In recent years, the financial landscape has seen tremendous shifts, with rising participation in the gig economy and increased online sales activities. Accompanying these changes is the heightened need for transparent income reporting. One tool designed to aid in this pursuit is Form 1099-K, which has become a crucial part of tax documentation for many individuals and businesses. This article explores the origins, purposes, and applications of Form 1099-K, and explains what taxpayers need to know when handling this form in various financial situations.

Why Form 1099-K Was Created: Form 1099-K was introduced as part of the Housing Assistance Tax Act of 2008. The U.S. government aimed to ensure accurate income reporting by providing a formal method of documenting transactions made via payment card processors (like credit and debit cards) and third-party networks (such as PayPal or Venmo). Prior to this form’s introduction, much of the income generated through these channels went unreported, creating an environment ripe for tax evasion. By mandating third-party reporting, the IRS increased transparency in the self-reporting of such income, thus reducing the tax gap and encouraging compliance.

Understanding the Purpose of Form 1099-K:

1.    Income Verification: Form 1099-K provides the IRS with data enabling more effective verification of income reported by taxpayers. This is particularly important for those engaging in cashless transactions who might otherwise underreport or misclassify earnings.

2.    Transparency in Transactions: With economies globally moving towards digitalization, there’s a burgeoning necessity for systems that clearly track digital financial exchanges. The data collected via Form 1099-K helps ensure that income derived from digital or card-based payments isn’t overlooked.

3.    Encouraging Voluntary Compliance: By laying out clear reporting structures, Form 1099-K serves as a reminder and prompt for taxpayers to self-report accurately.

What It Means for Income Reporting: Form 1099-K reports the gross amount of all reportable payment transactions: the total, unadjusted dollar amount received by a taxpayer for goods or services. It doesn’t account for refunds, chargebacks, or any fees deducted from payments, so businesses need to reconcile these totals when filing tax returns to ensure they don’t overstate their taxable income.

Cash Income: The IRS has been vigilant in its efforts to ensure comprehensive reporting of income, particularly focusing on the potential underreporting of cash income. A significant tool in this enforcement strategy is Form 1099-K, which captures payment transactions conducted through third-party networks such as credit card processors and digital payment platforms. When businesses predominantly dealing in cash report only the amounts specified in 1099-Ks as their sole income source, it signals to the IRS a potential red flag for unreported cash earnings. Such discrepancies are especially apparent in industries where cash transactions are commonplace, such as restaurants or small retail operations. By cross-referencing reported 1099-K amounts with typical income patterns in these sectors, the IRS can identify anomalies that may indicate underreporting, thereby improve compliance and ensure all income, including cash, is properly reported and taxed.

Application in Various Situations:

1.    Selling Personal Items – For individuals casually selling personal items online, the receipt of Form 1099-K can be surprising. Luckily, selling a personal item at a loss (for less than it was purchased) typically isn’t taxable; however, selling for a profit introduces a potential tax liability. The receipt of a 1099-K necessitates documenting the sales to differentiate taxable gains from non-taxable sales.

Accurate records of original purchase amounts help ensure proper reporting if the IRS questions income claimed by a taxpayer to be non-taxable due to personal sales.

2.    Side Hustles and Gig Economy – The gig economy’s rapid growth has led many to engage in side hustles. These individuals, ranging from ride-share drivers to freelance artists, often receive earnings through third-party networks, leading to a Form 1099-K being filed with the IRS and a copy to the income earner.

Individuals must report all related income, not just the amount shown on a 1099-K, and then can deduct legitimate business expenses. Such deductions might include phone usage, mileage, or home office expenses, which can significantly reduce taxable income.

3.    Business Operations – Businesses receiving credit and debit card payments will see those transactions reflected on a Form 1099-K. Typically, these amounts will already be incorporated into their internal sales records. Nonetheless, reconciling the total from a 1099-K with booked revenue is crucial; discrepancies may prompt IRS scrutiny.

Common Challenges and Solutions:

1.    Recordkeeping – Meticulous recordkeeping is essential. Taxpayers should maintain detailed accounts of all transactions, documentation of sales, receipts, and relevant deductions. Digital recordkeeping solutions or accounting services can simplify this process.

2.    Preventing Double Income Reporting – Given that Form 1099-K reports gross transaction amounts, taxpayers must ensure these amounts aren’t double-counted. For businesses, it’s important that revenues aren’t counted as both part of other cash incomes and through the form.

3.    Reporting Thresholds – Prior to passage of the One Big Beautiful Bill (OBBBA) in July of 2025, the threshold at which transactions had to be reported on Form 1099-K was going to be $600. The OBBBA retroactively repeals the American Rescue Plan Act’s lower reporting threshold by restoring the previous threshold for third-party settlement organizations (TPSOs) (payment apps and online marketplaces) so that they need report payments on Form 1099-K only when the total amount of payments an individual receives for goods or services through the platform in a year exceeds $20,000 in more than 200 transactions. This change is effective for tax years beginning in 2022 and nullifies the lower, phased-in thresholds for 2024 and 2025.However, for credit card issuers, all payment card transactions are reportable regardless of amount or number of transactions.

Steps for Compliance:

1.    Reconcile Early and Often – Begin reconciling 1099-K figures with internal records as soon as possible. This helps ensure accuracy and provides ample time to address any discrepancies or missing information before filing season.

2.    Seek Professional Guidance – Given potential complexities, engaging a tax professional—particularly for new or expanded business operations—is often wise. Tax experts can navigate the nuances of Form 1099-K and advise on optimal practices for deduction and reporting.

3.    Maintain Clear Communication with Processors – Ensure open channels with payment processors to address or clarify any figures or discrepancies on the provided 1099-K. Updating contact and business information can prevent errors or confusion regarding transaction reporting.

Conclusion: Form 1099-K has become an integral part of the tax landscape for digital and card-based transactions. Its creation stems from the need for more transparent and equitable tax reporting, which benefits both the IRS and taxpayers by creating a standardized process for reporting income.

As more taxpayers receive this form, understanding its implications becomes crucial. By recognizing its purpose, resolving common challenges, and adhering to best practices for compliance, taxpayers can ensure they meet their obligations without unnecessary errors or liabilities. In a rapidly evolving economy that increasingly emphasizes digital transactions, informed handling of Form 1099-K is paramount in maintaining transparency and accountability in income reporting.

For tailored tax assistance to ensure your compliance with 1099-K reporting requirements, contact this office for assistance. 

The post Received a 1099-K? What You Should Be Concerned About first appeared on Wellman Tax & Business Advisors, Inc..

The personal health challenges of drug & alcohol addiction are complex. Navigating the tax implications of addiction is also a significant hurdle. As individuals strive towards recovery, understanding the intricate web of tax issues becomes crucial in managing the economic impact of addiction. This includes the potential for deducting treatment expenses, understanding the implications of unemployment and disability benefits, and leveraging employer- critical support systems. By shedding light on these tax nuances, those affected by addiction—along with their families and employers—can better navigate the path to recovery with informed financial strategies, helping to alleviate some of the burdens associated with this widespread social issue.

Medical Expenses: Alcoholism and drug addiction are treated as medical ailments for tax purposes. People with addictions often cannot quit on their own; addiction is an illness that requires treatment. Generally, treatment expenses are tax deductible as itemized deduction medical expenses subject to the 7.5% of AGI deduction floor. Possible deductible expenses include the costs of:

• Doctors
• Prescribed medications
• Laboratory testing
• Psychological services
• Treatment programs
• Inpatient treatment at a therapeutic center for alcoholism or drug abuse, including meals and lodging furnished as necessary incident to the treatment
• Counseling
• Behavioral therapies

To claim these expenses for someone other than the taxpayer, the person must have been the taxpayer’s dependent or spouse either at the time that the medical services were provided or at the time that the expenses were paid.

