Individual Tax Tips Archives

Tag Archive for: Individual Tax Tips

What families need to know about the new tax law

July 24, 2025/in News, Tax Tips - Individual/by Betty Kim

When it comes to family, we do everything we can for the people we love. And let’s be real—raising a family today isn’t cheap. I have two teenage daughters in international sports, and they’ve been breaking me (financially and otherwise!). Between childcare, education, medical expenses, and just everyday life, the costs add up fast. That’s why smart planning isn’t optional anymore—it’s essential.

The new tax law, known as the One, Big, Beautiful Bill Act, brings several updates designed to help families do exactly that—save more, plan ahead, and take advantage of what’s available. Whether you’re adopting, maximizing your Child Tax Credit, or looking into the new “Trump Account” savings tool, these changes are worth understanding.

Here’s a breakdown of what’s new and how it could impact your family’s tax picture.

Adoption credit enhanced

Parents who adopt may be eligible for more generous tax relief. Under current law, a tax credit of up to $17,280 is available for the costs of adoption in 2025. The credit begins to phase out in 2025 for taxpayers with modified adjusted gross income (MAGI) of $259,190 and is eliminated for those with MAGI of $299,190 or more.

If you qualify, the adoption credit can reduce your tax liability on a dollar-for-dollar basis. This is much more valuable than a deduction, which only reduces the amount of income subject to tax.

What changed?

Beginning in 2025, the OBBBA makes the adoption tax credit partially refundable up to $5,000. This means that eligible families can receive this portion as a refund even if they owe no federal income tax. Previously, the credit was entirely nonrefundable, limiting its benefit to families with sufficient tax liability. The refundable amount is indexed for inflation but can’t be carried forward to future tax years.

Child Tax Credit increased, and new rules imposed

Beginning in 2025, the OBBBA permanently increases the Child Tax Credit (CTC) to $2,200 for each qualifying child under the age of 17. (This is up from $2,000 before the law was enacted). The credit is subject to income-based phaseouts and will be adjusted annually for inflation after 2025.

The refundable portion of the CTC is made permanent. The refundable amount is $1,700 for 2025, with annual inflation adjustments starting in 2026.

The MAGI phaseout thresholds of $200,000 and $400,000 for married joint-filing couples are also made permanent. (However, these thresholds won’t be adjusted annually for inflation.)

Important: Starting in 2025, no CTC will be allowed unless you report Social Security numbers for the child and the taxpayer claiming the credit on the return. For married couples filing jointly, a Social Security number for at least one spouse must be reported on the return.

Introduction of Trump Accounts

We’re still in the early stages of learning about this new type of tax-advantaged account but here’s what we know. Starting in 2026, Trump Accounts will offer some families a way to save for the future. An account can be set up for anyone under age 18 at the end of the tax year who has a Social Security number.

Annual contributions of up to $5,000 (adjusted annually for inflation after 2027) can be made until the year the child turns 18. In addition, U.S. citizen children born after December 31, 2024, and before January 1, 2029, with at least one U.S. citizen parent, may potentially qualify for an initial $1,000 government-funded deposit.

Contributions aren’t deductible, but earnings grow tax deferred as long as they’re in the account. The account generally must be invested in exchange-traded funds or mutual funds that track the return of a qualified index and meet certain other requirements. Employers may make contributions to Trump accounts on behalf of employees’ dependents. Withdrawals generally can’t be taken until the child turns age 18.

Even more changes

Here are three more family-related changes:

The child and dependent care credit. This credit provides parents a tax break to offset the cost of child care when they work or look for work. Beginning in 2026, there will be changes to the way the credit is calculated and the amount of income that parents can have before the credit phases out. This will result in more parents becoming eligible for the credit or seeing an increased tax benefit.

Qualified expenses for 529 plans. If you have a 529 plan for your child’s education, or you’re considering starting a plan, there will soon be more opportunities to make tax-exempt withdrawals. Beginning in 2026, you can withdraw up to $20,000 for K-12 tuition expenses, as well as take money out of a plan for qualified expenses such as books, online education materials and tutoring. These withdrawals can be made if the 529 plan beneficiary attends a public, private or religious school.

