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Tied the Knot? Your Taxes Just Got Interesting!

So you got married. Now what?  Easy there, this isn’t that type of article.  We will keep our marriage advice and recommendations strictly to the tax realm

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But seriously though, I’m sure, right at the top of your concerns is how getting married will impact your taxes.  The first thing is that you can’t file as single status anymore.  If you are married on December 31st, you have to file with one of the married status designations – jointly or separately.  What’s the difference you ask?  With a married filing jointly (MFJ) status, you file one return together, reporting both of yours and your spouse’s income and deductions together.  Under married filing separately (MFS), you will each file a separate return, reporting your share of income and deductions on your own separate returns.

Next Question: why does it matter?  There are a couple of different reasons why it matters.  MFJ filing status generally has better tax rates across the board than MFS.  If you are looking at only tax savings, MFJ is almost always the way to go because you will pay less combined tax.  If you take a look at the tax brackets and how they increase as income increases, MFJ gets broader tax brackets that go up more slowly than MFS.  MFJ also gets a higher standard deduction than you would get as MFS.  MFS also has to choose the same deduction method – standard or itemized- regardless of which one works best for each taxpayer.  

So why would someone choose MFS then?  It is usually for a reason that falls outside pure dollars and cents.  When you file MFJ, both you and your spouse are liable for the full tax obligation and what is reported on the return.  It isn’t split 50/50, you both are legally required to be sure the full amount is paid. If there is potential fraud on the return, both taxpayer and spouse can be liable. Maybe that isn’t what you want.  Sometimes, taxpayers will choose to file separately for student loan repayment reasons to keep payments lower based on income. If one spouse had significant medical expenses, it could make sense to file separately if that spouse would have a lower AGI, allowing more of those medical expenses to be deducted since expenses have to be over 7.5% of your AGI.  MFS is often a good option for spouses who are going through a divorce that is not finalized yet.  It largely allows each spouse to file a return mostly independent of the other.

This choice can also be important for how it impacts many of the tax credit we discussed in our last installment.  Do a quick dive HERE .  In general, the earned income credit is eliminated for MFS taxpayers, since all income could in theory be on one spouse’s return while one taxpayer reports below poverty level income.  The Child and Dependent Care Credit is also virtually eliminated with a few narrow exceptions.  Education credits and Adoption credits are also largely disallowed

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So, think carefully when choosing to file separately if you are married.  The tax man can bite you.  

Here are some real like examples of when married filing separately might make sense: One Spouse has significant medical expenses – perhaps one taxpayer is undergoing cancer treatments and has significant out-of-pocket medical expenses of $25,000+ but has low taxable income from being unable to work.  Since medical expenses are an itemized deduction and only expenses in excess of 7.5% of AGI qualify, this might be a place where married filing separately makes sense, to maximize itemized deductions.

You want to keep tax liability legally separate: Perhaps one spouse owes significant back taxes, has defaulted on student loans, or has a tax lien.  Filing separately allows the spouse of the taxpayer to maintain separate legal liability and protect her/his refund from the IRS.  If the couple were to file jointly, the IRS would claim any refund entitled to the spouse to satisfy the outstanding debts.

So, how do you change your filing status?  If you are going from joint to separate, you can simply file 2 separate tax returns reporting each share of your income and deductions.  You split any items that are reported jointly, in most cases.  You will also need to both choose the same deduction method as mentioned earlier – either you both take the standard deduction or you both itemize your deductions.  If you are going from separate to joint status, you file one return, check the MFJ box and report all of your income and deductions together on one return.  To go back and change prior years, you have to file amended tax returns.  Generally, you can go back and amend from MFS and change to a joint return, however, you are not permitted to amend a joint return and change to MFS once the due date of the original return has passed.  

In conclusion choosing how you will file your tax returns is an important decision that can make a major financial difference but at the same time, can also expose you to risks, depending on your circumstances.  As a general rule, married filing jointly produces a better tax result but there could be other financial and legal factors that may drive your decision to file separately.  As usual, this is a blog and not tax advice.  If you have questions about what filing status makes the most sense for you, consult a tax professional who is experienced in these conversations.  They will be able to help you weigh the various factors and put to numbers to paper regarding what make the most sense for your particular set of circumstances.

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Top Tax Credits to Save You Money This Year

In our previous installment we talked about the difference between tax deductions and tax credits.  You can check that out here {Blog Post Link}.  In short summary, tax credits reduce your tax liability dollar for dollar where deductions reduce the income your tax is calculated on. The world of tax credits is vast and varied.  In this particular post we will hit on some of the most popular/claimed credits, how much they can make a difference, and some of the qualifications to claim them.  This will be a primer and is certainly not an exhaustive list.  Even I don’t want to sit and read an exhaustive list of tax credits.  I might do it, but it isn’t the most interesting reading in the world.

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To kick things off, we will start with maybe one of the most mis-claimed or misunderstood credits – the Earned Income Credit (EITC).  The EITC is a tax credit intended to provide benefit to lower income tax payers and can actually be refundable.  What does “refundable” mean?  It means that even is your don’t actually owe tax or have withholding, you can still get a tax refund of this credit. {Sweet} The credit is based on a percentage of your earnings and factors in other financial information, like your filing status, how many dependents you have, what kinds of income that you have, and some other specific tax items.  If you make over $68,075 and file a joint return or $61,555 filing as single/head of household, you won’t be eligible for this one.  For 2025, the maximum credit is about $8,000 and is also fully refundable.  To claim the credit, you can file a Schedule EIC along with your annual Form 1040 – you know, your annual tax form.

