Milestone moments: How age affects certain tax provisions
Milestone moments: How age affects certain tax provisions
They say age is just a number — but in the world of tax law, it’s much more than that. As you move through your life, the IRS treats you differently 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.
Lower your self-employment tax bill by switching to an S corporation
Lower your self-employment tax bill by switching to an S corporation
If you own an unincorporated small business, you may be frustrated with high self-employment (SE) tax bills. One way to lower your SE tax liability is to convert your business to an S corporation.
SE tax basics
Sole proprietorship income, as well as partnership income that flows through to partners (except certain limited partners), is subject to SE tax. These rules also apply to single-member LLCs that are treated as sole proprietorships for federal tax purposes and multi-member LLCs that are treated as partnerships for federal tax purposes.
In 2025, the maximum federal SE tax rate of 15.3% hits the first $176,100 of net SE income. That includes 12.4% for the Social Security tax and 2.9% for the Medicare tax. Together, we’ll refer to them as federal employment taxes.
The rate drops after SE income hits $176,100 because the Social Security component goes away above the Social Security tax ceiling of $176,100 for 2025. But the Medicare tax continues to accrue at a 2.9% rate, and then increases to 3.8% at higher income levels because of the 0.9% additional Medicare tax. This 0.9% tax applies when wages and SE income exceed $200,000 for singles and heads of households, $250,000 for married couples filing jointly and $125,000 for married couples filing separately.
Tax reduction strategy
To lower your SE tax bill, consider converting your unincorporated small business into an S corp and then paying yourself (and any other shareholder-employees) a modest salary. Distribute most (or all) of the remaining corporate cash flow to the shareholder-employee(s) as federal-employment-tax-free distributions.
S corp taxable income passed through to a shareholder-employee and S corp cash distributions paid to a shareholder-employee aren’t subject to federal employment taxes. Only wages paid to shareholder-employees are subject to them. This favorable tax treatment places S corps in a potentially more favorable position than businesses conducted as sole proprietorships, partnerships or LLCs.
The caveats
However, this strategy isn’t right for every business. Here are some considerations:
1. Operating as an S corp and paying yourself a modest salary saves SE tax, but the salary must be reasonable. Otherwise, you run the risk of the IRS auditing your business and imposing back employment taxes, interest and penalties.
You can minimize that risk if you gather objective market evidence to demonstrate that outsiders could be hired to perform the same work for salaries equal to what you’re paying.
2. A potentially unfavorable side effect of paying modest salaries to an S corp shareholder-employee is that it can reduce your ability to make deductible contributions to tax-favored retirement accounts. If the S corp maintains a SEP or traditional profit-sharing plan, the maximum annual deductible contribution for each shareholder-employee is limited to 25% of his or her salary.
So, the lower the salary, the lower the maximum contribution. However, if the S corp sets up a 401(k) plan, paying modest salaries won’t preclude generous contributions.
3. Operating as an S corp requires extra administrative hassle. For example, you must file a separate federal return (and possibly a state return).
In addition, you must scrutinize transactions between S corps and shareholders for potential tax consequences, including any transfers of assets from an existing sole proprietorship or partnership to the new S corp. State-law corporation requirements, such as conducting board meetings and keeping minutes, must be respected.
Mechanics of converting
To convert an existing sole proprietorship or partnership to an S corp, a corporation must be formed under applicable state law, and business assets must be contributed to the new corporation. Then, an S election must be made for the new corporation by a separate form with the IRS by no later than March 15 of the calendar year, if you want the business to be treated as an S corp for that year.
Suppose you currently operate your business as a domestic LLC. In that case, it generally isn’t necessary to go through the legal step of incorporation to convert the LLC into an entity that will be treated as an S corp for federal tax purposes. The reason is because the IRS allows a single-member LLC or multi-member LLC that otherwise meets the S corp qualification rules to simply elect S corporation status by filing a form with the IRS. However, if you want your LLC to be treated as an S corp for the calendar year, you also must complete this paperwork by no later than March 15 of the year.
Weighing the upsides and downsides
Converting an existing unincorporated business into an S corp to reduce federal employment taxes can be a wise tax move under the right circumstances. That said, consult with us so we can examine all implications before making the switch.
