Can the IRS Garnish Social Security?

tax

There is a lot of confusion when it comes to this topic.

Most creditors cannot garnish federal benefits. This includes social security benefits. The federal government has a different set of rules than most creditors. Only the federal government can garnish your social security and other federal benefits.

Throughout my time in this industry, I have absolutely received more phone calls from people on social security being garnished than garnishments on regular income and many others in my industry will say the same.

The only explanation is that it is an easy form of garnishment because it is government to government. Another big confusion when it comes to social security is that it is nontaxable. This is true in some cases but if there is additional income then social security can become taxable.

No taxpayer regardless of additional income has all of their social security taxed.

It is either zero, 50% or 85%. If you have income between $25,000 and $34000 you may have to pay tax on up to 50% of your benefits. If you have more than $34,000 up to 85% of your benefits may be taxable.

These two confusions can lead to some major tax problems.

I have dealt with many clients that because of these confusions were being garnished 15% of their social security check when they were already living in a tight financial situation. Many of these cases call in for help and they didn’t even know that they owed a tax debt or that they were even required to file.

I can think of one client that was completely blindsided by the IRS garnishment.

She also went a good amount of time without realizing that it was happening because she never received any notice from the IRS of not only the garnishment but never received notice that she actually owed a debt. Out of respect for her privacy, we will call her Ms. J.

Ms. J was a widow whose husband had died about 8 years back. Her had handled most of the bills and had always handled the yearly tax filing. She was left with a little savings and a pension from her deceased husband. She was 76 years old so at this point in her life she was retired and just receiving social security and this pension.

Her confusion and listening to people who were not tax professionals led her to the assumption that because she was retired and on social security, she did not have to file taxes.

Over these many years as her savings was being depleted, she downgraded her rental situations a few times moving from a rented home to a cheaper senior’s apartment.

Since she had moved since the last time that her husband had filed taxes the IRS no longer had her correct address. So, years went by, and she never heard anything, so she just figured her assumptions about filing were correct.

As her savings were depleting, she was becoming more dependent on the income she was receiving from her social security and the pension. She then started noticing that her social security deposit was smaller than it had been in the past.

When she received her statement, she saw that the IRS had been taking $270 monthly out of the $1800 that she normally receives. She said she began calling them but could never get through. She said she felt helpless and gave up but after a few months of trying.

Luckily a friend of hers had been a client of ours in the past and recommended that she give us a call. We knew we could help her, but we had to get some answers for her from the IRS first.

Tax Investigation

Ms. J was very excited to finally get some answers because at this stage she had no idea how much she owed or even how she owed it.

We had a good idea of what had happened because we had seen cases like this in the past, but every case is different, so we definitely wanted to get all of her information from the IRS and strategize using the facts. Within about a week we had all of her information from the IRS.

The IRS had been up to a lot in the background that she was unaware of.

It turns out that she should have been filing her taxes all of these years. If she was just receiving her social security, she would not have been required to file but since she was receiving the pension that totaled $24,000 for the year on top of that the social security had become taxable.

To make matters worse she had no withholdings set up on the social security or the pension.

After a few years of not filing these taxes, the IRS had begun filing missing years on her behalf. They had completed 3 substitutes for returns and still had 5 years that were unfiled that the IRS was looking for.

At this point the IRS had her owing a little over $37,000 for the three years filed with penalties, fees and interest. They had been garnishing her social security check for almost the whole past year and had taken a total of $2700 from her. The bad thing was that all of this had gone directly to penalties and interest.

people talking

The Resolution

The first step in her case would be to get her compliant with her filing requirements.

Our Enrolled Agents were able to convince the IRS to allow a temporary hold on the garnishment while we filed these years. Typically, the IRS will never release a garnishment, so this was definitely a gift.

We filed these years and because of the lack of the lack of withholdings she owed a significant amount more. The IRS took a few months to assess these filings, but they kept that hold on the garnishment while they did this. Once the filings were all assessed Ms. J owed about $70,000 altogether.

At first, she was horrified to be owing this much. She had gone from a few months ago thinking that she was not required to file head on into a major situation with the IRS.

At this point we already had a plan in place of how we were going to help her resolve her tax debt. Since she was now compliant with her filings, she had a lot of rights when it comes to owing the tax debt.

The next step was proving her ability to pay the debt back.

The first thing that needed to be done is that she had to fix her withholdings with her social security and the pension that she had. This would do two things.

First of all, it would stop her from owing any further tax debt. The programs that company of our nature utilize have a lot of benefits and savings, so they are one time get of debt programs. Also, present year tax debt is an expense that she has a right to pay prior to paying back taxes so paying these taxes first will lower her payment on the older debt.

After this we were able to show all other allowable expenses, and this gave us the ability to negotiate a very small payment for her. She would only be required to pay $25 a month. Since the is a statute of limitations on tax debt she will only end up paying back around $3000 on the $70,0000 that she owes.

Ms. J was very excited to say the least. She came to us not having a clue what was happening or how she could possibly owe the IRS and now she had an end date to everything.

Also, the garnishment was released and she was paying her very small payment that helped her afford all of her other allowable expenses. If you have not filed taxes out of fear that you will owe the IRS money that you don’t have, contact us for a free tax consultation.

Let’s see how we can help you resolve your situation so you can stop worrying about the IRS.

What Is Depreciation?

When operating any business, it always takes money to make money. This money that is being spent is your expenses and can actually be deducted on a taxpayer’s tax return.

There are many different expenses that can be deducted such as cost of goods, sales commission expenses, rent, salaries, or advertising expense. These are all expenditures that do not have a useful life beyond one year, which are generally deductible in the year incurred.

Today we are going to discuss how a business can expense larger items or fixed assets such as buildings or vehicles used in the course of business. This is where depreciation comes in.

Depreciation is an accounting method that allows a company to write off an assets value over a period of time, commonly the assets useful life. I will explain what types of business property can be depreciated and their recovery periods. There are also four different methods of depreciation that I will describe for you.

What types of property can be depreciated?

There are many different types of property that can be depreciated. For a property to be depreciated it must meet the following requirements:

  • The taxpayer must own the property
  • The taxpayer uses the property in business or income producing activity (e.g., rental property)
  • The property has a determinable useful life
  • The taxpayer expects the property to last more than one year

Land, Property placed in service and disposed of the same year and equipment used to build capital improvements all cannot be depreciated. Also, a taxpayer cannot depreciate personal use property. The depreciation deduction is allowed only on the part of the property used for a business or income producing activity.

There are many different properties that are depreciable, and they can all be categorized by their recovery period. The recovery period of each asset or property is the amount of time the IRS requires you to depreciate it. These periods theoretically track the actual useful life of an asset.

Depreciable properties generally fall into one of the following categories.

  • 5-year Property – Computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc.) automobiles, light trucks, appliances, carpeting, furniture used in residential rental real estate activity.
  • 7-year Property – Office furniture and fixtures (desks, file cabinets, etc.) This class also includes any property that does not have a class life and that has not been designated by law as being in any other class.
  • 15-year Property – Roads, fences and shrubbery.
  • 20-year Property – Includes improvements such as utilities and sewers.
  • Residential rental property (27.5 year property) – Real property that is a rental building or structure (including mobile homes) for which 80% or more of the gross rental income for the tax year is from dwelling units. It does not include a unit in a hotel, motel, inn, or other establishments where more than half of the units are used on a transient basis.
  • Nonresidential real property (39-year Property) – Commercial buildings and structures. Includes section 1250 property.

How Does Depreciation Work?

Tax payers must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. MACRS consists of two systems that determine how property may be depreciated.

  • General Depreciation System (GDS)- Generally, taxpayers must use GDS for property used in most rental activities. Recovery periods generally are shorter than under ADS.
  • Alternative Depreciation System (ADS)- ADS uses the straight-line method of depreciation. A taxpayer electing to use ADS may not change the election, which applies to all property in the same class that is placed in service during the year of the election. However, the election applies on a property-by-property basis for residential rental property ad nonresidential real property.

Taxpayers must continue to use the same depreciation method unless the IRS grants approval to change the accounting methods. The methods under MACRS for depreciating property are as follows:

  • Straight-line-depreciation– Deduct equal amounts throughout the recovery period.
  1. A taxpayer must use the straight-line method and a mid-month convention for residential rental property. In the first year of claiming depreciation for residential rental property, take depreciation only for the number of months the property is in use.
  • 200% or 150% declining balance– Allows for greater depreciation percentages in early years. Us the straight-line method in place of accelerated depreciation in the first tax year it provides and equal or larger deduction than either the 200% or 150% declining balance method.

