Article Highlights:

Marriage
Buying a Home
Having or Adopting Children
Getting Divorced
Death of Spouse

Throughout your life there will be certain significant occasions that will impact not only your day-to-day living but also your taxes. Here are a few of those events: Getting Married – If you just got married or are considering getting married, you need to be aware that once you are married you no longer file returns using the single status and generally will file a combined return with your new spouse using the married filing jointly (MFJ) status. When you file MFJ all of the income of both spouses is combined on one return, and where both spouses have substantial income, that could mean your combined incomes could put you in a higher tax bracket. However, when filing MFJ you also benefit by being able to claim a standard deduction equal to twice that of the standard deduction for a single taxpayer. It may be appropriate for a couple planning a wedding, or even those who just got married, to estimate differences of filing as unmarried and filing married so there are no unpleasant surprises at tax filing time. It may be appropriate to adjust withholding to compensate for the MFJ status. Be mindful that filing status is determined on the last day of the tax year, so no matter when you get married during the year you will be considered married for the entire year for tax purposes. Once married here are some tasks that should be done:

Notify the Social Security Administration − Report any name change to the Social Security Administration so that your name and SSN will match when you file your next tax return. Informing the SSA of a name change is quite simple and can be done on the SSA’s website. Alternatively, you can call the SSA at 800-772-1213 or visit a local SSA office. Your income tax refund may be delayed if it is discovered that your name and SSN don’t match at the time your return is filed.
Notify the IRS – If you have a new address, you should notify the IRS by completing and sending in Form 8822, Change of Address.
Notify the U.S. Postal Service – You should also notify the U.S. Postal Service of any address change so that any correspondence from the IRS or state tax agency can be forwarded to your correct address.
Notify the Health Insurance Marketplace – If either or both of you are obtaining health insurance through a government health insurance marketplace, your combined incomes and change in family size could reduce the amount of the premium tax credit to which you would otherwise be entitled, requiring payback of some or all of the credit applied in advance to reduce your monthly premiums. More complicated yet, if either or both of you are included on your parents’ marketplace policy, those insurance premiums must be allocated from their return to your return.

Here are a few tax-related items you should be aware of when filing a joint return:

New Spouse’s Past Liabilities – If your new spouse owes back taxes, past state income tax liabilities or past-due child support or has unemployment debts to a state, the IRS will apply your future joint refunds to pay those debts. If you are not responsible for your spouse’s debt and do not want your share of any tax refund used to pay your spouse’s past debts, you are entitled to request your portion of the refund back from the IRS by filing an “injured spouse” allocation form. As an alternative, you can file separately using the “married filing separate” filing status; however, that generally results in higher overall tax.
Capital Loss Limitations – If an individual has sold stock or other investment property at a loss, when filing as unmarried, each individual can deduct up to $3,000 of capital losses on their tax return for a possible combined total of $6,000, but a married couple is limited to a single $3,000 loss and if they file married separate, then the limit is $1,500 each.
Spousal IRA – Contributions to “Spousal IRAs” are available for married taxpayers who file jointly where one spouse has little or no compensation; the deduction is limited to the lesser of 100% of the employed spouse’s compensation or $6,000 (2022) for the spousal IRA. That permits a combined annual IRA contribution limit of a certain amount (up to$12,000 for 2022). The maximum amount is $7,000 if you or your spouse is age 50 or older ($14,000 if you are both 50+). However, the deduction for contributions to both spouses’ IRAs may be further limited if either spouse is covered by an employer’s retirement plan.
Deductions – The standard deduction in 2022 for a married couple (both spouses under age 65) is $25,900 and for a single individual is $12,950. So, if both of you have been taking the standard deduction, there is no loss in deductions. However, if in past years one of you had enough deductions to itemize and the other took the standard deduction, and after your marriage you’ll be filing jointly, you would either have to take the joint standard deduction or itemize, which likely will result in a loss of some amount of deductions.
Impact on Parents’ Returns – If your parents have been claiming either of you as a dependent, they will generally lose that benefit. In addition, if you are in college and qualify for one of the education credits, those credits are only deductible on the return where your personal exemption is used. That generally means your parents will not be able to claim the education credits even if they paid the tuition. On the flip side, unless your income is too high, you will be able to claim the credit even though your parents paid the tuition.