No tax on car loan interest under the new law? Not exactly
No tax on car loan interest under the new law? Not exactly
Under current federal income tax rules, so-called personal interest expense generally can’t be deducted. One big exception is qualified residence interest or home mortgage interest, which can be deducted, subject to some limitations, if you itemize deductions on your tax return.
The One Big Beautiful Bill Act (OBBBA) adds another exception for eligible car loan interest. In tax law language, the new deduction is called qualified passenger vehicle loan interest. Are you eligible? Here are the rules.
“No tax” isn’t an accurate description
If you could deduct all your car loan interest, you’d be paying it with pre-tax dollars rather than with post-tax dollars — meaning after you paid your federal income tax bill. The new deduction has been called “no tax on car loan interest,” but that’s not really accurate. Here’s a more precise explanation.
The OBBBA allows eligible individuals — including those who don’t itemize — a temporary new deduction for some or all of the interest paid on some loans. The loans must be taken out to purchase a qualifying passenger vehicle.
Specifically, for 2025 through 2028, up to $10,000 of car loan interest can potentially be deducted each year. The loan must be taken out after 2024 and must be a first lien secured by the vehicle, which is used for personal purposes. Leased vehicles don’t qualify. So far, this may sound good, but not all buyers will qualify for the new deduction because of the limitations and restrictions summarized below.
Income-based phaseout rule
The deduction is phased out starting at $100,000 of modified adjusted gross income (MAGI) or $200,000 for married joint-filing couples. If your MAGI is above the applicable threshold, the amount that you can deduct (subject to the $10,000 limit) is reduced by $200 for each $1,000 of excess MAGI. So, for an unmarried individual, the deduction is completely phased out when MAGI reaches $150,000. For married joint filers, the deduction is completely phased out when MAGI reaches $250,000.
Qualifying vehicles
To qualify for the new deduction, the vehicle must be a car, minivan, van, SUV, pickup truck or motorcycle with a gross vehicle weight rating under 14,000 pounds. It must be manufactured primarily for use on public streets, roads and highways, and it must be new (meaning the original use begins with you). The “final assembly” of the vehicle must occur in the United States. You must report the vehicle identification number (VIN) on your tax return. Vehicles assembled in America have a special number in the VIN to signify that.
Meeting the requirements
In the law, the definition of final assembly is convoluted. The law states: “Final assembly means the process by which a manufacturer produces a vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.”
Another requirement is that your car loan lender must file an information return with the IRS that shows the amount of interest paid during the year on your qualified car loan.
Refinanced loans
If an original qualified car loan is refinanced, the new loan will be a qualified loan as long as: 1) the new loan is secured by a first lien on the eligible vehicle and 2) the initial balance of the new loan doesn’t exceed the ending balance of the original loan.
Ineligible loans
Interest on the following types of loans doesn’t qualify for the new deduction:
- Loans to finance fleet sales,
- Loans to buy a vehicle not used for personal purposes,
- Loans to buy a vehicle with a salvage title or a vehicle intended to be used for scrap or parts,
- Loans from certain related parties, and
- Any lease financing.
Conclusion
According to various reports, most American car buyers rely on loans to finance their purchases. So, the ability to deduct car loan interest is something that many taxpayers would be happy about. That said, many buyers won’t qualify for the new deduction. It’s off limits for high-income purchasers, used vehicle buyers and those who buy foreign imports. Contact us with any questions.
What you still need to know about the alternative minimum tax after the new law
What you still need to know about the alternative minimum tax after the new law
The alternative minimum tax (AMT) is a separate federal income tax system that bears some resemblance to the regular federal income tax system. The difference is that the individual AMT system taxes certain types of income that are tax-free under the regular system. It also disallows some deductions that are allowed under the regular system. If the AMT exceeds your regular tax bill, you owe the larger AMT amount.
Tax law changes
The Tax Cuts and Jobs Act (TCJA) made the individual alternative minimum tax (AMT) rules more taxpayer-friendly for 2018-2025 and significantly reduced the odds that you’ll owe the AMT for those years. But the new One Big Beautiful Bill Act (OBBBA) contains mixed news about your AMT exposure.
AMT rates
The maximum AMT rate is “only” 28% versus the 37% maximum regular federal income tax rate. At first glance, it may seem counterintuitive that anyone would worry about paying AMT. However, while the top AMT rate is lower, it applies to a much larger taxable base with fewer deductions and credits. That’s why people in certain situations still need to worry about it.
For 2025, the maximum 28% AMT rate kicks in when your taxable income, calculated under the AMT rules, exceeds an inflation-adjusted threshold of $239,100 for married joint-filing couples or $119,550 for other taxpayers. Below these thresholds, the AMT rate is 26%.
AMT exemptions
Under the AMT rules, you’re allowed an inflation-adjusted AMT exemption — effectively a deduction — in calculating your alternative minimum taxable income. The TCJA significantly increased the exemption amounts for 2018-2025. The OBBBA made the TCJA increased exemption amounts permanent, with annual inflation adjustments.
For 2025, the exemption amounts are $88,100 for unmarried individuals, $137,000 married joint-filing couples, and $68,500 for married individuals who file separate returns.
Exemption phase-out rule
At high levels of alternative minimum taxable income, your AMT exemption is phased out, which increases the odds that you’ll owe the tax. The TCJA dramatically increased the phase-out thresholds to levels where most taxpayers are unaffected by the phase-out rule. For 2025, the exemption begins to be phased out when alternative minimum taxable income exceeds $626,350 or $1,252,700 for a married joint-filing couple. For 2018-2025, the applicable exemption is reduced by 25% of the excess of your alternative minimum taxable income over the applicable phase-out threshold.
Mixed news in the OBBBA
Starting in 2026, the OBBBA makes the $500,000 and $1 million exemption phase-out threshold permanent. That’s the good news.
The bad news: Starting in 2026, the new law resets the exemption phase-out thresholds to $500,000 and $1 million with annual inflation adjustments for 2026 and beyond. So for 2026, these phase-out thresholds will be lower than the higher thresholds that apply for 2025. More bad news: Starting in 2026, the OBBBA increases the exemption phase-out percentage from 25% to 50%.
Bottom line: For 2026 and beyond, AMT exemptions for higher-income taxpayers can be phased out faster. That means more taxpayers may owe the AMT for 2026 and beyond.
AMT risk factors
Various interacting factors make it difficult to pinpoint exactly who’ll be hit by the AMT and who’ll dodge it. Here are five implications and risk factors.
- Substantial income from capital gains or other sources. When you have high income, from whatever sources, it can cause your AMT exemption to be partially or completely phased out. That increases the odds that you’ll owe the AMT.
- Itemized state and local tax (SALT) deductions. You can’t deduct SALT expenses under the AMT rules. This can hurt those living in high-tax states.
- Exercise of incentive stock options (ISOs). When you exercise an ISO, the bargain element (the difference between the market value of the shares on the exercise date and your ISO exercise price) doesn’t count as income under the regular tax rules, but it counts as income under the AMT rules.
- Standard deductions. Standard deductions are disallowed under the AMT rules.
- Private activity bond interest income. This category of interest income is tax-free for regular tax purposes but taxable under the AMT rules.
Determine your status
The TCJA significantly reduced the odds that you’ll owe the AMT. But the OBBBA increases the odds for some taxpayers, thanks to unfavorable changes to the AMT exemption rules that will take effect in 2026. Don’t assume you’re exempt from AMT — especially if you have some of the risk factors outlined above. Contact us to determine your current status after the OBBBA changes take effect.
Plan ahead to minimize risk
Divorce can create unexpected tax and financial consequences, especially when dividing business interests and retirement accounts (such as 401(k) accounts and IRAs). The financial stakes are often higher for business owners, making careful planning essential.
We can help you navigate these rules and structure your settlement to minimize tax liabilities while complying with state community property laws. The earlier you address potential tax issues, the better your financial outcome after divorce.
The 2025 SALT deduction cap increase might save you substantial taxes
If you pay more than $10,000 in state and local taxes (SALT), a provision of the One Big Beautiful Bill Act (OBBBA) could significantly reduce your 2025 federal income tax liability. However, you need to be aware of income-based limits, and you may need to take steps before year end to maximize your deduction.
Higher deduction limit
Deductible SALT expenses include property taxes (for homes, vehicles and boats) and either income tax or sales tax, but not both. Historically, eligible SALT expenses were generally 100% deductible on federal income tax returns if an individual itemized deductions. This provided substantial tax savings to many taxpayers in locations with higher income or property tax rates (or higher home values), as well as those who owned both a primary residence and one or more vacation homes.