Another popular credit is the Child Tax Credit (CTC).  The CTC is easy to identify.  It is a flat per dollar amount per child that you have under the age of 17.  

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In July of 2025, President Trump’s One Big Beautiful Bill (OBBB) – could we have any more abbreviations? – increased the 2025 credit amount to $2,200 per eligible child, indexed the credit to increase with inflation, and added some requirements about the parent and child having valid social security numbers.  You must have earned income to claim the credit and if you make over $200,000 as a single filer or $400K for jointly filers, you aren’t able to claim the credit.

Next up on the list of credits you never knew you wanted to know about are Educational Tax Credits.  There are 2 different credits designed to support taxpayers with post-secondary education costs – the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).  Both credits are designed to help with higher education costs.  The AOTC is the more generous credit of the 2, designed to help only with the first 4 years of college tuition.  You must be at least a half-time student and the student can be you, a spouse or a dependent.  The maximum credit amount is $2,500, with 100% of the first $2000 being eligible for the credit and 25% of the next $2,000.  Up to 40% of the credit can also be refundable.  For the LLC, the qualifications are lower.  The eligible student is required to only be enrolled in one course during the calendar year.  The LLC is available for all years of post-secondary education, including masters and beyond courses, for an unlimited number of years.  The maximum credit annually is $2,000 but is calculated at 20% of your tuition costs up to $10,000.  It is not refundable.  As with most credits, if you make over $90K as a single filer or $180K married filing jointly, you can’t claim the credits.

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The last group of credits we will discuss are energy credits that help the environment. You can claim small credits related to energy efficient improvements to your main home as long as that home is in the US.  The credits are based on how much you spend and are generally capped at $200-$500 but various items can qualify like new windows, insulation, interior and exterior doors, HVAC systems, or hot water heaters.  If you decide to install larger energy items, like solar panels or a geothermal heating system, you can actually claim a tax credit up to 30% of the cost of the improvement.  You want to be sure you check and make sure whatever you are doing meets the requirements, but don’t miss out since they can make a difference.

This list is by no means exhaustive and primarily touches on a few common credits available to individuals.  Business owners have access to a host of other credits like the Research & Development Tax Credit, various employer/employee related credits, retirement plan credits and many others.  

You may be thinking, “Great – now what do I do?”  How do I get these credits?  Are they on a card or something?  To claim these credits, you file and report the required info on various forms as a part of your annual Form 1040 tax return.  Each credit type will have a corresponding form or Schedule and outline what information you need to include in order to properly claim and support the credit.  Be sure that you maintain any documentation necessary to support your credit claim in the event the IRS asks for it, particularly if regarding the EV vehicle credit.  This isn’t one we talked much about due to changing laws, but as with all credit, be sure you can back up the claim.

A few things to keep in mind, if you think you may be eligible to claim any tax credit, be sure that you either consult a qualified professional or thoroughly review the instructions to be sure you meet requirements of the credit.  You don’t want to be claiming credits that you don’t actually qualify for.  If the IRS catches it, your credit claim could get denied and you might end up owing penalties too.  Nobody wants that. This wraps up our discussion on credits.  Be sure when filing your return that you are maximizing everything available to you. Don’t let the G’men be keeping your money.

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What are 529 Accounts and Can They Save Me Money?

If you read this title and thought, “Man, 529 Accounts seems like a whole lot of accounts for one person, and why is such an oddly specific number?”, then you have stumbled upon the right blog post.

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If you have ever sat uncomfortably quiet when your buddies at the bar are discussing funding options, well, first…you need more fun friends.  That I can’t help you with much, other than to help you dazzle them the next time the topic comes up.

Established under section 529 of the Internal Revenue Code, these accounts are state sponsored qualified educational savings accounts designed to help save and pay for higher education costs.  

What makes them qualified?  Well, obviously you get a tax deduction for contributing to them, right? Nope.  There is not a federal tax deduction available upon contributing to a 529 account.  Why would you do it then?

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It is all about the growth.  Even though a federal deduction is not received upon contribution, these accounts function similarly to ROTH IRAs.  You are allowed to invest the contributions in securities and then the growth of the money invested in the accounts is not taxable while it remains in the 529 accounts.  Your contribution grows, tax free.  Then, if you withdraw the money for “qualified educational expenses”, the distributions are not taxable as income.

“Well the government must really limit what are qualified higher educational expenses if they are offering a deal that good!” 

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(Adjusts nerd glasses) Actually the tax law is surprisingly generous as to what is permitted to be paid for from a 529 account.  The following expenses are deemed qualified:

Tuition
Fees
Books
Supplies
Equipment
Room & Board (also off-campus rent)

Higher education can be for any 2 year or 4 year program after high school and you can even use up to $10,000 per year to pay for private secondary school education as well.

This may seem like a trick, but the government is attempting to encourage citizens to invest in education.  And we are taking advantage of the program.  As of the end of 2024, $508 Billion with a B have been invested in 529 plans.

And that’s not all, while there isn’t a federal tax deduction available for 529 plan contributions, many states do offer a deduction for state income tax.  The deduction and limitations vary by state so you want to be sure to check your home states rules.  They generally aren’t home run sized deductions but take the money where you can.

“Yeah, but what happens if my kid gets a scholarship or doesn’t use all of the money?”  No need to fear, you don’t necessarily lose the benefits.  You can assign a different beneficiary – a younger sibling perhaps – to the account instead, without tax consequence.  There may be family issues to deal with but you are clear on the tax part.  Another option if you run out of potential beneficiaries is to roll the 529 funds into a Roth IRA account.

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The Secure Act 2.0 granted the option to roll unused 529 account funds into a Roth IRA if the 529 account has been open for at least 15 years.  The total amount rolled over can’t exceed $35,000 and you can’t rollover any contributions made in the last 5 years.  There are a few other rules so be sure to check with a qualified advisor on eligibility.

“This all sounds great, but how do we get money in there?”  Great question.  In the funding discussion, we need to touch on gift tax rules.  You may not have known that there can be a tax on gifts.  Two tax types in one blog post – man did you hit the jackpot. 

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We won’t get too into gift tax here, but the government has a tax in place to make sure wealthy individuals don’t dodge the estate tax too much by giving money to their decedents.  There are several exceptions and planning techniques to help reduce liabilities but those aren’t for this post.  One exception to the gift tax is the annual exclusion.  This is important since contributions to a 529 account are technically a gift to the beneficiary.  The annual gift tax exclusion is an amount of money that changes with inflation most years that permits you to give to any individual without ever having to worry about the gift tax.  For 2025 and 2026, the annual exclusion amount is $19,000.  So you can put up to $19,000 into a 529 account for any number of beneficiaries without ever worrying about gift tax.  You do need to check your state rules though.  Just because this is the federal limit doesn’t mean you can take a state tax deduction for the full amount. Some states have caps on the deduction you can claim for 529 account contributions.  

There is also a special rule for 529 accounts that allow you to “superfund” them.  Sounds pretty spectacular right?  This rule for 529 accounts allows you to fund up to 5 times the annual exclusion amount in year 1 and then treat that as being contributed over 5 years for gift tax purposes, meaning you don’t have to worry about gift tax if you don’t give the beneficiary anything else during that time period.  This “super funding” option allows your contributions to be invested and start growing tax free sooner than making that contribution each year over the next 5 years.

This wraps up our primer on 529 accounts.  Hopefully, you can now impress your friends at Christmas parties.  If this sounds like something you’re interested in, please reach out to a qualified professional.  Again, this is just a blog and not to be taken as tax advice.

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What is a Tax “Write-Off” Anyway? Is It the Same as a Tax Credit?

For this friendly tax installment, we are going to reverse course from being in the tax weeds and bring it back to things that are basic.  This installment is going to cover Tax Deductions and Tax Credits, what the difference is, and how they work.

I’m sure you have heard of a tax “write off”

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Maybe you have a friend that offers to pay for meals and says, “I can just write it off” or something to that effect.  What does that even mean? Can you invite me to these lunches?

A more technical term for a tax write off is a tax deduction.  All right, got it.  Tax Deduction = Tax write off.  Now what?

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Tax deductions are generally quite broad and cover a wide array of expenses given your specific set of tax circumstances.  First we will start with how your tax is determined.  Calculating tax starts with your income – the amount of money you earn, not necessarily the cash that hits your account.  Once you have your income tabulated, you subtract or “deduct” expenses that are allowed under our tax laws to reduce your income.  This is sometimes referred to as net income or taxable income.  Your tax is then calculated based on your taxable income. So deductions reduce the amount of income that you are required to pay tax on.

Some common deductions for most individuals who are employees might be retirement plan contributions, HSA account contributions, student loan interest, or itemized deductions.  Many individuals take advantage of the increased “standard deduction” rather than itemize those deductions.  Taxpayers who own a business are permitted to deduct from their gross business income a much broader range of expenses – travel, payroll, advertising, and other expenses deemed to be necessary trade or business expenses.

Great, so if I can deduct it, that means the government is paying for it right, by reducing my tax, right?

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Going back to the above, your deductions reduce the income used for calculating your tax not your actual tax directly.  If you spend $3,000 as a deduction, that does not translate to $3,000 in less tax.  You have to look at your tax rate.  If you are in the 20% marginal tax bracket, then that deduction would save you $600 in tax ($3,000 x .2).  If you are in a higher bracket, then your deduction will reduce your tax more.  You can think of deductions as buying things at a discount that is variable from taxpayer to taxpayer based on your tax bracket.  You still have to spend the money, you just save some in tax later when you file your return.

So what are tax credits then?  Is that even a real thing?

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Tax credits actually directly reduce your tax owed instead of the income on which your tax is calculated.  They are factored in after the tax is calculated and reduce it dollar for dollar.  You may be thinking “Well that sounds way better, lets just do that instead”.

That’s because it is better, but tax credits are limited by the government on purpose for this reason.  You have to be eligible to qualify for them, and they are limited to specific circumstances.  For example some prominent credits for individuals are the child tax credit, the earned income credit, the dependent care credit, and the American Opportunity tax credit.  Each of theses credit will reduce your tax directly by the amount of the credit.  Most of them have income limitations and/or other qualifications so that the credit is limited to the targeted groups.  However, definitely take legal advantage of them if you can.  

