If you are considering borrowing funds to finance your college education or that of your spouse or children, it is important that you understand that the student loan interest deduction is not limited to the interest paid on government student loans. In fact, virtually any loan interest will qualify as long as the loan proceeds are used solely for qualified higher-education expenses (that is, it is a sole-purpose loan). However, the maximum interest that is deductible each year is $2,500. Thus, in addition to government student loans, home equity lines of credit, personal loans from unrelated parties, and even credit cards can be used if they otherwise qualify. Pension plan loans and loans from related parties do not qualify.
“Home office” is a type of tax deduction that applies to the business use of a home; the space itself may not actually be an office. One of the following must apply to be able to deduct home office expenses.
According to the Internal Revenue Service (IRS), just about 2 million Individual Taxpayer Identification Numbers (ITINs) are set to expire at the end of 2019.
According to a recent study conducted by U.S. Bank, over 80% of all newly formed businesses that ultimately fail do so due to cash flow problems. If you needed a reason to believe that getting your spending in order and dedicating the time to drafting a proper budget for your new startup is important, look no further than that one.
If you are contemplating selling real estate property, there are a number of issues that could impact the taxes that you might owe, and there are steps you can take to minimize the gain, defer the gain, or spread it over a number of years.
A taxpayer’s filing status for the year is based upon his or her marital status at the close of the tax year. Thus, if you get married on the last day of the tax year, you are treated as married for the entire year. The options for married couples are to file jointly or separately. Both statuses can result in surprises – some pleasant and some unpleasant – for individuals who previously filed as unmarried.
Individuals filing jointly must combine their incomes, and if both spouses are working, combining income can trigger a number of unpleasant surprises, as many tax benefits are eliminated or reduced for higher-income taxpayers. The following are some of the more frequently encountered issues created by higher incomes:
- Being pushed into a higher tax bracket
- Causing capital gains to be taxed at higher rates
- Reducing the child care credit
- Limiting the deductible IRA amount
- Triggering a tax on net investment income that only applies to higher-income
- Causing Social Security income to be taxed
- Reducing the Earned Income Tax Credit
- Reducing or eliminating medical deductions
Filing separately generally will not alleviate the aforementioned issues because the tax code includes provisions to prevent married taxpayers from circumventing the loss of tax benefits that apply to jointly filing higher-income taxpayers by filing separately.
On the other hand, if only one spouse has income, filing jointly will generally result in a lower tax because of the lower joint tax brackets and a higher standard deduction, double the amount for single individuals ($24,400 for 2019), if the couple does not itemize deductions. In addition, some of the higher-income limitations that might have applied to an unmarried individual with the same amount of income may be reduced or eliminated on a joint return.
Filing as married but separate will generally result in a higher combined income tax for married taxpayers. For instance, if a couple files separately, the tax code requires both to itemize their deductions if either does so, meaning that if one itemizes, the other cannot take the standard deduction. Another example relates to how a married couple’s Social Security (SS) benefits are taxed: on a joint return, none of the SS income is taxed until half of the SS benefits plus other income exceeds $32,000. On a married-but-separate return, and where the spouses have lived together at any time during the year, the taxable threshold is reduced to zero.
Aside from the amount of tax, another consideration that married couples need to be aware of when deciding on their filing status is that when married taxpayers file jointly, they become jointly and individually responsible (often referred to as “jointly and severally liable”) for the tax and interest or penalty due on their returns. This is true even if they later divorce. When using the married-but-separate filing status, each spouse is only responsible for his or her own tax liability.
Once a couple files as married filing jointly they cannot undo that. However, if they file separately, they can later amend that filing status to married filing jointly. Once the knot is tied, the Social Security Administration should be notified of any name changes, and if they’ve moved, the IRS needs to be notified of the couple’s new address.
If either or both of the newlyweds purchased their health insurance through a government marketplace, the marketplace should be advised of the couple’s marriage so that any advance premium tax credit (APTC) being applied to pay the insurance premiums can be adjusted when necessary. Doing so could prevent having to repay some or all of the APTC when filing their federal return(s) for the year of the marriage.
Of course the couple needs to notify their employers of their new marital status so any affected benefits can be updated. Usually new W-4 forms should be prepared and given to their employers so income tax withholding can be revised for the new filing status.
Other issues that may come into play and should be considered are:
- If one of the spouses has an outstanding liability with the IRS or state taxing
authority, that situation could jeopardize any future refund on a jointly filed
- It may be appropriate not to commingle income from assets a spouse wants
to maintain as separate property or where the spouses want to name
- Individuals marrying later in life may wish to keep their incomes separate or
only pay the tax on their own income.
If you have questions or would like an appointment to evaluate the impact of marriage on your tax liability before saying “I do,” please give this office a call.
Isler Northwest LLC is a firm of certified public accountants and business advisors based in Portland, Oregon. Our local, regional, and global resources, our expertise, and our emphasis on innovative solutions and continuity create value for our clients. Our service goals at Isler Northwest is to earn our clients trust as their primary business and financial advisors.
1300 SW 5th Avenue
Portland, Oregon 97201
July 1 – Time for a Mid-Year Tax Check Up
Time to review your 2019 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.
You’re accustomed to money going in a certain direction, but sometimes you have to pay your customers. Here’s how it’s done.
QuickBooks is very good at helping you get paid by your customers. It comes equipped with customizable invoice templates for billing customers and sales receipts for recording instant sales. It supports online payments, so you can accept debit or credit cards and electronic checks. It simplifies the process of recording payments and it offers reports that let you keep track of it all.
The Treasury Department and the IRS have essentially shot down efforts by several states to help their residents circumvent the $10,000 cap on the itemized deduction for state and local taxes (SALT).
Taxpayers are often confused by the differences in tax treatment between businesses that are entered into for profit and those that are not, commonly referred to as hobbies. Recent tax law changes have added to the confusion. The differences are: