Adoption Tax Break

Adopting a child? Bring home a tax break too

Two tax benefits are available to offset the expenses of adopting a child. In 2022, adoptive parents may be able to claim a credit against their federal tax for up to $14,890 of “qualified adoption expenses” for each child. This will increase to $15,950 in 2023. That’s a dollar-for-dollar reduction of tax.

Also, adoptive parents may be able to exclude from gross income up to $14,890 in 2022 ($15,950 in 2023) of qualified expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are phased out if the parents’ income exceeds certain limits.

Parents can claim both a credit and an exclusion for expenses of adopting a child. But they can’t claim both a credit and an exclusion for the same expenses.

Qualified expenses 

To qualify for the credit or the exclusion, the expenses must be “qualified adoption expenses.” These are the reasonable and necessary adoption fees, court costs, attorney fees, travel expenses (including meals and lodging), and other expenses directly related to the legal adoption of an “eligible child.”

Qualified expenses don’t include those connected with the adoption of a child of a spouse, a surrogate parenting arrangement, expenses that violate state or federal law or expenses paid using funds received from a government program. Expenses reimbursed by an employer don’t qualify for the credit, but benefits provided by an employer under an adoption assistance program may qualify for the exclusion.

Expenses related to an unsuccessful attempt to adopt a child may qualify. Expenses connected with a foreign adoption (the child isn’t a U.S. citizen or resident) qualify only if the child is actually adopted.

Taxpayers who adopt a child with special needs are deemed to have qualified adoption expenses in the tax year in which the adoption becomes final, in an amount sufficient to bring their total aggregate expenses for the adoption up to $14,890 for 2022 ($15,950 for 2023). They can take the adoption credit or exclude employer adoption assistance up to that amount, whether or not they had those amounts of actual expenses.

Eligible child 

An eligible child is under age 18 at the time a qualified expense is paid. A child who turns 18 during the year is eligible for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for him- or herself is eligible, regardless of age.

A special needs child refers to one who the state has determined can’t or shouldn’t be returned to his or her parents and who can’t be reasonably placed with adoptive parents without assistance because of a specific factor or condition. Only a child who is a citizen or resident of the U.S. is included in this category.

Phase-out amounts 

The credit allowed for 2022 is phased out for taxpayers with adjusted gross income (AGI) over $223,410 ($239,230 for 2023) and is eliminated when AGI reaches $263,410 ($279,230 for 2023).

Note: The adoption credit isn’t “refundable.” So, if the sum of your refundable credits (including any adoption credit) for the year exceeds your tax liability, the excess amount isn’t refunded to you. In other words, the credit can be claimed only up to your tax liability.

Get the full benefit

Contact us with any questions. We can help ensure you get the full benefit of the tax savings available to adoptive parents.


Interested in an EV? How to qualify for a powerful tax credit

Sales and registrations of electric vehicles (EVs) have increased dramatically in the U.S. in 2022, according to several sources. However, while they’re still a small percentage of the cars on the road today, they’re increasing in popularity all the time.

If you buy one, you may be eligible for a federal tax break. The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.

Be aware that not all EVs are eligible for the tax break, as we’ll describe below.

The EV definition

For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.

The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit. And Toyota is the latest auto manufacturer to sell enough plug-in EVs to trigger a gradual phase out of federal tax incentives for certain models sold in the U.S.

Several automakers are telling Congress to eliminate the limit. In a letter, GM, Ford, Chrysler and Toyota asked Congressional leaders to give all electric car and light truck buyers a tax credit of up to $7,500. The group says that lifting the limit would give buyers more choices, encourage greater EV adoption and provide stability to autoworkers.

The IRS provides a list of qualifying vehicles on its website and it recently added some eligible models. You can access the list here: https://www.irs.gov/businesses/irc-30d-new-qualified-plug-in-electric-drive-motor-vehicle-credit.

Here are some additional points about the plug-in electric vehicle tax credit:

  • It’s allowed in the year you place the vehicle in service.
  • The vehicle must be new.
  • An eligible vehicle must be used predominantly in the U.S. and have a gross weight of less than 14,000 pounds.

These are only the basic rules. There may be additional incentives provided by your state. If you want more information about the federal plug-in electric vehicle tax break, contact us.

© 2022


The tax obligations if your business closes its doors

Sadly, many businesses have been forced to shut down recently due to the pandemic and the economy. If this is your situation, we can assist you, including taking care of the various tax responsibilities that must be met.

Of course, a business must file a final income tax return and some other related forms for the year it closes its doors. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.

Sole proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax.

Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”

All corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

C corporations. File Form 1120, “U.S. Corporation Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return.

S corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation,” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.

All businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.

Employees and contract workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

Other tax issues

If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.

We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.

We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions.

© 2022


Five tax implications of divorce

Are you in the early stages of divorce? In addition to the tough personal issues that you’re dealing with, 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 five issues to consider if you’re in the process of getting a divorce.

  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.)
  2. Child support. No matter when the divorce or separation instrument is executed, child support payments aren’t deductible by the paying spouse (or taxable to the recipient).
  3. Personal residence. In general, if a married couple sells their home in connection with a divorce or legal separation, they should be able to avoid tax on up to $500,000 of gain (as long as they’ve owned and used the residence as their principal residence for two of the previous five years). If one spouse continues to live in the home and the other moves out (but they both remain owners of the home), they may still be able to avoid gain on the future sale of the home (up to $250,000 each), but special language may have to be included in the divorce decree or separation agreement to protect this tax exclusion for the spouse who moves out.
    If the couple doesn’t meet the two-year ownership and use tests, any gain from the sale may qualify for a reduced exclusion due to unforeseen circumstances.
  4. Pension benefits. A spouse’s pension benefits are often part of a divorce property settlement. In these cases, the commonly preferred method to handle the benefits is to get a “qualified domestic relations order” (QDRO). This gives one spouse the right to share in the pension benefits of the other and taxes the spouse who receives the benefits. Without a QDRO the spouse who earned the benefits will still be taxed on them even though they’re paid out to the other spouse.
  5. Business interests. If certain types of business interests are transferred in connection with divorce, care should be taken to make sure “tax attributes” aren’t forfeited. For example, interests in S corporations may result in “suspended” losses (losses that are carried into future years instead of being deducted in the year they’re incurred). When these interests change hands in a divorce, the suspended losses may be forfeited. If a partnership interest is transferred, a variety of more complex issues may arise involving partners’ shares of partnership debt, capital accounts, built-in gains on contributed property, and other complex issues.

A variety of other issues

These are just some of the issues you may have to deal with if you’re getting a divorce. In addition, you must decide how to file your tax return (single, married filing jointly, married filing separately or head of household). You may need to adjust your income tax withholding and you should notify the IRS of any new address or name change. There are also estate planning considerations. We can help you work through all of the financial issues involved in divorce.

© 2022


The kiddie tax: Does it affect your family?

Many people wonder how they can save taxes by transferring assets into their children’s names. This tax strategy is called income shifting. It seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children.

While some tax savings are available through this approach, the “kiddie tax” rules impose substantial limitations if:

  1. The child hasn’t reached age 18 before the close of the tax year, or
  2. The child’s earned income doesn’t exceed half of his or her support and the child is age 18 or is a full-time student age 19 to 23.

The kiddie tax rules apply to your children who are under the cutoff age(s) described above, and who have more than a certain amount of unearned (investment) income for the tax year — $2,300 for 2022. While some tax savings on up to this amount can still be achieved by shifting income to children under the cutoff age, the savings aren’t substantial.

If the kiddie tax rules apply to your children and they have over the prescribed amount of unearned income for the tax year ($2,300 for 2022), they’ll be taxed on that excess amount at your (the parents’) tax rates if your rates are higher than the children’s tax rates. This kiddie tax is calculated by computing the “allocable parental tax” and special allocation rules apply if the parents have more than one child subject to the kiddie tax.

Note: Different rules applied for the 2018 and 2019 tax years, when the kiddie tax was computed based on the estates’ and trusts’ ordinary and capital gain rates, instead of the parents’ tax rates.

Be aware that, to transfer income to a child, you must transfer ownership of the asset producing the income. You can’t merely transfer the income itself. Property can be transferred to minor children using custodial accounts under state law.

Possible saving vehicles

The portion of investment income of a child that’s taxed under the kiddie tax rules may be reduced or eliminated if the child invests in vehicles that produce little or no current taxable income. These include:

  • Securities and mutual funds oriented toward capital growth;
  • Vacant land expected to appreciate in value;
  • Stock in a closely held family business, expected to become more valuable as the business expands, but pays little or no cash dividends;
  • Tax-exempt municipal bonds and bond funds;
  • U.S. Series EE bonds, for which recognition of income can be deferred until the bonds mature, the bonds are cashed in or an election to recognize income annually is made.

Investments that produce no taxable income — and which therefore aren’t subject to the kiddie tax — also include tax-advantaged savings vehicles such as:

  • Traditional and Roth IRAs, which can be established or contributed to if the child has earned income;
  • Qualified tuition programs (also known as “529 plans”); and
  • Coverdell education savings accounts.

