How New Budgeting App Level May Change the Way You Think About Money - Level Money

Patrick Nelson for the Motley Fool writes: If you've ever used a bank, you'll know there's room for improvement. San Francisco-based Level Money, funded by Kleiner Perkins Caufield & Byers, reckons it has the answer to next-generation financial services.

Level Money pitches its product, smartphone app Level, as a digital version of a wallet. Recently released and just updated for the Android mobile operating system, Level links banks and other accounts, monitors them, and tells you how much cash you have available to spend.

Unlike new smartphone mobile wallet transactional services, Level is a live analytical budgeting tool it describes as a "digital money meter."

Level is available for free in the Google Play store and is also available for iOS.

Signing up with the app and allowing it to link multiple bank accounts lets you in on its simple analytic: income, less bills, less savings, equates to your spendable cash.

The app then guesses at your specific formula values -- for example, income. It does this by looking through the online banking ledger at your transactions, like deposits, bills, and so on. The app then tells you how much you can spend daily, weekly, or monthly, in a clean UI with pie charts.

What it doesn't do -- and this may be one of its selling points -- is it doesn't move money around; it works with existing bank accounts. This is a good thing at the consumer level, because any time you move money, banks take a piece. 

How does Level make money?

The backend is run through its partner Intuit (NASDAQ: INTU  ) , maker of Quicken, the personal finance software product.

Level promises not to hit you up with ads or sell your data, according to its app FAQ page, but it does provide a caveat that says that it might ultimately offer financial products.

Level won't need to follow the traditional banking slice-of-the action if it can work closely with Intuit, and cross-promote some of Intuit's software products, like tax preparation software TurboTax, already available in mobile app form, called SnapTax.

Intuit is long removed from its 1983-released desktop PC personal finance-oriented Quicken and its business-geared QuickBooks, with its spreadsheet-like ledger and reporting products. Working with Level is a way to appeal to a smartphone-wielding youthful consumer. It takes budgeting to an impulsive crowd that needs personal finance products, but is possibly turned off by them, yet is likely open to new-fangled financial techniques like analytics.

Level makes copious use of the demographic term "Millennials" in its marketing. Strategically then, Intuit and Level is an interesting match.

I liked the app, but not for its obvious daily, at-a-glance budgeting.

Where this app really comes into its own is that by getting a daily snapshot of how much cash you have available, conceivably you could start saving some of it. Hidden away, the app provides what it calls a Rollover screen—an estimate of how much you've saved above and beyond your usual savings, if any.

If you spend less than the daily goal, that dollar amount appears as Rollover. You could then transfer it into a savings account.

Unfortunately, that part of the process will be with your bank's likely cumbersome online banking software or app.

For those interested in how analytics are changing the way we do things, and how to get Millennials to pay attention to the dull things in life, like budgets, the Level app is a must see.

Tax Quirks That Make You Go Huh?

Marilyn Calister and Lee Sussman for WTAS write: Ever heard the maxim, "always expect the unexpected"?  We have all experienced its truth in the "real world."  Similarly, the tax law has no lack of oddities or quirks that can leave even tax professionals uttering "huh?"

Following are some of the more common oddities of the tax law that effect more taxpayers than you might think.

The Marriage Penalty – "Oxymoron" or "Truism"?

It would seem inexplicable that the entering into the institution of marriage should bring about a tax penalty. However, the way the tax brackets are arranged for different categories of filers, it is very possible for two unmarried individuals to pay less tax on a combined basis than if they were married.

For example, two unmarried individuals filing as single, earning $183,250 each, would pay tax at a marginal tax rate of 28% for a total of $89,206 ($44,603 each). However, if those same individuals were married and filed a joint return, their combined income would yield a tax liability of $97,257. This translates into a marginal tax rate of 33% and a tax increase of $8,051. "Huh?" A marriage penalty indeed!

Incentive Stock Options – "Carrot" or "Stick"?

Congratulations! The company for which you worked for the past three years just went public at $100 per share and the incentive stock options ("ISOs") you were granted in year one are worth a fortune. You know that the primary benefit of an ISO is that long-term capital gains rates can be utilized if certain holding period requirements are met. The stock needs to be held for at least one year after exercise and at least two years from the option grant date. The 100,000 options you were granted have a $0.10 exercise price and are now worth $10 million.

While jumping for joy, you call up the company and inform them that you want to immediately exercise all of your options. You pay the company $10,000 (100,000 options * $0.10 exercise price) and the company puts 100,000 shares into your brokerage account. On your way to the IPO party, you call your accountant to tell her about your newfound wealth. However, she proceeds to inform you that you now owe about $2.8 million in federal taxes even though you did not sell a single share. "Huh?"

What you did not know is that ISOs, although when exercised, are not subject to regular tax, are subject to Alternative Minimum Tax ("AMT"), at a rate of 28%, on the difference between the exercise price and the fair market value at the time of exercise. Of course, you could sell enough shares to pay the tax. However, then the taxable income on the shares sold will be taxed at ordinary instead of capital gains rates. Now let's add some more salt to the wound.