Beginning in 2018, the Tax Cuts and Jobs Act (TCJA) limited the deduction to $10,000 ($5,000 for married couples filing separately). This SALT cap was scheduled to expire after 2025.
Rather than letting the $10,000 cap expire or immediately making it permanent, the OBBBA temporarily quadruples the limit. Beginning in 2025, taxpayers can deduct up to $40,000 ($20,000 for married couples filing separately), with 1% increases each subsequent year. Then in 2030, the OBBBA reinstates the $10,000 cap.
The increased SALT cap could lead to major tax savings compared with the $10,000 cap. For example, a single taxpayer in the 35% tax bracket with $40,000 in SALT expenses could save an additional $10,500 in taxes [35% × ($40,000 − $10,000)].
Income-based reduction
While the higher limit is in place, it’s reduced for taxpayers with incomes above a certain level. The allowable deduction drops by 30% of the amount by which modified adjusted gross income (MAGI) exceeds a threshold amount. For 2025, the threshold is $500,000; when MAGI reaches $600,000, the previous $10,000 cap applies. (These amounts are halved for separate filers.) The MAGI threshold will also increase 1% each year through 2029.
Here’s how the earlier example would be different if the taxpayer’s MAGI exceeded the threshold: Let’s say MAGI is $550,000, which is $50,000 over the 2025 threshold. The cap would be reduced by $15,000 (30% × $50,000), leaving a maximum SALT deduction of $25,000 ($40,000 − $15,000). Even reduced, that’s more than twice what would be permitted under the $10,000 cap. The reduced deduction would still save an additional $5,250 in taxes [35% × ($25,000 − $10,000) compared to when the $10,000 cap applied.
Itemizing vs. the standard deduction
The SALT deduction is available only to taxpayers who itemize their deductions. The TCJA nearly doubled the standard deduction. As a result of that change and the $10,000 SALT cap, the number of taxpayers who itemize dropped substantially. And, under the OBBBA, the standard deduction is even higher — for 2025, it’s $15,750 for single and separate filers, $23,625 for head of household filers, and $31,500 for married couples filing jointly.
But the higher SALT cap might make it worthwhile for some taxpayers who’ve been claiming the standard deduction post-TCJA to start itemizing again. Consider, for example, a taxpayer who pays high state income tax. If that amount combined with other itemized deductions (generally, certain medical and dental expenses, home mortgage interest, qualified casualty losses, and charitable contributions) exceeds the applicable standard deduction, the taxpayer will save more tax by itemizing.
Year-end strategies
Here are two strategies that might help you maximize your 2025 SALT deduction:
1. Reduce your MAGI. If it’s nearing the threshold that would reduce your deduction or already over it, you can take steps to stay out of the danger zone. For example, you can make or increase pretax retirement plan and Health Savings Account contributions. Likewise, you can avoid moves that increase your MAGI, like Roth IRA conversions, nonrequired traditional retirement plan distributions and asset sales that result in large capital gains.
2. Accelerate property tax deductions. If your SALT expenses are less than $40,000 and your MAGI is below the reduction threshold for 2025, for example, you might prepay your 2026 property tax bill this year. (This assumes the amount has been assessed — you can’t deduct a prepayment based only on your estimate.)
Plan carefully
In your SALT planning, also be aware that SALT expenses aren’t deductible for purposes of the alternative minimum tax (AMT). A large SALT deduction could have the unintended effect of triggering the AMT, particularly after 2025.
Under the right circumstances, the increase to the SALT deduction cap can be a valuable tax saver. But careful planning is essential. Contact us for assistance with maximizing your SALT deduction and other year-end tax planning strategies.
Unlocking the mystery of taxes on employer-issued nonqualified stock options
Unlocking the mystery of taxes on employer-issued nonqualified stock options
Employee stock options remain a potentially valuable asset for employees who receive them. For example, many Silicon Valley millionaires got rich (or semi-rich) from exercising stock options when they worked for start-up companies or fast-growing enterprises.
We’ll explain what you need to know about the federal income and employment tax rules for employer-issued nonqualified stock options (NQSOs).
