Paolo Soro

Accountants, are you ready for the US?

In the United States, the fiscal powers of taxation is based on three levels: federal, state and municipal. The federal income tax, in particular, is a pay-as-you-go tax.

From November 7 to 10, the Italian accountants will stay in New York city, on a mission in the US. We went to look around the contents by the IRS (Inland Revenue Service) in the field of “Tax Withholding and Estimated Tax”, for use in 2016.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. There are two ways to pay-as-you-go: Tax Withholding and Estimated Tax.

  1. Tax Withholding. If you are an employee, your employer probably withholds income tax from your pay. In addition, tax may be withheld from certain other income, such as pensions, bonuses, commissions, and gambling winnings. The amount withheld is paid to the IRS in your name. The typical income related to tax withholding are: Salaries and wages, Tips, Taxable fringe benefits, Sick pay, Pensions and annuities, Gambling winnings, Unemployment compensation, and Certain federal payments.
  2. Estimated Tax. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. People who are in business for themselves generally will have to pay their tax this way. You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rents, and royalties. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax. Therefore, we can say that estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough. Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return.

If you receive salaries and wages, you may be able to avoid paying estimated tax by asking your employer to take more tax out of your earnings. You do not have to pay estimated tax for 2016 if you meet all three of the following conditions:

-          You had no tax liability for 2015;

-          You were a U.S. citizen or resident alien for the whole year.

-          Your 2015 tax year covered a 12-month period.

You had no tax liability for 2015 if your total tax was zero or you did not have to file an income tax return. However, If you owed additional tax for 2015, you may have to pay estimated tax for 2016.

If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. Generally, the IRS can figure this penalty for you.

Before completing the specific Form, nonresident alien employees should see the instructions for the exemption from withholding on compensation for independent (and certain dependent) personal services of a “Nonresident Alien Individual”.

Standard mileage rates. The 2016 rate for business use of your vehicle is 54 cents per mile. The rate for use of your vehicle to get medical care or move is 19 cents per mile.

Personal exemption for certain taxpayers. For 2016, the personal exemption amount is increased to $4,050 for taxpayers with AGI (Adjusted Gross Income) at or below $311,300 if married filing jointly or qualifying widow (widower), $285,350 if head of household, $259,400 if single, or $155,650 if married filing separately. The personal exemption amount for taxpayers with AGI above these thresholds may be reduced.

Limitation on itemized deductions. For 2016, itemized deductions for taxpayers with AGI above $311,300 if married filing jointly or qualifying widow (widower), $285,350 if head of household, $259,400 if single, and $155,650 if married filing separately may be reduced.

Alternative minimum tax (AMT) exemption amount. The AMT exemption amount is increased to $53,900 ($83,800 if married filing jointly or qualifying widow/widower; $41,900 if married filing separately).

Lifetime learning credit income limits. In order to claim a lifetime learning credit, your MAGI must be less than $55,000 ($111,000 if married filing jointly).

MAGI and AGI. MAGI is Modified Adjusted Gross Income. In all contents concerning the US tax return, you can frequently find two typical acronyms: MAGI and AGI. Your AGI is an important line item on your taxes, as it affects your eligibility for certain other tax credits or exemptions. The same is true of your MAGI. Generally speaking, your MAGI and AGI are close in value to one another. However, the small adjustments that tweak your AGI into your MAGI could have an important bearing on your overall tax return.

Retirement savings contribution credit income limits. In order to claim this credit for 2016, your MAGI must be less than $30,750 ($61,500 if married filing jointly; $46,125 if head of household).

Adoption credit or exclusion. The maximum adoption credit or exclusion for employer-provided adoption benefits has increased to $13,460. In order to claim either the credit or exclusion, your MAGI must be less than $241,920.

