Top 100 nationally ranked accounting firm Brady Martz & Associates is excited to announce its expansion into the state of South Dakota. Effective October 1, 2023, Woltman Group, PLLC will join Brady Martz.
“We are excited for this opportunity to expand our team and geographic footprint into the growing Sioux Falls market,” said Todd Van Dusen, Brady Martz Chief Executive Officer. “The combination of our firms will enhance career path opportunities for our team members as well as service opportunities for clients.”
Woltman Group has been providing accounting, tax, and advisory services to businesses and individuals since 1988 when they were Pfeiffer Woltman Kutz, PC. From 2008-2010, several additional partners joined the firm and in 2016, it was reorganized and rebranded as Woltman Group. Today, the firm proudly serves thousands of business and individual clients throughout the upper Midwest. Their experienced team provides a wide variety of personalized business advisory services in addition to a full line of traditional accounting and tax services. Woltman Group has offices in Sioux Falls and Marion, South Dakota.
“We can’t wait to start working with the Brady Martz team,” said Eric DeHaan, Managing Shareholder for Woltman Group. “Joining Brady Martz will allow us to continue to create opportunities for our team and increase value and expertise for our clients.”
Most of the time an expense that may be tax deductible needs to be paid by the end of the year for which the expense will be claimed. However, there is an exception to that rule. IRA contributions for the prior year can be made after the close of the year if made by the return’s original filing due date for the year. Thus IRA contributions for 2022 can made by April 18, 2023. Normally the due date would be April 15, 2023, but when the due date falls on a weekend or a holiday, the due date becomes the next business day. Since April 15, 2023 falls on a Saturday and Monday, April 17 is a holiday observed in Washington, D.C., the due date for 2023 returns becomes April 18. If you reside in a federally-declared disaster area the date may be extended past April 18.
There are several benefits to making an IRA contribution, the most important one being that you are putting money aside for your future retirement. The following is a rundown of the rules and tax tips relating to making IRA contributions and the potential tax benefits.
Age Rules – It used to be thatyou had to be under age 70½ at the end of the tax year to contribute to a traditional IRA. That is no longer the case after 2019, and contributions to a traditional IRA can be made at any age so long as you have earned income equal or greater than the IRA contribution. There has never been an age limit to contribute to a Roth IRA.
Compensation Rules – You must have taxable compensation, also termed earned income, to contribute to either a traditional or Roth IRA. This includes income from wages and salaries and net self-employment income. It also includes tips, commissions, bonuses, and taxable alimony. If you are married and file a joint tax return, only one spouse needs to have compensation in most cases.
Contribution Limits – In general, the most you can contribute to your IRA for 2022 is the smaller of either your taxable compensation for the year or $6,000. If you were age 50 or older at the end of 2022, the maximum you can contribute increases to $7,000. The limit applies to combined contributions to traditional and Roth IRAs, not each type. If you contribute more than these limits, an additional tax will apply. The additional tax is six percent of the excess amount contributed that is in your account at the end of the year.
Deductibility – Contributions to a traditional IRA are generally tax deductible, but the deductible amount phases out for taxpayers who are active participants in their employer’s retirement plan and whose adjusted gross income exceeds a threshold amount. (The “retirement plan” box in box 13 on your W-2 form from your employer will be checked if you are an active participant in your employer’s plan.) A higher phaseout threshold applies to unemployed spouses who make contributions based on the other spouse’s income. For 2022, the adjusted gross income (AGI) phaseout range is:
|Filing Status||Phaseout Threshold||Fully Phased Out|
|Married Filing Jointly||$109,000||$129,000|
|Married Filing Separately||$0||$10,000|
If you can deduct the traditional IRA contribution, it will lower your AGI, taxable income and tax liability. The amount of your AGI is used to limit certain other deductions and tax credits. So deductible IRA contributions are a way to reduce your AGI and potentially increase other deductions and credits. For example, if you are obtaining your health insurance from a Government Marketplace, lowering your AGI could actually increase the amount of your premium tax credit that helps to pay for your insurance.
Saver’s Credit – For lower income taxpayers, there is a tax credit that helps you pay for your IRA contribution. The credit is a percentage of your IRA contribution ranging from 50% to 10% of your first $2,000 of IRA contributions. If you are married, it applies to each spouse individually. For 2022, the credit applies to married taxpayers with an AGI less than $68,000, single taxpayers under $34,000 and head of household filers under $51,000.