Sending money to family members in other countries. One of the lesser-known provisions in the OBBBA is that the money an individual sends to another country may be subject to tax, beginning in 2026. The 1% excise tax applies to transfers of cash or cash equivalents from a sender in the United States to a foreign recipient via a remittance transfer provider. The transfer provider will collect the tax as part of the transfer fee and then remit it quarterly to the U.S. Treasury. Transfers made through a financial institution (such as a bank) or with a debit or credit card are excluded from the tax.

What to do next

These and other changes in the OBBBA may offer substantial opportunities for families — but they also bring new rules, limits and planning considerations. The sooner you start planning, the better positioned you’ll be. Contact us to discuss how these changes might affect your family’s tax strategy.

Spousal IRAs: A smart retirement strategy for couples

July 9, 2025/in News, Tax Tips - Individual/by Betty Kim

Have you wondered if your spouse can still save for retirement even if they’re not bringing home a paycheck? Good news — they totally can!

Thanks to something called a spousal IRA, couples can keep growing retirement savings for both partners, even if just one is earning an income. It’s a smart (and often overlooked) way to keep your long-term financial goals on track together.

Let’s break it down and see why this could be a win for your future selves.

A spousal IRA isn’t a separate type of account created by the IRS, but rather a strategic use of an existing IRA. It allows a working spouse to contribute to an IRA on behalf of their non-working or low-income spouse. The primary requirement is that the couple must file a joint tax return. As long as the working spouse earns enough to cover both their own contribution and that of their spouse, both partners can take advantage of the retirement savings benefits offered by IRAs.

Amount you can contribute

For 2025, the contribution limit for both traditional and Roth IRAs is $7,000 per person under the age of 50. Those aged 50 or older can put away an additional $1,000 as a catch-up contribution, for a total of $8,000. This means that a married couple can potentially contribute up to $14,000 (or $16,000 if both are eligible for catch-up contributions) into their respective IRAs, even if only one spouse has earned income.

The main advantage of a spousal IRA lies in its ability to equalize retirement savings opportunities between spouses. In many households, one spouse may have taken time off from paid work to raise children, care for an elderly family member or pursue other responsibilities. Without earned income, that spouse would traditionally be excluded from contributing to a retirement account. A spousal IRA changes that by allowing the working spouse to fund both accounts, helping both partners accumulate tax-advantaged savings over time.

Income limits

Spousal IRAs can be opened as either traditional or Roth IRAs, depending on the couple’s income and tax goals. Traditional IRAs offer the possibility of a tax deduction in the year the contribution is made, though this is subject to income limits, especially if the working spouse is covered by a workplace retirement plan. On the other hand, Roth IRAs are funded with after-tax dollars, so they don’t offer an immediate tax break, but qualified withdrawals in retirement are tax-free. Couples with a modified adjusted gross income under $236,000 in 2025 can make full contributions to a Roth IRA, with the eligibility phasing out completely at $246,000.

It’s important to note that Roth IRAs aren’t subject to required minimum distributions during the original owner’s lifetime, while traditional IRAs are.

Setting up a spousal IRA is straightforward. The account must be opened in the name of the non-working spouse, and the couple must ensure that contributions are made by the annual tax filing deadline, generally April 15 of the following year. Many financial institutions offer the option to open and fund these accounts online or with the help of a financial advisor.

Plan for financial security

In summary, a spousal IRA is a valuable financial planning tool that can help ensure both partners are saving adequately for retirement, regardless of employment status. With the increased contribution limits in 2025, this strategy is more powerful than ever for couples looking to maximize their long-term financial security. For tailored advice about retirement planning and taxes, contact us to help guide you based on your unique situation.

Milestone moments: How age affects certain tax provisions

July 2, 2025/in News, Tax Tips - Individual/by Betty Kim

Happy 4^th of July! Wishing you a safe and happy Independence Day!

Can’t believe we’re already halfway through 2025—hope you’re enjoying a great summer!