Buying a Home – Buying a home, especially your first home, can be a trying experience. Without a landlord to take care of repairs and upkeep of the property those tasks will become your responsibility as a home owner. When you rent, you are responsible for making a rental payment which is not tax deductible. On the other hand, when you own a home, in addition to being responsible for its maintenance, you have to make homeowner’s insurance, mortgage, and real property tax payments. While routine upkeep costs aren’t tax deductible, the interest on the mortgage and the property taxes you pay may be tax deductible, providing you with a significant saving in income tax. However, if the standard deduction amount for your filing status exceeds the total of all itemized deductions the law allows you to claim, you won’t get a tax benefit from the home mortgage interest and property tax payments. So, when figuring if you can afford a home be sure to take into account whether you’ll benefit from those home-related tax savings. Also consider the long-term benefits of home ownership. Homes have generally appreciated in value in the past, so you can look forward to your home gaining value, and when you sell it, the gain up to $250,000 ($500,000 for a married couple) can be excluded from income if the property has been owned and used as your primary residence for any 2 of the 5 years just prior to the sale. Many taxpayers don’t feel the need to keep home improvement records, thinking the potential gain will never exceed the amount of the exclusion for home gains ($250,000 or $500,000 if both filer and spouse qualify) if they meet the 2-out-of-5-year use and ownership tests. Here are some situations when having home improvement records could save taxes:
(1) The home is owned for a long period of time, and the combination of appreciation in value due to inflation and improvements exceeds the exclusion amount. (2) The home is converted to a rental property, and the cost and improvements of the home are needed to establish the depreciable basis of the property. (3) The home is converted to a second residence, and the exclusion might not apply to the sale. (4) You suffer a casualty loss and retain the home after making repairs. (5) The home is sold before meeting the 2-year use and ownership requirements. (6) The home only qualifies for a reduced exclusion because the home is sold before meeting the 2-year use and ownership requirements. (7) One spouse retains the home after a divorce and is only entitled to a $250,000 exclusion instead of the $500,000 exclusion available to married couples. (8) There are future tax law changes that could affect the exclusion amounts.
Everyone hates to keep records but consider the consequences if you have a gain and a portion of it cannot be excluded. You will be hit with capital gains (CG), and there is a good chance the CG tax rate will be higher than normal simply because the gain pushed you into a higher CG tax bracket. Having or Adopting Children – Besides the loss of sleep, changing diapers, middle of the night feedings, and constant attention, a new born also brings some tax benefits, including a maximum $2,000 child tax credit which can go a long way in reducing your tax liability. If both spouses work, you will no doubt incur child care expenses which can result in a maximum (can be less) credit of between $600 and $1,050 for one child or twice those amounts for two or more children. The credit amounts are based on a maximum child care expense of $3,000 for one child and $6,000 for two or more multiplied by 20 to 35 percent of the expense based upon a taxpayer’s income. (The amounts noted apply for 2022; there were temporary increases in the credits as part of Covid pandemic relief for 2021. Congress may extend the enhanced credits.) Of course, the medical expenses are deductible if you itemize your deductions but only to the extent the medical expenses exceed 7.5% of your adjusted gross income. Although rarely encountered, the expense of a surrogate mother is not deductible. If you adopt a child under age 18 or a person physically or mentally incapable of taking care of himself or herself, you may be eligible for a tax credit for qualified adoption expenses you paid. The credit, which is a maximum of $14,890 for 2022, is not refundable, but if the credit is more than your income tax, you can carry over the excess and have 5 years to use up the credit. If the child is a special needs child, the full credit limit will be allowed for the tax year in which the adoption becomes final, regardless of whether you had qualified adoption expenses. The credit phases out for higher income taxpayers. It is also time to begin planning for the child’s future education. The tax code offers two tax favored education savings accounts, the Coverdell account allowing a maximum contribution of $2,000 per year and the Qualified State Tuition plan, more commonly referred to as a Sec 529 plan, which allows large sums of money to be put aside for a child’s education. There is no federal tax deduction for contributing to either of these programs, but the earnings from the plans are tax-free if used for qualified education expenses, so the sooner the funds are contributed the greater the benefit from tax-free earnings. Getting Divorced – If you are recently divorced or are contemplating divorce, you will have to deal with or plan for significant tax issues such as asset division, alimony, and tax-return filing status. If you have children, additional issues include child support; claiming of the children as dependents; the child, child care, and education tax credits; and perhaps even the earned income tax credit. Here are some details:

