Tag: tax tips

Home Office Deductions

The home office deduction topic often comes up when I speak with business owners. It’s been an even more popular subject in the last two years when COVID-19 has so many more people working from home. The thing is, however, everyone who works at home isn’t eligible for a home office deduction, even if she or he owns a business. As often happens when taxes are concerned, many rules apply for taking home office deductions.

Ask yourself these two questions to see if you are eligible for a home office deduction:

  1. Who is eligible for a home office deduction?

Only individuals who own a business can be eligible for the deduction. Yes, some employees used to be eligible under special circumstances, but those rules changed at the end of 2017. Now, only business owners who use space in her or his home exclusively and regularly to substantially conduct business operations can consider taking a home office deduction. Non-business activities cannot be conducted in the home office, including storing clothes in the closet.

  1. What home expenses can be deducted?

Deductible home office expenses are either direct or indirect. The deduction amount is based on the expense type and business percentage of the home used for business. The most common method used to calculate the business percentage is dividing the square footage used exclusively for business by total square footage of the living space. 

  • Direct Expenses: Expenses that benefit only the home area that is exclusively used for business, such as painting or repairs in the home office, are direct expenses that are fully deductible.
  • Indirect Expenses: Expenses for keeping up and running the entire home, such as the mortgage interest, real estate taxes, insurance, utilities, and general repairs are deductible based on the business use percentage, described above. Shared spaces, like hallways, cannot be included in office space calculation. Some home expenses, such as lawn care, are not deductible. 

For business owners who don’t want to hassle with tracking direct and indirect home office expenses, the IRS has a Simplified Option that allows a standard deduction of $5 per square foot, limited to 300 square feet. 

Eligibility for a home office deduction is determined by a lot of rules. The basics are addressed here, but the topic can get complicated. It’s a good idea to get more details on the home office deduction and read examples of how to apply the tax rules on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction.

Income Taxes for LLC Businesses

Business owners often choose to protect themselves for legal purposes by forming a Limited Liability Company (LLC). An LLC is a state-defined legal structure that business owners use to protect their personal assets in case their business is sued, or another event exposes them to financial liability. However, forming an LLC doesn’t automatically tell the business owner(s) – or the tax preparer – how the LLC operates for tax purposes

How an LLC files its business income taxes depends on the number of business owners and a few other considerations. Determining the best option depends on your objectives and circumstances. The decision can get complicated, so it’s probably a good idea to get professional advice. Here are the basics to get you started.

Income taxes for LLC businesses can be filed in one of three different ways:

  1. Sole Proprietorship

An individual business owner who has not incorporated is, by default, a Sole Proprietor. This is the simplest tax filing option. A Sole Proprietor reports income and expenses on a separate form filed with the owner’s individual income tax return, IRS Schedule C, “Profit or Loss from Business.” Net business profits are subject to income tax and to Medicare and Social Security taxes (i.e., 15.3% of net business profit).

  1. Partnership

Two or more individuals in business together without incorporating have, by default, formed a Partnership. Partnerships are considered a separate tax entity and are required to file a separate income tax return, IRS Form 1065, “U.S. Return of Partnership Income.” Partners receive an IRS Form K-1 for everyone’s pro-rata share of non-wage income, based on the operating agreement. 

  1. Subchapter S Corporation

Businesses with one to 100 domestic owners can take the Subchapter-S election. Sub-S Corps are considered a separate tax entity and are required to file a separate income tax return, IRS Form 1120S, “U.S. Income Tax Return for an S corporation.” Shareholders receive an IRS Form K-1 for their share of non-wage income, based on the operating agreement. Owners are considered employees, must be paid wages, and get a W-2.

How an LLC files its business income taxes depends on several considerations, including the number of business owners. Determining the best income tax option for your LLC isn’t easy. You’ll probably want more information, and some professional advice. Check the IRS website for income tax options and resources for business owners at https://www.irs.gov/businesses.

More Taxpayers Now Qualify for EITC

The Earned Income Tax Credit (EITC) was enacted back in 1975 to assist low- and moderate-income workers by lowering a taxpayer’s tax liability, sometimes resulting in a refund that is bigger than the amount of federal taxes withheld. Despite what a great financial boost it is, the IRS estimates that about 20% of eligible working taxpayers do not claim the EITC because they don’t know about it. And that’s too bad, especially now, when for the first time, the credit is now available to both younger workers and senior citizens.

