August 2023

Tax Breaks for Teachers and Other Educators

It’s almost time for the start of the new school year, and if you are a teacher or other educator, you should know that you can still deduct certain unreimbursed expenses. Deducting expenses such as classroom supplies, training, and travel will reduce your 2023 income tax liability. And you don’t even have to itemize to claim this deduction.

How the Educator Expense Deduction Works

The educator expense deduction allows eligible educators to deduct up to $300 of unreimbursed educator expenses in 2023. If two eligible educators are married and file a joint return, they may deduct up to $600 but not more than $300 each. To be eligible, you must be a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide for at least 900 hours during a school year in a school that provides elementary or secondary education as determined under state law.

If you qualify, you can deduct costs of books, supplies, computer equipment and software, classroom equipment and supplementary materials used in the classroom. Expenses for participation in professional development courses are also deductible, and athletic supplies qualify if used for health or physical education courses.

To prevent a missed deduction at tax filing time, keep receipts for qualifying expenses and note each purchase’s purpose.

Questions?

Don’t forget that teachers and other educators can also take advantage of various education tax breaks for their own ongoing educational pursuits, such as the Lifetime Learning Credit or, in some cases, , the American Opportunity Tax Credit.

Don’t hesitate to call if you have any questions about tax deductions available to educators, including teachers, administrators, and aides.

Deducting Business-Related Vehicle Expenses

If you’re self-employed and use your car, SUV or other vehicle for business, you can deduct certain business-related vehicle expenses. Depending on the cost of operating the vehicle or how much you drive it, as well as how much of your use of the vehicle is for business purposes, this can add up to a significant tax deduction

Deduction methods

There are two options for claiming deductions:

Actual Expenses. To use the actual expense method, you must figure out the actual costs of operating the vehicle for business use. You are allowed to deduct the business-related portion of costs related to gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments).

Standard Mileage Rate for 2023. To use the standard mileage deduction, multiply 65.5 cents by the number of business miles driven during the year.

Vehicle expenses such as parking fees and tolls attributable to business use are deducted separately, no matter which method you choose.

Which Method Is Better?

Using the standard mileage rate produces a larger deduction for some taxpayers. Others fare better tax-wise by deducting actual expenses. You may use either of these methods whether you own or lease your car.

To use the standard mileage rate for a vehicle you own, you must choose to use it in the first year the vehicle is available for use in your business. You can use the standard mileage rate or actual expenses in subsequent years. If you choose the standard mileage rate and lease a car for business use, you must use the standard mileage rate method for the entire lease period, including renewals.

Opting for the standard mileage rate method allows you to bypass certain limits and restrictions and is simpler. From a tax-saving perspective, generally the standard mileage method benefits taxpayers who have less expensive vehicles or drive many business miles.

The standard mileage rate may understate your costs, especially if you use the car 100 percent (or close to it) for business.

Documentation

Tax law requires that you keep travel expense records and show business versus personal use on your tax return. Furthermore, if you don’t keep track of the number of miles driven and the total amount you spend on the vehicle, your tax advisor won’t be able to determine which of the two options is more advantageous for you at tax time. It is essential to keep careful records of your travel expenses (if you use the actual expenses method, you must keep receipts) and record your mileage.

You can use a mileage logbook or, if you’re tech-savvy, an application on your phone or tablet. Several phone apps are available to help you track your business expenses, including mileage and billable time. These apps also allow you to create formatted reports that are easy to share with your CPA, EA, or tax preparer.

To simplify your recordkeeping, consider using a separate credit card for business.

If you have any questions about the business use of a car, don’t hesitate to call.

Minimizing Capital Gains Tax on Sale of a Home

If you’re looking to sell your home this year, then it may be time to take a closer look at the exclusion rules and cost basis of your home to reduce your taxable gain on the sale.

The IRS home sale gain exclusion rule allows an exclusion of gain up to $250,000 for a single taxpayer or $500,000 for a married couple filing jointly. This exclusion can be used over and over during your lifetime (but not more frequently than every 24 months), as long as you meet certain ownership and use tests.

Eligibility Requirements

During the five-year period ending on the date of the sale, you must have:

• Owned the home for at least two years – Ownership Test
• Lived in the home as your main home for at least two years – Use Test
• Not excluded gain from the sale of another home during the two-year period ending on the date of the sale.

The Ownership and Use periods need not be concurrent. Two years means 24 months or 730 days within a five-year period, but the months or days need not be consecutive. Short absences, such as for a summer vacation, count in the period of use. Longer breaks, such as a one-year sabbatical, do not.

If you own more than one home, you can exclude the gain only on your primary home. The IRS uses several factors to determine which home is a principal residence: the place of employment, location of family members’ main home, mailing address on bills, correspondence, tax returns, driver’s license, car registration, voter registration, location of banks you use, and location of recreational clubs and religious organizations you belong to.

The exclusion can be used repeatedly every time you reestablish your primary residence. When you change homes, please call the office with your new address to ensure the IRS has your current address on file.

Only taxable gain on the sale of your home needs to be reported on your tax return. Further, you cannot deduct the loss on the sale of your main home, unless a portion of your home is rented out or used exclusively for your business. In that situation, the loss attributable to that portion of your home may be deductible, subject to various limitations. Please call for additional details.

Improvements Increase the Cost Basis

Be sure to consider all improvements made to the home over the years when selling your home. Improvements will increase the cost basis of the home, thereby reducing the capital gain.