Choosing Between Traditional & Roth IRAs – Generally distributions (except for non-deductible contributions) from traditional IRAs are taxable, while distributions from Roth IRAs are tax-free. This is because you can’t deduct contributions to Roth IRAs.
For more details on how an IRA contribution will impact your 2022 tax return, please give this office a call. We can also determine the effect at your tax appointment.
If you hire a domestic worker to provide services in or around your home, you probably have a tax liability that you don’t know about – or one that you do know about but are ignoring. Either situation can come back to bite you. When the worker is your employee, your liability includes both withholding and paying payroll taxes as well as issuing a W-2 after the close of the year.
Sure, it is a lot easier to pay your worker in cash so as to avoid federal and state payroll taxes – and all the paperwork that goes with them. Your domestic worker will likely be fully cooperative with a cash deal because he or she can also avoid paying taxes. However, if the IRS or your state employment department finds out about these payments, the result could be very unpleasant for you.
Some families may be paying their household help via a third-party payment processor such as PayPal, Venmo, etc. Beginning for the 2023 tax year these payment processors must begin reporting those payments (on Form 1099-K) when the total for the year exceeds $600.
Not everyone who performs services in or around your home is classified as an employee. For instance, a plumber or electrician who makes repairs in your home will generally be a licensed contractor; the government does not classify contractors as employees.
On the other hand, the IRS has conclusively ruled that nannies, housekeepers, senior caregivers, some gardeners, and various other domestic workers are employees of the people for whom they work. It makes no difference if you have a written contract with the worker; similarly, the number of hours worked, and the amount paid does not matter.
You are probably thinking, “Wait a minute” – perhaps everyone you know pays in cash, and none of them has paid payroll taxes or issued a W-2 for a household employee. However, if a worker gets injured on your property or if you dismiss the worker under less-than-amicable circumstances, it’s a pretty sure bet that your household employee will be the first one to throw you under the bus by reporting you to the state labor board or by filing for unemployment compensation.
Generally, an unemployment insurance claim form requires the worker to list all employers and wage amounts to get benefits. That, in turn, creates a letter audit to collect state employment taxes and a referral to the IRS to collect federal employment taxes (FICA and FUTA). Some individuals try to circumvent the payroll issue by treating a household employee as an independent contractor, incorrectly issuing the household employee a Form 1099-NEC.
The easiest way to comply with federal and state law is to engage a payroll company to make the payroll payments and take care of the paperwork and required filings.
If you are a do-it-yourselfer, here are the correct actions you should take for domestic employees:
- Obtain a Federal Employer Identification Number (FEIN), which you will use in lieu of your Social Security Number when filing the required reporting forms. Note: If, as the owner of a sole proprietorship business, you already have a FEIN, you should use that number instead of requesting a separate one as a household employer.
- Obtain a state ID number for unemployment insurance and state tax withholdings.
- Withhold Social Security and Medicare taxes from the employee’s pay if it exceeds the annual threshold ($2,600 for 2023).
- Withhold income tax from the employee if requested by the worker and if you agree to do so.
- File state employment tax returns as required – generally quarterly (although beware that some states require monthly returns) – and make the required deposits for state employment taxes.
- Prepare a W-2 for the employee and a W-3 transmittal; file them by the end of January.
- File Schedule H with your federal individual income tax return and pay all the federal payroll and withholding taxes (i.e., the federal taxes that you withheld from the employee’s pay, plus your matching share of Social Security and Medicare taxes plus federal unemployment tax, which is entirely your responsibility). Limited exception: If you operate a sole proprietorship with employees, you may include the payroll taxes of your household workers with those of the business’s employees, but you cannot take a business deduction for those taxes. Generally, it is better to keep personal and business reporting separate.
Some additional issues to consider are as follows:
Overtime – Under the Fair Labor Standards Act, domestic employees are nonexempt workers and are entitled to overtime pay after working 40 hours a week. Live-in employees are an exception to this rule in most states.
Hourly Pay or Salary – It is illegal to treat nonexempt employees as if they are salaried.
Separate Payrolls – If you own a business with payroll, you may be tempted to include your household employees on the company’s payroll. The payments to the household employees are personal expenses, however, and are not allowable deductions for a business. Thus, you must maintain a separate payroll for household employees; in other words, you must use personal funds to pay household workers instead of paying them from a business account.