The next morning you wake up to headlines stating that your company is being investigated for fraud. The stock drops to $0.01. This is a disaster! You still owe $2.8 million in taxes from the option exercise and even if it was possible to sell stock, you would not generate sufficient cash to pay the tax bill. Further, with the expiration of the refundable alternative minimum tax credit in 2012, any tax benefit attributable to the AMT taxes paid can only be applied to prospectively generated income. This means that unless you have significant income in the future, you may never recoup all of the taxes paid for the now worthless stock.

The moral of the story is never exercise ISOs without discussing it with a qualified tax professional.

Statutory Residency – When is a "Pied-à-Terre" a huge pain?

Most people consider themselves a resident of only one state but this is not necessarily the state they are employed in. If your home is located a distance from your place of employment, it would not be uncommon for you to purchase or rent an apartment that is closer to your employment but not in the state in which you reside. You now exist in a twilight zone because it is very possible that you could be considered a statutory resident of the state you are employed in as well as the state you call home. (See "Home is Where The Heart Is").

New York State (NYS) and New York City (NYC) would consider your "Pied-à-Terre" a "permanent place of abode" for statutory residency purposes. If you spend more than 183 days in NYC (any portion of a day, not necessarily a work day), you would be deemed a NYS and NYC statutory resident subject to tax on ALL of your income (including interest, dividends, capital gains, etc.) not just the portion you earned in NY. The issue here is that your home state will also tax all of your income but they will only allow you a credit for taxes paid to NY that relate to your NY earned income. No credit would be allowed for your unearned investment income (e.g., interest, dividend, etc.) and this would be subject to a hefty double tax.

Of course, you might wonder how NY would even know that you have an apartment in NY. The answer is very simple. If you file a NY Non Resident return to report your NY earnings there is a question on page 1 of the return that you must answer. It asks, "Did you or your spouse maintain living quarters in NY?" Once you check this box "Yes" your chances of being audited by NY jump significantly. Once under audit, the burden is on you to prove where you were on every single day including holidays and weekends. If you cannot prove where you were on a specific day, NY will count this as an NY day. "Huh?"

Maintaining detailed documentation of your whereabouts is critical. If you choose to take on this mission "almost" impossible, consult with a tax advisor who is experienced with residency issues.

Expatriation – "You can leave but it will cost you!"

The United States taxes its citizens and long-term green card holders on their world-wide income regardless of where they live. The only way out of the U.S. tax regime is to move abroad and give up your citizenship/green card. However, before you get all happy, you should know that the U.S. will charge an exit tax on your assets' unrealized gain at the time of expatriation. "Huh?"

This exit tax is effectively a mark-to-market regime that takes all of your assets and deems them as being sold on the day you leave the country. Of course, expatriating is not as simple as this. Therefore, before you pack your bags, consult a qualified tax advisor.

Conclusion

The U.S. as well as the States' tax law is full of items that will make you say "huh?" The items listed above are just a small sampling illustrating the importance of having a qualified tax advisor as part of your professional advisory team.

Do you owe the alternative minimum tax?

Bill Bischoff for MarketWatch writes: Remember back when you were young and poor and nothing made you madder than tales of rich people who paid nothing in income taxes? Well, you weren’t alone, and that anger led to the creation of something called the alternative minimum tax, which was designed to keep the rich from living tax-free.

Fast-forward a few years. You’re a bit older, somewhat better off and paying far more in taxes than you ever thought possible. So what’s the last thing you expect to see when you fill out your tax return? That you owe the alternative minimum tax. You can take some solace in the fact that thousands of taxpayers just like you have been snagged by this nasty bit of tax law in recent years. While only 19,000 people owed the AMT in 1970, millions are paying it now.

What happened? Inflation, mostly. While the “regular” tax brackets, exemptions and standard deductions were adjusted annually for inflation, the AMT brackets and exemptions were not, so many people whose income increased entered the dreaded AMT zone. Especially vulnerable are people with income over $75,000 and some large deductions, but not the exotic ones that were originally targeted by the AMT’s creators. Most vulnerable are taxpayers with several children, interest deductions from second mortgages, capital gains, high state and local taxes, and incentive stock options.

Thankfully, the AMT brackets and exemptions are adjusted for inflation for 2013 and beyond, which will cause fewer folks to be exposed to the tax.

How the Tax Works

The best way to understand the AMT is to view it as a separate tax system. It has its own set of rates and its own rules for deductions, which usually are less generous than the regular rules. Because of these confusing rules, the only ways you can tell if you owe the tax are by filling out the forms (essentially doing your taxes a second time) or by being audited by the Internal Revenue Service. If it turns out you should have paid the AMT but didn’t, you will owe the back taxes plus any interest or penalty that the IRS decides to dole out.

You should definitely run the numbers if your gross income is above $75,000 and you have write-offs for personal exemptions, taxes and home-equity loan interest. Ditto if you exercised incentive stock options during the year, or if you own a business, rental properties, partnership interests or S corporation stock. If you earn more than $100,000, run the numbers for that reason alone.

That means filling out Form 6251. In effect, you are simply adding back some tax deductions and income exclusions to your regular taxable income to arrive at your alternative minimum taxable income. Here is where the middle class gets soaked. First you have to add back your personal- and dependent-exemption deductions ($3,900 each in 2013), then your standard deduction if you don’t itemize ($12,200 for joint filers in 2013; $6,100 for singles in 2013). You also lose your state, local and foreign income and property-tax write-offs, as well as your home-equity loan interest, if the loan proceeds are not used for home improvements.

The AMT also ignores some itemized deductions, such as investment expenses and employee business expenses, and some medical and dental expenses. It also counts as income the interest from some private-activity bonds, a type of tax-exempt bond issued by governments, usually to finance sports stadiums and the like. Finally, AMT rules force you to pay taxes on the “spread” between the market price and the exercise price of incentive stock options granted by your employer. For example, if you exercised an option to buy 100 shares of stock for $3 a share and the stock was trading at $10, the spread would be $7 a share, or $700. Under the regular rules, you wouldn’t pay current taxes on that amount, but under the AMT, it’s considered income.

Don’t give up hope. You do get a few small breaks under AMT rules that you wouldn’t see under the regular tax rules. For example, while you can’t deduct state, local and foreign taxes under AMT rules, you can deduct the refunds, which are considered income under the regular tax rules. And because you’re taxed on the spread on your incentive stock options, your tax basis for the shares you bought is higher under the AMT, meaning your tax bill will be lower when you sell the shares.

The AMT form has quite a few other pluses and minuses, but you can probably ignore them unless you own a business, rental properties or interests in partnerships or S corporations. If you do, you may need a tax pro to prepare at least the Form 6251 part of your return.

Finally, you get to deduct the AMT exemption -- $80,800 for 2013 joint filers; $51,900 for unmarried persons; $40,400 for those who use married filing separate status. However, this exemption is reduced by 25 cents for each dollar of AMT taxable income above the applicable annual threshold. For 2013, the thresholds are $153,900 for married joint-filing couples, $115,400 for singles, and $76,950 for folks who use married filing separate status.

After the exemption (if any) has been deducted, the result is subject to the AMT rates: (1) 26% on the first $179,500 for 2013 or $89,750 for if you are married and file separately from your spouse and (2) 28% on the excess. If the AMT exceeds your regular tax, you have to pay the greater amount. Technically, the AMT is just the liability over and above the regular tax, and this figure is entered on page 2 of Form 1040.

Sorry, you’re not finished yet. People get pushed into the AMT zone for different reasons, and some are actually better than others. That’s because you could be eligible for the so-called minimum tax credit, which allows you to claim a credit on your tax return in future years for some or all of the extra taxes you paid under AMT rules. So you have to fill out another document, Form 8801, to determine if you are eligible. For whatever reason, the tax rules say that exercising incentive stock options is one of the few things that qualifies you for the credit, so if that’s the reason you ended up paying the AMT, pay special attention to this form. 

A cheat sheet for itemized tax deductions

Bill Bischoff for MarketWatch writes: The first thing to know about miscellaneous itemized deductions is that if they’re small, you probably won’t benefit from them. If all you have in your miscellaneous category is a random work-related magazine subscription, forget about it. The only way you’re allowed to deduct miscellaneous items is if they total more than 2% of your adjusted gross income (AGI). You can then deduct anything in excess of that 2%. Just so you know, AGI is the number from the bottom of page 1 of your Form 1040. It includes all your taxable income items and is reduced by certain deductions claimed on page 1, such as deductible IRA contributions, alimony paid to an ex-spouse, and moving expenses.

For example, say your AGI is $50,000. Two percent of that is $1,000. So your total miscellaneous itemized deductions must exceed $1,000 in order for you to claim a penny. But if you have miscellaneous expenses of $1,500, you’ll only get to deduct $500, or $1,500 minus $1,000.

Next comes the somewhat inexact science of defining what qualifies for a miscellaneous deduction. These include business expenses that you’re not reimbursed for, such as dues paid to a union or other professional society, uniforms if they’re not appropriate for wear outside of the workplace, courses you take to improve your job skills (but not to get you a job in a new field), and the expense of looking for a new job. Other examples of miscellaneous expenses include some home-office deductions, investment and legal fees if they helped you produce taxable income and the expense of hiring an accountant to help you master your 1040.

If you’re close to meeting the 2% floor one year, try bunching some of next year’s expenses into that year. For example, rather than wait until January to enroll in that continuing education class, pay your tuition in December. That way, maybe you can get some tax savings from your miscellaneous deductions at least every other year. 

How to get tax breaks for your debt / When you get a tax break for borrowing and when you don’t

Bill Bischoff for MarketWatch.com writes: They’re both too high, right? But your debts may actually help keep the evil twin at bay. Why? At least some of that interest you shovel out each month is probably tax-deductible. Back in “the good old days,” taxpayers were allowed to deduct all their interest charges, even credit-card bills for vacations, Armani suits and movie tickets. Then, Congress caught on.

Now the Tax Code permits deductions only for certain varieties of interest. This makes debt management more important than ever, because you are basically penalized by the IRS whenever you have interest that falls into the nondeductible category. Here’s a quick summary on when you get a tax break for borrowing and when you don’t.

Home-Mortgage Interest

You are allowed an itemized deduction for interest on up to $1 million worth of mortgages used to acquire or improve your main personal residence and one other home. Mortgage interest on your third personal residence and beyond is considered a nondeductible personal expense.

So the tax-wise debt-management trick here is to: (1) make sure you don’t have over $1 million in mortgage debt and (2) pay cash for your third, fourth and fifth homes. We should all have such financial challenges.

Interest on Home-Equity Loan

You are also allowed to claim an itemized deduction for interest on home-equity loans totaling up to $100,000, regardless of how you use the loan proceeds. The $100,000 figure is above and beyond the $1 million limit explained above. So you can actually have up to $1.1 million of debt against your first and second homes and still deduct the interest.

Warning: interest on home-equity loans is deductible for alternative minimum tax (AMT) purposes only if you use the proceeds to acquire, construct or improve a first or second residence. So if you are in the AMT mode, you should understand that you may not get any tax benefit if you take out a $75,000 home-equity loan to buy a BMW and pay for your kid’s braces. On the other hand, if you spend the $75,000 to put in a swimming pool and spa alongside your house, you can deduct the interest under both the regular tax and AMT rules. Does this make any sense? Of course not, but Congress doesn’t ask for our input on tax legislation.

Interest on Vacation Homes

For most people, the vacation home is the second home and the mortgage interest will turn out to be deductible under the rules explained earlier. However, when you rent the property part of the time, the tax rules get very tricky. Nevertheless, you will usually be able to deduct all of the interest or nearly so.

Investment Interest

When you borrow money and use the proceeds to buy taxable investment assets, the resulting interest is called investment-interest expense. The most common example: interest on broker-margin accounts.

You can deduct investment interest to the extent of your taxable investment income—from interest, short-term capital gains, certain royalties and the like. If you don’t have enough investment income, the excess interest expense gets carried over to the following tax year. Hopefully, you’ll have enough investment income in that year to claim your write-off. If not, the carry-over procedure happens all over again. And so on and so on.

You can also choose to treat all or part of your long-term capital gains and qualified dividends as investment income. The upside of making this choice is it allows you to currently deduct more of your investment-interest expense. The downside is the amount of long-term gains and dividends treated as investment income gets taxed at your regular rate (which can be as high as 39.6%) instead of the normal rate of 15% or 20% (or less).

If you have investment interest, complete IRS Form 4952 (Investment Interest Expense Deduction) to calculate your write-off. You also use this form to indicate how much of your long-term capital gains and qualified dividends, if any, you want treated as investment income.

What about interest on loans used to purchase nontaxable investments, like municipal bonds or muni-bond funds? Nondeductible. Logically enough, the government won’t let you write off interest on debts used to generate income that goes untaxed.

So if your investing strategy calls for some borrowing, the tax-wise trick is to spend the debt proceeds to buy taxable investments and use cash to pay for the nontaxable ones.

College-Loan Interest

Not too long ago, Congress finally gave us a much-needed tax break for up to $2,500 of annual interest on loans used to pay for college. But the deduction comes with limitations, and high-income types won’t be eligible (surprise). If you fall into the ineligible category, consider taking out a home-equity loan instead. You have a decent shot at being able to deduct the interest, as explained above.

Interest on 401(k) Loans

This is generally nondeductible regardless of how you use the money. Sorry. But this is not really so bad, because you are basically paying interest to yourself. The potential downside of tapping this particular line of credit is that you must immediately repay the loan if you leave the company. If you don’t, you’ll be taxed as if you received a distribution equal to the loan balance. When this happens before age 59 1/2, you will generally be tagged with a 10% penalty tax to boot. So you generally shouldn’t even think about taking out a 401(k) loan unless you are darn sure you’ll be able to pay it back on time and in full.

Interest on Car Loans, Credit Cards and Other ‘Consumer Debt’

Unless you are borrowing to finance a business expenditure—like a car used in your sole-proprietorship business—you can generally forget about any tax breaks.

This is why it’s often advisable to take out a home-equity loan and use the money to pay off credit-card balances and car loans. You may be able to convert high nondeductible interest charges into relatively low interest charges that are fully deductible. If so, this procedure is an excellent debt-management scheme. Just make sure you read the earlier caveats about the deductibility issue.