Filing Status – As mentioned earlier your filing status is based on your marital status at the end of the year. If, on December 31, you are in the process of divorcing but are not yet divorced, your options are to file jointly or for each spouse to submit a return as married filing separately. There is an exception to this rule if a couple has been separated for all of the last 6 months of the year, and if one taxpayer has paid more than half the cost of maintaining a household for a qualified child. In that situation that spouse can use the more favorable head of household filing status. If each spouse meets the criteria for that exception, they can both file as heads of household; otherwise, the spouse who doesn’t qualify must use the status of married filing separately. If your divorce has been finalized and if you haven’t remarried, your filing status will be single or, if you meet the requirements, head of household.
Child Support – Is support for the taxpayer’s children provided by the non-custodial parent to the custodial parent. It is not deductible by the one making the payments and is not income to the recipient parent.
Children’s Dependency – When a court awards physical custody of a child to one parent, the tax law is very specific in awarding that child’s dependency to the parent who has physical custody, regardless of the amount of child support that the other parent provides. However, the custodial parent may release this dependency to the noncustodial parent by completing the appropriate IRS form.
Child Tax Credit – A federal credit of $2,000 is allowed for each child under the age of 17. This credit goes to the parent who claims the child as a dependent. Up to $1,400 of the credit is refundable if the credit exceeds the tax liability. However, this credit phases out for high-income parents, beginning at $200,000 for single parents.
Alimony – For divorce agreements that are finalized after 2018, alimony is not deductible by the payer and is not taxable income for the recipient. Because the recipient isn’t reporting alimony income, he or she cannot treat it as earned income for the purposes of making an IRA contribution.
Tuition Credit – If a child qualifies for either of two higher-education tax credits (the American Opportunity Tax Credit [AOTC] or the Lifetime Learning Credit), the credit goes to whoever claims the child as a dependent even if the other spouse or someone else is paying the tuition and other qualifying expenses.

Death of Spouse – Losing a spouse is difficult emotionally, and unfortunately, can be accompanied by a number of tax issues that may or not apply to the surviving spouse. Here is an overview of some of the more frequent issues:

Filing Status – If a spouse passes away during the year, the surviving spouse can still file a joint return for that year if the surviving spouse has not remarried. However, after the year of death the surviving spouse will no longer be able to jointly file with the deceased spouse and will have to use a less favorable filing status.
Notification – If the deceased spouse is receiving Social Security benefits the Social Security Administration must be immediately notified. Likewise, payers of pensions and retirement plans of the deceased spouse need to be advised of the spouse’s death.
Estate Tax – Where the deceased spouse’s assets and prior reportable gifts exceed the current lifetime inheritance exclusion ($12.06 million for deaths in 2022), an estate tax return may be required. However, the lifetime inheritance exclusion can be changed at the whim of Congress. Even when an estate tax return isn’t required because the value of the deceased spouse’s estate is less than the exclusion amount, it may be appropriate to file the estate tax return anyway, as there could be an impact on the estate tax of the surviving spouse when he or she passes.
Inherited Basis – Under normal circumstances the beneficiary of a decedent’s assets will have a tax basis in those assets equal to the fair market value of the assets on the date of death. Thus, generally a qualified appraisal of the assets is required. However, for a surviving spouse this can be more complicated depending upon whether the state of residence is a community property state and how title to the property was held.
Changing Titles – The title to all jointly held assets needs be changed into the survivor’s name alone to avoid complications in the future.
Trust Income Tax Returns – Many couples have created living trusts that, while they are both alive, don’t require a separate tax return to be filed for the trust and can be revoked. But upon the death of one of the spouses, this trust may split into two trusts, one of which remains revocable and the other becomes irrevocable. A separate income tax return for the latter trust will usually have to be prepared and filed annually.

These are just a few of the issues that must be addressed upon the death of a spouse, and it may be appropriate to seek professional help. If you have questions about the tax impact of any of your life changing situations, be sure to give this office a call for assistance.

