Learning Center for Tax and Financial Insights

Article Highlights: Changing Filing Status Liability Community Property States Social Security Benefits Capital Loss Limitations Sec 179 Business Expensing Election Rental Loss Limitation Traditional IRA Contributions Roth IRA Contributions Education Credits Series EE or I Bonds Higher Education Interest Standard Deduction Medicare Premiums Allocating Home Mortgage Interest Alternative Minimum Tax (AMT) 2021 Tax Rate Tables Child and Dependent Care Credit Child and Dependent Credit Earned Income Tax Credit (EITC) Adoption Credit Estimated Taxes Allocation Premium Tax Credit (PTC) Couples who are married on the last day of the tax year basically have two filing status options when filing their tax returns: either married filing jointly (MFJ) or married filing separately (MFS) returns. Generally, filing MFJ will produce the better tax result. However, other factors – usually personal or financial rather than tax-related – can come into play that cause taxpayers to choose to file MFS returns. There is one exception to the requirement that married taxpayers file either MFS or MFJ. This is where one spouse lived apart from the other spouse for the last 6 months of the year and (1) pays more than one-half of the cost of maintaining as his or her home a household (2) which is the principal place of abode for more than one-half the year of a child, stepchild or eligible foster child that (3) the taxpayer may claim as a dependent. (A nondependent child qualifies only if the taxpayer gave written consent to allow the dependency to the non-custodial parent.) When these requirements are met, the head of household status can be used. The other spouse would still file as MFS unless that spouse also qualifies for the exception. Whatever the reason for filing MFS, the consequences encountered when filing separate returns are as follows. Changing Filing Status – Once a couple files a joint return, the joint filers may not change to filing separate returns after the unextended due date of the tax return. The unextended due date is generally April 15 unless it falls on a weekend or holiday, in which case it will be the next business day. Liability – When married taxpayers file joint returns, both spouses are responsible for the tax on that return. What this means is that one spouse may be held liable for all the tax due on a return, even if all the income on that return was earned by the other spouse. This also applies to back taxes and back child support. When spouses file MFS, each is liable only for the tax on their own return. Community Property States – Where taxpayers reside in a community property state, the allocation of income when filing separate returns is governed by state law. If the spouses file separate returns, each spouse, with certain exceptions, must report one-half of the income from community property, and if the couple is estranged or uncooperative, determining the correct amount of income that each should report may be difficult. The IRS can disregard community property laws when a spouse is not informed of community income by the other spouse. However, the IRS’s ability to disregard community property laws only occurs after the fact should the IRS question the allocations. Taxpayers may be able to disregard community property rules if the spouses have an agreement (commonly referred to as a prenuptial agreement, but agreements can also be created after marriage) that their property is separate property, and thus income from such property is separate income. It is best for an attorney to draft any such agreement. Following are how some of the most common types of income are treated for federal tax purposes in community property states. Wages – Earned income from personal service received by a husband and wife domiciled in a community property state is generally community income during the period the community is in existence. Thus, wages are community income during the period of the community and must be split evenly. Example: Bill and Chris are married and live in a community property state. Bill is employed and had wages for the year of $120,000 ($10,000/month), while Chris is not employed. If they file MFS returns, each will report $60,000 of wages as income. Let’s say they separated on July 1 (i.e., the community ended) but were still married on December 31. They file MFS returns – Bill’s return will include $90,000 of wage income ((6 months x $10,000 x 50%) + (6 months x $10,000 x 100%)) and Chris will report $30,000 of wages (50% of Bill’s $60,000 wages for January through June). Credit for Tax Withheld on Wages – If a husband and wife domiciled in a community property state file separately for federal tax purposes and each report one-half of the community wages received during the tax year, half the credit for the income tax withheld on the community wages that are reported on separate returns is taken by each spouse. FICA Wage Withholding – The FICA (Social Security and Medicare) withholding cannot be allocated. It has already been reported to the Social Security Administration and credited under the Social Security Number (SSN) of the individual who actually earned it. Net earnings from self-employment – Where the net self-employed earnings of a taxpayer is community property, and the spouses file MFS returns, then: o Self-Employment Tax – Is assessed on the taxpayer who actually earned the income. If the spouses jointly operate the trade or business, for SE tax purposes, the gross income and related deductions are allocated between the spouses based on their distributive shares of the gross income and deductions. o Income Tax – For purposes of income tax, the SE income that is community income is divided 50/50 between the spouses and the SE income that is separate income is allocated 100% to the spouse who owns it. Example: Where a married couple lives in a community property state and only one spouse is self-employed, that spouse must pay SE tax on his total gross SE income, less total business deductions, despite the fact that half of that income is attributable to the other spouse for