Does the IRS think you have a Business?

2013 Tax

Many taxpayers started a business and thought, or were told, “Don’t worry about the expense, it’s a write off on your tax return”.

The truth is that this may or may not be true.

Tax is not a cookie-cutter industry and as you can probably guess, the IRS did not make a “One Size Fits All” tax rule for write-offs.

If your intent is to enjoy your hobby and perhaps make some incidental income, this blog may not be of interest to you.

If your intent is to make money through a legitimate business, as defined by the IRS – this is for you

  • My purpose is to provide you “heads up” and “eyes open” to help ensure your business and financial success
  • This blog is provided to help educate you on how to organize, manage and conduct your business to improve your chances with the IRS in the event that your “activity” is audited ***

 

IRS Hobby VS Business Rules:

  • An “Activity” is either a hobby or a business
  • The IRS uses facts to decide if an activity is a (hobby) or a business
  • Neither the Code nor the Regulations provide an absolute definition
  • It is difficult for a taxpayer to win a hobby-loss case at the Tax Court level
  • If your tax return pays tax as a business and the IRS finds that it is a hobby, your tax return can be corrected and your tax liability could go up; i.e. you might owe the IRS money ***
  • The financial adjustment may be significant. In addition to the loss of the deductions, you, may face a §6662 understatement penalty for the tax years in question ***

 

Hobby Rules:

  • An activity is presumed to be a Hobby if a profit is not earned in at least 3 taxable years of a consecutive 5-year period
  • A taxpayer can overcome the presumption if he/she can show the activity was operated with a For-Profit motive
  • Under IRC §183, a taxpayer’s deduction for Hobby losses is limited to the income produced
  • You must itemize deductions to claim hobby expenses on your tax return
  • Hobby expenses, along with other miscellaneous expenses you itemize on Schedule A, must come to more than 2% of your adjusted gross income before you can deduct them
  • Hobby Expenses can bring your Hobby Gross Income, to zero
  • Income is reported on your IRS Form 1040, Line 21, Other Income
  • I understand that this can be confusing, so I will rephrase differently, to help bring clarity:
  • Hobby Income needs to be reported
  • Hobby Expense deductions have 3 limitations:
  1. Total Itemized Deductions have to be greater than your Standard Deduction
  2. Hobby expense deductions are limited to the hobby income produced, and then
  3. Then those expenses must be reduced by 2% of your Adjusted Gross Income (AGI)

 

Business Rules:

  • A Business has a For-Profit motive
  • A simple, general rule is that if the business makes a profit in 3 of 5 years there will be a presumption of profit
  • IRC § 183(d) is a safe harbor for the taxpayer
  • If the business is For-Profit, no limit on deductions is imposed and the taxpayer may be able to use losses to offset (reduce) other taxable income
  • If an activity has not produced profits in three of the past five years, the taxpayer may still argue that the business has a profit motive by relying on Reg. §1.183-2, which provides for a nine-factor test
  • More weight is given by the courts to the objective facts (rather than to the taxpayer’s statement intent) Dreicer v. Comr., 78 T.C. 642 (1982)
  • Judicial decisions suggest that no one factor is controlling
  • Court decisions often seem to consistently rely on the first factor as the most important

 

The prevailing regulations list nine critical factors for determining whether an activity constitutes a Hobby or a Business. They are:

  1. The manner in which the taxpayer carries on the activity
  2. The expertise of the taxpayer or his or her advisers
  3. The time and effort expended by the taxpayer in carrying on the activity
  4. The expectation that assets used in the activity may appreciate in value
  5. The success of the taxpayer in carrying on other similar or dissimilar activities
  6. The taxpayer’s history of income or losses with respect to the activity
  7. The amount of occasional profits, if any, which are earned by the taxpayer
  8. The financial status of the taxpayer
  9. Any elements of personal pleasure or recreation

 

Business Tax Reporting:

  • A Sole Proprietor or Qualified Joint Venture will file a federal return on Form 1040 and Schedule C- Profit or Loss from Business
  • If you have another Schedule C business activity; a separate Schedule C is required for each business; the same is true for your business records
  • Check to see what tax reporting is required by your state tax board and local municipality
  • The IRS expects you to pay tax as the money is earned
  • If you operate on a calendar year, due dates are 4/15, 6/15, 9/15, and 1/15 for the previous year
  • Quarterly estimated tax payments should be paid if you expect to owe more than $1,000 in federal taxes on an annual basis
  • Use 1040ES for Individual Estimated Payments
  • Reconcile payments on your annual Year End tax return
  • Self-Employment tax of 15.30% is required on all Annual Net Earnings of more than $400

 

Building the Foundation for a For-Profit Business Intent

Tips for Success:

  • Conduct your business, like a business, consistently
  • Consistency includes Quarterly tax reporting and payments – as required
  • Quarterly reporting requires that your accounting records be current – so you know if you have a profit or a loss
  • Taxpayers bear the burden of proving that they engaged in the activity with an actual and honest objective of realizing a profit
  • Keep detailed financial records
  • Credit Card and Bank statements and cancelled checks are not enough- the IRS needs to see the detail of what you bought
  • Receipts are your Audit Protection – the IRS has Strict Substantiation Requirements
  • The Cohen Rule,” states that you can use “other credible evidence,” or rely on IRS Publication 463 which states that you don’t need to keep receipts for expenses under $75 – it is safer to save all receipts and to follow a consistent business practice
  • Don’t use Cash: it is hard to track, easy to spend and nearly impossible to reconcile with receipts
  • Establish separate checking and credit accounts for your business – don’t co-mingle business & personal funds
  • Keep a Time/Activity Log- Outlook or Google calendar may be requested during an audit
  • If you have had business losses and made changes in the attempt to improve profitability, keep a list of changes made and the date the change was made
  • Establish a level of expertise by attending seminars, networking, and joining professional organizations related to the activity
  • Anticipate that you could be audited ***
  • Pursue your passion, enjoy the journey, and ask questions as you learn along the way

 

If you want to learn more about IRS tax rules, contact for me for a $75.00 Special: includes a 45 minute Q&A phone session plus a free “cheat sheet” for your personal use. The “cheat sheet” includes accounting/tax tips about what is a deductible expense, etc. Offer is valid until 9/5/16.

 

“Success is nothing more than a few simple disciplines practiced every day” – Jim Rohn

“To open a shop is easy; to keep it open is an art” –Chinese Proverb

 

Thanks for reading,

Deb

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

Self-Directed IRA’s – Are these for you?

piggy

Many of us are familiar with the Traditional IRA’s and the investment opportunities they provide. Less commonly known is the Self- Directed IRA, which offers a greater choice of investment options, including real estate.

I am not a financial advisor selling investments.

I am a CPA who just finished reading a book titled, ‘Leverage Your IRA, Maximize Your Profits with Real Estate’. One of the authors is a CPA and a Certified Financial Planner. I read this book for personal reasons and to learn the tax aspects so that I could be an informed resource for others. I found the information beneficial and hope you will as well.

Investment Opportunities:

There are two types of Individual Retirement Accounts (IRA’s):

  • Traditional: IRA’S: Most retirement plans are tax deferred and are funded with pre-tax dollars. Traditional IRA’s, SEP IRA’S, SIMPLE IRA’S, and 401 (K) plans are in this category; tax is deferred and paid at a future event such as a withdrawal /distribution
  • Roth IRA’s and Roth 401k’s are tax-free because they are funded with after -tax dollars

Traditional IRA’s allow funds to be invested with banks, brokerage firms, mutual fund companies, and insurance companies.

Self-Directed IRA’s allow the Account Holder many more investment options. For example, Self-Directed IRA retirement account funds can be invested in mortgages without having to “cash out” to make the investment. Investments are made inside this type IRA and funds can be rolled over from traditional accounts without a penalty.