Business Interest

What happens when you borrow money and use it to finance your small business? The interest is generally fully deductible just like any other garden-variety business expense. Before you jump for joy at the apparent simplicity of the preceding sentence, be warned that the IRS has a complicated set of rules which basically require you to trace the debt proceeds to business uses. If this affects you, be sure to schedule a chat with your tax accountant to talk about what exactly is needed to lock in your write-offs. 

Understanding Your Tax Forms: The W-2

Kelly Phillips Erb for Forbes writes:  Each year about this time, mailboxes across America are filled with tax forms. Sometimes, those tax forms go straight to a tax professional, unopened. Other times, taxpayers may dutifully open those forms and type the information, box for box, into tax preparation software. In both cases, it’s not unusual for taxpayers to not have an understanding of the meaning of all of the numbers, letters and other information on those forms. That’s about to change.

This week, I’ll be dissecting some of the most basic tax forms for you. The more you know, the less scary some of these forms can be.

First up, here’s what you should know about the form W-2, Wage and Tax Statement: A form W-2 is issued by an employer to an employee. That carries with it some significance and not only for tax reasons. An employer has certain reporting, withholding and insurance requirements for employees that are a bit different from those owed to an independent contractor.

The threshold for issuing a form W-2 is based on dollars – nothing else matters. Not time worked. Not position held. Just dollars (or dollar equivalents) earned. The magic number is $600. Every employer who pays at least $600 in case (or cash equivalent, including taxable benefits) must issue a form W-2. If any taxes are withheld, including those for Social Security or Medicare, a form W-2 must be issued regardless of how much was paid out to an employee.

An employer prepares six copies of each form W-2 per employee. Yes, that’s a lot of paperwork.

Copy A is transmitted to the Social Security Administration (SSA) along with a form W-3 (the form W-3 reports the total of all of the forms W-2 for the employer). The due date for employers to get that information to SSA is February 28. Copy 1 is issued to any applicable state, city or local tax department. Copy D is retained by the employer.

As an employee, you get three copies of your form W-2. Those three copies must be issued by January 31 of each year. Copy B is for use in reporting your federal income taxes and is generally filed with your federal income tax return (unless you are e-filing in which case you have to provide it to the preparer but it is not usually forwarded to IRS). Copy 2 is for use in reporting your state, city or local income tax and is filed with the relevant taxing authorities. Copy C is for your records (you should retain Copy C for at least three years after you file or the due date of your return, whichever is later).

The left side of the form is for reporting taxpayer information; the right side of the form is used to report financials and codes. The bottom of the form reports local and state tax information.

Here’s a closer look at each of the boxes on the left:

Box a. Your Social Security Number (SSN) is reported in box (a). You should always double-check this to make sure it’s correct. If it’s not correct, you need to request a new form W-2 from your employer. An error could slow the processing of your return.

Box b. Your employer’s EIN is reported in box (b). An EIN is more or less the employer’s equivalent of your SSN.

Box c. Your employer’s address is reported in box (c). This is the legal address of your employer which may or may not be where you actually work. Don’t let that throw you.

Box d. The control number is an internal number used by your employer or your employer’s payroll department. If your employer doesn’t use control numbers, box (d) will be blank.

Boxes e and f. These appear as one big block on your form W-2. Your full name is reported at box (e). It’s supposed to reflect the name that’s actually on your Social Security card (the SSA isn’t crazy about suffixes, even if you use them, so you shouldn’t see one on your form W-2 unless it’s on your Social Security card). If your name isn’t exactly as it appears on your Social Security card, you may need a new form W-2; ask your employer if you’re not sure. Your address is reported at box (f) and should reflect your mailing address – which could be a post office box – likely without punctuation (a USPS preference). If your address on the form W-2 isn’t correct, notify your employer: you won’t need a new form W-2 but your employer needs to update his or her records.

The boxes you care most about are those boxes (a), (e) and (f), as highlighted by the pink circles:

Now, here’s a closer look at the boxes on the right:

Box 1 shows your total taxable wages, tips, prizes and other compensation, as well as any taxable fringe benefits. It does not include elective deferrals to retirement plans, pretax benefits or payroll deductions. Since the figure (highlighted by the red arrow in my example below) doesn’t include those amounts, it’s not unusual for this amount to be less than the amounts included at boxes 2 and 3. It’s the number most taxpayers care about the most.

Box 2 reports the total amount of federal income taxes withheld from your pay during the year. This amount (highlighted by the purple arrow in my example below) is determined by the elections on your form W-4 based on exemptions and any additional withholding. If you find that this number is too low or too high, you’ll want to make an adjustment on your form W-4 for the next year.

Box 3 shows your total wages subject to the Social Security tax. This figure is calculated before any payroll deductions which means that the amount in box 3 could be higher than the number reported in box 1, as in my example. It could also be less than the amount in box 1, if you’re a high-wage earner, since the total of boxes 3 and 7 (see below) cannot exceed the maximum Social Security wage base. For 2013, that amount was $113,700. If you have more than one job, for Social Security tax purposes, the cap still applies.