Eligibility to Work in the U.S. – It is illegal to knowingly hire or continue to employ an alien who is not legally eligible to work in the U.S. When hiring a household employee who works on a regular basis, you and the employee each must complete Form I-9 (Employment Eligibility Verification). You will need to examine the documents that the employee presents to establish the employee’s identity and employment eligibility.
Other Issues – Special situations not covered in this overview include how to handle workers hired through an agency, how to gross up wages if you choose to pay an employee’s share of Social Security and Medicare taxes, and how to treat noncash wages.
Please call this office if you would like assistance with your household employee tax and reporting requirements or with any special issues that apply to your state.
You’d be hard-pressed to find someone who actually enjoys the process of filing taxes. Having said that, it’s absolutely something that you’re supposed to do like clockwork every single year.
Of course, there is a myriad of different reasons why you may have fallen behind. You could be going through something of a major life transition and simply were unable to meet the filing deadline. Maybe you filed for a much-needed extension and then other things got in the way (as they often do), causing you to fall behind even further.
Regardless of the reason, it’s important to take meaningful steps to get yourself back on track before it’s too late. Thankfully, this isn’t necessarily a difficult process – but it will require you to keep a number of important things in mind along the way.
The Consequences of Not Filing Your Taxes for Multiple Years
But first, it’s important to understand the actual consequences of what can happen if you don’t file your taxes for multiple years in a row – or even for ten years or more in some situations.
The most immediate impact you’re likely to experience will come by way of the IRS itself. If you have income that you haven’t reported on your taxes, you will be charged various penalties and fees on everything that you should have been paying up until now. These can and often do quickly add up to significant sums of money, which is why it is always important to get on track as soon as you’re able to.
Keep in mind that the IRS will charge you those fees and penalties on all taxable income, not taking into consideration any credits or deductions that you would have enjoyed had you filed taxes on time. They don’t have records pertaining to expenses like your rent or other things that you need for your job like essential equipment. Because of this, any fees will be assessed based on what they think you owe – not necessarily on what you actually owe.
If it is determined that you have been “willfully” failing to file taxes, you could potentially be punished with up to five years in prison. Likewise, you could get hit with a fine of up to $100,000 if your situation is considered to be “tax evasion.” These are all consequences that you would do well to avoid at all costs.
There are other consequences involved with not filing your taxes for a lengthy period of time, too. Sometimes when you file for a passport, for just one example, you may be asked to show your recent tax returns as a form of income verification. Obviously, you can’t do that if you haven’t been filing them. The same is true if you were planning on applying for a mortgage or car loan.
If retirement is coming up, it could also impact the types of benefits that you will receive like Social Security and Medicare. All of these are crucial aspects of life that you do not want to jeopardize, so you should get your taxes taken care of sooner rather than later.
Getting on Track With Your Taxes: A Plan of Action
The first thing you should do to get back on track with your taxes involves checking on the current status of your account with the IRS. At the very least, this will give you an indication of what the IRS thinks you owe. You can do so at the official website via irs.gov, or by calling 1-800-829-1040 to speak to a live representative.
At that point, you have two options available to you. The first involves paying what the IRS currently says you owe, along with both the original taxes and any fees or penalties that have accrued, to settle your account. If you can’t pay the full balance in one lump sum, you could always attempt to get on a payment plan.
The second involves gathering all the financial information you need to complete the tax forms you did not file. You’ll need to compile several important documents, including but not limited to things like:
- Any information pertaining to the income you made during the missing years, along with any expenses that you had so that you can claim deductions and credits that apply to you.
- Any supporting documentation like receipts and income statements that are necessary to complete the aforementioned financial records. This may require you to perform some forensic accounting so that you have the most complete picture to work from.
At that point, the next step is clear: you should file your missing tax returns at your earliest convenience. Thankfully, there is no time limit associated with filing those old tax returns. However, the sooner you do it, the better.
Oftentimes, this is absolutely the way to go as once all documents and other financial information have been properly recorded, you’ll likely end up owing less than the IRS thinks you do. You’ll still owe money, but you’ll save a bit in the long run.
Finally, you should pay your taxes as soon as you can. Again, you can do this either through a lump sum or get on some type of payment plan to bring your account up to date. You may also choose to look into a settlement agreement or any type of income tax forgiveness that may apply to you. You could even choose to make what is known as an “offer in compromise,” which allows you to pay something towards your balance to consider everything settled. The IRS would have to agree with whatever offer you make, of course.