A child’s earned income (as opposed to investment income) is taxed at the child’s regular tax rates, regardless of the amount. Therefore, to save taxes within the family, consider employing the child at your own business and paying reasonable compensation.

If the kiddie tax applies, it’s computed and reported on Form 8615, which is attached to the child’s tax return.

Two reporting options

Parents can elect to include the child’s income on their own return if certain requirements are satisfied. This is done on Form 8814 and avoids the need for a separate return for the child. Contact us if you have questions about the kiddie tax.

© 2022


When inheriting money, be aware of “income in respect of a decedent” issues

Once a relatively obscure concept, “income in respect of a decedent” (IRD) may create a surprising tax bill for those who inherit certain types of property, such as IRAs or other retirement plans. Fortunately, there may be ways to minimize or even eliminate the IRD tax bite.

Basic rules

For the most part, property you inherit isn’t included in your income for tax purposes. Items that are IRD, however, do have to be included in your income, although you may also be entitled to an IRD deduction on account of them.

What’s IRD? It is income that the decedent (the person from whom you inherit the property) would have taken into income on his or her final income tax return except that death interceded. One common IRD item is the decedent’s last paycheck, received after death. It would have normally been included in the decedent’s income on the final income tax return. However, since the decedent’s tax year closed as of the date of death, it wasn’t included. As an item of IRD, it’s taxed as income to whomever does receive it (the estate or another individual). Not just the final paycheck, but any compensation-related benefits paid after death, such as accrued vacation pay or voluntary employer benefit payments, will be IRD to the recipient.

Other common IRD items include pension benefits and amounts in a decedent’s individual retirement accounts (IRAs) at death as well as a decedent’s share of partnership income up to the date of death. If you receive these IRD items, they’re included in your income.

The IRD deduction

Although IRD must be included in the income of the recipient, a deduction may come along with it. The deduction is allowed (as an itemized deduction) to lessen the “double tax” impact that’s caused by having the IRD items subject to the decedent’s estate tax as well as the recipient’s income tax.

To calculate the IRD deduction, the decedent’s executor may have to be contacted for information. The deduction is determined as follows:

  • First, you must take the “net value” of all IRD items included in the decedent’s estate. The net value is the total value of the IRD items in the estate, reduced by any deductions in respect of the decedent. These are items which are the converse of IRD: items the decedent would have deducted on the final income tax return, but for death’s intervening.
  • Next you determine how much of the federal estate tax was due to this net IRD by calculating what the estate tax bill would have been without it. Your deduction is then the percentage of the tax that your portion of the IRD items represents.

In the following example, the top estate tax rate of 40% is used. Example: At Tom’s death, $50,000 of IRD items were included in his gross estate, $10,000 of which were paid to Alex. There were also $3,000 of deductions in respect of a decedent, for a net value of $47,000. Had the estate been $47,000 less, the estate tax bill would have been $18,800 less. Alex will include in income the $10,000 of IRD received. If Alex itemizes deductions, Alex may also deduct $3,760, which is 20% (10,000/50,000) of $18,800.

We can help

If you inherit property that could be considered IRD, consult with us for assistance in managing the tax consequences.

© 2022


Getting a divorce? Be aware of tax implications if you own a business

If you’re a business owner and you’re getting a divorce, tax issues can complicate matters. Your business ownership interest is one of your biggest personal assets and in many cases, your marital property will include all or part of it.

Tax-free property transfers

You can generally divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

Let’s say that under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding periods for the home and the stock would carry over to the person who receives them.

Tax-free transfers can occur before a divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made “incident to divorce.” This means transfers that occur within:

  1. A year after the date the marriage ends, or
  2. Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.

More tax issues

Later on, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).

What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.

Note that the person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.

In addition, the beneficial tax-free transfer rule is now extended to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in a divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.

Plan ahead to avoid surprises

Like many major life events, divorce can have major tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. We can help you minimize the adverse tax consequences of settling your divorce.


Can you deduct charitable gifts on your tax return?

Many taxpayers make charitable gifts — because they’re generous
and they want to save money on their federal tax bills. But with the tax law
changes that went into effect a couple years ago and the many rules that apply
to charitable deductions, you may no longer get a tax break for your generosity.

Are you going to itemize?

The Tax Cuts and Jobs Act (TCJA), signed into law in 2017,
didn’t put new limits on or suspend the charitable deduction, like it did with
many other itemized deductions. Nevertheless, it reduces or eliminates the tax
benefits of charitable giving for many taxpayers.

