Constitutionality of Taxation

Married Filing Jointly

Schedule B, Part III Foreign Accounts and Trust Requirements

Can you believe there was a time when there was no income tax?

We were at one time with no tax laws. Our tax collectors were merely an extension of the English tax collectors. As a new nation, we had to come up with new laws and many of these laws copied over from the old world. Then, we had to make sure that our new laws and tax laws were in accord with other documents such as the Constitution. For a long time, there was no provision in the Constitution to tax individuals and the taxing of individuals was considered unconstitutional. The taxing process graduated slowly to what it is now. Although at one point there was a question of the constitutionality of taxation, it was just a matter of minor adjustments. Taxes are a necessity. How else can we survive and prosper as a nation?

This fight on whether taxing individual being unconstitutional has kept going. There are still organizations that are trying to keep this concept of taxes being unconstitutional alive. The IRS time and again excuses these arguments as frivolous tax arguments and as mere misinterpretations of laws and of the Constitution. But then there are still many people who think the earth is flat, so you get the idea.

The fight over the constitutionality of taxation has been going on since the start of our country. For example, in 1895, the U.S. Supreme Court decided that the income tax was unconstitutional because it was not apportioned among the states in conformity with the Constitution. More recently in 2004, the U.S. was forced to eliminate a corporate tax provision that had been ruled illegal by the World Trade Organization. Two tax bills signed in 2005 and 2006 extended through 2010 the favorable rates on capital gains and dividends that had been enacted in 2003, raised the exemption levels for the Alternative Minimum Tax, and enacted new tax incentives designed to persuade individuals to save more for retirement.

In 1862, Congress enacted the nation's first income tax law to support the Civil War effort. It was in 1862 that the office of Commissioner of the Internal Revenue was established. It was then that this individual was given the power to enforce the tax laws. There has not been too much change to this power to now. The Act of 1862 established the office of the Commissioner of Internal Revenue. The Commissioner was given the power to assess taxes, to enforce the tax laws through seizure of property and income and prosecution and to levy and collect taxes.

Many individuals have tried to influence these new tax laws. Many times, the tax laws were changed, and amendments issued to make the tax laws a permanent component of our daily life. Taxes are here to stay and will be raised as the need arises for more money. The fact remain that the powers and authority of the office of Commissioner of Internal Revenue remain the same today very much. However, there is a difference now and it has to do with the media. Today the taxpayer seems to have more power due to social media and the knowledge and advice inseminated by others through the internet. Those books with titles such as "How to Beat the IRS" are real, and they offer much advice on how to win your case against the IRS. Some people call these dirty attorney tricks. Regardless of what they are called they still provide guidance and information on Internal Revenue loopholes. They still provide information on IRS operations and loopholes in the tax law regardless if you are going to use the loopholes to be unethical.

Remember one thing though, the tax laws cannot prevent taxpayers from being unethical, but there are rules in place that prohibit tax preparers from being unethical. The IRS has these rules and most organizations such the state CPA licensing boards and other organizations force you as a tax professional to hold the highest level of ethics and can even suspend you when you don't hold to the standards. So yes, ethics do matter in this profession.

By 1913, the 16th Amendment to the Constitution made the income tax permanent as we have it today. This amendment gave Congress legal authority to tax income of both individuals and corporations. Amendments like the one in 1913 are brought about through the needs for additional funds of government. Also, many tax changes are incepted due to economy changes such as more employment available to taxpayers or vice versa. If there is high unemployment, then tax laws will take that into consideration too. This is done so and mostly seen by the tax credits or special tax deductions offered though the tax system.

Later, and to reduce the federal budget deficit, the Revenue Reconciliation Act of 1990 was signed into law on November 5, 1990. The emphasis of the 1990 act was increased taxes on the wealthy. It came to everyone's realization that the wealthy were paying less than the fair share. With this new act came higher taxes and a limitation on itemized deductions.

Almost every presidential candidate promises not to raise taxes. President Bush promised not to raise taxes to get elected and then signed the Revenue Reconciliation Act of 1990 in law which did the contrary. It raised taxes and lowered deductions. This was the act that started our "pay as you go system". In this system taxpayers pay their tax in installments as they earn the money. This is usually done weekly or biweekly every time the taxpayer receives a check from their employer. Taxpayers who don't have an employer usually are required to make estimated tax payments throughout the tax year. Other countries have similar tax policies.

It was with this act that Roth IRAs were established. This act also exempted the capital gain taxation of the sale of personal residences of up to $500,000 for married couples and up to $250,000 for single taxpayers. There is also a $600,000 estate tax exemption and family farms and small businesses can qualify for exemption of $1.3 million. It was also at this time that the annual gift tax was corrected for inflation. In this work we will be dealing with information about our economy – inflation or deflation. By inflation we mean rising prices. Of course, deflation is that opposite of that.

We have come a long way from 200 years ago. From 1791 to 1802, the United States government was supported by internal taxes on distilled spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate bonds, and slaves. Now, the government gets their review from more modern items in addition to the items from 100-200 years ago. This includes more modern items such as commerce transacted over the internet and plastic surgery tax. This all started in 1791. Before that really. Way before that in some form or other. It is just that things become formal at one point or other.

In 1862, to support the Civil War effort, Congress formally enacted the nation's first income tax law, and it was a forerunner of our modern income tax. The nation's first sales taxes were on gold, silverware, jewelry and watches due to the high cost of the War of 1812. This war resulted in struggles. Individuals did not only have to worry about certain war uncertainties, but by this time they also had to worry about complying with the government and pay tax. During the Civil War, a person earning from $600 to $10,000 per year paid tax at the rate of 3%.

Many things have transpired in the process of a more fair tax. Beginning in 1868, Congress focused its taxation efforts on tobacco and distilled spirits and eliminated the income tax in 1872. Tobacco laws have changed, and it started from tax making money from producing it to trying to complete eradicate the habit. The government has recently become concerned with public health and has passed certain taxes on tobacco products to discourage their consumption. Now the government is trying to discourage tobacco product consumption by charging high taxes on the products. Others tax changes have transpired in the process of candidates to office wanting to get elected or re-elected to office.

Budgets are important for everyone. Everyone needs a budget, even the United States Treasury. On or before the first Monday in February of each year the President is required by law to submit to Congress a budget proposal for the fiscal year that begins the following October. The United States budget process was initiated in 1921 and it was not a formal process. It was until 1974 that Congress was forced to adopt a more formal process. The Congressional Budget and Impoundment Control Act of 1974 was enacted because President Richard Nixon refused to spend funds as Congress had allocated them and passing a more formal budget process would force President Nixon to spend funds as Congress had indicated.

On December 22, 2017, the Tax Cuts and Jobs Act was passed by Congress. This new tax act provided reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”. This legislation, which the President signed into law on Dec. 22, 2017, is the most sweeping tax reform measure in over 30 years.

The new legislation makes fundamental changes to the Internal Revenue Code that will completely change the way individuals and businesses calculate their federal income tax liability, to create numerous planning opportunities. The changes affecting individuals include new tax rates and brackets, an increased standard deduction, elimination of personal exemptions, new limits on itemized deductions (state taxes, mortgage interest), and the repeal of the individual mandate under the Affordable Care Act. The changes affecting businesses include a reduction in the corporate tax rate, increased expensing and bonus depreciation, limits on the deduction for business interest, and a new 20% deduction for pass-through business income. The foreign provisions include an exemption from U.S. tax for certain foreign income and the deemed repatriation of offshore income.

This new tax reform is the new Tax Cuts and Jobs Act (TCJA). This new tax reform was passed to take effect on both individuals and businesses. This new legislature dictates how businesses compute business interest and what business interest limitations exist under the new legislation.

This new tax law also affects the withholding on the transfer of non-publicly traded partnership interests and tax withholding me need adjustment for certain key groups. Furthermore, the new legislation affects the computing of the "transition tax" on the untaxed foreign earnings of foreign subsidiaries of U.S. companies. S corporations are also subject to the extended three-year holding period for applicable partnership interests. With the new tax law changes, will come different withholding demands. The interest on home equity loans will still be deductible under the new tax law.

Other items will be affected, such as the procedures for changing the accounting period of foreign corporations owned by U.S. shareholders that are subject to the transition tax under the new Tax Cuts and Jobs Act. For instance, certain controlled foreign corporations are required to adopt the tax year of their majority U.S. shareholder. These corporations are subject to these rules if more than 50% of the total voting power or value of stock is treated as owned by a U.S. shareholder.

Alaska Native Corporations and Alaska Native Settlement Trusts may be able to take advantage of certain benefits that are in place in the new tax law legislation. These trusts promote the health, education, and welfare of its beneficiaries. Certain tax advantages may exist is paying items early before enacting of certain items in the new tax code take effect. One of these items is prepaid real property taxes. Real property taxes may be deductible in 2020 if assessed and paid in 2020. In addition, ANSTs can elect to defer recognizing non-cash contributions as income until the trust sells or disposes of the property.

A new tax law equals new way to calculate inflation.  We can measure the consumer price index by looking at the average price of the most common household goods and services. The results compared to previous results give us information about our economy – inflation or deflation. This tells us if the economy is good or if it is not doing so well. By inflation we mean rising prices and by deflation we mean falling prices. However, for our purpose of tax law changes, the new tax law will disregard the CPI index as a measure of inflation. The new tax bill will switch the calculation of inflation.

The new tax law will now use the Chained CPI which grows slower than the traditional consumer price index. The Chained CPI use the same common household goods but if the particular goods or services get too expensive, it is assumed that consumers will select other cheaper products and thus use a cheaper alternative. The Chained CPI to calculate inflation is supposed to be one of the positive items in the new tax law changes. What that means to individuals is that the income thresholds for each marginal tax bracket will rise more slowly than in previous years. Or is it? At first maybe, but this will not be so in later years. The new way will make a greater portion of each worker’s income subject to higher marginal tax rates in the long run. This could turn out to be disastrous for the middle class as it is expected to result in higher taxes.

The TCJA tax reform has replaced the existing tax rates with seven new rates. These rates are 10%, 12%, 24%, 32%, 35% and the highest one at 37%. The TCJA tax reform amended section 11(3) to provide a permanent cost-of-living adjustment based on the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). The Cost-of-living index is modified by Rev. Proc. 2018-18, and it modifies certain 2020 cost-of-living adjustments set forth to reflect statutory amendments made by an Act to provide reconciliation pursuant to titles II and V of the concurrent resolution on the budget.

The TCJA tax reform section 22021 amends section 63(c)(2) to provide a temporary increase in the basic standard deduction. The following are the new basic standard deductions for 2020.

The new figures are out for 2021 and they are the following: 

The older or blind individuals will continue to receive an additional amount added to their standard deduction. For those who are married and age 65 or older, the additional amount is $1,300 for 2020 or $1,650 if the individual is also unmarried and not a surviving spouse. Not sure exactly why a single taxpayer gets a higher standard deduction than a married one. Normally it is the other way around for everything else.

These standard figures those who are over 65, blind also change for 2020 and they are:

$1,350 for taxpayers who are at least 65 years or blind. This amount is slightly higher if the taxpayer is over 65 or blind and using the single or head of household filing status. The taxpayer is at least 65 years old and blind then the additional standard deduction for this person is simply doubled.

If you do not itemize deductions, you are entitled to a higher standard deduction if you are 65 or older at the end of the tax year. For 2020, you are considered 65 on the day before your 65th birthday. Therefore, you can take a higher standard deduction for 2020 if you were born before January 2, 1956.
 

Deduction considerations are based, according to the IRS, on inflation. It may be better for now on to use the standard deduction amounts since they are really high and your itemized deductions, especially with some of the new limitations or the straight-out elimination of certain deductions will probably not be more than the standard deduction amount. These amounts will remain similar except for adjustments for inflation.

The personal exemption which is normally adjusted for inflation every year has been changed by the TCJA to $0. Inflation works by taking a percentage of the inflation increase, but no matter how you put it, anything percent of $0 will always be $0. This is to remain so through December 31, 2026.

So now we have a new way to inflation using the consumer price index. We measure the consumer price index by looking at the average price of the most common household goods and services. This new way is supposed to be a more exact way to measure inflation, and it will be used from now on or at least until December 31, 2026. The new way is the Chained CPI which grows slower than the traditional consumer price index. The TCJA tax reform has also replaced the existing tax rates with seven new rates. These rates are 10%, 12%, 24%, 32%, 35% and 37%. This is probably where everyone is getting the idea that this tax reform is for the rich - the lowest tax rate of 10% remained at 10% while all the others changed at least a little. The lower tax rates will compensate for the fact that we no longer can use the exemption credits for having dependents, but not for the ones at the lower 10% bracket. No more effort needs to be made in adjusting the personal exemptions for inflation as done every year since there is none.

The information asked on your tax return is needed to carry out the tax laws of the United States and to figure and collect the right amount of tax. It is imperative that you supply the taxing agencies with the most correct information requested on the tax forms and worksheets. Form 1040 asks you for information about yourself, your spouse if you are married, and your dependents. It is usually in your best interest to provide the information request on your tax return.

This hike in the standard deductions seems good from outside but once you look further into it you can see that maybe that benefit is not as great as it seems. Adjustments for 2020 are the following. The standard deduction rises to $24,800 for married filing jointly tax returns. This amount rises to $12,400 for single and married filing separate filers. The amount is $18,650 for the head of household filing status. These amounts seem good right? But remember many things were cancelled or completed eliminated. 

A higher standard deduction will not always make up for the exemption credits which are now down to zero. This is especially true if you have many dependents where each dependent meant an extra $4,150. This amount was $4,050 for 2017 the last year we were allowed to use the personal exemption and it would have been increased to $4,150 in 2018. We would have seen a slight increase every year after that. 

For example, the personal exemption amount was eliminated, and it remains at zero. Which means that you don't have this exemption amount which was for each person on your tax return. That right is a huge deal. The 2020 top tax rate remains at 37% for individual singles with income greater than $518,400. The amount is $622,050 married filing jointly. Some things however seem to be good, and they probably are for the people in these tax situations where they get higher amounts to base their lower tax rates on.

The base amounts have gone up for all filing statuses. The tax rates for single filers in 2020 for incomes over $207,350 is 35%. The same rate of 35% is for incomes over $414,700 for married filing jointly filers. Higher base amounts and lowers rates means less money out of the taxpayer pocket.

Now higher incomes are taxed at lower rates. For example, the tax rates for single filers in 2020 for incomes over $163,300 is 32%. The same rate of 32% is for incomes over $326,600 for married filing jointly filers. As you can see the new tax legislation has tried help individual keep more of their tax dollars.

Furthermore, you can see how the rates for higher incomes seem to favor people with higher incomes. In other words, they seem to favor the rich. For instance, the tax rates for single filers in 2020 for incomes over $85,525 is 24%. The same rate of 24% is for incomes over $171,050 for married filing jointly filers. The tax rates for single filers in 2020 for incomes over $40,125 is 22%. The same rate of 22% is for incomes over $80,250 for married filing jointly filers. Once you analyze the different tax rates you will see this trend.

Once you get to the lower incomes you can see that not much has changed for people with lower incomes as their rates remain the same at 10 percent to 12 percent. For instance, the tax rates for single filers in 2020 for incomes over $9,875 is 12%. The same rate of 12% is for incomes over $19,750 for married filing jointly filers. Additionally, the tax rates for single filers in 2020 for incomes over $9,875 is 10%. The same rate of 10% is for incomes over $414,700 for married filing jointly filers.

Before when there were limitations on itemized deductions there was  a section on Schedule A that read "Is Form 1040, line 38, over $156,900" (from 2017 Schedule A, Form 1040) and if the amount was over this amount then you were not able to take advantage of your entire itemized deduction calculation. You had to limit the amount based on the amount was over the $156,900. However, in 2020 and for a couple of years now, this limitation has ceased to exist. There are no limitations on itemized deductions for 2020 because itemized deduction limitations were eliminated by the TCA. 

New Standard Mileage rates

The standard mileage rates have increase form 2020. However, the 2021 standard mileage rate are set to decrease. In tax year 2020 business mileage is 57.5 cents per mile. You can claim 14 cents per mile for charitable mileage. The mileage rate for medical mileage is 17 cents per mile. The rate of 17 cents is also for moving mileage.

For tax year 2021 the mileage amounts have decreased. For instance, the business mileage is lowered 56 cents per mile. The charitable contribution mileage rate goes down to 14 cents per mile. The mileage rate decreases to 16 cents per mile for medical mileage and moving expense mileage.

The AMT phase out amount for 2020 is $72,900 for single and phase-out is at $518,400. For married filing jointly the amount $113,400 and it phases out at $1,036,800. These AMT provisions are temporary, and you can expect changes after 2026.

For 2020 maximum Earned Income Credit amount is $6,660 with three or more children. If you have three or more children, expect your Earned Income Credit to be anywhere from $538 to $6,660. The amounts will depend on your filing status and how many children you have. The credit amounts change according to income and dependents.

The 2020 monthly limitation for qualified transportation fringe benefits is $270. The monthly limitation would apply for qualified parking at a limit of $270 per month. This amount was previously $265 per month. The Qualified Transportation Fringe Benefit limit will remain at $270 per month for 2021.  

In 2020, there are dollar limitation for employee salary reductions. The limitation for contributions to health flexible spending arrangements is $2,750. An FSA is a special account accumulate money into and the use it to pay certain out-of-pocket health care costs. Since you don't pay taxes on the money you save up into an FSA, the money you save equals the taxes you have paid on the money you invest into an FSA.

In 2020, participants who have a self-only coverage median savings account must have annual deductions of not less than $2,350 but not more than $3,550. The maximum out-of-pocket expense amount for self-only coverage is $4,750. Furthermore, the 2020 participant with family coverage, the floor for the annual deduction is $4,750. However, the deductible cannot be more than $7,100. The family coverage out-of-pocket expense limit is $8,650.

The Lifetime Learning Credit (LLC) is a credit allowed for qualified education related expenses paid for a student enrolled in an eligible educational institution. The credit is worth up to $2,000 per tax year. The 2020 AGI amount used by joint filers to determine the reduction in the Lifetime Learning credit is $118,000. You, your spouse, and your children whom you claim on your tax return qualify you for the Lifetime Learning Credit (LLC).

For 2020, the Foreign earned income exclusion amount is $107,600 per qualifying person. This amount will go up to $108,700 per person for tax year 2021. The amount that can be excluded for 2020 is the lesser of the foreign earned income or $107,600 per person.

Estates of decedents who die during 2020 have a basic exclusion amount of $11,580,000. A person has the right to transfer property at time of their death. The total of everything you own such as cash, securities, real estate, business interests and more consists of your gross estate. Of your gross estate a person who dies is 2020 can legally exclude up to $11,580,000 from taxable income. 

In 2020, the annual exclusion for gifts is $15,000. This amount remains the same from 2019 and will be the same for 2021. What all this means to you is that you can give up to $15,000 away to anyone you want to give it to, and no gift tax will be charge on anything you give up to $15,000. If you give more to any one person, you will have to pay tax on the amount that is over the $15,000 and you will have to file a gift tax return. This return is filed by using IRS Form 709.

The maximum credit allowed for adoptions for the year 2020 is the amount of the qualified adoption expense up to $14,300. In 2020, if a family finalizes the adoption for of a child who has special needs can claim the full adoption credit amount for $14,300 regardless of the adoption expenses incurred. It is important to note that the $14,300 adoption credit is per child.

Resumption of required minimum distributions for IRAs and retirement plans (including age change from 70 1/2 to age 72). This is outlined in the Secured Act of 2019 and paused by the CARES Act of 2020. The Coronavirus Aid, Relief, and Economic Security Act, or for short the CARES Act, has waved the requirements for minimum distributions during 2020 for IRAs and retirement plans. This includes beneficiaries of such plans who have inherited accounts.

Retirement plan account holders are required to begin taking an RMDs annually starting the year he or she reaches age 70 1/2 or age 72. This depends on his or her birth date and it can even depend on the year he or she retires.

The age requirement from 70 1/2 to 72 was changed by the SECURE Act. The SECURE ACT stands for Setting Every Community Up for Retirement Enhancement Act. Age 72 is the new age that individuals must start taking withdrawals from their retirement accounts to avoid penalties. If you are born on or before June 30, 1949, you were originally required to start getting RMD for the year you reached age 70 1/2. Now that the age has been changed to age 72, adjustments or exceptions are allowed in the transition because of the SECURE Act. This mean that if your 70th birthday is July 1, 2019, or later, you do not have to take your first RMD until the year you reach age 72.

The CARES Act - Coronavirus Aid, Relief and Economic Security Act waved the RMD requirement during 2020 because of the pandemic. This means that seniors, retirees, or beneficiaries with inherited accounts were exempted from the obligation to take money out of their IRA and workplace retirement accounts. This exemption included the individuals who turned 70 1/2 in 2019 and who took their first withdrawal in 2020.

The CARES Act also exempted the requirement for individuals who reached age 70 1/2 before 2020, who are still employed but ended their employment in 2020. These individuals would normally have an RMD due by April 1, 2021 from their workplace retirement plans. This requirement does not included Roth IRAs because Roth IRAs do not require any minimum withdrawals. That is true until after the death of the owner.

If you reached age 70 1/2 in 2019 or earlier, you did not have an RMD due in 2020. However, for 2021 you will have an RMD due by December 31, 2021. Other taxpayers who will reach age 72 in 2021 will have their first RMD due by April 1, 2022. Their second RMD will be due by December 31, 2022.

If you want to avoid including both amounts in income in the same year, you can make the first withdrawal by December 31, 2021, instead of April 1, 2022. Please note that after the first year, all RMDs must be made by December 31 of the year.