At that point, you should prepare for future taxes so that you don’t find yourself in the same position down the road. If you need help doing precisely that, or if you have any additional questions about this process that you’d like to see answered, please don’t delay – contact us to speak to a tax professional today.
All of us dream of one day being able to retire – to finally be able to relax and enjoy the lifestyle we worked so hard for. However, you’ll need a significant amount of money to do it, which is where a lot of Americans begin to worry.
Saving for retirement is a constant fear for many out there, especially during periods when the economy is hurting. The good news is that not everyone needs to save the same amount for retirement. By performing a few simple calculations now, you can help get yourself on the right path to financial success later on.
Calculating Your Retirement Needs: Breaking Things Down
First, you need to sit down and ask yourself several important questions that are specific to your situation. These include:
- How much money will you need to spend in retirement in order to maintain the lifestyle you see for yourself?
- Between now and retirement, how much money do you expect to earn from things like your savings and other potential income sources? How much do you plan on bringing in via Social Security?
- If you don’t have enough money in your savings at that time, what are you going to do?
To answer the first question accurately, make a list of the two types of expenses: both essential and discretionary. Essential, as the term implies, are those things that you absolutely cannot live without. Things like food, shelter, health insurance, etc. Discretionary expenses are things like entertainment and travel.
One simple theory is that after you retire, you’ll need between 75% and 80% of your current income to maintain the lifestyle you enjoy today. So, if you made $90,000 per year right now, you would need to earn between $67,500 and $72,000 to continue on as you are as far as spending is concerned.
Another theory is that you should simply take what you are currently earning and subtract the amount of money that you are currently saving towards retirement to arrive at that ideal spending number. So if you’re currently making that same $90,000 and you’re saving $8,000 per year, you would need to make $72,000 to maintain your current lifestyle.
In this example, they happened to provide similar estimates. But that won’t always be the case, so try both formulas out and see which one makes the most sense for you and your goals.
Next, you’ll want to help shed even more light on the subject by figuring out how much non-portfolio income you can expect to earn during your retirement years. For the sake of example, let’s say that you want to earn $80,000 per year during retirement. If you can expect to receive about $20,000 per year from non-portfolio situations like Social Security, then you would need to make up $60,000 from elsewhere – meaning from your retirement portfolio.
So how does all of this relate back to the amount of money you should be saving right now? Many rely on what is referred to in the industry as the “25x Rule.” It simply states that if you want to get $60,000 from your retirement portfolio every year, and you assume that you are going to live an estimated 25 years beyond retirement age, then that would mean that the value of your retirement portfolio needs to be $1.5 million or more.
If you’ve performed these calculations and realize that you aren’t near your current goals yet, there are a few key steps you can take. First, it’s never too late to start contributing more money to your 401(k). You could also invest in an IRA if you haven’t already done so, contribute to a SEP-IRA (which is used by people who are self-employed), and more.
You also always have the option of simply working longer to help preserve your savings, but if you don’t necessarily want to do that you don’t have to. You might want to consider at least working until you’re eligible for Medicare, as this can help cut down on your essential expenses because you wouldn’t need private health insurance coverage.
In the end, saving for retirement is something that a lot of people worry about so if you’re among them, rest easy knowing that there are many, many others. It can be a challenging process, but by following best practices like those outlined above you can help make sure you’re on the right path. You should also consult with a financial professional to help come up with a specific plan that makes the most sense for you.
S corporation compensation requirements are often misunderstood and abused by owner-shareholders. An S corporation is a type of business structure in which the business does not pay income tax at the corporate level and instead distributes (passes through) the income, gains, losses, and deductions to the shareholders for inclusion on their income tax returns. If there are gains, these distributions are considered a return on investment and therefore are not subject to self-employment taxes.
However, if stockholders also work in the business, they are supposed to take reasonable compensation for their services in the form of wages, and of course, wages are subject to FICA (Social Security and Medicare) and other payroll taxes. This is where some owner-shareholders err by not paying themselves reasonable compensation for the services they provide, some out of unfamiliarity with the requirements, and some purposely to avoid the payroll taxes.
The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.
If the S corporation does not pay it’s working stockholders a reasonable compensation for their services, then the IRS generally will treat a portion of the S corporation’s distributions as wages and impose Social Security taxes on the deemed wages.