Depreciation begins when the taxpayer places the property in service for the production of income.

taking money out of a wallet

Depreciation ends when either the taxpayer fully recovers the cost, or the property is retired from service, whichever happens first. Property is placed in service in a rental activity when it is ready and available for a specific use in that activity. Even if unused, it is in service when it is ready and available for specific use.

A convention is a method established under MACRS to set the beginning and end of the recovery period. The convention used determines the number of months that the taxpayer may claim as depreciation in the year the property was placed in service and in the year disposed.

Use the mid-month convention for residential rental property and nonresidential real property. For all other property, use the half-year or mid quarter convention, as appropriate.

  • Mid-month convention– Use a mid-month convention for all residential rental property and nonresidential real property. Treat all property place in service or disposed of during the month as placed in service or disposed of at the midpoint of that month.
  • Mid-quarter convention– Use a mid-quarter convention if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last three months of a tax year is more 40% of the total basis of such property placed in service during the year.

For this convention the MACRS property excludes nonresidential real property and property placed in service and disposed of in the same year, under this convention, treat all property place in service, or disposed of during any quarter of a tax year as placed in service or disposed of at the midpoint of the quarter.

  • Half-year convention– Use the half-year convention if neither the mid-quarter convention nor the mid-month convention applies. Under this convention, treat all property placed into service, or disposed of during a tax year as being placed in service, or disposed of, at the midpoint of that tax year.

If this convention applies, the taxpayer may deduct a half year of depreciation for the first year and the last year that the taxpayer depreciates the property. The taxpayer may deduct a full year of depreciation for any other year during the recovery period.

Depreciation is meant to simulate your property losing its value over time. You are basically getting the IRS to reduce your taxes by telling them that your property is losing value.

If the property does not lose value and you end up selling the property for more than the depreciated value this money has to be paid back. This is called depreciation recapture.

Depreciation recapture is the gain realized by the sale of depreciable property that must be reported as income for taxed purposes.

Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis. The difference between these figures is thus “recaptured” by reporting it as ordinary income and is taxed at a 25% recapture tax rate.

A business taxpayer may take an additional 100% special depreciation allowance often referred to as “bonus depreciation” on certain qualified property. The special depreciation allowance only for the first year the property is in service. Bonus depreciation is taken before the taxpayer figures regular depreciation under MACRS. Qualified property includes tangible property depreciated in 20 years or less.

For the 100% special depreciation allowance, the qualified property must be acquired and placed in service after September 27, 2017, and before January 2, 2023. A taxpayer may elect out of this additional first year depreciation deduction with respect to any class of property that is qualified property placed in service during the taxable year.

There are many reasons why it is a huge mistake to not claim depreciation. The IRS will expect a taxpayer to pay this recapture tax even if they have not taken the depreciation on the property. So, it would be a huge mistake for a taxpayer not to use a depreciation method as part of their business.

Also, by claiming depreciation you get money today that you can use to invest, even if you have to pay taxes in the future. Since you are going to pay the bill in the future you may as well get the benefits today.

Do I Have to Report Foreign Bank Accounts When I File?

filling up form

In today’s article we are going to discuss the reporting requirements of for foreign accounts held by taxpayers.

There are two different forms that possibly need to be filled out by a taxpayer holding a foreign account. These two different forms have different requirements for who needs file. These two forms are the FATCA Form 8938 and the FBAR form 114 and if a taxpayer meets the requirements with their foreign held accounts, they must file this form on or before April 15th of each year.

These forms each have different filing requirements so I will separately break down in detail when a taxpayer is required to file and to whom each filing needs to be submitted.

It is also very important to know that the filing of one form is not a replacement for the filing of the other. Some taxpayers may only be required to file one, while some may be required to file both forms.

FACTA Requirements (Form 8938)

FACTA or the Foreign Account Tax Compliance Act is a tax law addressing tax noncompliance by US taxpayers with foreign accounts by focusing on the reporting by US taxpayers and foreign financial institutions.

In general, federal law requires US citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.

In most cases, affected taxpayers need to complete and attach Schedule B to their tax returns. Part 3 of Schedule B asks about the existence of foreign accounts, such as bank and security accounts and generally requires US citizens to report the country in which each account is located.

In addition, certain taxpayers have to complete and attach to their return form 8938 Statement of Special Foreign Financial Assets.

US citizens and certain non-residents as well as certain US corporations, trusts and partnerships who have an interest in foreign financial assets and meet the reporting thresholds are required to file this form with the IRS.

The threshold for qualified Single or Married filing Separately taxpayers living in the US is the value of the assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year.

The threshold for a married individual filing jointly is a taxpayer who holds an account with the total value of assets of more than $100,000 on the last day of the tax year or more than $150,000 at any time during the year.

The threshold for taxpayers living outside of the United States is different.

A taxpayer filing Single or Married filing Separately and is living outside the US must file this form if the value of the assets was more than $200,000 on the last day of the tax year or more than $300,000 anytime during the year.

A taxpayer that is filing married filing jointly is required to file this form if the value of the assets was more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

This form is attached to your annual return and due by the expat tax filing deadline including any allowable extensions. If not received by the deadline there can be a penalty of up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after the IRS notice of failure to disclose is sent. This penalty holds a maximum penalty of $60,000 and criminal penalties may apply also.

FBAR Requirements (Forms 114)

FBAR refers to Form 114, Report of Foreign and Financial Accounts that must be filed with the Financial Crimes Enforcement Network (FinCen), which is a bureau of the Treasury Department.

FinCen Form 114 is used to report a financial interest or signature authority over a foreign account. The due date for filing the FBAR is April 15. FinCen will grant filers failing to meet the FBAR annual due date of April 15th an automatic six-month extension to October 15th each year.

Generally, an account at a financial institution located outside of the United States is a foreign financial account. If the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the year it must be reported. This is a cumulative amount so if you have two different foreign accounts with a combined account balance greater than $10,000 at any one time during the year, you will need to report both accounts.

There are certain accounts or certain situations when a FBAR filing is not required.

  • Correspondent/Nostro accounts,
  • Owned by a governmental entity,
  • Owned by an international financial institution,
  • Maintained on a United States military banking facility,
  • Held in an individual retirement account (IRA) you own or are beneficiary of,
  • Held in a retirement plan of which you’re a participant or beneficiary, or
  • Part of a trust of which you’re a beneficiary, if a U.S. person (trust, trustee of the trust or agent of the trust) files an FBAR reporting these accounts.

You don’t need to file an FBAR for the calendar year if:

  • All your foreign financial accounts are reported on a consolidated FBAR.
  • All your foreign financial accounts are jointly-owned with your spouse and:
  • You completed and signed FinCEN Form 114a authorizing your spouse to file on your behalf, and your spouse reports the jointly-owned accounts on a timely-filed, signed FBAR.

It is very important to remember that this form is not filed with your return and is not submitted to the IRS.

You must file the FBAR electronically through the Financial Crimes Enforcement Network BSA E-Filing System.

using laptop

If you do not want to e-file then you must contact FinCen to request an exemption from e-filing. If they approve you then they will send you the paper FBAR form to complete and mail to the IRS at the address in the form’s instructions.

Married taxpayers are able to file a single FBAR with their spouse only if either none or only one of you own a separate account. Otherwise each spouse must file their own form.

If you are required to file, the FBAR and fail to do so on time or if you do not correctly report your foreign accounts you can be subject to a penalty of up to $10,000.

If you knowingly fail to file, meaning you were fully aware of your requirement and you failed to do so you could get hit with a penalty up to $100,000 per violation or even higher depending on your account balances at the time of the violation.

Persons required to file an FBAR must retain records that contain the name in which each account is maintained, the number of other designations of the account, the name and address of the foreign financial institution that maintains the account, the type of account, and the maximum account value of each account during the reporting period.

These records must be retained for a period of 5 years from April 15th of the year following the calendar year reported and must be available for inspection as provided by law.

How does the IRS & FinCen Catch Avoiders?

The Foreign Account Tax Compliance Act also obliges foreign banks to report their American account holders to the IRS including their bank balance.

As of June 2016 197,000, foreign financial institutions were signed up to comply.

This means that the IRS knows about more or less all American financial and bank accounts abroad, including their balances, along with the name and address of their account holders. The IRS can now simply cross reference this data with FBAR filing data. Much like the way they seek out taxpayers for unreported income.