Medical Dependent: Tax law does include a special provision that allows medical expenses to be deducted for an individual who does not meet all the requirements to qualify as a dependent. A person generally qualifies as a “medical” dependent for purposes of the medical expense itemized deduction if:

1. That person lived with the taxpayer for the entire year as a member of the household (temporary absence to obtain medical treatment is an exception) OR is related to the person,
2. That person was a U.S. citizen or resident or a resident of Canada or Mexico for some part of the calendar year in which the tax year began, and
3. The taxpayer provided over half of that person’s total support for the calendar year.

The medical expenses of any person who meets these qualifications may be included even if he or she cannot be claimed as a dependent on the taxpayer’s return.

Thus, the dependent’s age and income are not limiting factors in determining whether an individual is a dependent for purposes of deducting their medical expenses.

For example, suppose an adult child has an addiction problem. Even though the child is an adult and generates an income, a parent may still be able to deduct medical expenses that he or she pays for the adult child if the three requirements above are met. The parent must pay the medical service providers directly and not just give the money to the dependent to pay the bills.

In the case of divorced parents, if either parent qualifies to claim a child as a dependent, then each parent can deduct the medical expenses each paid for the child. However, consider the limitations (discussed below) that might preclude any deduction for one of the parents, and plan payments accordingly.

Two situations will prevent a taxpayer from deducting otherwise eligible addiction-related medical expenses. The first is that medical expenses are only allowed as an itemized deduction to the extent that total medical expenses exceed 7.5% of the taxpayer’s adjusted gross income (AGI). The second hurdle is that if the taxpayer’s standard deduction amount is greater than the total of all allowed itemized deductions, there’s no tax benefit to itemizing, and therefore, no medical expenses would be deductible. For 2025 and 2026, the standard deduction amounts are:

A taxpayer, and spouse if married, age 65 and older, or blind, is allowed an additional standard deduction amount:

For 2025: $2,000 for single and head of household status; $1,600 for married (either joint or separate) and qualifying surviving spouse.

For 2026: $2,050 for single and head of household status; $1,650 for married (either joint or separate) and qualifying surviving spouse.

As you can see, these and other tax rules related to medical deductions can become complicated. If you need assistance in planning medical expenditures for maximum tax benefits or determining whether you can deduct certain expenses, please call.

Employment Issues: Substance addiction affects individuals’ ability to maintain consistent employment, which in turn impacts their financial stability. Understanding the interplay of unemployment benefits, disability, and worker’s compensation is crucial for those navigating recovery and the fiscal challenges it brings.

• Unemployment Benefits – Unemployment benefits serve as a critical financial lifeline for individuals who have lost their jobs. However, eligibility and applicability for those struggling with drug or alcohol addiction can be complex. Generally, to qualify for unemployment benefits, an individual must have lost their job through no fault of their own. If an individual is terminated due to substance abuse, eligibility may be jeopardized unless they can demonstrate efforts toward rehabilitation.
  
  In some cases, if an addiction causes temporary loss of employment but the individual is actively seeking treatment, they may still qualify for unemployment benefits. This scenario underscores the importance of pursuing a documented treatment plan, which not only aids recovery but also demonstrates to unemployment agencies the commitment to rejoining the workforce.
  
  Unemployment compensation is taxable for federal purposes, but some states do not tax this type of income.
• Disability Benefits – Disability benefits become relevant when substance addiction leads to severe health issues, rendering an individual unable to work. Programs such as Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) can provide support, contingent upon meeting specific criteria.
  
  o    SSDI – For SSDI eligibility, the addiction itself must not be the primary reason for the disability claim; rather, it must result in long-term physical or mental impairments. Conditions like liver disease or severe mental health disorders stemming from substance abuse may qualify an individual for these benefits, provided thorough medical documentation is presented. SSDI, like regular Social Security income, may be federally taxable depending on the individual’s total income. Some states do not tax Social Security income.
  
  o    SSI – SSI, on the other hand, is need-based and requires that the disability be separate from the addiction itself. Both programs necessitate a solid medical history that articulates how the addiction-induced condition inhibits the capacity to work. SSI is not taxable.
• Worker’s Compensation – Worker’s compensation offers another avenue of financial relief, primarily in the context of workplace injuries or conditions exacerbated by addiction. It typically covers medical expenses and lost wages due to work-related injuries or illnesses. However, if substance use is found to be a significant factor contributing to a workplace accident or injury, the claim may be denied. Generally, worker’s compensation payments are not taxable, but if the payments are received for non-occupational injuries or sickness, they would be taxable. Also taxable are salary continuation payments and certain retirement benefits if they are not strictly for a work-related injury.

Employers and insurers often scrutinize worker’s compensation claims involving substance use more critically. Nevertheless, if an addiction can be shown to have developed because of job-related stressors or untreated mental health conditions exacerbated by work environments, it may still be possible to navigate a successful claim. Legal counsel specializing in worker’s compensation is often beneficial in such complex cases.

Employee Assistance Programs (EAPs): Are workplace-based intervention programs designed to support employees dealing with personal issues, including addiction to drugs or alcohol, that might impact their job performance, health, and overall well-being. Employers offering EAPs that focus on mental health and support can deduct costs associated with these programs as business expenses.

• Confidential Support Services – EAPs offer confidential support services, providing a safe space for employees to seek help without fear of stigma or job loss. These programs typically include access to counseling services, where individuals can discuss their struggles with addiction and receive professional guidance. This confidentiality is crucial in encouraging employees to seek help early, thereby preventing the escalation of addiction-related issues.
• Education and Prevention Programs – In addition to direct support for those currently dealing with addiction, EAPs often conduct educational workshops and training to inform all employees about the risks of substance abuse and methods of prevention. These programs can help cultivate a healthier workplace culture that proactively addresses substance use issues before they develop into significant problems.

Charitable Contributions:

• Cash Contributions – Contributions to qualified addiction support groups or charities are deductible, offering indirect financial support for both donors and beneficiaries. Starting after 2025, a new law allows nonitemizers to deduct up to $1,000 ($2,000 for joint returns) for cash contributions to qualified charities. This deduction is claimed in calculating taxable income, but does not reduce the donor’s AGI.
• Volunteering and In-kind Contributions – While donating time is not tax-deductible, out-of-pocket expenses incurred during volunteer activities, such as travel costs to and from addiction support centers, can be deducted when itemizing deductions.

Contact this office with questions or assistance.

The post The Tax Implications of Addiction first appeared on Wellman Tax & Business Advisors, Inc..

The year 2025 marks a pivotal moment for taxpayers across the nation as sweeping changes take effect, ushered in by the One Big Beautiful Bill Act (OBBBA) and the delayed implementation of other significant legislative provisions. This update is a must-read for every taxpayer seeking to navigate the tax landscape and optimize their financial strategies. From adjustments in tax rates and tax credits, to expanded deductions and employer incentives, the ripple effects of these changes affect taxpayers in many ways. Understanding these updates is crucial, not only for compliance but also for capitalizing on potential tax savings. Dive into the essential details and ensure you’re fully prepared for the coming tax season.

Standard Deductions Increased

The 2025 inflation adjusted amounts are $15,750 for single and married separate filers, $23,625 for heads of household, and $31,500 for married filing jointly. For 2026, the amounts are $16,100 for single and married separate filers, $24,150 for heads of household, and $32,200 for married filing jointly.

New Senior Deduction

From 2025 through 2028, seniors aged 65 or older can each claim a $6,000 deduction. It phases out for unmarried individuals with a MAGI over $75,000 and for married couples filing jointly over $150,000, reducing by $100 for each $1,000 exceeding these thresholds. Both itemizers and standard deduction filers are eligible. Reported on the new 1040 Schedule 1-A, it is a below the line deduction, but does not reduce AGI.