There is no specific method for determining what constitutes reasonable compensation, and it is based on facts and circumstances. Generally, it is an amount that unrelated employers would pay for comparable services under like circumstances and based upon the cost of living in the area where the business is located. The following are just some of the many factors that would be considered in making this determination:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Dividend history
- Payments to non-shareholder employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar services
- Compensation agreements
- The use of a formula to determine compensation
The problem here, of course, is that it is easy for the IRS to list contributing factors used by the courts in determining reasonable compensation and leave it to the corporation to quantify these factors into a reasonable salary but still can challenge the selected amount later if an auditor, off the top of their head, decides the compensation is unreasonable.
The IRS has a long history of examining S corporation tax returns to ensure that reasonable compensation is being paid, particularly if no compensation is shown being paid to employee-stockholders.
Reasonable Compensation in the Spotlight – With the passage of tax reform, reasonable compensation will be in the spotlight because of the new deduction for 20% of pass-through income. This new Sec. 199A deduction is equal to 20% of qualified business income (QBI) and will figure into the shareholder’s income tax return. The QBI for the stockholder of an S-corporation is the amount of net income passed through to the stockholder and designated as QBI on the K-1, but the stockholder may not include the reasonable compensation (wages) he or she was paid as QBI. Thus, wages paid to stockholders reduce the QBI because the S corporation deducts the wages as a business expense, therefore reducing the corporation’s net income and QBI. But that does not mean wages can be arbitrarily adjusted to maximize the Sec. 199A deduction.
IRC Sec. 199A Deduction – Here are some details about how the 199A deduction works and the impact of reasonable compensation wages on the Sec. 199A deduction.
- The S corporation’s employee-stockholder’s wages are NOT included in qualified business income (QBI) when computing the 199A deduction. Thus, the larger the wages, the smaller the K-1 flow-through income (QBI) and thus the smaller the 199A deduction, which is 20% of QBI. In this case, an S corporation would tend to pay the stockholder a smaller salary to maximize the flow-through income and, as a result, the 199A deduction.
- If married taxpayers filing a joint return have taxable income that exceeds $364,200 ($182,100 for other filing statuses), the 199A deduction begins to be subject to a wage limitation, and once the taxable income for married taxpayers filing a joint return exceeds $464,200 ($232,100 for other filing statuses), the 199A deduction becomes the lesser of 20% of the QBI or the wage limitation. For these high-income taxpayers, an S corporation will tend to pay stockholders less wage income for them to benefit from the Sec. 199A deduction.
- If an S corporation is a specified service trade or business, the Sec. 199A deduction phases out for married taxpayers filing a joint return with taxable income between $364,200 and $464,200 (between ($182,100 and ($232,100 for other filing statuses). And although the wage limitation is used in computing the phase-out, once the taxpayer’s taxable income exceeds $464,200 ($232,100 for other filing statuses), the taxpayer will receive no benefit from the wage limitation and therefore would again want to minimize their reasonable compensation to minimize FICA taxes. Specified service trades or businesses (SSTBs) include those in the fields of health, law, accounting, actuarial science, performing arts, athletics, consulting, and financial services (for more information on what constitutes an SSTB, please call).
Of course, taxpayers cannot pick and choose a reasonable level of compensation to minimize taxes or maximize deductions. Therein lies a trap for taxpayers who do not consider the factors related to reasonable compensation. There are commercial firms that have the data necessary to determine reasonable compensation and specialize in doing so. These firms can be found by searching the Internet for “reasonable compensation.” Even the IRS has employed these firms to provide reasonable compensation data in tax court cases.
If you want additional information related to reasonable compensation, please give our office a call.
With tax season upon us, documents reporting income, sales and other items needed for your 2022 tax return should have arrived or will be arriving soon. Be on the lookout for them and be careful not to accidently discard any. Here are some of the common tax forms you need to be watching for depending upon your particular circumstances.
Form W-2 – If you were employed in 2022, you will receive a W-2 from each of your employers. Not only does this form report your wages, but also the income tax that was withheld from your paychecks and which will be a credit against your tax liability.
Form W-2G – If you had gambling income more than the IRS gambling winning reporting thresholds, you will receive one or more Form W-2Gs. In fact you may have already received one from the gambling entity at the time you won.
