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Repaying the Advance Premium Tax Credit (Form 8962) as a Dependent

A reader writes in, asking:

“I have a question regarding Form 8962 (Premium Tax Credit). I am a dependent, received Advance Premium Tax Credit, and have to file 8962 since nobody will actually be claiming me as a dependent. Last year it was simple because publication 974 provided clear instructions for my situation. There was a section that provided instructions for people claiming no personal exemptions, as would be the case for somebody who is a dependent.

This year those instructions are absent since nobody can claim personal exemptions. I’m confused about how to proceed, especially regarding lines 1-5.”

Firstly just to make sure we’re clear on this point: people still can claim dependents, even though the exemption amount is currently set to zero. (Dependents might be claimed for the child tax credit, American Opportunity Credit, or for other assorted purposes.)

If you are claimed as somebody’s dependent, then you are not eligible for the premium tax credit, and you do not file Form 8962. Rather, it is the person who claims you as a dependent who would file Form 8962 for the purpose of calculating any premium tax credit and, if necessary, repaying any excess advance premium tax credit.

If you are confident that nobody is claiming you as a dependent for the year, but you could be claimed as somebody’s dependent for the year, then you would fill out Form 8962 to indicate that you were not eligible for the premium tax credit (because you can be claimed as somebody’s dependent). That is, you would enter zero as your family size (assuming you are not married). And the household income (i.e., MAGI of the people in the household) is zero, because the family size in question is zero. And because the premium tax credit is not allowed to anybody who could be claimed as a dependent, the premium tax credit (line 24) is zero. And then lines 27, and 29 would ultimately reflect the fact that any advance premium tax credit is excess advance premium tax credit.

Now, those are the rules, and that is how I would personally fill out the return in such a situation. But I’m sure I will receive several emails pointing out the following if I do not mention it: some people would encourage you to not check the “I can be claimed as somebody’s dependent” box if nobody else is actually claiming you as a dependent — because if nobody claims you as a dependent, it would be hard for the IRS to be aware of the fact that somebody could claim you as a dependent. And if you are not somebody else’s dependent, then you could be eligible for the premium tax credit.

But again, the Code sections in question (36B, 151, 152) are very clear on this point: if you could be claimed as a dependent, you are not eligible for the premium tax credit. And I would suggest filing accordingly.

For More Information, See My Related Book:

Book6FrontCoverTiltedBlue

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

How Do Tax Inflation-Adjustments Work?

A reader writes in, asking:

“Could you please discuss how the inflation adjustments in the tax code work? I know that they now rely on chained CPI rather than regular CPI, but when I try the math on my own I do not get the same results as the official numbers.”

The general approach is to:

  1. Multiply the dollar amount specified in the relevant Code provision by a percentage (which is essentially the inflation that has occurred in the years since the provision went into effect), then
  2. Round to a multiple of a given dollar amount.

As the reader noted in his email, such calculations now use the Chained Consumer Price Index For All Urban Consumers (C-CPI-U) rather than the regular CPI-U, with the result generally being smaller inflation adjustments than we would have seen otherwise.

Let’s look at an example.

For the tax brackets that apply from 2018-2025, the inflation adjustment for any year beginning in 2019 is the percentage by which:

  • the C-CPI-U for the preceding calendar year, exceeds
  • the C-CPI-U for calendar year 2017.

Of note: when we refer to the C-CPI-U “for a given year,” we’re talking about the average such figure for the 12-month period ending in August of that year. For example, the C-CPI-U for 2018 would be the average of the C-CPI-U figures from September 2017-August 2018.

So if we want to calculate the inflation adjusted tax brackets for 2019, we first find the average C-CPI-U from September 2016 – August 2017. That figure was 138.237. And the average Chained CPI-U for September 2017 – August 2018 was 141.078. Then we divide 141.078 by 138.237 to get 1.02055. This tells us that our tax bracket thresholds will each be increased by 2.055%, before rounding.

Rounding

After the above math is performed, the applicable figure is then rounded. The rounding rules vary from one provision to another. For instance, IRA contribution limits are rounded down to the next lower multiple of $500, whereas the income limits for Roth IRA contributions are rounded (up or down) to the nearest multiple of $1,000.