Qualified Sound Recording Production Expenses

Effective after July 4, 2025, and through December 31, 2028, these expenses are qualified for bonus depreciation.

Required Minimum Distributions (RMD)

Taxpayers must start annual withdrawals from traditional IRAs at age 73. The RMD is calculated by dividing the account’s previous year-end value by the taxpayer’s life expectancy based on the IRS’s Uniform Lifetime Table. In the year a taxpayer turns 73, the RMD can be postponed until April 1 of the following year.

Special RMD rules apply for retirement plans inherited from decedents who died after 2019, specifically for surviving spouses, disabled or chronically ill individuals, and minor children of the account owner. Other beneficiaries must take RMDs until the account is exhausted and it must be totally distributed within 10 years of the decedent’s passing.

No Tax on Tips

From 2025 through 2028, a deduction up to $25,000 is allowed for qualified cash tips in customary tip-receiving occupations, excluding specified service trades. The IRS has provided a list of qualifying occupations in an information release, IR-2025-92, and will also include details in the instructions for 2025 returns. The deduction phases out when AGI is over $150,000 for singles and $300,000 for joint filers, reducing by $100 for every $1,000 over. The deduction applies per return and is available to both itemizers and standard deduction filers.   Employers will include qualifying tips on the employee’s W-2. Taxpayers claim the deduction on the new 1040 Schedule 1-A. It is a below the line deduction that does not reduce AGI.

No Tax on Qualified Overtime

From 2025 through 2028, a deduction of up to $12,500 ($25,000 for MFJ) is allowed for overtime pay exceeding the regular rate as per the Fair Labor Standards Act. Phases out for MAGI over $150,000 (singles) and $300,000 (joint), reducing by $100 for every $1,000 over. Available to both itemizers and standard deduction filers.

Example:

Overtime Hourly Rate: $30.00

Regular Hourly Rate: <$20.00>

Deductible Amount:    $10.00 per eligible overtime hour

For the 2025 tax year, employers can use a reasonable method to estimate the deductible amount of overtime, as the IRS has not yet finalized its forms and guidance. For the 2026 tax year, the IRS is expected to require reporting qualified overtime pay in Box 12 of the W-2 using the code “TT”. Employees claim the deduction on the new 1040 Schedule 1-A as a below the line deduction. It does not reduce AGI.

New Vehicle Loan Interest Deduction

From 2025 through 2028, individuals may deduct up to $10,000 in interest on loans secured by a new personal-use passenger vehicle, assembled in the U.S. and weighing under 14,000 pounds. Excludes family loans and non-personal vehicles like campers. Phases out for incomes between $100,000-$150,000 (single) and $200,000-$250,000 (MFJ). Available to both itemizers and standard deduction filers by filing a new 1040 Schedule 1-A with the vehicle’s VIN. A below the line deduction, it does not reduce AGI.

Adoption Credit Changes

One Big Beautiful Bill Act added a refundable amount. For 2025 the credit is $17,280 with $5,000 refundable. Those inflation adjusted amounts are $17,670 and $5,120 for 2026. Phases out between $259,190 and $299,190 for 2025 and in 2026 between $265,080 and $305,080 for all filing statuses. Any excess can be carried forward 5 years.

Child Tax Credit Increase

One Big Beautiful Bill Act increased the credit amount. In 2025 through 2028 the credit is $2,200 ($1,700 refundable) for dependents under 17. Phases out at $400,000 MAGI for joint filers, $200,000 for others, decreasing by $50 per $1,000 above these limits. A work-eligible SSN is required for the child and one filer.

Environmental Tax Credits Sunset

One Big Beautiful Bill Act terminated most of the environmental credits early. Electric vehicle credits ended after September 30, 2025. Residential clean energy credits, including solar, and home energy efficient improvement credits are no longer available after December 31,2025,

Qualified Small Business Stock (QSBS) Gain Exclusion

C Corporation shareholders can exclude gains from the sale of QSBS, and for QSBS acquired after July 4, 2025, the exclusion rates are 50% after three years, 75% after four years, and 100% after five years of holding the stock. The exclusion cap is raised to $15 million, and the corporation’s asset limit is increased to $75 million, both of which will be adjusted for inflation after 2026. More restrictive exclusions apply to QSBS acquired before July 5, 2025, the most recent being for the period September 28, 2010, through July 4, 2025, providing 100% exclusion for stock held for more than 5 years.

SALT Deduction Limit Increase

For 2025 One Big Beautiful Bill Act increased the deduction limit for state and local taxes (SALT) to $40,000 up from the prior $10,000 limit. However, the SALT limit for higher income taxpayers’ phases down starting at $500,000 MAGI, reaching a $10,000 floor at $600,000. It never drops below $10,000. For 2026 the deductible limit increases to $40,400 and the phase down range goes from $505,000 to $606,333. The deduction limits continues to increase through 2029 and reverts to $10,000 in 2030 and subsequent years.

Expensing Research or Experimental Expenditures

Effective beginning in 2025, domestic expenditures are immediately deductible. Expenses incurred outside the U.S. continue to be amortized over 15-years.

Limit on Business Interest Deduction

In the past, the business interest deduction was generally limited to 30% of a taxpayer’s earnings before interest and taxes (EBIT) and any “floor plan financing interest” for the year. Effective for tax years after 2024 the limit is determined using taxpayer’s earnings before interest, taxes, depreciation, and amortization (EBITDA), which allows many businesses to deduct a higher amount of interest.

However, the One Big Beautiful Bill Act also implements additional, less favorable changes to the business interest deduction for tax years beginning after December 31, 2025. These changes include: 

• Excluding foreign income items from the Adjusted Taxable Income (ATI) calculation, which may reduce the deductible interest amount for multinational companies.
• Largely eliminating the effectiveness of electing to capitalize business interest to avoid the Section 163(j) limitation. 

Small businesses are exempt from this limitation in 2025 if their average gross receipts over the past three years do not exceed $31 million. The amount is inflation adjusted annually and increases to $32 million for 2026.

Minimum Qualified Business Income (QBI) Deduction

Beginning in 2025, taxpayers with at least $1,000 of QBI from actively managed businesses are allowed a minimum deduction of $400.  

Quali?ed Production Property Expensing

To encourage domestic production, the One Big Beautiful Bill Act added a new temporary provision. Nonresidential real property placed in service after Jan 19, 2025, within the U.S. or its possessions can be expensed. The original use of the property must commence with the taxpayer. Construction of the property must begin after January 19, 2025, and before January 1, 2029, and be placed in service before January 1, 2031. This provision is geared to manufacturing, production (limited to agricultural and chemical production) or refining of qualified products. So, any portion of a property that is used for o?ces, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or certain other functions is ineligible for this bene?t.

Don’t limit your thinking to big business and overlook the possibilities for this to apply to small, even mom-pop manufacturing businesses.

Section 179 Expensing Limits Increased

Section 179 allows businesses to immediately expense the cost of qualifying assets such as machinery, equipment, and certain vehicles, although SUVs are limited to a specific deduction cap. This benefits many small and medium-sized business enterprises and provides upfront tax savings and encourages investment. OBBBA substantially increased the limits for Sec 179 expensing. For 2025 the limit was increased to $2.5 million and for 2026, it is inflation adjusted to $2.56 million. However, the deduction phases out dollar-for-dollar when purchases for the year exceed $4 Million in 2025 and $4.09 in 2026.  

A drawback to the Section 179 expensing method is that if the business’ use of the asset drops to 50% or less, some or all the amount deducted may need to be recaptured.

Bonus Depreciation Reinstatement

A 100% bonus depreciation was made permanent by OBBBA and after January 19, 2025, allows businesses to immediately write off 100% of the cost of qualifying assets in the year they are placed in service. This applies to new and used tangible property with a recovery period of 20 years or less, such as machinery, equipment, and certain improvements. This provision is designed to incentivize business investments by accelerating tax deductions, providing businesses immediate financial benefits and improved cash flow. For qualifying property placed in service between January 1, 2025, and January 19, 2025, the bonus depreciation rate was 40%.