Form 1099-G – This form is used for reporting income and refunds from several sources including:
If you received a state income tax refund in 2022 from your 2021 return, the state will issue a Form 1099-G reporting the refund amount, which may or may not be taxable income on your 2022 federal return. If you itemized your deductions on your 2021 federal return, the state refund will most likely be taxable for federal.
You will also receive a Form 1099-G showing the amount of any unemployment benefits you may have received in 2022, which are taxable for federal purposes. Some states also tax these payments.
Form 1099-MISC – You may receive a Form 1099-MISC for miscellaneous income received during 2022. This income will need to be reported on your tax return, but in some cases expenses may be deductible against this income.
Form 1099-DIV – If you have stocks or mutual funds that pay dividends, they are typically reported on Form 1099-DIV.
Form 1099-INT – If you received interest income in 2022, typically from bank savings accounts, or other investments, you will receive a 1099-INT showing the taxable amount of interest you earned. Although banks and other financial institutions aren’t required to issue a 1099-INT form if the interest you earned is less than $10 for the year, you are still required to report the interest income on your tax return.
You may receive a 1099-INT reporting interest paid to you by the IRS because of a delay in their processing your 2021 tax return. This interest is taxable on both your federal and state returns.
If you cashed in U.S. savings bonds during 2022 through an account with the government’s TreasuryDirect, you will need to retrieve your 1099-INT from your TreasuryDirect online account since the government is not sending paper 1099-INT forms for these redemptions. This interest is taxable on your federal return but not your state return.
Form 1099-B – Where you sold securities during 2022 you should receive a 1099-B providing all the details of your sales for the year.
NOTE: If your investments are with a brokerage firm, you will generally receive a substitute reporting form, listing all the stock and security sales, interest, dividends, and other investment information needed for your 1040 preparation.
Form 1099-S – If you sold your home during the year, you may receive a Form 1099-S showing the sales price. Sometimes the escrow company issues the 1099-S at the closing of the sale, so check your closing documents to see if you already have the form.
Form SSA-1099 – If you received social security benefits during 2022, you will be receiving a Form SSA-1099 showing the amount received, any social security benefit adjustments, and the amount of Medicare insurance premiums withheld from your monthly benefits.
Form RRB-1099 – Is the equivalent of Form SSA-1099 for railroad retirement benefits.
Form 1099-R – Reports retirement plan benefits you received, including IRA distributions. Generally, the taxable amount is also included on the Form 1099-R.
Form 1098-T – If you paid college tuition for yourself or a dependent, you will generally need the Form 1098-T that will be sent to you by the educational institution to claim an education credit.
Form 1095-A – If you obtained your health insurance through a government marketplace, you should receive a Form 1095-A that is needed to reconcile your advance premium tax credit, and used to reduce your 2022 premiums.
Form 1099-NEC – If you were self-employed in 2022, businesses that paid you $600 or more will be issuing you a Form 1099-NEC, some even if the amount they paid you is less than $600.
Form 1099-K – If your business accepts credit cards, debit cards, as well as PayPal or other third-party payments, you may receive a Form 1099-K showing those sales for the year. Even if you don’t have a business, you may receive a 1099-K, if you received income through one of these or similar sources, such as when you sold items online or the income was reimbursement for personal expenditures or a gift to you from a friend or relative. These non-business-related payments may need to be reported on your return, but may not be taxable or may be only partly taxable.
Schedule K-1 – If you are a partner in a partnership, shareholder in an S-Corporation, or a beneficiary of a trust, you will also receive a Schedule K-1 from the entity, showing information from the entity that will be needed to prepare your personal return. You may also receive Schedules K-2 and K-3. These forms may be delayed, since they won’t be available until after the partnership, S-Corporation, or trust’s tax return has been prepared.
The IRS also receives copies of these documents. If the information on these documents is not reported correctly on your tax return, you will hear from the IRS at a later date.
If you don’t receive an income-reporting Form 1099 or schedule that you were expecting, you should check to see if it is available from the payer online. Even if you don’t receive the form, you are still required to report on your tax return the income that you received from that payer or business.
Please call this office if we can be of assistance.
Married taxpayers generally have the option to file a joint tax return or separate returns, a filing status commonly referred to as married filing separate (MFS). If you are married and you and your spouse are filing separate returns, or are considering doing so, you should read this article before making that decision.Depending on whether the taxpayers are residents of a separate or community property state, their separate returns may include just the income and eligible expenses of each filer or a percentage of their combined income and expenses.