With some tax provisions, it’s common for the rounding rules to prevent us from seeing any change in many years. For instance, the IRA contribution limit was stuck at $5,500 from 2013-2018. Even though we had inflation over that period, it wasn’t enough to push the contribution limit over the next $500 threshold — until this year. (The limit will be $6,000 for 2019.)

Some Things Get No Inflation Adjustments

Finally, it’s worth noting that there are also an assortment of figures that don’t get an inflation adjustment at all (e.g., catch-up contribution limit for IRAs, or the thresholds for Social Security taxability).

For More Information, See My Related Book:

Book6FrontCoverTiltedBlue

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

2019 Tax Brackets, Standard Deduction, and Other Changes

I had been waiting to do this article, because I didn’t want to have to rewrite it if Republicans decided to pass another significant piece of tax legislation while they still have control of both chambers of Congress. But it’s now pretty clear that that won’t be happening.

While 2018 was a major overhaul relative to 2017, the differences between 2019 and 2018 will be pretty modest. The overwhelming majority of the changes are simply inflation adjustments from 2018’s figures. One point of interest is that this is the first year for which the inflation adjustments are based on chained CPI-U rather than regular CPI-U.

If you have questions about a particular amount that I do not mention here, you can likely find it in the official IRS announcements: Rev. Proc. 2018-57 (which contains most inflation adjustment figures) and Notice 2018-83 (for figures relating to retirement accounts).

Single 2019 Tax Brackets

Taxable Income
Tax Bracket:
$0-$9,700 10%
$9,700-$39,475 12%
$39,475-$84,200 22%
$84,200-$160,725 24%
$160,725-$204,100 32%
$204,100-$510,300 35%
$510,300+ 37%

 

Married Filing Jointly 2019 Tax Brackets

Taxable Income
Tax Bracket:
$0-$19,400 10%
$19,400-$78,950 12%
$78,950-$168,400 22%
$168,400-$321,450 24%
$321,450-$408,200 32%
$408,200-$612,350 35%
$612,350+ 37%

 

Head of Household 2019 Tax Brackets

Taxable Income
Tax Bracket:
$0-$13,850 10%
$13,850-$52,850 12%
$52,850-$84,200 22%
$84,200-$160,700 24%
$160,700-$204,100 32%
$204,100-$510,300 35%
$510,300+ 37%

 

Married Filing Separately 2019 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$9,700 10%
$9,700-$39,475 12%
$39,475-$84,200 22%
$84,200-$160,725 24%
$160,725-$204,100 32%
$204,100-$306,175 35%
$306,175+ 37%

 

Standard Deduction Amounts

The 2019 standard deduction amounts are as follows:

  • Single or married filing separately: $12,200
  • Married filing jointly: $24,400
  • Head of household: $18,350

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,300 for each married taxpayer or $1,650 for unmarried taxpayers.

IRA Contribution Limits

The contribution limit for Roth IRA and traditional IRA accounts has increased to $6,000.

The catch-up contribution limit for people age 50 or over does not get inflation adjustments and therefore is still $1,000.

401(k), 403(b), 457(b) Contribution Limits

The salary deferral limit for 401(k) and other similar plans has increased to $19,000.

The catch-up contribution limit for 401(k) and other similar plans is unchanged, at $6,000.

The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a solo 401(k)) is increased to $56,000.

Child Tax Credit

The child tax credit ($2,000 per child) and the related phaseout threshold ($200,000 of modified adjusted gross income, $400,000 if married filing jointly) do not get inflation adjustments. The portion of the credit that can be refundable (up to $1,400 per child) does receive inflation adjustments, but it is still $1,400 for 2019.

Capital Gains and Qualified Dividends

For 2019, long-term capital gains and qualified dividends face the following tax rates:

  • 0% tax rate if they fall below $78,750 of taxable income if married filing jointly, $52,750 if head of household, or $39,375 if filing as single or married filing separately.
  • 15% tax rate if they fall above the 0% threshold but below $488,850 if married filing jointly, $461,700 if head of household, $434,550 if single, or $244,425 if married filing separately.
  • 20% tax rate if they fall above the 15% threshold.

Alternative Minimum Tax (AMT)

The AMT exemption amount is increased to:

  • $71,700 for single people and people filing as head of household,
  • $111,700 for married people filing jointly, and
  • $55,850 for married people filing separately.

Estate Tax

The estate tax exclusion is increased to $11.4 million per decedent.

Individual Mandate

Beginning in 2019, the individual mandate (i.e., the penalty for not having health insurance) has disappeared.

Alimony Payments

For divorces that become finalized in 2019 or later, alimony payments are no longer deductible to the payor, nor includable as income to the payee.

Pass-Through Business Income

With respect to the 20% deduction for qualified pass-through income, for 2019, the threshold amount at which the “specified service trade or business” phaseout and the wage (or wage+property) limitations begin to kick in will be $321,400 for married taxpayers filing jointly, $160,725 for married taxpayers filing separately, and $160,700 for single taxpayers or people filing as head of household.

For More Information, See My Related Book:

Book6FrontCoverTiltedBlue

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

Which Shares Should I Sell When Using the Specific Identification Cost Basis Method?

A reader writes in, asking:

“With regard to selecting a ‘cost basis method’ for a brokerage account, Vanguard and others say that the specific identification method may allow for ‘greater tax efficiency’ than other methods. I get that the specific identification method lets me choose which shares to sell, so I have more control. But how should I actually decide which shares are the most tax efficient ones to sell?”

As a bit of background, selecting a cost basis method is important when investing in a taxable brokerage account, because it affects how your capital gains/losses are calculated whenever you sell shares of any of your holdings.

Example: You have a taxable brokerage account in which you own 1,000 shares of Vanguard Total Stock Market Index Fund, purchased over several years, at various prices. Now you place an order to sell 200 shares. For the purpose of reporting capital gain or loss on the sale, which 200 shares (out of the 1,000 that you own) will be sold? It depends on which cost basis method you are using.

The three options for cost basis method are:

  • Specific identification, in which you tell the brokerage firm which specific shares you are selling;
  • First-in-first-out, in which it is always assumed that you are selling your oldest shares of the holding in question; and
  • Average cost, in which, for each holding, the total cost basis of all of your shares is added together, then divided by the number of shares you own, for the sake of calculating an average basis per share. And then each share is considered to have that average basis. (In other words, for a given holding, all of your shares are considered to be the same as each other.)

The specific ID method requires the most work, because you have to choose which shares to sell. In addition, you have to keep records of all of your purchases and sales in order to track the basis for each of the shares you own. (For shares purchased after 2011 the brokerage firm will track this for you, as long as you have told them you want to use the specific identification method. But it’s wise to keep records yourself as well.)

But the upside of the specific ID method is that whenever you sell shares, you can sell the shares that are most tax-efficient to sell at that time.

In most cases, that means selling the shares with the highest cost basis — with the reasoning being that doing so results in the smallest capital gain (and therefore the lowest tax cost) or the largest loss (and therefore the greatest tax savings).

However, there are two important exceptions.

First, if selling the shares with the highest cost basis would mean realizing a short-term capital gain (because you’ve held those shares for 1 year or less), then you might want to sell other shares instead. Short-term capital gains are taxed at ordinary income tax rates, whereas long-term capital gains are taxed at lower tax rates. So instead of selling your highest-basis shares, you might want to sell your highest-basis shares out of the shares that you’ve held for longer than one year.

Second, if your taxable income including capital gains is below (for 2018) $38,600 if single or $77,200 if married filing jointly, long-term capital gains have a 0% tax rate. So you may want to sell the shares with the lowest cost basis. That is, you may want to “harvest” the largest gain possible.

For More Information, See My Related Book:

Book6FrontCoverTiltedBlue

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

What *Didn’t* Change as a Result of the New Tax Law?

Quick book-related update: The 2018 edition of Social Security Made Simple is now available (print version here, Kindle version here). The changes are minor, so I’m using the same ISBN as the 2017 edition, which means that the Amazon page will still show the 2017 publication date.

And the writing is finished for the 2018 edition of Taxes Made Simple. My estimate is that the book will be available in roughly 2-3 weeks.

The single topic that readers have asked about most often over the last month or so has been the new deduction for pass-through business income. To my surprise though, there has been another type of email that has been even more common: questions about various things that haven’t changed at all. That is, people want confirmation that certain things weren’t changed by the broad new tax law.

“Is Social Security taxation changing?” (Nope.)

“Has the premium tax credit changed?” (Nope.)

And so on.

