TAX GUIDES

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Tax Reform

Tax Reform The Tax Cuts and Jobs Act of 2017 (TCJA) brought about the biggest tax reform in decades, so almost every American has been affected in some way.

CARES Stimulus and Relief Package

What is the CARES Act? In March of 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (officially referred to as H. R. 748) was passed. The CARES Act stimulus package is designed to provide relief and stimulate the U.S. economy as part of the national emergency relief operations during the COVID-19 pandemic. Most aspects of the CARES Act have already been applied, but here are the basics and how they could affect you in 2021.

Deductions

Download Tax Office & Associates™ Deductions Infographic 2021

Dependents

Download Tax Office & Associates™ Dependents Infographic 2021

Earned Income Credit

Download Tax Office & Associates™ EIC Infographic 2021

Taxes For Families

When you're no longer on your own as a single taxpayer, your family tax return will naturally be a bit more complicated. But that's usually a good thing, because it probably means you'll owe less tax.

Who Can You Claim?

Who can I claim as a dependent on my tax return? Let’s break down the IRS requirements for correctly adding dependents to your tax return.

Child Tax Credits

Are there tax breaks for having children? Among all the new and exciting challenges with a new child, you may not have considered how your child will affect your taxes. No worries, it’s nothing but good news. Even if born on the last day of the year, the IRS counts your child as having lived with you all year—so you get the full value of the tax breaks available to parents.

Adoption Credit

What is the Adoption Credit? Along with all the other tax breaks for parents, the Adoption Credit can help ease the financial stress of adding a new child to your family. The Adoption Credit is a nonrefundable tax credit. That means it can’t give you a refund by itself, but it does take a good chunk off the top of your tax liability. So much, in fact, that you probably won’t even be able to use up all the credit in one year. Good news: You can roll over what you don’t use for up to five years. Now, let’s take a look at how this credit helps adopting parents.

Child and Dependent Care

What is the Child and Dependent Care Credit? Making sure your children are cared for while you work can be costly, which is why the Child and Dependent Care Credit (CDCC) is such a great tax credit for working parents. The credit applies not only to children under 13, but also to dependent adults. Let’s look at what dependents are eligible.

Foster Parents

How do taxes work for foster parents? If you’re a foster parent, it can be confusing to try to figure out what tax breaks and advantages are available to you. Foster children are often not eligible for some of the same credits and deductions as biological or adopted children. But there are a couple of valuable tax breaks available.

Claiming Child When Divorced

Who gets to claim dependents when you’re divorced? Claiming a dependent child can provide or increase certain breaks, including Child or Dependent Tax Credits, the Earned Income Credit, and a more favorable filing status. However, being divorced or legally separated can make it difficult to determine who can claim dependents.

Claiming a Parent

Can I claim a parent as a dependent on my tax return? Paying more than half of your parent’s household expenses means you are eligible to claim your parent as a dependent. Claiming a depdent will no longer give you an exemption, but it can still provide tax breaks.

Marriage and Divorce

Will my marriage or divorce affect my taxes? Getting married or divorced is a major life event, and can raise questions when it’s time to do your taxes. Do I have to change my last name? How do I file now? When does my marriage or divorce count? It’s fairly simple, once you know the IRS rules.

Dependents For Head of Household and EIC

What are the qualifications for filing as head of household? Filing as head of household gives you a higher standard deduction and lower tax rate than filing as a single person or as married filing separately, so naturally some qualifications must be met: You must be single or have been separated for at least the last half the year. You must have a qualifying dependent living with you at least half the year (unless it’s a parent – see below). You must have paid more than half the maintenance costs for the home where you and the dependent lived. The qualifying dependent can be a child or relative, and if it’s your parent, he or she doesn’t have to live with you for you to claim the head of household status. See Claiming a Parent as a Dependent.

Alimony and Child Support

How do alimony and child support affect my taxes? After a divorce, it’s common to forget that alimony and child support important parts of filing your tax return.

Filing as a Widow(er)

When your spouse dies, the IRS provides a short-term additional tax break in the form of a special filing status, qualifying widow(er) with qualifying child. Here are the details about using this filing status after the loss of a spouse.