Additions and other improvements that have a useful life of more than one year can also be added to the cost basis of your home. Examples of such improvements include the following: building an addition; finishing a basement; putting in a new fence or swimming pool; paving the driveway; landscaping; or installing new wiring, new plumbing, central air conditioning, flooring, insulation, or a security system.

Jack and Mary purchased their primary residence in 2012 for $200,000. They paved the unpaved driveway, added a swimming pool, and made several other home improvements adding up to a total of $75,000. The adjusted cost basis of the house is now $275,000. The married couple sold the house in 2023 for $550,000. It costs them $40,000 in commissions, advertising, and legal fees to sell the house.

These selling expenses are subtracted from the sales price to determine the amount realized. The amount realized in this example is $510,000. That amount is then reduced by the adjusted basis (cost plus improvements) to determine the gain. The gain, in this case, is $235,000. After considering the exclusion, there is no taxable gain on the sale of this primary residence and, therefore, no reporting of the sale on Jack and Mary’s 2023 joint income tax return.

Partial Use of the Exclusion Rules

Even if you do not meet the ownership and use tests, in certain circumstances you may be allowed to exclude a portion of the gain realized on the sale of your home. A partial exclusion may be available if you sold your home because of health reasons, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home. If one of these situations applies to you, please call for additional details.

Recordkeeping

Good recordkeeping is essential for determining the adjusted cost basis of your home. Ordinarily, you must keep records for three years after the filing due date. However, you should keep documents proving your home’s cost basis for as long as you own your home.

The records you should keep include:

• Proof of the home’s purchase price and purchase expenses
• Receipts and other records for all improvements, additions, and other items that affect the home’s adjusted cost basis
• Any worksheets or forms you filed to postpone the gain from the sale of a previous home before May 7, 1997

Help Is Just a Phone Call Away

Tax considerations surrounding the sale of a home can be confusing. If you have any questions on taxes related to the sale of your home, please call.

It’s Natural Disaster Season: Safeguarding Tax Records

With hurricane season in the East and South, wildfire season in the West, and severe weather season in the middle of the county, now is a good time to create or review emergency preparedness plans for surviving natural disasters. Here are three steps taxpayers can take to safeguard their tax records before disaster strikes and minimize negative tax consequences should a disaster occur:

1. Secure key documents and make copies. You should place original documents such as tax returns, birth certificates, deeds, titles, and insurance policies inside waterproof containers in a secure space. Duplicates of these documents should be kept with a trusted person outside your geographic area. Scanning them for backup storage on electronic media, such as a flash drive, is another option that provides security and portability.

2. Document valuables and equipment. Current photos or videos of your home’s or business’s contents can help support claims for insurance or tax benefits after a disaster. While all property should be documented, it’s especially important to record expensive and high-value items.

5. Get assistance from a tax professional. After FEMA issues a disaster declaration, the IRS may postpone certain tax filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. Taxpayers who do not reside in a covered disaster area but suffered impact from a disaster may qualify for disaster tax relief and other options. Reconstructing records after a disaster may be required for tax purposes, getting federal assistance, or insurance reimbursement. A tax professional can help you determine what tax relief you’re eligible for and even assist with reconstructing records. If you have suffered a natural disaster, please call the office immediately for assistance.

A Tax Checklist for Newly Married Couples

Summer is the wedding season and newlyweds should understand how tying the knot can affect their tax situation. Here’s are three things newly married couples should know:

1. Name and address changes

Name. When a name changes through marriage, it is important to report that change to the Social Security Administration. The name on a person’s tax return must match what is on file at the SSA. If it doesn’t, it could delay any tax refund. To update information, file Form SS-5, Application for a Social Security Card. It is available on SSA.gov, by calling 800-772-1213 or at a local SSA office.
Address. If marriage means a change of address, the IRS needs to know. To do that, send the IRS Form 8822, Change of Address.

2. Withholding

After getting married, couples should consider changing their withholding. Newly married couples must give their employers a new Form W-4, Employee’s Withholding Certificate, within 10 days. If both spouses work, they may move into a higher tax bracket or be affected by the 0.9% additional Medicare tax. They can use the Tax Withholding Estimator on IRS.gov to help complete a new Form W-4.

3. Filing status

After you say, “I do,” you’ll have two filing status options to choose from: married filing jointly or married filing separately. While married filing jointly is usually more beneficial, it’s beneficial to figure the tax both ways to find out which works best. Remember, if a couple is married as of December 31, the law says they’re married for the whole year for tax purposes.

For more information about how life changes, such as marriage, the birth of a child, or the death of a loved one, affect your tax situation, don’t hesitate to call.

Tips on the Tax Treatment of Gifts

Gift tax returns generally do not need to be filed unless you give someone, other than your spouse (if he or she is a U.S. citizen), money or property worth more than the gift tax annual exclusion for that year. Here are four more tips regarding the tax treatment of gifts:

1. The annual exclusion amount for 2023 is $17,000. You and your spouse can make a gift of up to $34,000 to a third party without making a taxable gift.

2. You do not have to file a gift tax return to report gifts to political organizations or qualified charities or for gifts made by paying someone’s tuition or medical expenses, as long as the payment is made directly to the institution.

3. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).

4. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.

If you have any questions about the gift tax, please contact the office for assistance.

Tax Due Dates for August 2023

August 15

Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in July.

Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in July.

September 11

Employees Who Work for Tips – If you received $20 or more in tips during August, report them to your employer. You can use Form 4070.

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