Super Retirement Catch Up Contributions

Beginning in 2025 retirement plan catch-up contribution limits have significantly increased for individuals aged 60 through 63. They can now contribute the greater of $10,000 or 50% more than the standard catch-up amount to qualified plans, such as SIMPLE plans, 401(k)s, 403(b) annuities, and 457(b) government plans, but not IRAs. For 2025 the enhanced catch-up is $11,250 except for SIMPLE plans which is $5,250. The enhanced catch-up is inflation adjusted beginning in 2026.

Increased Third Party Network Transaction Reporting Threshold (1099-K)

OBBBA retroactively repeals the American Rescue Plan Act’s lower reporting threshold for Form 1099-K. It restores the threshold to the original $20,000 in gross payments and 200 transactions, effective for tax years beginning in 2022. This change nullifies the lower, phased-in thresholds for 2024 and 2025.

Sec 529 Qualified Funds Usage Expanded

Effective for distributions after July 4, 2025, OBBBA expands the use of Section 529 plans, allowing funds to cover expenses associated with elementary and secondary school and postsecondary credentialing programs. This includes costs related to tuition, fees, books, and other educational expenses for both school levels, as well as expenses for obtaining professional certificates and licenses at the postsecondary level. By broadening the scope of qualified expenses, the OBBBA enhances the flexibility and utility of 529 plans, making them a more versatile tool for families planning educational investments across various stages of learning.

As the 2025 tax landscape unfolds with profound changes under the One Big Beautiful Bill Act and other pivotal provisions, it’s crucial to understand how these new regulations impact your unique financial situation. Navigating these changes can be complex, and personalized advice often makes a significant difference. We invite you to reach out with any questions or for a detailed consultation. Our office is ready to help you interpret these changes and explore strategies tailored to your circumstances, ensuring you maximize potential benefits while maintaining compliance.

The post One Big Beautiful Bill Act: The Impact of 2025 Tax Overhaul first appeared on Wellman Tax & Business Advisors, Inc..

With the introduction of Trump Accounts under President Trump’s Working Families Tax Cuts Act, also known as the One Big Beautiful Bill Act (or OBBBA), a new opportunity has been created for American families to set up tax-advantaged savings accounts for their children younger than 18, and for those born between January 1, 2025, and December 31, 2028, to participate in a pilot program contribution of $1,000 made by the government.

Overview of Trump Accounts

Trump Accounts are innovative savings vehicles akin to individual savings accounts (IRAs) designed to help families build wealth from the birth of a child. For a child born in 2025 through 2028, they come with the option of receiving a one-time $1,000 government seed contribution. Additional contributions of up to $5,000 annually, adjusted for inflation, are permitted up to the year before a child turns age 18. The funds are invested in broad, and low-cost, stock market index funds, providing a substantial growth potential over time.

Eligibility and Contributions

Any child under 18 with a valid Social Security number can have a Trump Account, which is managed by a parent or guardian until the child reaches adulthood. These accounts are inclusive, allowing contributions from a wide range of sources.

1. Eligibility to Contribute:

• Contributions to Trump Accounts can be made by various parties, including children, parents or guardians, grandparents, family members, friends, and employers. The standard annual contribution limit starts off at $5,000 per child and will be adjusted for inflation in the future.
• Contributions are not tax deductible (but see next bullet).
• Employers can contribute up to $2,500 annually towards the $5,000 cap. The employer is allowed a deduction for the contribution, and it is not taxable to the employee.
• To ensure the annual $5,000 contribution limit to Trump Accounts is not exceeded, robust safeguards must be put in place due to the diverse array of qualified contributors. A centralized record-keeping system should be established to monitor all contributions made under each child’s account, requiring real-time updates and access for contributors to verify current contribution levels. Contributors should be encouraged or mandated to register their planned contributions in advance, allowing the system to automatically flag any attempts that would exceed the limit. Additionally, implementing automated alerts for both contributors and account holders upon approaching the $5,000 threshold can prevent unsolicited over-contributions. Transparent communication channels and clear guidelines on contribution reporting obligations will also be crucial. By integrating these comprehensive systems and procedures, the integrity of the annual contribution cap can be effectively upheld, avoiding any missteps that could potentially disrupt the intended benefits of the Trump Accounts.

2. Qualified Class Contributions: Qualifying charitable organizations and government entities (such as states, tribes, and localities) are also eligible to make contributions. However, these entities (charities and governmental bodies) must specify a “qualified class” of account beneficiaries to whom the contribution is to be distributed. This means the contributions are directed towards a defined group of beneficiaries, such as all children born in a specific year or within a certain geographic area, rather than to individual accounts without specification.

This framework allows charitable organizations and government entities to significantly contribute to the foundational development of these tax-advantaged savings accounts for the eligible children.

Example: Michael and Susan Dell, through the Michael & Susan Dell Foundation, are contributing $6.25 billion to seed Trump Accounts with $250 for children who are 10 or under who were born before Jan. 1, 2025. The pledged funds will cover 25 million children age 10 and under in ZIP codes with a median income of $150,000 or less.

The $1,000 Government Seed Contribution

The federal government will provide a one-time $1,000 contribution to eligible Trump Accounts. This seed money is intended to give newborns a financial jumpstart through long-term investing in the stock market. The government seed amount applies to a specific cohort of children:

• Birth Date Range – The child must be born on or after January 1, 2025, and before January 1, 2029.
• Citizenship – The child must be a U.S. citizen with a valid Social Security number.
• Account Opened – An election must be made by a parent or guardian to open a Trump Account on the child’s behalf.
• One-Time Contribution – It is a one-time, initial deposit of $1,000; the government does not make recurring contributions.
• Does Not Count Toward Limits – The government’s $1,000 contribution does not count toward the annual private contribution limit (currently $5,000).
• Taxed Upon Distribution – The $1,000 seed amount, along with investment earnings, grows tax-deferred but is considered pre-tax money and will be taxed as ordinary income when withdrawn after age 18.

Children born outside this four-year window (e.g., before 2025) are eligible to have a Trump Account opened for them and receive other benefits (like potential employer contributions and those from charitable organizations like the Dell Foundation), but they will not receive the $1,000 government seed money.

Investment Strategy

Trump Accounts must adhere to specific investment rules: they can only invest in broad U.S. equity index funds that do not use leverage and charge minimal fees. This restriction aims to simplify the investment process and ensure transparency while capitalizing on the growth potential of the U.S. stock market.

Tax Implications

For taxpayers, understanding the tax implications of Trump Accounts is critical. Like a Roth IRA, contributions are not tax deductible, but like a traditional IRA the earnings grow tax-deferred until withdrawn. Once the child reaches 18, the account follows standard IRA withdrawal rules, including potential taxes and penalties for early withdrawals.

• Distributions Before Age 18 – Distributions from Trump Accounts are not permitted until the account beneficiary reaches the age of 18. This restriction ensures that the funds are preserved and potentially grow within the account until the beneficiary comes of age.
  
  In the unfortunate event that a child with a Trump Account dies, the funds within the account can be transferred to the child’s estate, or alternatively, the account can be transferred to a designated survivor or beneficiary specified for such circumstances. It’s essential to have clear directives in place to manage these accounts ensuring that the transfer of funds is handled smoothly and according to the account holder’s intentions.
• Distributions After Age 18 – When the beneficiary is 18 or older, distributions have two components:• After-tax contributions (made by parents, relatives, etc.) can be withdrawn tax-free because taxes were already paid on the money before it was contributed.• Pre-tax contributions/amounts (such as earnings on investments, the $1,000 government seed grant, and employer/charitable contributions) are taxed as ordinary income upon withdrawal.• Penalty – Additionally, a 10% early withdrawal penalty generally applies to taxable distributions taken before the beneficiary reaches age 59½, unless an exception applies.• Tax-Exempt Scenarios (Exceptions to the 10% Penalty) – While the pre-tax portion of the distributions is still subject to ordinary income tax, the 10% penalty may be waived if the funds are used for “qualified expenses” once the child is 18 or older:
• Higher Education Expenses: Tuition, fees, books, and other related costs for post-secondary education.
• First-Time Home Purchase: Up to $10,000 may be used for a down payment on a first home.
• Birth or Adoption: Up to $5,000 can be used for qualified expenses related to the birth or adoption of a child.
• Disability Expenses: Expenses related to the disability of the beneficiary.
• Other exceptions: Including disaster recovery and terminal illness.

Account Management and Transfers

To open a Trump Account, guardians must use IRS Form 4547, Trump Account Election(s), or an online tool or application at trumpaccounts.gov. Form 4547 can be filed with a taxpayer’s 2025 tax return while the online tool/application won’t be available until sometime in mid-2026. And accounts cannot begin to take contributions until July 4, 2026.

Accounts are initially held with the Treasury’s designated agent, but they can be transferred to a preferred brokerage, offering flexibility once the initial setup is complete.

This transferability is an advantage for account holders, allowing them to manage their investments actively and to select financial institutions that best align with their financial goals and service preferences. 

Please contact this office with questions and for filing assistance.

The post Trump Accounts – Seed Money for Your Newborn Children first appeared on Wellman Tax & Business Advisors, Inc..

Remember when “downsizing” was something you did to your closet every spring? Now, it’s a buzzword for a major financial move: selling the big family home to streamline expenses, pocket extra cash, or fund that dream RV trip. Especially for Baby Boomers and Gen Xers stepping into retirement territory, downsizing isn’t just about purging your dusty attic—it’s about deciding how you want to live the next chapter of your life.

But there’s a caveat. Before you pop that “For Sale” sign in the ground, you’ve gotta get tax-savvy. Because the IRS? They never miss an opportunity to tag along.

Capital Gains Taxes: The Big Kahuna

Let’s get right into the heavy stuff: capital gains taxes. Suppose you sell your long-time home for more than you paid for it—yay, profit! But that profit might be taxable. There is good news, though: if the property was your primary residence for at least two of the last five years, the IRS offers a sweet exclusion—up to $250,000 for single filers, and $500,000 if you’re married filing jointly.

Sounds too good to be true? Well, there are a few catches:

• Short Occupancy: If you haven’t lived in the house for that magic two-year window, or used it as a rental or business site, you’ll likely face a bigger tax bill.
• Multiple Properties: Selling more than one home? You don’t get to claim this exclusion twice in the same two-year period.

Essentially, don’t assume your sale profit automatically sails off tax-free. You might need to plan your timing or usage to snag the best tax breaks.

Tapping Into Sneaky Deductions

Yes, you can still find deductions—but it’s complicated. Recent legislation (looking at you, Tax Cuts and Jobs Act of 2017) capped state and local tax (SALT) deductions at $10,000. That might cramp your style if you live in a high-tax state.

The moving deduction is no longer allowed except for the military.

Leveraging the Sale for Retirement Funding

Downsizing can do more than trim your monthly bills—it can boost your golden years. Turn your home’s equity into rocket fuel for your retirement:

1. Time Your Sale Wisely: Selling in a strong market = bigger proceeds, and a well-structured sale can minimize your tax hit.
2. Park Funds in Tax-Advantaged Accounts: Rolling part of that new nest egg into IRAs or 401(k)s (up to the contribution limits) can help cushion your post-paycheck life.
3. Diversify, Diversify, Diversify: Talk to a financial advisor about distributing your proceeds into a blend of stocks, bonds, or even real estate investment trusts (REITs). Because “eggs” and “one basket” never end well.

Carrying Over Your Property Tax Basis (Sometimes)

Heard the rumor that you might get to carry your old property’s tax basis over to a new one? In certain places—California, we’re looking at you—this is more than a myth. Laws like Proposition 13 allow eligible homeowners to transfer their property tax base to a new home.

But the rules are notoriously finicky. Age requirements, property values, and county regulations can all squash your hopes if you don’t follow them to the letter. This is the kind of nuance that can save you bundles… or cost you if you mess it up.

Don’t Wing It

Let’s be real: the money you’ve spent a lifetime building is on the line here. You want to keep as much of it as possible—preferably for fun stuff like spoiling grandkids or traveling the world, not handing it over to Uncle Sam.

That’s why a little strategic planning goes a long way. And you don’t have to be the tax code’s best friend to do it right. You just need the right people in your corner.

Next Step: Dial Our Office for Tailored Tax Smarts

Ready to turn your downsizing dreams into a fully informed reality? We’ve got you.

Call or email our office now, and let’s chat through your situation—no generic, one-size-fits-all advice here. We’ll help you:

• Identify tax pitfalls specific to your property
• Pinpoint opportunities for deductions and exclusions
• Map out strategies to amplify your retirement savings

Don’t let confusion about capital gains or complicated tax rules derail your next life move. Get clarity today—and set yourself up for a smoother, more profitable transition into those well-earned golden years.

Remember: The smartest moves are made with eyes wide open… and a solid tax plan under your belt.

The post Tax Implications of Downsizing first appeared on Wellman Tax & Business Advisors, Inc..

We no sooner sent out a reminder about the pending March due date for BOI reporting and FinCEN declared a temporary halt on the imposition of fines, penalties, or any enforcement actions against organizations that fail to file or update Beneficial Ownership Information (BOI) reports. This suspension will remain in effect until the issuance and implementation of a new interim BOI reporting final rule, along with the expiration of any new deadlines established therein.

Furthermore, FinCEN plans to release this interim final rule by no later than March 21, 2025, with an aim to extend the existing BOI reporting deadlines.

Watch for further updates.

The post “Flash”- BOI Reporting Temporarily Halted Again first appeared on Wellman Tax & Business Advisors, Inc..

In a significant shift impacting the tax landscape, the Internal Revenue Service (IRS) is projected to lay off approximately 6,700 employees right in the middle of tax season. As of the announcement, the IRS had expanded its workforce to roughly 100,000 employees after hiring initiatives initiated by the Biden administration, which aimed to enhance enforcement, particularly against wealthy taxpayers. However, the current downsizing aligns with a broader governmental restructuring initiative led by the “Department of Government Efficiency,” spearheaded by deputies aligned with Elon Musk’s vision for streamlined operations.

Overview of IRS Personnel Reductions – The layoffs encompass a diverse range of roles within the IRS, including revenue agents, customer service employees, independent specialists handling tax dispute appeals, and IT personnel. This move has sent ripples through Washington, with numerous reports surfacing about potential service disruptions, data security challenges, and a subsequent impact on taxpayer experiences. Especially concerning are those awaiting their tax refunds, as potential delays can affect financial planning for households nationwide.

IRS’s Strategic Position – Despite these staffing changes, the IRS affirms its commitment to ensuring a successful tax filing season, in adherence to the executive orders while minimizing disruptions. Official communications from the agency suggest that efforts are underway to manage resources efficiently and uphold service standards. However, this is an evolving situation with ongoing litigation and potential policy changes looming, possibly altering the current course of operations.

Data Security Measures – For those concerned about data security amidst these changes, the IRS maintains stringent protocols to safeguard sensitive taxpayer information. These protocols are applicable to all parties with data access, regardless of their employment status with the IRS, thereby upholding the integrity and confidentiality of taxpayer information.

Managing Expectations: Refund Processing – Taxpayers concerned about potential delays in refund processing can utilize the “Where’s My Refund?” tool for real-time status updates, typically available 48 hours post e-filing. Refunds from paper or amended returns may take longer to reflect in the system and can extend up to 16 weeks for processing. For amended returns, taxpayers can check the “Where’s My Amended Return?” tool for updates.

Under ordinary circumstances, refund processing timelines are as follows:

• E-filed Returns: Up to 21 days

• Amended or Mailed Returns: 4 weeks or more
• Returns Requiring Extensive Review: Longer durations

For those early filers claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) and filing online with refunds via direct deposit, most refunds are expected by March 3, provided there are no discrepancies. Legally, EITC and ACTC refunds cannot be issued before mid-February, and any issues during the processing of returns will prompt IRS communication for additional information.

To Optimize Refund Speed – Taxpayers should electronically file with automatic refund deposit.

Extension Options for Tax Filings – Taxpayers needing extra time can request an extension by the April deadline, which gives them until October 15 to file without incurring penalties. However, any taxes owed must be paid by the April deadline. Two main methods are available for securing this extension:

1. Online Payment with Extension Check Box:
   • Pay amounts due online and select the extension checkbox, negating the need for filing a separate extension form while providing the taxpayer a confirmation number for their records.
2. Mail-in Extension Request:
   • File Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) through the mail, online, or via a tax professional.
   • Estimate annual tax liability, subtract taxes already paid for the year and include a payment for the balance.
3. Business, Trust and Information Return Extensions – There are a variety of forms used to obtain an extension for these type returns. Contact this office for assistance.

Special Situations

• For U.S. Citizens Abroad: An automatic two-month extension is available for individuals residing outside the United States as of the standard tax filing deadline. If more time is still needed at the end of the two-month period, Form 4868 can be filed for an additional four-month extension to October 15.
• Disaster Situations: Additional time may be granted for those impacted by federally recognized disasters.

As this complex situation unfolds, it remains crucial for taxpayers and businesses alike to stay informed and proactive, ensuring compliance while optimizing financial outcomes amid these systemic changes.

Contact this office at (614) 991-5107 with questions.

The post IRS Layoffs in Mid-Tax Season: Potential Impacts on Tax Filings and Refund Delays first appeared on Wellman Tax & Business Advisors, Inc..

Many individuals may find themselves earning below the income thresholds that require them to file a federal income tax return. However, even if you are not required to file, doing so may be beneficial. This article will explore the filing thresholds for 2024, the potential benefits of filing a tax return even when one isn’t required, and the refundable credits available, such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).

• Filing Thresholds for 2024 – The filing thresholds for 2024 depend on your filing status, age, and type of income. Here are the general thresholds:
  
  o    Single Filers: If you are under 65, the threshold is $14,600. For those 65 or older, it is $16,550.
  
  o    Married Filing Jointly: For couples where both spouses are under age 65, the threshold is $29,200. If one spouse is 65 or older, it is $30,750, and if both are 65 or older, it is $32,300.
  o    Married Filing Separately: The threshold is $5, regardless of age.
  
  o    Head of Household: For those under 65, the threshold is $21,900. For those 65 or older, it is $23,850.
  
  o    Surviving Spouse with Dependent Child: If under 65, the threshold is $29,200. For those 65 or older, it is $30,750. This status applies only for the first and second year after the year of the spouse’s death.

These thresholds are subject to change based on inflation adjustments and IRS updates, so it is always wise to check the latest figures when preparing your taxes.

• Why File a Tax Return Anyway? – Even if your income is below these thresholds, filing a tax return can be advantageous. The reason? You may qualify for refundable tax credits, which can provide a refund even if you owe no tax.
  
  o    Earned Income Tax Credit (EITC): This credit is designed to benefit low- to moderate-income workers and can result in a significant refund.
  
  o    Child Tax Credit (CTC): This credit can provide substantial financial support to families with children.
  
  o    State Benefits: Some states offer additional credits or benefits that require a federal tax return to be filed in addition to the state return.
  
  Earned Income Tax Credit (EITC) – The EITC is a refundable tax credit aimed at helping low- to moderate-income workers. It can significantly reduce the amount of tax owed and may result in a refund.
• Earned income includes wages, salaries, tips, and other taxable employee pay. It also includes net earnings from self-employment and certain disability payments. However, it does not include income from pensions, unemployment benefits, or Social Security.
  
  The amount of EITC varies based on your income, filing status, and number of qualifying children. For 2024, the maximum credit amounts are approximately:
  
  o    No Children: Up to $632
  o    One Child: Up to $4,213
  o    Two Children: Up to $6,960
  o    Three or More Children: Up to $7,830
  
  To qualify, you must meet certain criteria, including having earned income, a valid Social Security number, and filing a tax return. The credit amount decreases as income increases and phases out completely at higher income levels.
• Child Tax Credit (CTC) – The Child Tax Credit is another valuable benefit for families. It provides financial support for each qualifying child under the age of 17.
  
  o    Amount of the Credit – For 2024, the CTC is up to $2,000 per qualifying child. Of this amount, up to $1,700 is refundable, meaning you can receive it as a refund even if you owe no tax.
  
  o    Qualifying Children – To qualify, a child must meet several criteria, including age, relationship, residency, and support tests. The child must be under 17 at the end of the tax year, related to you, live with you for more than half the year, and not provide more than half of their own support.
  
  o    High-Income Earners Phase Out – The CTC begins to phase out for higher-income earners. For 2024, the phase-out begins at $200,000 for single filers and $400,000 for married couples filing jointly. The credit is reduced by $50 for each $1,000 of income above these thresholds.

Filing a tax return, even when not required, can be beneficial for individuals with income below the filing thresholds. By filing, you may qualify for valuable refundable credits like the Earned Income Tax Credit and the Child Tax Credit, which can provide significant financial support. Understanding these credits and the filing thresholds can help you make informed decisions and potentially receive a refund that can aid in your financial well-being.

If you were not required to and did not file returns in the past, tax years 2021 2022, and 2023 are still open years, and returns for those years can still be filed for refundable credits that you are entitled to. However, note that the statute of limitations for filing the 2021 return for a refund expires after April 15, 2025.

Contact this office to determine what your benefit from filing may be and for assistance in preparing your current or past returns.  

The post Not Required to File a Tax Return? You May Be Missing Out on Sizeable Tax Credit Refunds first appeared on Wellman Tax & Business Advisors, Inc..

Stimulus (Economic Impact) Payments: Biden’s plan requests that Congress provide an additional stimulus payment of $1,400 to qualified lower income households. Combined with the $600 that Congress authorized in December legislation, this will bring the latest total direct assistance to $2,000 per person. The prior stimulus distributions included stipends for dependent children under the age of 17, whereas the proposed payments will be provided for all dependents regardless of age.

So far, the payments have counted as advances toward a 2020 Recovery Rebate Credit. This is so even for the second round of payments that didn’t reach recipients until early January 2021. Individuals will need to reconcile the payments they received and the credits they are entitled to on their 2020 returns. Whether the proposed additional payments will be considered part of the 2020 credit (which could delay some 2020 return filings) or as an advance toward a new 2021 credit will need to be clarified in the legislation.

Unemployment Compensation: This part of the plan requests that Congress provide a $400-per-week unemployment insurance supplement through September 2021, and extend the unemployment benefits to self-employed workers such as ride-share drivers and many grocery delivery workers, who do not typically qualify for regular unemployment compensation. Presumably, the $400-per-week enhancement would be in lieu of the $300-per-week benefit passed in the Consolidated Appropriations Act in December 2020. In any event, the unemployment benefits are taxable income for federal purposes; most states also tax this income, but a few do not.

Raise the minimum wage to $15 per hour.

Education Assistance: The CARES Act, passed in late March 2020, included a Higher Education Emergency Relief Fund that provides funding to institutions to provide emergency financial aid grants to students whose lives have been disrupted by the COVID-19 pandemic. Emergency financial aid grants to students are nontaxable and can be used for expenses related to the disruption of campus operations due to coronavirus (including eligible expenses under a student’s cost of attendance, such as food, housing, course materials, technology, health care, and child care). Biden’s proposal would increase funding for the Higher Education Emergency Relief Fund, including providing college and university students with up to an additional $1,700 in financial assistance from their institutions.

Families First Coronavirus Response Act: This part of the American Rescue Plan requests that Congress fund an extension of sick leave through September 30, 2021, which would provide over 14 weeks (up from 12) of paid sick and family and medical leave to help parents with additional caregiving responsibilities when a child or loved one’s school or care center is closed; for people who have or are caring for people with COVID-19 symptoms, or who are quarantining due to exposure; and for people needing to take time to get the vaccine. The maximum payment would be increased from $1,000 per week to $1,400 per week.

Under Biden’s plan, the exemptions for businesses with over 500 employees and those with fewer than 50 employees would be eliminated, making the program mandatory for all sizes of businesses. The government will reimburse employers with fewer than 500 employees for 100% of the cost.

Increase the Child Care Tax Credit: Currently, a nonrefundable tax credit is available to some taxpayers for the expenses they incur for the care of a child, spouse, or other dependent while the taxpayer is gainfully employed (or is seeking a job). The maximum expenses that can be used to determine the credit are $3,000 for one child and $6,000 for two or more children. The credit rate ranges from 20% to 35% depending on income (the higher the income, the lower the credit rate).

Biden’s plan requests Congress to authorize an increase in the child care credit and make it refundable for one year. The credit would be a full 50% of the expenses, with maximum expenses of $4,000 for one child under age 13 and $8,000 for two or more children. The credit would be phased out when income ranges from $125,000 to $400,000.

Child Tax Credit: For years 2018 through 2025, the child tax credit is a maximum of $2,000 per dependent child under the age of 17. In some cases, up to $1,400 of the credit is refundable. The credit phases out when the taxpayer’s modified adjusted gross income exceeds $200,000 ($400,000 for married joint filers). Biden is asking Congress, for a period of one year, to include children through age 17 in the credit and increase the Child Tax Credit to $3,000 ($3,600 for children under the age of 6).

Earned Income Tax Credit (EITC): Childless adults are eligible for a lesser earned income tax credit amount than if they had a qualifying child. Biden’s plan requests that Congress make a one-year increase in the EITC for childless adults from roughly $530 to $1,500 and increase these individuals’ income limit for the credit from roughly $16,000 to $21,000. Biden also would also like Congress to eliminate the age cap so that older workers without a qualifying child can claim the credit (currently, a childless individual cannot claim the credit after reaching age 65).

Healthcare Coverage: Individuals who purchase their health insurance through the government marketplace may be eligible for a premium tax credit, with an advance premium tax credit (APTC) used to reduce monthly premiums, and the advance and actual credits reconciled on their income tax return each year. Biden’s plan asks Congress to increase the premium tax credit so that workers will pay no more than 8.5% of their income for coverage.

Although not tax-related, other issues in the plan affecting individuals include:

Evictions and Foreclosures: President-Elect Biden is calling on Congress to extend the eviction and foreclosure moratoriums and continue applications for forbearance on federally guaranteed mortgages until September 30, 2021, as well as to provide funds for legal assistance for households facing eviction or foreclosure.

Homelessness: The plan requests that Congress provide $5 billion to help secure housing for the approximately 200,000 individuals and families.

Remember, these are only Biden’s proposed changes; quite often, what Congress ends up passing is not the same as the originally proposed legislation. If you need assistance or have questions related to other tax issues, please give this office a call.

The post How Biden’s Rescue Plan Might Impact Your Taxes first appeared on Wellman Tax & Business Advisors, Inc..

• State Income Tax Refund
• Social Security Taxes Deduction
• NOL Carryback
• Charitable Contribution Deduction for Non-Itemizers
• PPP Loan Expenses
• Military Reservist Travel Expenses
• Child’s Private School Expenses
• Student-Loan Interest
• Extended Tax Benefits
• Gambling Losses
• Live in a State without a State Income Tax?
• Spousal IRA
• Economic Impact Payment
• Economic Impact Payment Document
• Reinvested Dividends
• Worthless Stock
• Lifetime Learning Credit
• Charity Volunteer Tax Breaks
• Self-Employed Travel Expenses
• Self-Employed Health Insurance Deduction
• Summer Camp
• Medical Dependent
• Income in Respect of a Decedent (IRD)

As tax time approaches, here are some tax issues that taxpayers frequently overlook, ranging from obscure deductions to overlooked tax credits and benefits. Of course, not everything can be included since the tax law has grown significantly in complexity, and it would take a thick book to list everything. But besides what you are probably accustomed to, here are over 20 issues you may not be aware of and that can save you tax dollars.

State Income Tax Refund – For those who took the standard deduction on their 2019 federal return, your state income tax refund received in 2020 is not taxable income. If you itemized your deductions, then the state tax was a federal tax deduction, and to the extent you received a tax benefit from the deduction, the state tax refund you received in 2020 is federally taxable. However, in many cases, the entire refund will be tax-free if you were subject to the alternative minimum tax (AMT) for 2019, the deductible amount was reduced by the $10,000 limit on tax deductions, or part of the deduction pushed your deductions over the standard deduction threshold. Although the Form 1099-G shows the entire amount of the refund, not all of it may be taxable, so you do not want to report more than necessary.

If you owed state income tax on your 2019 return and paid that tax during 2020, then that tax payment can be added to your state tax deduction for 2020, subject to the $10,000 limit for state and local taxes.

Social Security Taxes Deduction – If you are self-employed, you can deduct half of the self-employment tax (Social Security and Medicare tax) that you are liable for on your 2020 net profits. You don’t have to itemize on a Schedule A to take the deduction because it is an adjustment to income.

NOL Carryback – The year 2020 has been challenging for many businesses, especially those that were subjected to COVID-19 closure orders and ended up with a tax loss for the year. However, the CARES Act does allow a 5-year carryback period in which to use the loss (known as a net operating loss) for business owners who cannot utilize the full loss in 2020. This is done by amending prior returns to recover the taxes paid in the earlier year(s). First, the 2015 return is amended, and if not all of the loss is used on that return, then the 2016 return is amended, and so on.

Charitable Contribution Deduction for Non-Itemizers – For the first time ever, taxpayers can claim a cash charitable contribution without itemizing their deductions on Schedule A. Non-itemizers can deduct up to $300 in cash contributions per tax return. Unfortunately, the $300 limit – and not $600 – also applies to married taxpayers filing jointly. So, hold onto those receipts to substantiate the contributions.

PPP Loan Expenses – Don’t forget that the COVID-Related Tax Relief Act passed late in December 2020 confirmed that business expenses paid for with proceeds from a forgiven PPP loan continue to be deductible on the business schedule. However, this may not be true for state taxes.

Military Reservist Travel Expenses –Armed forces reservists who travel more than 100 miles away from home and stay overnight in connection with service as a member of a reserve component can deduct their travel expenses as an adjustment to gross income (they don’t have to itemize deductions). Unreimbursed expenses for the reservist’s transportation, meals (subject to the 50% limit for 2020), and lodging qualify for the above-the-line deduction, but the deduction is limited to the amount that the federal government pays its employees for travel expenses – i.e., the general federal government per diem rate for lodging, meals, and incidental expenses applicable to the locale as well as the standard mileage rate (57.5 cents per mile for 2020) for car expenses plus parking, ferry fees, and tolls.

Child’s Private School Expenses – If your child is attending a private school, the Tax Cuts and Jobs Act allows up to $10,000 per year of Sec. 529 college savings plan funds to be used to pay tuition for kindergarten through grade 12. However, tapping your college savings plan for these expenses may be detrimental to your overall long-term savings plan to pay for college tuition.

Student-Loan Interest – If parents pay back a non-dependent child’s student loans, the IRS treats the transactions as if the money were a gift to the child and the child made the payment. Thus, the child is deemed as having paid any interest included in the payment and can deduct it as student-loan interest, which is deductible without having to itemize deductions, up to the annual limit of $2,500.

Extended Tax Benefits – A number of tax benefits that had expired at the end of 2019 were extended, without much fanfare, and are still available in 2020. In case you missed any of them, they include the following:

• A tax credit of up to $500 for installing energy-efficient improvements in your home, including exterior windows and skylights, exterior doors, metal roofs with appropriately pigmented coatings, asphalt roofing with appropriate cooling granules, energy-efficient heating and air-conditioning systems, insulation materials, or systems designed to reduce heat loss or gain. The $500 limit is a lifetime limit, so if you’ve taken this credit in the past, you need to take into account the amount of credit you claimed previously.
• A tax credit of up to $2,500 for purchasing a qualifying electric motorcycle.
• A deduction for mortgage insurance premiums on a loan used to purchase the home (acquisition debt).
• Forgiveness of qualified cancellation of debt income on a principal residence.
• Tax credits for fuel-cell vehicles and alternative-fuel-refueling property.

Gambling Losses – Gambling losses up to the extent of one’s gambling winnings are allowed as a deduction and can help to offset gambling winnings, provided the taxpayer itemizes deductions.

Live in a State Without a State Income Tax? – If you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, these states do not have an income tax. Because you can choose to deduct either state income tax or sales tax, if you itemize your deductions, your only choice will be sales tax.

The sales tax that can be deducted is the actual amount paid during the year, which can be determined by the larger of the following:

1. Actual receipts for purchases OR
2. The amount from the IRS’s income-based table PLUS sales tax paid when purchasing motor vehicles, boats, and other items specified by the IRS.

Spousal IRA – If one spouse works and the other does not, the tax law allows the non-working spouse to base his or her contribution to an IRA on the working spouse’s income. This tax benefit is frequently overlooked when spouses have been working for years and basing their individual contributions on their own income, and then one of the spouses retires. Even if the working spouse has a pension plan at work and his or her income precludes making a deductible IRA contribution, the non-working retired spouse may still make a contribution based on the working spouse’s income. Spousal contributions can also be made to Roth IRAs if the spouses’ joint income does not exceed IRS limits. As of 2020, the law was changed so that there is no longer an age limitation for making contributions to IRAs.

Economic Impact Payment – If you qualified for an economic recovery payment, in either the first or the second round, and did not receive the amount you were entitled to, you can claim the underpayment on your 2020 tax return as a tax credit.

Economic Impact Payment Document – If you received an economic impact payment, you should have received a Notice 1444, which documents the payment you actually received. The IRS has requested that taxpayers keep this form with all other important tax records, including W-2s from employers, 1099s from banks and other payers, and other income documents and records, to support their tax deductions.

Reinvested Dividends – If you are invested in a mutual fund, you are probably reinvesting the annual dividends. Reinvested dividends add to the basis of your investment, and when you sell the mutual fund, having a higher basis will reduce the gain. Mutual funds are required to track your basis for mutual fund shares purchased after 2012. Some even track the basis and reinvested dividends going further back. However, some do not, and it would be your responsibility to track the reinvested dividends so that you get the benefit of all reinvested dividends when you sell.

Worthless Stock – If you are like most investors, you occasionally will pick a loser that declines in value. Sometimes, a security can even become totally worthless when the issuing company goes out of business. Whatever you do, don’t wait until it’s too late to claim your loss. If the IRS challenges the loss and the security is found to have become worthless in an earlier year, then the current year’s loss will be denied.

Lifetime Learning Credit – The American Opportunity Credit (AOTC) is the education credit most familiar to taxpayers because it is available for the first four years of post-secondary education and provides a higher credit. It also requires the student to attend the college or university on at least a half-time basis and to pursue a program leading to a degree or other recognized educational credential. On the other hand, the Lifetime Learning Credit (LLC) is available for all years of post-secondary education and for courses to acquire or improve job skills. The student doesn’t need to be pursuing a program leading to a degree or other recognized education credential, and it is available for one or more courses. Many individuals who do not qualify for the AOTC overlook the LLC.

Charity Volunteer Tax Breaks – If you volunteered your time for a charity or governmental entity during the COVID-19 pandemic, then you probably qualify for some tax breaks. These rules actually apply to all charity volunteers, not just COVID-19 volunteers. Although no tax deduction is allowed for the value of services performed for a qualified charity or a federal, state, or local governmental agency, some deductions are permitted for out-of-pocket costs incurred while performing the services, such as away-from-home travel, lodging, and meals; automobile travel; and uniforms.

Self-Employed Travel Expenses – If you are self-employed and travel for business, don’t overlook highway tolls, porter fees, airline baggage fees, tips, taxi fares, Uber fees, car rentals, laundry, cleaning, or other incidentals while away, in addition to the normal meal, lodging, and transportation expenses.

Self-Employed Health Insurance Deduction – A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can generally deduct, as an above-the-line expense, 100% of the amount paid during the tax year for medical insurance on behalf of themselves, their spouse, and their dependents limited to the self-employed taxpayer’s net income from self-employment.

However, no deduction is allowed for any month when the self-employed individual is eligible to participate in a subsidized health plan maintained by an employer of the taxpayer, the taxpayer’s spouse, any dependent, or any child of the taxpayer who hasn’t attained age 27 as of the end of the tax year. The term “subsidized” means that the employer pays at least 50% of the coverage’s cost.

The health insurance premiums claimed as an above-the-line self-employed health insurance expense cannot also be claimed as a Schedule A medical expense.

Summer Camp – If you are single and working, or married and both you and your spouse work, you may not realize that the costs of day camp during the summer generally count as expenses toward the child and dependent care credit allowing you to work. A day camp or similar program may qualify even if the camp specializes in a particular activity, such as soccer or computers. The credit ranges from 20% to 35% of the day camp’s cost, not exceeding $3,000 for one child or $6,000 for two or more. Overnight camps do not count.

Medical Dependent –You may not realize that if you itemize your deductions, you can deductmedical expenses paid for certain individuals who are not your dependents. One such situation involves divorced parents, in which the non-custodial parent can deduct medical expenses they pay for their child, even when the other parent claims the child as a dependent. Another situation, which we refer to as a medical dependent, involves paying the expenses for someone who would qualify as your dependent except that their gross income is too much, which disqualifies them. For 2020, the gross income limitation is $4,300.

Example – The taxpayers’ adult son was seriously injured in a motorcycle accident and did not have medical insurance. His parents paid all of his medical expenses for the year. Their son meets all of the dependent qualifications, except that his gross income of $20,000 is too much, which disqualifies him. However, under the exception, they can still include his medical expenses on their 1040 Schedule A.

Income in Respect of a Decedent (IRD) – One of the most overlooked tax deductions is what is referred to as the IRD deduction. IRD is the acronym for income in respect of a decedent. IRD income is income that is taxable to the decedent’s estate and also taxable to the estate’s beneficiaries. Thus, it is double taxed; as a result, the beneficiaries generally receive a deduction equal to the difference between the decedent’s estate tax figured with and without the taxed income. Beneficiaries will only have this deduction if the decedent’s estate was large enough to be subject to the estate tax.

If you have questions about how these or other tax issues apply to your particular tax circumstances, please give this office a call at (614) 991-5107.

The post Obscure and Overlooked Tax Deductions, Credits, and Benefits first appeared on Wellman Tax & Business Advisors, Inc..