income tax purposes. Disability and Unemployment Income – Since these are substitutes for current earnings, they are treated as community income. Dividend & Interest Income – Interest and dividend income can be either separate or community income. This depends on whether the underlying investment that produced the income was acquired with joint or separate funds and whether the couple’s domicile was in a community or separate property state at the time the investment was acquired. IRA & SEP Accounts – Traditional IRAs, Roth IRAs, SIMPLE IRAs, and simplified employee pension (SEP) IRAs are separate property by law; thus: o Distributions – Are reported by the individual who owns the IRA. o Contributions – When deductible, the deduction is claimed by the individual who owns the IRA. Social Security and Equivalent Railroad Retirement Benefits – Are treated as the income of the spouse who receives the benefits. Pension Income – Income from qualified plan distributions can be either community income or separate income based upon the amount of separate and community income used to fund the pension account. One possible proration scenario would be prorating by the respective periods of participation in the pension while married and domiciled in a community property state or in a noncommunity property state during the total period of participation in the pension. Example: Prorating by Years – Suppose Dave has had a 401(k) plan since January 1 of 2010. He and Shirley get married on January 1, 2017. On January 1 of 2020, Dave retires and begins taking distributions from his 401(k) plan. Dave had the 401(k) plan for 10 years, three of which were during the period of his marriage to Shirley. Thus, prorating by year, Dave’s 401(k) distributions would be 70% separate income and 30% community income. If they filed married but separately, Dave would report 85% of the income (70% plus ½ of 30%) and Shirley would report 15%. Partnership Income – Income from a partnership is based upon whether: Income Is Attributable to the Personal Services of Either Spouse – Where the income from the partnership is attributable to the efforts of either spouse, the partnership income is community property. Income Is Not Attributable to Personal Services – In this case, income can be either communal or separate based upon whether the partnership involves community or separate property. Now, let’s look at some tax-related issues where filing MFS is generally unfavorable: Social Security Benefits – Social Security (SS) income is not taxable until their modified AGI (MAGI) – which is regular AGI without Social Security income plus 50% of their Social Security income, tax-exempt interest income, and certain other infrequently encountered additions – exceeds a specific threshold. The threshold is $32,000 for MFJ taxpayers. However, for taxpayers filing MFS, the threshold is zero, meaning they lose the benefit of the tax-excludable portion of Social Security benefits enjoyed by others and will have 85% of their Social Security benefits counted as income. Exception – There is an exception to this MFS penalty if the spouses lived apart for the entire tax year. The Tax Court has held that separate-filing spouses must live in separate residences to qualify as living apart. Capital Loss Limitations – When a taxpayer’s reportable sales of capital assets, such as stocks, result in a loss for the year, the loss is first used to offset capital gains; then, any excess loss is deducted from ordinary income, but the entire excess loss may not be deductible. Instead, the tax code limits the losses to $3,000, and amounts not allowed are carried over to the subsequent year. For MFS filers, that amount is reduced to $1,500. This will cause an MFS penalty, whereas the losses would all be reported on only one of the MFS returns. Example: One spouse of a married couple has separate property that generates a $4,000 loss, which is the only capital gain or loss between them for the year. If they file jointly, they would be allowed a $3,000 capital loss deduction. If they file separately, then the spouse whose separate property generated the loss would report the entire transaction on their own separate return and would be limited to a $1,500 loss. The other spouse would not have a loss. Sec 179 Business Expensing Election – Under Section 179 of the tax code, taxpayers are allowed to expense (write off) rather than capitalize and depreciate personal tangible equipment purchased for business use. For purposes of the Sec 179 election, married taxpayers are treated as one taxpayer for determining the Section 179 limit. Thus, when filing MFS, the limit is divided equally between the taxpayers, unless they elect an unequal split. This will generally not be an issue for most taxpayers, since the Sec 179 expensing limit is $1,050,000 for 2021. Rental Loss Limitation – Rental property in the early years after acquisition will often show a tax loss. These losses are generally attributable to an accounting deduction for depreciation. The tax code includes some complicated rules related to deducting rental losses, but they are generally limited to $25,000 for taxpayers with an AGI of $100,000 or less and ratably phased out for taxpayers with AGIs between $100,000 and $150,000. MFS taxpayers are not allowed any loss unless they live apart the entire year. If they lived apart all year, the allowance is reduced to $12,500, and phaseout begins at an income level of $50,000. Traditional IRA Contributions – Deductible traditional IRA contributions are allowed for taxpayers up to $6,000 ($7,000 if age 50 or over). However, the deductibility now begins to phase out in 2021 for married joint filers if they are active participants in another plan when their AGI reaches $105,000 and is fully phased out when the AGI reaches $125,000. If only one spouse is an active participant in a qualified plan and files jointly, the phase out range is $198,000 – $208,000. If the couple files MFS, the AGI phaseout begins at zero AGI and is fully phased out at $10,000, which essentially eliminates a deductible contribution for either spouse. Plans That