September 15 – S Corporations
File a 2021 calendar year income tax return (Form 1120-S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension. Provide each shareholder with a copy of their Schedule K-1 (Form 1120-S) or a substitute Schedule K-1 and, if applicable, Schedule K-3 (Form 1120-S) or substitute Schedule K-3 (Form 1120-S).
September 15 – Corporations
Deposit the third installment of estimated income tax for 2022 for calendar year
September 15 –  Social Security, Medicare and withheld income tax
If the monthly deposit rule applies, deposit the tax for payments in August.
September 15 – Nonpayroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in August.
September 15 – Partnerships
File a 2021 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.
September 30 – Fiduciaries of Estates and Trusts File a 2021 calendar year return (Form 1041). This due date applies only if you were given an extension of 5 1/2 months. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1.

September 1 – 2022 Fall and 2023 Tax PlanningContact this office to schedule a consultation appointment. September 12 – Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during August, you are required to report them to your employer on IRS Form 4070 no later than September 12. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.September 15 – Estimated Tax Payment Due
The third installment of 2022 individual estimated taxes is due. Our tax system is a ‘pay-as-you-earn’ system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the ‘pay-as-you-earn’ requirement. These include:

Payroll withholding for employees;
Pension withholding for retirees; and
Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.
Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the de minimis amount), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:

The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.
However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.
This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.
CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.

Article Highlights:

Interest Categories
Category Deductibility
Interest Tracing Rules

A frequent question that arises when borrowing money is whether or not the interest will be tax deductible. That can be a complicated question, and unfortunately not all interest an individual pays is deductible. The rules for deducting interest vary, depending on whether the loan proceeds are used for personal, investment, or business activities. Interest expense can fall into any of the following categories:

Personal interest – is not deductible. Typically this includes interest from personal credit card debt, personal car loan interest, home appliance purchases, etc.
Investment interest – this is interest paid on debt incurred to purchase investments such as land, stocks, mutual funds, etc. However, interest on debt to acquire or carry tax-free investments is not deductible at all. The annual investment interest deduction is limited to “net investment income,” which is the total taxable investment income reduced by investment expenses (other than expenses related to investments that produce non-taxable income). The investment interest deduction is only allowed to taxpayers who itemize their deductions.
Home mortgage interest – includes the interest on debt to purchase, construct or substantially improve a taxpayer’s principal home or second home. This type of loan is referred to as acquisition debt. For the interest to be deductible the debt must be secured by the home purchased, constructed, or substantially improved. A secured debt is one in which the taxpayer signs a mortgage, deed of trust, or land contract that makes their ownership in a qualified home security for payment of the debt; provides, in case of default, that the home could satisfy the debt; and is recorded under any state or local law that applies. In other words, if the taxpayer can’t pay the debt, their home can then serve as payment to the lender to satisfy the debt. o For Debt Incurred Before 12/16/2017 – the debt for which the interest is deductible is limited to $1,000,000 ($500,000 for married separate). o For Debt Incurred After 12/15/2017 – the debt for which the interest is deductible is limited to $750,000 ($375,000 for married separate).
Passive activity interest – includes interest on debt that’s for business or income-producing activities in which the taxpayer doesn’t “materially participate” and is generally deductible only if income from passive activities exceeds expenses from those activities. The most common passive activities are probably real estate rentals. For rental real estate activities, there is a special passive loss allowance of up to $25,000 for taxpayers who are active but not necessarily material participants in the rental. The $25,000 phases out for taxpayers with adjusted gross income between $100,000 and $150,000.
Trade or business interest – includes interest on debts that are for activities in which a taxpayer materially participates. This type of interest can generally be deducted in full as a business expense.

Because of the variety of limits imposed on interest deductions, the IRS provides special rules to allocate interest expense among the categories. These “tracing rules,” as they are called, are generally based on the use of the loan proceeds. Thus interest expense on a debt is allocated in the same manner as the allocation of the debt to which the interest expense relates. Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures, i.e., “follow the money.” These tracing rules, combined with the restrictions associated with the various categories of interest, can create some unexpected results. Here are some examples:
Example 1: A taxpayer takes out a loan secured by his rental property and uses the proceeds to refinance the rental loan and buy a car for personal use. The taxpayer must allocate interest expense on the loan between rental interest and personal interest for the purchase of the car, and even though the loan is secured by the business property, the personal loan interest portion is not deductible. Example 2: The taxpayer borrows $50,000 secured by his home to be used in his consulting business. He deposits the $50,000 into a checking account he only uses for his business. Since he can trace the use of the funds to his business, he can deduct the interest as a business expense. Example 3: The taxpayer owns a rental property free and clear and wants to purchase a home to use as his personal residence. He obtains a loan on the rental to purchase the home. Under the tracing rules, the taxpayer must trace the use of the funds to their use, and as the debt was not used to acquire the rental, the interest on the loan cannot be deducted as rental interest. The funds can be traced to the purchase of the taxpayer’s home. However, for interest to be deductible as home mortgage interest, the debt must be secured by the home, which it is not. Result: the interest is not deductible anywhere.
As you can see, it is very important to plan your financing moves carefully, especially when equity in one asset is being used to acquire another. Please call this office for assistance in applying the various interest limitations and tracing rules to ensure you don’t inadvertently get some unexpected results.

