Learning Center for Tax and Financial Insights

Article Highlights: Filing Status Claiming the Children as Dependents Child Exemption Head-of-Household Filing Status Tuition Tax Credit Child Care Tax Credit Child Tax Credit Earned Income Tax Credit Alimony 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 (EITC).Filing Status – 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 to each submit a return as married filing separately. There is an exception to this rule; however, 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, then 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 file using 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. Claiming the Children as Dependents – A common (and commonly misunderstood) issue for those who are divorced or separated and who have children is the choice regarding who claims a child for tax purposes. This can be a hotly disputed issue between parents; however, tax law includes very specific (albeit complicated) rules about who profits from child-related tax benefits. At issue are a number of benefits, including the child, child care, higher-education tuition, and earned income tax credits, as well as, in some cases, filing status. This is actually one of the most complicated areas of tax law, and both taxpayers and inexperienced tax preparers can make serious mistakes when preparing returns, especially if the parents are not communicating well. When parents cooperate with each other, they often can work out the best tax result overall, even though it may not be the best for them individually, and can then compensate for discrepancies in other ways. 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 the dependency to the noncustodial parent by completing the appropriate IRS form. CAUTION – The decision to relinquish dependency should not be taken lightly, as it impacts a number of tax benefits. On the other hand, if a court awards joint physical custody of a child, only one of the parents can claim the child for tax purposes. If the parents cannot agree on who will claim the child, or if both actually claim the child, the IRS tiebreaker rules apply. Per these rules, a child is treated as a dependent of the parent with whom the child resided for the greater number of nights during the tax year; if the child resides with both parents for the same amount of time, the parent with the higher adjusted gross income claims the child as a dependent. These rules take precedence over what a court may intend. For example, say the judge in Tom and Becky’s divorce proceeding rules that Tom, who is required to pay a specified amount of child support monthly, is to claim their child as a dependent on his tax return. But the child lives with Becky more nights during the year than with Tom. Under the tax law, Becky is allowed to claim the child as her dependent, regardless of what the court-approved divorce agreement says. Child’s Exemption – Under prior law, a child’s tax-exemption deduction was generally an issue; the parent claiming the child as a dependent got a deduction for the exemption allowance amount. However, because of tax reform, the tax deduction for such exemptions has been suspended through 2025; although this is no longer an issue for this benefit, a child’s dependency is still a consideration for other tax issues. Head of Household Filing Status – An unmarried parent can claim the more favorable head of household (rather than single) filing status if that person (a) is the custodial parent and (b) pays more than one-half of the cost of maintaining the household that is the principal place of residence for the child (i.e., where the child lives for more than half of the year).

Article Highlights: Tax Recordkeeping Tips Receipts Auto Deductions Gifts Business Equipment Ordinary and Necessary Meals & Lodging Entertainment Home Office With the ever-increasing complexity of our tax system, it is commonplace for many small businesses to make mistakes with bookkeeping and filing. One way to avoid making errors is to be aware of the most commonly encountered pitfalls. Here are some tips to help keep the proper records. Receipts – Even though the IRS does not require receipts for business meal expenses of less than $75, it is nevertheless wise to hang onto them. There is no better documentation than a credit card receipt since it has all the expense information required. All you need to do is write on the slip the purpose of the event, the individual(s) you were with, and your business relationship with that person or people.Auto Deductions – Generally, small businesses use either the actual expense method or the optional mileage method of deducting the business use of a vehicle, and both must account for any personal use of the vehicle, including commuting. When using the actual expenses method, the deducible business portion of the expenses is determined by multiplying the total expenses by the percentage of business use, which is found by dividing the business miles driven by the total miles driven. When using the optional mileage method, the business miles are multiplied by the IRS published standard mileage rate, which is 56 cents per mile for 2021 (down from 57.5 cents per mile for 2020). So, regardless of the method used, make sure you keep track of the total and business use miles for the year since it is required for either option. Gifts – Do not overspend on gifts to clients and business associates. The IRS will allow a deduction of only up to $25 worth of gifts to any individual per year. Being too generous will cost you. With only that first $25 per recipient considered a deductible business expense, the rest will be nondeductible. For deductible gifts, be sure to keep a copy of the purchase receipt and note on it the business purpose for making the gift or the benefit you expect to receive, as well as the name of the person to whom you gave the gift, his/her occupation or title, or some other designation that will establish your business relationship to the individual. Business Equipment – Since equipment is considered a capital expenditure, it has to be depreciated. That is why lumping equipment together with supplies is not a good idea. This is true even when you elect to expense equipment purchases under Sec. 179 or claim bonus depreciation. If the purchases are not reported properly, the IRS could rule that the expense was improperly characterized. If that is the case, you would not be entitled to the deduction claimed on your return. There could be other repercussions, leaving you with no current deduction at all. Ordinary and Necessary – To be deductible, an expense must be ordinary and necessary. An expense is “ordinary” if it is customary and conventional for the taxpayer’s line of business. A “necessary” expense is helpful in the taxpayer’s business; but it need not be indispensable. Meals and Lodging – When traveling for business, lodging is 100% deductible but the away-from-home meals deduction is limited to 50% of the cost.* So, if the meals are charged to a hotel room, they must be accounted for separately, and keeping a copy of the statement from the hotel that shows the charges, as well as a credit card receipt or other payment receipt, is advisable. Entertainment at Sports Events and Theaters – Entertaining customers at sporting events and theaters is commonplace but as a result of the Tax Cuts & Jobs Act, which became effective in 2018, a tax deduction is no longer allowed for entertainment expenses. However, the Act did retain a deduction for business meals that are directly related to or associated with the active conduct of your business. The term “directly related” means that actual business discussions were conducted during the meal and you anticipated a specific business benefit from the meal. The term “associated with” is more liberal and includes meals either preceding or following a bona fide business discussion. In either case, the business deduction continues to be 50%* of the actual expense. Also remember that business meals must be documented, including the amount, business purpose, date, time, place and names of the guests as well as their business relationship with you. * However, for 2021 and 2022, the cost of food and beverages provided by a restaurant as a business meal is fully deductible. Home Office Deductions – There are two methods for deducting the business use of a home. One is the conventional method of prorating the expenses (with some limitations) of the home by multiplying the allowable expenses times the business use square footage divided by the total square footage of the home. The other method, referred to as the simplified method, allows a $5 per square foot deduction (maximum 300 square feet) without having to keep records of expenses. Both methods have the same eligibility requirements.