Couples choose the MFS option for a variety of reasons:
- They want to avoid the joint and several liability for the tax from a joint tax return.Joint and several liability is a legal term for a responsibility that is shared by two or more parties to a lawsuit. A wronged party may sue any or all of them, and collect the total damages awarded by a court from any or all of them.
- They have children from a prior marriage and want to keep finances separate.
- They only want to keep their taxes separate.
- The marriage is tenuous.
- The taxpayers are separated and don’t want to cooperate in filing a joint return.
- One spouse might get a larger refund by filing separately (the other will pay more).
- They think they can save money by filing separate returns, and a variety of other reasons.
The fact of the matter is that tax laws are carefully written to keep married taxpayers from filing separately to manipulate the tax laws to their benefit. The following is a list of the more commonly encountered tax disadvantages – some might call them tax penalties –when filing as MFS. Unless otherwise noted the amounts shown are for 2023:
Filing Threshold – For all filing statuses except MFS the income threshold where a return must be filed is equal to the standard deduction for that filing status. For an MFS return the filing threshold is $5.
Community Property State Income – Unlike most states where each spouse claims their own earned income on an MFS return, in community property states the earned income is evenly split between the spouses. However, FICA payroll withholding, self-employment tax, and IRA contributions apply separately to the spouse who earned the income.
Joint & Several Liability – On a joint return both spouses can be held responsible for payment of the tax, while the spouses filing as MFS are only responsible for payment of the tax on their individual MFS returns.
Social Security Benefits Taxation Threshold – Social Security (SS) income is not taxable until taxpayers filing married joint have modified AGI (MAGI) that exceeds a threshold of $32,000. MAGI is regular AGI (without Social Security income) plus 50% of their Social Security income plus tax-exempt interest income, and plus certain other infrequently encountered additions. However, the threshold is zero for taxpayers filing as MFS. Thus taxpayers filing as MFS are taxed on 85% of every dollar of SS income.
Capital Loss Limitation –Where married couples filing jointly can annually deduct up to $3,000 of capital losses, those filing as MFS can only deduct up to $1,500.
Sec 179 Limitation – Taxpayers can elect to expense the cost of qualifying property used in the active conduct of a trade or business. The portion of the cost not expensed under Sec 179 is depreciable. The maximum amount that can be expensed is inflation adjusted annually and is $1,160,000 for 2023 (up from 1,080,000 in 2022). For MFS taxpayers the annual maximum amount must be allocated between the spouses.
Rental Loss Limitation – Generally, most taxpayers cannot deduct rental losses. However, there is aspecial rule that allows a deduction of aggregate losses from rental real estate activities up to $25,000 per year for taxpayers who are an active participant in the activity. It means that the taxpayer must participate in management decisions, and at least arrange for others to provide the necessary services such as repairs.
However, this special allowance only applies to lower income taxpayers with an AGI, without regard to passive losses, of $150,000 or less. In addition the $25,000 loss allowance begins to phase out 50 cents for each $1 of income over $100,000. Thus the allowance is fully phased out for joint filers when the AGI exceeds $150,000.
Phase out applies to gross income without considering passives, taxable Social Security benefits, or deductions for IRA.
Taxpayers filing as MFS must live apart the entire year or they get no relief under this rule. If they lived apart all year, the allowance is $12,500, and phase out begins at income of $50,000.
Traditional IRA – For taxpayers filing joint returns, a Traditional IRA is tax deductible except that the deductibility is phased out for higher income taxpayers who are active participants in an employer retirement plan. Where both spouses are active participants in an employer retirement plan the deductibility of IRA contribution in 2023 phases out for AGIs between $116,000 and $136,000. Where only one spouse is an active participant the phase out is between $218,000 and $228,000. However, for those filing MFS the phaseout is between $0 and $9,999.
Roth IRA – The ability to contribute to a Roth IRA phases out for those couples filing jointly between $218,000 – $228,000. However, for those living together and filing MFS the phase-out is range is $0 and $9,999.
Savings Bond Interest Exclusion – An individual who pays qualified higher education expenses with redemption proceeds from Series EE or I bonds issued after ’89 can potentially exclude from income the bond interest. No exclusion is available to a taxpayer filing married separate.