A tax credit like EITC is even better than a tax deduction because it’s a dollar-for-dollar tax liability reduction, not a reduction of taxable income. For a worker in the 22% marginal tax bracket, a deduction means 22 cents less in tax where a credit means $1 less in taxes. Even better, the EITC is a refundable credit, meaning that the refund can be even more than the amount of income tax that was withheld or paid for the year.

Five tips to determine if you’re eligible for the EITC:

  1. Single and married taxpayers with children who have Social Security numbers can claim the credit, even if their children do not have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn’t qualify for the credit at all.
  1. For 2021, workers may choose to use her or his 2019 earned income to figure the EITC if the 2019 earned income is more than the 2021 earned income. This opportunity to get a higher EITC is part of the Taxpayer Certainty and Disaster Relief Act of 2020. 
  1. For 2021, the EITC is available to more filers without qualifying children, including those who are at least 19 years old with earned income below $21,430. The maximum EITC for filers with no qualifying children is $1,502, up from $538 in 2020.
  1. Workers and working families who have investment income can qualify for the credit. Starting in 2021, the amount of investment income they can receive and still be eligible for the EITC increases to $10,000. 
  1. Married but separated spouses can choose to be treated as not married for EITC purposes. To qualify, the spouse claiming the credit cannot file jointly with the other spouse and must have a qualifying child living with them for more than half the year. 

The EITC is now available to more taxpayers, including more people without dependent children. Don’t leave this valuable tax benefit on the table! Check to see if you qualify for EITC when you prepare your 2021 income taxes. Learn the details, rules, and exceptions at

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit-eitc.

Keeping Your Tax Information Secure

The IRS announced last week that the 2022 tax filing season starts on January 24th. Most people will not have all their necessary tax documents for 2021 by then, but it’s the first day that the IRS will accept and start processing income tax returns for last year. As you’re gathering those W-2s, 1099s, 1098s, P&Ls, and the rest of the alphanumeric “soup” that comprises your tax information, how are you keeping it secure?

Most taxpayers receive or download their tax documents electronically and save them in a folder on a home computer. While the “work at home” aspect of the pandemic shed light on the need for enhanced cybersecurity at home, tax time reminds us how important it is to protect against identity theft. The IRS collaborates with the tax software and preparer communities to secure the tax filing process. Taxpayers have a role in keeping their tax information secure, too.

Here are three tips from the IRS for taxpayers to protect online personal and financial data from identity thieves:

  1. Keep Your Computer and Mobile Phone Secure 

Use firewall and security software on every device that contains confidential information and set it for automatic updates. Use strong, unique passwords and consider using a password manager to keep it all straight. Implement Multi-Factor Authentication. Only give personal information over encrypted websites, those with a “https” address. Periodically back-up your data onto an external drive as an “insurance policy” against ransomware or a crashed drive.

  1. Avoid Phishing Scams and Malware 

Identity thieves use phishing emails to trick users into giving up passwords and other information. Don’t take the bait. Before opening messages in your inbox, look out for emails that pose as trusted source (e.g., your bank) and for emails with an urgent message (e.g., update your account now!) with a link or attachment. Never download software or apps from pop-up advertising. Talk to your family members who also go online (i.e., everyone) about online security, both with computers and mobile devices. 

  1. Protect Your Tax Return 

Taxpayers who can validate their identities can obtain an Identity Protection PIN. An IP PIN is a six-digit code that prevents an identity thief from filing a fraudulent tax return using your Social Security number. After the IRS issues an IP PIN, that taxpayer’s tax return cannot be filed without entering the IP PIN to “unlock” the taxpayer’s return for that year. Learn more about getting an annual IP PIN at www.irs.gov/ippin. 

The 2022 tax filing season starts next week, on January 24th. As you receive or download all the tax documents that comprise your tax information, how are you keeping them secure? The IRS has tips for taxpayers to keep their confidential tax and other financial information secure. Read all about it here at https://www.irs.gov/pub/irs-pdf/p4524.pdf.