The IRA trustee must report the amount of the RMD to the IRA owner or offer to calculate the amount for the owner. The calculation depends on the type of IRA or whether the amounts are from different accounts.

Not taking the required distribution or taking a distribution below the required amount could mean a 50% excise tax on the amount not taken. If you are not aware of it could really cost you big.

Due to the change in age from 70 1/2 to age 72, adjustments must be made. Participants in workplace retirement accounts who are still employed are usually able to wait until April 1 of the year after they retire to start receiving distributions from those workplace retirement account plans. If you reached age 70 1/2 before 2020 and were still employed but ended your employment, your requirement to make an RMD by April 1, 2021, from your workplace retirement account is waved as part of the CARES Act relief.

The CARES Act is there to help you. The CARES Act made it easier to access savings in IRAs and workplace retirement plans. This is especially helpful for those affect by Covid19. The CARES Act provided relief and favorable tax treatment for certain withdrawals from retirement plans and IRAs. This included expanded loan options from these accounts.

As a result of the CARES Act, these distributions are not subject to the 10% additional tax on early withdrawal, for instance. This special tax treatment also includes the 25% additional tax on certain SIMPLE IRA distributions. Distributions and loans made from January 1, 2020, through December 30, 2020 from IRAs or workplace retirement plans to qualified individuals are treated as Corona virus related distributions.

This is the tax treatment on corona virus related distributions. Taxes on corona virus related distributions are includable in taxable income over a three-year period, one-third each year, or in you elect it in the year you take the distribution.

Any coronavirus related distributions can be repaid to an IRA or workplace retirement plan within three years. In addition, if you had an outstanding loan balance when you left employment, the plan sponsor will usually offset the loan balance against your benefit.

If you have loan offsets in 2020, you have until the due date of your tax return to rollover that amount to another retirement plan or another IRA.

If you qualify, you can treat the loan offset as a coronavirus-related distribution and you have three years to repay to an IRA. You can do that or include it in income tax ratably over three years.

If you received an RMD in 2020, you had the option to return it to your account or place it in another qualified plan to avoid paying taxes on that distribution. If you made an RMD in 2020 and you did not roll it over or repaid it, you may be eligible to treat it as a coronavirus-related distribution if you are a qualified individual. If your 2020 RMD qualifies as a coronavirus-related distribution, it may be repaid over a 3-year period, or you can have the taxes due on the distribution spread over three years. A coronavirus-related distribution can include a withdrawal from an inherited IRA to a qualified individual. And this income from the withdrawal can also qualify to be spread over three years for income inclusion. You will not be able, however, to repay the withdrawal back to the inherited IRA. The one-time rollover per 12-month period limitation to inherited IRAs do not apply to repayments made by August 31, 2020. Neither do the restrictions on rollovers to inherited IRAs apply to this August 31, 2020, date.

Everyone who makes money must file a tax return for the most part. Everyone who makes money above a certain level, that is. Some will be exempt from filing if their income does not fall within certain guidelines. Filing your tax return will most probably be obligatory. However, sometimes it will be in your best interest to file even if filing is not mandatory.

The head of household filing status has more requirements to be met than the other filing statuses. One of these requirements for 2020 is to have supported a home for your dependent for more than half the cost of maintaining the home. This dependent can also be your parent and the parent does not have to live with you.

However, if you had federal withholding or any state tax withheld, you could file your federal or state tax returns to get these refunded to you if you did not make enough money to even file a tax return. Why would your employer if withhold any money in the first place? You ask. Well, when you first start your job, your employer usually does always get your Form W-4 from you right away. Therefore, your employer is obligated to withhold at a single rate and sometimes with zero exemptions. To avoid any kind of withholding, it is a good idea to give your employer Form W4 immediately, right at the start of your job.

To maximize tax-savings opportunities, you must keep good records through the year. Good recordkeeping makes it easier to prepare your tax return, reduces errors, and provides a defense to any challenge from the Internal Revenue Service. There are many things you can do to keep good records or to make your recordkeeping easier to handle such as:

There are certain record keeping requirements you must meet in case the IRS needs to review your tax records later. There are certain obligations to keep records, and this depends on your tax situation. Claiming certain deductions and credits require you to keep records. Sometimes you can opt for standard deductions on certain items such as the standard deduction, standard mileage deduction, and even if you claim office in the home, there is a standard amount you claim and that way you don't have to worry about the record keeping requirements as much. However, you do need to keep some form of proof. You just select a standard amount of $5 per square footage in that case, just to provide you an example.

The types of calculation methods for claiming office in the home for 2020 are the simplified method and the standard method. This is like the concepts of standard deduction and itemized deductions where one requires a certain amount of record keeping and the other requires zero. Using the simplified method, you simply deduct $5 for every square foot of your home office. You can only claim up to $1,500 per year using this method. This means that by using this method, you are limited to a maximum of 300 square feet. On the other hand, the regular method allows you to use your actual expenses to determine a deduction and you must maintain records.

There are so many brilliant ways to cut your taxes, to legally avoid paying taxes. Although the Tax Cuts and Jobs Act has come up with many tax incentives and many ways to disallow certain tax items, it has either allowed or neglected to disallow others. You can look really closely at almost every item in the new tax law, and you will find ways to legally save money on your taxes. Whatever tax saving skill you manage to come up with requires that you show proof. To show proof or to prove your deductions, you must keep excellent business records.

The IRS and new Tax Cuts and Jobs Act (TCJA) know exactly how difficult it is for some people to keep good records and that is why there are options for taking the standard - the standard deduction instead of itemizing, for example. Another one of these is using the cash method of accounting to avoid inventory recordkeeping obligations. If you are in the cash method of accounting business, you can be excused from the obligation of doing inventory accounting for your business. This does not mean that you should not do inventory for your business.

If you are claiming the office in the home deduction, you can claim it by using the standard method which requires that you keep detailed records of all your expenses or you can use the simplified method which gives you a flat rate to deduct that is much easier to calculate than the standard method. You are allowed to deduct $5 per square foot of your home office area. However, you are limited to only $1,500. Therefore, it is probably more beneficial to you to use the other methods which require that you keep more detailed records. Sometimes the methods that require more effort are more beneficial.

How long to keep records? It depends.

If you own property, you may want to keep your tax records to show proof of depreciation deductions if your property is used for business. Also, when you sell your property, you must be able to show how you came up with the adjusted basis. Once you dispose of your property, then you must keep your tax records for at least 3 years, unless other conditions apply. There are other reasons you may want to keep your tax records for longer periods of time than required by the Internal Revenue Service. For example, your insurance company may need to ask you for these tax records a longer period than the Internal Revenue Service does.

You probably should not be in too much of a hurry to get rid of your tax records. Nowadays it is easy to keep tons of paperwork stored in the cloud since you don't need any physical space to keep these records. Maybe the only ones that should want to get rid of tax records are tax professionals. In that case, you as a tax professional should keep tax records readily available to be copied for as long as your client is legally required to keep them.

There are certain record keeping requirements you must meet in case the IRS needs to review your tax records to prove your deductions, but also you must keep a copy of your tax returns for a certain period of time as dictated by the Internal Revenue Service. The time to keep these tax return records varies depending on your filing situation but it normally is a minimum of 3 years or more time if you own property. If you own property, you are not necessarily obligated to keep the tax records forever, but you do need to be able to provide records for the basis of the property when you sell it. Maybe, if you never sell your property you don't have to worry about it, but no one really knows what is to come. There are many reasons why you may have to sell your property in the future.

If you have made nondeductible contributions to a traditional IRA, keep a record of both your nondeductible and deductible contributions. This will help you when withdraw IRA money to figure the tax-free and taxed parts of the withdrawal. You also must keep records of contributions and conversions to Roth IRAs. You should also keep copies of Form 8606 and Form 5498 for these purposes.

Alternatively, they may request the copy from the Internal Revenue Service, but this usually takes longer. You, as a tax preparer are legally required to provide a copy upon your tax client's request. You can charge for the copy, but you must be able to produce it upon request. By the way, the charge for providing a copy must be nominal or reasonable. You should not be charging $900 for a copy of the tax return, for instance.

If more than one filing status applies to you, choose the one that will give you the lowest tax. Your filing status is the filing status that applies to you at the last day of the year. If you obtained a divorce on December 26, 2020, and at the time of your divorce in 2020 you intended to and did remarry each other on August of 2021. You and your spouse must file your tax return as Married Filing Jointly or Married Filing Separately. Nice try?

The Internal Revenue Service is already in the know about this trick. There is an easier way to do this. Choose the filing status which will give you the lowest tax but do it legally. You and your spouse must file your tax return as married filing jointly or married filing separately. The Internal Revenue Service is aware of the "get married in December and divorce in January" trick. Unbelievable that this was a trick that some taxpayers pulled some time ago. Anyways, choose the best filing status that applies to you and do it honestly. No tricks!

If you lived apart at the end of the year, it may be worthwhile to look into the head of household filing status instead. If the total amount you paid is more than the amount others paid, you meet the requirement of paying more than half the cost of keeping up the home to qualify for the head of household status. This of course is one of the many requirements to qualify for the head of household filing status. One of these is that you did not live with your spouse at any time during the last six months of the year.

Head of household

In qualifying for head of household filing status and in calculating the expenses of keeping up a home, include in the cost of upkeep expenses such as rent, mortgage interest, real-estate taxes, insurance on the home, repairs and utilities, and food eaten in the home. In calculating the cost of the upkeep expenses, you would not include the rental value of a home you own.

The due diligence requirement that has always been in place for the Earned Income Credit is also now in effect for the head of household filing status. There is a now a record keeping requirement under IRC section 6695(g) that includes a paper trail requirement for determining a client's eligibility to file as head of household. If you don't show how you qualified your client for the head of household filing status by asking the correct questions, the IRS imposes a $540 penalty for each failure for returns filed in 2021. These are the same due diligence requirements already in place on Form 8867 for the child tax credit, the American opportunity tax credit, and the earned income credit.

In 2020, the due diligence requirements that has always been in place for the Earned income credit is also now available for claiming the head of household filing status. The due diligence requirements were later added to also apply claiming the American opportunity credit and the child tax credit. The penalties for not following due diligence requirements as imposed will be quite steep.

If you don't show proper due diligence on how you qualified your client for the head of household filing status for 2020, the IRS will impose a $540 penalty for each failure for tax returns filed in 2021.

Many misuse the Head of Household filing status to get a higher Earned Income Credit amount, for example. Therefore, to qualify for head of household you must be unmarried or be considered unmarried. You must have paid more than half the cost of keeping up a home for the year and have a qualifying person who lived with you for more than half of the year unless this person is your parent.  Add up the amounts contributed and if you amount is more than half the amount others paid, you meet the requirement of paying more than half the cost of keeping up the home to qualify for the head of household status. If you think you qualify for the head of household filing status, fill out the worksheets and follow the rules. It is worth your try because doing so will give you a lower tax rate than those for single or married filing separately. This would also allow you better credits and higher deductions too.

If you live apart from your spouse and meet certain tests, you may be able to file as head of household, even if you are not divorced or legally separated. One of the requirements to file as Head of Household, you must not have lived with your spouse at any time during the last six months of the year. It's very important to know is that if you are married and if you qualify, you can practically use any filing status except single. If you are married, you would not use the qualifying widow (or widower) filing status, of course.

If your child is considered temporarily absent from home, you can still claim him as living with you if he is away because of illness, vacation, education, military service or if the child is away on a business trip.

If your qualifying relative is not related to you in one of the ways for relatives who do not have to live with you, and they are a qualifying relative only because he or she lived with you all year as a member of your household, then they are not a qualifying person for you to use the head of household filing status. Almost in all cases, if you cannot take an exemption for a qualifying relative, they cannot be a qualifying person for you to benefit from the head of household filing status. It is in your best interest for you to opt for the head of household filing status. This filing status can give you a greater tax benefit than the single or married filing separately filing statuses.

You no longer have to worry if you are using the correct form to file your tax return. All your federal tax returns are filed using Form 1040 now.

An Individual Tax Identification Number (ITIN) does not entitle you to social security benefits and neither does it allow you to work legally under U.S. law. An ITIN is only intended to serve the purpose of identifying the individual filing a tax return or being claimed on a tax return for various purposes such as when claiming an exemption. It is in the same format as a social security number. Although an individual taxpayer identification number (ITIN) is like a social security number in format, unlike a social security number which serves many purposes, the ITIN number only serves one - identifying the holder. The individual tax identification number (ITIN) does not entitle the holder for social security benefits or to legally work in the United States. If you are working in the United States illegally and someday will have a status adjustment, you should keep all your paystubs to report all your wages to the Social Security Administration to the correct social security number when your legal status becomes adjusted. This is such an oxymoron! In one part of the tax law, we are stating that using someone else's taxpayer identification is tax identity fraud and in another part, we are letting them file tax returns with form W-2s that have fraudulent social security numbers on them.

Everyone needs a number. TIN numbers are unique. Names are not unique to an individual and that is why we use numbers instead. Search for a name on Facebook, including both the first name and last name and you will probably get at least ten people with the same name. If you are a nonresident or resident alien and you do not have and are not eligible to get an SSN, you must apply for an ITIN. You must have an Individual Tax Identification Number (ITIN) to file their tax return. It must be noted, and it is extremely important that this identification is only used for tax filing purposes. A Taxpayer Identification Number (ITIN) is an identification number issued by the Internal Revenue Service that is only made available for certain nonresident and resident aliens, their spouses, or dependents who are not eligible to get a Social Security Number (SSN). It is in the same format of the social security number with nine digits. Many undocumented taxpayers make the mistake of giving this number to their employers, but they should never do this. The employer is under the obligation to end their employment on the spot if the employee shows them this Internal Revenue Service issued identification card. This is like making a confession to their employer that they are indeed working illegally in the country. In turn if the employer continues their employment, such employer will run into trouble with the immigration service. This could mean huge penalties for the employer for not complying with the immigration laws. 

An ITIN must be furnished on returns, statements, and other tax related documents. This number must be furnished when filing your returns or when claiming tax treaty benefits. Also, an ITIN must be on a withholding certificate if the beneficial owner is claiming tax treaty benefits other than from income from marketable securities. This number must also be on a withholding certificate if the beneficial owner is claiming exemption for effectively connected income or exemption for certain annuities.

However, let's say you qualify for an SSN instead. You should apply for an SSN by completing Form SS-5, Application for a Social Security Card, and also submit evidence of identity, age and citizenship or lawful alien status. The IRS requires a Taxpayer Identification Number (TIN) as an identification number for the administration of the tax laws. You can acquire this number from the Social Security Administration (SSA) or by the Internal Revenue Service (IRS). Only the Social Security Administration can issue a Social Security number and all other taxpayer Identification numbers are issued by the Internal Revenue Service (IRS).

It seems that we mentioned all the possible TINs and here they are again just in case we missed them. The taxpayer identification numbers available are social security number (SSN), the Employer identification number (EIN), Individual taxpayer identification number (ITIN), the taxpayer Identification number for pending U.S. Adoptions (ATIN), and the preparer tax identification number (PTIN). The previously assigned temporary IRS Preparer Tax Identification Numbers are no longer valid. It is like there is a number for every situation.

The ITIN number is not an SSN! It is only used to file your tax returns with it. You should probably also not use your ITIN to open credit with it. Maybe it would work and since SSNs are not yet in the 900 series, doing so does not seem to pose a legal problem. However, the purpose of an ITIN is to file your tax returns.

In addition, a Taxpayer Identification Number (TIN) must also be provided when claiming exemptions for your dependents or your spouse. You generally must list on your tax returns the Social Security number (SSN) or Individual Taxpayer Identification number (ITIN) for any person for whom you are claiming an exemption. You can use either the Social Security Number that was issued by the Social Security Administration or the Individual Taxpayer Identification number (ITIN) that was issued by the Internal Revenue Service (IRS).

If the child was born or if the child died in the same year, you don't need a social security number. If the child was born in that year, you should probably apply for a number since it only takes about two to four weeks to receive the Social Security Number from the Social Security Administration or the Taxpayer Identification Number (TIN) from the Internal Revenue Service (IRS). These time frames vary depending on the SSA or IRS specifications or service areas.  If the child died in the same year he or she was born, then instead of a Social Security Number or an Individual Identification Number (ITIN), attach a copy of the child's birth certificate and write "Died" in the appropriate exemption line of the tax return.

So just to recap, you can acquire a Taxpayer Identification Number in various ways. If you need a Social Security Number from the Social Security Administration, you will need to complete Form SS-5, Application for a Social Security Card. In addition to filling out Form SS-5, you must also submit evidence of your identity, age, and of your U.S. citizenship or lawful alien status. You can get Form SS-5 by calling the Social Security Administration office or on the Web. If you have a business, you can acquire an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This number is also known as a federal identification number. This number is normally used to identify your business entity. Most of the time it is given to you when you have employees.

You can acquire this Employer Identification number even for your sole proprietor business but normally it is only given to a sole proprietorship if the sole proprietor has employees. Sole proprietors can use their Social Security number to report their business activities to the Internal Revenue Service (IRS) and are not obligated to get an Employer Identification number (EIN). The Employer Identification Number is also used by estates and trusts who are required to report their income on Form 1041, U.S. Income Tax Return for Estates and Trusts.

Foreign entities that are not individuals (i.e., foreign corporations, etc.) and that are required to have a federal Employer Identification Number (EIN) to claim an exemption from withholding because of a tax treaty (claimed on Form W-8BEN), need to submit Form SS-4 Application for Employer Identification Number to the Internal Revenue Service in order to apply for such an EIN. Those foreign entities filing Form SS-4 for the purpose of obtaining an EIN to claim a tax treaty exemption and which otherwise have no requirements to file a U.S. income tax return, employment tax return, or excise tax return, should comply with the special instructions when filling out Form SS-4. When completing line 7b of Form SS-4, the applicant should write "N/A" in the block asking for an SSN or ITIN, unless the applicant already has an SSN or ITIN. When answering question 10 on Form SS-4, the applicant should check the "other" block and write or type in immediately follow it with "For W-8BEN Purposes Only", or "For Tax Treaty Purposes Only", "Required under Reg. 1.1441-1(e)(4)(viii)" or "897(i) Election".

An Employer Identification Number (EIN) is also known as a federal tax identification number and is used to report estate and trust income on Form 1041 and also to identify a business entity. Most businesses have this number, and they usually must have it in order to open a bank account unless they want to be forced to use their own complete personal name as the business name. Both legal and natural persons must apply for an employer identification number (EIN). We said everyone needs a number and that also includes legal persons, such as corporations, too.

New regulation is that you cannot claim a child who is not related to you unless that child is placed with you by an authorized placement agency. If you have a child who was placed with you by an authorized placement agency, you may be able to claim that child. However, if you cannot get an SSN or an ITIN for the child, you must get an adoption taxpayer identification number (ATIN) from the Internal Revenue Service for the adopted child. An adoption taxpayer identification number (ATIN) is an issued by the Internal Revenue Service in order for taxpayers to be able to claim their children in the process of adoption.

The Practitioner PIN method allows you to authorize your tax practitioner to enter or generate a taxpayer PIN for signing a tax return. You can electronically sign your tax returns by selecting a five-digit PIN. If the taxpayer is married, a PIN is needed for the taxpayer and a PIN is also needed for the spouse when filing a Married Filing Jointly tax return. With this new option, now the tax preparer can also electronically sign Form 4868 to request an extension of time to file a tax return. The new method also allows you to authorize the Electronic Return Originator to enter or generate your PIN. Regardless of the manner that your PIN is generated, to file your tax return electronically, you must sign the tax return electronically using the personal identification number (PIN).

If you changed your name because of marriage, divorce, etc., be sure to report the change to the Social Security Administration (SSA) before you file your tax return. This prevents delays in processing your tax return and will prevent any delay in issuing your refund. By the way, you want to update your files with the Social Security Administration (SSA) to safeguard your social security benefits. Notify the Social Security Administration before you file your tax return with the IRS if you or your dependents changed your names. The name and the name of your dependents with the Social Security Administration must match the name with the reports you file with the Internal Revenue Service.

Avoid filing your tax return without double checking your Social Security Administration records first because you would encounter the most difficult problem to try to fix the mismatch with the Internal Revenue Service (IRS) if you entered the wrong identifying information for you or your dependents. You should do everything in your power to avoid any kind of letter from the IRS especially a letter about something so simple as a social security number and name mismatch. It will especially be very difficult to straightening out the problem if they disallowed a credit such as the Earned Income Credit because of a social security mismatch. This is where an ounce of prevention is worth a pound of cure. If you change your name, do yourself a favor and let everyone know. Just like you would not want your friends and family calling you by your old name, you also don't want the Internal Revenue Service (IRS) and the Social Security Administration (SSA) calling you by your old name.

Everyone is on the look-out for identity theft crime. Identity theft occurs when someone uses your personal information, such as your name, social security number (SSN), or other identifying information, without your permission, to commit fraud or other crimes such as getting a job or filing a tax return to receive a refund. To reduce your risk, protect your Social Security Number by ensuring that your employer is protecting your SSN and be careful when choosing a tax preparer. Sometimes, it is not that the preparer will do something illegal more like the tax prepare would be careless. If a tax preparer leaves tax return out in the open for his or her customers to see, then that is a preparer you need to stay away from. You are a preparer so this is something you should not do. 

