roth IRA is that the contributors’ withdrawal criteria are different. Traditional IRAs require Required Minimum Distributions (RMDs), which are taxable withdrawals of a percentage of your savings that must be taken by the age of 72, even if you don’t need the money. The IRS provides a worksheet on their website to assist contributors in determining their annual RMD. The estimate is based on your age and the amount of money you have.

Roth IRAs, on the other hand, do not force you to take any RMDs and do not even compel you to withdraw your money at any point throughout your life. It is not necessary or essential to take any money out because there is no tax at the time of withdrawal.

There are numerous more important distinctions between traditional and Roth IRAs; to learn more about which account is right for you, call your Miami Tax Accountant now. Excellent guidance at a minimal cost.

The Complete Guide to Inheritance Taxes

03 Aug 2021
SDG Accountants
Accounting, Tax
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Many people in the United States wonder if they have to pay taxes on inheritances. Let us begin by defining what inheritance is. An inheritance is a gift from a deceased person; a relative, or a friend. If you have received an inheritance, you may now be subject to three types of taxes. Inheritance tax, capital gains tax, and the estate tax would be the three taxes.

Inheritance Tax: An inheritance tax is a tax levied on a decedent’s property.

Capital Gains Tax: After the property you inherited has been sold, you must pay a capital gains tax. The tax would be levied on the selling earnings rather than the property itself.

A tax on the value of the inherited property is known as an estate tax. The estate, not the heirs, would be responsible for this tax. It may potentially lower the inheritance’s worth.

Inheritance Taxes at the Federal Level:

The Internal Revenue Service (IRS) is more concerned with capital gains tax than with all other sorts of inheritance taxes. Inheritances aren’t often subject to income taxes, and the federal government doesn’t levy one either. In many circumstances, inheritances are made in cash, such as your cousin leaving you $30,000 in cash, which is tax-free because it is not considered income.

Inheritance Taxes at the State Level:

Only 6 of the 50 states in the United States collect inheritance taxes; if you don’t live in one of these states, you won’t have to worry about inheritance taxes. Iowa, Kentucky, Maryland, Nebraska, and New Jersey are the six states that collect inheritance taxes. Even if you live in one of the six states, you can consider yourself tax-free as long as the decedent lived in one of the other 44 states. It’s also possible that property was left to an alive spouse, which would be exempt from inheritance taxes in all 50 states of the United States. Only Nebraska and Pennsylvania would levy an inheritance tax if the property was left to the decedent’s children or grandchildren.

Income Taxes for Inheritance at the State and Federal Level:

As previously stated, inheritance property is not considered taxable income and hence is not subject to income taxation. Depending on the sort of property you inherited, you may be required to pay some built-in income taxes.

Capital Gains Tax:

Capital gain is the difference between the asset’s worth and the amount you sell it back for. Because the capital gain is taxable income, you will have to pay capital gains tax to the IRS when you sell the inheritance property. If, on the other hand, the inheritance was sold for less than its worth, it will be regarded as a capital loss, and so no capital gains tax will be due.

For inheritance properties, the IRS imposes a different tax bracket than for regular income. This benefits taxpayers who are subject to capital gains tax as a result of the sale of their inherited property. Keep in mind that capital gains are calculated using the asset’s value on the day of the decedent’s death, not the asset’s worth when it was first purchased. This is beneficial to the taxpayer because they will have to pay fewer taxes.

State and Federal Level Estate Taxes:

Your inheritance property may be subject to state and federal estate taxes. The federal estate tax exemption is $11.4 million as of 2019. If an estate’s worth is less than this, there will be no estate tax. As of 2021, the District of Columbia and 12 other states also impose a state-level estate tax. Connecticut, Maine, Maryland, Hawaii, Washington, Rhode Island, Massachusetts, New York, Oregon, Minnesota, Vermont, and Illinois are the twelve states. If the inherited property is located in one of these states, you will be subject to state estate taxes.

If you do not live in one of those 12 states or the District of Columbia, the state’s estate tax will only apply if the exemption amount is surpassed. On the other hand, state-level exemptions are substantially lower than federal exemptions, with some states offering exemptions as low as $1 million.

Keep in mind that state-level estate taxes will be due and paid before you receive your inheritance.

Contact your Downtown Miami Tax Accountant for help with your inheritance taxes. Book a consultation using the in below or contact SDG Accountants by phone: +1 (786) 706-5905 or by email: admin@sdgaccountant.com.

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