Box 4 shows the total of Social Security taxes withheld for the year. Unlike federal income taxes, Social Security taxes are calculated based on a flat rate. The rate is 6.2%. The amount in Box 4 should, then, be equal to the amount in box 3 times 6.2%. Since you should not have more Social Security withholding than the maximum wage base times 6.2%, the amount in box 4 should not exceed $7,049.40. In my example, the figure is $50,000 x .062, or $3,100.00.

Box 5 indicates wages subject to Medicare taxes. Medicare taxes generally do not include any pretax deductions and will include most taxable benefits. That, combined with the fact that unlike Social Security wages, there is no cap for Medicare taxes, means that the figure in box 5 may be larger than the amounts shown in box 1 or box 3. In fact, it’s likely the largest number on your form W-2.

Box 6 shows the amount of Medicare taxes withheld for the year. Like Social Security taxes, Medicare taxes are figured based on a flat rate. Therate is 1.45%. For most taxpayers, this means that the figure in box 6 is equal to the figure in box 5 times 1.45% (as in my example indicated by the green arrow since $50,000 x 1.45% = $725). However, under a new law that kicked in beginning in 2013, an employer must withhold additional Medicare tax of .9% from wages paid to an individual earning more than $200,000, regardless of filing status or wages paid by another employer. Since your employer doesn’t know your entire financial picture, it’s possible under the new law that you may have to pay more additional Medicare taxes than your withholding depending on filing status, compensation and self-employment income.

Tips which were reported to your employer will be found in box 7. If this box is blank, it means that you did not report tips to your employer (this doesn’t mean that you don’t have to report those tips to IRS).

Allocated tips reported in box 8 are those that your employer has figured are attributable to you. Those tips are considered income to you.

There won’t be anything in box 9. The reporting requirement for that box expired a few years ago and the box hasn’t yet been removed from the form (go figure).

At box 10, your employer will report the total of any benefits paid on your behalf under a dependent care assistance program. Amounts paid out under a qualified plan which are less than $5,000 are considered non-taxable benefits. That number will include report the value of all dependent care benefits, including those greater than the $5,000 exclusion (if the value exceeds $5,000, that excess will be reported in boxes 1, 3 and 5).

Box 11 is used to report amounts which have been distributed to you from your employer’s non-qualified deferred compensation plan (this amount is taxable). This isn’t to be confused with amounts contributed byyou. That shows up in box 12.

Box 12 is the kitchen sink of form W-2 reporting. Here, you’ll see all kinds of codes. Not all of the income coded at box 12 is taxable. Here’s aquick rundown of the codes:

A – Uncollected social security or RRTA tax on tips
B – Uncollected Medicare tax on tips (but not Additional Medicare Tax)
C – Taxable cost of group-term life insurance over $50,000 (included in your wages at boxes 1, 3 and 5)
D – Elective deferrals to a section 401(k) cash or deferred arrangement plan (including a SIMPLE 401(k) arrangement)
E – Elective deferrals under a section 403(b) salary reduction agreement
F – Elective deferrals under a section 408(k)(6) salary reduction SEP
G – Elective deferrals and employer contributions (including nonelective deferrals) to a section 457(b) deferred compensation plan
H – Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan
J – Nontaxable sick pay
K – 20% excise tax on excess golden parachute payments
L – Substantiated employee business expense reimbursements
M – Uncollected social security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only)
N – Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (but not Additional Medicare Tax)(former employees only)
P – Excludable moving expense reimbursements paid directly to employee
Q – Nontaxable combat pay
R – Employer contributions to an Archer MSA
S – Employee salary reduction contributions under a section 408(p) SIMPLE plan
T – Adoption benefits
V – Income from exercise of nonstatutory stock option(s)
W – Employer contributions (including employee contributions through a cafeteria plan) to an employee’s health savings account (HSA)
Y – Deferrals under a section 409A nonqualified deferred compensation plan
Z – Income under a nonqualified deferred compensation plan that fails to satisfy section 409A
AA – Designated Roth contributions under a section 401(k) plan
BB – Designated Roth contributions under a section 403(b) plan
CC – HIRE exempt wages and tips (2010 only)
DD – Cost of employer-sponsored health coverage
EE – Designated Roth contributions under a governmental section 457(b) plan

In the sample form W-2, I’ve included three of the most popular codes.

Elective deferrals (Code D) are extremely popular. As noted above, these amounts will generally be included at box 3 and box 5 even if they are excluded from wages at box 1.

The cost of employer-sponsored health coverage is reported using Code DD. This amount is reportable under the Affordable Care Act but it is not taxable to you.

Excludable moving expenses (Code P) for qualified costs are an example of benefits which will be reported by your employer but are not taxable to you. If reimbursements are non-qualified, they will be reported as income to you in boxes 1, 3, and 5.