Preparers should ensure that they notify their clients of the precautions they are taking to safeguard their personal information. There are many commercials by many identity theft companies letting the public know of the identity theft problem. Therefore, it is in your best interest to instill a trust in your client's mind as to how you are protecting their person information and their social security number. There have been reports of tax preparers abusing their client's personal information and many taxpayers are already aware of the negative possibilities. 

This is important information you always wish you kept or asked for after you encounter problems. Probably the most common comment people make to themselves is "This will not happen to me". Therefore, they never bother to take precautions. Probably many of us can relate to the "This will not happen to me" concept. Have you even not backed up your data because you were thinking this way? Then, all your data was lost and now you back up every single item on your computer. This is the same thing with identity theft. The people to who this has happened never took the precautions because they always thought that this would not happen to them.

If you file a separate tax return, you could claim an exemption for your spouse only if your spouse had no gross income and is not filing a tax return and was not a dependent of another taxpayer. You generally cannot claim a married person as a dependent if he or she files a joint tax return unless he or she files only to claim for a refund and no tax liability would exist for either spouse on separate tax returns. Additionally, you generally cannot claim a married person as a dependent if he or she files a joint tax return only if they file a joint tax return to get a refund of the withheld taxes. Sometimes it is best to stay from these complex situations.

If you choose married filing separately as your filing status, certain rules apply such as you cannot take the credit for child and dependent care expenses in most cases, and the amount you can exclude from income under an employer's dependent care assistance program is limited to $2,500 for 2020.

For 2021, ARPA has increased the limit to $10,500 which means that if you are filing separately the amount you would be able to claim is limited to $5,250.

Married individuals always have the legal right to file their returns as either married filing jointly or married filing separately. However, if one spouse does not report the correct tax, both spouses may be responsible for any individual taxes assessed by the Internal Revenue Service. You may want to file separately if you believe your spouse is not reporting all his or her income or if you do not want to be responsible for any taxes due if your spouse does not have enough tax withheld or does not pay enough estimated tax. We often wonder why we even have married filing separately filing status. Many tax professionals tell you right off not to file Married Filing Separately. Why?

Basically, if you file Married Filing Separately, you end up paying more tax and end up qualifying for less tax credits and deductions. Married Filing Separately is notorious for not being chosen as a filing status by many tax professionals and taxpayers. This is so much so that some tax professionals don't care to learn the ins and outs of the married filing separate filing status. And they even think that if you are married, you cannot file separately.

Also, if you file married filing separately, the amount of exclusion from income under an employer's dependent care assistance program is limited to $2,500 instead of the full $5,000 using 2020 amounts. This credit has been increased for 2021 to double the benefit. For 2021 the amount of the credit has been increased to $10,500, therefore if you are MFS you can only receive $5,250 in 2021.

As you may already know, the Earned Income Tax Credit will not be allowed for individuals using the married filing separate status. If you choose to file as married filing separate on your tax return, you have a higher tax rate and less deductions and credit. In most cases, the exclusion or credit for adoption expenses is not allowed.

Other credits that are not allowed are the education credits such as the American opportunity credit, lifetime learning credit, or the deduction for student loan interest. Still on the subject of education, the exclusion of any interest income from qualified U.S. savings bonds you used for higher education expenses are also not allowed if you file married filing separately on your tax return.

You see now why the married filing separately filing status is not so popular? For example, if you choose this filing status, the retirement savings contributions credit is reduced at half income levels than if you filed jointly. Married filing jointly is normally the most advantageous filing status to select. It depends on your income level and the income level of your spouse.

Furthermore, your itemized deductions could be reduced at half income levels than if you filed jointly. Your capital loss deduction limit is $1,500 for choosing to file separately instead of the $3,000 on a joint return. Moreover, if your spouse itemizes her deductions, you cannot claim the standard deduction on your tax return which would be half the amount allowed on a joint tax return. So apparently married filing separately is not the way to go. There are many drawbacks in choosing married filing separately as your filing status. However, sometimes married filing separately is the only option for you and you would not have a choice. So, if you have any of the credits or deductions mentioned above it behooves you to make file jointly. If you and your spouse are not talking, this is a perfect time to make peace at least temporarily. 

It could be that they separated from their spouse and the spouse is nowhere to be found. In some states such as California, the tax professional or taxpayer would have to apply the community property rules to married filing separate tax returns. There are nine states that are community property states, and they are California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Washington, and Wisconsin. Alaska could be considered a community property state also depending on what the taxpayer elects. Alaska gives their taxpayers the option to make their property community property.

If you were married on or before December 31, 2020, you can either be Married filing jointly or Married Filing separate for tax year 2020. However, you can probably qualify for Head of Household filing status if you can be considered unmarried for 2020 and otherwise meet the other requirements.

Don't believe them if anyone tells you that if you are married, you must file a married filing joint tax return. That is why we have the married filing separate filing status. Both you and your spouse must include all your income, exemptions, and deductions on your tax return. In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint tax return. You can request innocent spouse relief and be relieved from the responsibility of tax, interest, or penalties from your spouse's tax return. Not all tax, interest and penalties qualify for relief.

Under Separation of Liability relief, you divide the understatement of tax plus interest and penalties on your joint return between you and your spouse. If you qualify for the Separation of Liability relief, you would be only responsible for the amount allocated to you. Equity relief is your last resort, and the IRS will consider if equitable relief is an option. Equitable relief is from an understatement or underpayment of tax. It is always your legal right to file as married filing separate regardless if doing so does not allow for most favorable tax outcome. Your decision will be based on the tax calculations and the best benefit acquired by your choice of filing status.

To qualify for innocent spouse relief, you must have filed a joint return with an erroneous item that is solely your spouse's responsibility, and you must establish that had no reason to know that tax was understated and that it would be unfair to hold you responsible for the liability.  For separation of liability relief at the time of your request you must show that you are divorced or legally separated from your spouse with whom you filed the return. You can also show that you are widowed or that you have not been a member of the same household for at least twelve months before your separation of liability relief request.

If you file a joint tax return, both you and your spouse are generally responsible for the tax and any interest or penalties due on the tax return. You may want to file separate if you believe that your spouse is not reporting all of his or her income. If you do not want to be responsible for any taxes due if you spouse does not have enough tax withheld or does not pay enough estimated tax, you may want to file as "married filing separate". If things were great for you and your spouse at first and now things changed and you are having second thoughts on your decision to trust him or her, you can keep things separate, even filing your tax returns. There are many spousal relief options available to you on behalf of the Internal Revenue Service which you can request to remedy the situation. Sometimes the problem is all the paperwork involved and require just to get the process started. Then you still must meet with an IRS agent to discuss your situation. Finally, many of these benefits don't get approved.

On a joint return, you and your spouse report your combined income and deduct your combined allowable expenses. You can file a joint tax return even if one of you had no income or deductions. In order to file jointly, you and your spouse must agree to file jointly, and you both must sign the tax forms. As a tax preparer you can have them sign in front of you, but you are not required to do so. You are obligated to exercise a certain amount of due diligence and making sure that the people filing the tax return can be part of your due diligence protocol.

If your spouse died at the end of 2020 and you remarried at the end of 2020 to another spouse, you would still file married filing jointly but with a new spouse. If you are remarried to a new spouse, your deceased spouse would have no choice but to file married filing separately. Remember, even people who have died may be obligated to file a tax return. Then for two years after that and if you have not remarried, you can probably qualify for the qualifying widow (or widower) filing status if you have a qualifying child.

You can choose the Married Filing Jointly filing status if you are married and both you and your spouse agree to file together. When you file as Married Filing Jointly, you report your combined income and deduct your combined allowable expenses. You can file using the Married Filing Jointly filing status even if one of you had no income or deductions. Married taxpayers have a choice to either file jointly or to file separately. The better choice always seems to be to opt for the Married Filing Jointly filing status. The other options are the Married Filing Separate and the Head of Household filing status.

There are a number of worksheets and rules that you must follow to determine if you as a married person can file a Head of Household. There are many credits and deductions which you can qualify for by filing Married Filing Jointly or Head of Household that you would not qualify or be allowed to be claimed when you file as Married Filing Separately. One thing is for sure. If you have a choice, choosing Married filing Jointly is much better than using Married Filing Separately for various reasons. One of these reasons is that you would like to keep everything including your tax return filing, separate from your spouse.

If you obtain a divorce for the sole purpose of filing a tax return as unmarried individuals, and at the time of the divorce you intend to and do, in fact, remarry each other in the next tax year, you and your spouse must file as married individuals in both years. This has been a scheme for a while now. Taxpayers are still doing this to take advantage of the lower tax rates. Before you try this or other schemes, get advice from the IRS or tax professionals who can enlighten you further. Buying into any tax scheme or tax evasion scheme can be very costly.

If you obtain a court decree of annulment, which holds that no valid marriage ever existed, you are considered unmarried even if you filed joint returns for earlier years. In essence, you are considered to have never married in the first place. Your marriage never existed and thus has become void. Therefore, you should amend your tax returns if you have filed returns as married filing jointly or married filing separate for years for which this annulment of the marriage applies. There's a difference between a divorce and an annulment. A court grants a divorce to mark the end of a marriage that was valid, whereas an annulment is for a marriage that at no time was valid. The Internal Revenue Service holds to this idea in applying the tax laws to annulments.

For example, Jay and Thelma married in 2020, filed a joint return for that year, and had their marriage annulled after the filing deadline. Because their marriage was declared null and void from its very inception, they're considered to be unmarried at the end of 2020. Consequently, they were ineligible to file jointly or even as married filing separately and therefore they must undue their joint return by filing amended returns as unmarried taxpayers. This means that they will probably be liable for taxes at the single rate and will probably be liable for interest or penalties.

There are many stipulations that determine if you are indeed in a common law marriage. One of these would be if you hold certain items jointly such as bank accounts and other property. Another requisite is that the couple be known in their community as holding a relationship as a married couple. So basically, the couple is married if they are living the married life and shouting their union to the four winds. 

The IRS recognizes common-law marriages as legal marriages. This includes being known in your society as being married as husband and wife. If on the last day of your tax year you are living together in a common law marriage that is recognized in a state where you now live or in the state where the common law marriage began, you would be considered married for the entire year. If you have a valid common-law married that the IRS recognizes, then you can file a federal married filing jointly or married filing separate tax return. Now the Internal Revenue Service also recognizes same sex marriages too.

For federal tax purposes, individuals of the same sex are married if they were lawfully married in a state or foreign country whose laws authorize the marriage even if the state or foreign country in which they now live do not recognize same-sex marriage. This is different than the registered domestic partnership rules from previous years.

Federal tax law never recognized registered domestic partnership so individuals would file a return using married filing jointly for certain states but single for federal tax purposes. All same-sex couples who are legally married will be recognized as such for federal tax purposes, even if the state where they reside does not recognize their union. Same-sex couples are entitled to the same federal tax benefits as all married couples. With this rule also comes the obligation to file if the taxpayers are legally married just as all other married couples. Now, they too must file as either "married filing jointly' or "married filing separately". If two individuals of the same sex are married, they generally must use the married filing jointly and married filing separate status.

There are no more deductions for athletic tickets. Furthermore, the casualty and theft loss deduction has been limited to only federally declared disaster areas.

The medical expense deduction is one of the few deductions that will be left to itemized on Schedule A. The new Tax Cuts and Job Act has doubled the standard deductions. For 2020 the standard deduction is $12,400 for individuals and $24,800 for joint filers. And for 2021 the standard deduction is $12,550 for individuals and $25,100 for joint filers. With these figures it is anticipated that there will less taxpayers who itemize deductions on their tax returns.

The types of eligible expenses remain unchanged. They continue to include

The items you cannot deduct continue to be the same such as over-the-counter medicines, toothpaste, cosmetic surgery, gym memberships, nutritional supplements, nicotine patches or gum and teeth whitening.

You had a choice to deduct either your individual state income taxes paid, or your sales taxes paid and for some people this amount was up there especially if he or she lived in a state like California or New York with high state taxes. For some people, it will not matter too much because of the doubling of the standard deduction, but for some it will. This is especially true for those people who have always itemized or who will itemize because their itemized deductions end up being higher than the standard deduction, even the doubled standard deduction.

Some taxpayers may be confused because maybe they think that this is only the state and local taxes withheld on their Form W-2. No, it is more than that. It is that plus the real-estate property tax, property taxes such as the tax from the DMV taxes you pay for owning your car or cars. All these make up a huge chunk and the $10,000 cap may be way less than the actual amount spent. For some taxpayers, this deduction can mean it is $1,500 less but for other it could mean it is $18,000 or even $25,000 less.

Before the Tax Cuts and Jobs Act, the mortgage interest deduction limit was $1 million. Now, the limit is a deduction of interest based on an amount that does not exceed the $750,000 in principal. This means that single filers and married couples filing jointly can deduct the interest based on up to $750,000 of mortgage debt if single, a joint filer or head of household. Married taxpayers who wish to file separate tax returns can deduct interest based on up to $375,000 mortgage debt each. This itemized deduction limitation will be from 2018 through 2025. Only the interest paid or accrued on acquisition debt will be eligible for the mortgage interest deduction from 2018 through 2025. Therefore, from 2018 through 2025, the the maximum amount of debt used to calculate the allowable home mortgage interest deduction will be reduced from $1,000,000 to $750,000 on new mortgages incurred after December 15, 2017.

There are a few exceptions, however. A mortgage taken out before October 13, 1987 is considered grandfathered debt and is not limited by the new law. This means that all of the interest you pay on a grandfathered debt will be fully deductible. Additionally, a home purchased after October 13, 1987 and before December 16, 2017 is still eligible for the $1 million limit. The limit would be $500,000 each if you are filing as married filing separate. Furthermore, any home that was sold before April 1, 2018 is eligible for the $1 million limit with the condition that there was a binding contract entered before December 15, 2017 to close before January 1, 2018 and the home was purchased before April 1, 2018.

Most often than not, you can deduct all of  your home mortgage interest. The amount you can deduct would depend on the date the mortgage was acquired and the amount of the mortgage. How you use the mortgage proceeds plays a huge role in the ability to deduct the mortgage interest. There are also special considerations to be taken into account as the federal government tries to help taxpayers out of the coronavirus pandemic. For instance, the IRS is willing to overlook the restrictions on home mortgages and therefore allow taxpayers to deduct interest on a home equity loan, home equity line of credit or second mortgage overlooking the type of mortgage. However, you still cannot try to deduct home mortgage interest on home loans taken out and funds used for purposes that are not to buy, build or substantially improve your home.

Colleges and universities counted on the previous tax code that permitted the 80 percent deduction, but now they are out of luck with the new tax law reform. This means that these colleges and universities will lose millions in revenues. Many colleges and universities relied on the 80/20 rule for charitable donations to encourage athletic programs, scholarships, and other programs of the institution.

If you know the rules for deducting charitable contributions when you receive a benefit in exchange, you will probably better understand the new law's position on this issue. The rules are for deducting contributions for which you get a benefit in return. If any part of your payment toward a charitable contribution is for tickets (rather than the right to buy tickets), 100% of that part is not deductible. You must reduce the amount of your contribution by the value of any benefit you receive. However, you don't have to reduce your contribution amount if you received (1) only a small item or other benefit of token value, and (2) the qualified organization correctly determines that the value of the item or benefit you received isn't substantial and informs you that you can deduct your payment in full. The organization will be using Revenue Procedures 90-12 and 92-49 to determine this.

Basically, if you receive a benefit as a result of making a contribution to a qualified organization, you can deduct only the value of your contribution that is more than the value of the benefit you receive.

When you make a payment to the college or university for the right to buy tickets to an athletic event in the athletic stadium of the college or university, you are getting a benefit in return: the right to buy tickets and usually this gives you the right to buy tickets for a designated area of the stadium or some form of preference. You are not allowed to do this and get a charitable contribution deduction. However, if you pay $300 to the university for tickets for which you would normally pay $75, then you can possibly deduct the difference as a charitable contribution. You can as long as the organization you pay this to is a qualified organization and the event usually would have to be for charitable purposes.

This written acknowledgment requires that the taxpayer provide on it the name of the organization, the amount of cash contribution, and a description, without needing to disclose the value, of non-cash contributions. Additionally, the taxpayer is required to provide a statement from the recipient of the donation that no goods or services were provided by the organization in return for the contribution, unless there was an exchange. Furthermore, the taxpayer must substantiate on this contemporaneous acknowledgment a description of, and a good faith estimate of the value of goods or services, if that was the case, that the organization provided in exchange for the contribution, and you would only be able to deduct what exceeds this value. Finally, the acknowledgment should include a statement that goods or services consisted entirely of religious benefits, and if so, the organization would simply state that the organization provided intangible religious benefits to the taxpayer.

Contemporaneous means that the donor receives the acknowledgment by the earlier of

The taxpayer can provide another form of substantiation such a thank you letter from the organization as long as this other form of substantiation provides the same information of the organization that received the donation.

The alternative process where the taxpayer was able to have the charitable organization file a document with the IRS containing detailed information about the donor and his or her donation has been eliminated by the new Tax Cuts and Job Act.

Consequently, this does not seem to be a problem, since most charitable organizations usually send thank you letters to their donors. It only makes sense that they send thank you letters because they want the contributions to keep coming. The donor taxpayer can use this letter as substantiation that they have made the donation.

There are other items to consider though. The fact that Congress has doubled the standard deduction means that less individuals will donate because there will be no tax incentive to do so since many people will not itemize due to the larger standard deduction. So, this in itself will affect charitable organizations, indirectly. No really, indirectly because the organization will lose billions annually and this is very direct. Don't you think?

Another change in the new law that will affect charitable organization is the fact that the new tax law increased the estate tax threshold, and this means that fewer estates will be subject to taxation and again affecting indirectly the pockets of the charitable organization by having less bequests to charitable organizations. After all, who wants to give anything in exchange for nothing? 

The suspension of this deduction brings a greater grief than what it appears to be on the surface. One example of this is the deduction for hobby losses. With this elimination, the hobby losses will be eliminated 100%. Many figure that you can take hobby expenses up to the income earned, but this is not true, well, at least not anymore. With the new tax law, you will be able to deduct zero of your expenses that you had to acquire hobby income. However, you will have to report 100% of the hobby income. You will see that there are many other items which are affected.

Another one of these items that will be greatly affected by this change that seems to be harmless is the office in the home deduction which is no longer available to employees of a company who work from home. It is quite convenient to work from home. The office in the home deduction for employees which was a deduction that you can take about the 2% of AGI is no longer an option. This new tax law has affected items such as the 2% of AGI deduction and has caused chaos for many taxpayers on many different platforms.

Most taxpayers have a choice of either taking a standard deduction or itemizing their deductions. If you have a choice, you use the method that gives you the lower tax and higher deduction. Some persons are not eligible for the standard deduction. Your standard deduction is zero and you should itemize any deductions you have if your filing status is married filing separately and your spouse itemizes deductions on his or her tax return.

Also, your standard deduction is zero and you should itemize any deductions you have if you are filing a tax return for a short tax year because of a change in your annual accounting period. In addition, if you are a non-resident or dual-status alien during the year, you should itemize your deductions and your standard deduction is zero. 

If your itemized deductions are less than the amount of your standard deduction, you can elect to itemize deductions on your federal tax return rather than take the standard deduction. Furthermore, you can itemize your deductions if the tax benefit of being able to itemize your deductions on your state tax return is greater than the tax benefit you lose on your federal tax return by not taking the standard deduction.

At no time are you obligated to take the standard deduction. It is for the most part more beneficial to take advantage of the larger figure but not always as in the case with the state calculations. You are not obligated to itemize your deductions just because your total deductions are more than the standard deduction amount. However, sometimes you may be obligated to itemize your deductions based on actions your spouse takes when filing separately. Other than that, you normally always have a choice to not itemize if you are able to choose either of the two.  You can itemize your deduction for federal and not for state or vice versa if it is more beneficial to do so. There is one exception though, if you are filing married filing separate and your spouse itemizes, then you are forced to itemize too no matter what the figures are.

When filing married filing separate, you must itemize your deductions if your spouse itemizes deductions even if you normally would not itemize or if it would not be in your best interest to do so. For example, Marvin is married to Clara and for 2020, due to some marital problems, they filed married filing separate. Clara will itemize her deductions of $28,000 because she had qualifying medical expenses. Marvin wants to use the standard deduction on his tax return, because his total itemized deductions amount is only $4,100 for 2020 and it is less than the standard deduction amount. Since Clara will itemize her deductions, Marvin must also itemize his deductions but only use the $4,100 amount.

If you do not itemize deductions, you are entitled to a higher standard deduction if you are 65 or older at the end of the tax year. You are considered 65 on the day before your 65th birthday. Therefore, you can take a higher standard deduction for 2020 if you were born before January 1, 1956. This is why it is important to ask all pertinent information about your client. A lot of us look very young, so be safe and ask for the date of birth and not if we are 65 or over. Also, someone could be only 45 years old and if you ask them if they are over 65, for sure will have made a new enemy. This is especially true if your client is a woman. So, if you do this, don't be surprised if they as if they can use the restroom down the hall and you never see them again.

After that, Kevin can file as Qualifying Widower if he qualifies. He can use the Qualifying Widower filing status for two years after the last year that he filed married filing jointly with this wife. The qualifications for the Qualifying Widower filing status are similar to the head of household filing status. You must have a qualifying child who lived with you for all of the tax year. You must have paid more than half the cost of the costs of maintaining a home for this child.

The qualifying child cannot be a foster child, but the child can be your stepchild. You can benefit from taking the Qualifying Widow (or widower) filing status because you qualify for the married filing jointly tax rates if you use this filing status. Using the qualifying widow (or widower) filing status will entitle you to use the highest standard deduction amount. The married filing jointly and the qualifying widow (or widower) filing statuses qualify for the highest standard deduction amounts. You can use Form 1040 to file using the qualifying widow (or widower) filing status.

