Disability Income: How Is It Taxed?

Many Americans receive disability income. You may wonder if — and how — it’s taxed. As is often the case with tax questions, the answer is … it depends.

11 03 20 1164644090 ITB 560x292

The key factor is who paid for the benefit. If the income is paid directly to you by your employer, it’s taxable to you as ordinary salary would be. (Taxable benefits are also subject to federal income tax withholding, although depending on the employer’s disability plan, in some cases aren’t subject to the Social Security tax.)

Continue Reading

Taking Distributions From a Traditional IRA

Although planning is needed to help build the biggest possible nest egg in your traditional IRA (including a SEP-IRA and SIMPLE-IRA), it’s even more critical that you plan for withdrawals from these tax-deferred retirement vehicles. There are three areas where knowing the fine points of the IRA distribution rules can make a big difference in how much you and your family will keep after taxes:

11 17 20 1088845606 ITB 560x292

Early distributions. What if you need to take money out of a traditional IRA before age 59½? For example, you may need money to pay your child’s education expenses, make a down payment on a new home or meet necessary living expenses if you retire early. In these cases, any distribution to you will be fully taxable (unless nondeductible contributions were made, in which case part of each payout will be tax-free). In addition, distributions before age 59½ may also be subject to a 10% penalty tax. However, there are several ways that the penalty tax (but not the regular income tax) can be avoided, including a method that’s tailor-made for individuals who retire early and need to draw cash from their traditional IRAs to supplement other income.

Continue Reading

Health Savings Accounts for Your Small Business

Small business owners are well aware of the increasing cost of employee health care benefits. As a result, your business may be interested in providing some of these benefits through an employer-sponsored Health Savings Account (HSA). Or perhaps you already have an HSA. It’s a good time to review how these accounts work since the IRS recently announced the relevant inflation-adjusted amounts for 2021.

11 16 20 1182211245 SBTB 560x292

The Basics of HSAs

For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs.

Continue Reading

Do You Want to Withdraw Cash From Your Closely Held Corporation at a Low Tax Cost?

Owners of closely held corporations are often interested in easily withdrawing money from their businesses at the lowest possible tax cost. The simplest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient, since it’s taxable to you to the extent of your corporation’s “earnings and profits.” And it’s not deductible by the corporation.

11 09 20 872553816 SBTB 560x292

Continue Reading

How Series EE Savings Bonds Are Taxed

Many people have Series EE savings bonds that were purchased many years ago. Perhaps they were given to your children as gifts or maybe you bought them yourself and put them away in a file cabinet or safe deposit box. You may wonder: How is the interest you earn on EE bonds taxed? And if they reach final maturity, what action do you need to take to ensure there’s no loss of interest or unanticipated tax consequences?

11 10 20 1216614297 ITB 560x292

Fixed or Variable Interest

Series EE Bonds dated May 2005, and after, earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.

Continue Reading

Divorcing Couples Should Understand These 4 Tax Issues

When a couple is going through a divorce, taxes are probably not foremost in their minds. But without proper planning and advice, some people find divorce to be an even more taxing experience. Several tax concerns need to be addressed to ensure that taxes are kept to a minimum and that important tax-related decisions are properly made. Here are four issues to understand if you’re in the midst of a divorce.

10 27 20 450225543 ITB 560x292

Issue 1: Alimony or Support Payments. For alimony under divorce or separation agreements that are executed after 2018, there’s no deduction for alimony and separation support payments for the spouse making them. And the alimony payments aren’t included in the gross income of the spouse receiving them. (The rules are different for divorce or separation agreements executed before 2019.)

Continue Reading

New Business? It’s a Good Time to Start a Retirement Plan

If you recently launched a business, you may want to set up a tax-favored retirement plan for yourself and your employees. There are several types of qualified plans that are eligible for these tax advantages:

  • A current deduction from income to the employer for contributions to the plan,
  • Tax-free buildup of the value of plan investments, and
  • The deferral of income (augmented by investment earnings) to employees until funds are distributed

10 26 20 655781780 SBTB 560x292

There are two basic types of plans.

Continue Reading

There May Be Relief From Tax Liability for “Innocent Spouses”

If you file a joint tax return with your spouse, you should be aware of your individual liability. And if you’re getting divorced, you should know that there may be relief available if the IRS comes after you for certain past-due taxes.