Article Highlights:

Tax Filing Thresholds
Withholding
2021 Recovery Rebate Credit
Earned Income Tax Credit (EITC)
Child Tax Credit or Credit for Other Dependents
Education Credits

Some people may choose not to file a tax return because they didn’t earn enough money to be required to file, but these folks may miss out getting a refund if they don’t file. Although there are some exceptions, generally individuals are not required to file a tax return if their income for the year is below the filing threshold for their filing status as shown in the following table.

2021 TAX FILING THRESHOLDS FOR MOST INDIVIDUALS

Filing Status
Age at the end of 2021
Gross Income Filing Threshold

Single
Under 65
$12,550

–
65 or older
$14,250

Head of Household
Under 65
$18,800

–
65 or older
$20,500

Married Filing Jointly
Under 65 (both spouses)
$25,100

–
65 or older (one spouse)
$26,450

–
65 or older (both spouses)
$27,800

Married Filing Separate
Any Age
$5

Qualifying Widow(er)
Under 65
$25,100

–
65 or older
$26,450

Many social benefits provided by the government for lower income individuals are distributed through the tax return, often in the form of a tax credit, and a return must be filed to claim those benefits, many of which can be substantial. Some of these credits are partially or fully refundable even if an individual has no tax liability. So, even though you might not be required to file a return you may be missing out on a tax refund if you don’t file one. Here are some examples: Withholding – If you are not required to file a tax return but had income taxes withheld from your W-2 wages, Social Security benefits, retirement income, or investment income, or you made estimated tax payments, you are entitled to have that withholding or estimate payments refunded. However, you must file a tax return to recover the withholding or tax payments. 2021 Recovery Rebate Credit – Individuals who didn’t qualify for a third Economic Impact Payment or got less than the full amount, may be eligible to claim the 2021 recovery rebate credit. However, a 2021 return will need to be filed, even if not otherwise required to file a tax return. The credit will reduce any tax owed for 2021 or be included in the tax refund. Earned Income Tax Credit (EITC) – A working individual who earned $57,414 or less in 2021 can receive the EITC as a tax refund. For 2021 the amount of the earned income credit ranges from $1,502 to $6,728 depending on your filing status and how many, if any, children you claim on your tax return. Those who did not file a return for tax year 2020 or 2021 or who did not claim the earned income tax credit on their 2020 or 2021 return because they had no earned income in those years may file an original or amended return to claim the credit using their 2019 earned income if they are otherwise eligible to do so. Child Tax Credit Or Credit For Other Dependents – individuals can claim the child tax credit for 2021 if they have a qualifying child under the age of 18 and meet other qualifications. Other taxpayers may be eligible for the credit for other dependents. This includes people who have:

Dependents who are age 18 or older.
Dependents who have individual taxpayer identification numbers instead of a Social Security number.
Dependent parents or other qualifying relatives whom the taxpayer supports.
Dependents living with the taxpayer who aren’t related to the taxpayer.

Education Credits – There are two higher education credits that can reduce the amount of tax someone owes on their tax return. One is the American opportunity tax credit and the other is the lifetime learning credit. The taxpayer, their spouse or their dependent must have been a student enrolled at least half time for one academic period and have paid college or university education expenses to qualify. The taxpayer may qualify for one of these credits even if they don’t owe any taxes. If you are not required to file, and didn’t, you can contact this office to determine if any benefit can be gained by filing a 2021 tax return. Even if you are required to file and didn’t, this office can help you meet your filing requirements and take advantage of the many benefits available.