The federal standard deduction amount for a dependent who earned $4,000 from her job is $4,350. This is so because the dependent earned only $4,000. Therefore, the standard deduction for the dependent would be $4,000 plus $350. The standard deduction for the dependent cannot be more than the regular standard deduction of $12,400 for a single person in 2020. The standard deduction for the dependent would also not be less than $1,100 for the tax year. In this case, the standard deduction would be the larger of $1,100 or her earned income plus $350. This calculation is for dependents who are not over 65 years old or blind. If the dependent is over 65 or blind the standard deduction would be additional $1300.

A person who is a dependent may still have to file a tax return. This depends on the amount of the dependent's earned or unearned income and gross income. Age is a factor in determining if you must file a tax return if you are age 65 or older, you are a dependent or if you have gross income of more than $12,400 at the end of the tax year.

You can check "Single" box on line 1 if on December 31, 2020, you were never married or you were legally separated according to your state law under a decree of divorce or separate maintenance. You can also check "Single" if you were widowed before January 1, 2020, and you did not remarry before the end of 2020 and you did not have a qualifying child to claim qualifying widow (widower) filing status.

Do not reduce the amount you report as taxable compensation on your tax return by withholdings for income taxes, Social Security taxes, union dues, or U.S. Savings Bonds purchases. Your Form W-2 does not include in taxable pay your qualifying salary-reduction contributions to a retirement plan, although the amount may be shown on the form. You must attach a copy of Form W-2 to your tax return. You attach Forms 1099 only if there are withholdings on it.

On March 11, 2021, the American Rescue Plan allows an exclusion of unemployment benefits received in 2020 of up to $10,200. This also means that if you are married and your spouse receives benefits, he or she will also his or her first $10,200 excluded from income. If you get over $10,200 in unemployment benefits, then the amounts you received that are over $10,200 is taxable for federal. If your spouse gets over $10,200 of unemployment compensation, her benefits that are over the $10,200 amount will be taxable. In order for you to exclude the $10,200 amount from unemployment compensation, the amount your modified AGI must be less than $150,000.

Before this new tax law reform, there were still seven brackets, but they were 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. The brackets have changed a bit, but not only that, the income ranges is what really matters in these percentages. What is more important is at what income levels the brackets apply.

The new tax law reform was intending to only have a few tax brackets and less than the seven brackets we have currently. However, it was inedible and at the end we ended up with the same amount of tax brackets. Say goodbye to the idea that taxes are going to be so easy "We will file our tax return on a postcard". Filing your taxes on a postcard is not going to happen. Building a 2,000-mile wall is not going to happen either, not even a 200 mile one.

There are many employee fringe benefits affected by the Tax Cuts and Jobs Act (TCJA). First, the employees can no longer deduct unreimbursed business expenses. Second, moving expenses are no longer deductible like they used to be. Third, the employer can no longer deduct qualified transportation benefits for providing tax-free transportation fringe benefits by the employer. Neither can the employer deduct any expense incurred for providing any transportation between the employee's residence and place of employment.

Fourth, entertainment expenses are out as the TCJA does not allow an employer to claim a tax deduction for entertainment. In addition, the TCJA will continue to allow the value of meals to be tax-free provided certain conditions are met. Finally, the TCJA limits the conditions of tangible personal property for employers who make a tax-free award of tangible personal property for length of service or safety achievement.

Unreimbursed business expenses are no longer allowed. If an employer reimburses an employee for a business expense, the reimbursement is tax-free to the employee, but if the employer does not reimburse the employee, the employee is no longer allowed to claim a tax deduction for this expense.

 Section 123(e)(2) provides the value of meals can be tax-free if

Section 119 provides the value of meals furnished to an employee can be tax-free if

However, the TCJA tax reform now imposes a 50% limit on deducting food or beverage expenses to employees at an employer-operated eating facility. Furthermore, these expenses will be fully nondeductible after December 31, 2025.

The tax code permits an employer to make a tax-free award of tangible personal property to an employee for length-of-service or safety achievement. The TCJA tax reform states that tangible property does not include

As you can see, there are many employee fringe benefits affected by the Tax Cuts and Jobs Act (TCJA). Unreimbursed business expenses are no longer allowed. Moving expenses are only allowed for member of the military. With the new tax reform, the employer can still provide tax-free qualified transportation fringe benefits to employees, except for qualified bicycle commuting reimbursements. The employer will not be allowed to deduct any commuting expense incurred for providing any transportation to travel between the employee's residence and place of employment unless it is for the employee's safety.

The TCJA tax reform will also no longer allow a deduction to employers for entertainment and recreational expenses or deductions with respect to any facility used in connection with such activity. The rules for employer operated eating facilities remain at only 50% deductible. The new TCJA tax reform puts limitation son what tangible property includes or does not include. Very much effort has been placed on the deduction allowance or disallowance of employee fringe benefits.

Also, any profit from the sale of your main home may be includable in gross income unless you qualify for the exemptions. If you qualify for the sale of your home exemption, then you must determine which amounts of the gain from the sale of your home are includable in gross income. Practically anything that you receive in exchange for services is taxable income. You don't need to receive any kind of paperwork from anyone to report income that is taxable. If you receive cash or money "under the table" it is taxable income. Sometimes when the amounts are small and you don't report them, then probably no one will notice that you are getting paid this way. However, when that is your only source of income and out of that money you pay your car payment and mortgage, then you better believe it you will get caught.

Everyone must do their part and provide documentation for everything that has transpired as far as what income was received. There are steep penalties for everyone for failing to comply. Your employer must provide or send Form W-2 to you no later than January 31, 2021. If you do not get a Form W-2, you still must report your earnings on your tax return. You should not file your tax return without Form W-2. Also, if your employer has not sent you a copy of your W-2 yet, then they most probably have not sent a copy to the IRS so asking the IRS for a copy is probably not an option. Besides, if they do have a copy, a copy would not be made available to you since it is too early in the tax year.

Your employer has until January 31, 2021, to mail your Form W-2 to you, but has until March 2, 2021 to submit the forms to the Social Security Administration and to the Internal Revenue Service. The good news is that once you ask your employer for Form W-2 and if he refuses, you can file a substitute form to report your wages to the Internal Revenue Service on Form 4852. You have to allow enough mail processing time after January 31, 2021, and or visit the employer to make your request before you can file Form 4852. The point is that you must wait until after January 31, 2021, in order to file your substitute wage form. Another requirement is that you ask your employer for a copy before your use Form 4852. Form 4852 is not a form you would file if you are ready to file your tax return on January 7th, for example.

All tip income is taxable. You must include in the total on your tax return tip income that you did not report to your employer. You must use Form 1040 and Form 4137 if you received tips of $20 or more in any month and did not report the full amount to your employer. Allocated tips should be shown in box 8 of your Form W-2 and they are not shown in box 1. Indeed, all tip in taxable. Many taxpayers think that if they don't receive at least $20 they don't have to report the tip income on their tax return. All tip income is taxable even if you are not required to report it to your employer. In turn, your employer is supposed to report a certain percentage of sales you make as tip income. You will be forced to report the calculated as tip income. This is so unless you can prove that you are such a horrible person that no one would ever tip you. 

We will be reviewing some basic tax preparation concepts regarding income, deductions, and credits on your tax return. One of these basic tax preparation items is interest income. When you receive interest income as a nominee, it means that the income is in your name, but it really belongs to someone else. You are responsible to report any interest income on your tax return. Your bank is normally only obligated to send you an interest statement if the interest amount is over $10. However, this does not mean that you are not obligated to report your interest if it is less than $10 or if your bank did not send you a statement at the end of the year. The under $10 amount that your bank did not send you a form because it was not required is still taxable income. All amounts of taxable interest income are to be reported on your tax return.

For 2020, Schedule B Part III is where you report a financial interest or signature authority over a financial account located in a foreign country. A financial account includes a commodity futures or options account. It can also include shares in a mutual fund or similar pooled fund. Even an insurance policy with cash value is considered a financial account.

If you received a statement as a nominee of the interest received, the Internal Revenue Service will hold you responsible to report this income on your tax return or name you as the owner of such interest income if you don't file the proper paperwork to let them know who the real owner is. You should not just choose whomever you want as the owner of this interest income, because the person to whom you report the interest income will be obligated to report it on their own tax return if they have a filing requirement.

If you received interest income as a nominee, you received this income for someone else. Therefore, you are not required to report this amount on your own tax return. You must use Form 1040 if you received interest as a nominee. By the way, there is no other form that you can use. You must also use Form 1040 if you received a 2020 Form 1099-INT of U.S. savings bond interest that includes amounts you reported before 2020. If you owned or had authority over one or more foreign financial accounts with a combined value over $10,000 at any time during 2020, then you must use Form 1040 to report it. 

Qualified dividends are eligible for a lower tax rate than other ordinary income. Some dividends may be reported as qualified dividends in box 1b of Form 1099-DIV but are not qualified dividends such as dividends received as a nominee. Dividends you received on any share of stock which you held for less than 61 days during the 121-day period that began 60 days before then ex-dividend date are also not qualified dividends. Neither are qualified dividends considered any payments you receive in lieu of dividends, but only if you know or have reason to know that those payments are not qualified dividends.

If in 2020 you had a financial interest in or signature authority over a financial account in a foreign country, you must file Schedule B even if you are not otherwise required to file one. In Part III of Schedule B, you must disclose your interest in the foreign account and are directed to the instructions for FinCEN Form 114 (FBAR) to if you must file that form (if yes, it must be filed electronically), and to indicate in Part III of Schedule B if the FBAR is required. There are penalties for not filing a required FBAR. Regardless of whether you must file a FBAR, you may have to file Form 8938 to disclose your ownership of specified foreign financial assets. Penalties also apply for failure to file a required Form 8938.

If you have financial interests in foreign bank accounts or other foreign financial accounts or assets, you may be required to file a FBAR, Form 8938, or both. Depending on your holdings, you may be required to file both forms, so check the filing requirements for both. Failure to file a required form may result in substantial penalties.

What is FBAR? A report on Foreign Bank and Financial Accounts, generally referred to as the "FBAR", must be filed if you have a financial interest in or a signature authority over foreign bank or other financial accounts and the aggregate value of the accounts at any time during the year exceeds $10,000. The annual report is FinCEN Report 114, which is filed electronically with the Treasury Department. FinCEN is the Treasury's Financial Crimes Enforcement Network.

The FBAR, if required, is not filed with your income tax return. Form 2018 foreign holdings, the FBAR report is due April 17, 2021. The report is filed with the Treasury Department separately from the income tax return. You can obtain a filing extension for FinCEN Report 114 for up to 6 months.

In Part III of Schedule B of Form 1040, you must tell the IRS if you had a financial interest in or a signature interest over a financial account located in a foreign country. If you answer yes, you are directed to the FBAR instructions to determine if you must file the form, and if you are required to file the FBAR, you are asked to enter the name of the foreign country where the financial account is located.

What are the penalties? If you are required to file an FBAR and fail to do so, a civil penalty of up to $10,000 may be imposed if the violation was not willful. The penalty may be waived if there was reasonable cause for the failure and a FBAR is properly filed. For a willful failure to file, the civil penalty can be up the greater of $100,000 or 50% of the account balance; criminal penalties may also apply. If you have not been reporting foreign accounts as you should, you can come into compliance with reduced penalties if you qualify for the Offshore Voluntary Disclosure Program (OVDP). It will behoove you to look more into this.

You may be required to file Form 8938 which is a statement of Specified Foreign Financial Assets and you may have to file it with your tax return. If you don't file Form 8938, you may incur penalties and extensions of the statute of limitations.

You are required to report information about assets of Form 8938 if you are a U.S. taxpayer holding specified foreign financial assets with an aggregate value exceeding $50,000.

On Schedule B Part III is where you report a financial interest or signature authority over a financial account located in a foreign country. A financial account includes securities, brokerage, savings accounts, and demand accounts. It also includes checking accounts, deposit accounts, time deposit accounts, commodity futures or options accounts. A financial account also includes an insurance policy with a cash value and an annuity policy with a cash value. Shares in a mutual fund or similar pooled fund are also considered a financial account. 

You must report on Part III any financial account that is physically located outside of the United States. This would include a branch that is physically located outside the U.S.

Part III may require you to fill out and file Form 8939 or FinCen Form 114 depending on your situation. Not filing FinCen Form 114 when required to do so may cause you to owe a penalty of $10,000. Willful violations and refusals to comply may subject the taxpayer to criminal prosecution. There are other forms which may be required such as Form 3520 for certain distributions.

Form 8938 must be filed with Form 1040 if you have specified foreign financial assets (SFFAs) at the end of the year in excess of the applicable threshold. SFFAs include, in addition to financial accounts maintained by foreign financial institutions, foreign stocks and securities, financial instruments or contracts issued by a foreign party, and interests in certain foreign estates, trusts, and partnerships.

An accuracy-related penalty may be imposed if you do not disclose an SFFA and income related to the undisclosed SFFA is not reported on your tax return. The penalty is 40% of the tax underpayment resulting from the omission of income. The penalty can be avoided if you can show reasonable cause for the underpayment. An underpayment due to fraud is subject to a 75% penalty. 

This law will be in effect through 2025. After that we don't really know what is going to happen. We kind of know that the law will revert, but that all depends on who is in charge at that time. For now, we have to worry about the new tax rates that pertain to the Kiddie tax and the changes that were made with the new TCJA revisions. The new tax rates can be as high as 37% for ordinary income or as high as 20% for long-term capital gains and qualified dividends.

The prior law for the kiddie tax, the portion of an affected child's unearned income, were taxed at the parent's marginal tax rate if that rate was higher than the child's tax rate. This means that for 2020, the parent's rate could be as high as 39.6% for ordinary income or as high as 20% for long-term capital gains and dividends.

Remember that for kiddie tax purposes, we are mainly concerned with unearned income such as income from investments or income that is not income from wages, salaries, professional fees, or any amounts otherwise received as compensation for any kind of services rendered. If you are watching a movie and the director of that movie wants to make things interesting, he or she would probably script it to misinform you and

The new kiddie tax rules have changed forcing taxpayers to use the trust and estate tax rate structure. This structure is less favorable because it overrides the lower tax rates that would apply to a child's unearned income. This trust and estate tax rate structure is compressed compared to the brackets for single individuals. Once you look at the rate table you will realize that the rates for the lower incomes have not been changed to much but have been drastically lowered for the higher incomes. 

When you calculate the federal income tax for a child who's subject to the kiddie tax, the child is allowed to deduct his or her own standard deduction. Under the new law, the kiddie tax could affect children who don't provide over half of their own support in 2020 and who live with their parents for more than half of the year.

The kiddie tax will most likely apply until the year the child reaches age 24. These are the requirements for the kiddie tax:

The kiddie tax applies to unearned income for children under the age of 19 and college students under the age of 24. Unearned income is income from sources other than wages and salary, like dividends and interest. Taxable income attributable to net unearned income will be taxed according to the brackets applicable to trusts and estates. With respect to earned income, the rules are the same as before. The kiddie tax rules were in place to prevent parents and grandparents in high tax brackets from shifting income to children in lower tax brackets.

You may be able to include your child's interest and dividend income on your 2020 tax return if the interest and dividend income was less than $11,000 for the 2020 tax year. Your child must have been under 19 and no federal income tax was taken from your child's income under the backup withholding rules.

If you received a refund, credit, or offset of state of local income taxes in 2020, you may receive a Form 1099-G. If you itemized deductions for the year that the tax was paid to the state or other taxing authorities, you may have to report part or all the refund on Form 1040 for 2020.

If you claim a loss on Schedule C, be prepared to show that you regularly and substantially participate in the business. Otherwise, your loss may be considered a passive loss deductible only from passive income or not deductible at all. Furthermore, if your business loss exceeds your other income, you may be able to carryforward the loss and claim a refund.

If you are going into business alone, your choices are to operate as a sole proprietor, to incorporate, or to form a limited liability company (LLC).

However, if you are going into business with an associate, you may choose to operate as a partnership, a corporation, or as an LLC.

If you are concerned with limiting your personal liability, your choice should be between a corporation or a Limited Liability Company (LLC). An LLC gives you the advantage of limited liability without having to incorporate.

If you operate through an LLC with no co-owners, you report income and loss as a sole proprietor. If you operate an LLC with associates, the LLC reports as a partnership, and you report your share of income and loss. However, under the check-the-box rules, the LLC may elect on Form 8832 to report as an association taxable as a corporation.

The new Tax Cuts and Jobs Act will be using the same seven tax brackets as before, but the tax rates are lowered for the for the most about 2 percent. Besides this, the income thresholds have been expanded. This will not only benefit the regular company worker, but it will also tremendously benefit the self-employed or the taxpayers who are considered self-employed by the Internal Revenue Service.

First off, there is a 20 percent deduction for pass-through entities which is not just for pass-through businesses but for all businesses or individuals considered self-employed. It seems that the original idea was to only offer this 20 percent deduction to pass-through businesses such as limited liability company (LLCs), partnerships and S corporations. However, it may well be that this new TCJA tax reform was arranged and settled around the holidays that the individuals involved in making the decisions felt generous enough to offer it also to sole proprietors. Therefore, sole proprietors or self-employed individuals are also included. This tax deduction should help alleviate the high self-employment tax of 15.3 percent. This deduction is simply calculated by multiplying your net income by 20 percent. The business income must be qualified business income (QBI is the term you will get familiar with when calculating this deduction). Certain rules must be followed to claim this deduction and one of these rules besides have QBI, is that there is a phase-out amount of $163,300 for single filers and $326,600 for joint filers.

Secondly, the business owner will get very generous depreciation benefits to expenses their business property and even includes used business property (counting used business property as qualifying depreciable property is a first in the tax code). The business owner can deduct and fully write-off the entire cost of a new purchase (this is 100 percent bonus depreciation). The equipment which qualifies for this bonus depreciation are computers, furniture, and equipment. This is a great deduction specially that previously you could only deduct up to 50 percent of the cost in the first year. To top this off, the IRS has doubled the section 179 tax deduction to $1,040,000 million.

The business property that qualifies for the section 179 deduction now also includes fire protection, fire alarm and security alarm systems. The maximum allowed depreciation expenses for passenger vehicles placed in service for business will get an increased depreciation deduction to over $41,660 in the first four years. This is not counting if you choose bonus depreciation which will make this amount even greater. However, if your auto is a sports utility vehicle there is a $25,000 limitation.

Other deductions are available for business owners such as the home office deductions and the business trip expense deduction. For the office in the home deduction business is as usual except that now you are allowed to fully write off your equipment such as computers, furniture and business equipment and you can deduct the entire amount instead of waiting years to deduct it. If you travel primarily for business, you can deduct 100 percent of the flight costs. This includes your hotel or lodging and 50 percent of your meals. It is probably superfluous to mention that the meals can only be deducted for the days you are spending on business.

Now if you are self-employed (and before too), you must calculate your expenses and income (you can hire a bookkeeper) and keep good business records. Keeping good records for your business is imperative for success. Remember, you are on your own. You don't have an employer to be doing this for you. You must also remember that no one is deducting money from your income. Therefore, you must send it in by yourself. You must send in estimated payments periodically usually every three months depending on your business income, it could even be every month. If you don't voluntarily apply the pay-as-you-go tax concept, you will be charged a penalty by the Internal Revenue Service.

The 20 percent deduction for pass-through entities which includes sole proprietor businesses is an excellent incentive for individuals to become self-employed and a great way to try to boost our economy. That and the very generous business depreciation benefits deductions to expense business property should be incentives enough for the business owner to put all his or her efforts into the business. To top this off, the IRS has doubled the section 179 tax deduction, from $500,000 to $1,040,000. Moreover, the types of property that can be depreciated have been expanded and now it even includes used property. Don't get carried away, thought. The property can be used property, but it must be new property to you.

You are usually involved in the business with continuity and regularity because you are hoping to make money from your efforts. Many individuals start out their business because they love what they do and thus their business is their passion or hobby, and they end up making a lot of money from it. Well, as long as you meet the IRS rules for considering your hobby a business, then you have a business. These rules as mentioned above are that you are in the business with the primary purpose of making a profit and that you are involved in the activity with continuity and regularity.

However, don't get us wrong. No one is telling you that you cannot entertain your customers, in fact you must. Entertaining your customers is an integral part of doing business regardless if you are going to get a deduction for it or not. Do yourself a favor and don't go around telling your customers that you cannot entertain them anymore and worst don't tell them that the new tax law does allow you to do so. You should still entertain, but this time you, the business owner, will pick up the tab. Regardless if it is deductible or not, entertainment expenses will continue in business and maybe it is a shame that a business owner will not be able to deduct these.

Just because it will no longer be deductible, does not mean this activity will stop. Some will probably sacrifice business in the name of there being no deduction for their entertainment expenses, but many will be wise and continue to entertain, because entertaining their customer will continue to be a necessary business expense. At least in our American culture, this continues to be so.

Yes, indeed, entertainment expenses are very necessary for your business to succeed. Good news, though. Remember that part of the entertainment expense that is for meals? Well, you can generally take 50% of your business-related meal expenses are allowed as a deduction. You can still entertain your customers, but you pick up the tab for the entertainment part and the IRS will pick up the tab for 50% of the meal part. To be able to deduct 50% of your meals as a business deduction though, the meal expense must be ordinary and necessary in carrying on your trade or business and this expense must still meet the directly related test or the associated test.