10 06 20 666153058 ITB 560x292

What’s “Joint and Several” Liability?

When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full tax amount on the couple’s combined income. That means the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. Liability includes any tax deficiency that the IRS assesses after an audit, as well as penalties and interest. (However, the civil fraud penalty can be imposed only on spouses who’ve actually committed fraud.)

Continue Reading

Homebuyers: Can You Deduct Seller-Paid Points?

Despite the COVID-19 pandemic, the National Association of Realtors (NAR) reports that existing home sales and prices are up nationwide, compared with last year. One of the reasons is the pandemic: “With the sizable shift in remote work, current homeowners are looking for larger homes…” according to NAR’s Chief Economist Lawrence Yun.

09 08 20 134252386 ITB 560x292

If you’re buying a home, or you just bought one, you may wonder if you can deduct mortgage points paid on your behalf by the seller. Yes, you can, subject to some important limitations described below.

Continue Reading

Business Website Costs: How to Handle Them for Tax Purposes

The business use of websites is widespread. But surprisingly, the IRS hasn’t yet issued formal guidance on when Internet website costs can be deducted.

09 21 20 1159783584b SBTB 560x292

Fortunately, established rules that generally apply to the deductibility of business costs, and IRS guidance that applies to software costs, provide business taxpayers launching a website with some guidance as to the proper treatment of the costs.

Continue Reading

Why It’s Important to Plan for Income Taxes as Part of Your Estate Plan

As a result of the current estate tax exemption amount ($11.58 million in 2020), many estates no longer need to be concerned with federal estate tax. Before 2011, a much smaller amount resulted in estate plans attempting to avoid it. Now, because many estates won’t be subject to estate tax, more planning can be devoted to saving income taxes for your heirs.

09 29 20 1269148150 ITB 560x292

While saving both income and transfer taxes has always been a goal of estate planning, it was more difficult to succeed at both when the estate and gift tax exemption level was much lower. Here are some strategies to consider.

Continue Reading

The Easiest Way to Survive an IRS Audit Is to Get Ready in Advance

IRS audit rates are historically low, according to the latest data, but that’s little consolation if your return is among those selected to be examined. But with proper preparation and planning, you should fare well.

10 05 20 1036260604 SBTB 560x292

In fiscal year 2019, the IRS audited approximately 0.4% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, all types of audits are being conducted less frequently than they were a decade ago.

Continue Reading

Tax Implications of Working From Home and Collecting Unemployment

COVID-19 has changed our lives in many ways, and some of the changes have tax implications. Here is basic information about two common situations.

09 15 20 1225941615 ITB 560x292

Working From Home.

Many employees have been told not to come into their workplaces due to the pandemic. If you’re an employee who “telecommutes” — that is, you work at home, and communicate with your employer mainly by telephone, videoconferencing, email, etc. — you should know about the strict rules that govern whether you can deduct your home office expenses.

Continue Reading

What Happens If an Individual Can’t Pay Taxes

While you probably don’t have any problems paying your tax bills, you may wonder: What happens in the event you (or someone you know) can’t pay taxes on time? Here’s a look at the options.

08 18 20 1188221885 ITB 560x292

Most importantly, don’t let the inability to pay your tax liability in full keep you from filing a tax return properly and on time. In addition, taking certain steps can keep the IRS from instituting punitive collection processes.

Continue Reading

Will You Have to Pay Tax on Your Social Security Benefits?

If you’re getting close to retirement, you may wonder: Are my Social Security benefits going to be taxed? And if so, how much will you have to pay?

08 25 20 485008004 ITB 560x292

It depends on your other income. If you’re taxed, between 50% and 85% of your benefits could be taxed. (This doesn’t mean you pay 85% of your benefits back to the government in taxes. It merely that you’d include 85% of them in your income subject to your regular tax rates.)

Continue Reading

5 Key Points About Bonus Depreciation

You’re probably aware of the 100% bonus depreciation tax break that’s available for a wide range of qualifying property. Here are five important points to be aware of when it comes to this powerful tax-saving tool.

08 31 20 1151885486 SBTB 560x292

1. Bonus Depreciation Is Scheduled to Phase Out

Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.

Continue Reading

Back-To-School Tax Breaks on the Books

Despite the COVID-19 pandemic, students are going back to school this fall, either remotely, in-person or under a hybrid schedule. In any event, parents may be eligible for certain tax breaks to help defray the cost of education.

09 01 20 1154631974 ITB 560x292

Here is a summary of some of the tax breaks available for education.

Continue Reading

File Cash Transaction Reports for Your Business — on Paper or Electronically

Does your business receive large amounts of cash or cash equivalents? You may be required to submit forms to the IRS to report these transactions.

07 17 20 1246340606 FTP 560x292 2

Filing Requirements

Each person engaged in a trade or business who, in the course of operating, receives more than $10,000 in cash in one transaction, or in two or more related transactions, must file Form 8300. Any transactions conducted in a 24-hour period are considered related transactions. Transactions are also considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

Continue Reading

Are Scholarships Tax-Free or Taxable?

COVID-19 is changing the landscape for many schools this fall. But many children and young adults are going back, even if it’s just for online learning, and some parents will be facing tuition bills. If your child has been awarded a scholarship, that’s cause for celebration! But be aware that there may be tax implications.

07 28 20 1197075854 ITB 560x292

Scholarships (and fellowships) are generally tax-free for students at elementary, middle and high schools, as well as those attending college, graduate school or accredited vocational schools. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition.

Continue Reading

Why Do Partners Sometimes Report More Income on Tax Returns Than They Receive in Cash?

If you’re a partner in a business, you may have come across a situation that gave you pause. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.

07 27 20 595143658 SBTB 560x292

Why is this? The answer lies in the way partnerships and partners are taxed. Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his share of a partnership’s loss to offset other income.)

Continue Reading

Take Advantage of a “Stepped-Up Basis” When You Inherit Property

 If you’re planning your estate, or you’ve recently inherited assets, you may be unsure of the “cost” (or “basis”) for tax purposes.

07 21 20 1149759432 ITB 560x292

Fair Market Value Rules

Under the fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property equal to its date-of-death value. So, for example, if your grandfather bought ABC Corp. stock in 1935 for $500 and it’s worth $5 million at his death, the basis is stepped up to $5 million in the hands of your grandfather’s heirs — and all of that gain escapes federal income tax forever.

Continue Reading

Even If No Money Changes Hands, Bartering Is a Taxable Transaction

During the COVID-19 pandemic, many small businesses are strapped for cash. They may find it beneficial to barter for goods and services instead of paying cash for them. If your business gets involved in bartering, remember that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

07 20 20 1157891945 SBTB 560x292

For example, if a computer consultant agrees to exchange services with an advertising agency, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there is contrary evidence.

Continue Reading

Conduct a “Paycheck Checkup” to Make Sure Your Withholding Is Adequate

Did you recently file your federal tax return and were surprised to find you owed money? You might want to change your withholding so that this doesn’t happen next year. You might even want to do that if you got a big refund. Receiving a tax refund essentially means you’re giving the government an interest-free loan.

07 14 20 1174414051 ITB 560x292

Withholding Changes

In 2018, the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks. In general, the amount withheld was reduced. This was done to reflect changes under the Tax Cuts and Jobs Act — including an increase in the standard deduction, suspension of personal exemptions and changes in tax rates.

Continue Reading

Steer Clear of the Trust Fund Recovery Penalty

If you own or manage a business with employees, you may be at risk for a severe tax penalty. It’s called the “Trust Fund Recovery Penalty” because it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.

07 06 20 1225729287 SBTB 560x292

Because the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is very aggressive in enforcing the penalty.

Continue Reading

Launching a Business? How to Treat Start-Up Expenses on Your Tax Return

While the COVID-19 crisis has devastated many existing businesses, the pandemic has also created opportunities for entrepreneurs to launch new businesses. For example, some businesses are being launched online to provide products and services to people staying at home.

06 22 20 843748922 SBTB 560x292

Entrepreneurs often don’t know that many expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

Continue Reading

Good Records Are the Key to Tax Deductions and Trouble-Free IRS Audits

If you operate a small business, or you’re starting a new one, you probably know you need to keep records of your income and expenses. In particular, you should carefully record your expenses in order to claim the full amount of the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns if you’re ever audited by the IRS or state tax agencies.

06 15 20 1128491393 SBTB 560x292

Certain types of expenses, such as automobile, travel, meals and office-at-home expenses, require special attention because they’re subject to special recordkeeping requirements or limitations on deductibility.

Continue Reading

More Articles ...