At Encore, we know that age is more than just a number when it comes to tax and financial planning. Whether you’re saving for your kids, navigating mid-career decisions, or planning for retirement, each stage of life brings different opportunities—and different IRS rules.

We tailor our advice to fit your life now and help you prepare for what’s ahead. The article below is a helpful reminder of the tax milestones tied to age. Let us know if you’d like to take a closer look at how they apply to you or your family.

With that in mind, the IRS treats you differently as you move through life, because key tax rules kick in at specific ages. Here are some important age-related tax milestones for you and loved ones to keep in mind as the years fly by.

Ages 0–23: The kiddie tax

The kiddie tax can potentially apply to your child, grandchild or other loved one until age 24. Specifically, a child or young adult’s unearned income (typically from investments) in excess of the annual threshold is taxed at the parent’s higher marginal federal income tax rates instead of the more favorable rates that would otherwise apply to the young person in question. For 2025, the unearned income threshold is $2,700.

Age 30: Coverdell accounts

If you set up a tax-favored Coverdell Education Savings Account (CESA) for a child or grandchild, the account must be liquidated within 30 days after the individual turns 30 years old. To the extent earnings included in a distribution aren’t used for qualified education expenses, the earnings are subject to tax plus a 10% penalty tax. To avoid that, you can roll over the CESA balance into another CESA set up for a younger loved one.

Age 50: Catch-up contributions

If you’re age 50 or older at end of 2025, you can make an additional catch-up contribution of up to $7,500 to your 401(k) plan, 403(b) plan or 457 plan for a total contribution of up to $31,000 ($23,500 regular contribution plus $7,500 catch-up contribution). This assumes that your plan allows catch-up contributions.

If you’re 50 or older at the end of 2025, you can make an additional catch-up contribution of up to $3,500 to your SIMPLE IRA for a total contribution of up to $20,000 ($16,500 regular contribution plus $3,500 catch-up contribution). If your company has 25 or fewer employees, the 2025 maximum catch-up contribution is $3,850.

If you’re 50 or older at the end of 2025, you can make an additional catch-up contribution of up to $1,000 to your traditional IRA or Roth IRA, for a total contribution of up to $8,000 ($7,000 regular contribution plus $1,000 catch-up contribution).

Age 55: Early withdrawal penalty from employer plan

If you permanently leave your job for any reason after reaching age 55, you may be able to receive distributions from your former employer’s tax-favored 401(k) plan or 403(b) plan without being socked with the 10% early distribution penalty tax that generally applies to the taxable portion of distributions received before age 59½. This rule doesn’t apply to IRAs.

Age 59½: Early withdrawal penalty from retirement plans

After age 59½, you can receive distributions from all types of tax-favored retirement plans and accounts (IRAs, 401(k) accounts and pensions) without being hit with the 10% early distribution penalty tax. The penalty generally applies to the taxable portion of distributions received before age 59½.

Ages 60–63: Larger catch-up contributions to some employer plans

If you’re age 60–63 at the end of 2025, you can make a larger catch-up contribution of up to $11,250 to your 401(k) plan, 403(b) plan, or 457 plan. This assumes your plan allows catch-up contributions.

If you’re age 60–63 at the end of 2025, you can make a larger catch-up contribution of up to $5,250 to your SIMPLE IRA.

Age 73: Required minimum withdrawals

After reaching age 73, you generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts (traditional IRAs, SEP accounts and 401(k)s) and pay the resulting extra income tax. If you fail to withdraw at least the RMD amount for the year, you can be assessed a penalty tax of up to 25% of the shortfall. However, if you’re still working after reaching age 73 and you don’t own over 5% of your employer’s business, you can postpone taking RMDs from the employer’s plan(s) until after you retire.

Watch the calendar

Keep these important tax milestones in mind for yourself and your loved ones. Knowing these rules can mean the difference between a smart tax strategy and a costly oversight. If you have questions or want more detailed information, contact us.

Is college financial aid taxable? A crash course for families

June 24, 2025/in News, Tax Tips - Individual/by Betty Kim

As my oldest daughter enters her senior year of high school, our family is stepping into the world of college applications, financial aid, and exploring the growing costs of higher education. It’s been eye-opening to see how competitive the process has become—and how quickly tuition adds up, even for in-state public schools.

The article below offers a helpful overview of how different types of financial aid are treated for tax purposes. College can be expensive—according to the College Board, the average sticker price for tuition and fees at private colleges was $43,350 for the 2024–2025 school year. The average cost for out-of-state students at public colleges was $30,780, and for in-state students, it was $11,610. There are also additional costs for housing, food, books, and other expenses that can quickly add thousands to the total.

Fortunately, a surprisingly high percentage of students at many schools receive at least some financial aid, and your child’s chances may be better than you think. If your child receives financial aid, what are the tax implications? Here’s what you need to know. If you or your family are navigating this stage as well, I hope you find it useful.

The basics

The economic characteristics of what’s described as financial aid determine how it’s treated for federal income tax purposes.

Gift aid, which is money the student doesn’t have to work for, is often tax-free. Gift aid may be called a scholarship, fellowship, grant, tuition discount or tuition reduction.

Most gift aid is tax-free

Free-money scholarships, fellowships and grants are generally awarded based on either financial need or academic merit. Such gift aid is nontaxable as long as:

The recipient is a degree candidate, including a graduate degree candidate.
The funds are designated for tuition and related expenses (including books and supplies) or they’re unrestricted and aren’t specifically designated for some other purpose — like room and board.
The recipient can show that tuition and related expenses equaled or exceeded the payments. To pass this test, the student must incur enough of those expenses within the time frame for which the aid is awarded.

If gift aid exceeds tuition and related expenses, the excess is taxable income to the student.

Tuition discounts are also tax-free

Gift aid that comes directly from the university is often called a tuition discount, tuition reduction or university grant. These free-money awards fall under the same tax rules that apply to other free-money scholarships, fellowships and grants.

Payments for work-study programs are generally taxable

Arrangements that require the student to work in exchange for money are sometimes called scholarships or fellowships, but those are misnomers. Whatever payments for work are called, they’re considered compensation from employment and must be reported as income on the student’s federal tax return. As explained below, however, this doesn’t necessarily mean the student will actually owe any tax.

Under such arrangements, the student is required to teach, do research, work in the cafeteria or perform other jobs. The college or financial aid payer should determine the taxable payments and report them to the student on Form W-2 (if the student is treated as an employee) or Form 1099-MISC (if the student is treated as an independent contractor).

Taxable income doesn’t necessarily trigger taxes

Receiving taxable financial aid doesn’t necessarily mean owing much or anything to the federal government. Here’s why: A student who isn’t a dependent can offset taxable income with the standard deduction, which is $15,000 for 2025 for an unmarried individual. If the student is a dependent, the standard deduction is the greater of 1) $1,350 or 2) earned income + $450, not to exceed $15,000. The student may have earned income from work at school or work during summer vacation and school breaks. Taxable financial aid in excess of what can be offset by the student’s standard deduction will probably be taxed at a federal rate of only 10% or 12%.

Finally, if you don’t claim your child as a dependent on your federal income tax return, he or she can probably reduce or eliminate any federal income tax bill by claiming the American Opportunity Tax Credit (worth up to $2,500 per year for the first four years of undergraduate study) or the Lifetime Learning Credit (worth up to $2,000 per year for years when the American Opportunity credit is unavailable).

Avoid surprises at tax time

As you can see, most financial aid is tax-free, though it’s possible it could be taxable. To avoid surprises, consult with us to learn what’s taxable and what’s not.

The advantages of a living trust for your estate plan

June 5, 2025/in News, Tax Tips - Individual/by Betty Kim

Lately, I’ve found myself attending more funerals than I ever expected at this stage in life — and with that comes a wave of questions from friends, clients, and family about what happens when a loved one passes. It’s emotional, complicated, and often filled with more questions than answers.

One thing that can make a big difference is having a living trust in place. It’s not just about tax savings — it’s about keeping things simple, avoiding probate, and protecting your family’s privacy. This week’s article dives into what a living trust is, how it works, and what pitfalls to avoid.

It’s not just for the ultra-wealthy, and with the estate tax exemption likely changing soon, it may be a good time to revisit your plan.

If this has been on your mind or if you’re not sure where to start, take a moment to read the article below — and let us know if we can help to navigate this with you.

That said, even if you believe you don’t need to worry about estate planning because of the current federal estate tax exemption ($13.99 million per individual or $27.98 million for married couples in 2025), it’s worth thinking again. Even with this substantial exemption, creating a living trust can offer significant benefits, especially if your goal is to avoid probate and maintain privacy.

Here are some answers to questions you may have about this estate planning tool.

What’s a living trust?

A living trust — also known as a revocable trust, grantor trust, or family trust — is a legal entity that holds ownership of your assets during your lifetime and distributes them according to your instructions after your death. Unlike a will, a living trust allows your estate to bypass probate, which is the often lengthy and public court process of settling an estate.

How does a living trust work?

You begin by creating a trust document and transferring ownership of specific assets to the trust. These may include:

Your primary residence,
Vacation properties, and
Valuable personal items like antiques.

You’ll name a trustee to manage and distribute the assets after your death. You can serve as the trustee while you’re alive and legally competent. After that, you may appoint a successor trustee — such as a trusted family member, friend, attorney, CPA, or financial institution.

Because a living trust is revocable, you can amend or cancel it at any time during your lifetime.

What are the tax implications?

For federal income tax purposes, the IRS doesn’t treat the living trust as separate from you while you’re alive. You’ll continue to report all income and deductions from the trust’s assets on your personal tax return.

However, under state law, the trust is recognized as a separate entity. When structured properly, this allows your estate to bypass probate, helping to ensure a more private and efficient distribution of your assets.

Upon your death, assets in the trust are generally included in your estate for federal estate tax purposes. However, any assets passed to a surviving spouse who’s a U.S. citizen qualify for the unlimited marital deduction, which exempts them from estate tax.

It’s also important to note that the current high federal estate tax exemption is set to expire at the end of 2025, unless Congress extends it. Under “The One, Big, Beautiful Bill,” which recently passed the U.S. House of Representatives, the federal gift and estate tax exemption would be increased to $15 million per individual in 2026. This amount would be permanent but annually adjusted for inflation. The bill is now being considered by the Senate. Keep in mind that the pending legislation could change.

Are there any common pitfalls to avoid?

While a living trust is a powerful tool, it’s only effective when properly executed. Here are some common mistakes to avoid:

Outdated beneficiary designations. The beneficiaries named on retirement accounts, life insurance policies, and brokerage accounts override your trust. Make sure your designations align with your overall estate plan.
Jointly owned property. Real estate held as “joint tenants with right of survivorship” automatically passes to the surviving co-owner, regardless of what your trust says.
Failing to transfer assets. Simply creating a trust isn’t enough. You must formally transfer ownership of assets to the trust. Failing to do so means those assets may still be subject to probate.

When is more planning needed?

Although a living trust helps avoid probate, it doesn’t reduce estate or inheritance taxes. If your assets exceed the current exemption or if state estate taxes apply, additional strategies (such as irrevocable trusts, charitable giving, or gifting) may be necessary.

Not a one-size-fits-all solution

A living trust is an estate planning tool that can simplify the transfer of your assets, protect your privacy, and avoid probate. However, it’s not a one-size-fits-all solution. To make the most of your estate plan and stay ahead of changing tax laws, consult with us or an estate planning attorney.

Digital assets and taxes: What you need to know

May 28, 2025/in News, Tax Tips - Individual/by Betty Kim

As your trusted CPA, I want to highlight that digital assets have become a major focus area for IRS enforcement. We’ve recently seen a noticeable rise in IRS notices targeting clients who either overlooked reporting digital asset transactions or inaccurately reported them. Accurate and thorough reporting is now more critical than ever.

Remember, transactions involving digital assets—including cryptocurrencies, stablecoins, and NFTs—must be carefully documented and reported. Common reportable events include selling or exchanging digital assets, receiving them as payment, and converting them into cash.