Remember though, that these limitations only apply to your relationships with customers and not with your employees. Don't get all confused and start setting your own limits that are not included in the new Tax Cuts and Jobs Act. The expenses that are still deductible, and we mention this only so that you get this ingrained in your head, are expenses for your employees that are for

1. Entertainment, amusement, and recreation expenses which you treat as compensation to your employees and of course you must include these in their wages.

2. Entertainment expenses for recreation, social, or similar activities and facilities for employees.

Please note that you cannot call entertainment expenses those expenses that you incur for entertainment goods, services, and facilities which you have for sell to customers. Come on, these are called cost of goods sold.

Also, again, remember that with the entertainment expense elimination as with the other elimination of deductions, that they are only temporary. Who knows, someone with enough sense will re-establish these provisions that have for such a long time become a part of who we are. In America we can deduct business expenses for entertaining our clients, we can golf and transact business at the same time, we can... Don't worry our America will come back to us, after all this chaos is over, we will be normal again!

Business income is any income received from the sale of your products or services. Business income may also include rents received by a real-estate business. If you receive income in the form of property, then you must include the fair market value of it as business income. You also must be careful not to include money received that is not really income such as security deposits and loans.

It costs you money to conduct business and this money that you spend to make money is considered a business expense. Business expenses are those charges that you incur in carrying on your trade or business. If your business operates to make a profit, these expenses are usually 100 percent deductible. If your business operates as a hobby, then none of these expenses are deductible, any longer. It used to be that you could deduct hobby expenses on Schedule A as 2% of adjusted gross income deduction, but the new Tax Cuts and Jobs Act has eliminated that deduction. Therefore, you cannot even get a partial deduction for your hobby expenses anymore.

You must also consider the time when you make certain expenses to determine if they are fully deductible or not. If you make most of your expenses at the start of your business, you may have to amortize the expenses over a period into the future to match the expenses with the income received for the business.

Property that qualifies for the 100% bonus depreciation deduction has been expanded to include used qualified property acquired and placed in service after September 27, 2017 and it is property that that the taxpayer didn't use at any time before acquiring it. Also, the property must not have been acquired from a related person or a member of a controlled group of corporations. The basis of the used property must not have been figured by reference to the adjusted basis of the property in the hands of the seller or the transferor.

Section 179 allows taxpayers to immediately expense the cost of qualifying property rather than taking depreciation deductions in yearly increments. The maximum amount that a taxpayer can deduct has been increased with the new Tax Reform. The maximum amount a taxpayer can deduct now in Section 179 deduction for property placed in service in 2020 has been increased from $1,040,000. Along with this increase there is also a phase-out threshold from $2,070,000 to $2,500,000 for property placed in service after 2017. Once the amount for the total Section 179 property placed in service during the year exceeds the threshold amount, then that is when the phase out occurs and at that point the deduction will be reduced dollar-for-dollar by the excess amount. As with other tax items, the deduction and the phase-out limit amounts will be increased for inflation in 2020 and in later years.

Under the new tax law, the qualifying property for Section 179 expensing now also includes certain depreciable tangible property used in connection with lodging and improvements to non-residential real property such as roofs, heating, ventilation, air conditioning, and fire and alarm protection systems.

For many businesses and corporations, this is an excellent tax savings brought about with the new Tax Cuts and Jobs Act.

It is noteworthy that the rate of bonus depreciation will not always be 100% and it will decrease over the next four years:

80% for property placed in service in 2023

60% for property placed in service in 2024

40% for property placed in service in 2025

20% for property placed in service in 2026

0% for property placed in service after 2026

Bonus depreciation is retroactive beginning with assets purchased after September 27, 2017.

1. $10,000 for the first year a vehicle is placed in service

2. $18,100 for the first year with bonus depreciation.

2. $16,100 for the second year,

3. $9,700 for the third year,

4. $5,760 for each succeeding year until the basis in the vehicle has been recovered.

The amount in 1 through 4 above will change slight every year to adjust for inflation. 

Farming equipment and machinery placed in service after December 31, 2017, and tax years that end after December 31, 2017, have a 5-year recovery period. Grain bins, cotton gins, fences and other land improvements are excluded from the 5-year useful life. With the new Act, there is no longer a requirement that property use in a farming business be depreciated using the 150% declining balance method. Farming property placed in service after December 31, 2017, and in a tax year ending after December 31, 2017, is depreciated using the 200% declining balance method. The 200% declining method excludes buildings, trees, vines bearing fruits or nuts, and property for which the taxpayer has elected to use either.

Certain assets that can be used for business and for personal use are considered listed property and are subject to limited depreciation deductions. For example, there are limits in place for depreciating passenger vehicles and again because it is considered a personal use item.

Depreciation rules have been improved by the Tax Cuts and Jobs Act (TCJA). Qualifying property place in service after September 27, 2017, is eligible for 100 percent bonus depreciation. However, bonus depreciation drops by 20 percent per year beginning in 2023 until is it is eliminated in 2027. It has always been that only new property placed in service can be depreciated. The new Tax Cuts and Jobs Act (TCJA) has changed that. Now you can depreciate 100 percent of used property too! The eligible assets are those that are 20 years or less and personal property and qualified improvement property for work done to the interior of a commercial building. This excludes costs related to the enlargement of a building, an elevator or escalator, or the internal framework of a building.

This is a very generous improvement because under the old law, there was a 50 percent bonus depreciation for property placed in service in 2017, 40 percent depreciation for property placed in service in 2018 and 30 percent for property to be placed in service in 2019.

Section 179 depreciation also permits expensing of assets for commercial property. The Tax Cuts and Jobs Act (TCJA) expands the annual section 179 limitation from $500,000 to $1,040,000. The phase-out begins at $2.5 million for qualifying assets placed in service. Section 179 did not include roofs, HVACs, fire protection, fire alarm systems and security systems, but not the JCJA rules include these newly depreciable assets. The new tax bill expands the definition of qualified real property eligible for section 179 expensing to include any of these.

The Tax Cuts and Jobs Act of 2017 dramatically improved the ability to take depreciation for real estate property. For example, property is eligible for 100% bonus depreciation is what real-estate owners want to hear. The annual section 179 deduction for commercial property has been increased from $500,000 to $1,040,000 is also music to a real estate investor's ear.

NOLs are business operating expenses on its tax return that exceeds its revenues. It is a net operating loss (NOL) that it creates and according to the tax code can probably be carried forward (or even carried back) to another time when the business has taxable income and thus it can be offset by the NOL. This makes very much sense because the success of the company in the future depends mostly on all the efforts of the company at first. This kind of makes sense also because income should always be matched with its expenses.

There has been a major change to the NOL carryforward and carryback rules and a new limitation on NOL utilization has been added. Before this new tax reform NOLs were allowed to carry a NOL back to two years and a carryforward for twenty years and the NOL was allowed to fully offset taxable income of the taxpayer unless specific limits were in place by the Internal Revenue Service. These specific limits were known as section 382 limitations. These are no longer applicable and thus they have changed with the new Tax Cuts and Jobs Act (TCJA) reform.

Now there are amendments in section 172 that disallow any carryback of NOLs. However, these same amendments allow indefinite carryforwards of these NOLs. The new carryback and carryforward amendments apply to any NOL arising in a taxable year ending after December 31, 2017.

As to the carryback limitation, many can argue that it is unfair because little notice has been given as to what a taxpayer, who perhaps was planning a carryback and to his or her surprise woke up January 1, 2018, with the news that this is not possible. However, the law says that the new law is effective for NOLs arising in tax years ending after December 31, 2017, which means that the January 1, 2018 is when the new NOL rules start applying. Therefore, if you had an NOL for a tax year ending December 31, 2017, then, according to the law, you should be able to carry it back by using the old NOL rules.

The new Tax Cuts and Jobs Act (TCJA) has limitations on the amount of NOLs that a corporation may deduct in a single year under section 172(a) equal to the lesser of the available NOL carryover or 80 percent of a taxpayer's pre-NOL deduction taxable income. This is the 80 percent limitation rule. Again, this limitation applies only to losses arising in tax years that begin after December 31, 2017 as amended by section 172(e)(1). This is good news for taxpayers who have previous NOLs. We are working on 2020 now, so if you develop an NOL in 2020, you will not be able to carryback any of it.

The new rules seem to be in sync with what a NOL should really be. It should be a deduction that has the income matching concept in mind. It really does make sense that if all your efforts at the beginning of your business will bring fruit for later years, that we match income to its expenses. If you are going to follow one of the basic underlying guidelines of accounting, you will agree that the new tax law is following the matching principle of accounting. This goes awry when you are applying expenses incurred now to earlier years. You know it takes money to make money. That should probably tell you everything. You are spending money to make money. It is not the other way around.

Taxpayers in this situation need to start setting up and run their hobby sideline as a true business in business to make a profit to be able to deduct any expenses of running the business. Therefore, to deduct expenses for your business, your business be set up with the purposes of making a profit. When you hobby develops from something you love such as your hobby to a thriving business, then you don't really have to worry too much about being able to deduct your expenses, since you are making money. However, what happens when you hobby is not making money and you instead have a loss? That is when you need to even look into the fact that your business is really a hobby and not a business.

Who is going to know? You may be asking. Well, there are certain businesses that naturally are well known for being hobbies. Now, looking at it another way, say you have a loss from a business (and perhaps continue to have a loss for a long time), the IRS wants to challenge you on the type of business this is. The Internal Revenue Service may disallow your expenses beyond your loss because they may suspect you are running a hobby. This may also be so because you may not be running your business as a business but as a hobby. How does this happen? If you don't keep records or are not diligently seeking to make a profit, could be a reason to disallow your expenses as a business. They may allow your expenses as hobby for which the amount of expenses you can claim is limited or not allowed at all.

These rules have not improved with the new Tax Cuts and Jobs Act (TCJA) for tax years through 2025. Under the new TCJA tax reform, you may have a harder time trying to show a profit motive for your activity. The hobby activity expenses fall under hobby-related deductions. As mentioned before, you only worry about this rule is you are involved in an activity that yields a loss at the end of the year. If your business is making money and it does not have a loss at the end of the year, you don't even need to read this.

Hobby activities cannot offset the losses like regular businesses can. In a regular profit motivated business, all losses not only can be offset against income, but they can even be carried forward to future years (no more carrybacks after 2018 for a while at least). Before the Tax Cuts and Jobs Act, you could deduct hobby-related expenses up to the amount of income from that hobby. Again, you could deduct the losses not as a regular business would do. A regular business can get a full deduction for these expenses or losses. A hobby activity could only get a partial deduction and only if you itemized. Then to top it off, this entire amount could be totally disallowed under the alternative minimum tax (AMT) rules.

Now the Tax Cuts and Jobs Act (TCJA) eliminates the ability to deduct any items as itemized deduction subject to the 2 percent of adjusted gross income threshold. That means that you can deduct zero expenses for your hobby related business. However, you must pay the tax on the entire amount of income your received from your hobby.

You can try to figure out what to do about making sure the IRS does not treat your business as a hobby and this includes diligently running your business as a business and not as a hobby. Another thing to look into is the IRS safe-harbor rules. These rules state that

You must prove or be ready to prove that you have an intent to make a profit. There are certain factors that demonstrate intent to make a profit.

Look, the new Tax Cuts and Jobs Act has tremendously affected hobby business income without even thinking about hobby businesses (not that they didn't think about it). If you have business revenue of $10,000 and you have business expenses for that revenue of $10,000, nothing has happened here, we claim zero income and we all go about our business. If we have $10,000 hobby income and $10,000 hobby expenses, then we will probably really feel the pain because we must pay taxes on $10,000. Since there is nowhere, we can deduct those expenses in since the new TCJA has eliminated this ability on Schedule A, then we simply cannot deduct it. Even at that method a full deduction was not attained. It was bad enough as it was with only a partial deduction and sometimes no deduction if we did not have enough items to itemize our deductions, but now that deduction is eliminated. We can always try to convince the IRS that our business is not a hobby, because as you can see, this makes all the difference.

Because of the changes placed by the Tax Cuts and Jobs Act, less taxpayers will be eligible for a home office deduction - more like most taxpayers that were eligible before. Employees are no longer eligible to deduct unreimbursed job expenses, which includes the cost of an office in the home. The total of your business portion of the home expenses would go on Schedule and be subject to the over 2 percent of adjusted gross income criteria. Whatever added more than the 2 percent of adjusted gross income figure, you could deduct. We can tell you what these expenses were that you could deduct, but it is not necessary since you can no longer deduct them if you were an employee. Basically, they were any expenses which were "ordinary and necessary" to do your job or to improve you job skills. If you maintain a home office for the convenience of your employer, ask him or her to pay your or reimburse you for it.

Now if you are self-employed or considered self-employed (which means you would file Schedule C as a sole proprietorship or similar form), the tax reform is on your side, and you can still deduct your home office expenses against your business income and a plethora of other deductions. The requirements for claiming office in the home and its expenses have not change. The only change is that employees are excluded.

Now that all that is said and done, there are two types of calculation methods for claiming office in the home. You can use the standard method or the Simplified method.

The standard method has been around forever. This method requires that you determine the percentage of the part of your home used for business. You usually measure the entire square footage of your home and then take the total square footage of your work area and get a percentage by dividing the business area by the size of the entire house. Then on IRS Form 8829 along with Schedule C you will enter a percentage of all your home expenses that apply by multiplying that expense by the percentage for business use.

Now there is a simplified method at arriving at your deductible home expenses. Using this method, you can deduct a flat rate and it is much easier to calculate. You are allowed $5 per square foot of your home office area. If you use this method you are limited to 300 square feet, so your maximum deduction is $1,500. The simplified methods require less records. It is like a standard deduction method that just requires you to measure the spaces in your home that are used for business and include this calculation on Schedule C.

When claiming office in the home you can deduct practically every expense that you can deduct in a normal office that you have for business in a commercial area. All direct expenses include office supplies, repairs such as carpet, paint, and stuff like that. Indirect expenses include those expenses that would normally not be deductible as a business expense such as home property taxes, rent, mortgage interest, home insurance, maintenance, utilities, garbage disposal and security and fire alarm systems. You would deduct a percentage of these expenses - the percentage that applies to the office in the home part based on the square footage. Additionally, these expenses can only be deducted if you use the standard method, not the simplified $5 per square footage method.

Expenses that you should probably stay clear from are expenses that are completely unrelated to your home office. Such items as the pool or yard area will not be deductible even if you use these to see your clients. Expenses that would normally have nothing to do with your office in the home such as business insurance, your computer, and office supplies are ordinary business expenses which are 100 percent deductible regardless of where you run your business.

One important thing to note, though, is that you cannot deduct more expenses than the amount of your business gross income. Your deduction will be limited. However, you may be able to carryover the excess to the next year. These are the rules for claiming an office in the home.

Although capital gain distributions from mutual funds and REITs are generally reported as long-term capital gains on line 13 of Schedule D, investors who receive such distributions but have no other capital gains or losses to report may generally report the distributions directly on Form 1040 without having to file Schedule D.

The favorable maximum capital gain rates apply to net capital gain (net long-term capital gain in excess of net short-term capital loss) from Schedule D, and also to qualified dividends. Although qualified dividends are subject to the same favorable maximum rates as net capital gain, they are not entered as long-term gains in Part II of Schedule D.

Long term capital gain taxes are taxes on gains made on the selling of assets that are held for over a year. The counterpart of that is short-term capital gain, which is for assets that are held for less than a year. Short term capital gains are considered ordinary income taxed at whatever tax rate you fall under. It is a long-term capital gain it is taxed at 0%, 15% and 20%. Under the new Tax Cuts and Jobs Act, the three capital gains income thresholds don't match up perfectly with the tax brackets. On the contrary, they are applied to maximum taxable income levels.

Form 8949 is used for information about transactions that you receive on Form 1099-B. Form 1099-B is the form you receive for proceed from Broker and Barter transactions. Form 8949 is for reporting both short-term on part I and long-term capital gains on part II. Schedule calls for Form 8949 and then you transfer items from Form 8949 to Schedule D. Capital gains and deductible capital losses are reported on Form 1040, Schedule D, Capital Gains and Losses, and on Form 8949, Sales and Other Dispositions of Capital Assets. If you have a net capital gain, that gain may be taxed at a lower tax rate than your ordinary income tax rates. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term "net long-term capital gain" means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. Generally, for most taxpayers, net capital gain is taxed at rates no higher than 15%. Some or all net capital gain may be taxed at 0% if you are in the 10% or 15% ordinary income tax brackets.

The new administration campaign tax plan was that the number of tax brackets would reduce from seven to three. Similarly, the House of Representatives’ original tax reform bill contained four brackets. Ultimately, common sense interceded, and we are still at the seven-bracket structure. There is just no way, we will ever have a postcard tax return with all these many tax brackets! The tax rates are lower with about 2 % less than with the previous tax brackets but starting at 10%.
 

The marriage penalty is almost gone. What is the marriage penalty? This penalty does not really exist as a specified penalty anywhere, but it is widely talked about. Why? The marriage penalty is a concept that takes place with the change is the tax bill after a couple marries. The “marriage penalty” or the higher tax bill is due to the combined income of the couple and because of the combined income, the couple is changed to a new tax bracket and thus new tax rate which will usually result in paying more taxes than if the couple remained single.

In a few instances the opposite can be true. Instead of a marriage penalty, the couple could incur a bonus which means that the couple fairs better by filing their tax returns as married filing jointly than when they file their tax returns as single. Thus, the couple will have a gain resulting in a bonus instead of a penalty. Again, these are widely spoken about, but there is not per say a “marriage penalty” or “marriage bonus” and these are merely the result of calculations after applying the different tax brackets at the married rates and at the single rates. Other items also affect couples that would cause a “marriage penalty” such as the ability of the individual to file as head of household when the individual is single and thus would not qualify for this HOH filing status once the individual gets married. Additionally, the individual will no longer qualify for the Earned Income Credit because of the combined income as a married individual.

Remember this, the marriage penalty is not an actual penalty. It is something that happens because of the different tax bracket (7 tax brackets). The only thing a taxpayer can do to completely eliminate this penalty, or the possibility of the marriage penalty is to plan your taxes before marriage. It is a well-known fact that when couples plan to marry, the last thing on their mind is the marriage penalty.

If you earn more, your income tax bracket will be higher and that only makes sense. An individual who is not married is single for tax purposes. A couple who is married is considered one individual for tax purposes and thus their income is taken together as one individual. When the couple gets married, the income will usually increase tremendously unless one of the individuals in the marriage is not working. If the income increases, then the tax bracket and the tax rate also increase. The higher tax as a result of getting married is the marriage penalty. The marriage penalty would be the higher tax and the loss of credits and deductions because of the marriage.

What is a capital asset?

Everything you own or use for personal purposes is a capital asset such as your car, household furnishings and stocks. Stocks or bonds are used for investment purposes and would be items that are considered capital assets which you hold for investments. When you sell these items, the difference is a capital loss or a capital gain. Then, after that, you must determine if your assets are a short-term or a long-term item and then you will apply the tax rate. The capital gains tax rates if you have a gain, of course. If you have a loss, you usually you can deduct up to $3,000 of it. Please note that this amount is $1,500 if you are married filing separately. You have this limit and once you reach the maximum you can deduct for the year, you usually can either carry the excess forward to other years. Anyways, if you held the item for less than a year, this property is considered short-term and thus you would have a short-term capital gain and you held your asset for more than a year, then your asset is considered long-term.

The tax rate on most net capital gain is usually no more than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than $80,000. This is your tax bracket for your other income such as your W-2 wages. However, if you exceed certain thresholds, then your capital gains may be taxed at 20%. A capital gain rate of 15% applies if your taxable income is $80,000 or more but less than $441,450 for single; $496,600 for married filing jointly or qualifying widow(er); $469,050 for head of household, or $248,300 for married filing separately. A net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate. There are a few other exceptions where capital gains may be taxed at rates greater than 20.:

Your capital gains may be taxed at rates greater than 20% if

1. The taxable part of the capital gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.

2. Net capital gains from selling collectible are taxed as a maximum 28% rate.

3. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

The items discussed above usually apply only to long-term capital gains, but short-term capital gains are taxed differently. Notice that net short-term capital gains are taxed as ordinary income. These gains are from property you hold for less than a year.

Income is due as you earn it, so if you know you are going to have to pay capital gains tax, then you should plan accordingly and even make estimated payments.

The new tax provisions in the above mentioned is that the tax rate on most net capital gain is no longer higher than 15% for most taxpayers. That is, unless you go over the thresholds mentioned, or you are selling section 1202 qualified small business stock. If you are selling section 1202 qualified small business stock, then it is taxed at a maximum 28% rate. Also, if you are selling collectibles your maximum rate is 28%. The portion of any unrecaptured section 1250 gain from selling this section 1250 real property is taxed at a maximum of 25% rate. Other than this, the capital gain is not higher than 15%.

Unemployment compensation is taxable income for federal. You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you in 2018. However, if you made contributions to a government unemployment compensation program, reduce the amount you report on line 13 by those contributions. If you receive an overpayment of unemployment compensation in 2020 and you repaid any of it in 2020, subtract the amount you repaid from the total amount your received.

Therefore, let's say that these same two amounts are $5,000 instead of the $25,000 and $12,000 instead of the $32,000. We can all agree that if the base amount was $5,000 instead of $25,000, more of your Social Security benefits would be taxable than if the amount is $25,000. So, then if we are supposed to make adjustments for inflation, it makes sense that every year this $25,000 and $32,000 amount should also be adjusted. They have not been adjusted for inflation since - never. As a result, more and more of your Social Security benefits get taxed every year.