Business owners have other credits available to them as well on a host of things.  The research and developmental expenditures credit is a big one meant to incentivize businesses to engage in new technology development or processes.  In recent years, many environmental based credits have been opened up for both businesses and individuals to encourage investments in technologies or products deemed good for the environment.

One credit that has been in the news lately is the Employee Retention Credit.  While in theory it was a great credit for business owners to retain employees throughout the pandemic, it was so throughly abused by fraudsters that the IRS shut the credit down and stopped processing new claims.

So, now you know the difference between tax credits and tax deductions.  Tax credits are in effect much better but on the down side, much more limited in applicability.  While tax deductions don’t reduce tax by the same degree as a credit, they are so much broader in availability that they can not be neglected.

I hope this helps the next time you are chatting with you friends about taxes (everyone does this right?) You will be able to throughly the discuss the merits of writing off that Starbucks Latte or new iPad.

As always, if you have specific questions about expenses that could be deductible or credits of which you could take partake, consult a qualified tax professional.  This is a blog, not tax advice.

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Reducing Taxes – Standard vs. Itemized Deductions

What’s the difference and why should you care?

So it is tax filing time. You have all your income documents and withholding ready to go.  You are cranking through ready to wrap this up and get back to the things you like doing, which taxes are definitely not a part of, and you get to this question: Would you like to use the Standard Deduction or Itemize your Deductions?

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You may be tempted to select whichever option gets you done the fastest.  Stop! Unless it is April 15th (or October 15th) at 11:59pm, the fastest choice may not be the best choice.  Why you ask? Have no fear, faithful reader, I am here to set you down the right path.

Why it Matters

The short answer is that either one of the options save you money.  Deductions reduce your taxes.  How? They reduce the amount of money on which you have to pay tax.  If you make $50K, a tax deduction of $10K would have you pay tax on $40K, which might save you $1,000 in tax if you didn’t have the deduction.  Tax Credits work a little differently and I have dig into that in this fancy post here.

The Standard Deduction

So what is the “standard” deduction.  Your mama always said you were special, and you are.  The standard deduction is a base level tax deduction offered to all taxpayers.  The amounts fluctuate primarily based on your filing status. We can cover filing status in another post.  Often your age can increase the standard deduction you are eligible to claim as well.  You  are permitted to claim the standard deduction no matter how much money you make.  The amount changes from year to year.  The 2017 Tax Cuts and Jobs Act basically doubled the standard deduction amounts and reduced a lot of the need for itemized deduction filing.

Itemizing Deduction

The alternative to utilizing the standard deduction is to itemize out your deductions.  The IRS Code allows taxpayers to deduct 5 broad categories of deductions, when combined, are your Itemized Deductions: Medical Expense, State and Local Taxes, Interest Expenses, Charitable Contributions, and Miscellaneous.  There are nuances and details to all of these deductions that would need to be covered in separate posts like Explaining the Mortgage Interest Deduction. When Itemizing your deductions, you add the totals of each of these five categories and the total is your deduction.  With itemizing deductions, your income matters.  With the passage of the One Big Beautiful Bill, it reintroduced certain income limitations that factor into how much of your itemized deductions that you are permitted to deduct. 

Pros and Cons

The biggest benefit of the standard deduction is that it is the simplest which also means quickest.  You take the deduction allotted to your filing status.  The downside is that you could be leaving money on the table.  Conversely, the biggest benefit of itemizing your deductions is that you could save more tax dollars.  The con of itemizing is the additional time it takes to gather documentation of your expenses and calculate each deductible amount.  Depending on how you file your return, there could also be additional filing cost if your tax preparer charges extra to prepare Schedule A, the extra form you file to report your deductions, or your tax software may charge more to calculate it.

So How Do You Decide?

You may be feeling like you want to pull your hair out at this point. when comes to figuring out which deduction to you use. Usually, you just take the biggest…except when you don’t.

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 It doesn’t always come down to picking the biggest.  In most cases, it will. There are a couple of other items to keep in mind though.  If your filing status is married filing separately, you are required to use the same deduction method as your spouse.  You both have to either take the standard deduction or itemize.  You can’t split.  Another item to consider is state tax filings.  In some instances, it could provide a better combined federal and state result to take a lower itemized deduction on the federal return so that you can take a larger itemized deduction on the state return.  States generally follow IRS guidelines, but individual state standard deductions vary greatly, and they often have different thresholds for limitations on itemized deductions.

The IRS has tools to help you in calculating your itemized deductions and most tax softwares will help you optimize which is best on the federal return.  

Summary

Here is a quick checklist to help you in your decision:

Filing Status – to determine the amount of your standard deduction

Information for potential itemized deductions: 

Form 1098 for mortgage interest and maybe real estate taxes

W-2 for State income taxes paid

Documentation for major charitable deductions

How does your state standard deduction or itemized deduction vary from the federal?

There is your basic primer on taking the standard deduction or choosing to itemize.  As always, this is a blog post and not intended to be considered tax advice.  Taxes are highly dependent on your own personal situation and this post is just to point you in the right direction.  Please consult and engage with a tax professional for recommendations regarding your own personal specific circumstances.

