Category: Tax

When The Children Grow Up- How To Adjust For Taxes

If you were used to receiving a refund because you claimed your children but can no longer claim them, the transition can be rough. The shock is common for parents, the first year they file without dependents. Refunds are considerably lower, or worse, there’s now a tax liability.

What to do?

If you’re paid wages or salary the easiest solution, from a tax point, is to update your W4. If you previously filed as head of household, and marked that status on your W4, you’ll want to go back and mark “single”.

If you’re self-employed and can no longer claim dependents the only solution available is to make estimated payments. These are quarterly payments that are meant to cover both your income tax and self-employment tax.

Estimated Payments

Taxpayers who expect to owe at least $1,000 on their tax return, and who are unable to have tax withheld, must make quarterly payments the year prior.

A good starting point is last year’s tax return. Your 1040 will show your gross income and expenses. If you expect your income and expenses to be similar, then your self-employment tax will also be similar. If you’re now filing single, instead of head of household, your income tax will be different, most likely higher.

Form 1040-ES offers worksheets that can help calculate accurate payments.

Tax Planning

Although you may still support your adult children, if they’ve fallen out of dependency eligibility for tax purposes, you’ll have to plan for a new tax scenario. Tax planning can be confusing, but hopefully this guide offers a good start for you.

You’re Going To Want To Keep Track Of Those Miles

If you plan on driving your car for business, in 2023, you might be able to deduct 65.5 cents per mile. If you drive for medical reasons the rate is 22 cents per mile. For charity, it’s 14 cents per mile.

Driving the same car for business and personal use will require you to calculate the use percentage for each. The miles driven for business are deductible, but the miles driven for personal use are not.

Business Miles

There are two methods of deducting the use of your car for business. There is the standard mileage rate (65.5 cents per mile), and there is actual use.

Standard mileage covers maintenance and repairs on your car, as well as gasoline and insurance. The 65.5 cent rate is a flat rate meant to cover all these expenses. You’ll have calculate which method will give you the biggest deduction.  

You can alternate between methods every year, but only if you opted to use the standard mileage rate the first year you used your car for business.

Medical Miles

Although medical miles have a lower rate than business miles, they follow the same rules. You can either deduct the standard mileage rate (22 cents per mile) or actual expenses. Unlike business miles, which are deducted on Schedule C, medical miles can only be deducted on Schedule A, Itemized Deductions.

To figure out which medical expenses are allowed by the IRS consult Publication 502, Medical and Dental Expenses.

Charity Miles

If you used your car to provide services to a qualified charitable organization, you can either deduct mileage (14 cents per mile) or actual expenses. These expenses must be unreimbursed and out-of-pocket.

Like medical deductions, charitable deductions must also be claimed on Schedule A.

Final Note

Burden of proof lies with the taxpayer. Any car deductions claimed on the tax return must be ready to be substantiated in the case of an audit.

Miles driven, and the purpose of those miles, must be made clear to the IRS through recordkeeping.

How To E-File 1099 Forms For Free

If you’re a business owner who’s hired independent contractors for services rendered to your business, you can e-file 1099 forms for free. Through the IRS’s Information Returns Intake System (IRIS), you can file 1099 returns, as well as print recipient copies.

1099 Requirements

If you paid an independent contractor over $600 in a tax year, you’re required to file a 1099-NEC Form with the IRS and issue the independent contractor a copy by January 31st.

As of 2023, if you must file 10 or more 1099 forms in a given tax year, you’re required to e-file them.

IRIS Taxpayer Portal

In order to use the IRIS portal you’ll have to submit an application to receive a Transmitter Control Code. This code will allow you access to the portal.

The application will require your business information and the information of the person submitting the application (also called a Responsible Office). The business must have an EIN, as social security numbers or ITINs are not acceptable.

How to Get an EIN

To get an EIN you’ll have to submit an application, providing your business information and the information of the Responsible Party. The Responsible Party is the person who exercises control over the business, like the owner. Most EINs are issued immediately.

More detailed information is provided in Publication 5717, Information Returns Intake Systems.

Guard Your Personal Information Against Tax Scammers

Tax season is officially here, and with it are tax scams. Common among them are e-mail and text scams meant to look like they come from the IRS and other tax agencies. These scams aim to get your personal information, including your banking information. Some scammers have become successful enough that cybersecurity experts at Securonix have begun tracking them ahead of tax season.

Taxpayers who fall for these scams do so because they received messages claiming outstanding refunds, or in some cases outstanding tax bills. If you ever receive an e-mail or text from what seems to be a tax agency, do not reply or click on any links. Instead, capture a screenshot of the message and send it to phishing@irs.gov. The IRS encourages taxpayers to report these scams in order to make other taxpayers and tax professionals aware of them.

It’s important to know that the IRS initiates contact with taxpayers through mail correspondence. If you suspect that a letter with an IRS letterhead could be a scam, you can always verify its authenticity by calling the IRS directly.

Taxpayers can also create a tax account with the IRS. If you create an account you’ll be able to monitor new account activity and information, and know for sure if the IRS is actually trying to communicate with you. To sign up for a tax account go to https://www.irs.gov/, and click on “Sign in to your account.” If you don’t already have an ID.me account you’ll have to create one.

Why Self-Employed People Should Always Carry A Weekly Planner

A weekly planner isn’t just great for jotting down appointments. It can also serve as supporting documentation if the IRS were to ever audit your return. The U.S. Tax Court often makes it clear in case decisions that the burden of proof falls on the taxpayer claiming the deductions and credits. In the event of an audit, any unsubstantiated deduction will result in a higher tax bill.

But what should be written down? Even if you use third-party payment companies, such as Square, and pay for every expense with your debit card, it’s still beneficial to write down every sale and major expense to avoid discrepancies.

If you drive to clients’ homes or to any other business destination, it’s important to log in your mileage and destination to prove you are entitled to take the mileage deduction.

In a recent court case, a taxpayer’s mileage claim was disallowed after he was unable to back up his business mileage. Although he had a log of miles driven, he did not make it clear if the miles were for business or personal use. Writing down the purpose of the business trip could prevent a future disallowance.

Aside form helping you prepare an accurate tax return, a weekly planner can also help you manage your customer relationships. If you’re looking for recurring sales, knowing the date of your last visit can show your clients you haven’t forgotten them.

Canceled, Discounted, Or Modified Credit Card Debt

If you owe credit card debt and the lender decides to cancel (“discharge”) your remaining balance, or discount or modify the principal balance, you’ll likely receive Form 1099-C, Cancellation of Debt. The amount shown on box 2 is taxable as ordinary income, meaning it will not be subject to any extra tax besides the regular income tax.

It’s possible, however, to make some or all the canceled debt nontaxable. The IRS offers “exceptions” and “exclusions” to the rule, with exceptions considered first before exclusions.

For credit card borrowers, canceled debt might be nontaxable if the debt could have been deductible. If you were self-employed, and the credit card was used solely for business expenses, that debt could have been deductible and therefore the canceled debt would be nontaxable.

If your canceled debt does not qualify for an exception, you may still be able to exclude canceled debt from income if the debt was canceled due to a title 11 bankruptcy case. One other possible exclusion is insolvency. This exclusion can be trickier, and the services of a tax pro might be required.

Under the insolvency exclusion, your total debt, immediately before your debt was canceled, must have been more than your total assets. The IRS provides an insolvency worksheet in Publication 4681 that can help you figure out if you were insolvent immediately before your credit card debt was canceled, discounted, or modified. Publication 4681 also provides a full list of exceptions and exclusions, as well as examples that might be relevant.

If you qualify for an exclusion, it will have to be reported on Form 982, with the appropriate box checked.

If you do not qualify for any exception or exclusion your canceled debt will have to be included in income. There are two ways to plan for a possible increase in tax. You can either make an estimated payment throughout the year or increase your withholding at work.

3 Things to Know About Capital Losses

1. A loss can only be claimed on a tax return for investment assets, not for personal assets. Personal assets are assets such as a home or car. Gains from personal assets are still taxed, but losses cannot be claimed (although an exclusion is available for the sale of a home).

2. Capital losses reduce income. Capital losses are claimed on line 7 of Form 1040 (in parentheses). They lower your income, which in turn can produce a lower tax.

3. Capital losses are limited to the lesser of $3,000 or your total net loss. To figure your capital losses you’ll first need to list your sales on Form 8949, then transfer your short-term and long-term net gains/losses to Schedule D, where you’ll figure your limit and any possible carryover losses.

Paying Less in Taxes when Selling Your Home

Taxpayers are generally allowed to exclude up to $250,000 ($500,000 if Married Filing Jointly) from gains of a home sale. There are eligibility requirements that must be met to qualify, found in IRS Publication 523. For most, those requirements boil down to whether the home was owned and used by the taxpayer for 2 out of the previous 5 years before the sale of the home. The 2 years don’t have to be continuous. You also must not have taken an exclusion for the sale of another home in the 2 years prior to selling your current home.

The exclusion alone might not be enough to exclude all gains. In order to bring those gains within the exclusion range it’s important to increase the basis of the home. Basis is your investment in the property. It includes your purchase cost and certain closing costs and improvements made before selling.

The following closing costs are allowed to be included in the basis:

  • Abstract fees (abstract of title fees)
  • Charges for installing utility services
  • Legal fees (including fees for the title search and preparing the sales contract and deed)
  • Recording fees
  • Survey fees
  • Transfer or stamp taxes
  • Owner’s title insurance

Qualifying improvement include:

Additions
Bedroom
Bathroom
Deck
Garage
Porch
Patio


Lawn & Grounds
Landscaping
Driveway
Walkway
Fence
Retaining wall
Swimming pool

Systems
Heating system
Central air conditioning
Furnace
Air/water filtration systems
Wiring
Security system
Lawn sprinkler system

Exterior
Storm windows/doors
New roof
New siding


Insulation
Attic
Walls
Floors
Pipes and duct work

Plumbing
Septic system
Water heater
Soft water system
Filtration system


Interior
Built-in appliances
Flooring
Wall-to-wall carpeting
Fireplace

Your gain is calculated by subtracting your basis from your selling price.

It’s important to keep track of these adjustments. They might make all the difference when it comes time to report your sale.

The Simplest Way to Deduct Your Home Office

There are two ways to deduct the use of a home office. You can deduct actual expenses, which provide for a higher allowable deduction. If you go this route, you’ll be bound by stricter requirements and more detailed reporting.

The IRS also allows taxpayers to use the Simplified Method. This method allows a deduction of $5 per square foot (limited to an area of 300 square feet).

The deduction is not allowed if a taxpayer has business expenses, unrelated to the use of a home office, that are greater than the gross income produced by the use of your home office.

If your business gross income is greater than your other business expenses, deduct the smaller of this difference or of the home office deduction.

Taxpayers who only had a home office for part of the year are limited to the average monthly square footage use. For example, if you started operating out of your home office in September, you’ll figure the average like this (assuming your home office use was 200 square feet):

((0+0+0+0+0+0+0+0+200+200+200+200)/12)=67 square feet

You home office deduction will be $335 ($5×67).

The simplified method is particularly helpful for self-employed individuals who rent. It’s easier to figure out and requires less recordkeeping. If you’re interested in deducting actual home office expenses, you can read more about Form 8829.

Tax Filing for Spouses Who Run a Business Together

It’s important, when spouses work together, that each spouse gets the social security and Medicare credit they deserve. It’s common for one spouse to file a Schedule C, claiming all income and expenses, when in fact, both spouses contributed equally to running their business.

The IRS generally requires married couples who run unincorporated businesses to file as partnerships. To limit the level of complexity, however, the IRS allows for the Qualified Joint Venture exception. This exception is available to married couples who:

1) file a joint return and are the only members of the venture.

2) materially participate in the business.

3) elect not to be treated as a partnership.

If you and your spouse qualify to file as a Qualified Joint Venture, you can each file a Schedule C. You’ll need to split the income and expenses according to each person’s interest in the business. For example, if both spouses were equally responsible and exerted the same level of control in the business it’s safe for each spouse to report 50% of the income and expenses on their respective Schedule Cs. You won’t necessarily pay more in taxes, but you will make sure each person’s social security and Medicare accounts are credited.

Note that the business must be co-owned by both spouses and must not be a state law entity. If you’ve registered the business with the state as an LLC, you no longer qualify as a Qualified Joint Venture and must file as a partnership. This involves filing Form 1065, in addition to Form 1040.