Planning on flipping houses? Make sure to learn about the tax treatments of dealers, investors, and homeowners. Check out this helpful video for a quick summary of what you should know. .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%; }

Article Highlights: Reporting Sole Proprietorships on Your 1040 Business Checking Account Local Business Licenses Resale Permits & Payroll Reporting Personal Liability Limited Liability Company Registration If you are considering starting a business, the simplest and least expensive form of business is a sole proprietorship. A sole proprietorship is a one-person business that reports its income directly on the individual’s personal tax return (Form 1040) using a Schedule C. There is no need to file a separate tax return as is required by a partnership or corporation. Generally, there are very few bureaucratic hoops to jump through to get started as a sole proprietorship. However, we strongly recommend that you open a checking account that is used solely for depositing business income and paying business expenses. You will also need to check and see if there is a need to register for a local government business license and permit (if required for your business). If you are conducting a retail business, you will need to obtain a resale permit and collect and remit local and state sales taxes. If you hire employees, you will need to set up payroll withholding and remit payroll taxes to the government. Before you can do that, however, you’ll need to apply to the IRS for an employer identification number (EIN) because you can’t just use your Social Security number for payroll tax purposes. An EIN can be obtained online at the IRS website or by completing a paper Form SS-4 and submitting it to the IRS. As a sole proprietor, you can also very simply set aside tax-deductible contributions for your retirement.

Did you miss the $10,200 unemployment benefit exclusion on your tax return? No worry, the IRS has started reprocessing and sending refunds back to affected taxpayers. For more information, watch this video. .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%; }

Article Highlights: Roth IRA Contribution Limitations Converting a Traditional IRA to a Roth IRA Circumventing the Limitations Back-Door Roth IRAs Pitfalls of a Back-Door Roth IRA The “All IRAs Are One” Rule Many individuals who are saving for retirement favor Roth IRAs over traditional IRAs because the former allows for both accumulation of account earnings and post-retirement distributions to be tax-free. In comparison, contributions to traditional IRAs may be deductible, earnings are tax-deferred, and distributions are generally taxable. Anyone who has compensation can make a contribution to a traditional IRA (although the deduction may be limited). However, not everyone is allowed to make a Roth IRA contribution. High-income taxpayers are limited in the annual amount they can contribute to a Roth IRA. The maximum contribution for 2021 is $6,000 ($7,000 if age 50 or older), but the allowable 2021 contribution for joint-filing taxpayers phases out at an adjusted gross income (AGI) between $198,000 and $208,000 (or an AGI between $0 and $9,999 for married taxpayers filing separately). For unmarried taxpayers, the phase-out is between $125,000 and $140,000. However, tax law also includes a provision that allows taxpayers to convert their traditional IRA funds to Roth IRAs without any AGI restrictions. But there is a price to pay for such conversions: to the extent the contributions to the traditional IRA had been deducted, the conversion is taxable. Otherwise, the IRA owner would have a double benefit – a deduction when the funds were contributed to the traditional IRA and no tax when distributed from the Roth IRA in the future. Although deductible contributions to a traditional IRA have AGI restrictions (for those who are in an employer’s plan), nondeductible contributions do not. Thus, higher-income taxpayers can first make a nondeductible contribution to a traditional IRA and then convert that IRA to a Roth IRA. This is commonly referred to as a “back-door Roth IRA.”