Itemizing saves tax only if itemized deductions exceed the
standard deduction. Through 2025, the TCJA significantly increases the standard
deduction. For 2020, it is $24,800 for married couples filing jointly (up from
$24,400 for 2019), $18,650 for heads of households (up from $18,350 for 2019),
and $12,400 for singles and married couples filing separately (up from $12,200
for 2019).

Back in 2017, these amounts were $12,700, $9,350, $6,350
respectively. The much higher standard deduction combined with limits or
suspensions on some common itemized deductions means you may no longer have
enough itemized deductions to exceed the standard deduction. And if that’s the
case, your charitable donations won’t save you tax.

To find out if you get a tax break for your generosity, add up
potential itemized deductions for the year. If the total is less than your
standard deduction, your charitable donations won’t provide a tax benefit.

You might, however, be able to preserve your charitable
deduction by “bunching” donations into alternating years. This can allow you to
exceed the standard deduction and claim a charitable deduction (and other
itemized deductions) every other year.

What is the donation deadline?

To be deductible on your 2019 return, a charitable gift must
have been made by December 31, 2019. According to the IRS, a donation generally
is “made” at the time of its “unconditional delivery.” The delivery date
depends in part on what you donate and how you donate it. For example, for a
check, the delivery date is the date you mailed it. For a credit card donation,
it’s the date you make the charge.

Are there other requirements?

If you do meet the rules for itemizing, there are still other
requirements. To be deductible, a donation must be made to a “qualified
charity” — one that’s eligible to receive tax-deductible contributions.

And there are substantiation rules to prove you made a
charitable gift. For a contribution of cash, check, or other monetary gift,
regardless of amount, you must maintain a bank record or a written
communication from the organization you donated to that shows its name, plus
the date and amount of the contribution. If you make a charitable contribution
by text message, a bill from your cell provider containing the required
information is an acceptable substantiation. Any other type of written record,
such as a log of contributions, isn’t sufficient.

Do you have questions?

We can answer any questions you may have about the deductibility
of charitable gifts or changes to the standard deduction and itemized
deductions.

© 2020


Cents-per-mile rate for business miles decreases slightly for 2020

This year, the optional standard mileage rate used to calculate
the deductible costs of operating an automobile for business decreased by
one-half cent, to 57.5 cents per mile. As a result, you might claim a lower
deduction for vehicle-related expense for 2020 than you can for 2019.

Calculating your deduction

Businesses can generally deduct the actual expenses attributable
to business use of vehicles. This includes gas, oil, tires, insurance, repairs,
licenses and vehicle registration fees. In addition, you can claim a
depreciation allowance for the vehicle. However, in many cases depreciation
write-offs on vehicles are subject to certain limits that don’t apply to other
types of business assets.

The cents-per-mile rate comes into play if you don’t want to
keep track of actual
vehicle-related expenses. With this approach, you don’t have to account for all
your actual expenses, although you still must record certain information, such
as the mileage for each business trip, the date and the destination.

Using the mileage rate is also popular with businesses that
reimburse employees for business use of their personal vehicles. Such
reimbursements can help attract and retain employees who drive their personal
vehicles extensively for business purposes. Why? Under the Tax Cuts and Jobs
Act, employees can no longer deduct unreimbursed employee business expenses,
such as business mileage, on their own income tax returns.

If you do use the cents-per-mile rate, be aware that you must
comply with various rules. If you don’t, the reimbursements could be considered
taxable wages to the employees.

The rate for 2020

Beginning on January 1, 2020, the standard mileage rate for the
business use of a car (van, pickup or panel truck) is 57.5 cents per mile. It
was 58 cents for 2019 and 54.5 cents for 2018.

The business cents-per-mile rate is adjusted annually. It’s
based on an annual study commissioned by the IRS about the fixed and variable
costs of operating a vehicle, such as gas, maintenance, repair and depreciation.
Occasionally, if there’s a substantial change in average gas prices, the IRS
will change the mileage rate midyear.

Factors to consider

There are some situations when you can’t use the cents-per-mile
rate. In some cases, it partly depends on how you’ve claimed deductions for the
same vehicle in the past. In other cases, it depends on if the vehicle is new
to your business this year or whether you want to take advantage of certain
first-year depreciation tax breaks on it.

As you can see, there are many factors to consider in deciding
whether to use the mileage rate to deduct vehicle expenses. We can help if you
have questions about tracking and claiming such expenses in 2020 — or claiming
them on your 2019 income tax return.

© 2019