Streamlined Filing Compliance Procedures

Filing an FBAR late or not at all is a violation and may subject you to penalties.  If you have not been contacted by IRS about a late FBAR and are not under civil or criminal investigation by IRS, you may file late FBARs and, to keep potential penalties to a minimum, should do so as soon as possible.  To keep potential penalties to a minimum, you should file late FBARs as soon as possible. If you were truly not aware of your filing obligations, there is a voluntary disclosure program that can possibly help you catch up with your filing and possibly pay any back taxes owed without penalty.

In conclusion it is very important that all foreign accounts are reported to the IRS and the Financial Crimes Enforcement Network. If you do not understand the requirements or how to file then you should seek the advice of a true tax professional.

Enrolled Agents and CPA’s have the licensing and knowledge to properly advise you. If you have failed to file these forms and meet the requirements for either the FBAR or FACTA and have further questions or are ready to fix your situation contact us for a free tax consultation.

Let’s see how we can help you resolve your situation so you can stop worrying about the IRS.

How the IRS Tax Collections Process Works

man reading his notice from the IRS

The whole world has been in the grasp of the Coronavirus for the past two years. During this time, the government has done many things to try and aid people financially. There have been three different stimulus checks sent out, the federal government provided extra money for unemployment benefits on top of what the states normally provided, and they provided many other funding programs to assist those who were struggling financially. They even recently made $10,200 of the unemployment compensation that a person received during 2020 tax-free. 

The IRS also took a huge step back in collection activities and even suspended many active installment agreements. Beginning in 2020 however, they gradually resumed collection efforts but still left many of their collection systems idle including involuntary collections such as garnishments and levies.

In June of this year, the IRS released a notice stating they felt that the current economic situation deemed that they could resume full collection activity to maintain a fair and just taxing system. So, they began sending collection letters on June 15th. A sequence of letters is usually sent notifying the taxpayer where they are in the collections process in order to give the taxpayer an opportunity to either pay the tax debt, work out some sort of payment arrangement with the IRS, or hire representation to enforce their rights on the repayment of the tax debt.

 

The Notice of Balance Due

Typically, the sequence of these letters would begin with the filing of the taxes on or before April 15th. Once the IRS processes your tax return or if the IRS has made a change to your return, an initial notice is sent out. This is called a Notice of Balance Due and will either be a Notice CP501, CP503, or CP504. This year, the IRS started sending out these notices on June 15th.

These are not threatening letters. The notices explain how much you owe, when your payment is due, and your payment options. It also tells you how to contact them if you disagree with the amount owed. At this point, you can request a collection due process hearing using Form 12153. 

You typically have 30 days from receipt of the first letter to dispute the debt with the IRS. Afterward, notices are sent sequentially every 4 weeks until the balance is paid in full. If not, the IRS will begin taking collection action.

At this point, you have a few options. If you can afford to pay the tax debt in full, that is always the best course of action. Anytime there is an outstanding debt with the IRS, it is subject to penalties, fees, and interest that typically continue to accrue until the debt is satisfied. 

If you cannot pay the balance in full but you do have the means to pay over time, there are short-term and long-term payment arrangements available. 

If you do not have the income to support the payment required in these plans, there are also hardship programs available. If an inability to pay can be proven, you may qualify for a reduced payment or even a full-on hardship status, otherwise known as a “currently non-collectible” status or CNC. In a CNC status, you will not be required to make a payment on the tax debt until your financial situation improves and you can afford to pay. 

Another hardship program that is available with the IRS is the Offer in Compromise. This is where the IRS may agree to accept a lesser amount than what is owed and forgive the remainder of the tax debt.

A taxpayer can absolutely deal directly with the IRS on their own and try to take advantage of any of these programs. Like everything else in life, you can take a chance and try it on your own or you can hire a tax professional that does this every day and is thoroughly knowledgeable about tax law and the taxpayer rights involved.

 

The Notice of Intent to Levy

If a taxpayer ignores these letters and does not either hire representation to respond to the IRS or contacts them directly, they will then receive a Notice of Intent to Levy, known as Notice CP504. The IRS may give you this notice in person, leave it at your home or place of business, or send it to your last known address by certified or registered mail. 

This Notice of Intent to Levy is an important step and one to be taken seriously because it satisfies the requirement of the government to notify the taxpayer before it begins seizing assets. Interestingly, there is no actual requirement stating that the letter must be received by the taxpayer. If the IRS mails the notice to the taxpayer at their last known address, that action satisfies their legal obligation and they can then pursue collections. But until this notice is sent, the IRS cannot use involuntary collections against a person.

A Notice of Intent to Levy may appear to be very threatening but it is not meant to scare a taxpayer to pay the amount they owe. It is simply a legal notice from the IRS stating that they plan to use involuntary collections to collect on the tax debt. 

If a taxpayer has received this notice, their situation is now very serious. This is the point when a taxpayer must either take steps to resolve the matter directly with the IRS or hire representation because the IRS is literally telling the individual what they are about to do–enforce collections. 

If the taxpayer does not respond to this notice, the taxpayer’s case is either sent to the Automated Collection System (ACS) or to a Revenue Officer for collections. Some accounts may initially be assigned to ACS only to be transferred to a Revenue Officer later.

 

The IRS Automated Collection System

The Automated Collection System is comprised of many large call centers located in multiple cities where ACS Agents take incoming calls from taxpayers, review cases, and issue notices of tax debt and collection actions on behalf of the IRS. Most tax debts below $100,000 are assigned to ACS. 

The cases that are in ACS are not assigned to specific agents but exist within the system and are fielded by agents when the need arises. The system uses a computer program that ranks and selects tax debts based on the amount owed and the age of the debt. This means that the collection process of the ACS can be very sporadic.

I have helped clients that owed large amounts of money to the IRS and also had unfiled taxes but somehow flew under the radar of the ACS for years. I have also spoken to many sweet little old ladies living solely on social security income barely making it by that owed very small balances to the IRS but were being garnished. So, there is no real rhyme or reason as to who the system selects and who flies under the radar.

The Automated Collection System contains computerized records of a taxpayer’s sources of income and assets such as their wages, bank accounts, certificates of deposit, and accounts receivable, all of which can be seized administratively from them. Since the Notice of Intent has already been sent to the person, the system can issue wage garnishments and bank account levies without any further warning. 

ACS may also file a Federal Tax Lien against a taxpayer to secure their interests in any property that they may hold. The lien is put in place so that if the taxpayer tries to sell or refinance a property such as their house, the IRS will receive the proceeds to pay the tax debt.

 

When a Revenue Officer Gets Involved

If ACS is unable to recover the debt, the debt may then be assigned to a Revenue Officer for further collections. In cases that involve large tax debts of $100,000 or more, the case typically goes directly to a Revenue Officer and completely skips ACS. If you get to this point in the process and a Revenue Officer has been assigned to your case, there is no more ignoring the situation. 

A Revenue Officer also gets involved when the tax debt stems from payroll taxes. If an employer withholds taxes but does not turn them over to the IRS, this is generally viewed by the IRS as stealing. If not paid upon demand, these debts are typically assigned directly to a Revenue Officer. 

Revenue Officers have the power to issue summons to a taxpayer or business and demand the taxpayer show up at their office at a certain time with records in hand. They are also usually local and can make surprise visits to a taxpayer’s home or place of employment. If you refuse to respond to a Revenue Officer, they can involve IRS district counsel who then can get a court order and force you to comply with the summons. 

If your case gets to this point, it is at the highest level within the IRS Collections System and I highly recommend that you hire a legitimate tax professional immediately to represent you or your business.

 

Be Proactive, Not Reactive

Throughout my time in this industry, I have dealt with many different types of people. I have always used one main classifier to describe how a person deals with the IRS: a taxpayer is either proactive or reactive. 

Proactive people don’t get themselves into these types of situations or if they do they immediately deal with the situation when a notice arrives. During this part of the collections process when notices are being sent, you have a lot of rights. You can either deal directly with the IRS on your own or hire a true tax professional to represent your rights in the collections process. 

Then there is the reactive person. This is the type of person that ignores all of the IRS letters either out of fear or with the thought that the IRS really won’t do anything about their debt. This type of taxpayer tries to deal with the situation after the IRS has begun a garnishment, froze their bank account, or a Revenue Officer is knocking at their door. At this point, they still have rights but these cases are much harder to deal with. 