So, with that in mind, here’s a non-exhaustive list of things that are essentially unchanged as a result of the new law. (I say “essentially” unchanged, because many of these these deductions/credits/etc. involve dollar amounts that are inflation-adjusted each year. And, going forward, they will be adjusted based on chained CPI-U rather than CPI-U.)

  • The calculation that determines how much of your Social Security benefits are taxable
  • Retirement accounts (aside from the new inability to recharacterize — undo — a Roth conversion)
  • Cost basis tracking/reporting (i.e., the proposed change that would have forced people to use the FIFO method for identifying shares did not occur)
  • The step-up in cost basis that occurs when property is inherited
  • The 3.8% net investment income tax
  • The 0.9% additional Medicare tax for high earners
  • Medicare and Social Security taxes in general (including self-employment tax)
  • Health Savings Accounts (HSAs)
  • Deduction for self-employed health insurance
  • Deduction for student loan interest
  • Itemized deduction for charitable contributions
  • American Opportunity Credit
  • Lifetime Learning Credit
  • Child and dependent care credit (not to be confused with the child tax credit, which has changed, and which in some cases can now be claimed for dependents other than your children)
  • Retirement savings contribution credit
  • Premium tax credit
  • Earned income credit
  • Credit for purchasing a plug-in electric drive vehicle
  • Residential energy credit (for purchasing solar panels or a solar hot water heater for your home)

Hopefully, this should wrap up our discussion of the new tax law — at least for now. I’m looking forward to discussing some non-tax topics in upcoming articles.

For More Information, See My Related Book:

Book6FrontCoverTiltedBlue

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

How Do I Calculate My Income Tax Refund?

The following is an excerpt from my book Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

Many taxpayers in the U.S. have come to expect a sizable refund check every tax season. To some people who don’t prepare their own tax returns, it’s a mystery how the refund is calculated.

The idea is really quite simple. After calculating your taxable income, you use the information in the tax tables to determine your total income tax for the year. This amount is then compared to the amount that you actually paid throughout the year (in the form of withholdings from your paychecks). If the amount you paid is more than your tax, you are entitled to a refund for the difference. If the amount you paid is less than your tax, it’s time to get out the checkbook.

Withholding: Why It’s Done

If you work as an employee, you’re certainly aware that a large portion of your wages/salary doesn’t actually show up in your paycheck every two weeks. Instead, it gets “withheld.”

The reason for this withholding is that the federal government wants to be absolutely sure that its gets its money. The government knows that many people have a tendency to spend literally all of the income they receive (if not more). As a result, the government set up the system so that it would get its share before taxpayers would have a chance to spend it.

The amount of your pay that gets withheld is based upon an estimate of how much tax you’ll be responsible for paying over the course of the year. (This is why you are required to fill out Form W-4, providing your employer with some tax-related information, when you start a new job.)

Withholding: How It’s Calculated

At this point you may be thinking, “OK. Well I just learned that I’m in the __% tax bracket, and it’s obvious that my employer is withholding way more than that!”

You’re probably right. That’s because your employer isn’t just withholding for federal income tax. They’re also withholding for Social Security tax, Medicare tax, and (likely) state income tax.

The Social Security tax is calculated as 6.2% of your earnings, and the Medicare tax is calculated as 1.45% of your earnings. Before you’ve even begun to pay your income taxes, 7.65% of your income has been withheld.

Your refund is determined by comparing your total income tax to the amount that was withheld for federal income tax. Assuming that the amount withheld for federal income tax was greater than your income tax for the year, you will receive a refund for the difference.

EXAMPLE: Nick’s total taxable income (after subtracting deductions) is $32,000. He is single. Using the tax table for single taxpayers, we can determine that his federal income tax is $3,649.50.

Over the course of the year, Nick’s employer withheld a total of $8,500 from his pay, of which $4,000 went toward federal income tax. His refund will be $350.50 (i.e., $4,000 minus $3,649.50).

Simple Summary

  • Every year, your refund is calculated as the amount withheld for federal income tax, minus your total federal income tax for the year.
  • A large portion of the money being withheld from each of your paychecks does not actually go toward federal income tax. Instead, it goes to pay the Social Security tax, the Medicare tax, and possibly state income tax.

For More Information, See My Related Book:

Book6FrontCoverTiltedBlue

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"
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