February 2021 Questions and Answers

Question:

I’m working on my Master’s degree online. Can I write off any of my tuition on my tax return?

Answer:

You can deduct up to $4,000 in tuition expenses in 2020 but the deduction begins to phase out for single taxpayers with income of $65,000. This deduction is completely eliminated for 2021 and beyond.

However, you may prefer to take the Lifetime Learning Credit. It provides a credit of up to $2,000 on your tax bill and has similar phase out thresholds as the deduction. The phase out thresholds will increase in 2021, due to the elimination of the tuition expense deduction. As an extra bonus, there is no limit to the number of years you can claim the credit. The credit may be a better option because tax credits are generally more valuable than tax deductions since a tax credit directly offsets the tax you owe. Tax deductions only lower the amount of income on which you are taxed.

Question:

My business sells goods online and my customers live all over the world. Do I have to pay taxes on income earned from other countries?

Answer:

Most countries will require you to pay taxes only if you have a meaningful presence in their country. This could mean maintaining an office or warehousing inventory in their country. If your business has no connection to a foreign country other than sales to its citizens, generally you won’t have to worry about paying taxes there. But international tax is complicated. Consult with your tax professional if you have specific questions.

Taxes in Retirement

Retirement is something almost all of us look forward to. But have you considered how your retirement income will be taxed? Not all retirement income is taxed the same, so it is important that you understand the details.

SOCIAL SECURITY

If your total income is more than $25,000 for an individual or $32,000 for a married couple filing jointly, you must pay federal income taxes on your Social Security benefits. The tax rate is based on your total income from all sources, maxing out at the rate of 85%. Some states also tax social security income.

401(K) AND IRA WITHDRAWALS

Withdrawals from tax-deferred retirement accounts, such as a 401(k), are taxed as ordinary income. The taxability of a traditional IRA depends on how you treated your contributions before you retired. If you took a tax deduction in the years you contributed, your withdrawals are likely taxable.

Qualified withdrawals from a Roth IRA are non-taxable. Since your investment was made with after-tax dollars, you won’t be taxed again when you withdraw it. Although these accounts are long-term assets, they don’t enjoy capital gains treatment.

INVESTMENT INCOME

You’ll pay taxes on dividends, interest and capital gains just as you did before you retired. The length of time you held an asset before selling it will determine your capital gains tax rate. It can be as low as zero if your total income for the year isn’t high.

SELLING YOUR HOME

If you’ve downsized and sold your home, you may be able to avoid paying tax on the gain. If you lived in your home for two of the five years prior to the sale, you may be able to exclude up to $250,000 in gain. The rules are a little more complex if you rented your home out, so consult with your tax professional to determine if you have taxable gains.

Time To Regroup

Many of us may have avoided looking at our investment portfolios after the major economic disruption brought on by the closure of non-essential businesses. However, as you recover from shell shock, its important to review your financial situation.

INVESTMENTS

Financial market volatility can throw off asset allocation, so your portfolio likely needs some finetuning. Make sure you’ve allocated the right type of investments with the timing of each goal including short-term, mid-term and long-term. Also consider your tolerance for risk and diversify among asset classes.

TAXES

As Tax Day for 2019 comes and goes, talk to your tax advisor about any potential changes you should consider for the coming year. It’s not too late to alter your strategy in order to lower your 2020 tax obligation.

INSURANCE AND ESTATE PLANNING

The COVID-19 crisis has made us all highly aware that our lives can change in an instant. Maybe it has motivated you to finally draft a will (see Must-Have Documents article) and address any other estate planning needs you may have. It is a very loving thing to do for your family. Now is also a good time to review all of your insurance coverage, which may need adjustments if you’ve experienced major life changes.