April Key Focus
Your Last-Minute Tax Questions Answered
We are now one week away from the April 15th tax filing deadline. With crunch time here, the questions have been pouring in, so with that in mind, here are the answers to 5 of the most common questions we have been hearing over the past few weeks.
What's the difference between a tax deduction and a tax credit?
While both a tax deduction and a tax credit are good things, a tax credit is generally much, much better. A tax deduction reduces your overall tax bill by reducing the amount of income you have subject to income tax.
So, for example, say you are in the 25% tax bracket and have $100,000 of income. If you were able to take a $10,000 tax deduction, your tax bill would drop by about $2,500 ($10,000 x 25% rate). That's nothing to sneeze at, but if you were somehow eligible for a $10,000 tax credit, your tax bill would be reduced dollar-for-dollar by $10,000. For instance, let's say the tax bill on your $100,000 of income was $16,000. If you had a $10,000 credit, your tax bill would be reduced all of the way to $6,000.
I got married/divorced in 2012. What's my filing status?
Your filing status is generally determined on the last day of the year, so even if you were single for the entire year and got married at 11:59 p.m. on December 31st, you can file a joint return with your spouse as if you were married for the entire year. The reverse, of course, would be true if you got divorced on December 31.
There are a few exceptions to these rules that you should know. For instance, if you are married, but legally separated at the end of the year, you may be able to file as single or head of household. Also, if your spouse passed away in 2012 and you did not remarry, you can file a joint tax return.
I received a K-1 for my IRA investment. Where do I report
If this question has got you stumped, you are going to love this answer...you generally don't! Gains and losses inside an IRA are generally not taxable. Instead, you are taxed at ordinary rates on distributions you take from your IRA. Therefore, information on a K-1 issued to an IRA, just like 1099s issued to an IRA, for interest, dividends or capital gains earned in the IRA account generally does not have to be reported anywhere. Of course, there are always exceptions to the rule, such as if your K-1 shows unrelated business taxable income, which can be taxable to your IRA (and not directly to you).
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