Kids and Taxes

How do taxes work for my children? It’s a fact of the taxpaying life: Once you earn a certain amount of money, the IRS wants you to report it and pay taxes on it. That’s true for you, and that’s true for your child too. So, what kind of money are we talking about, how much counts, and on whose return should it be reported?

Taxes for the Self-Employed

For many, being self-employed is exciting: You’re your own boss, so you get to work how you please, where you please, when you please, and for whom you please. But that greater freedom comes with greater responsibilities. And nowhere is that more true than with your taxes.

Hobby or Business?

You say you have a business, but does the IRS? The answer will determine whether you can deduct expenses from income.

Business Structures

When starting a new business, one of the first things you’ll have to decide is what type of business you’re going to establish. Is it a corporation, an S corporation, sole proprietorship, partnership or a limited liability company (LLC)? There are important differences between them – and they all have different forms for reporting business activity to the IRS.

Estimated Tax Payments

For those who get a paycheck from an employer, withholding sets aside our federal taxes paycheck-by-paycheck – and that keeps us square (mostly) with the IRS. But when you're self-employed, the situation is different – no employer means no withholding.

Basics of Schedule C

The center point of doing your taxes when you have your own business is Schedule C. This is where you enter most of your business’s income and deductions. Let’s take a step-by-step look at filling out the form.

Business Assets

What are business assets? Simply put, assets are stuff that your business owns. From vehicles to tools, computers to pens and paper, the things that help you work are assets. Buildings and land are assets too, but even if you rent, chances are you have assets of some kind. Even the software you use on your business computer is an asset. In the business world, assets generally fall into one of two very broad categories: Assets that are expected to last a year or less, and assets that have a useful life of more than one calendar year.

Basics of Depreciation

What is depreciation? Depreciation is a type of deduction that allows recovering the cost of certain property. It’s an annual allowance for the wear and tear, deterioration or obsolescence of the property. Most types of tangible property – except land – is depreciable. This would include buildings, vehicles and equipment. But some intangible property is also depreciable, such as patents, copyrights and computer software.

Section 179 Deduction

How does the Section 179 deduction affect my business taxes? There are basically three ways to treat your business expenses in order to reduce your taxable income. Some expenses are for supplies and other items that are – or could be – used up within a year’s time. These can be treated as a business expense and get deducted in total on your income tax return. Bigger-ticket items such as computers, equipment vehicles and buildings – virtually anything that can’t be used up in year – are considered capital expenses; since their lifespan is longer, it takes longer to recoup their cost. Depreciation does just that, spreading the item’s cost as a deduction over its expected lifespan. And then there’s the Section 179 deduction.

Deductible or Not?

The financial costs of running your own business are almost certainly much greater than those for an employee who works for someone else. Luckily for the small business owner, many of these expenses can be claimed as a deduction on federal income taxes – within limits, of course.

Deducting Startup Costs

Starting a business requires some work on the front end, before you open the doors or see your first client. Usually there are costs involved, whether it’s from refurbishing a storefront to buying equipment and supplies. These start-up costs are deductible, but not all at once. The IRS considers start-up costs to be capital expenses, because the expenses incurred before the business starts will benefit that business for years to come. So expenses to get the business going have to be depreciated and deducted over time.

Deducting Auto Expenses

How do I deduct vehicle expenses for business? If you are self-employed and use your personal vehicle for business purposes, you can usually deduct your business expenses for that vehicle. You generally can choose from two ways of deducting: either claim the standard mileage rate, or report the actual expenses incurred while carrying out business-related activities.

Deducting Bad Debt

At some point as a small business owner you’ll be faced with an instance of bad debt. Whether it’s a customer or another business, somebody owes you money and unfortunately, the chances of collecting are slim to none. Now what?

Deducting Insurance

Can I deduct insurance premiums for my business? Generally, you can deduct premiums you pay for the kinds of insurance used in your business.

Deducting Your Home Office

Many self-employed taxpayers use the deduction for having an office for business in their home. They’ve used Form 8829, Office in Home, to figure their deduction, based on the square footage of their home, the percentage of the structure that’s used for business purposes, and other criteria.

Deducting Taxes

If you're self-employed or own a small business, you get a perk from the federal tax code that many individual taxpayers do not: You get to write off part of the taxes you pay each year as a deductible expense.