The most important piece of advice I can give is to be proactive when it comes to dealing with the IRS. In their recent budgets, the government has allocated extra funding to the IRS to enhance their collections, so the chance of flying under the radar is a lot lower now.

And if you do have a large tax debt, it will always financially benefit you to hire a legitimate tax professional to be your advocate.

If you have received a notice from the IRS or they have already begun taking collection action against you, contact us today for a free consultation so that we can protect your rights and finances and help you resolve your tax issues ASAP.

 

How to File a Final Tax Return for Decedents

a widow filing taxes for her late husband

The last thing that anybody wants to think about when they lose a loved one is filing their taxes. Unfortunately, if the deceased were normally required to file, then someone would be required to file a final tax return on their behalf.

In many of these situations, the decedent may be leaving a spouse behind that is unaware of how the decedent handled their taxes. In other cases when there is not a spouse or the spouse is unable to handle the situation, the courts or the will of the decedent will appoint an executor. This person would then be responsible to file the final return or in some cases multiple returns if some had not been filed. 

In this article, we will discuss when a decedent is required to file a tax return and what forms must be filed. We will also talk about some of the credits and exemptions that can be utilized on estate returns when those are required.

 

When Is a Decedent Tax Return Filing Required?

The first step for either the spouse or executor would be figuring out what needs to be filed. The requirements to file for a decedent are the same as for a normal tax year. The decedent would be required to file if they make more than the standard deduction for that year. 

The standard deduction changes every year but for the 2020 tax year, you most likely must file if income was above $12,400 or $24,800 for those married filed jointly. This includes all money, goods, and property the deceased received from a job, pension, investments, disability payments, IRA’s, and retirement plans. For people with larger incomes, a decedent’s social security may also be taxable. 

The final tax return of an individual should only cover income received up to the date of death. Income received after that, such as income received from the sale of assets sold after the date of death may have to be reported on a separate return for the deceased person’s estate or trust.  If the decedent has income below the threshold, then they are not required to file but be sure to look at credits and withholdings to see if any refund would be due.

It is also especially important to make sure that tax returns for the previous years have been filed. If the decedent has not done so and has requirements, you may also have to file individual income tax returns for the years preceding the death. In such cases, you can hire a tax professional and they can do a Tax Investigation. This is when either an Enrolled Agent, CPA, or Tax Attorney can contact the IRS on behalf of the decedent and do a full compliance check and request the master tax file. If you are trying to sort this out on your own, you can also obtain verification of non-filing and certain income documents of the decedent from the IRS using IRS Form 4506-T which is called the Request for Transcript of Tax Return.

 

How Do You File a Decedent’s Final Tax Return?

The final tax return would be for the year of death beginning January 1st until the date of death and whatever income was received during that time up to the date of death. The filing must be done by the due date of April 15th. If this deadline cannot be met then the same extension of six months is allowed. This extension only changes the due date of the filing. If taxes are owed, they are still due by April 15th. The same 1040 tax form is used for filing and the person’s income is still taxed just as if the person was alive. The same tax rates apply and they can claim the same deductions and credits as normal.

The difference from a normal tax filing is that the word “Deceased” must be written across the top of the 1040 form along with the person’s name and date of death. If the court has appointed a personal representative, that person must sign the return. If it is a joint return, the surviving spouse must sign it. If the court has not appointed a personal representative, the surviving spouse would need to sign the return and write in the signature area “Filing as the surviving spouse”. 

If the court has not appointed a personal representative and there is no surviving spouse, the person in charge of the decedent’s property must file and sign the return as the personal representative. If you are signing the tax return and are not the surviving spouse, you would have to attach the IRS Form 56 and attach it to the 1040 form. This form is used to notify the IRS of the creation or termination of a fiduciary relationship. Also, you must attach to the 1040 form a copy of the certificate that shows the official appointment as executor and a copy of the death certificate.

If the decedent was married at the time of death, the decedent and surviving spouse are considered married for the whole year for filing status purposes. A surviving spouse who does not remarry before the end of the tax year in which the decedent died may file a joint return with the decedent. The return can include the full standard deduction based on the filing status of the decedent. If the surviving spouse remarries during the year, they must file apart from the decedent. The decedent must file separately but the surviving spouse can file a joint return with the new spouse.

 

What If the Decedent Owes Taxes or Is Owed a Refund?

If there are taxes owed after filing, then they must be paid prior to distributing one’s estate. This can be done with a payment by check, debit card, credit card, or electronic funds transfer. 

If the decedent is owed a refund and has a surviving spouse, then the spouse can claim the refund. If the taxes are being filed by an executor, the executor may claim the refund using IRS Form 1310.

 

Can You Take Deductions and Credits for a Decedent?

When it comes to filing the final return, the same rules apply when it comes to deductions and credits. The full standard deduction may be claimed if deductions are not itemized.  Medical expenses that were paid before the decedent’s death are deductible, subject to limits on the final income tax return if deductions are itemized. This includes expenses for the decedent as well as for the decedent’s spouse and dependents.

Medical expenses that were not paid before death are liabilities of the estate and appear on the federal estate tax return, IRS Form 706. If the estate pays medical expenses for the decedent during the one-year period beginning with the day after death, the executor may elect to treat all or part of the expenses as paid by the decedent at the time the decedent incurred them. An executor making this election may claim all or part of the expenses on the decedent’s income tax return as an itemized deduction rather than on the federal tax return.

A decedent’s net operating loss deduction from a prior year and any capital losses including capital loss carryovers can be deducted only on the decedent’s final income tax return. An unused net operating loss or capital loss is not deductible on the estate’s income tax return. The individual filing a decedent’s tax return may claim any tax credits that applied to the decedent before death on the decedent’s final income tax return. Certain credits like the Earned Income Tax Credit and the Child Tax Credit would still apply even though the return covers a period of fewer than 12 months.

 

If the Decedent Died During Military Action

If the decedent is a member of the US Armed Forces at the time of death and dies from wounds or injury incurred while a member of the US Armed Forces due to a terrorist or military action, the decedent may qualify for forgiveness of his or her tax debt. The forgiveness applies to the tax year the death occurred and any earlier tax year in the period beginning with the year before the year in which the wounds or injury occurred. The beneficiary or trustee of the estate of a deceased service member does not have to pay taxes on any amount received that would have been included in the deceased member’s gross income for the year of death.

 

Getting Help

In conclusion, it is an emotional time when losing a loved one, and dealing with their tax situation can be challenging. I always recommend seeking the help of a true tax professional. An Enrolled Agent or a CPA has the knowledge and licensing to properly advise you and assist you in the final filing for the decedent. 

If you are still trying to navigate this on your own and need more information, please check out the IRS Publication 559. This publication is designed to help those in charge of the property of an individual who has died.

 

A Guide to the Qualified Business Income Deduction

screenshot of the Section 199A page on irs.gov

In 2017, there were major changes to tax law. The Tax Cuts and Jobs Act included reductions in tax rates for businesses and individuals, increasing the standard deduction and family tax credits, eliminating personal exemptions, and making it less beneficial to itemize deductions, limiting deductions for state and local income taxes and property taxes. 

With these reductions of tax rates for businesses, it was felt that this would be very fair for small businesses. Most small businesses are set up as pass-through entities. This is where the income tax is passed through the entity and the tax responsibility is left on the owner or owners as individual taxpayers. To level the playing field, Section 199A was added to the Act.

 

What Is Section 199A?

Section 199A details an individual taxpayer deduction for qualified business income. It is called the Qualified Business Income Deduction. This deduction allows eligible self-employed and small business owners to deduct up to 20% of their business income, REIT dividends, or qualified publicly traded partnership (PTP) income on their individual tax returns. The Qualified Business Income Deduction lowers your taxable income, which is the amount used to determine how much you owe in taxes. Unless changes to this law are made, it is to be available for tax years 2018-2025.

The 20% Qualified Business Income Deduction is calculated as the lesser of 20% of the taxpayer’s qualified business income, plus (if applicable) 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income or 20% of the taxpayer’s taxable income minus net capital gains. The 20% deduction reduces federal income tax but not Social Security or Medicare taxes. It also does not reduce self-employment tax.

 

Who Qualifies for the Qualified Business Income Deduction?

The 199A deduction is provided for sole-proprietorships, partnerships, S-corporations, trusts, or estates. Income from C-corporations, any trade or business whose principal asset is the reputation or skill of one or more of its employees or owners or services you performed as an employee of another person or business does not qualify. 