Last-Minute Tax Tips for 2021

Less than two weeks left to go before the year ends. Wow! You’ve been meaning to do some 2021 tax planning for months now. Is it too late? Believe it or not, there’s still time to implement some planning moves that can improve your tax situation for 2021. 

Here are four last-minute tax tips you can jump on and still enjoy the holidays:

  • Make HSA contributions If you are an eligible individual under the health savings account (HSA) rules for December 2021, you are treated as having been eligible for the entire year and can make a full year’s deductible contribution for 2021. The maximum contribution provides a deduction of $3,600 for individual coverage and $7,200 for family coverage. Taxpayers aged 55 or older also get an additional $1,000 catch-up amount.
  • Nail down stock losses Consider realizing losses for stock you planned to divest anyway. Those losses can offset gains from other stock or investment asset sales. Losses that exceed gains may be deducted up to $3,000 for individuals and married couples filing jointly, or up to $1,500 for married taxpayers filing separately. Any losses above the deduction limit can be carried forward to the next year to offset gains or other income.
  • “Bunch” deductible contributions and/or payments of medical expenses Many taxpayers who itemized deductions before the 2017 Jobs and Tax Cut Act no longer benefit from doing so because the standard deduction has been increased and many itemized deductions have been cut back or abolished. A bunching strategy can help you get around these new limits — by accelerating or deferring discretionary medical expenses and/or charitable contributions into the year where they will exceed the standard deduction and do some tax good.
  • Use IRAs to make charitable gifts If you are age 70½ or older, own IRAs, and are thinking of making a charitable gift, consider arranging for the gift to be made with a qualified charitable contribution, a direct transfer from the IRA trustee to the charitable organization. The transferred amount, up to $100,000, isn’t included in gross income or allowed as a deduction on your tax return. A qualified charitable contribution is a particularly good idea for retired taxpayers who don’t need all their required minimum distribution (RMD) for living expenses.

Yes, it’s late in the year for tax planning, but not entirely too late. Implementing one or more of these four last-minute tax tips will improve your tax situation for 2021. Makes the holidays even merrier, doesn’t it?

Be Prepared for Next Tax Season

The holiday season is upon us, and tax season will be here before you know it. Filing your tax returns is not exactly a festive time, but, just like the holidays, the season will be less stressful if you are prepared. Even though the year isn’t over yet, starting early reduces stress and confusion caused by rushing to meet a deadline. Plus, you have time to review your situation for tax savings or other strategies that may still be available before year-end, such as contributing to a retirement plan.

Whether you file your own tax returns or engage a tax professional, these three tips will help you be prepared for next tax season:

  • Pandemic-Related Items 

Various pandemic-relief and other tax changes could impact the information that you need to gather when filing your 2021 income taxes. The expanded Advance Child Tax Credit was authorized by the American Rescue Plan Act in March. Monthly advance tax credit payments started in July, based on the parent’s 2020 reported income, or the 2019 income if a 2020 return was not filed. The March tax act also included a third round of Economic Impact Payments, depending on a taxpayer’s income level and family size. 

  • Tax Estimates and Withholdings

Did you owe a lot when filing your 2020 returns, or did you get a big refund? An IRS Paycheck Checkup is an online tool to make sure that your withholdings will cover your anticipated tax liability https://www.irs.gov/paycheck-checkup.Taxpayers with investment, self-employment or other non-wage income can check if they need to make a larger or smaller quarterly estimated tax payments at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

  • Organize Tax Documents

Use your 2020 tax return to identify documents that you’ll need to accumulate in preparation for next tax season. Start printing the charitable donation letters and real estate tax bills to cut the delay when the 1099s and W-2s are released or mailed to you. If a life event in 2021, such as buying a home, starting a business, or changing your marital status, you need to check out how it impacts your taxes. You might need a tax professional to help you plan for and understand the tax impacts of life changes.

Follow these three tips to be prepared for next tax season. And one last thing. Supply chain issues hit the tax profession just like it’s hit the store shelves. If you plan to engage a tax professional for your 2021 preparation, start looking now. There’s a shortage.

Tax Options for Your LLC

New tax clients and workshop participants who own a business often ask about their taxes when they have formed an LLC. My answer is, “It depends.” I realize that is not a satisfying response, but unless I know more about the business and its ownership, I cannot provide an accurate reply. It’s often the case that correctly answering tax questions depends a lot on your circumstances. 