Self-Directed IRA’s can invest in just about anything except:

  • Collectibles
  • Life Insurance contracts
  • Subchapter S Corporation stock (S-Corps cannot have an IRA as a stock holder)

Your Self-Directed IRA can purchase rental properties, commercial properties, tax liens, foreign real estate, buy mortgage notes, loan money earning interest, and more. Assets need to be handled as investments and cannot be used personally by you or any disqualified person. Your IRA owns the investment, not you. Investment possibilities may include:

  • Buying real estate from an unrelated party with cash
  • Buying property with a down payment and obtaining an “unsecured loan”
  • Co-investing with other parties

Income and capital gains can flow back to IRA’s tax-deferred (Traditional) or tax-free (Roth), if the IRA does not have a related real estate loan.

Real Estate Loans are possible and are “Unsecured”; your IRA funds cannot be used as collateral as security and there is no recourse against the Account Holder. In the event of default, the lender can only look to the property or the leases for repayment.

Non-Secured Loan Qualification is underwritten similar to a commercial real estate property loan. Criteria includes:

  • The Property – the lender needs to be satisfied with the value, marketability, and the condition of the property
  • Cash Flow – does the property cover the mortgage and the expenses?
  • IRA Funds – are the funds sufficient to cover the down payment, closing costs, pre-paid costs for taxes and insurance, and reserves for repairs or vacancies?

Down payment requirements vary by the lender and the property type. One such lender that provides Unsecured IRA Loans is North American Savings Bank (www.nasb.com)

Safeguards – how to protect your investment

Transactions need to be handled by a Specialized Custodian or Administrator. If you handle the transactions, the transaction could become taxable and the value of your money is at risk. Always follow the rules and keep your IRA funds and you safe.

While the Self-Directed IRA’s offer greater investment choices, there are also specific IRS rules that must be followed to protect your IRA. For example, “Self-Dealing” and “Prohibited Transactions” must be avoided.

The Exclusive Benefit Rule applies to all IRA’s. This means only the IRA can benefit from the transaction and that the IRA owner nor any other “disqualified person” may receive a personal benefit as a result of a transaction by their IRA; i.e. your IRA cannot buy your vacation home.

IRS Publication 590 (2013), Individual Retirement Arrangements (IRAs) includes the following about Prohibited Transactions:

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are some examples of prohibited transactions with a traditional IRA. ***

  • Borrowing money from it
  • Selling property to it
  • Using it as security for a loan
  • Buying property for personal use (present or future) with IRA funds.

With any investment, Due Diligence is always important. Knowledge is power. As Benjamin Franklin said, “An investment in knowledge pays the best interest”.

I encourage you to take the time to become an educated investor prior to considering using any portion of your retirement funds in a Self Directed IRA. Additional information can be found at:

  • Retirement Industry Trust Association (RITA) is a non-profit trade association formed in 1987which represents Trust Companies, banks, attorneys, accountants and other service providers in the self-directed retirement plan industry. http://www.self-directed-retirement.org/investor-resources/
  • Review “Self-Directed IRA Custodian” websites
  • For more in-depth information on Prohibited Transactions, you may wish to read IRC 4975
  • Discuss with your CPA, Tax Attorney, or other experienced investors about their Self-Directed IRA

The information provided in this post is intended to be a good basic primer about Self Directed IRA’s. A comprehensive review is beyond the scope of this blog post.

Please let me know if you have any questions or if you would like me to post a more technical blog about UDFI (Unrelated Debt-Financed Income) and UBIT (Unrelated Business Income Tax), which can apply if an IRA real-estate loan is part of the IRA transaction.

Deb Fox is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointment. More information is available at www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com.

Have you reviewed your legal business structure for tax savings and/or liability?

Tax Time is a great time to review your business financial life and determine if there are changes you can make to help you keep more of the money your earn in your pocket. One way to do this is to see if your legal business structure provides you the best opportunity for tax savings and/ or more limited liability.