Box 13 really isn’t one box: it’s a series of three boxes. Your employer will check the applicable box if you are a statutory employee (employees whose earnings are subject to Social Security and Medicare taxes but not federal income tax withholding); if you participated in your employer’s retirement plan during the year; or if you received sick pay under your employer’s third-party insurance policy.

Box 14 is a “catch all” box. Your employer reports anything here that doesn’t fit anywhere else on the form W-2. Examples include state disability insurance taxes withheld, union dues, health insurance premiums deducted and nontaxable income.

Your state and local tax reporting can be found at the very bottom of the form W-2.

Box 15 is very straightforward and includes your employer’s state and state tax identification number. If you work in a state without a reporting requirement, this box (along with boxes 16 and 17) will be blank. If you had multiple withholdings in a number of states, more than one box will be filled.

If you are subject to state taxes, box 16 will indicate the total amount of taxable wages for state tax purposes.

If you have wages reported in box 16, box 17 will show the total amount of state income taxes withheld during the year. If you live in a state that has a flat state tax (like PA), you can double check to make sure that your withholding is correct by multiplying the amount in box 16 by the flat tax rate.

If you are subject to local, city, or other state income taxes, those will be reported in box 18. If you have wages subject to withholding in more than two states or localities, your employer will furnish an additional form W-2.

If you have wages in box 18 subject to local, city, or other state income taxes, any amount of withholding will be reported at box 19.

Box 20 is exactly what you’d expect: the name of the local, city, or other state tax being reported at box 19.

You should have received your form W-2 – with all of this information properly reported – by January 31, 2014. If you didn’t, you’ll want to contact your employer and possibly take more action.

For more details on other tax forms, like the forms 1098 and 1099, check out the rest of the series this week.

How big tax changes will affect you

Chris Kissell  for BankRate.com writes: With New Year's celebrations over and Christmas already a distant memory, hardworking Americans are turning their attention to a less pleasant event: Tax Day, which this year falls on Tuesday, April 15.

This year's tax changes rank among the most significant in recent memory. High-income Americans will pay at the highest rate in nearly two decades and will fork over more in Medicare taxes to boot.

Meanwhile, Obamacare gets into full swing in 2014 and will have a corresponding impact on the taxes of millions of Americans when they file returns in 2015.

Matthew L. Carey, director of the Center for Financial Market Studies at the Hagan School of Business at Iona College in New Rochelle, N.Y., outlines the changes in the following interview.

QUESTION: In 2013, a lot of taxes were raised -- from an increase in the top income tax rate to a new Medicare surtax on the wealthy. In your opinion, what are some of the most significant increases, and how will they impact taxpayers?

ANSWER: Indeed, 2013 began with the first categorical income tax increases in two decades. Income tax rates for the highest wage earners increased, while rates for most others held steady.

Taxes on dividends and capital gains were raised for some taxpayers, and the temporary rollback in the Social Security payroll tax was allowed to expire.
The alternative minimum tax is now (finally) indexed for inflation, lessening the risk of potential tax burdens for some taxpayers.

Among other changes rolled out in 2013 were an increase in the estate tax, new limits on use of exemptions and deductions for upper income taxpayers, and a new Medicare tax on unearned income.

QUESTION: 2014 is the year that Obamacare finally makes its full impact. What are the tax implications for the average citizen?

ANSWER: The average citizen (as opposed to the higher-income taxpayer) will not see too much of a difference in his or her taxes as a result of Obamacare. Most will be exempt from the new Obamacare Medicare taxes because their MAGI (modified adjusted gross income) will not exceed the required thresholds, or they have no net investment income to report.

Those taxpayers with moderate incomes who purchased health insurance coverage through the Health Insurance Marketplace between Oct. 1, 2013, and March 31, 2014, may be able to lower their monthly premium through an advance payment of the Premium Tax Credit.
The itemized medical expenses deduction threshold has changed for most people. You can deduct your unreimbursed medical and dental expenses that exceed 10 percent -- (which was) previously 7.5 percent -- of your adjusted gross income on your 2013 tax return. The 7.5 percent threshold will remain for those 65 and older for tax years 2013 through 2016.
Citizens who do not have health insurance in 2014 and don't meet the criteria for an exemption will wind up paying the Obamacare penalty in 2015, which the IRS calls the "Individual Shared Responsibility Payment." Note the absence of the word "tax."

QUESTION: A lot of people seem to be confused about how the Obamacare tax subsidy will work. Can you explain how the subsidy will be paid out and how it will be treated on an individual's tax return?

ANSWER: The Affordable Care Act provides government subsidies -- the government calls these the "Premium Tax Credit" -- to certain eligible consumers beginning in January 2014. The goal of these subsidies is to make individually purchased health insurance more affordable for households with annual incomes below thresholds specified by the law.

Health care consumers earning less than 400 percent of the federal poverty level -- about $46,000 for a single person, or $94,000 for a family of four -- may be eligible for a government subsidy to help them buy coverage in 2014.
If it's determined that you are eligible for a government subsidy during the application and enrollment process, you will have the option to:

• Get it now: Have some or all of the estimated credit paid in advance directly to your insurance company to lower what you pay out of pocket for your monthly premiums during 2014.
• Get it later: Receive the credit instead when you file your 2014 federal tax return in 2015.

Subsidies for 2014 are based on your modified adjusted gross income for 2014. You should use your best estimate of what your household MAGI for 2014 will be. Any discrepancy in the amount of subsidy you were due and the amount you actually received will be reconciled in your 2014 federal tax return.

QUESTION: What is the tax penalty for not buying health insurance? How will that be assessed?

ANSWER: You call this a tax penalty; the IRS calls it "the Individual Shared Responsibility Provision." The provision went into effect on Jan. 1, 2014. It applies to each month in the calendar year. The amount of any payment owed takes into account the number of months in a given year an individual is without minimal essential coverage or an exemption.

The basic penalty is $95 in 2014 if you:

• Are single.
• Have no dependents.
• Have income less than $19,500.

If income is higher, a penalty is assessed as a percentage of income.
If you owe the penalty, you are supposed to pay it with your income tax return. The ability of the IRS to collect, however, is a much-debated question.

Although the penalty is assessed through the tax code, it is not subject to the enforcement provisions of the tax code. The ACA's drafters specifically barred the IRS from applying criminal penalties, property seizures, or liens and levies. So, they cannot throw you in jail or garnish your wages. Basically, they can only deduct the penalty from your refund.
If a penalty does not come out of a refund, don't think it just disappears. The penalty will be carried over to the following year's tax filings and held on the filer's account. And people should understand that the IRS is also allowed to charge interest (about 3 percent currently) on any unpaid tax.

Theoretically, if one wanted to challenge the mandate and game their tax return to avoid a refund and consequently avoid paying the penalty, they could. Penalties and interest on the unpaid amounts will accrue, but the IRS will remain limited in its ability to collect those amounts.
Inevitably, some folks will take this stand. So it will be interesting to see how the government ultimately addresses this in future years.

The Best Retirement Tax Credit You Never Knew Existed

Eric McWhinnie for Wall St Cheat Sheet writes:  The retirement crisis in America is far from being solved. Workers are increasingly responsible for their own retirement savings, but are faced with a seemingly endless supply of obstacles. Households are experiencing stagnant wage growth, rising living expenses, and an overall weak labor market. Making matters worse, millions of people lack financial knowledge and often overlook ways to help them reach their retirement goals.

Benjamin Franklin once said that, “An investment in knowledge pays the best interest.” A large portion of the nation should heed this wisdom and learn about the Internal Revenue Service’s Retirement Savings Contributions Credit, also known as the Saver’s Credit. This overlooked credit is available to low and moderate income workers saving for retirement, but only 23 percent of Americans with annual household incomes of less than $50,000 are aware of the credit, according to the 14th Annual Transamerica Retirement Survey.

“The Saver’s Credit reduces an eligible taxpayer’s federal income taxes dollar for dollar, making it a meaningful incentive for low- to moderate-income individuals and households to save for retirement in a 401(k), 403(b), or IRA. Unfortunately, many may be missing out simply because they are unaware of it,” said Catherine Collinson, president of nonprofit Transamerica Center for Retirement Studies. “It’s critical that we raise awareness of this important tax credit and opportunity to save for retirement so that more workers can take advantage of it and improve their retirement outlook.”

The credit may be applied to the first $2,000 ($4,000 if married filing jointly) of voluntary contributions an eligible worker makes to a 401(k), 403(b), or similar employer-sponsored retirement plan, or an IRA. In order to qualify, you must be age 18 or older, not a full-time student, and not be claimed as a dependent on another person’s return. As the chart below shows, the Saver’s Credit is worth a percentage of your contribution, and adjusted gross income limits do apply — the less you make, the greater the percentage.

It’s important for workers to stay updated on the income limits. As the chart below shows, there are minor improvements for 2014. Also, rollover contributions are not eligible for the credit, and your eligible contributions may be reduced by any recent distributions you received from a retirement plan or IRA. However, the credit is a benefit in addition to other advantages such as tax deductions on retirement accounts.

The IRS provides the following example of the Saver’s Credit: “Jill, who works at a retail store, is married and earned $30,000 in 2013. Jill’s husband was unemployed in 2013 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2013. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $29,000. Jill may claim a 50 percent credit, $500, for her $1,000 IRA contribution.” That’s a 50 percent return for just making the contribution to her IRA. Workers need to use Form 1040, 1040A, or 1040NR to file their taxes with the credit, which is detailed on Form 8880.

In 2012, more than 57 million households were eligible for the Saver’s Credit, but less than one fifth actually took advantage of it. While households eligible for the tax credit may find it difficult or nearly impossible to save for retirement, the responsibility ultimately falls on individuals. Nobody cares about your money and future as much as you do. The earlier you start making sacrifices and placing money aside for retirement, the better off you will be.