Until next time…

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I hate The State Income Tax Deduction Cap and How to Kick it to the Curb

Alright faithful reader, this post is in the tax weeds a little bit but worth your time.  One of the most discussed and impactful tax changes that came about in the Tax Cuts and Jobs Act (TCJA) from 2018, came in the form of limiting the itemized deduction that tax payers could claim on a personal return for state income taxes paid.  You may be saying “TGHA (that’s me), what in the world are you talking about?”

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Prior to 2018, taxpayers who paid state income taxes were allowed to take an itemized deduction on Schedule A for those taxes as well as some others, such as property taxes.  This greatly benefited residents in states that assess a high state income tax in addition to the Federal income tax ( cough, California & New York, cough, cough).  The TCJA changed all of that.  It placed a cap on the deduction of state taxes of nearly all types to $10,000.  Immediate uproar ensued from the states accustomed to the old ways of financing their state budgets at the expense of the federal government.  That’s harsh but true from a certain point of view

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Now residents of these states would be unable to deduct these high taxes, effectively increasing taxes on residents of states that charge their residents a high price for the privilege of residing there.

So that is the state of things here in 2024.  The state tax cap is in effect. All taxpayers have a capped deduction at $10,000 regardless of how much income tax or property tax you pay.  Now, the important part, what can you do about it?

The first and most obvious thing – MOVE.  This isn’t a cute acronym.  Many US citizens are moving from high tax states to lower tax states.  Some have taken to calling themselves “Tax Refugees”.  An option that is always on the table is picking up your home and moving somewhere less expensive.  This can be real dollars.  If you move from a state with an upper rate of 13% to a state with no income tax, this is huge boost to your standard of living.  Here at TGHA, we strive to pay as little tax as we are legally allowed.  Relocation helps reduce tax at a personal level and it holds law makers accountable to the legislation that pass instituting theses taxes.  Check out these stories here to see how effective relocation can be.

Many times, taxpayers can’t move for one reason or another.  What else can you do?  Most states have now offer a work around of the state tax cap for individuals who own a partnership or S Corporation.  It is common referred to as the “Pass Through Entity” Tax (PTE).

Most states have recently passed legislation allowing owners of a partnership or S Corporation to pay the personal state income tax liabilities of the shareholders, out of the business account and have the business take the deduction from income for those taxes.  This shifts the state income tax from being a personal expense of the shareholder to a business expense, where there is no cap on state income taxes.  The tax expenses reduce the amount of income that “passes-through” to the shareholders (accountants aren’t the most creative when titling things) effectively providing a state income tax deduction that would otherwise be capped if the same shareholder attempted to deduct these taxes on their personal return instead. We could walk through a numerical example at this point, but I don’t want your eyes to glaze over if you have stuck with me so far. 

If you own an S Corp, partnership, or LLC and aren’t taking advantage of this, ask your accountant why not? Don’t be mean about it, accountants are mostly good people.  Also, if you tell them you heard about it on the internet, they will immediately think you mean TikTok, and then look at you suspiciously.  There is a lot of less than reputable info floating around out there. 

Thanks for reading.  Drop a note in the comments below.  Until next time…

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Estimated Tax Payments: What are they and How to be sure you aren’t behind?

One question that I get a lot from clients relates to confusion regarding estimated taxes. I get this question most often from taxpayers who have been employees for most of their careers and for whatever reason find themselves self-employed, either full-time or by just having a side gig.

Generally the questions fall around: “Do I have to pay quarterly estimates?”, “When are they due?”, and “How much do I have to pay?”

I’m going to lay down a “brief” primer on estimated taxes and why, primarily self-employed people, have to pay them.

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The Feds require all taxpayers to pay in both Income Tax and FICA taxes throughout the year as you earn your income.  Taxpayers who are classified as employees (those that work for “the man”) have both of these taxes withheld by their employer before they ever get paid .

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This is a pretty crazy development that we accept as the governed in that you agree to work with an employer for money and before you even receive it, the government carves out their share first.  I don’t want to stand too long on this soap box. So, employees have their taxes withheld and remitted to the government by their employer every pay period, generally.

For those who are self-employed, the government does not yet have a practical way to get their hands on the funds nor appropriately assess how much to withhold since self-employed taxpayers pay tax on their net income (income after expenses) rather than their gross income (cash that comes in the door).  Since self-employed taxpayers don’t have withholdings they are required to make tax payments every quarter for what they expect to owe. This is how we get the term “Quarterly Estimated Tax Payments”.  

Taxpayers are required to reasonably estimate how much tax they think they will owe when filing a tax return after the year closes.  Again this process is more difficult for a self-employed person rather than the employee.  A self-employed taxpayer may know how much gross income they have in a quarter, but the net income may be completely different depending on what expenses they incurred to generate that income.  These expenses reduce the amount of income they are required to pay tax on.  FICA taxes complicate matters further.  For employees, the FICA tax responsibility is shared between the employee and the employer, with each group remitting half of the tax.  In reality, the employee bares the cost of the full tax, they just don’t feel it. Therefore it is accepted.  One half of the tax is paid through direct withholding of the employee’s wages, the other half is indirectly paid by the employee in the form of suppressed gross wages that they never see because it is a cost of employment to the company. This unseen half is remitted to the Feds by the employer.   For the self-employed, they are directly responsible for both the employee and employer portions and this is reported to the IRS annually as a part of their income tax return. 