More Deductions

What are some commonly overlooked self-employment deductions? Here’s a grab bag of other expenses that the IRS allows to be deducted from your taxable business income.

For Students and New Graduates

Are there tax breaks for education expenses and student debt? If you’re a college student (or the parent of one), you should know about some key tax breaks that are available to you when you do your taxes.

Student Loan Interest

How do student loan interest payments lower my taxes owed? Paying back your student loan won’t generate any tax breaks, but paying the interest on that student loan can, by reducing your income tax. The max deduction is $2,500 for your 2020 tax return. This max is per return, not per taxpayer, even if both spouses on a joint return qualify for the deduction.

Tuition Deduction vs. Education Credits

When it comes to getting some of your college expenses back in your pocket, there are basically two options at income tax time: claim one of the two education credits, or the tuition and fees deduction. The question is, which is best for you?

Filling Out Education Tax Forms

Entering 1098-T and Education Expenses Our Education screen is the place you'll enter information to claim the American Opportunity credit, the Lifetime Learning credit, and the tuition and fees deduction all on this one form. For each student, though, you have to choose just one of the three. (We cover the choices more thoroughly in Tuition Deduction vs. Education Credits.)

Qualifying Education Expenses

“Qualifying” education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. That sounds like it covers a lot, but there are limitations.

Is My Scholarship Taxable?

It could be both part taxable and part tax-free. Your scholarship or fellowship is tax-free if you are a full-time or part-time candidate for a degree at an eligible educational institution. This can be a primary, secondary or post-secondary school. But there are very definite limits on what the award can be used for and still be tax-free. Your scholarship or fellowship can be considered non-taxable if it was used only for tuition, fees, books, supplies and equipment that are all required for your courses.

Saving for College? Here’s the Plan

Planning for college – for yourself or for a child – involves the inevitable explorations of how to pay for it. Your best bet is is to start a savings plan ahead of time to handle future expenses. Obviously, the more you can save ahead of time, the less debt you’ll take on in student loans. Plus, you can get certain tax benefits with college savings plans.

Coverdell Education Savings Accounts

The Coverdell Education Savings Account lets you set aside up to $2,000 per year for the beneficiary and can be used tax-free not only for college, but for K-12 expenses as well. The student beneficiary must be under age 18 when the account is created.

Other Ways to Pay for College

While student loans and educational savings accounts are the most common ways to finance higher education, there are a couple of other options you may want to consider.

Taxes and Your First Job

When you get your first job, it may be surprising – and disappointing – just how much you have to pay, before you get what’s left over.

Tax Breaks for Homeowners

Buying gives a great feeling of starting a new chapter in life, of having “arrived.” But make no mistake, owning a home is a huge financial responsibility, probably the biggest you’ll ever have. Besides the mortgage payments, there’s insurance, property taxes, maintenance costs, the list goes on.

Keeping Records for Home Tax Breaks

Paperwork is normal part of life, school, work and taxes, and owning a home is no different. It’s important that you keep records of anything relating to your home. If you need to file a disaster, casualty, or theft loss, you’ll need paperwork. If you install energy-efficient appliances, you’ll need the receipts. To deduct mortgage interest or real estate tax, you’ll need a Form 1098 or other statement showing how much interest you paid.

Tax Breaks for Vacation Homes

Just like your main home, vacation or second homes can have considerable costs – mortgage payments, taxes, and so forth. Good news: Many of the same tax breaks you can get for your primary home are also available for a vacation home.

Disaster and Other Losses

How do disasters affect my taxes? If you live in a federally declared disaster area, claiming a casualty or disaster loss is certainly allowed. If you receive insurance proceeds, they are tax free, but reduce the loss amount. For losses not insured or not fully insured, you may be able to take a deduction.

Residential Energy Credits

Making energy-efficient upgrades to your home is a great way to save money on utilities, but it can also give you a break on your taxes.

Home Renovations as Medical Expenses

Living with a chronic or debilitating health condition is made tougher when you have to make costly changes to your home, just to cope. But there are ways to help offset such home renovations, which are often expensive. For example, if the change lets you better cope or improves the condition of the illness or disease AND is medically prescribed, you may deduct the cost of the equipment and installation as a medical expense. Let’s look at what kinds of equipment are deductible.

