Did You Pay Tax on Home Mortgage Debt Relief in 2018? You May Be Entitled to a Refund

Article Highlights:

  • Appropriations Act of 2020 
  • Cancellation-of-Debt (COD) Income 
  • Retroactively Extended Special Exclusion 
  • Home Affordable Modification Program (HAMP) 
  • Amended Return 

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included several tax law changes, including retroactively extending specific tax provisions that expired after 2017 or were about to expire, several retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.

When a taxpayer’s debt is forgiven (i.e., credit card, auto loan, or home mortgage debt), it is then referred to as cancellation-of-debt (COD) income. COD income becomes taxable income to the taxpayer unless the debt is discharged in a bankruptcy proceeding or the taxpayer qualifies for one of the tax law exclusions providing relief from taxation of COD income.

The decline in the real estate market over a decade ago, combined with the recession, left many homeowners upside-down. Their mortgages were significantly higher than the value of their home. As a result, many homes went back to the lenders via foreclosure, abandonment, and voluntary reconveyance, leaving taxpayers with taxable COD income.

To alleviate this situation and relieve homeowners from COD income, Congress created a particular rule in 2007 that allowed taxpayers to exclude COD income from taxation if the income arose from cancellation of the debt used to acquire the taxpayer’s primary residence. This debt is termed acquisition debt. However, this particular provision expired at the end of 2017, and those facing a similar problem after 2017 were stuck paying taxes on the COD income.

Thankfully, Congress has retroactively extended that special exclusion (home mortgage debt relief) back to 2018 and through 2020. By making it retroactive, if you were required to pay tax on forgiven home acquisition debt income in 2018, then your 2018 return can be amended, and you can recover those tax dollars you paid in 2018.

This exclusion may also apply to home debt discharged as part of the Home Affordable Modification Program (HAMP). Under this program, certain qualifying individuals could have their mortgage debt reduced so they could afford to remain in their homes. Although this program ended in 2016, the debt was forgiven over three years, which means, in some cases, taxpayers may have had debt forgiveness (COD income) in 2018. This COD income will probably qualify for income exclusion that will result in a refund of taxes if the taxpayer amends their 2018 tax return.

If you have questions related to home mortgage debt relief or if you paid taxes on home mortgage debt relief in 2018, please contact us

Improve Your Financial Health with a Healthy Savings Fund

To stay afloat during tough times, financial experts recommend that you keep three to six months’ expenses in a savings account. But, if you are in the majority, you likely only have less than $1,000 in your savings account at any given time. Thankfully, 2020 is here to provide you with a chance to start anew and get your savings in check. Follow the tips below to start building a healthy savings fund and boost the health of your finances.

Build a Budget and Stick to It

To halt excessive spending and channel your money into all the right areas, you need to build a budget and stick to it. Before you can do that, however, you need to see just where all your money is going. You can either use an app that connects to your accounts or write down all your spending for a month.

With that information in hand, you can see where you can cut back your spending and divert the funds into savings instead. You can work your budget on paper or use a software program to help you track your spending.

As you build your budget, try to follow the 50/30/20 rule. By following this rule, you will assign 50% of your take-home income to necessities, 30% on what you want, and 20% for paying down debt and saving. You can tighten up these figures as you wish by pulling out of the “want” category for savings and debt repayment.

To eliminate the urge to spend, consider taking a picture or screenshot of the item you want and waiting at least 24 hours before buying it. Or think about the hours it took you to earn the money you will spend on the purchase. Before you know it, the urge to spend that money may dissipate, leaving more in your bank account at the end of the month.

Switch to a High-Yield Savings Account

The national interest rate for savings accounts has been steadily declining through the decades, landing at just 0.9% at this time. This does not even keep up with the inflation rate of 1.9%, putting you at a loss by the end of each year. To overcome this issue, you can switch to a high-yield savings account.

With interest rates of 1.9% or higher, high-yield accounts keep your money growing at a decent pace. And since many are online, you cannot just head down to your bank for a withdrawal, helping keep your money in savings where it belongs.

Go with Automatic Savings Deductions

Automation makes everything more manageable, and putting money in your savings is no exception. So, set up your account to automatically pull money from checking and put it into savings every month. You will hit your goal without even thinking about it and can adjust upward year to year to maximize your savings.

Gradually Bump Up Retirement Savings

Your high-yield savings account is not the only one in need of love. Your retirement account also needs attention each year to realize its full potential. You can maximize your retirement savings pain-free by increasing your contributions by just 1%. Then, make it a tradition to celebrate the new year with this smart move to keep bolstering your savings for the future.

Additional Fun Ways to Save Big

Once you have your retirement contributions and automatic deposits ticking away, you can continue to increase your savings in fun ways. Here are a few to try throughout the new year.