This does not mean that any business income from these entities qualifies for the 20% deduction. This deduction comes with significant qualifications. This is what they call an “above-the-line” deduction, so it does not matter if you take the standard deduction or if you itemize on a Schedule A. The deduction is only for pass-through entities and qualified business income from these entities. It is not available for wage income and can be limited by which type of business in which you are engaged, your taxable income, W-2 wages paid, and the unadjusted basis immediately after acquisition of qualified property.

The Qualified Business Income Deduction is the net number of qualified items of income, gain, deduction, and loss from any qualified trade or business. This includes but is not limited to the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans. The Qualified Business Income Deduction is the taxable income that comes from a domestic business. If a business has both domestic and foreign income only the domestic income qualifies.

 

What Does Not Qualify For the Qualified Business Income Deduction?

The Qualified Business Income Deduction does not include items such as:

  • Items that are not properly includable in taxable income
  • Investment items such as capital gains or losses or dividends
  • Interest income not properly allocable to a trade or business
  • Wage income
  • Income that is not effectively connected with the conduct of business within the United States
  • Commodities transactions or foreign currency gains or losses
  • Certain dividends and payments in lieu of dividends
  • Income, loss, or deductions from notional principal contracts
  • Annuities, unless received in connection with the trade or business
  • Amounts received as reasonable compensation from an S corporation
  • Amounts received as guaranteed payments from a partnership
  • Payments received by a partner for services other than in a capacity as a partner.
  • Qualified REIT dividends
  • Publicly traded partnership (PTP) income

There is a safe harbor rule for 199A purposes available to individuals and owners of pass-through entities who seek to claim the deduction under section 199A with respect to a rental real estate enterprise. Under the safe harbor, a rental real estate enterprise will be treated as a trade or business for the purposes of the Qualified Business Income Deduction if certain requirements are met.

Also, there are income limitations to qualify for the deduction.

 

2020 Qualified Business Income Deduction Income Thresholds

 

Filing StatusIncome Threshold (limit for the full deduction)Income Limit for a partial deduction
Single$163,300$213,300
Head of household$163,300$213,300
Married filing jointly$326,600$426,600
Married filing separately$163,300$213,300

 

If you are below these thresholds, it is very straightforward and you should qualify for the 20% deduction on your taxable business income. 

If you are above these limits, it gets confusing as to who qualifies and who does not. Above those limits, your ability to claim the deduction depends on the precise nature of your business. Even if your business qualifies, you may not get to enjoy the full 20% break as the deduction phases out for certain types of businesses.

 

Determining If Your Business is an SSTB

If the business owner’s taxable income is above the income limits, you will need to determine if the business is a specified service trade or business (SSTB). An SSTB is a trade or business involving the performance of services in the fields below:

  • Accounting
  • Actuarial science
  • Athletics
  • Brokerage services
  • Consulting
  • Financial services
  • Health services, such as performed by doctors and nurses
  • Investing and investment management
  • Law, including lawyers
  • Performing arts
  • Trading

Many businesses offer a multitude of services or products. A business will not be considered an SSTB if less than 10 percent of the gross receipts, (5 percent if gross receipts are greater than $25 million) of the trade or business are attributable to the performance of specified services. 

Many business owners are trying workarounds to restructure their businesses by splitting up their business into two or more entities with the same owner to separate the SSTB income and non-SSTB income and avoid missing out on part or all the Qualified Business Income Deduction. 

To prevent this workaround there are set rules that if a non-SSTB has 50% or more common ownership with an SSTB and the non-SSTB provides 80% or more of its property or services to the SSTB, the non- SSTB will by regulation be treated as part of the SSTB.

 

What If Your Taxable Income is Above the Threshold?

If your taxable income is equal to or higher than the threshold, your maximum possible deduction is subject to limitations. How much you can get will decrease based on your income. 

The deduction considers multiple factors, and the instructions will walk you through them. If the income is from a specified service trade or business (an SSTB), it does not qualify for the deduction once it passes the maximum threshold. 

If you are between the thresholds and an SSTB, the deduction will be phased out until it no longer exists. If you are not an SSTB and you go over the phase-in range, your deduction could be limited by your W-2 wages paid or the UBIA of qualified property held by a trade or business.

There are many more factors that affect a taxpayer’s qualifications for the deduction and factors that set limitations on the percentage one can deduct. The IRS has noted that 95 percent of small business owners will fall below the thresholds and not have to worry about the limitations. If you are below the threshold, you would use IRS Form 8995 (Qualified Business Income Deduction Simplified Computation). 

If your taxable income is more than the income threshold then you would use IRS Form 8995-A (Qualified Business Income Deduction). Both of these forms take you through the process of adding up your qualified business income, qualified REIT dividends, and qualified PTP income. This will determine the amount of your deduction.

 

Are You Taking Advantage of the Deductions Available to You?

I am sure many questions are still left unanswered. This is one of the most complex tax laws not only from the 2017 Tax Cuts and Jobs Act but in all of the tax codes. The IRS website provides a lot more information if you’d like to dig in further.

The Treasury Inspector General for Tax Administration has identified nearly 900,000 returns filed for 2018 that did not take the Qualified Business Income Deduction even though it appeared that they qualified. In my past articles, I have always recommended that a taxpayer seeks advice and assistance from a true tax professional. 

When it comes to the 199A deduction, it is imperative that a business owner has the correct tax professional assisting them especially if they are above the limitations. Enrolled Agents, CPA’s and Tax Attorneys can make sure you are not missing out on this valuable deduction and formulate strategies in the operation of the business that will increase the likelihood of you being able to benefit from the Qualified Business Income Deduction. Most importantly, as complex as it is, they can make sure that your tax return is filed correctly so that you get the correct deductions and don’t have to worry about a future IRS examination or an IRS audit.

 

Avoid Being a Victim of IRS Scams

a worried woman on the phone with an IRS scammer

Over my many years in this industry, I have encountered petrified taxpayers that reach out looking for help that feels the IRS is bearing down on them. This is what the IRS does, so in some cases, it is 100% valid to be scared. 

With others that contact me, I ask some simple questions and come to realize that they have been the victim of an IRS scammer. In any situation when people are vulnerable you will always have nefarious people in our society trying to take advantage. 

Thousands of people fall victim to these scammers every year. An FTC (Federal Trade Commission) report said that these scams have cost Americans some $667 million in 2016.  

In today’s article, I am going to discuss things to look out for when you feel you are communicating with the IRS to avoid falling victim to these scammers. I will go on to provide and describe some of the most common scams to look out for from people calling and posing as the IRS all the way to companies in our industry who scam taxpayers in need of help.

The IRS has provided a list they call “the dirty dozen”. The dirty dozen list focus’ on scams that target taxpayers. The IRS urges everyone to be on guard and look out for others.  Taxpayers should all be aware of these different scams and know that they are legally responsible for what is put on their tax returns even if it is prepared by someone else. 

Make sure when hiring a tax professional to look at their online reviews to see what previous clients have said about them and to make sure they have the correct licensing and educational background to properly help you. An Enrolled Agent and CPA (certified public accountant) are true tax professionals that can assist you. 

 

The Dirty Dozen IRS Scams

Phishing

Scammers utilize fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers through email about a tax bill, refund, or Economic Impact Payments. The IRS Criminal Investigations has seen a tremendous increase in phishing activity utilizing emails, letters, texts, and links. These schemes are blasted to large numbers of people to get personally identifying information or financial account information including account numbers and passwords.

Fake Charities

Criminals Frequently exploit natural disasters and other situations such as the current Covid-19 pandemic by setting up fake charities to steal from well-intentioned people trying to help in times of need. These schemes can start with a contact by telephone, text, social media, or in-person using a variety of tactics. They try to trick people into sending money or personal financial information. Legitimate charities will always be willing to provide their EIN (Employer Identification Number) which can be used to verify their legitimacy. You can search these directly on the IRS website. 

Threatening Impersonator Phone Calls

Scammers will call taxpayers posing as the IRS. They can threaten arrest, deportation, or license revocation if the person does not pay a bogus tax bill. These callers will often use robocalls which are text to speech recorded messages with instructions for returning the call. The IRS will never demand immediate payment, threaten, or ask for financial information over the phone or call about an unexpected refund or Economic Impact Payment.

Social Media Scams

Social media scams have also led to tax-related identity theft. The basic element of social media scams is convincing a potential victim that he or she is dealing with a person close to them that they trust via email text or social media messaging.

