May 2022 Tax Tips and More
May 2022
Upcoming dates:
May 8
- Mother's Day
May 30
- Memorial Day
With tax season now in the rear view mirror for most of us, it’s time to start thinking about how to minimize your taxes on next year’s tax return.
Read a great article explaining how taxes work for those picking up a summer job.
Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.
Summer Jobs and Taxes
The tax man wants their share!
Now is the time to prepare for the not-so-pleasant part of having a summer job – paying taxes! Here’s what you can expect depending on what type of job you have this summer.
The employee. A job at a retail store or restaurant generates earned income that is subject to payroll and income taxes. Paying taxes as an employee is super easy, as all necessary taxes will be withheld from your paycheck. You may need to file a tax return if wages and tips are more than $12,950, which is the standard deduction for single taxpayers in 2022.
The family business. A job at a family business will also generate earned income that is subject to payroll and income taxes. If you are under age 18, receive reasonable compensation for a legitimate job, and the business is either a sole proprietorship or an LLC, you could qualify for an exemption from Social Security, Medicare, and federal unemployment taxes.
The entrepreneur. A job such as mowing lawns, working on computers or dog walking will generate earned income that is subject to income taxes. You will also have to pay a 15.3% self-employment tax on all profits. Paying taxes as an entrepreneur or business owner also involves making payments to the IRS, either electronically or via check, throughout the year.
The domestic worker. Performing chores such as babysitting and cleaning for neighbors may trigger the household employee rules, also known as the nanny tax. This can be good news, as these jobs are typically exempt from Social Security and Medicare taxes when paid to workers under age 18 who are considered household employees.
What you need to do
Here are some suggestions for understanding how taxes will affect your summer job:
Explain how taxes are withheld. If you are an employee, take one of your paychecks and review how each dollar amount is calculated. This will also help you understand the different types of taxes, including federal and state income taxes, Social Security taxes and Medicare taxes.
Set up a savings account. If you have your own business, you’ll need to set aside a certain percentage of the money you earn to pay the IRS. An easy way to do this is by transferring a certain portion of the money into a savings account. Pay attention to the quarterly estimated due dates throughout the year – April 15th, June 15th, September 15th and January 15th. These are the deadlines for you to send tax payments to the IRS.
Lower your tax bill. Consider opening an IRA that can help you start saving for the future while potentially lowering your taxes. This helps establish a healthy savings habit while understanding it is possible to pay less in taxes!
Please call if you have questions about taxes and how they apply to your summer job.
The Home Gain Exclusion: Make Sure You Qualify!
Across the country, many homeowners are cashing out to multiples over list price, especially since one of the largest tax breaks available to most individuals is the ability to exclude up to $250,000 ($500,000 married) in capital gains on the sale of your personal residence. Here is what you need to know.
Background
As long as you own and live in your home for two of the five years before selling your home, you qualify for this capital gain tax exclusion. Here are the official hurdles you must jump over to qualify for this tax break:
Main home. This is a tax term with a specific definition. Your main home can be a traditional home, a condo, a houseboat, or mobile home. Main home also means the place of primary residence when you own two or more homes.
Ownership test. You must own your home during two of the past five years.
Residence test. You must live in the home for two of the past five years.
Other nuances:
You can pass the ownership test and the residence test at different times.
You may only use the home gain exclusion once every two years.
You and your spouse can be treated jointly OR separately depending on circumstances.
When to pay attention
You live in your home for a long time. The longer you live in your home, the more likely you will have a large capital gain. Long-time homeowners should check to see if they have a capital gain prior to selling their home.
You have old home gain deferrals. Prior to the current rules, home gains could be rolled into the next home purchased. These old deferred gains reduce the cost of your current home and can result in a capital gains tax.
Two homes into one. Newly married couples with two homes have a potential tax liability as both individuals may pass the required tests on their own property but not on their new spouse’s property. Prior to selling these individual homes, you may wish to create a plan of action that reduces your tax exposure.
Selling a home after divorce. Property transferred as a result of a divorce is not deemed a sale of your home. However, if the ex-spouse that retains the home later sells the home, it may have an impact on the available amount of gain exemption.
You are helping an older family member. Special rules apply to the elderly who move out of a home and into assisted living and nursing homes. Prior to selling property, it is best to review options and their related tax implications.
You do not meet the five-year rule. In some cases you may be eligible for a partial gain exclusion if you are required to move for work, disability, or unforeseen circumstances.
Other situations. There are a number of other exceptions to the home gain exclusion rules. This includes foreclosure, debt forgiveness, inheritance, and partial ownership.
A final thought
The key to obtaining the full benefit of this tax exclusion is in retaining good records. You must be able to prove both the sales price of your home and the associated costs you are using to determine any gain on your property. Keep all sales records, purchase records, improvement costs, and other documents that support your home’s capital gain calculation.
Making Your Home Office a Tax Deduction
The home office deduction is a great tax break for the millions of Americans who are now working from home, either occasionally or full-time. But there’s one huge catch…you can’t be an employee!
That’s right, if you’re working from home for an employer, you normally can’t deduct your office expenses.
Here’s a quick look at the basic requirements to be able to deduct your home office expenses, along with some suggestions for how to qualify for the deduction and turning your home office into a tax planning opportunity:
The basics
There are two requirements for having a tax-deductible home office:
Your home office is only used for business purposes. Your home office must be used exclusively for operating your business. It can’t double as the family media center or living room. To meet this requirement, set up your office in a separate area of your house. Then if you get audited by the IRS, there is no doubt that your office is used exclusively for business purposes.
Your home office is your primary place of business. You need to demonstrate that your home office is the primary place you conduct your business. The IRS has clarified that you can meet clients and conduct meetings at separate office locations, but your home office must be the only location where your administrative work is completed. So if you meet with clients or work on any part of your business away from your home office, keep a journal of each specific activity undertaken and describe how it doesn’t violate the primary place-of-business rule.
Looking at these two criteria, everyone that is now required to work from home probably meets both qualifications.
Qualifying for the deduction
While it usually makes little sense to move from an employee to a contractor simply to get a home office deduction, too many ignore the move when it could be available to them. Here are some ideas.
Become an independent contractor. The easiest way to deduct your home office expenses is by switching from being an employee to an independent contractor. With a number of firms cutting pay and benefits due to the pandemic, it may be worth exploring. If you can meet the IRS requirements for becoming an independent contractor, it may be worth doing the math by considering all the deductions your home office may make available to you and comparing them to the cost of lost benefits as an employee.
Start a side business. If becoming an independent contractor for your current employer isn’t an option, consider starting a side business. You can deduct all business-related expenses on your tax return, including your home office expenses. If you go this route, ensure your home office is in a different location in your home than your other work space.
Consider your entire household. Even if you don't qualify for the home office deduction, maybe someone else living in your home does qualify. So look into your options to see if a family member can take advantage of the home office deduction.
Figuring out how to properly deduct your home office can be a lot more complicated than it appears. If you need help, please call.
As always, should you have any questions or concerns regarding your tax situation please feel free to call.
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