  • Transfer Leftover Funds to Savings on Payday. Each time you get paid, take whatever was left in your account before the check hit and transfer it to savings. Even if you only have $50 of your check left after expenses, you can end up with more than $600 in savings by the end of the year.
  • Practice No-Spend Months on Occasion. If you can swing it, designate a month or two out of the year as a no-spend month. Then, task yourself with only covering necessities, such as bills, food, and fuel, leaving all wants to the wayside during that time.
  • Sock Away All the $5 Bills You Encounter. Every time you come across a $5 bill, place it in your savings to watch the money grow before your very eyes. If you do not often carry cash, transfer $5 into your savings every time your checking account balance ends on 5 or 0 instead.
  • Round-Up Your Purchases for Savings. Alternatively, you can round up all your purchases and put the change in your account to bump up your balance. Although it is less than a dollar at a time, the difference can add up quickly, giving you several hundred extra dollars in savings each year.

By taking these money-saving steps, you can quickly increase your savings without breaking a sweat. If you need assistance getting started, contact us. When you begin saving, you will marvel at how fast your financial health improves.

Budget Tips for Covering A Surprise Tax Bill

Tax time is always a bit unnerving, but when you’re hit with a large, unexpected tax bill, it can be shattering. Few people have the resources to pull out their checkbook and write a check for thousands of dollars, yet it can feel like that’s your only choice.

The truth is that even people who owe significant amounts of money have several options available to them, including taking advantage of the IRS’ Fresh Start Initiative, which was created explicitly for this purpose back in 2011. Though the lien program won’t make your tax obligation go away, it does offer solutions to make things a bit easier. The solution provides expanded installment plan options, the ability under a program called Offers in Compromise to negotiate a lower tax bill under severe circumstances, and even the opportunity to avoid having to pay some assessed penalties.

Start by Checking the Math

Though it’s a relief to know that these options exist, your very first step when faced with an overwhelming and unexpected tax bill is to check the math. It’s unlikely that you’ll have significant changes to your tax obligation unless there’s been another significant shift in your life. Unless you’ve sold a business or property, or no longer can claim a child as a dependent, there’s a good chance that there’s a math error that needs to be fixed. So, start by comparing this year’s return to last year’s, and contact the tax professional who prepared your latest return to enlist their help both in understanding the big bill, and helping you determine the best way to address it if it is correct.

What If the Math is Right?

If the math is right and you do owe the amount that set off those alarms, your choices are limited to figuring out the best way to pay it. It may be tempting to skip sending in the return, but doing so is not going to help. The IRS will quickly figure out that you haven’t filed and the amount that you owe, and you will find yourself owing even more money because of penalties and interest. It is much better to take control of your situation rather than let the IRS take the lead and contact your employer to garnish wages or file a lien on your home or other property. Many people make the mistake of filing for an extension and thinking that will delay the need to pay; unfortunately, an extension does not negate the obligation to make your payment – it just extends the time for your paperwork.

Some people submit a small amount of the amount owed along with an indication that more will be forthcoming when you can afford it. Though this can serve as a stopgap to a problematic situation, the truth is that the best way to approach this situation is to find a way to pay your debt immediately.

Ways to Pay

If you decide to pay in full without having the funds immediately available, there are only a few options. These include:

  • Charge your tax debt on a credit card – Though you may be able to earn whatever points your credit card entitles you to by charging your tax debt, that bonus will likely be negated by the fact that the IRS charges a 2% fee for that service. Additionally, you’ll have to pay whatever interest rates your credit card is charging. Still, if you can get a credit card with zero percent interest for a limited period, or even one that offers a cash bonus for charging a certain amount, this may be the smartest way to go (as long as you actually find a way to pay the debt).
  • Ask the IRS about an installment plan – This option is available to taxpayers who owe less than $50,000 and who can pledge to pay their debt in full within six years by making payments online. This option carries a fee and a variable interest rate that can be excessive, especially because the interest compounds daily, and the risk of having a lien placed on your property or your wages if you fail to make a scheduled payment.
  • Take out a home equity loan – If you have the time to apply and enough equity in your home, you may want to apply for a low-interest rate home equity loan for which you can deduct any interest that you pay on future tax returns.

What You Should Never Do

It can be frightening to be in debt to the government and tempting to withdraw money from your retirement accounts. Though this might seem like the easiest way to eliminate the problem, doing so can be a huge mistake, as it not only severely limits the amount of money that you will have available once you stop working, but also puts you in a position of having to pay additional fees for early withdrawals.

Thinking Ahead

At the same time that you are dealing with a surprise tax bill from last year’s tax return, you are already several months into this year’s earnings, and may unwittingly be furthering your fiscal problems. Take the time to learn how you got into the position you’re in and then take steps to ensure that you are setting aside money for next year or have the proper amount of withholding being taken out by your employer.