Encore Partners LLP has successfully managed several cases involving digital assets, helping clients navigate complexities and correct reporting errors, thus minimizing potential penalties.

If you’ve participated in digital asset transactions and have questions or concerns about compliance or reporting requirements, please contact us directly.

For comprehensive guidance on digital asset reporting and staying compliant with IRS guidelines, see the detailed information below.

The definition of digital assets

Digital assets are defined by the IRS as any digital representation of value that’s recorded on a cryptographically secured distributed ledger (also known as blockchain) or any similar technology. Common examples include:

Cryptocurrencies, such as Bitcoin and Ethereum,
Stablecoins, which are digital currencies tied to the value of a fiat currency like the U.S. dollar, and
Non-fungible tokens (NFTs), which represent ownership of unique digital or physical items.

If an asset meets any of these criteria, the IRS classifies it as a digital asset.

Related question on your tax return

Near the top of your federal income tax return, there’s a question asking whether you received or disposed of any digital assets during the year. You must answer either “yes” or “no.”

When we prepare your return, we’ll check “yes” if, during the year, you:

Received digital assets as compensation, rewards or awards,
Acquired new digital assets through mining, staking or a blockchain fork,
Sold or exchanged digital assets for other digital assets, property or services, or
Disposed of digital assets in any way, including converting them to U.S. dollars.

We’ll answer “no” if you:

Held digital assets in a wallet or exchange,
Transferred digital assets between wallets or accounts you own, or
Purchased digital assets with U.S. dollars.

Reporting the tax consequences of digital asset transactions

To determine the tax impact of your digital asset activity, you need to calculate the fair market value (FMV) of the asset in U.S. dollars at the time of each transaction. For example, if you purchased one Bitcoin at $93,429 on May 21, 2025, your cost basis for that Bitcoin would be $93,429.

Any transaction involving the sale or exchange of a digital asset may result in a taxable gain or loss. A gain occurs when the asset’s FMV at the time of sale exceeds your cost basis. A loss occurs when the FMV is lower than your basis. Gains are classified as either short-term or long-term, depending on whether you held the asset for more than a year.

Example: If you accepted one Bitcoin worth $80,000 plus $10,000 in cash for a car with a basis of $55,000, you’d report a taxable gain of $35,000. The holding period of the car determines whether this gain is short-term or long-term.

How businesses handle crypto payments

Digital asset transactions have their own tax rules for businesses. If you’re an employee and are paid in crypto, the FMV at the time of payment is treated as wages and subject to standard payroll taxes. These wages must be reported on Form W-2.

If you’re an independent contractor compensated with crypto, the FMV is reported as nonemployee compensation on Form 1099-NEC if payments exceed $600 for the year.

Crypto losses and the wash sale rule.

Currently, the IRS treats digital assets as property, not securities. This distinction means the wash sale rule doesn’t apply to cryptocurrencies. If you sell a digital asset at a loss and buy it back soon after, you can still claim the loss on your taxes.

However, this rule does apply to crypto-related securities, such as stocks of cryptocurrency exchanges, which fall under the wash sale provisions.

Form 1099 for crypto transactions

Depending on how you interact with a digital asset, you may receive a:

Form 1099-MISC,
Form 1099-K,
Form 1099-B, or
Form 1099-DA.

These forms are also sent to the IRS, so it’s crucial that your reported figures match those on the form.

Evolving landscape

Digital asset tax rules can be complex and are evolving quickly. If you engage in digital asset transactions, maintain all related records — transaction dates, FMV data, and cost basis. Contact us with questions. This will help ensure accurate and compliant reporting, minimizing your risk of IRS penalties.

Filing Status Matters: A Timely Tax Season Reminder

April 2, 2025/in News, Tax Tips - Individual/by Betty Kim

As we dive deeper into tax season, one of the most common — and surprisingly complex — questions we come across is: What’s the right filing status for me?

With life changes like separation, divorce, blended families, or shifts in household dynamics, choosing the correct filing status isn’t always straightforward. And it matters — big time. This filing status topic always comes up. Never a dull moment in tax!

Here’s a quick breakdown of the five IRS filing statuses, with a spotlight on a common area of confusion:

Filing Statuses:

Single – Unmarried and not qualifying for another status.
Married Filing Jointly (MFJ) – Most common for married couples.
Married Filing Separately (MFS) – May make sense in certain situations (e.g., separate finances, liability concerns).
Head of Household (HOH) – For unmarried or “considered unmarried” individuals who support a qualifying person.
Qualifying Surviving Spouse – Available for two years following the year of a spouse’s death (with a dependent child).

Let’s talk Head of Household (HOH) — a common area of confusion:

If you’re legally married, you typically must file MFJ or MFS — not HOH.

However, if you’ve been living apart from your spouse for the last six months of the year, and:

You maintain the household,
Your dependent child, stepchild, adopted child, or foster child lives with you for more than half the year,
You pay more than half of the household expenses,

Then you may be treated as “considered unmarried” and be eligible to file as Head of Household — even if still legally married.

This can offer better tax rates, a higher standard deduction, and access to valuable credits like the Child Tax Credit or Earned Income Credit (EIC).

Every family situation is unique — and we’re here to help make sure your filing status accurately reflects yours. Whether your life looked a little different in 2024 or you’re just not sure where you fit, reach out and let’s take a closer look together.

Working remotely is convenient, but it may have tax consequences

August 28, 2024/in News, Tax Tips - Individual/by Encore Partners Team

Many employees began working remotely during the pandemic and continue doing so today. Remote work has many advantages for employers and employees, and as a result, it’s here to stay in many industries. But it may also lead to some tax surprises, especially if workers cross state lines.

Double taxation may occur

It’s not unusual for employees to work remotely for an employer in another state. For some businesses, remote work has become a permanent arrangement that allows employees to live and work further away from a physical office.

If you live in one state and work remotely for an employer in another state, familiarize yourself with the tax laws in both states and determine how they may affect you. For example, you may need to file income tax returns in both states, which could result in increased — or even double — taxation.

Here’s the problem: A state generally has the power to tax the incomes of people who are domiciled in it as well as people who reside there. Domicile is a state of mind and is often based on a person’s intent to make a location his or her “true, fixed, permanent home.” Residency is based on physical presence in a state for a certain amount of time (typically, 183 days per year).

It’s possible to be domiciled in one state and a resident of another. For example, let’s say you have a permanent home in one state where your job is located and a vacation home in another state. Your employer allows employees to work remotely, so now you spend more than 200 days per year living and working at your vacation home. The state where your permanent home is located considers you to be domiciled there, but the state where your vacation home is located views you as a resident. So you may be subject to taxes on the same income in both states. You could avoid double taxation if one or both states provide credit for tax paid to other states. But your tax bill may still increase if, for example, one state’s income tax rate is significantly higher than the other state’s rate.

Complications for employers

From an employer’s perspective, allowing employees to work remotely may create obligations to withhold and remit income and payroll taxes in several states. Plus, having employees in other states may be sufficient to establish “nexus” with those states, potentially triggering liability for their income, franchise, gross receipts, or sales and use tax. In addition to the expense of tax reporting in multiple states, this may increase an employer’s overall tax liability. There are other complications as well.

Business expense deductions

Under current law, employees generally can’t deduct unreimbursed job-related expenses. Years ago, employees could claim certain costs as miscellaneous itemized deductions, which are deductible to the extent they exceed 2% of adjusted gross income. But those deductions were eliminated for 2018 through 2025.

Remote workers typically aren’t eligible for the home office deduction either. That deduction is generally limited to self-employed business owners. Prior to 2018, employees could claim the deduction if, among other things, they worked at home “for the convenience” of their employers. But that deduction was also eliminated for 2018 through 2025.

Employers may reimburse remote workers for their business expenses according to an “accountable plan” that requires employees to substantiate expenses and meet other requirements. Properly reimbursed expenses are deductible by an employer and excludable from an employee’s income.

Be aware of the consequences

If you’re a remote worker or own a business that employs remote workers, be sure you understand the tax implications. In some cases, you may be able to take steps to minimize them. But even if you can’t, it’s important to know what to expect.

Questions you may still have after filing your tax return

May 11, 2023/in News, Tax Tips - Individual/by Betty Kim

If you’ve successfully filed your 2022 tax return with the IRS, you may think you’re done with taxes for another year. But some questions may still crop up about the return. Here are brief answers to three questions that we’re frequently asked at this time of year.

When will your refund arrive?

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount.

Which tax records can you throw away now?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2019 and earlier years. (If you filed an extension for your 2019 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

Can you still collect a refund for a tax credit or deduction if you overlooked claiming it?

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

Help available all year long

Contact us if you have questions about retaining tax records, receiving your refund or filing an amended return. We’re not just here at tax filing time. We’re here all year long.

Year-end tax planning ideas for individuals

October 28, 2022/in News, Tax Tips - Individual/by Betty Kim

Now that the tax filing season is all behind us and your taxes are filed, it’s a good time to start taking steps that may lower your tax bill for this year and next.

Team Encore is very grateful for your support during yet another brutally demanding tax busy season.

One of the first planning steps is to ascertain whether you’ll take the standard deduction or itemize deductions for 2022. Many taxpayers won’t itemize because of the high 2022 standard deduction amounts ($25,900 for joint filers, $12,950 for singles and married couples filing separately and $19,400 for heads of household). Also, many itemized deductions have been reduced or abolished under current law.

If you do itemize, you can deduct medical expenses that exceed 7.5% of adjusted gross income (AGI), state and local taxes up to $10,000, charitable contributions, and mortgage interest on a restricted amount of debt, but these deductions won’t save taxes unless they’re more than your standard deduction.

Bunching, pushing, pulling

Some taxpayers may be able to work around these deduction restrictions by applying a “bunching” strategy to pull or push discretionary medical expenses and charitable contributions into the year where they’ll do some tax good. For example, if you’ll be able to itemize deductions this year but not next, you may want to make two years’ worth of charitable contributions this year.

Here are some other ideas to consider:

Postpone income until 2023 and accelerate deductions into 2022 if doing so enables you to claim larger tax breaks for 2022 that are phased out over various levels of AGI. These include deductible IRA contributions, child tax credits, education tax credits and student loan interest deductions. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. However, in some cases, it may pay to accelerate income into 2022. For example, that may be the case if you expect to be in a higher tax bracket next year.
If you’re eligible, consider converting a traditional IRA into a Roth IRA by year end. This is beneficial if your IRA invested in stocks (or mutual funds) that have lost value. Keep in mind that the conversion will increase your income for 2022, possibly reducing tax breaks subject to phaseout at higher AGI levels.
High-income individuals must be careful of the 3.8% net investment income tax (NIIT) on certain unearned income. The surtax is 3.8% of the lesser of: 1) net investment income (NII), or 2) the excess of modified AGI (MAGI) over a threshold amount. That amount is $250,000 for joint filers or surviving spouses, $125,000 for married individuals filing separately and $200,000 for others. As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax depends on your estimated MAGI and NII for the year. Keep in mind that NII doesn’t include distributions from IRAs or most retirement plans.
It may be advantageous to arrange with your employer to defer, until early 2023, a bonus that may be coming your way.
If you’re age 70½ or older by the end of 2022, consider making 2022 charitable donations via qualified charitable distributions from a traditional IRA — especially if you don’t itemize deductions. These distributions are made directly to charities from your IRA and the contribution amount isn’t included in your gross income or deductible on your return.
Make gifts sheltered by the annual gift tax exclusion before year end. In 2022, the exclusion applies to gifts of up to $16,000 made to each recipient. These transfers may save your family taxes if income-earning property is given to relatives in lower income tax brackets who aren’t subject to the kiddie tax.

These are just some of the year-end steps that may save taxes. Contact us to tailor a plan that will work best for you.

Tag Archive for: Individual Tax Tips

Get the latest tax and finance news