The Social Security benefits you received in 2020 may be taxable. You should receive a Form SSA-1099 which will show the total amount of your benefits. The information provided on this statement along with the following seven facts from the IRS will help you determine whether your benefits are taxable. How much, if any, of your Social Security benefits are taxable depends on your total income and marital status. Generally, if Social Security benefits were your only income for 2020, your benefits are not taxable, and you probably do not need to file a federal income tax return. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.

The 2020 base amounts are

* $32,000 for married couples filing jointly.

IRA/401(k) distributions

The new Tax Cuts and Jobs Act (TCJA) brought changes to IRAs in the form of recharacterization of IRA contributions. When the taxpayer contributes to a regular IRA or Roth IRA, he or she can re-characterize it as if made to another type of IRA via a trustee-to-trustee transfer before the due the date of the tax return for the contribution year. The new Tax Cuts and Jobs Act has made it a rule that once a contribution to a regular IRA has been converted into a Roth IRA, it can no longer be converted back to a regular IRA. Recharacterization cannot be used to unwind Roth IRA conversions.

The new Tax Cuts and Jobs Act extends the rollover period for plan loan offset amounts. If the employee takes a loan from his qualified retirement plan, Code Sec. 403(b) plan, or Code Sec. 457(b) plan is treated as distributed from the plan due to the plan's termination or the employee's failure to meet the repayment terms due to his separation of service, the employee may rollover the deemed distribution to an eligible retirement plan. Under the new tax law allows you to rollover the amount any time up to the due date (including extensions) of the employee's tax return for the year of the deemed distribution. The new law is allowing more time compared to the old law's 60 days from the date of distribution.

The new tax law increases the limit on the aggregate amount of length of service awards that can accrue in a year of service for a bona fide volunteer from $3,000 to $6,000. For a defined benefit plan, the limit applies to the actuarial present value of the aggregate amount of awards accruing for any tax year of service. The old tax law, a plan that only provides length of service awards to bona fide volunteers or their beneficiaries for qualified services performed, was not treated as deferred compensation plan for Code Sec. 457 purposes.

For employees, coverage in a qualified employer retirement plan is a valuable fringe benefit, as employer contributions are tax free within specified limits. Certain salary-reduction plans allow you to make elective deferrals of salary that are not subject to income tax. An advantage of all qualified retirement plans is that earnings accumulate tax free until withdrawn. However, along with tax savings opportunities come technical restrictions and pitfalls. For example, retirement plan distributions eligible for rollover are subject to a mandatory 20% withholding tax if you receive the distribution instead of asking your employer to make a direct trustee-to-trustee transfer of the distribution to an IRA or another qualified employer retirement plan.

Under the new Tax Cuts and Jobs Act, a qualified plan or IRA can be amended for new tax law changes retroactively any time up to the last day of the first plan year beginning after 2017 without losing its qualified status for actions taken om compliance with the new tax law changes.

Pensions

On Form 1099-R, payments from pensions, annuities, IRAs, Roth IRAs, SIMPLE IRAs, insurance contracts, profit-sharing, and other qualified corporate and self-employed plans are reported to you and the IRS. Social Security benefits are reported on Form SSA-1099. If you are paid a distribution that qualifies for lump-sum averaging, Code A will be entered in Box 7 of Form 1099-R.

Annuities

If you are entitled to a lump-sum distribution from a qualified company or self-employed retirement plan, you may avoid current tax by asking your employer to make a direct rollover of your account to an IRA or another qualified employer plan. If the distribution is made to you, 20% will be withheld, but it is still possible to make a tax-free rollover within the 60-day period.

On the other hand, if you receive a lump sum and do not make a rollover, the taxable part of the distribution (shown in Box 2a of Form 1099-R) must be reported as ordinary pension income on your tax return unless you were born before January 2, 1956 and qualify for special averaging. Your after-tax contributions and any net unrealized appreciation (NUA) in employer securities that are included in the lump sum are recovered tax free; they are not part of the taxable distribution.

By the way, a taxable distribution made before age 59 1/2 is subject to a 10 percent penalty in addition to the regular income tax, unless you qualify for an exception.

How do recharacterization work and why it is useful?  A recharacterization allows you to treat a regular contribution made to a Roth IRA or to a traditional IRA as having been made to the other type of IRA. You are only allowed to make a contribution to an IRA to certain limits and these limits are up $6,000 for 2020 or $7,000 if you are 50 or older. Different rules apply if you contribute to a traditional IRA and if you contribute to a Roth IRA or the tax treatments are different for each kind of IRA.

You recharacterize by telling your trustee of the financial institution holding your IRA to transfer the amount of the contribution plus earnings to a different type of IRA which is either a Roth IRA or a traditional IRA. This is done either in a trustee-to-trustee transfer or to a different type of IRA with the same trustee. This works by making the transfer by the due date for filing your tax return (including extensions) and you treat the contribution as made to the second IRA for that year as if you made it to the second IRA for that year as if you never made it to the first IRA.

For tax year 2020 and moving forward, you will not be allowed to do this any longer as dictated with the new Tax Cuts and Jobs Act legislation. Hence, a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA can no longer be characterized. In addition, the Tax Cuts and Jobs Act also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans such as 401(k) or 403(b) plans. 

One thing to note is that you can still recharacterize by rolling out excess contributions to a Roth IRA. Do this if you contribute early in the year to a Roth IRA, but then earn to much over the phase-out limits, thereby disqualifying you from being able to contribute to a Roth IRA for the year. You can undo this contribution without being subject to an excess contribution penalty tax by recharacterizing the contribution to an IRA. You can still do this regardless of the new tax law changes.

It is important to note that the reason people are recharacterizing from one IRA to another is the fact that these are two different products that are treated differently in the tax code. With a traditional IRA for example, you get a tax deduction up front, and taxes are delayed until you withdraw your money when you retire and the idea is that at that time your tax rate will be a lot lower. With Roth IRA, the IRA is funded with post-tax money and with a Roth IRA your tax rate when you retire will be zero. Therefore, recharacterizing an IRA is changing how taxes will apply to the IRA.

But now, the new Tax Cuts and Jobs Act (TCJA) has removed this ability to recharacterize and this could have a major impact on financial planning for many.

What are these adjustments to income that help you arrive at AGI? A few examples of over the line deduction that help you arrive at AGI are

These are only a few of the possible deductions that help you arrive at AGI. Adjustments to income are expenses that are applied before any taxes. These reduce your total income. These are the items you enter on your Form 1040 before you apply your standard deduction, itemized or your exemptions. After you calculate adjustments to income you are left with your adjusted gross income.

Adjustments to income are individual retirement arrangement (IRAs), alimony, bad debt deduction, moving expenses, student loan interest deduction, tuition and fees deduction, and the educator expense deduction.

The requirements to deducting moving expenses are that your move closely relates to the start of work, you meet the distance test, and that you also meet the time test. If you are a member of the Armed Forces and your move was due to military order and a permanent changer of station, you don't have to satisfy the distance test. If you are in the military and must move due to military order, you can still take a moving expense deduction on your tax return.

In tax year 2020, you will not be able to deduct moving expenses on your tax return. Yes, this is another attempt at making your tax return as simple as sending in a postcard.

The Tax Cuts and Jobs Act was passed in has eliminated the moving expense deduction. This deduction elimination is not permanent and may revert after 2025 and may depend on who is in charge at that time. It may come back at that time and at that time it will up to Congress or the individual in charge to eliminate it permanently.

By the way, many of the tax law changes such as the suspension of the moving expense deduction are temporary and only for the periods of 2018 through 2025. At that time, we will know what will come back and what will stay eliminated.

It is better to use Direct Deposit because your payment is more secure and there is no check to get lost. It is more convenient, and you can avoid a trip to the bank to deposit your check. Direct deposit costs the Internal Revenue Service less to refund your overpayment. It costs you less to receive the money like this too. Therefore, it is a win-win situation for everyone. Get your refund faster by direct deposit than you do by check. Using Direct Deposit is more convenient, and you don't have to make a trip to your bank or wait in line for a teller to give you your money.

Additionally, if you opt for Direct deposit your payment is more secure and there is no chance that your payment will not be received or deposit getting lost. Using Direct Deposit saves everyone money. The Internal Revenue Service does not have to spend that extra money to print you out a check or on postage to mail you a check. If you are paying, you will save money that you would otherwise have to spend on postage and you will also save your 20 cents that it would cost you to issue a check. Also, now that most post office locations have put the self-service machines out of service, you would have to wait in line to mail out your items. Do it all online and you will save a lot of time. As you may already know time is money. They say that time is money, and it is very true here. Now you can even split your refund and have it deposited in two or three different checking or saving accounts.

If you don't pay enough or what you pay is not enough to cover most of your tax, you may have to pay a penalty for not having paid enough. You may have to pay a penalty if the amount you owed is at least $1,000 and it is more than 10% of the tax shown on your tax return. However, you will not owe the penalty if your 2020 tax return was for a tax year of 12 full months and there was no tax shown on your 2020 tax return and you were a U.S. citizen or resident for all of 2020.

Ask the Internal Revenue Service for an extension of time to pay. If you cannot pay the full amount when you file, you can ask for an installment agreement or ask for an extension of time to pay. Remember your extension of time to file is not an extension of time to pay. This does not mean that you cannot ask for an extension of time to pay, it is just that this extension of time to pay will cost you in interest and penalties. As result of our current pay-as-go tax system, taxpayers are obligated to pay their tax every time they get a paycheck. If the taxpayer or employer does not follow the pay-as-you-go system, they must pay penalties for not making timely payments and also pay interest for the time that the money was not received on time.

The Internal Revenue Service will accept your return without the payment but will send you a letter asking you for payment and the interest and usually the penalty for not paying your tax will be calculated in that letter. The worst thing you can do is not send your tax return to the IRS on time. If you don't have the money, at least send your tax return. You can send a part of the money you owe, and the Internal Revenue Service will most probably follow up with a letter offer you an installment plan. If not, you can always request an installment plan.

There are varying degrees of wrongdoing when it comes to preparing tax returns. A frivolous tax return is one that does not contain information needed to figure the correct tax or shows a substantial incorrect tax because you take a frivolous position or desire to delay or interfere with the tax laws. In addition to any other penalties, there is a penalty of $5,000 for filing a frivolous tax return. There are many frivolous tax return preparation tactics you could use to lower your tax bill, avoid paying taxes or penalties, or even decide not to file a tax return altogether.

However, you could suffer the consequences of your misguided actions. Many people or professionals draw from different sources of the law to try to win their case against the tax agencies. These people may quote court cases to try to win their case. The Internal Revenue Service is aware of these frivolous tax filing tactics. The Internal Revenue Service has come up with various rules to discourage any frivolous tax practices. Section 6651(a)(2) and section 6654 are some of these rules that penalize you for participating in these frivolous tax filing tactics. 

An automatic six-month extension to file will not extend the time to pay your tax. You can always pay late but not without the Internal Revenue Service charging you interest or penalties on any tax not paid by the original due date of your tax return. If you are a U.S. Citizen or resident alien, you may qualify for an automatic extension of time to file without filing Form 4868. You qualify if, on the due date of your tax return, you live outside the United States and Puerto Rico and your main place of business or post of duty is outside the United States and Puerto Rico. You also qualify for an automatic extension of time to file without filing Form 4868 if are in the military or naval service on duty outside the United States and Puerto Rico.

The Internal Revenue Service processing center probably receives thousands of Form 4868 after the required due date and they probably just either toss them away or send you a letter to let you know that the request for an extension of time to file your return has been filed late and ask you to immediately file your tax return as if you never sent an extension. Although, they technically can charge you a late filing penalty, they might waive it if you comply with their letter and send your tax return immediately. Maybe. If you get an automatic extension for 2020, you have until October 15, 2021, to file your tax return but not to pay the tax you owe. Clearly, it's important to clear up this confusion now, the automatic extension of time to file is not an extension of time to pay your tax.

Remember, our tax system is based on the pay-as-you-go system. You must have paid enough money on every paycheck you received. Upon calculating and reconciling with the Internal Revenue Service, you must owe an amount that is closer to zero. If you did not pay enough to cover your tax during the year and you are off when you reconcile and file your tax return with the Internal Revenue Service, you could be liable for certain penalties for failing to pay your taxes as you earned your money. This usually means that you pay every time you receive a paycheck from your employer. If you are self-employed, this means that you will send money at least every three months through estimated tax payments.

An IRA is an individual retirement arrangement that is a tax-favored personal savings arrangement to set money aside for your retirement. You and your spouse (under age 50) each may be able to contribute up to $6,000 to a traditional IRA or Roth IRA in 2020. The amount of contribution cannot be more than the taxable compensation amount for the year. So, if your compensation for the entire year was only $4,000 then your contribution amount cannot be more than $4,000 for the year.

You should not contribute more than the allowed amount or the amount that can be deductible per year. If you are age 50 or older, you may owe a penalty if your contributions to an IRA or Roth IRA exceed $6,000. An excess IRA contribution occurs if you contribute more than the contributions limit, if you are making regular IRA contributions to a traditional IRA at age 70 1/2 or older. An excess IRA contribution would also occur if you make an improper rollover contribution to an IRA. If it is determined that you made an excess contribution, you will be liable for an excess contribution of 6% per year if the excess contributions remain in the IRA. You can avoid the excess contribution penalty by withdrawing the excess contribution from your IRA and any income earned by the due date of your tax return.

Your individual retirement account (IRA) may be reduced or eliminated. If you were covered by a retirement plan (401 (k), SIMPLE, etc.) at work, your IRA deduction may be reduced or eliminated. Additionally, if were covered by a retirement plan at work, you can still make contributions to an IRA even if you cannot deduct them. Remember, the income earned on your Individual Retirement Account contributions is not taxed until it is paid to you. If you were not covered by a retirement plan but your spouse was, then you are considered covered by the plan unless you lived apart from your spouse for all of 2020.

You need to start receiving items invested from your retirement once you reach age 70 1/2 otherwise you will be penalized for not doing so. By April 1st of the year after the year in which you reach age 70 1/2, you must start taking minimum required distributions from your traditional IRA. If you do not, you may have to pay a 50% additional tax on the amount that should have been distributed. If you were age 70 1/2 or older at the end of 2020, you cannot deduct any contributions made to your traditional IRA or treat them as nondeductible contributions. If you owe tax on any excess contributions made on an IRA or any excess accumulations in an IRA, you must use Form 1040. If you made any nondeductible contributions to a traditional IRA for 2020, you must report them on Form 8606.

If you were born before January 2, 1936, and received a lump-sum distribution from a qualified retirement plan, you may be able to choose an optional method of figuring the tax on the distribution, unless you elect the 10-year tax option. In that case you don't need to follow the community property laws.

These statutes of limitations obligate you to keep records for a mandated period. You need to keep a copy of your tax returns for as long as they may be needed to comply with the administration of any provision of the Internal Revenue Service. You basically must keep a copy of your tax return in your power and ready to provide a copy if asked and they can ask you for them if the statute of limitations has not run out. This statute of limitations is usually 3 years and this is the time frame in which you can amend your tax return to claim a credit or refund. The statute of limitations period is also the time frame that the Internal Revenue Service can assess additional tax on your tax returns.

Additionally, if you do not report all of your income, the statute of limitation is 6 years. Your statute of limitation never runs out if you never file a tax return for that year or you filed a fraudulent tax return. Furthermore, if you have employees, your statute of limitations is 4 years after the tax becomes due or paid whichever is later. You must keep employment payroll records in case the Internal Revenue Service or state agencies want to see your employment tax records.

Other agencies may require a tax return for a period which is beyond the statute of limitation the Internal Revenue Service requires. Your insurance company may need a copy of your tax return for longer periods, for instance. You may have property for which you figured depreciation that requires you to keep your records for many years. This would be the case with real-estate transactions, where you keep records for long periods to calculate basis and depreciation when you sell or exchange the property.

Mistakes can happen on your tax return and amending the mistakes on your tax returns is a simple process. Sometimes amending the tax return has to do with you changing your mind about filing status. For example, you filed as married filing separately and you then you change your mind and decide that you are better off to file as married filing jointly.

If your spouse died during the year, you are considered married for the entire year. You don't start filing as qualifying widow or widower until the following year. Additionally, if your spouse died during the year and you did not remarry before the end of the year, your filing status will be married filing jointly.

You may be able to take the Credit for Child and Dependent Care Expenses if you paid someone to care for your qualifying child who is under age 13 or other qualifying dependent in need of care and whom you claim as your dependent. Additionally, you can be able to claim the credit for your disabled spouse or any other disabled person who could not care for himself or herself.

Furthermore, if your child whom you could not claim as a dependent because of the rules for children of divorced or separated parents, then you can possibly claim the Credit for Child and Dependent Care Expenses for that child. There are many rules to follow. The care must be for an eligible dependent and must be for care while you are at work or looking for work. If your spouse did not work, then you will not qualify for the credit unless he or her were not able to work because of a disability or because they were a full-time student at a school which meets the requirements.

If you meet the requirements, you may be able to take the credit for the elderly or the disabled. You may be able to take the Credit for the Elderly or the Disabled if by the end of 2020, if you were age 65 or older or retired on permanent and total disability and you had taxable disability income. This credit is a nonrefundable credit and unfortunately, due to the low income most elderly taxpayers receive, it is not a credit which would help much. If it was refundable, that would be a whole different story. By all means, you should claim it on your tax return if you qualify for this credit. You know every penny counts.

However, there is a catch, this new law only applies for alimony payments required by post-2018 divorce agreements. If the alimony payments are made under a pre-2019 divorce agreement, then we continue to deduct alimony as usual. This new tax law treatment of alimony starts for alimony divorce or separation instruments which are executed after December 31, 2018, and thus no more deduction for payments or including the payments in income for alimony instruments that are executed after this date.

There are two things. The new tax law treatment of alimony payments will apply to payments that are required under divorce or separation instruments that are (1) executed after December 31, 2018, or (2) have been modified after that date and if the modification specifically states that the new tax law now applies. 

If you are married but qualify to file as Head of Household under the rules for married taxpayers living apart and live in a state that has community property laws, your earned income for the Earned Income Tax Credit includes the entire amount you earned. This is so even if part of it is treated as belonging to your spouse under your state's community property laws.

Treat earned income that is not trade or business or partnership income as the income of the spouse who performed the services to earn the income. Earned income does not include amounts paid by a corporation that are a distribution of earnings and profits. Do not treat income and related deductions from a trade or businesses that are not considered a partnership as community income that must be split between the spouses. 

Do not treat income or loss from a trade or business carried on by a partnership as community income. Social Security and equivalent railroad retirement benefits are never treated as community income that must be split between the spouses. In some states, income earned after separation but before a decree of divorce continues to be community income. The marital community may end in several ways. When the marital community ends, the community assets (money and property) are normally divided between the spouses.

Don't forget that the timing of the receipt of your income is very important. If you have a valid check that you received or that was made available to you before the end of the tax year it is considered income constructively received in that year regardless if you cash the check or deposit the check into your account until the next year. To demonstrate further, if the post office tries to deliver a check to you on the last day of the tax year but you are not at home to receive it, you must include the amount in your income for that year. 

Partner's distributive share. Your distributive share of partnership income, gains, losses, deductions, or credits generally is based on the partnership agreement. You must report your distributive share of these items on your return whether they actually are distributed to you. However, your distributive share of the partnership losses is limited to the adjusted basis of your partnership interest at the end of the partnership year in which the losses took place. Although a partnership generally pays no tax, it must file an information return on Form 1065, U.S. Return of Partnership Income. This shows the result of the partnership's operations for its tax year and the items that must be passed through to the partners. The partnership filing is only an information return. This means that it reports income on the partners and the partners take this information to report it on their own tax returns. Information on Schedule K-1 is like information on a Form W-2 which reports income information on the people involved.

In general, like a partnership, an S corporation does not pay tax on its income. Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder's pro rata share. You must report your share of these items on your return. Generally, the items passed through to you will increase or decrease the basis of your S corporation stock as appropriate. An S corporation must file a return on Form 1120S, U.S. Income Tax Return for an S Corporation. This shows the results of the corporation's operations for its tax year and the items of income, losses, deductions, or credits that affect the shareholders' individual income tax returns.

In case you don't know, 529 plans are tax-advantage investment accounts which were originally designed to help families pay for a college education for their child. It is based on tax free interest compounding. Any 529 withdrawals are tax-free so long as you use the funds toward qualified higher education expenses. These expenses include tuition, room, and board, and even computer software and hardware.

Now the new tax law, allows parents to use these same benefits to pay for their child's education which means that the parent would be able to send their children to private grade schools and high schools. The 529 savings plans have not income limits, no contribution limits, no contribution deadlines, and no-account time limits.

Here is the deal. The new tax bill will allow you to use 529 plans for up to $10,000 per year in K-12 grade tuition expenses. This is important for families who send their kids to private schools or to religious schools. Moreover, if the family is already saving in similar plans such as the Coverdell ESA, they can switch to a 529 plan and rollover the amounts with absolutely no tax consequences whatsoever.

There is one first question that comes to mind. How is this 529 savings plan which usually has to do with saving money by making any interest received tax-free income when your infant or young child is of college age? There does not seem to be too much benefit there, is there? One benefit to think about in the short term is the fact that your state may have a deduction or credit for contributions made to a 529 plan. The deduction would depend on your state with deductions limits ranging from $500 per year to the entire amount of the 529 plan contribution. Your state may even carry forward any excess contributions for later years. Some of the states that offer such credits or deductions include Arizona, Kansas, Minnesota, Missouri, Montana, and Pennsylvania.