In the U.S., there are four major legal choices to chose from when deciding how to operate your business: sole proprietorship, partnership, corporation, and the limited liability company. There are also variations within these categories, such as the S-corporation.

Making this decision is complicated and both an attorney and an accountant should be consulted to provide information to help you decide which form may be best for your business. Factors to consider include:

  • Legal Liability
  • Tax implications
  • Cost of formation and record keeping
  • Flexibility
  • Future needs

As someone with both an accounting and risk management background, I look at choices from both perspectives. The number side of me wants to find out if there is a way to save money. The risk management part of me wants to make sure we are protecting the money we have. The following business entity review focuses upon these two aspects.

Liability can arise from negligence, statutory law, and assumption by contract. The risk of potential liability varies by business entity form.

Sole Proprietor: Flying Solo

  • Taxpayer is the owner; the business is not separate
  • Unlimited exposure to liability
  • All debts or claims against the business can be filed against the owners’ personal property
  • If the owner is sued, insurance is the only form of protection
  • The business itself is not taxed separately; The IRS calls this “pass-through” taxation, because the business Profit and Loss passes through the business to be taxed on your personal tax return
  • Tax is based on your personal income level and is taxed at graduated rates
  • File your personal income tax on Federal Form 1040 and all business information on Schedule C or Schedule F, Profit or Loss from the business
  • Sole Proprietors must pay both the employer and the employee side of Social Security and Medicare taxes; this is called Self-Employment tax
  • Self-Employment tax is required if your annual net-earnings is more than $400
  • The self-employment tax rate for 2014 is 15.3% of the first $117,000 of income and 2.9% of everything above that amount
  • Self-Employment taxes are reported on Federal Form Schedule SE
  • Sole Proprietors can deduct ½ of this cost on 1040-Line 27, the deductible part of self-employment tax 

Partnership: Two or More

  • General Partnerships: Partners are exposed to unlimited liability for business expenses
  • Limited Partnerships: General Partner is personally liable; Limited Partners have limited liability unless they are participating in management
  • Depending on the form, Partners may lose their investment and/or personal assets as well
  • Partners are not employees and should not be issued a W-2
  • Partnerships file an annual information return on Federal Form 1065; Schedule K1 form is used for the individual member’s profit and loss allocations
  • Individual Partners file their personal tax information on Federal Form 1040 and Schedule E, Supplemental Income and Loss
  • Taxable at the personal income level and at the graduated rates
  • File Self-Employment tax on Schedule SE; see Sole Proprietor for additional information

C-Corporation: Double-Taxation applies

  • Separate legal entity that exists, separately and is distinct from its owners
  • Owners’ personal assets are protected from claims against the corporation
  • Generally, the owners of a corporation cannot lose any more than they have invested in the corporation
  • The corporation is taxed and can be held legally liable for its actions
  • Double-Taxation applies: the profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends
  • Owners do not pay tax on corporate earnings unless they receive money as compensation for services or as dividends
  • The corporation pays taxes on the annual net earnings and files Federal Form 1120
  • Corporate owners, who want to leave some profit in the business, may benefit from lower corporate rates
  • For example, 2013 corporate tax rates are 15% for taxable income below $50K, plus 25% for taxable income between $50K-$75K; perhaps, lower than individual rates
  • Corporate taxation is more complicated than the pass-through taxation
  • Self-Employment tax does not apply; FICA payroll taxes are shared 50/50 between the corporation and the employee

Limited Liability Company (LLC) – Single Member

  • An LLC is an entity created by state statute
  • LLCs are state entities, so the level of legal protection given to a company’s owners depends upon the rules of the state in which the LLC was formed
  • Tax reporting depends on the status of the LLC
  • Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return; i.e. a disregarded entity
  • An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes unless it files Form 8832 and elects to be treated as a corporation
  • If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return on Federal Form 1040 and Schedule C, Schedule E, or Schedule F
  • An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship
  • A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Federal Form 8832 and elects to be treated as a corporation
  • All income, gain, loss, and deduction flow through to members unless the LLC is taxed as C-Corp
  • No double taxation unless the LLC choses to file as a corporation
  • Taxable at the personal income level and at the graduated rates
  • Self-Employment Tax applies except if the LLC operates as C-Corp
  • File Self-Employment tax on Schedule SE; see Sole Proprietor for additional information