EIP or Refund Theft

Scammers will steal identity information and then file false tax returns or supply bogus information to the IRS to divert refunds to wrong addresses or bank accounts.

Senior Fraud

Seniors are more likely to be targeted and victimized by scammers than other segments of society. The IRS recognizes the pervasiveness of fraud targeting older Americans.

Scams Targeting Non-English Speakers

IRS impersonators and other scammers also target groups with limited English proficiency. These scams are often threatening in nature. Some scams also target those potentially receiving an Economic Impact Payment and request personal or financial information from the taxpayer.

Unscrupulous Tax Preparers

Dishonest tax preparers pop up every tax season committing fraud, harming innocent taxpayers, or talking taxpayers into doing illegal things that they regret later. Taxpayers should avoid what the IRS calls “ghost preparers”. This is where a tax preparer will not sign a tax return. 

All paid tax preparers must have a PTIN (Preparer Tax Identification Number) and must sign and include this PTIN on all returns. These types of preparers will promise inflated refunds by claiming fake tax credits, including education credits, the Earned Income Credit, and others. 

Taxpayers should avoid preparers who ask them to sign a blank return, promise a big refund before looking at the taxpayers’ records, or charge fees based on a percentage of the refund.

Offer in Compromise Mills

While there are many good tax relief companies out their anytime you have people in vulnerable situations you will have companies that prey on that. There is an extremely attractive IRS Program called the OIC (Offer In Compromise). This is where the IRS settles, takes a lesser amount, and forgives the remainder of the tax debt. This is a difficult program to qualify for. 

These unscrupulous companies oversell the program to unqualified candidates so they can collect hefty fees from taxpayers already struggling with debt. These companies will cast a wide net for taxpayers and charge them pricey fees and churn out applications for the program that they are unlikely to qualify for.

Fake Payments with Repayment Demands

A new method that scammers are tricking taxpayers with has emerged since the IRS has taken measures to crack down on identity theft. In the past scammers would steal a taxpayer’s personal information such as social security number and bank account information and then file fake returns with refunds directed to the scammer. With IRS cracking down and making sure refunds are going to the correct taxpayer these scammers will now make a call once the refund is issued posing as the IRS and tell the taxpayer they need to pay the money back to them to avoid trouble. These scammers typically demand payment with specific gift cards for the amount of the refund.

Payroll and HR Scams

These scammers use phishing techniques to steal Form W-2 and other tax information from tax professionals, employers, and taxpayers. They commonly use two methods which are business email compromise or business email spoofing. This has become more common since people have been working from home due to covid and more business communication is done through email.

Ransomware

Ransomware is malware targeting human and technical weaknesses to infect a potential victim’s computer, network, or server. Once infected ransomware looks for and locks critical or sensitive data with its own encryption. Victims typically are not aware of the attack until they try to access their data, or receive a ransom request in the form of a pop-up window.

 

How to Avoid Falling Victim to an IRS Scam

In conclusion, the IRS very rarely if ever makes phones calls or sends emails. They definitely do not do this as an initial interaction with a taxpayer. The IRS will never call you and threaten arrest nor will they send local police to arrest you. Ordinary taxpayers are not at risk of going to jail over unpaid taxes. If you receive contact from the IRS by these methods, it is most likely fraudulent. Even if the caller ID shows IRS does not mean it is really the IRS. Unfortunately, caller IDs can be easily spoofed to say whatever a caller wants.

If the contact is initiated via email do not respond or click any of the links. Forward any of these emails to phishing@irs.gov. If you receive a phone call, tell them you are busy and will call back shortly and ask for the caller’s badge number and name. Then contact the treasury department directly by calling its fraud hotline 1-800-366-4484.

If you receive a text that claims to be from the IRS, it is a scam. The IRS does not send text messages. If you receive a text claiming to be the IRS forward it to the IRS at 202-552-1226. If you feel you have been a victim of Identification theft, then you need to complete a form 14309 Identity theft affidavit.

If you really owe taxes, then make sure you are dealing directly with the IRS or have a legitimate tax professional working on your behalf. You can check if you owe right on the IRS website. 

If you feel that you want or need representation, make sure to investigate whatever company that you hire. Fortunately, with the internet, you can see through a company’s reviews how they have treated their previous clients. Also, make sure they have true tax professionals on staff who are licensed to communicate directly with the IRS on your behalf. Enrolled Agents, CPAs, and Tax Attorneys are your best choices to represent you.

 

What You Can Deduct from IRS, State, and Local Taxes

a 1040 tax return

When filing your taxes there are many ways to reduce your tax bill or ways to get yourself a bigger refund. This can happen using different credits and deductions that are available. 

This article will discuss different tax deductions that can be used on your tax return to reduce your taxable income. I will start off by discussing the choice of either using the standard deduction or itemizing your deductions. I will also discuss above the line deductions which can be used in addition to the standard deduction.

 

What is a Tax Deduction?

A tax deduction is a deduction that lowers a person’s or organization’s liability by lowering their taxable income. Deductions are typically expenses that the taxpayer incurs during the year that can be applied against or subtracted from their gross income to figure out how much they owed. There is always confusion about the difference between the deduction and a tax credit. Remember a deduction reduces your taxable income while a credit directly reduces your tax bill.

On a tax return, you can either take the standard deduction or you can itemize your deductions. You cannot do both. When making the decision to itemize your deductions or to take the standard deduction it is especially important that you evaluate your situation thoroughly to see which will better benefit you. 

It is much easier to take the standard deduction but if you qualify for many deductions the choice to itemize can equate to many tax dollars saved so take your time to review the different deductions that are available and which ones that you qualify for. If these deductions that you qualify for are greater than the standard for your filing status, then you have the answer to your question. 

Having a true tax professional to assist you in reviewing your situation to make this decision is recommended. I will start off with the standard deduction so you have the information on that choice to compare to the breakdown of the possible itemized deductions that you could qualify for.

 

What is the Standard Deduction?

The standard deduction is the portion of income not subject to tax that can be used to reduce your tax bill. Even if you have no other qualifying deductions the IRS allows you to take the standard deduction no questions ask. In the past, the decision to take the standard deduction or to itemize was much more difficult. In 2017, with the Tax Cuts and Jobs Act, the standard deduction was almost doubled making this decision much easier. This will remain in effect for 2018 through 2025. 

The amount of your standard deduction now is based on your filing status, age, and whether you are disabled or claimed as a dependent on someone else’s tax return. The standard deduction adjusts every year based on inflation. The allowable standard deduction for 2020 and 2021 is laid out below as seen on Nerd Wallet.

Filing status2020 tax year2021 tax year
Single$12,400$12,550
Married, filing jointly$24,800$25,100
Married, filing separately$12,400$12,550
Head of household$18,650$18,800

The standard deduction is higher for taxpayers who are 65 and older at the end of the year and/or blind. This extra deduction applies to taxpayers and spouses if married.  Increase the standard deduction by the following for each occurrence of the conditions above. 

For married filing jointly, married filing separately or qualified widow there would be an increase in the deduction by $1300 for 2020 and $1350 for 2021. 

For single or head of household filers, the increase would be $1650 for 2020 and $1700 for 2021. 

If a taxpayer is claimed as a dependent on someone else’s tax return is limited to the greater of $1,100 in 2020 or the individual’s earned income for the year plus $350.

 

Tax Deductions You Should Itemize

Itemized deductions are expenses that can be subtracted from adjusted gross income to reduce your taxable income and therefore reduce the amount of taxes owed. Such deductions would permit those who qualify the ability to pay less in taxes than if they had taken the standard deduction. Itemized deductions are listed on Schedule A of Form 1040. If you decide to itemize you must save all receipts in case the IRS decides to audit you because they can request proof. 

There are many different deductions that one may qualify for. If the amount of these deductions that you qualify for are more than the standard deduction and you have proof of all these deductions, then you should itemize.

State and Local Taxes

Taxpayers can deduct state and local real estate, personal property, and either income or sales taxes. For taxes 2018 through 2025 this deduction is limited to $10,000.

Mortgage Interest

Taxpayers can deduct home mortgage interest on the first $750,000 of mortgage debt. Homeowners can only deduct mortgage interest on home equity loans if the debt was used to buy, build, or substantially improve the taxpayer’s home that secures the loan. Homeowners may deduct mortgage interest on the primary and secondary properties.