Earned income credit (EIC). You may be able to take the EIC in 2016 if:

-          Three or more children lived with you and you earned less than $47,955 ($53,505 if married filing jointly);

-          Two children lived with you and you earned less than $44,648 ($50,198 if married filing jointly);

-          One child lived with you and you earned less than $39,296 ($44,846 if married filing jointly); or

-          A child did not live with you and you earned less than $14,880 ($20,430 if married filing jointly).

You may be able to take the credit if your MAGI is less than the amount in the above list that applies to you. The maximum investment income you can have and get the credit is $3,400 for 2016.

Social security tax. Usually, each employer for whom you work during the tax year must withhold social security tax up to the annual limit. The annual limit is $118,500 in 2016.

Health care coverage. When you file your 2016 tax return in 2017, you will need to either indicate on your return that you and your family had health care coverage throughout 2016, claim an exemption from the health care coverage requirement for some or all of 2016, or make a payment if you do not have coverage or an exemption(s) for all 12 months of 2016.

Advance payments of the premium tax credit. If you buy health insurance through the Health Insurance Marketplace, you may be eligible for advance payments of the premium tax credit to help pay for your insurance coverage. Receiving too little or too much in advance will affect your refund or balance due. Promptly report changes in your income or family size to your Marketplace.

Additional Medicare Tax. A 0.9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income over a threshold amount based on your filing status. You may need to include this amount when figuring your estimated tax. You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on specific Form.

Net Investment Income Tax. You may be subject to Net Investment Income Tax (NIIT). NIIT is a 3.8% tax on the lesser of net investment income or the excess of your MAGI over the threshold amount. NIIT may need to be included when figuring estimated tax. You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on Form.

Credit for tax withholding and estimated tax. When you file your 2015 income tax return, take credit for all the income tax and excess social security or railroad retirement tax withheld from your salary, wages, pensions, etc. Also take credit for the estimated tax you paid for 2015. These credits are subtracted from your total tax. Because these credits are refundable, you should file a return and claim these credits, even if you do not owe tax.

If the total of your withholding and your estimated tax payments for any payment period is less than the amount you needed to pay by the due date for that period, you may be charged a penalty, even if the total of these credits is more than your tax for the year.

Underpayment Penalty. As we written earlier,If you did not pay enough tax, either through withholding or by making timely estimated tax payments, you will have underpaid your estimated tax and may have to pay a penalty.

No penalty. Generally, you will not have to pay a penalty for 2015 if any of the following apply:

-          The total of your withholding and timely estimated tax payments was at least as much as your 2014 tax.

-          The tax balance due on your 2015 return is no more than 10% of your total 2015 tax, and you paid all required estimated tax payments on time.

-          Your total tax for 2015 minus your withholding is less than $1,000.

-          You did not have a tax liability for 2014.

-          You did not have any withholding taxes and your current year tax (less any household employment taxes) is less than $1,000.

IRS can figure the penalty for you. If you think you owe the penalty, but you do not want to figure it yourself when you file your tax return, you may not have to. Generally, the IRS will figure the penalty for you and send you a bill. You only need to figure your penalty in the following three situations:

-          You are requesting a waiver of part, but not all, of the penalty.

-          You are using the annualized income installment method to figure the penalty.

-          You are treating the federal income tax withheld from your income as paid on the dates actually withheld.

However, if these situations do not apply to you, and you think you can lower or eliminate your penalty, complete the specific Form and attach it to your return.

Penalty figured separately for each period. Because the penalty is figured separately for each payment period, you may owe a penalty for an earlier payment period even if you later paid enough to make up the underpayment. This is true even if you are due a refund when you file your income tax return.

Exceptions. Generally, you do not have to pay an underpayment penalty if either:

-          Your total tax is less than $1,000; or

-          You had no tax liability last year.

This above, it is such a brief overview of the contents concerning the tax return in the US. To sum up, apart from some interesting typical American features, we would tell you:

Dear Accountants, Dear Colleagues, we can easily go to New York (and not only on holyday – or on vacation, as American people use to say); after all, the whole world is a country!

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