Renting Your Home

Renting part of your main home or renting a second home can put more money in your pocket. Becoming a landlord may move you to a higher tax bracket, but you may also be eligible for certain tax breaks that lower your taxable income. You may be able to deduct some expenses that are normally nondeductible, lowering your taxable income even lower.

Selling Your Home and Taxes

Selling your home may complicate your taxes, depending on whether it's your main home. It's all about gain and loss. Let's explore how.

Foreclosure and Short Sales

Owning a home is a major financial obligation, and sometimes it becomes a little too much. Foreclosures, short sales, and cancelled mortgage debt can be confusing and overwhelming. Here are the differences, and how they can affect you.

Taxes and Your Job

Tax Law Update: Beginning with 2018 tax returns, most unreimbursed employee business expenses are no longer deductible, with few exceptions. Many such expenses had been allowed as an itemized deduction in prior years, for the amount that was more than 2 percent of adjusted gross income.

Moving Expenses

Tax Law Update: Beginning with 2018 returns, moving costs are no longer deductible, unless you're in the armed services and meet certain qualifications.

Understanding Your W-2

What’s a W2? A Form W-2 is a wage and tax statement that summarizes how much you earned and how much you paid in taxes throughout the year if you work for an employer. Employers withhold taxes from your paychecks and send those payments to the IRS, and once the year is over, your employer sends a copy of the W-2 to both you and the IRS. Form W-2 is by far the most common form on tax returns.

Cafeteria Plans

A cafeteria plan is just a fancy term for a certain way to group the employee benefits you get at work, like health insurance. It's important because if you're paying for any of the benefits, a cafeteria plan is a way to pay for them with pre-tax income, which is not federally taxed.

Adjust Your Withholding

Getting a big tax refund check from the IRS is so nice, right? You can always find a use for that money, whether it's a big-ticket purchase, paying off a debt, or just adding to your savings. But by getting that big refund every year, you're missing out on even more money.

Filing Without A 1099

You’re ready to start e-filing your income tax return, only to discover that you’re missing a Form 1099. Now what? No problem: You can e-file without the physical 1099 in hand.

Fringe Benefits

Fringe benefits are valuable freebies for employees. For employers … well, they wouldn't offer them if they didn't get something in return. Let's take a look a few popular fringe benefits and how they might affect the employee's taxes.

Reporting Unemployment

If you lose your job or get laid off, you may be able to get unemployment benefits. The payments may be a welcome relief, but they are taxable and need to be reported on your tax return.

Tax Help After A Layoff

If you're laid off, shouldn’t that mean you don’t have any taxes to worry about? After all, there’s no income coming in – right? Not quite.

Taxes for the Military

For members of the U.S. military, the IRS allows some extra benefits – or at least some extra flexibility.

Combat Pay and EIC

You do not have to report your nontaxable pay as a member of the Armed Forces. Examples of nontaxable military pay are combat pay, the Basic Allowance for Housing (BAH), and the Basic Allowance for Subsistence (BAS). Your nontaxable combat pay is listed on Form W-2, box 12, with code Q.

Military Financial Challenges

The military way of life has challenges unlike most other chosen professions. Some of those challenges involve just how to best run the family finances. Here’s a snapshot of some of the most common problems, and some tips for dealing with them.

Taxes Abroad

The tax code says that if you're a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. You make it, they tax it – no matter where you make it. But you do get a nice exclusion of up to $107,600 in foreign income for tax year 2020.

Taxes for Ministers

Income as a minister is taxable, whether you're connected to a church or are an independent evangelist. However, whether you're considered an employee or self-employed does affect how the expenses related to that income are treated.

Tax Savings Strategies

What are the top 9 best tax-saving strategies? Everyone could use a few more tax breaks, so here are some that can really pay off if you qualify.

Deducting State and Local Taxes

If you itemize deductions, you can deduct state and local taxes you paid during the year. These taxes can include state and local income taxes or state and local sales taxes, but not both.

Qualifying for the EIC

The EIC is a refundable credit, meaning it can give you a tax refund if you qualify – even if you don’t owe any tax. But you do have to file a tax return to get the credit, plus meet certain requirements.