Create “Active Participation”: A qualified annuity plan A tax-sheltered annuity A simplified employee pension (SEP) An employer-sponsored qualified pension, profit-sharing or stock bonus plan A plan established by a governmental agency for its employees, other than an unfunded deferred compensation plan for employees of state and local governments or exempt organizations (§ 457 plan) An employee-only contributory plan exempt from tax Roth IRA Contributions – Even though contributions up to $6,000 ($7,000 if age 50 or over) are allowed, unlike traditional IRA contributions, Roth IRA contributions are not deductible. Since Roth IRAs enjoy tax-free accumulation contributions, Congress decided contributions should not be available to high-income taxpayers. Thus, for 2021 the contributions now begin to phase out for married taxpayers with AGIs of $198,000 and are fully phased out when the AGI reaches $208,000. However, for MFS taxpayers, the phase out range is $0 to $10,000, essentially eliminating a contribution for either spouse. This AGI limitation applies regardless of whether the taxpayer is an active participant in a qualified plan. Education Credits – Tax law includes two tax credits to aid taxpayers who are paying higher education tuition and certain expenses for themselves and their children. The American Opportunity Tax Credit provides a tax credit up to $2,500 per eligible student, of which 40% is refundable. The second credit is the Lifetime Learning Credit, which provides a nonrefundable credit of up to $2,000 per tax return.

Article Highlights: Restaurant Revitalization Fund Eligible Entities Application Good-Faith Certification Tax Issues Covered Period Available Funding Priority in Awarding Grants Determination of Grant Amount Use of Funds Applying for a Grant The American Rescue Plan Act established the Restaurant Revitalization Fund (RRF) to provide funding to help restaurants and other eligible businesses keep their doors open. This program will provide restaurants with funding equal to their pandemic-related revenue loss, up to $10 million per business and no more than $5 million per physical location. Recipients are not required to repay the funding as long as funds are used for eligible uses no later than March 11, 2023. Eligible Entities – Eligible entities are businesses that are not permanently closed and include businesses where the public or patrons assemble for the primary purpose of being served food or drink, including: Restaurants Food stands, food trucks and food carts Caterers Bars, saloons, lounges and taverns Licensed facilities or premises of an alcoholic beverage producer where the public may taste, sample, or purchase products Other similar places of business in which the public or patrons assemble for the primary purpose of being served food or drink Snack and nonalcoholic beverage bars The following types of businesses are also eligible if they can document that their on-site sales to the public comprised at least 33% of gross receipts in 2019. For businesses that opened in 2020 or that have not yet opened, the applicant’s original business model should have contemplated at least 33% of gross receipts in on-site sales to the public. Bakeries Brewpubs, tasting rooms and taprooms Breweries and microbreweries Wineries and distilleries Inns – Based on on-site sales of food and beverage rather than gross receipts. Note: All businesses must satisfy the statutory requirement for “place of business in which the public or patrons assemble for the primary purpose of being served food or drink,” and an eligible entity must have had at least 33% in 2019 of on-site sales to the public. The original business model of eligible entities that opened in 2020 or that have not yet opened should have contemplated at least 33% of gross receipts in on-site sales to the public. Those entities without additional documentation requirements, such as restaurants and bars, are presumed to have on-site sales to the public comprising at least 33% of gross receipts in 2019. All applicants must attest to the following in the application: “The Applicant is eligible to receive funding under the rules in effect at the time this application is submitted.” Eligible entities do not include: o State- or local government-operated businesses. o Any entity that owned or operated more than 20 locations on March 13, 2020, regardless of whether those locations do business under the same or multiple names. o Any entity with a pending application for or that has received a grant under Sec 324 of the Economic Aid to Hard-Hit Small Businesses Act (PL 116-260). o Publicly traded companies. Application Good-Faith Certification – An eligible entity applying for a grant under this subsection must make a good-faith certification that: The uncertainty of current economic conditions makes the grant request necessary to support the ongoing operations of the eligible entity. The eligible entity has not applied for or received a grant under Sec 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Title III of Division N of the Consolidated Appropriations Act, 2021). Tax Issues These grants are tax free. No deduction or basis increase is denied, and no tax attribute is reduced by reason of the gross income exclusion. Since the restaurant revitalization grants are treated as tax-exempt income, they will be allocated to partners or shareholders and increase their bases in their partnership or S corporation interests. Covered Period – The period beginning on February 15, 2020 and ending on March 11, 2023. If the business permanently closes, the covered period will end when the business permanently closes or on March 11, 2023, whichever occurs sooner. Recipients that are unable to use all of the funds received on eligible expenses by the end of the covered period must return any unused funds to the Treasury. Available Funding $5 billion will be available for grants to businesses with gross receipts of no more than $500,000 in 2019. $20 billion will be available to the SBA administrator to award grants equitably to eligible entities of various sizes based on annual gross receipts.