Tax planning objectives
You’ll eventually sell shares you acquire by exercising an NQSO, hopefully for a healthy profit. When you do, your tax planning objectives will be to:
1. Have most or all of that profit taxed at lower long-term capital gain rates.
2. Postpone paying taxes for as long as possible.
Tax results when acquiring and selling shares
NQSOs aren’t subject to any tax-law restrictions, but they also confer no special tax advantages. That said, you can get positive tax results with advance planning.
When you exercise an NQSO, the bargain element (difference between market value and exercise price) is treated as ordinary compensation income — the same as a bonus payment. That bargain element will be reported as additional taxable compensation income on Form W-2 for the year of exercise, which you get from your employer.
Your tax basis in NQSO shares equals the market price on the exercise date. Any subsequent appreciation is capital gain taxed when you sell the shares. You have a capital loss if you sell shares for less than the market price on the exercise date.
Let’s look at an example
On December 1, 2023, you were granted an NQSO to buy 2,000 shares of company stock at $25 per share. On April 1, 2024, you exercised the option when the stock was trading at $34 per share. On May 15, 2025, the shares are trading at $52 per share, and you cash in. Assume you paid 2024 federal income tax on the $18,000 bargain element (2,000 shares × $9 bargain element) at the 24% rate for a tax of $4,320 (24% × $18,000).
Your per-share tax basis in the option stock is $34, and your holding period began on April 2, 2024. When you sell on May 15, 2025, for $52 per share, you trigger a $36,000 taxable gain (2,000 shares × $18 per-share difference between the $52 sale price and $34 basis). Assume the tax on your long-term capital gain is $5,400 (15% × $36,000).
You net an after-tax profit of $44,280 when all is said and done. Here’s the calculation: Sales proceeds of $104,000 (2,000 shares × $52) minus exercise price of $50,000 (2,000 shares × $25) minus $5,400 capital gains tax on the sale of the option shares minus $4,320 tax upon exercise.
Since the bargain element is treated as ordinary compensation income, the income is subject to federal income tax, Social Security and Medicare tax withholding.
Key point: To keep things simple, the example above assumes you don’t owe the 3.8% net investment income tax on your stock sale gain or any state income tax.
Conventional wisdom and risk-free strategies
If you had exercised earlier in 2024 when the stock was worth less than $34 per share, you could have cut your 2024 tax bill and increased the amount taxed later at the lower long-term capital gain rates. That’s the conventional wisdom strategy for NQSOs.
The risk-free strategy for NQSOs is to hold them until the earlier of 1) the date you want to sell the underlying shares for a profit or 2) the date the options will expire. If the latter date applies and the options are in-the-money on the expiration date, you can exercise and immediately sell. This won’t minimize the tax, but it eliminates any economic risk. If your options are underwater, you can simply allow them to expire with no harm done.
Maximize your profit
NQSOs can be a valuable perk, and you may be able to benefit from lower long-term capital gain tax rates on part (maybe a big part) of your profit. If you have questions or want more information about NQSOs, consult with us.
The nanny tax: What household employers need to know
The nanny tax: What household employers need to know
Hiring household help, whether you employ a nanny, housekeeper or gardener, can significantly ease the burden of childcare and daily chores. However, as a household employer, it’s critical to understand your tax obligations, commonly called the “nanny tax.” If you hire a household employee who isn’t an independent contractor, you may be liable for federal income tax and other taxes (including state tax obligations).
If you employ a household worker, you aren’t required to withhold federal income taxes from pay. But you can choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax.
2024 and 2025 thresholds
In 2024, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,700 or more (excluding the value of food and lodging). The Social Security Administration recently announced that this amount will increase to $2,800 in 2025. If you reach the threshold, all the wages (not just the excess) are subject to FICA.
However, if a nanny is under age 18 and childcare isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time student babysitter, there’s no FICA tax liability.
Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for the employer and the worker (2.9% total).
If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.
You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.
Making payments
You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.
As an employer of a household worker, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.
When you report the taxes on your return, include your employer identification number (EIN), which is not the same as your Social Security number. You must file Form SS-4 to get one.
However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) you file for the business. And you use your sole proprietorship EIN to report the taxes.