Higher Education Interest – An “above-the-line” deduction is allowed for interest payments due and paid on any “qualified student loan,” regardless of when a taxpayer first incurred the loan. The maximum deduction per year is $2,500. However, for those filing MFS, no deduction is allowed.
Standard Deduction – The deduction for those filing as MFS is ½ of the standard deduction for married filing joint taxpayers plus the age 65 and blind add-on amounts.
Standard Deduction vs Itemized Deductions – Generally taxpayers can choose between taking the standard deduction or itemizing deductions. However, where both spouses are filing as MFS if one itemizes, then both must itemize, a tax trap often overlooked by MFS filers.
Medicare Premiums – For taxpayers who qualify forMedicare, the premiums are based upon their modified adjusted gross income (MAGI) and filing status from the tax return two years prior. The rates for individuals filing MFS are substantially higher than for other Medicare participants.
Home Mortgage Interest – MFS spouses are treated as if they are one taxpayer and must split between them the amount of mortgage interest deduction they would be entitled to jointly. If two homes are involved, each spouse can only claim interest on one home unless they agree one can claim both.
State and Local Taxes Deduction – When itemizing deductions, the tax code limits (referred to as the SALT limitation) the deduction for state and local taxes, such as state income or sales tax and property tax, to $10,000 for all filing statuses except MFS, which is limited to $5,000.
Alternative Minimum Tax (AMT) – For MFS taxpayers the AMT exemption amount is only half of the amount for those filing jointly and the income threshold for the 28% tax rate is half of what it is joint filers.
Tax Rates – The marginal rates for MFS are twice that of married taxpayers filing jointly.
Child & Dependent Care Credit – MFS taxpayers cannot claim this credit unless legally separated. Where it can be claimed, the AGI credit phaseout threshold is $75,000 (half of that allowed for joint filers).
Earned Income Tax Credit (EITC) – The EITC is a tax credit for low-income taxpayers. Where one spouse can file as head of household (HH) instead of MFS and lives in a community property state, earned income for the credit does not include amounts earned by the other spouse. For a spouse to claim HH instead of MFS, he or she must have lived apart from their spouse at least the last six months of the year and paid more than one-half of the cost of maintaining a household which is the principal place of abode for more than one-half the year of a child, stepchild, or eligible foster child for whom the taxpayer may claim a dependency exemption.
Adoption Tax Credit – Allowed for an MFS taxpayer only if the spouses lived apart for the last 6 months of the year and the child lived with taxpayer more than half the year and the taxpayer provided over half the cost of maintaining the home.
Elderly & Disabled Tax Credit – Not allowed for those filing as MFS.
Retirement (Saver’s) Credit – The maximum AGI to be eligible for any Saver’s Credit for those filing jointly in 2023 is $54,750 while for those filing MFS it is $36,500.
Tax Withholding – MFS taxpayers only claim their own income tax withheld unless they are residents of a community property state where they each claim half.
Estimated Tax Allocation – When taxpayers make joint estimated tax payments, they can allocate the payments between themselves in any amounts they can agree upon. If they cannot agree, they must divide the payments in proportion to each spouse’s individual tax as shown on their separate returns for the year.
Estimated Tax High Income Safe Harbor – Taxpayers are subject to an underpayment penalty when their tax liability less the sum of their withholding and estimated tax payments is more than $1,000. However, there is a high income exception to the penalty when the AGI for the previous year is over $150,000, in which case the required estimated payments are the smaller of 90% of the current year’s tax, or 110% of the previous year’s tax. If filing MFS the AGI for the previous year need only be over $75,000.
Premium Tax Credit – The premium tax credit is a refundable credit available to lower income taxpayers to help them offset the cost of purchasing their health insurance from a government marketplace. Taxpayers filing MFS cannot claim this substantial credit unless they are a victim of spousal abuse or abandonment.
Automatic 2-month Extension When Out of the Country – Taxpayers who are out of the U.S. on the tax filing due date are granted an automatic 2-month extension to file their tax return. This provision applies to both spouses when filing a joint return even if only one spouse is out of the country. When filing MFS, the extension will only apply to the spouse that is out of the country.
Many of the consequences listed interact with others and generally require professional tax software to account for all of interactions and to accurately compare the results for a couple filing jointly or each filing separately.
If you have questions or would like to schedule an appointment to see how the consequences of filing separate returns might apply to your situation, please give the office a call.