On another note, you many consider having two 529 savings plans - one for your child's college education and another to serve the purpose of the K-12 education.

Furthermore, you can rollover your existing 529 savings plan to a 529 ABLE account. 529 ABLE accounts are good for parents who have children with disabilities.

The 529 plans have been expanded under the new Tax Cuts and Jobs Act tax reform. The TCJA has expanded the types of expenses that can be paid with a 529 savings plan. This has been known under the name 529 college savings plan, but now it also includes education from K-12. Amounts deposited in the plan will be able to grow tax free until distributed. If the 529 plan distribution during the year are less than the beneficiary's qualified education expenses, distributions are also tax free. Additionally, to top it off, taxpayers will also be able to rollover amounts from a 529 plan into an ABLE account. Additionally, most states, like 30 of them, provide a state tax benefit for contributing to the state 529 plan. After all, education is mostly run by the state.

The annual contribution like is adjusted for inflation as are most other items in the tax code. For the 2020 tax year an adjustment to ABLE for inflation is set at $15,000. Previously the annual contribution for ABLE was $14,000.

The annual contribution limit for the ABLE is $15,000 in 2020. ABLE account owners can choose to contribute to their own accounts, have friends contribute or have family contribute to the account. The ABLE account owners who decide to contribute to their own account are now able to take advantage of the Retirement Savings Contributions Tax Credit which is also known as the Saver's Credit. However, you must qualify for the Saver's Credit. The Saver's Credit is a non-refundable credit.

If you are the both the owner and the beneficiary on both accounts, you are now able to transfer funds in a 529 college savings account to an ABLE account without incurring any tax or penalty. However, the funds rolled over from the 529 college savings account to an ABLE account are still subject to the annual contribution limit of $15,000 for the tax year.

That is, unless the ABLE account owner is employed. If so, under the ABLE to Work Act, the ABLE account owner may be eligible to contribute above the $15,000 annual contribution limit and depending on the gross income this amount could be an additional $12,060. These contributions which are above the $15,000 annual contribution limit would be limited to contributions made specifically by the account owner into their ABLE account.

If you have current student loans or are paying back student loan debt you must know the tax consequences of not paying your student loans. Student loans are debts that not even forgiven in bankruptcy. However, there are still some deductions you can take. The student loan deduction remains the same and you are still allowed to claim a deduction of up to $2,500 for the interest you pay on student loans every year. Additionally, tuition waivers for graduate students remain tax-free. This means you could waive your tuition even if it is $70,000 per year. 

You can discharge your federal and private student loan debt and you will not have to pay any tax through 2025. The student loan discharge will no longer be treated as taxable income by the Internal Revenue Service. After 2025, it is to be seen what will happens. For now the new tax bill excludes student loan debt forgiveness from taxable income if you are permanently disabled. It also excludes student loan forgiveness in case of death. You may be thinking that nothing will matter after you are dead, although for many people this is not true specially if they have children who depend on them, this is quite important if your student loan was cosigned by someone. The cosigner will not be held accountable for your student loan because it will be a tax-free transaction.

The new Tax Cuts and Jobs Act has remained generous with student tax matters and has not suspended any of the credits that pertain to education. For example, there is a favorable change to the rules as to how money can be used for the 529 savings accounts to include K-12 and not only the previous only for college rule. The credits remain intact such as the Lifelong Learning Credit. This new rule to make discharge of certain student loan indebtedness completely tax free through 2025 is another one of these benefits display concern for the well-being of our students.

You and your spouse if married, must have a valid Social Security number (SSN) by the due date for your 2020 tax return plus extensions. The due date for your 2020 tax return is April 15, 2021. The date was extended to May 17, 2021, as a result of the pandemic. If you do not have a Social Security number by the due date of your tax return (with extensions), you cannot claim the credit on your original tax return and you cannot claim it on an amended tax return if you later obtain a Social Security number. Similarly, you cannot treat a child as a qualifying child on either your original tax return or on an amended tax return if that child did not have a Social Security number by the due date of the tax return (with extensions), even if the child later obtains a Social Security number.

If you are claiming an earned income credit on your tax return and file your tax return in the beginning of the tax season, say January 1, 2021, you will have to wait until February 15th to get your refund. Under the 2015 PATH Act, the IRS cannot issue a refund before February 15th if the return includes the earned income credit. The same goes for tax returns claiming the refundable child tax credit. The entire refund must be withheld until February 15th and not just the portion of the refund attributable to the earned income credit or the refundable child tax credit. The delay in issuing these very early refund claims is intended to give the IRS some extra time to review the returns and reduce improper refund payments.

The Earned Income Tax Credit (EITC) is a financial boost for people working hard to make ends meet. Millions of workers may qualify for the first time this year due to changes in their marital, parental, or financial status. Therefore, to get the credit taxpayers need to file a return and specifically claim the EITC, even if they aren’t required to file. The EITC is a refundable tax credit. This means taxpayers may get money back, even if they have no tax withheld. Nationwide last year, over 27 million eligible individuals and families received more than $63 billion in EITC. Many special rules apply to the EITC, so taxpayers should review the rules carefully, even when paying someone else to prepare their returns. Generally, the EITC has no effect on welfare benefits. In most cases, EITC payments are not used to determine eligibility for Medicaid, Supplemental Security Income (SSI), supplemental nutrition assistance program (food stamps), low-income housing or most Temporary Assistance for Needy Families (TANF) payments. Though unemployment benefits are not earned income, they are taxable income and may affect the amount of EITC.

The Earned Income Credit has been the most abused tax credit. If you take the EIC even though you are not eligible and it is determined that your error is due to reckless or intentional disregard of the EIC rules, you will not be allowed to take the earned income credit for 2 years even if you are otherwise eligible to do so in this year. As a tax professional you need to have many caveats in mind when it comes to the Earned Income Credit rules. When you prepare tax returns for a fee you have to determine the eligibility for the Earned Income Credit or face steep penalties. $530 per taxpayer can really add up. They say that an ounce of prevention is worth a pound of cure.

You don't want to be in front of an Internal Revenue Service agent frantically trying to figure out how you are going to come up with the due diligence proof for the 2,000 tax returns you prepared last year. Imagine two thousand tax returns times $540 for tax returns filed in 2021.  That is a million dollars that you would owe the Internal Revenue Service. Let's say you can negotiate the million dollars with the IRS. The negotiated figure is still a lot of money. You must do everything in your power to prevent any more Earned Income Tax Credit abuse. It is the law.

There are many tax and legal consequences if you choose to disregard the EITC rules. For example, you must file Form 8862 if your EIC for a year after 1996 was reduced or disallowed for any reason other than a math or clerical error. File Form 8862 if for 2 years after the most recent tax year for which there was a final determination that your EIC claim was due to reckless or intentional disregard of the EIC rules. Also, file Form 8862 if the reason your EIC was reduced or disallowed in an earlier year was because it was determined that a child listed on your Schedule EIC was not your qualifying child. Additionally, if your EIC credit was denied for 10 years due to fraud, then you must file Form 8862 along with your tax return.

Let's take an example when you must use Form 8862 in preparing a tax return for your client. In 2020, your client was age 24, single, and living at home with his parents. He worked and he was not a student and earned $7,500. His parents cannot claim him as a dependent. When he files his tax return, he cannot claim the Earned Income Credit because he is not at least age 25. Your tax preparation software would most likely catch this mistake because your client is not at least age 25. However, let's say you not only did not fill out the Form 8862 diligence worksheet, but you also did not fill out the correct age in you tax software. As a result, you give your client the Earned Income Credit. This is a tax preparation mistake an also a negligent disregard of the EIC due diligence rules. When the Internal Revenue Service asks for the due diligence requirement record, they will fine you $540 for that client if you fail to provide it. You must always use Form 8862, or the questions contained in Form 8862 before you issue any Earned Income Tax Credit amounts.

For both 2020 and 2021, eligible taxpayers can claim a nonrefundable tax credit of $500 for each dependent other than a qualifying child.

There are many other credits which have been increase, for a temporary period, but nevertheless have been increased and increased drastically. What is also drastic is that some credits have been eliminated.

For both 2020 and 2021, eligible taxpayers can claim a nonrefundable tax credit of $500 for each dependent other than a qualifying child.

You already know very much how it all works. As before, this tax credit will reduce your tax bill on a dollar-to-dollar basis by $3,000 for 2021 and is an increase from the 2020 amount of $2,000 per child. So now if your tax bill is $4,000, and you have two dependents, bingo, you will owe nothing. It is a nonrefundable credit, so it goes against tax. We call this credit "tax killer". What do you call it?

For both 2020 and 2021, eligible taxpayers can claim a nonrefundable tax credit of $500 for each dependent other than a qualifying child.

A credit that reduces your tax liability is a nonrefundable credit. Taxpayers have many tax credits that are "tax killers" that will help them eliminate their tax liability. If the taxpayer has children, there are more options and more available credits to them than when there are credits which don't include children. The child tax credit was started to help families raise their children. Raising a child is not cheap and many struggle to make ends meet. A credit that allows for a refund after taxes have been paid such as the newly expanded child tax credit is a refundable credit.

This legislation, the new Tax Cuts and Jobs Act (TCJA) has, at least for a temporary time, taking into account hard working family with a much-needed refundable child tax credit which is going to make an incredible difference in the lives of kids all around the country. To top it off, the child credit has been expanded to include more children, not just the children under 17.

So basically, you had a dependent under age 17, you had a credit of $2,000 for 2020 for that dependent. As far as the relationship test was concerned, it was the same relationship test that you must pass to claim a dependent so therefore it was as if this test to claim the child for the child tax credit did not exist or it was a given as it had already been met when you could claim the child as a dependent. Additionally and again, this is the same as the dependent test, the child must have not supported him or herself for more than half of their own support and the child must have been a U.S. Citizen, U.S. national or U.S. resident alien and must have lived with you for more than half of the year or in sum qualify under all the tests to qualify as your dependent.

Furthermore, the child tax credit had modified adjusted gross income limitations such as the phase-out amounts that depend on the filing status. If in 2020, your modified adjusted gross income (AGI) is more than the following amounts then the amount of the $2,000 child tax credit is either reduced or eliminated.

As for both 2020 and 2021, eligible taxpayers can claim a nonrefundable tax credit of $500 for each dependent other than a qualifying child.

There are Child Tax Credit phase-out amounts. For 2020, if your modified adjusted gross income (AGI) is more than the following amounts then the new amount of the $2,000 child tax credit is either reduced or eliminated.

If the child did not have a Social Security number, an ITIN number cannot be used to claim the child tax credit for the $2,000 amount for 2020. Now, under the new tax bill, children with ITIN number will need to provide a Social Security number to claim the child tax credit for that child since now the child tax credit is refundable. Therefore, in order to claim the refundable part and the non-refundable part of the credit a Social Security number must be provided. The idea behind this is that most children who have an ITIN, have an ITIN because they are undocumented. This is going to impact the entire family because as you may be aware of families that immigrate to the United States have both foreign born and US born children.

However, for both 2020 and 2021, eligible taxpayers can claim a nonrefundable tax credit of $500 for each dependent other than a qualifying child. For this nonrefundable tax credit of $500 per dependent an ITIN number can be used if there is no Social Security Number.

The Lifetime Learning Credit and the Student Loan Interest deduction survived the passing of the new tax law. Colleges and universities may be affected by the new Tax Cuts and Jobs Act because of the doubling of the standard deduction which means fewer individuals will itemize their deductions and thus have no incentive to donate to universities or charitable organizations. This is one of the indirect ways in which the new tax law reform will affect colleges and universities. Another one like this one is that you will no longer be able to exclude 80% of the amount that you have paid for the right to purchase tickets to athletic events which will greatly affect school athletic team contributions by donors.

You may claim on Form 8863 a Lifetime Learning credit of up to $2,000 for the total qualified expenses paid for yourself, your spouse, or your dependents enrolled in eligible educational institutions during the year, subject to the income phase-out. The credit is nonrefundable, meaning that it cannot exceed your regular tax plus AMT liability. In addition to tuition, the only qualified expenses are student activity fees and course-related books, supplies, and equipment that must be paid to the educational institution as a condition of enrollment or attendance. In contrast to the American Opportunity credit, the Lifetime Learning credit does not have a degree requirement.

Some of the benefits for saving for college either got modified or eliminated but some of the most popular benefits for education like the credits and the student loan interest deduction remain unchanged. There was no change to the American opportunity credit. With the AOC you can get up to $2,500 per eligible student and up to $1,000 of this credit a refundable credit. The requirements are that you only take this credit for four years and only take it if you have not completed the first four years of postsecondary education (college) before the tax year. To eligible the student must be enrolled at least half-time for at least one academic period and must be trying to acquire a degree. Furthermore, this credit is generally claimed by the parents of undergraduate students.

The Lifetime learning credit stays the same and the new tax reform has not affected it. You can get up to $2,000 for qualified education expenses paid for all eligible students include in the taxpayer's tax return. There is no limitation as to how many years you can take the Lifelong learning credit and your student does not have to be enrolled in a minimum number of hours to claim the credit. This credit is usually claimed by the graduate student him or herself. If you qualify for the lifelong learning credit and the AOC credits and since you cannot take both, you would usually choose the one that gives you the greater tax benefit which is usually the AOC.

The Nontaxable scholarship and grant rules stay the same and the new Tax Cuts and Jobs Act does not change or affect the rules. Scholarships that are used for tuition and fees remain nontaxable. Scholarships can be used to pay any expense such as room and board and can either taxable or nontaxable depending on what you spend it on. Nontaxable qualified expenses include tuition and fees, course-related expenses such as books, supplies and equipment required for your learning and these items must usually be required for all students that are taking the course. Nonqualified and therefore taxable expenses would include room and board, travel, research, clerical help, or equipment or other expenses that are not required for enrollment or attendance in the eligible educational institution.

The tuition and fees deduction was eliminated by the new Tax Cuts and Jobs Act. However, for 2020 this credit was revived. The deduction for tuition and fees is available for qualified education expenses you incurred for yourself, your spouse or for your dependent. This deduction had already expired in 2016 but it was provisionally extended and now it is revived again for 2020. This tuition and fees allowed taxpayers to reduce their taxable income by up to $4,000. This credit is usually claimed by people who claimed the Lifetime learning credit.

The Tax Cuts and Jobs Act did not make any changes to the IRA penalty exception for education. The 10% early distribution penalty is waved, if for the year of the distribution of an IRA before reaching age 59 1/2 if it is to pay for

You should claim the penalty exception on Form 5329.

Other items for education remain the same such as

However, the business deduction for work-related education has been eliminated for employees. Many expenses that have to do with employee deductions at work have been eliminated and business education for business work-related is one of these. All types of employee business expenses have been disallowed under the Tax Cuts and Jobs Act. We no longer can deduct uniforms, memberships in professional organizations, and any other necessary and ordinary employee business expenses. No deduction for the employee, all deductions for the business owner. You can deduct all these items as business related such as business related education on Schedule C but disallowed to an employee. If you are self-employed or a self-contractor or otherwise you own a business you can still deduct business expenses that are necessary to run your business. 

The Tax Cuts and Jobs Act has modified the exclusion for student loan cancellation. The TCJA has allowed rules that permit certain qualifying students to exclude cancellation of student loan debt from income. To qualify the loan must have a provision that states that part of the debt will be cancelled if the student works for a certain period of time and in a certain profession or if the student works for any of a broad class of employers.

Now the Tax Cuts and Jobs Act has included a new provision that student loan debt forgiveness due to death or permanent and total disability is excludable from income. You may think who cares if you are already dead, but think about it. Your surviving spouse would not be liable for your debt or your cosigner for that matter. After all, if you spouse dies, the amount would immediately forgiven and thus taxable, but with this new exclusion in the new TCJA reform, the spouse does not have to include income that he or she has not received in the first place.

The CDCTC or child and dependent care tax credit allows you to deduct up to $2,100 from your tax bill to help you with the high cost of childcare. That is $175 per month to help you a little bit with this cost. Yes, a little bit because if you have kids and you must pay for childcare, you know that most of your paycheck goes to pay for childcare. On top of that, it is a non-refundable credit, which means it only cancels tax. If there is no tax to cancel, there is no credit. Therefore, to qualify for this CDCTC credit the taxpayer must be employed and the spouse too if married must be employed. If he or she is not employed, then he or she can be a full time student. You must have paid up to $3,000 is childcare for one child or up to $6,000 for two or more children.

You may be able to claim the child and dependent care credit if you paid work-related expenses for the care of a qualifying individual. The credit is generally a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income. Work-related expenses qualifying for the credit are those paid for the care of a qualifying individual to enable you to work or actively look for work.

Expenses are paid for the care of a qualifying individual if the primary function is to assure the individual's well-being and protection. In general, amounts paid for services outside your household qualify for the credit if the care is provided for (i) a qualifying individual who is your qualifying child under age 13 or (ii) a qualifying individual who regularly spends at least 8 hours each day in your household.

The total expenses that may be used to calculate the credit are capped at $3,000 (for one qualifying individual) or at $6,000 (for two or more qualifying individuals). The dollar limits may differ depending on the tax year in question. The expenses qualifying for the computation of the credit must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from gross income.

One more thing, you must identify the care provider on your tax return. On Form 2441, you must list the name, address, and taxpayer identification number of the person you paid to care for your dependent. If the care provider is an individual, his or her Social Security number is required. If the provider is a business, enter the business' employer identification number (EIN), but you do need to enter a taxpayer identification number if the care provider is a tax-exempt organization such as a church. Failure to list the correct name, address, and identifying number may result in a disallowance of the credit. To avoid this possibility, ask the provider to fill our Form W-10 or get the identifying information from a Social Security card, driver's license, or business letterhead or invoice. If a household employee has filled out Form W-4 for you, this may act as a backup record.

There is another tax savings benefit for dependent care for those who have children. This is the dependent care flexible spending account. This will be eliminated after five years under the new tax law. This credit flexible account allows families to set aside up to $5,000 in pre-tax income to pay for childcare expenses. These childcare expenses can be for in-child care center care or for nanny care. Things may change as five years is a long time from now and depending on the people in charge at that time, this tax benefit may continue pass the five-year proposed plan.

You may contribute to a dependent care FSA if you expect to have expenses qualifying for the dependent care tax credit. If you contribute to the account, any tax-free reimbursement from the account reduces the expenses eligible for the credit. If you are married, both you and your spouse must work in order for you to receive tax-free reimbursements from an FSA, unless your spouse is disabled or a full-time student.

The maximum tax-free reimbursement under the FSA is $5,000, but if you or your spouse earn less than $5,000, the tax-free limit is the lesser earning of the two. You must use Part III of Form 2441 to figure how much of your reimbursement is tax free and how much must be included in your income. Unlike the health FSAs, an employer may limit reimbursements from a dependent care FSA to your account balance. For example, if you contribute $400 a month to the FSA and in January you pay $1,500 to a day-care center for your child, your employer may choose to reimburse you $400 a month as contributions are made to your account. 

You may increase or decrease withholding on your wages by submitting a new Form W-4 to your employer. Withholding may be reduced by claiming allowances based on tax deductions and credits.

Make sure that tax withholding meet or help you meet the estimated tax rules that require withholding plus estimated tax payments to equal 90% of your current year liability or the required percentage of the prior year's liability.

A mandatory 20% withholding rate applies to eligible rollover distributions that are paid to you from an employer retirement plan. You may avoid the withholding by instructing your employer to directly transfer the funds to an IRA or the plan or a new employer.

Withholding should cover your estimated tax. In fixing the rate of withholding on your wages, pay attention to the tests for determining whether sufficient income taxes have been withheld from your pay. A penalty will apply if your wage withholdings plus estimated tax payments (which include prior year overpayments credit to your current estimated tax) do no equal the lesser of 90% of your current tax liability or the required percentage of the prior year's tax.

Taxes are withheld from payments made to you for services that you perform as an employee, subject to certain exceptions. On Form W-4, you can claim allowances on Line 5 for yourself, your spouse, and your dependents, as well as withholding allowances for itemized deductions and tax credits such as the child tax credit and the child and dependent care credit. The number of allowances claimed will either decrease or increase the amount of withholding.

All taxpayers are still required to use the tax code's golden rule to pay as you go - we are still in the same tax system of pay as you go. This means that you make the money, and you send in the tax. This is the reason we get taxes deducted from every paycheck. If the taxpayer is self-employed, then he or she must send in the taxes every so often, which is usually every three months depending on how much money the individual is making. Many taxpayers start making estimated tax payments every three months and then the Internal Revenue Service may adjust their estimated tax schedule and require them to make payment every month, for example. Estimated tax payments are made by taxpayers who have income that isn't subject to withholding such as self-employment income.

The Tax Cuts and Jobs Act (TCJA) has changed the way estimated tax is calculated. This mainly has to do with the new tax rates and tax brackets. Many other factors, credits, deductions, and the lack of deductions change the how much a taxpayer must send in in estimated tax payments. The taxpayer must calculate their taxes based on the amount he or she estimates that he or she may owe and try to come as close to it as possible. The fact that personal exemptions are being eliminated, the standard deduction has been given a raise, and the fact that certain deductions are no longer available has a great significance on how much the taxpayer must send in in advance as estimated tax payments. Estimated payments will be due on the same dates they are normally due which are April 15, June 15, September 15, and January 15 of the next year. These payment dates cover a three-month period each. Don't ignore these dates because if you do, it can really cost you as you will be liable for failure to make estimated tax payments if you don't make them in a timely manner. It is not like it is only you who will fail to pay their estimated tax payments on time or that there are only a few individuals failing to do so, there are many. The IRS is used to the stories and no story will probably change their mind to cut you some slack. And, no, they are not just going after the big shots, they will enforce the tax law with the little guys, like you.