Save on Taxes All Year Long

Many times, we think about how to save on income taxes only once a year – just before we file. But really, it should be in the back of our minds all year long.

Standard vs. Itemized Deductions

What is the difference between standard deductions, itemized deductions, and above-the-line deductions? All deductions work by cutting your taxable income, and lower taxable income means less taxes owed for you. Deductions are intentional loopholes, written into the tax code to give you a break for certain financial and life circumstances. The three different types of deductions we’ve mentioned differ in where they appear on the tax return, and who qualifies to claim them.

Above-the-Line Deductions

The requirements for itemized deductions can be hard to meet for many people. But some deductions are available without itemizing: above-the-line deductions.

Donating to a Charity

Can I get a tax break for charitable donations? If you have some unwanted items that you aren't sure what to do with, you can get a tax break for donating them to a qualified charity or organization. You can donate used household items, collectible items, even clothes. If you have more extra time than property, volunteering expenses are also deductible.

Donating to a Church

Donating to your place of worship, like to any other qualified charity, can be tax deductible if the requirements are met. The most common deduction here is for cash donations. You can also deduct expenses for any volunteering or services you provided throughout the year. If you traveled as a representative of your church at a convention, you can deduct transportation, lodging, and meals.

Health and Life Insurance

How does health and life insurance affect my taxes? Many know from experience that medical expenses can easily overwhelm even the best financial plans. Whether it’s a quick ER visit with only modest charges, or a serious or chronic condition, going to the doctor can wreck your bank account.

Deducting Medical Expenses

Can I get a tax break for medical expenses? Yes—the medical expense deduction lets you recoup some of the cost of unreimbursed expenses from doctor visits, prescriptions, and other medical expenses on your tax return.

What Medical Expenses are Deductible?

One of the first steps in deducting your medical expenses is figuring out which expenses are deductible. Expenses like medical supplies, eyeglasses, and hospital services can be deductible. And some expenses must meet certain requirements to be deductible.

6 Medical Deductions Without Itemizing

Which medical deductions can I still claim with the standard deduction? Deducting medical expenses can be difficult, because of the required AGI floor of 7.5%. But there are some medical expenses that are deductible even if you don’t qualify for deducting medical expenses as an itemized deduction. Deducting these expenses lowers your taxable income, cutting your taxes. Your filing status and number of dependents don’t affect these deductions.

HSAs and Your Tax Return

How does my Health Savings Account affect my taxes? A Health Savings Account (HSA) is a way to save money to pay for medical expenses and costs that are not covered by insurance. An HSA is also a great tool for retirement savings, even if those savings are not for medical expenses post retirement.

Who’s Eligible for an HSA?

Depending on what kind of insurance plan you have, you may be eligible for an HSA. If you’re eligible for an HSA, your employer may set one up through your insurance company. Otherwise, you can set up an HSA at most banks or credit unions.

Withdrawing from an HSA

How do I use funds from my HSA? When you sign up for an HSA, you’ll probably receive a debit card – though some HSAs still provide paper checks. Some HSAs even allow you to pay bills for doctors, hospitals, and specialists through an online bill paying feature. Let’s look at how to withdraw funds from an HSA.

HSA Qualifying Expenses

An HSA qualifying medical expense is an expense that insurance doesn’t pay for OR reimburse you for. Otherwise, qualifying expenses are the same as those qualifying for the medical expense deduction.

FSAs and Your Tax Return

What is a Flexible Spending Arrangement (FSA)? Flexible Spending Arrangements (FSAs) are similar to HSAs in that you can use tax-free money for both medical and non-medical expenses. FSAs are set up by an employer in a cafeteria plan, where your employer provides certain benefits on a pretax basis. You, your spouse, or dependents are eligible for using the FSA for qualifying medical expenses. See Who’s Eligible for an FSA?

Who’s Eligible for an FSA?

You may be eligible for one or more FSAs, which probably have different amounts that you can contribute. You can’t move money from one FSA to another, and if you don’t use the balance, you’ll usually lose what’s left at the end of the plan year.