Since knowing what you are going to earn on a net basis may be difficult to predict, the IRS “offers” what are referred to as “safe harbor” calculations whereby, if you pay these safe harbors amounts, you will not be assessed any penalties for the underpayment of tax, even if you owe when you file your tax return.

The most commonly used safe harbor is related to the prior year tax.  If your adjusted gross income (a tax return calculation) is less than $150,000, then as long as your estimated tax payments total at least 100% of the tax owed in the prior year, you will not be assessed a penalty for underpayment of tax, even if you owe $1,000,000.  If your AGI for the prior year is over $150,000, then you have to pay 110% of the prior year tax to be eligible for this safe harbor.

The other safe harbor is much more subjective.  You have to pay in 90% of the tax for the current year to avoid penalties for underpayment of tax.

So, when are your quarterly taxes due?

Payments are due to be sent by calendar year taxpayers (most everyone) on the following schedule:

April 15th

June 15th

September 15th

January 15th (following year)

These dates are adjusted forward if they happen to fall on a holiday or weekend.

Underpayment penalties are assessed on a daily basis, for each day and amount of tax that you are underpaid.  When you file your return, the IRS generally assumes that you earned your income steadily throughout the year.  If you have a highly seasonal business where the bulk of your earnings occurs in the 3rd or 4th quarter, you can fill out the schedule as part of the Form 2210 for calculating underpayment penalties.  This will tell the IRS, “Hey, I didn’t earn my income evenly and I’m not underpaid.”

Still with me?

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I hope this helps you keep up with your tax payments when you start your own business or even a side hustle.  When you want more info on tax impacts of side hustles check out my prior post  HERE

Leave your tax questions or a personal story about estimated taxes down in the comments below.  We will what kind of future post I can cook to answer them.  Thanks for reading!

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New IRS Direct File – Should You Try It?

The IRS is rolling out a new filing option for taxpayers being dubbed “Direct File”.

In a nutshell, the program claims to offer taxpayers the ability to directly file their tax return with the IRS using an application provided by the IRS itself, at no cost to the taxpayer.  In this first year (2023), the program is only open to taxpayers in 12 states, primarily those that either don’t have a state income tax or those that have a similar option available for the state tax returns that need to be filed. IRS Direct File

At first glance, this seems like a pretty simple win for both parties involved, taxpayers have their tax return filed at no cost to them, and the Service has a tax return that it prepared delivered directly to it, in theory cutting down on non-filing as well as accuracy related issues.  But whether this is a good development requires a little more careful consideration.

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The IRS has for a long time now wanted to develop this capability.  The question is why?  On the surface, it claims to be a benefit for taxpayers but the IRS has, for quite awhile, offered free file options to taxpayers who meet particular requirements.  The free file program is a public-private partnership in which the IRS connects taxpayers to private service providers where they can file their tax return.  Per the IRS website, their goal is to connect taxpayers with private companies who are the best at what they do.  If that is the case, why does the government need to spend millions of dollars to accomplish the same thing?  Another possibility would be that by not funding the free file program, the government might save some money.  But when has the government ever really been concerned about saving money?

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Another reason that I’m not gung-ho on the IRS filing system is that I have interacted with varying levels of IRS representatives for the past decade plus some.  The general public has the tendency to assume that the IRS knows the tax rules since they are tasked with assessing and collecting taxes from The People.  This is not an accurate assumption in my experience.  From arguing with agents over application of tax law to just sorting through minor discrepancies, I will tell you the IRS is not always right.  For instance, if you go long enough without filing a tax return when you should have, the IRS will file a return on your behalf referred to as a Substitute for Return.  In my career, I have never seen a Substitute for Return filed where I agreed with the tax assessment.  Admittedly part of this is due to the IRS having limited information, but nonetheless, you never want to blindly accept a Substitute for Return.  I have concerns that the new Direct File system will look closer to the Substitute for Return system rather than a return prepared via a tax professional’s software.

This also brings me to a related point.  It seems to me there is a strong conflict of interest in having the organization charged with collecting tax also preparing the return telling you how much you owe them, as though you were audited.  By including a 3rd party in to the mix, now you have a knowledgeable advocate helping your prepare a return in compliance with the law but also striving to make sure the tax assessment is accurate and as low as possible.  The IRS is more or less charged with collecting as much tax as it can, putting it at direct odds with the taxpayer.  They have no incentive to ensure the taxpayer has maximized the deductions and credits available to them nor does the average taxpayer have much knowledge about tax to hold the IRS accountable if it doesn’t.  The situation doesn’t set up to be taxpayer friendly. As you can see, I’m not a huge fan of the New Direct file system, partly based on my biased prior experience, but as George Clooney once said, “That doesn’t mean that I’m wrong”

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The Direct File program appears to fill a void that doesn’t really seem to exist.  Some people have a term for this: pointless. Something can be pointless and people still use it (I’m looking at you throw pillows), but I won’t be using the Direct File system anytime soon.

If you have a tax question or disagree with me entirely, Great!  Leave me a note in the comments.  I’ll try answering the common questions in a later post.

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3 Simple Ideas to Prevent your Side Hustle from Being a Tax Debacle

It seems everyone is looking for a little extra cash these days, particularly with the price of gas going up just a tick.

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One common option people are turning toward is the side hustle, taking underutilized skills or time outside of their day job and generating some extra cash. 

Having some extra cash is great, but at some point, you get around to the question: do I have to pay taxes on my side hustle money?

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Survey Says – Yes, its taxable.  That is the IRS default position on most income.  As an example and not an idea endorsed here, the IRS maintains that even income derived from illegal activities is still subject reporting and income tax.  The number one story told to all accountants in every fraud course, is that it was the accountants who took down Al Capone for tax evasion on his illegally earned income, not the actual racketeering or murder.  

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So 3 things we are going go over today:

Income and Expense Tracking
Self-Employment Tax
Tax Form Reporting

I will sell you the whole seat, but all you will need is the edge.

Income and Expense Tracking. Reporting income from a side hustle is different than dealing with income you may receive from a job where you are employee.  You will need to have a method for keeping up with payments you receive from you customers, even if it as simple as a piece of paper.  Sometimes, it is easy and done digitally, like for Uber drivers, but at the end of the day you are responsible for reporting all of your income.  If your side hustle is service related and you collect $600 or more from a single customer, that customer is required to send you a form 1099-NEC (Non-Employment Compensation).  This will aid in helping you, but it will still be your responsibility. 

On the flip side, you need a method to keep track of your expenses.  Possible options could be as simple as paper or Excel, or there are numerous, easy to use accounting software packages to help you.  (If you sell an accounting software and would like to sponsor this post, I am accepting sponsorships.) Keeping track of your expenses is extremely important as they will help minimize your tax burden.  Have you ever heard the term “write off”?  This is what that is. 

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Self-Employment Tax.  Income from side hustles falls into a different category of income than employment income.  Side hustle income that we are talking about here is generally going to be considered self-employment income.  Rather than being employed by a company that hires you as an employee, you are working for yourself.  All businesses large and small are required to pay taxes based on the wages paid to their employees.  These taxes go to fund Social Security and Medicare programs and are equal to 15% of your wages, up to various limits.  I’m not going to bore you with limit discussions here but they exist.  When you are an employee, this 15% tax is shared by you and the company you work for.  The piece you pay directly is withheld from your paycheck and then company pays their other half to the IRS .  When you are self-employed, you have to pay both side of the tax, out of the gross income you have collected from your customers.  We could go into a discussion about how you really pay both sides of the tax as employee as well, via a reduced gross salary to account for your true cost of employment by the company but that is a soapbox for another day.  Long story, but the self-employment tax can feel like a big bite of your earnings.  The good news is that is it calculated on you net income (gross income minus expense) rather than your gross income.  This is where those expenses come in handy we mentioned earlier.

Reporting.  If you haven’t set up an organized company (See here for more on that), you will need to file a Schedule C with your income tax return.  The Schedule C reports both your gross income and expenses while calculating your net taxable income. You will pay both income tax and self-employment tax based on the net income from your Schedule C.  When you get paid from a company as employee, you most often have your all of your taxes withheld, both income and employment, before you ever even get paid. With Side hustle money, nothing has been withheld.  This will unfortunately make your end of the year tax bill higher.  A good rule of thumb in order to make sure you have some money set aside to pay your taxes at the year-end is to save about 25% of your gross income, until you have a good idea how much tax you have to pay.

Side hustles are great way to earn some additional cash, especially with companies like Uber, Door Dash, and other gig economy based apps in the marketplace.  Even sites like Etsy are helping people use their skills to create fun unique items and bring them to a bigger market.  Being prepared to deal with potential issues, like taxes, before they become a problem, will make that extra cash even better, rather than it becoming a big headache come filing season.  Until next time: 

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Unrealized Gain – Why taxing them is a terrible idea

Recently, an idea has been proposed by our political “leaders” (cough, overlords, cough) that the unrealized capital gains of “billionaires” should be subject to a minimum level of income tax because they “aren’t paying their fair share” on these record levels of profits. See Comments by Secretary Yellen. Today class, we are going to be discussing why this is a bad idea and complete

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As everyone who wants money knows, the best place to get money is from those that already have it. And who has so much money that they don’t even notice the Benjis falling out of their pockets? Billionaires.  Problem and solution, right? What’s the big deal?  This article is going to, at first glance, come off like I’m trying to protect billionaires, who admittedly have a lot people smarter than I am to do that, but as you will see, I’m talking about issues that affect all of us.  Also, in an effort to be honest with my tens of faithful readers, full disclosure, I am not a billionaire.

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If any of you feel very strongly about rectifying this, you can Venmo me at #accountantsneedmoneytoo.

Since I don’t have much faith in our public school system, we are first going to discuss a few terms we will be using quite a bit so that we all have a working knowledge in common.  We will be talking about capital gains in this article and there categories of them – unrealized, realized, and recognized.  Unrealized gains occur when the value of an asset, whether it be a publicly traded stock, piece of real estate, business interest or piece of art, increases in value above what you bought that asset for plus any additional expenses incurred in maintaining it.  Your cost plus expenses is called basis. The difference between the increased value of the asset and your basis is the unrealized gain.   For example, if you bought a house 10 years ago for $250,000 and then you added a sweet fire pit and pool to the back yard, for $100,000.  Your basis is now $350,000.  Since our real estate market is white hot (for now), if an appraiser says your property is now worth $2,000,000, you would have an unrealized gain of $1,650,000 but not have any actual cash in your hands.