Here’s why. An LLC is a state-defined limited liability legal business structure. Business owners often form an LLC to protect their personal assets in case their business is sued. How an LLC operates for tax purposes has some default provisions and other options that primarily depend on the number of business owners.

An LLC can file business income taxes in one of three different ways:

  • Sole Proprietorship

An individual business owner that has not incorporated is, by default, a Sole Proprietor. Sole Proprietors report income and expenses on a separate form filed with the owner’s individual income tax return, IRS Schedule C, “Profit or Loss from Business.” Net business profits are subject to income tax and the employer and employee portions of Medicare and Social Security taxes (i.e., 15.3% of net business profit).

  • Partnership

Two or more individuals in business together without incorporating are, by default, a Partnership. Partnerships are considered a separate tax entity and are required to file a separate income tax return, IRS Form 1065, “U.S. Return of Partnership Income.” Partners receive an IRS Form K-1 for each one’s pro rata share of non-wage income and expenses, based on the operating agreement (a MUST). 

  • Subchapter S Corporation

Qualifying businesses can take the Subchapter-S election and avoid the double taxation of a C Corp. A number of rules apply to see if a business owner(s) qualifies. Sub-S Corps are considered a separate tax entity and are required to file a separate income tax return, IRS Form 1120S, “U.S. Income Tax Return for an S corporation.” Shareholders receive an IRS Form K-1 for their share of non-wage income and expenses, based on the operating agreement (again, a MUST). Owner/employees earn wages and get a W-2.

Determining how your LLC operates for tax purposes is not easy. It depends on the circumstances and many rules apply. Need more information? The IRS has you covered, as usual. Check out their tax information, tools and resources for business and self-employed individuals at https://www.irs.gov/businesses.

Advanced Child Tax Credit Starts July 15th

The Advance Child Tax Credit, part of the $1.9 trillion American Rescue Plan, starts on July 15th .
Eligible families will receive monthly payments of up to $300 per qualifying child from July
through the end of 2021 to help them bridge the financial gap caused by the COVID-19
pandemic. Advance Child Tax Credit payments are based on tax credits that would ordinarily be
received next year when income tax returns are filed for 2021.

Taxpayers who filed a tax return for 2019 or 2020 should receive their first Advance Child Tax
Credit payment on or around July 15th . Taxpayers who provided bank information with their filed
federal income tax return should see the payment direct deposited into their bank account. If the
IRS does not have bank information on file, the taxpayer will receive the payment in a check mailed to the address it has on file.

What about people whose income for 2019 and 2020 wasn’t high enough to have to file an income tax return? The IRS established an online Non-filer Sign-up tool to help them register for the monthly Advance Child Tax Credit payments by providing required information about
themselves, their qualifying children aged 18 and under, and their bank information so the IRS
can deposit the payments into their checking or savings account.
Eligible families need to know these facts about the Advance Child Tax Credit:

  1. The Child Tax Credit increase and Advance Payments are in effect for 2021 only, unless
    extended by new law.
  2. The Child Tax Credit is increased from $2,000 to $3,000 per eligible child, for children
    who are age 6 and older, and to $3,600 per eligible child for children under the age of 6.
  3. The age for qualifying children is increased from children under age 17 to children under
    age 18, thereby increasing the number of eligible children.
  4. The Child Tax Credit is fully refundable, meaning that eligible taxpayers could receive a
    tax refund that exceeds her or his tax federal withholding.
  5. Income limitations for the Child Tax Credit remain at $200,000 for single taxpayers and
    $400,000 for married filing joint. The Additional Child Tax Credit is phased out by $50
    for every $1,000 of modified adjusted gross income above the threshold.
  6. Any eligible Child Tax Credit not paid in advance from July to December 2021 will be
    received after the taxpayer files her or his 2021 federal income tax return.
    The Advance Child Tax Credit gives eligible families up to $300 a month per qualifying
    child through the end of 2021 to help them bridge the financial gap caused by COVID-19.
    Want to know more? The IRS recently posted FAQs at https://www.irs.gov/credits-
    deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-d-calculation-
    of-advance-child-tax-credit-payments.