Withdrawing from an FSA

When you need to withdraw money from your Flexible Spending Arrangement, how to do it depends on your employer and who the FSA account holder is. Withdrawing from your FSA can be as simple as using a debit card, or you might have to submit paperwork and wait for a reimbursement.

FSA Qualifying Expenses

Qualifying expenses for an FSA vary by which of the three FSA types you have.

What’s an MSA?

A Medical Savings Account (MSA), often referred to as an Archer MSA, is a way for self-employed persons and employees of small business to save money to pay for medical costs. If you don’t have an MSA now and you're an employee, you may not be able to get one, because most employers are now using Health Savings Accounts (HSA). See HSAs and Your Tax Return.

What’s COBRA?

When you leave a job or are laid off, you have the option of COBRA coverage to continue with your health insurance.

Borrow Tax-Free From Life Insurance

Sometimes borrowing from your life insurance policy can make financial sense, as might be the case with a sudden financial emergency or debt that needs to be paid. Depending on what type of life insurance policy you have, the loan can even be tax-free, unlike simply withdrawing money from the policy. The loan isn’t interest-free, though, and the interest is not deductible.

Long-Term Care Insurance

Long-term care (LTC) insurance helps cover costs if you, your spouse, or dependent becomes chronically ill.

LTC Insurance and Your Taxes

How does long-term care insurance affect my taxes? If you’re already covered by long-term care (LTC) insurance, you may be eligible to deduct some or even all of your LTC premiums. Or, if you’re receiving payments from a LTC insurance plan, you could exclude from your taxable income any payments made to you.

Investing and Retirement

As with anything related to money, there are tax implications for your retirement accounts. It mostly depends on the type of account you have. There are many retirement savings options available. Some plans are offered through employers, while others are up to us. Here’s a look at what’s out there, and what they mean for your taxes.

Retirement Savers Credit

Low- and moderate-income employees can earn a special tax credit for saving for retirement. Also known as the Retirement Savings Contributions Credit, the credit helps offset voluntary contributions to IRAs, 401(k)s and similar workplace retirement programs.

Excess Contributions

When contributing to your IRA or most other retirement account, too much of a good thing can cost you. If you contribute more than the stated limit for your type of retirement plan, the IRS will assess a penalty on the excess.

Tapping Retirement Accounts

How do I Use funds from an IRA without penalty? Unless you elect otherwise, benefits of your qualified plan have to be available within 60 days after the close of the latest plan year in which any one of the following happens: You turn 65 (or the plan’s normal retirement age, if that’s earlier) You complete 10 years of plan participation You terminate service with the employer

Investment Income

Investments work from a simple principle: First, you may buy something in the expectation that it will go up in value. What you paid for it is called your basis for that investment. The things that qualify for investment property in the IRS include stocks, bonds, mutual funds, even some real estate.

Rollovers

A rollover of retirement funds is moving from one account – or one type of account – to another. You see, most payments you get – before retirement – from an IRA or other retirement plan can be “rolled over” by simply depositing them in another retirement plan within 60 days.

Retirement Plan Loans

When you look at your retirement plan's block of money “just sitting there,” it may be tempting to borrow from your retirement for more immediate needs. This isn’t a decision to be made lightly. Some retirement plans – such as IRAs, SEPs, SIMPLE IRAs and SARSEPs – don't allow loans at all. And once money is borrowed from an IRA, the account is no longer an IRA – the value of the entire account becomes taxable and must be included in income.

Hardship Distributions

In rare instances, it may be possible to take a hardship distribution from your retirement account. Hardship distributions can only be made if the distribution is because of an immediate and heavy financial need, and is limited only to the amount necessary to satisfy that need. Your retirement plan may – or may not – allow hardship distributions. Plans are not required to do so.

Are Government Benefits Taxable?

Part of your Social Security benefits could be taxed, but it depends on your tax filing status and income.

Tax-Related Identity Theft

What is PII (Personally Identifiable Information)? Personally identifiable information (PII) is any information that can be used to authenticate your identity. This includes Social Security Numbers, passwords, tax ID numbers, credit or debit card numbers, date of birth, prior-year AGI, and so on. You can never be too careful about protecting your PII. Make sure that websites you share PII on have security measures in place, like two-step verification and encryption certifications.