Maintain detailed records
Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, amount of wages paid, taxes withheld and copies of forms filed.
Contact us for assistance or if you have questions about how to comply with these requirements.
You don’t have to be in business to deduct certain vehicle expenses
You don’t have to be in business to deduct certain vehicle expenses
When you think about tax deductions for vehicle-related expenses, business driving may come to mind. However, businesses aren’t the only taxpayers that can deduct driving expenses on their returns. Individuals may also be able to deduct them in certain circumstances. Unfortunately, under current law, you may be unable to deduct as much as you could years ago.
How the TCJA changed deductions
For years before 2018, miles driven for business, moving, medical and charitable purposes were potentially deductible. For 2018 through 2025, business and moving miles are deductible only in much more limited circumstances. The changes resulted from the Tax Cuts and Jobs Act (TCJA), which could also affect your tax benefit from medical and charitable miles.
Before 2018, if you were an employee, you potentially could deduct business mileage not reimbursed by your employer as a miscellaneous itemized deduction. The deduction was subject to a 2% of adjusted gross income (AGI) floor, meaning that mileage was deductible only to the extent that your total miscellaneous itemized deductions for the year exceeded 2% of your AGI. However, for 2018 through 2025, you can’t deduct the mileage regardless of your AGI. Why? The TCJA suspends all miscellaneous itemized deductions subject to the 2% floor.
If you’re self-employed, business mileage can still be deducted from self-employment income. It’s not subject to the 2% floor and is still deductible for 2018 through 2025, as long as it otherwise qualifies.
Medical and moving
Miles driven for a work-related move before 2018 were generally deductible “above the line” (itemizing wasn’t required to claim the deduction). However, for 2018 through 2025, under the TCJA, moving expenses are deductible only for active-duty military members.
If you itemize, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. For example, you can include in medical expenses the amounts paid when you use a car to travel to doctors’ appointments. For 2024, medical expenses are deductible to the extent they exceed 7.5% of your AGI.
The limits for deducting expenses for charitable miles driven are set by law and don’t change yearly based on inflation. But keep in mind that the charitable driving deduction can only be claimed if you itemize. For 2018 through 2025, the standard deduction has nearly doubled, so not as many taxpayers are itemizing. Depending on your total itemized deductions, you might be better off claiming the standard deduction, in which case you’ll get no tax benefit from your charitable miles (or from your medical miles, even if you exceed the AGI floor).
Rates depend on the trip
Rather than keeping track of your actual vehicle expenses, you can use a standard mileage rate to compute your deductions. The 2024 rates vary depending on the purpose:
- Business, 67 cents per mile.
- Medical, 21 cents per mile.
- Moving for active-duty military, 21 cents per mile.
- Charitable, 14 cents per mile.
In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls. There are also substantiation requirements, which include tracking miles driven.
We can answer any questions
Do you have questions about deducting vehicle-related expenses? Contact us. We can help you with your tax planning.
Maximize your year-end giving with gifts that offer tax benefits
Maximize your year-end giving with gifts that offer tax benefits
As the end of the year approaches, many people start to think about their finances and tax strategies. One effective way to reduce potential estate taxes and show generosity to loved ones is by giving cash gifts before December 31. Under tax law, you can gift a certain amount each year without incurring gift taxes or requiring a gift tax return. Taking advantage of this rule can help you reduce the size of your taxable estate while benefiting your family and friends.
Taxpayers can transfer substantial amounts, free of gift taxes, to their children or other recipients each year through the proper use of the annual exclusion. The exclusion amount is adjusted for inflation annually, and in 2024 is $18,000. It covers gifts that an individual makes to each recipient each year. So a taxpayer with three children can transfer $54,000 ($18,000 × 3) to the children this year, free of federal gift taxes. If the only gifts during a year are made this way, there’s no need to file a federal gift tax return. If annual gifts exceed $18,000 per recipient, the exclusion covers the first $18,000 and only the excess is taxable.
Note: This discussion isn’t relevant to gifts made to a spouse because they’re gift-tax-free under separate marital deduction rules.
Married taxpayers can split gifts
If you’re married, gifts made during a year can be treated as split between the spouses, even if the cash or asset is given to an individual by only one of you. Therefore, by gift splitting, up to $36,000 a year can be transferred to each recipient by a married couple because two exclusions are available. For example, a married couple with three married children can transfer $216,000 ($36,000 × 6) each year to their children and the children’s spouses.
