I have a few tax questions that I hope you can help me with. First you should know I took your advice and went online for the free-file from the IRS. It is very easy to use and it really is free, so thank you. My first question deals with my tax status. I don’t know if I should file as single or married filing separately. In 2018, I was married in January. However, things did not work out and by the end of November, I was divorced. Since I was married for more than half the year, do I file as married filing separate? My second question deals with unpaid wages. Early last year my employer abruptly went out of business, owing me and other employees back pay. We hired an attorney who in so many words, told us that there is very little we could do since my former employer left the country. I was owed a few thousand dollars in back pay. Is there any way I can deduct that? My last question deals with IRA contributions. I was told I could still make an IRA contribution, but that it’s limited to my wages that I was paid. In calendar year 2018, my total wages that I was actually paid was about $3,500, but I had other income from some savings and investments. Am I limited to just $3,500?
Last year was certainly an eventful year for you, and I hope 2019 is better.
With regard to your tax status, that it is determined as of December 31st. Therefore, since on December 31st 2018 you were single, you should file your return as a single individual. The fact that you were married for the majority of the year is relatively immaterial. The key is what your status was as of December 31st.
With regard to the money you lost from your former employer, unfortunately, that money is not tax deductible. I know what you may be thinking that it is not fair, however, tax laws are rarely meant to be fair. As Americans we have this view that all laws should be fair; however, that is unfortunately not the case. We should never forget that when it comes to taxes, the purpose of taxes is to raise revenue, and fairness rarely enters into the equation. As a side note, if for some reason you do recover money from your employer, that money would be taxed to you.
With regard to an IRA contribution, for 2018 for people who are under 50, the limit is $5,500 and for those 50 and over, it is $6,500. That is the maximum contribution you can make. However, to qualify for an IRA contribution you must have what is known as earned income. Earned income is income from your labor that would typically show up on a W-2. Income from things like dividends and interest are not considered earned income. Therefore, since the only earned income you had was $3,500, that would be the maximum contribution you could make to your IRA in 2018.
It is important to remember that you can still make a 2018 IRA contribution. You have until April 15th to make your contribution. Typically, when it comes to IRA contributions, people wait until the last minute to do so; there is nothing wrong with that. However, a better strategy is to make your IRA contribution as soon as possible. If you make a 2019 IRA contribution now as opposed to a year from now, it gives you an extra year of that money growing for your benefit. Therefore, many people should look at the opportunity to make their 2019 IRA contribution as soon as possible.
One last note regarding IRA contributions – never forget about using a Roth IRA versus a traditional IRA. The downside of using a Roth IRA is that you cannot write off your contribution. However, the benefit is that your money grows tax free and thus, when you withdraw it, you pay no taxes. In addition, the required minimum distribution rules do not apply to Roth IRAs. I’m a big proponent of Roth IRAs, and I think more and more people ought to take advantage of them.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at email@example.com.