Charitable Contributions

Taxpayers are allowed to deduct charitable contributions up to 60% of the adjusted gross income.

Medical Expenses

A taxpayer can deduct unreimbursed medical expenses that are more than 7.5% of their adjusted gross income for the tax year.

Long-Term Care Premiums

Long-term care insurance premiums are tax-deductible to the extent that the premiums exceed 20% of an individual’s adjusted gross income. There is a deduction limit based on your age and the insurance must be qualified.

Gambling Losses

A taxpayer can deduct gambling losses only to the extent of their winnings. You can not deduct more than you win.

IRA Contributions

A taxpayer can deduct qualified IRA Contributions from a Traditional IRA. The amount of the deduction may differ if a taxpayer or their spouse has a 401k as well.

Self-Employment Expenses

A self-employed taxpayer can deduct 50% of the amount that they are paying in self-employment taxes.

Student Loan Interest

A taxpayer can deduct up to $2500 of the interest paid on a student loan from their taxable income.

Casualty and Theft Losses

Any casualty or theft loss incurred because of a federally declared disaster can be reported on a Schedule A. Unfortunately, only losses of more than 10% of the taxpayer’s adjusted gross income are deductible.

Moving Expenses

If a taxpayer is in the military and the move is permanent and was ordered by the military then they can claim a deduction on unreimbursed moving expenses. They can claim travel and lodging expenses, the cost of moving household goods, and the cost of shipping cars and pets.

Educator Expense Deduction

If a taxpayer is a schoolteacher or other eligible educator, they can deduct up to $250 spent on classroom supplies.

 

Tax Deductions That Have Been Limited or Eliminated 

Many commonly used and well know deductions have been recently eliminated or limited. In the past, an employer could reimburse a taxpayer up to $20 a month tax-free for bicycle commuting expenses. There were also employer-related deductions for parking, transit, and carpooling. The 2017 Tax Cuts and Jobs Act suspended these benefits. 

Another common deduction was the expenses from a move. In the past when a taxpayer relocated for a new job, they could use the expenses not only from the cost of moving their possessions but the cost of travel as well. Beginning in 2018 this deduction is only allowable for specific situations and only allowable for taxpayers in the military. 

Also, in the past, a taxpayer that made alimony payments was able to receive a deduction for alimony paid and the person receiving the alimony would include the money as taxable income. With any divorce decree beginning in 2019 the payer will no longer receive a deduction and the spouse receiving no longer must claim alimony as income. 

The medical expense deduction has not gone away but the threshold has changed so that the expenses must exceed 7.5% of your adjusted gross income. In years past the threshold was 10%. 

The Tax Cuts and Jobs Act also set limitations on SALT Tax deductions. SALT Tax is state and local taxes. In the past the amount that a taxpayer could deduct was unlimited. Now the SALT deduction is limited to $10,000. 

 

Understand Which Tax Deductions You Are Eligible For

In conclusion with the rise in the standard deduction and the limitation in many of the itemized expenses the decision of which method to utilize has gotten easier but it is still difficult. Also, with the many recent changes, it is especially important that you understand what you are eligible for and what you are not if you are thinking about itemizing overtaking the standard deduction. Unless a taxpayer has mortgage interest and property taxes, significant charitable gifts, or a major medical event it would probably make more sense to take the standard deduction. 

As I always recommend when filing taxes and tax planning, it will always benefit a taxpayer to consult with somebody that has the knowledge and licensing to correctly advise them. An Enrolled Agent and a CPA (Certified Public Accountant) are the tax professionals that have the educational background to best advise a taxpayer.

 

How to Get the Child Tax Credit Early

parents with their two children

There have been many different programs made available by the government to help people get through these tough times. With the Covid-19 pandemic, there has been a record number of people on unemployment, and many small businesses and self-employed people had a serious loss of income. 

The government has provided benefits in the form of stimulus payments, adding an additional federal amount to people state unemployment and they have given many tax breaks as well.

This article will discuss the major changes to the Child Tax Credit through the American Rescue Plan. These changes may not only give taxpayers with qualified dependents a much larger amount, but it will also give them a portion of the money earlier. The American Rescue increased the amount received per qualified child from $2000 to $3000 or $3600 per child under the age of 6. It also makes this credit fully refundable. 

I discussed this increase in the amount possibly credited to taxpayers in a previous article.  Please refer to our June 2nd article on the Child Tax Credit for more information. The reason I am coming back to this topic today is to further discuss the efforts that the IRS is taking as we speak to disburse a portion of this early over the next six months to taxpayers in need.

Starting July 15, 2021, about 36 million American families will start receiving checks from the IRS. Taxpayers who are eligible for this credit will receive up to $1800 broken up equally over the next six months. They will be receiving half of the credit that they qualify for and then they can claim the other half when they file their tax return for 2021. This is a temporary change just for the 2021 tax year.

To qualify for advance Child Tax Credit payments, you, and your spouse if you filed a joint return must have:

  • Filed a 2019 or 2020 tax return and claimed the Child Tax Credit on the return: or
  • Given us your information in 2020 to receive the Economic Impact Payment using the Non-Filers: Enter Payment Info Here tool; and
  • A main home in the United States for more than half the year (the 50 states and the District of Columbia) or file a joint return with a spouse who has a main home in the United States for more than half the year; and
  • A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number; and
  • Made less than certain income limits.

The IRS will use information that taxpayers have already provided to determine who qualifies and will automatically enroll you for advance payments. There is nothing the taxpayer must do to get these advance payments.

 

What Are the Income Limits For the Child Tax Credit?

Not all taxpayers with qualified children will receive the higher child tax credit. The taxpayers who will receive the maximum amount will be taxpayers who make $75,000 a year or less if filing single, $112,500 or less if filing head of household, and $150,000 or less if filing a joint return or are qualified widows or widowers. Taxpayers who make more than these amounts will receive a phased-out amount. They will receive $50 less for every $1000 of income over the thresholds until the payments are phased out for people who earn roughly $20,000 more than the salary thresholds. 

The IRS has set up a tool on their website where a taxpayer can see if they qualify. For parents that qualify payments can be up to $300 for children under six and $250 per month for each child between 6 & 17.

If you do not qualify because you earn more than the maximum income allowed for the credit then you still may qualify for the original Child Tax Credit. This Child Tax Credit of $2000 is available to single parents who earn up to $200,000 or married couples who earn up to $400,000. If you earn higher than these amounts, then you will not qualify for any Child Tax Credit.

Since the IRS is relying on previous years’ filings, they may not have information for some people that qualify. Low-income households that are not required to file tax returns may fall through the cracks. If you were not required to file in 2020 or 2019 and qualify for this credit the IRS has set up a Child Tax Credit non-filers tool. 

Non-filers will need to provide personal information such as their date of birth, as well as their social security numbers for themselves and the qualified child. 

 

What Is a Qualifying Child for the Child Tax Credit?

A qualifying child is a child who meets the four IRS requirements to be a dependent for tax purposes. These six requirements are the relationship, age, residence, support, joint return, and citizenship.

Relationship: The child must be a son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendent of any of them.

Age: To meet this test a child must be younger than the taxpayer (or spouse if filing jointly) and meet the following conditions.

  • Younger than the age of 19 at the end of the year
  • Younger than age 24 at the end of the year and a full-time student
  • Any age if permanently and totally disabled (does not need to be younger than the taxpayer)

Residence: The child must live with the taxpayer more than half of the year. A child who is born or dies during the year qualifies if the home was the child’s home the entire time the child was alive. A child is considered to live with a taxpayer when at a hospital following birth, or temporary absences due to special circumstances such as illness, education, business, vacation, or military service.

Support: The child cannot provide more than half of their own support.

 

How Do You Opt-Out of Receiving the Advance Payments?

While this seems like how stimulus payments were distributed there is one major difference. With stimulus checks, if you received more than you were entitled to you did not have to pay the money back. With the Child Care Tax Credit that is not the case. If you are not eligible when you file your 2021 tax return, then you will have to repay the amounts advanced to you. This could happen if you had an increase in income from last year where you are now over the income threshold or if your qualified child is now older than the age limits. Also, a lot of marital situations changed during this rough year.

The IRS is doing all their qualifications from old information. They are using the information provided on 2020 tax filings. If that year has not been filed or processed, then they are using 2019. If you are a taxpayer that no longer qualifies it is important that you opt-out of these payments or you could have a hefty tax bill, come filing time.