If gift splitting is involved, both spouses must consent to it. This is indicated on the gift tax return (or returns) that the spouses file. (If more than $18,000 is being transferred by a spouse, a gift tax return must be filed, even if the $36,000 exclusion covers the total gifts.)
More rules to consider
Even gifts that aren’t covered by the exclusion may not result in a tax liability. That’s because a tax credit wipes out the federal gift tax liability on the first taxable gifts you make in your lifetime, up to $13.61 million in 2024. However, to the extent you use this credit against a gift tax liability, it reduces or eliminates the credit available for use against the federal estate tax at your death.
For a gift to qualify for the annual exclusion, it must be a “present interest” gift, meaning you can’t postpone the recipient’s enjoyment of the gift to the future. Other rules may apply. Contact us with questions. We can also prepare a gift tax return for you if you give more than $18,000 (or $36,000 if married) to a single person this year or make a split gift.
Is your money-losing activity a hobby or a business?
Is your money-losing activity a hobby or a business?
Let’s say you have an unincorporated sideline activity that you consider a business. Perhaps you offer photography services, create custom artwork or sell handmade items online. Will the IRS agree that your venture is a business, not a hobby? It’s an essential question for tax purposes.
If the expenses from an activity exceed the revenues, you have a net loss. You may think you can deduct that loss on your personal federal income tax return with no questions asked. Not so fast! The IRS often claims that money-losing sidelines are hobbies rather than businesses — and the federal income tax rules for hobbies aren’t in your favor.
TCJA made tax rules worse
Old rules: Before the TCJA rules kicked in in 2018, if an activity was deemed to be a not-for-profit hobby, you had to report all the revenue on your Form 1040. You could deduct hobby-related expenses, such as itemized deductions for allocable home mortgage interest and property taxes. Other hobby-related expenses — up to the amount of revenue from the hobby — could potentially be written off. You had to treat those other outlays as miscellaneous itemized expenses that you could only deduct to the extent they exceeded 2% of your adjusted gross income (AGI).
Current rules: For 2018 through 2025, the TCJA suspends write-offs for miscellaneous itemized deduction items previously subject to the 2%-of-AGI deduction threshold. That change wipes all deductions for hobby-related expenses, except for expenses you can write off in any event (such as itemized deductions for allocable mortgage interest and property taxes). So, under current law, you can’t deduct any hobby-related expenses. As was the case before the TCJA, you must still report 100% of hobby-related income on your Form 1040. So, you’ll be taxed on all the income even if the activity loses money.
Determine if your activity is a business
Now you understand why for-profit business status is more beneficial than hobby status. The next step is determining if your money-losing activity is a hobby or a business.
There are two statutory safe-harbor rules for determining if you have a for-profit business:
- An activity is presumed to be a for-profit business if it produces positive taxable income in at least three out of every five years. You can deduct losses from the other years because they’re considered business losses.
- A horse racing, breeding, training or showing activity is presumed to be a for-profit business if it produces positive taxable income in at least two out of every seven years.
If you don’t qualify for one of the safe-harbor rules, you may still be able to treat the activity as a for-profit business and rightfully deduct the losses. You must demonstrate an honest intent to make a profit. Here are some of the factors that can prove (or disprove) such intent:
- You conduct the activity in a business-like manner by keeping good records.
- You have expertise in the activity or hire advisers who do.
- You spend enough time to help show the activity is a business.
- There’s an expectation of asset appreciation.
- You’ve had success in other ventures, which indicates business acumen.
- The history and magnitude of income and losses from the activity help show it’s a business. Losses caused by unusual events are more justifiable than ongoing losses that only a hobbyist would endure.
- If you’re wealthy, it may look like you can afford to absorb ongoing losses, which may indicate a hobby.
- If the activity has elements of personal pleasure, it may appear to be a hobby.
Don’t be discouraged
On the bright side, the U.S. Tax Court has, over the years, concluded that a number of pleasurable activities could be classified as for-profit business ventures rather than tax-disfavored hobbies. We may be able to help you create documentation to prove that your money-losing activity is actually a for-profit business that hasn’t paid off yet.