Realized gains and recognized gains often occur together but not necessarily.  A realized gain occurs when you actually sell that house and get cash (or other property) in your pocket.  Say you only sell it for $1,800,000.  Your realized gain is $1,450,000.  Your recognized gain is what you have to tax on after your gain is realized.  If you read a great blog post like this one: Sell your house and pay $0 tax, your recognized gain to calculate tax on would only be $950,000.  The proposed tax change seeks to collapse these categories and have just the unrealized gain of $1,650,000 be taxable. 

Why it is a bad idea

Fluctuating Nature of Value. One of the main reasons recognized gain is tied to the realization of gain is that realization of gain defines the value by converting your asset into dollars, generally.  Assets are only worth what another buyer is willing to pay and until you actually transfer the asset, that value is subject to fluctuation. 

We all know that stock values go up and down based general economic factors as well as circumstances specific to each company, real estate prices continuously fluctuate, and interest in a private business can change depending on a wide variety of factors.  How would the fluctuating value of the assets affect payment of the tax from year to year?  If the value of your asset goes down but you paid tax based on the value 12 months ago, are you able to request a refund the next year?

Another reason recognized gain (taxable gain) is tied with realized gain is that you actually have a liquid, trade-able asset (cash) to pay the tax, rather than something that may be without a ready market, like real estate.  If tax is calculated on your unrealized gain, you don’t have a way to pay the tax since all of the value is still locked in the asset.  This sounds like a great deal either for banks for financing or transactions markets as it could force liquidation of the very asset for the which you are paying tax.   

Not applicable to just billionaires. This “billionaire” tax isn’t applied to just billionaires, even though, if it was, I would still have an issue with it.  The tax would be applied to anyone worth $100 million dollars.  I get it, these folks aren’t hurting for cash either, but calling it a billionaire tax and applying it to people with 10% of that level wealth is at best disingenuous and seems like an out right lie to make the public OK with the law.  On to the next point. 

Trickle down effects.  Not talking about the economic effects on this one.  This blog is about tax.  Did you know our current income taxing system when it was ratified in 1913 (let’s not even bring up the income tax during the Civil War) was designed to “force the wealthy to take a on a fairer share of the federal tax burden”?  Less than 4 percent of American families made an annual income of $3,000 or more, the floor to even be eligible for the tax1.  After deductions permitted, the pool of taxpayers was even smaller.  Does this sound like anything you may have heard of?   As we know it now, the general income tax affects at least 50% of American households.  Our government has an incredibly poor history of instituting a tax under the guise that it will only affect a few and then expanding it once it is passed.  See nearly every federal tax currently in existence.  It seems foolhardy to expect that this tax would stay limited to the “few who need to pay their fair share”.  If this is your expectation, History would like a word.

Establishing Value.  Establishing value and basis in order to calculate these unrealized gains will be annual valuation headaches at best and nightmares at worst.  Sure, some things like a publicly traded stock are easier to determine value, but what about the other component, the basis?  For some stocks it will be quite simple, but for others, who maybe were owned privately before being taken public, have been paid in various types of restricted stock options or other types transaction, establishing basis can be involved.  What about business interests that aren’t publicly traded.  Will annual valuations by qualified professionals be required? Same for real estate and collectibles.  Will annual appraisals of theses assets be necessary to determine the fair market value each year?  Will basis be increased since tax has been paid on the gain moving forward?  These are accounting questions primarily (adjusts nerd glasses) but they can get expensive and time consuming very quickly.

How does the Government know.  I saved this point for last but considered putting it first.  How does the Federal Government know who the $100 millionaires are?  Sure, some investments are required to be disclosed to regulatory agencies, but not nearly all of them.  Currently, the IRS is privy to primarily income documentation and reporting since that is what our tax is based on.  Sure, income can give you an idea of who might be liable for the tax, but it has little to do with unrealized gains. That is the entire reason the government has proposed this idea in the first place.  Will all taxpayers be required to assert that they are not liable for this tax via disclosure of their asset holdings and values?  Will the IRS actively be reviewing this treasure trove of new data?  They are limited in their ability to audit as it is.  This would seem like a huge invasion of privacy of every tax payer in order to assess a tax that will initially be levied on less than 1% of Americans.  These actions fall right in line with the previous proposal of requiring banks to report all transaction in excess of $600 to the government.  That went over really well. 

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The Federal Government was designed to have limited ability to invade the privacy of the individual.  The income tax already provides a greater window than many would like.  This new unrealized gain tax would bust down the wall like the Kool-Aid man demanding that you give him your data.

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So this ended up a pretty long post:  In summary, it’s a bad idea for the following reasons:

  1. Fluctuating asset values and liquidity to pay the tax
  2. Not just billionaires
  3.  Trickle down effects
  4. Establish value headaches
  5. Huge privacy issues

For a shorter summary, see comments by Iceman.

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