Subchapter S-Corporation (S-Corp): Double Taxation does not apply

  • Separate legal entity
  • Limited liability for shareholders, officers, and directors
  • Generally, a corporation’s shareholders are not personally liable for the corporations debts just because they have ownership in the business; the same is true for the members of an LLC
  • S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes
  • Generally, the S-Corp does not pay Income Tax at the Corporate level; they can be responsible for tax on certain built-in gains and passive income at the entity level
  • Self-Employment tax does not apply
  • Many small business owners use S-Corps because they can save a business owner Social Security and Medicare taxes
  • Owners receive a salary and normal payroll taxes apply
  • As an owner-employee, the corporation pays ½ of the payroll tax which can be a substantial tax savings to the owner-employee
  • An S corporation must pay reasonable employee compensation to a shareholder-employee in return for the services the employee provides before a distribution
  • File S-Corp informational return on Federal Form 1120-S
  • Income, gain, loss, and deduction is passed through to share holders
  • Shareholder-employees will receive two tax documents from the S-Corporation: a W-2 wage statement and a Schedule K-1 statement
  • Shareholders report the flow-through of income and losses on their personal tax returns; taxed are based upon the individual income tax rates
  • Double-Taxation does not apply
  • Shareholder-employees are taxed on their salary income and on any profits distributed by the S-Corporation
  • Profit distribution is not subject to FICA payroll taxes; salaries paid must be reasonable for services provided
  • Shareholder-Employees file Federal Form 1040 and Schedule E – Supplemental Income and Loss
  • Under California law, the S corporation is subject to a 1.5 percent tax on its net income
  • See if special tax rules apply in your state

Understandably, reading about tax implications and legal liability might seem a bit boring. Most would agree. Think about it this way:

  • Money saved is money you do not need to earn
  • Knowing you are protected is a good form of “sleep insurance”

Chinese Proverb: To open a shop is easy; to keep it open is an art.

Deb Fox can be reached via twitter @ debfoxfinancial or via e-mail @ debfoxfinancial@gmail.com.

http://www.debfoxfinancial.com/

Congratulations Same Sex Married couples; The IRS – Post DOMA – Ruling is effective 9-16-13

 

This recent IRS ruling could have a major impact upon your finances. Don’t be caught short by an unexpected surprise.

This recent IRS ruling could have a major impact upon your finances. Don’t be caught short by an unexpected surprise.

Effective Monday September 16, 2013 all Same Sex Married (SSM) couples can file their Federal tax return as either Married Filing Separate or Married Filing Joint.  Filing as single is no longer an option.

The change was announced in an 8/29/13 IRS Press Release:

  • All Same-Sex Married (SSM) couples must file as married even if they are living in a state that does not recognize their marriage
  • Couples can evaluate returns filed in 2010, 2011, and 2012 to see if amending their return results in an overpayment and money back to you
  • Amending returns is an option and is not required

From a tax standpoint, SSM couples have incurred a lot of financial change since the DOMA ruling.

The 2012 Federal Tax filing season is almost over and SSM couples were granted the right to file their Federal return as married on 8/29/13. How will this change affect you? Is there “money in the IRS Treasury bank” or do you need to put money in the bank to pay tax obligations that you just incurred?

To help you get started evaluating how all this change could affect you, create a chart similar to the following for each of the tax years that could be amended to see if filing an amended return for Married Filing Joint (MFJ) saves you money as a couple.

Specific rules are available for each year on the IRS website. It is important to pay attention to credits, deductions, and related phase out amounts. For example, for 2012

  • The $2,500 maximum deduction for interest paid on student loans begins to phase out for married taxpayers filing a joint return at $125,000 and phases out completely at $155,000

The following chart shows TP#1 using the Standard Deduction and TP#2 using the Itemized Deduction. Hypothetical dollar amounts are not included because they would not be relevant to you.

2012 –Filed:

Prior to DOMA

Taxpayer #1 Taxpayer #2 MFJ Amended after 9-16-13
Adjusted Gross Income
Standard Deduction $5950. $0.00
Itemized Deduction 0 ?
Personal Exemption $3800 $3800.
Taxable Income
Tax Due


To see what the 2013 tax year looks like for Married Filing Joint:

  • List your combined income and Federal Tax withheld or paid to date
  • Determine if you are going to use the Standard or Itemized Deduction
  • Use the IRS Withholding Calculator to check your withholding amount
  • File a new W-4 to adjust your holding if needed

The American Taxpayer Relief Act of 2012 includes the following rules for 2013:

  • A new tax rate of 39.6% for individuals over $400,000 and $450,000 for Married Filing Joint
  • The Personal Exemption is $3900; this is phased out beginning with incomes of $250,000 and $300,000 for Married Fling Joint
  • Itemized Deductions are limited for Individuals over $250,000 and $300,000 for Married Fling Joint
  • The Alternative Minimum Tax Exemption is $51,900 ($80,000 for Married Fling Joint).

In closing, I understand that this is a lot of information to absorb, research, and evaluate to determine your financial situation.  Do-It –Yourselfers could be ready to go while others prefer to get help and spend their free time doing something enjoyable. Understandable. For now, just know that the IRS ruling could have a major impact upon your finances. Don’t be caught short by an unexpected surprise.

Benjamin Franklin said, “An investment in knowledge pays the best interest”.  May your investment produce a positive return for both your time and for your money.

How much do you keep of what you earn? 2013 Tax Plan

Have you noticed “The IRS” spells “Theirs”?  Paying tax is required.  How much you pay is determined, in part, by how you plan.

If you are married, or plan to be, for the 2013 Federal tax year, now is the time to look at your potential tax liability and determine your financial plan. Nobody wants to find out at the end of year that they owe taxes when there is little time to do anything about it.

The U.S. uses a graduated tax rate, which means that the tax rate increases as the income goes up.

There are five filing statuses:

  • Single (S)
  • Married Filing Joint (MFJ)
  • Married Filing Separate (MFS)
  • Head of Household (HOH)
  • Qualifying Widow (er) with Dependent Child (Q/W)

More than one filing status can apply to you. You can choose the one that gives you the lowest combined tax.

Generally, Married Filing Joint will result in the lowest amount of tax. There are exceptions and good tax planning involves reviewing “what if” scenarios.

Are you “withholding” enough to cover the estimated tax liability by the end of the year? If not, you need to either increase your withholding or use other methods, such as deferring income, to decrease the estimated amount owed.

The following will help you get started:

Filing Single is the easiest. All you need to decide is if you are going to save more money by using the Standard Deduction or to itemize deductions.

Married Filing Joint (MFJ) can be used if:

You are married on the last day of the year

Both you and your spouse report all your income, exemptions, deductions, and payments

Both spouses must sign the tax return because both of you may be held responsible for accurate reporting and tax payment

Married Filing Separate

Report your income, exemptions, credits, and deductions

Different rules apply if you live in a community property state. See Publication 555

You will “generally” pay more combined tax on Married Filing Separate returns than you would on Married Filing Joint returns for the reasons listed under “Special Rules” in IRS Publication 501

Some of the “Special Rules” include:

If your spouse itemizes deductions, generally, you cannot take the standard deduction

You cannot take the student loan interest deduction, the tuition and fees deduction, the education credits, or the earned income credit.

There are reasons why you might want to choose the Married Filing Separate (MFS) status:

  • You only want to be responsible for the accuracy and the payment of your tax liability
  • If your Adjusted Gross Income  (AGI) is lower by filing MFS than MFJ you may be able to deduct a larger amount for certain deductions that are limited by AGI such as medical expenses. For the 2012 tax year, you can deduct only the part of your medical and dental expenses that exceeds 7.5% of your Adjusted Gross Income. This increased to 10% for 2013.
  • Head of Household is for unmarried, or are considered unmarried, you provide a home for certain persons, and you meet the criteria by passing one of two tests. Detailed information can be found at IRS.Gov.

Tax rules are complicated and this is by no means comprehensive. Hopefully, it is enough to encourage you to look at your tax situation and to take action so you are not surprised with a big tax bill next year. A large return because of overpayment equates to giving the IRS an “interest free loan”.

Suggestions:

Use the 2012 tax rules to estimate your 2013 income and the amount of federal tax withheld

If it appears that you will either owe or have a possible large refund, consider filing a new W-4, the Employee withholding Allowance Certificate, with your employer

Reasons to change the amount withheld may include a change in your marital status or your dependents. Perhaps, you bought a house this year and know you will have enough deductions to itemize rather than use the standard deduction. Maybe, because of multiple jobs, too much is being withheld from your checks.

You work hard for your money. Don’t you want to keep as much as you can? After all, it is yours, not all theirs.

Together in Love & Marriage – but not for U.S. Taxes?

Marriage and TaxesNote:

While today’s blog has an initial focus for those affected by the recent Supreme Courts DOMA decision, the tax implications discussed apply to all married couples that file their federal return as Married Filing Joint.

*******************************************************************************

Same-Sex Married Couples may have enjoyed life together for years, but 2013 will be the first U.S. tax year that these couples have to consider “filing married “. How will this affect their personal finances or even the their personal financial liability?

Perhaps, because filing married was never a possibility for filing Federal Taxes there was not a clear and driving need for discussion. Now there is.

Consider this quote from the Prudential LGBT Financial Experience 2012-2013 Research Study: “Same-Sex Couples value financial independence far more than the general population, often keeping separate accounts and financial plans.”

With the overturn of certain parts of DOMA (Defense of Marriage Act), it will be harder to keep money in the closet.

One of my personal goals is to help people make smart financial decisions and to avoid expensive mistakes. A good method for doing this is to look at both the risks and the rewards of each possible action.

This blog will focus on some of the risks for “filing married”. In my next blog, I will discuss the difference between Married Filing Joint (MFJ) and Married Filing Separate (MFS).

Married Filing Joint (MFJ) requires that both spouses sign the tax return. Note that doing so can result in the following as per the 2012 1040 U.S. Individual Tax Return Instructions:

Joint and several tax liability. If you file a joint return, both you and your spouse are generally responsible for the tax and interest or penalties due on the return. This means that if one spouse does not pay the tax due, the other may have to. Or, if one spouse does not report the correct tax, both spouses may be responsible for any additional taxes assessed by the IRS.

You may want to file separately if:

You believe your spouse is not reporting all of his or her income, or

You do not want to be responsible for any taxes due if your spouse does not have enough tax withheld or does not pay enough estimated tax.

Relief from joint responsibility:  In some cases, one spouse may be relieved of joint responsibility for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. You can ask for relief no matter how small the liability.

There are three types of relief available:

Innocent spouse relief

Separation of liability (available only to joint filers who are divorced, widowed, legally separated, or who have not lived together for the 12 months ending on the date the election for this relief is filed).

Equitable relief

You must file Form 8857, Request for Innocent Spouse Relief, to request relief from joint responsibility. Publication 971, Innocent Spouse Relief, explains the kinds of relief and who may qualify for them.

On August 8, 2013, The IRS issued REG-132251-11. This proposes to expand from two to 10 years the amount of time that taxpayers could apply for Innocent Spouse Relief so they are no longer responsible for the tax debts of estranged spouses.

In closing, I understand that the “Joint & Several Liability” may come as a surprise to many and it should. Many are newly married for U.S. tax purposes. I chose to share the “risks” first because it will help keep the “rewards” in perspective.