The IRS has set up a tool on their website where taxpayers can opt out of receiving these payments. This tool will allow people who either do not want or no longer qualify for the credit to unenroll before the first payment is made on July 15th.  This tool can be used by families if they have internet access and a smartphone or computer. 

The IRS is planning on updating this portal to allow people to see payment history and change banking information or mailing addresses. They are also working on updating the tool to allow taxpayers who have had children in 2021 or if the child has aged out of qualification to update that information so they can begin receiving the advance or to correct the amount received.

If a taxpayer chooses to opt out they must notify the IRS before set deadlines for each payment. You must opt out by June 28th to skip the 1st payment. If they miss this opt-out before the 1st payment, then they can still opt-out prior to the next payments.

In conclusion, this is another step taken by the government to aid struggling families and to influx money back into our economy sooner than later. Vice President Harris was quoted as saying, “The proudest moment that I have experienced in this position was when President Joe Biden signed the American Rescue Plan into law. Because through tax credits and food assistance and housing assistance and health care coverage and direct checks the American Rescue Plan will lift half of America’s children out of poverty.” 

As much good as this will seem to do, I do have one reminder to point out where people need to be careful: If you no longer qualify for the tax credit, then it is especially important that you opt out. If you do not, then you can see yourself with a tax bill you may not be able to afford come tax time. If you can afford to pay it that is always best but if you can not you do need to remember that you have a lot of rights when it comes to owing delinquent taxes.  

If you find yourself in this tax situation reach out to a true tax professional for assistance to make sure your rights are enforced. In situations like this Enrolled Agents and CPAs have the educational background and licensing to best represent you.

 

Which Education Expenses Are Tax Deductible?

woman taking online courses

For many Americans, their years spent in college are a time when every little extra dollar counts. Fortunately, the government sees this, but they also value higher education so much that there are many different exclusions of income, tax deductions, and tax credits that can be utilized that are associated with different aspects of cost spent on education. 

This article will cover some of the savings programs that parents can utilize that have tax benefits. Then we will go through some of the exclusions and deductions from college expenses that can be utilized on the return to reduce taxable income as well as the different credits that can reduce the actual tax debt owed or maybe even get you a bigger refund. We all know that any sort of tax refund especially when things are tight helps.

 

Saving For Your Child’s College Expenses

There are many different programs and types of savings accounts that have specific tax benefits if the distributions from that account are for higher learning.

Education Savings Bond Program

A taxpayer may exclude all or part of the interest received on the redemption of qualified US savings bonds during the year if the taxpayer uses that interest to pay for qualified higher educational expenses during the same year.

Coverdell Education Savings Account

A Coverdell ESA is a trust or custodial account created or organized in the United State only for paying the qualified education expenses of the designated beneficiary of the account. While there is no tax deduction for contributions, earnings are tax-deferred. You can exclude distributions from a Coverdell ESA from income up to the number of qualified education expenses for the year, adjusted for other benefits received.

Qualified Tuition Programs

A qualified tuition program is a program set up to allow the taxpayer to either prepay or contribute to an account established for paying a student’s qualified expenses at an eligible educational institution. A state, a state agency, an instrumentality of a state, or an eligible educational institution can establish and maintain a QTP.

All these savings mechanisms can help you set aside a nice nest egg for your child’s college education while avoiding taxation. One major qualifier of each one is that the distributions must be spent on qualified education expenses.  

The qualified educational expense for these programs is the amounts paid for tuition, fees, books, supplies, and equipment required for enrollment or attendance to an eligible educational institution. They also include the reasonable costs of room and board for a designated beneficiary who is at least a half-time student. These are the qualified expenses for this type of savings program but remember different tax breaks have different criteria for what is considered a qualifying expense.

Another big way to save money while paying for college is by receiving scholarships and fellowships. These scholarships can provide a path to higher education that may not be feasible by other means. The government values this opportunity of higher education, so they provide a tax break on the income of a scholarship used for qualified educational expenses. 

When it comes to scholarships, qualified educational expenses included are tuition and fees to enroll at or attend an educational institution and any fees, books, supplies, and equipment required for courses at the educational institution. Amounts for room and board do not qualify for this exclusion. 

Another way some parents help their children pay for school is by doing early withdrawals from their IRAs. Typically, when you do an early withdrawal before the age of 59 ½ you must pay a 10% additional tax.  However, if you withdraw the funds to pay for qualified college expenses you can avoid the additional 10% tax. 

The educational expenses must be for yourself, your spouse, you or your spouse’s child, foster child or adopted child, or you or your spouse’s grandchild. Qualified educational expenses in this case include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.

 

What Educational Credits Can I Claim on my Taxes?

Outside of some income being used for paying for educational expenses being excluded many credits can be applied to your filing. A tax credit is designed to reduce taxable income. The amount of the credit that you qualify for comes right off the total payable tax. Sometimes these credits can turn your tax bill into a refund. 

There are two major education tax credits that students can utilize to reduce their tax bill: the American Opportunity Tax Credit & The Lifetime Learning Credit. A student or the parent of the student can only claim one of these credits for that student on a tax filing. If you have more than one child, you can claim either of the credits for each child but not both.

The American Opportunity Tax Credit

This credit could reduce your tax bill by up to $2500 if you paid that much in qualified education expenses. You can claim 100% of the first $2000 that you spent on qualified educational expenses. After that, you can add 25% of the next $2000 spent for a total of $2500. 

To qualify for this, you must make under $180, 000 if filing Married Filing Jointly and $90,000 if filing Single, Head of Household or Qualified Widower. This is a partially refundable credit. It can be refundable up to 40% so up to $1000.

The Lifetime Learning Credit

This credit could reduce your tax bill up to $2000 if you paid for students enrolled in eligible educational institutions. The Lifetime Learning Credit is computed on a family-wide basis. The amount of the Lifetime Learning credit is up to 20% of the first $10,000 of qualified education expenses paid for all eligible students. 

To qualify you must make under $138,000 if Married Filing Jointly and $69.000 if filing Single, Head of Household or Qualified Widower. This is a non-refundable credit.

Qualified living expenses for these two credits must be required for enrollment or attendance at an eligible educational institution and include tuition and required enrollment fees. Expenses include amounts paid to the institution for course-related books, supplies, and equipment. Room and board, insurance, medical expenses, transportation, and other similar personal expenses do not qualify.

 

Can I Use Educational Expenses as a Deduction?

The American Tax Credit and the Lifetime Learning Credit will give you the biggest tax break available but if you do not qualify there are other possibilities to save some money. You still may be able to claim a tax deduction for college tuition and fees for yourself, your spouse, or your dependents. This education deduction can be worth up to $4000. 

You can get the full amount of your income is under $65,000 on a single return or under $130,000 if you file jointly. The write-off for singles drops to $200 if your income is more than $65,000 and it disappears when your income passes $80,000. For married couples, the max is $2000 when income passes $130,000 and it is wiped out when income exceeds $160,000.  

Qualified expenses that can be used for this deduction are tuition, student fees, and required expenses for course-related books, supplies, and equipment. Room and board, insurance, medical expenses, transportation, and similar personal living expenses do not qualify. 

If you are self-employed generally can deduct the cost of work-related educational expenses. This will reduce the amount of income subject to both the federal income tax and self-employment tax. The education must be required to keep your present salary, status, or job or to maintain or improve skills needed in your present work. 

Expenses cannot be used in the education is needed to meet the minimum educational requirements of your present trade or business or if the expenses are for a program that will qualify you for a new trade or business. The qualified expenses that can be written off by self-employed individuals are tuition, books, supplies, lab fees, certain transportation, and travel costs.

With all these exclusions, credits, and deductions you cannot double-dip. You cannot deduct tuition and fees if:

  • You also deduct those expenses for another reason (e.g., as a business expense);
  • You or anyone else claims an American Opportunity or Lifetime Learning Credit for the same student in the same year.
  • The expenses are used to figure the tax-free portion of the 529 plan or Coverdell ESA distribution.
  • The expenses are paid with tax-free interest on U.S. savings bonds; or
  • The expenses are paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer.

In conclusion, as you can see there are a lot of opportunities to save from some of your expenses derived from education. As you can see there are very definitive qualifications and distinct benefits to all these different credits, deductions, and exclusions. 

That is why it is important to reach out to a true tax professional for assistance, so you do not miss out on an opportunity to use them or filing them incorrectly. An IRS Enrolled Agent or CPA has the educational background and licensing to properly advise you and legally save you the most money possible.