Article Highlights: American Rescue Plan Act Unemployment Income Exclusion Early Filers IRS Automatic Adjustment Refund Schedule Method of Payment Refund Offsets Potential Need for Amended Return Adjustment Notice Normally, unemployment insurance benefits are fully taxable for federal purposes. However, earlier this year, about the middle of the tax filing season, Congress, as part of the American Rescue Plan Act, decided that each individual who received unemployment benefits could exclude the first $10,200 of those benefits from taxation if their modified AGI was less than $150,000. This created a problem, since the exclusion was announced after millions of taxpayers had already filed their tax returns. The IRS, not wanting to deal with amended returns from all those early filers, announced they would automatically make the adjustment and send out the appropriate refunds, The IRS also cautioned taxpayers not to file amended returns since the Service would be making the adjustment. If you are a 2020 unemployment benefits recipient who filed early and have been waiting for a refund, the IRS has announced it will begin issuing refunds on May 15, 2021. The IRS plans to adjust the simplest returns first, which are those filed by unmarried taxpayers, followed by the returns of married taxpayers. The IRS estimates it will take through the end of summer to review and correct all of the returns. The IRS will issue refunds by direct deposit where a taxpayer included bank account information on their 2020 tax return; otherwise, the refund will be by a check mailed to the taxpayer’s address of record. The IRS will send taxpayers a notice explaining the corrections, which they should expect within thirty days of when the correction is made. You are strongly urged to retain the notice and forward it to this office, since the IRS concedes they may not pick up all the adjustments made possible by the reduced income as discussed below.

Overspending is a common financial issue and you are certainly not alone. Check out these four tips that can make a big difference in fixing your overspending habit. .embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }

Stripe, a company valued at $36 billion, is headquartered in San Francisco, CA and was founded in 2010 by young Irish entrepreneurial brothers John and Patrick Collison. While Stripe has been the biggest success over the course of their careers, it was not their first. In 2005, at the age of 16, Patrick won the 41st Young Scientist of the Year for his work with Lisp, prior to leaving high school early in order to attend MIT. During his freshman year, he founded his first company, Auctomatic, and joined Y Combinator in 2007, before selling the company after ten months to Live Current Media for $5 million. He joined the company as the Director of Product Engineering in 2008. His brother, John, is also talented, having received the highest score ever recorded by a student for the Irish Certificate. He went on to attend Harvard in the fall of 2009, before joining his brother to found Stripe. The brothers were working on other projects at the time and were frustrated with the difficulty for companies to accept payments online. They set out to fix the problem and Stripe was born. The core feature of their initial offering was to create a simple way for developers to integrate payment processing into company payment systems. To differentiate themselves from other service providers, they marketed their services to developers rather than traditional companies. Their first client came along 2 weeks after they finalized the prototype of the product. 280 North was a fellow Y Combinator participant and its founder, Ross Boucher, would go on to become one of Stripe’s first employees. Their ease-of-use led to increasing their client base significantly through word-of-mouth advertising within the developer community. Additionally, Stripe introduced transparent pricing, which helps their users to understand exactly how much they would be charged each month, which proved especially helpful for startup companies. Stripe was not the original name of the company. During the initial stages of the business, they were named Dev/Payments. However, they understood that this was not the most marketable name. After careful consideration, they renamed themselves Stripe. As a result, they purchased the domain name Stripe.com from an MIT alumni in June 2011.

The complexity of life, coupled with the new tax laws surrounding the pandemic, can lead to changes in your tax situation after you have filed a tax return. This video will help you understand when you need to file an amended return to get the most benefits and avoid penalties. .embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }