Individual Taxation: What You Need To Know

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Tax Prep

To report earnings to the government for taxation purposes, individuals file a Form 1040, which is due on April 15th. If taxpayers cannot file their taxes by the April 15th due date, they can ask their tax preparer to file a 6-month extension on April 15th.. This extension allows for an extended period of time to file the return, but not an extension for the tax payment. An estimate of taxes due must be paid by the April 15th deadline. Graduated income tax rates are applied to an individual’s income and range from 10% to 37%.

How is your income taxed?

Business income from a sole proprietor is reported on Schedule C; this income is subject to income tax and self-employment (SE) tax. Farming income is reported on Schedule F, which is subject to income tax and self-employment tax as well. Single member LLCs can elect to be taxed as sole proprotors on Schedule C or F. W-2 wages are reported as “wages” and are not subject to self-employment taxes on your return, since Social Security and Medicare were already withheld by the employer.

Form 1099-INT is used to reported interest income, which is subject to income tax but not SE tax. Form 1099-DIV is used to report dividend income which, if qualified, is taxed at the capital gains rate, but is not subject to SE tax. Royalty income is reported on Schedule E, page 1, and is generally subject to income tax but not subject to SE tax. Rental income is reported on Schedule E, page 1, and is generally subject to income tax but not subject to SE tax if the taxpayer does not materially participate in the activity. K-1 income from a partnership or s-corporation is reported on Schedule E, page 2 and is subject to income tax and may also be subject to SE tax.

Capital gains are taxed at lower rates than the individual’s income tax rates. The married filing jointly capital gains rates are as follows:

  • If total income is less than $77,200, the rate is 0%
  • If income is between $77,200 to $479,000, the rate is 15%
  • If income is over $479,000, the rate is 20%

Adjusted Gross Income (AGI)

AGI determines the deductibility of some itemized deductions. Adjustments to AGI reduce AGI and increase itemized deductions. For example, if your income is too high, you may not have the ability to deduct any of your medical expenses.  

Some examples of adjustments are:

    • Educator expenses
    • Health Savings Account Contributions
    • Traditional IRA Contributions
    • ½ of Self-Employment Tax
    • Self-Employed Health Insurance

Schedule A is used to report itemized deductions. Taxpayers can choose to itemize deductions or take the standard deductions. The Tax Cuts and Jobs Act increased the standard deduction to $24k (Married Filing Jointly) and $12k (single individuals), limited state and local tax deductions to $10k and removed miscellaneous itemized deductions. Therefore, many taxpayers stopped itemizing in tax year 2018 in order to take the larger standard deduction.

The new 20% business income deduction was available starting in 2018. It reduces income tax but does not reduce self-employment taxes. This deduction is available for business income, generally.

Dependents

The $4k exemption allowed for each spouse and dependent was repealed. The Child Tax Credit was increased to $2k per child under age 17, and $500 for other dependents. Generally, to qualify as a dependent, these rules apply: you cannot file a joint return with someone else, you must be a qualified relative, you must be under 19 (or under 24 and a full-time student) or you must be disabled, more than half your support must be provided by someone else, and you must live with the taxpayer for more than half of the year. The Child Tax Credit may increase your refund by up to $1,400 per child.

If you have questions about paying taxes on income, itemizing your deductions, or claiming someone as a dependent, contact the AgriSolutions tax department. We are happy to help you get your taxes in order.

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Disclaimer – Descriptions provided in this article are presented as generalities. There are many factors not listed above which may impact your return. This article should not be considered legal or tax advice. For advice on a specific transaction, please contact the AgriSolutions Tax Department at taxes@agrisolutions.com.

 

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