When you hear the IRS announcing that an increased number of taxpayers are subject to estimated tax penalties and that an increasing number of taxpayers have underpaid his or her taxes, then you know what is up. For example, the number of people who paid penalty jumped from 7.2 million in 2010 to 10 million in 2015 and that is an increase of 40 percent.

Income taxes are collected on a pay-as-you-go basis through withholding on wages and pensions, as well as quarterly estimated tax payments on other income. Where all or most of your income is from wages, pensions, and annuities, you will generally not have to pay estimated tax, because your estimated tax liability has been satisfied by withholding. But do not assume you are not required to pay simply because taxes have been withheld from your wages. Always check your estimated tax liability. Withholding may not cover your tax; the withholding tax rate may be below your actual tax rate when considering other income such as interest, dividends, business income, and capital gains.

Be careful. If you are an employee and have failed to adjust your withholding at work, then you run the risk of owing a penalty for not having enough money withheld from your paycheck. Remember, you were supposed to adjust your withholding since the first week of January 2020 when the new tax law the Tax Cuts and Jobs Act started applying. Don't make the mistake of thinking that that everything starts in 2021. That is when you file your tax return, not when you start getting income and applying your withholding rates, deductions, and exemption amounts. You hear everywhere that you will file tax returns in 2021 and it makes it sound like everything will start in 2021, but no, that is not true. News to you, the new tax law started already, and it started January 1, 2020.

Your withholding and estimated tax payments must also cover any liability for self-employment tax, alternative minimum tax (AMT), the additional 0.9% Medicare tax on earnings, the 3.8% tax on net investment income, and FICA withholding tax for household employees. Failure to pay a required estimated tax installment will subject you to a penalty based on the prevailing IRS interest rate applied to tax deficiencies unless the IRS waives the penalty.

If you expect your 2020 tax liability to be $1,000 or more after considering withheld taxes and refundable credits, you should make quarterly estimated payments unless you expect the withholdings and credits to be at least 90% of your 2020 total tax, or, if less, 100% or 110% of your total tax for 2019. The 100% test applies if your 2019 adjusted gross income (AGI) was $150,000 or less, $75,000, or less if for 2019 you will file as married filing separately. The 110% test applies if your 2019 AGI exceeded the $150,000 or $75,000 threshold.

If your employer is not taking enough withholding from your check, then you need to tell your employer to take an additional amount just to be on the safe side. It would not hurt to do some tax planning and visit a tax professional to make sure that your employer is not making an error and under-withholding from your paycheck. If you are self-employed or a self-contractor, then you need to look into sending estimated tax payments using Form 1040-ES. Remember that estimated tax payments are sent in every three months if you are self-employed or it could be that you get income on the side or any other taxable income that will make your adjusted gross income higher, you need to send in the estimated tax. As long as you are not too off from the actual tax you have to pay, you will be fine.

However, if you want the IRS to deposit into two or three accounts, you must file Form 8888 with your Form 1040. You can have the refund directly deposited into a checking or savings account, an online Treasury Direct account, or even to an IRA, Roth IRA, or health savings account. Furthermore, if you want the deposit to go into an IRA, you must first establish the IRA before you request the direct deposit. This makes a lot of sense. Just like you must first establish a checking account before you ask the IRS or anyone to deposit to it, you must have the account numbers to deposit to the IRA. Isn't an IRA technically a savings account?

Many taxpayers opt for direct deposit because it makes it faster and easier to get your refund. In this day and age, we are getting very used to everything being electronically. So much that going to the bank to cash a check or even make a deposit at an ATM is considered too much work. Why would we want to open an envelope, split the check at the perforated lines and then endorse the check in the back when all we had to do is input in our computer two sets of numbers and we are done? Yes, it is true, for people who work in the strawberry fields or in construction, of course even sitting at a desk is not considered work for them, but with our hectic schedule and the fact that we have to use our brains, all of this takes a lot of energy and then you go home, and you feel really tired and all you want to do is rest.

It is a lot of effort physically go to the bank and endorse your checks when all you have to do is make everything automatic on your screen. The taxpayer may even split refunds between up to three qualified accounts. Why would anyone want to do this? Who knows, but the option is available if you want to use it.

The option to direct deposit has become very popular because people are in great need of money at the beginning of the year, so they seek to receive their tax refunds faster or at least what they receive looks very much like a refund. It is against the IRS rules to state that a loan against your refund is a refund but many tax preparers either don't correct the client when they state they want their refund faster or for the best interest of not having to make long explanations, simply state it is a refund.

If you have a balance due on your tax return, you need to pay it.  When taxpayers have a balance due, they usually wait to the last day to file their tax return. Remember, an extension to file a tax return in not an extension to pay. If you file an extension to prepare your tax return, you must estimate the amount of tax and send it in with your extension. Much of the time, taxpayers just send in their request for an automatic extension of time to file but not the money. You can do that too, but you will be charged penalties and interest the same way. There are other penalties too such as a late payment penalty. So, there is a late filing penalty if you don't file on time and neglect to file an extension and there is also a late payment penalty if you don't pay on time. In addition, if the IRS sends you a letter and you fail to reply they can charge you a failure to comply penalty.

We all know or should know that there is a penalty for not paying enough to cover our tax with the Internal Revenue Service. We are hesitant to ask you if you know, because we don't want to offend you. However, did you know that there is also a penalty for overpaying? There is a 20% penalty for receiving an excessive claim for refund or credit on an original or on an amended tax return. The penalty is 20% of the "excessive" amount, the excess of the refund or credit claimed over the amount allowed, unless there is a reasonable basis for the amount claimed.

Good news though. The penalty does not apply to claims relating to the earned income credit. It also does not apply to any portion of the excess that is subject to the accuracy-related penalties which include the penalty for understatements due to reportable or listed transactions or even the fraud penalty.

We all should know by now how the AMT works by now. We have two separate tax systems; one is the regular tax system and the other is the AMT tax system. The alternative minimum taxes certain types of income that have been used to claim certain credits and deductions under the regular tax system and ultimately disallows some tax breaks allowed in the other tax system. The good news is you have good tax breaks. The bad news is that you owe ATM tax and those good tax breaks we mentioned before are no longer applicable. That is the common story behind the alternative minimum tax.

The purpose of the AMT is to effectively take back some of the tax breaks allowed for regular tax purposes. The AMT is an additional tax that you may owe if for regular tax purposes you claimed:

There are no specific tests to determine whether you are liable for the alternative minimum tax (AMT). You must first figure your regular income tax and then see whether tax benefit items must be added back to taxable income to figure alternative minimum taxable income, on which the AMT is figured. If after claiming the AMT exemption and applying the AMT rate and the tentative alternative minimum tax, this exceeds your regular income tax, the excess is your AMT liability. This is added to the regular tax on your return. In other words, your tax liability for the year will be the greater of your regular tax or your alternative minimum tax (AMT).

Therefore, to make things better, you are allowed an AMT exemption and it is deducted when you are calculating the AMT income. This exemption amount is significantly increases for tax years through 2025. Once the AMT surpasses the applicable threshold, the exemption amount is phased out. However, those thresholds are also very generous and the TCJA has greatly increased them.

It is important to plan your taxes and try to avoid being hit by the AMT. However, it may be a bit difficult to try to pinpoint what will trigger the alternative minimum tax since there are so many factors involved. First, high income can cause the AMT exemption to be partially or completely phased out and this would a factor that increases your chances of owing the alternative minimum tax. The TCJA has lowered some of its regular tax rates (5 of them) while leaving the AMT rates at 26 percent and 28 percent will not help you in trying to avoid the AMT.

Other items that may cause you to owe the AMT are large itemized deductions that include deductions for state and local taxes. This is especially true since these taxes are completely disallowed under the new AMT rules. The new tax law limits the regular tax deduction for state and local income taxes and property taxes combined to $10,000 ($5,000 if married filing separate).

Incentive Stock options (ISOs) do not count as income under the regular tax rules but they do count as income under the alternative minimum tax rules. So if you have these (no change from the old rules), you may trigger the AMT.

You can no longer include investment expenses, fees for tax advice and tax preparation and un-reimbursed employee business expenses for itemized deductions under the new tax rules. However, under the old tax law or under the new these items remain as disallowed for the alternative minimum tax, therefore, this would not be a trigger for the AMT, at least this time around.

Other items that would be of interest to look into for possible triggers of the AMT are interest income from privacy activity bonds, claiming the standard deduction since it is now almost doubled. The new tax law no longer allows a deduction for home equity loan interest, so therefore, this is not an item of threat or that would trigger the AMT.

The alternative minimum tax (AMT) liability is figured on Form 6251 and is attached to Form 1040. After you determine your regular income tax liability, you use Form 6251 to compute AMT liability, if any.

You can file your tax return as early as January 2nd of the start of the year. However, most people are not ready to file by this time. However, many people are super ready to file on first day of the year if it wasn't for the fact that January 1st is a legal holiday. The IRS gets its software ready to start receiving electronic tax return all the way into the end of January. In 2021 this end of January date was January 29, 2021. In 2021 the deadline to file tax returns was May 17, 2021, because we are still in a pandemic. This also has to do with the fact that IRS is understaffed and again it is understaffed because of the pandemic. Many people, smart people that is, are not willing to risk their life. Other people even if they don't want to risk their life during this pandemic have no choice but to work because bill simply don't wait.

If you cannot file your tax return on time, you can request an automatic extension of time to file. Please know that an extension of time to file a tax return does not grant you an extension of time to pay the tax liability. You may be able to get an automatic 6-month extension of time to file your tax return. Therefore, to ask for your extension, you must use Form 4868, Application for Automatic Extension of Time to File U.S. Individual Tax Return. You must file this form by the due date of your tax return for filing your calendar year report or your fiscal year return. This time is usually April 15 or if the 15th falls on a Saturday, Sunday, or legal holiday, then the following business day. However, this year because of the pandemic, the deadline to file an extension was May 17, 2021.

The Internal Revenue Service for some reason or other decides to start issuing refunds not until February. Any refunds that contain the Earned Income Credit or the Additional Child Tax Credit, legally, cannot be issued until mid-February. There is a law that prevents the IRS from issuing these types of refunds until a certain date. For the 2020 tax filings, many taxpayers did not see refunds into their accounts until February 28, 2021. This was the fastest way to get these refunds too! For a taxpayer to be able to get the refunds on this date, which is the earliest, the taxpayer would have to electronically file their tax returns and choose direct deposit. Of courses, if there are issues with the return, the refunds would be delayed regardless if the tax return was filed by e-file or by paper.

Maybe the IRS needs to change tax season to a later time in the year when it can be ready to service its customers. If you cannot issue refunds until February 28th, then maybe tax season should start February 28th and not January 1st. This was not an issue 15 years ago, for example. Taxpayers would file their tax returns in the first week of January and taxpayers would have their refund within about a week. It seems that the entire idea behind delaying refunds is due to the possibilities of fraud.

You have special privileges is you are living outside the United States or out of the country when your 6-month extension expires. You also receive special privileges if you are serving in a combat zone or a qualified hazardous duty area. You can request an automatic extension of time to file a U.S. individual income tax return by electronically filing Form 4868. You can also request an automatic extension of time to file a U.S. income tax return by paying all or part of your estimated income tax due using a credit or debit card or by using EFTPS.

Additionally, you can request an automatic extension of time to file a U.S. individual tax return by mailing out Form 4868 to the IRS. Businesses need to fill out Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. Corporations would file Form 1138, Extensions of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback. Therefore, if you are not able to file your tax return on time, whether you are an individual, a business or a corporation, you always have the option to ask for more time. At the time your extension expires, you can always ask for additional time by contacting the IRS and requesting an additional extension of time to file.

April 15 of each year is the due date for filing your federal individual income tax return if your tax year ends on December 31. Also, your return is considered filed timely if the envelope is properly addressed and postmarked no later than April 15. If you cannot file by the due date of your return, then you can request an extension of time to file. It is extremely important that you know that an extension of time to file will not extend the time to pay. You must also realize that an extension of time to file will not save you money on interest and late payment penalties. Finally, an extension of time to file is not an extension of time to pay.

Most of the western part of the country files their tax return either to Fresno, California or to San Francisco, California. Other the other hand, most of the eastern part of the country files their tax returns to either Kansas City, MO or to Hartford, Connecticut.

Why not file electronically? Filing electronically allows you to receive your refund much faster, usually within 3 weeks after the IRS receives your tax return. If you are getting a refund, your money will be a lot safer and received faster if you have it directly deposited into your checking or savings account. Many tax professionals are obligated to offer electronic filing to their clients and there isn't much leeway for them as to the manner of filing their clients' tax returns. So now filing a paper tax return for their clients is no longer an option for many tax professionals.

During 2021, the rounds of Economic Impact Payments continue to be sent out. Taxpayers continue to receive these as they file their tax returns, and there are taxpayers who qualify for "plus-up" payments.

1. The results compared to previous results give us information about our economy – inflation or deflation. This tells us if the economy is good in 2020 or if it is not doing so well. By inflation we mean

A. Rising prices.

B. Falling prices.

C. CPI index.

D. Chained CPI.

2. Practically everything you received for your work or services is taxable. This applies to 2020 or any tax year. Additionally,

A. There are a few exceptions, and these exceptions are usually specific treatments of income in the tax code.

B. Everything that you received in exchange for work, be it cash, property, or services in exchange are taxed as if paid in cash.

C. Your employer will generally report your taxable compensation on Form W-2 and other information returns, such as Form 1099-R for certain retirement payments.

D. All of the above.

3.  In 2020, there are penalties for not filing a required FBAR. Regardless of whether you must file a FBAR, you may have to

A. File Form 8938 to disclose your ownership of specified foreign financial assets.

B. Pay a penalty for failure to file a required Form 8938.

C. Both A or B above.

D. Postpone the filing your tax return if you have an interest in foreign accounts.

4. For 2020, Schedule B Part III is where you report a financial interest or signature authority over a financial account located in a foreign country. A financial account includes

A. A commodity futures or options account.

B. Shares in a mutual fund or similar pooled fund.

C. An insurance policy with a cash value.

D. Any of the above.

5. You can try to figure out what to do about making sure the IRS does not treat your business as a hobby and this includes diligently running your business as a business and not as a hobby and this especially important after tax year 2020. Another thing to look into is the IRS safe-harbor rules. These rules state that

A. If an activity makes money (has a positive taxable income) for at least three out of every five years it can be presumed to be a for-profit endeavor.

B. If a horse racing, breeding, training, or showing activity has a positive taxable income in two out of every seven years, it is presumed to be a for-profit business.

C. Both A and B above.

D. You must conduct the activity in a business-like manner by keeping good records.

6. What are the types of calculation methods for claiming office in the home for 2020?

A. The regular method.

B. The simplified method.

C. Either A or B above.

D. The accrual method.

7. Individuals always challenge the constitutionality of taxation. An instance when the challenge of tax laws was successful was

A. In 1895, the U.S. Supreme Court decided that the income tax was unconstitutional because it was not apportioned among the states in conformity with the Constitution.

B. In 2004, the U.S. was forced to eliminate a corporate tax provision that had been ruled illegal by the World Trade Organization.

C. Both A and B above.

D. In 2010 the favorable rates on capital gains and dividends that had been enacted were eliminated.

8. In 2020 or any tax year, you should supply the taxing agencies with

A. Information that is needed to file your tax returns which is only to your vantage.

B. The most correct information requested on the tax forms and worksheets.

C. Income information such as interest amounts from savings account numbers.

D. All of the above.

9. The Internal Revenue Service will use the 2020 tax return information you supply

A. To calculate the amount of tax you should pay.

B. To calculate the correct amount of tax to collect.

C. To determine if you qualify for the credits and deductions you are claiming on your tax return.

D. All of the above.

10. To determine if you must file a tax return for 2020, you must include in your gross income,

A. All income you earned or received abroad.
B. Any income you exclude under the foreign earned income exclusion.
C. Both A and B above.
D. All income regardless of source.

11. Even if you are not required to file a tax return for 2020, you should consider filing

A. If you had income tax withheld from your pay.
B. To keep you from getting a notice from the IRS.
C. If box 3 of Form 1099-B (or substitute statement) is blank
D. Any of the above.

12. You may be able to include your child's interest and dividend income on your 2020 tax return if

A. The interest and dividend income total was less than $11,000.
B. Your child was under age 19.
C. No federal income tax was withheld from your child's income under the backup withholding rules.
D. Any of the above.

13. You may have to file a tax return for 2020 even if your gross income is less than the required amounts if you

A. Are liable for the Alternative minimum tax.
B. Have additional tax on a qualified plan such as an IRA.
C. Have to pay household employment taxes and you are filing only because you owe these taxes.
D. Only A and B above.

14. The head of household filing status has more requirements to be met than the other filing statuses. One of these requirements for 2020 is

A. To have supported a home for your dependent for more than half the cost of maintaining the home.
B. To have earned more than $10,000 per year.
C. To have supported a house for a child but not for a parent.
D. Any of the above.

15. If you do not itemize deductions, you are entitled to a higher standard deduction if you are 65 or older at the end of the tax year. For 2020, you are considered 65 on the day before your 65th birthday. Therefore, you can take a higher standard deduction for 2020 if you were born before

A. January 2, 1951
B. January 2, 1956
C. January 2, 1951
D. January 2, 1955

16. Once you are married in 2020, you can file as

A. Single
B. Married Filing Separately.
C. Married Filing jointly only.
D. Qualifying Widow (widower).

17. You will most likely be obligated to file a 2020 tax return if


A. You owe special taxes such as the alternative minimum tax (AMT).
B. You owe taxes on individual retirement accounts (IRAs).
C. You had social security or Medicare taxes on tip income that you did not report to your employer.
D. Any of the above.

18. For 2020, the new tax law will now use the _______ which grows slower than the traditional consumer price index.

A. Chained CPI

B. Traditional consumer price index.

C. CPI

D. CPI-W

19. For 2020, the new tax law treatment of alimony payments will apply to payments that are required under divorce or separation instruments that are

A. Executed after December 31, 2018

B. Have been modified after that date and if the modification specifically states that the new tax law now applies.

C. Either A or B above.

D. Made after a 2020 divorce agreement, then they will continue to be deductible as usual.

20. In 2020, the due diligence requirement that has always been in place for the Earned income credit is also now available for

A. The head of household filing status.

B. The American opportunity credit.

C. The child tax credit.

D. All of the above.

21. If you don't show proper due diligence on how you qualified your client for the head of household filing status for 2020,

A. The IRS will impose a $540 penalty for each failure for tax returns filed in 2021.

B. The IRS will send you a letter warning you to follow the rules.

C. The IRS will charge you interest on the amount owed by your client.

D. The IRS will only require you to keep a due diligence record if you file more than 100 tax returns.

22. For 2020, it is important that you be aware that you cannot claim the earned income credit using an ITIN, except that 

A. You can claim the child tax credit.

B. There is a new $500 nonrefundable credit for dependents with an ITIN.

C. You can claim the American lifetime credit.

D. You can claim the American opportunity credit.

23. For 2020, foreigners who are individuals should apply for an Individual Taxpayer Identification Number (ITIN) on Form W-7. Each applicant for an ITIN

A. Should attach a copy of Form 1040 to Form W-7.

B. No longer needs to attach a copy of your tax return when submitting your Form W-7.

C. No longer need to attach the required identification documentation.

D. Can only apply in person with an authorized agent.

24. If you were married on or before December 31, 2020, you can either be Married filing jointly or Married Filing separate for tax year 2020. However, you can probably qualify for Head of Household filing status if

A. You file your tax return as single.

B. You file your tax return as married filing separate.

C. You can be considered unmarried for tax purposes for 2020.

D. None of the above.

25. If you were married at the end of 2020 even if you did not live with your spouse at the end of 2020, you can use the Married Filing Jointly filing status. However, you don't have to.

A. It is always your legal right to file your tax return separately.

B. If you are married you must file as married filing jointly.

C. You can choose any filing status including single, even if you are married.

D. If you live apart from your spouse, you can file as single.

26. If you obtain a court decree of annulment in 2020, which holds that no valid marriage ever existed, you

A. Are considered unmarried even if you filed joint returns for earlier years.

B. You are considered to have never married in the first place.

C. Your marriage never existed and thus has become void.

D. All of the above.

27. For 2020, the following is one of the stipulations that would determine if you are indeed in a common law marriage.

A. You plan to open accounts jointly such as bank accounts and other property.

B. You are known in the community as holding a relationship as a married couple.

C. You have paperwork to prove that you are married.

D. You have a declaration from the church that you are married.

28. Unreimbursed employee business expenses, such as job travel, union dues, job education, et al, is suspended starting with tax year 2020. The suspension of this deduction

A. Affects the deduction of hobby expenses.

B. Only affect small business.

C. Does not affect the office in the home deduction.

D. Allows you to deduct a greater deduction for investment expenses, safe deposit boxes, and any other expenses to produce income.

29. The kiddie tax will most likely apply until the year the child reaches age 24. The 2020 requirement for the kiddie tax is

A. The child does not file a tax return for the year.

B. One or both parents are alive at the end of the year.

C. The child's net unearned income for the year exceeds $2,200 income threshold for 2020.

D. All of the above.

30. Business expenses are those charges that you incur in carrying on your trade or business. If your business operates to make a profit in 2020, these expenses are usually

A. 25% deductible.

B. 50% deductible.

C. 75% deductible.

D. 100% deductible.