Self-employed individuals who are required to pay quarterly estimated taxes are strongly encouraged to set up an exclusive tax savings account so that they don’t find themselves at a loss when their tax payments are due. The IRS provides a withholding calculator to help with this. Contact us so we can help you determine the best steps going forward.

The Difference Between an Audit, a Review, and a Compilation

When it comes time for financial documents to be corroborated, the three options available are a compilation, a review, and an audit. Each of these represents a very different degree of effort and investigation, and therefore each provides differing levels of confidence for investors and lenders. Let’s take a closer look at all three.

The Compilation

A compilation requires the least amount of work from an auditor. Although it costs less than an audit or compilation and takes the least amount of time, it provides the lowest level of assurance about the accuracy of the information presented. This is because in a compilation, the auditor does little more than hand over the original financial statements that were prepared internally by the company’s management, with no due diligence performed even to determine whether the information contained in the documents is accurate or true. It relies entirely on the information originally presented.

The Review

A review demands significantly more work on the part of the auditor, who is expected to determine the accuracy of the information contained in the financial documents presented to them through a series of inquiries and analytical procedures. Because some of the information contained in the financial documents presented by management has been tested, a review provides a moderate degree of assurance that the information is correct and can be trusted.

The Audit

An audit requires a much higher degree of due diligence than either a compilation or a review. It represents a significant amount of time spent making sure that all of the disclosures and ending balances that are contained in the organization’s financial statements are accurate, including time spent testing internal controls, confirming the engagement and statements from third parties, and examining all source documents in order to make sure that they are representative of the true situation at hand. An audit will often include a physical inspection where appropriate, as well as other procedures that are designed to confirm or refute the information that management has presented.

Though an audit will take the most time and be the most expensive procedure, it also provides the highest level of assurance for those considering investing in an organization or lending it money.

Please contact us with any questions relating to the different options for financial documents to be corroborated.

Don’t Be Duped by Clever Scammers

Article Highlights:

  • Scammers disguise emails to look legitimate.
  • Legitimate businesses and the IRS never request sensitive personal and financial information by email.
  • Don’t become a victim.
  • Stop – Think – Delete
  • Be alert for phony letters and phone calls

It is necessary to protect yourself against identity theft and tax scams. Having your identity stolen is a financial nightmare that can sometimes take years to straighten out. Identity thieves are smart, relentless, and always coming up with new schemes. All it takes is one slip up to compromise your identity, and your nightmare could begin. 

What they try to do is trick you into divulging personal information such as your bank account numbers, passwords, credit card numbers, or Social Security number.

One of the most popular methods scammers use is requesting your personal information by email. They are pretty good at making their emails look as if they came from a legitimate source such as the IRS, your credit card company, or your bank.

It’s essential to be very careful when responding to emails asking you to update things such as your account information, personal identification number (PIN), or password. First and foremost, you should be aware that no legitimate company would make such a request by email. If one does, the email should be deleted and ignored, just like spam emails.

We have seen bogus emails that looked like they were from the IRS, well-known banks, credit card companies, and other pseudo-legitimate enterprises. The intent is to trick you and have you click through to a website that also appears legitimate, where they have you enter your secure information. Here are some examples:

  • Any emails from the IRS saying you have a refund coming, and claiming that additional information is needed to process the refund. The IRS never initiates communication via email. If you receive this type of email, right away, you should know that it is bogus. If you are concerned, please contact us.
  • Emails from a bank indicating that it is holding a wire transfer and needs your bank routing information and account number. Don’t respond; if in doubt, call your bank.
  • Emails saying you have a foreign inheritance and that the sender needs your bank info to wire the funds. The funds that will get wired are yours going the other way. Remember: if it seems too good to be true, it generally is.

We have seen cases where elderly individuals have been duped out of hundreds of thousands of dollars, and sometimes their entire life savings. The scammers primarily rely on individuals’ fear of the IRS, coupled with a phony urgent need to make a payment to avoid arrest, foreclosure, or property seizure.

The list of examples is endless. The key here is for you to be highly suspect of any email requesting personal or financial information or requesting an immediate tax payment. Scammers will generally request you pay by gift card, which should be an immediate red flag. 

A good rule of thumb is to stop, think, and delete. 

If you receive electronic correspondence from the IRS, your state taxing agency, a credit card company, or a financial institution and feel uncomfortable ignoring it, contact us to check so you won’t need to worry.

Knowing that this is the time of year when the IRS sends correspondence to taxpayers, scammers will send fake letters to trick people into making payments on bogus tax liabilities. As a result, taxpayers need to be very careful to avoid being deceived by these thieves. The best practice is to have your Tarlow tax professional review any letter that you receive before you take any action. If the message is real, then it will require a timely response, but if it is fake, you should ignore it.

Scammers have also been known to call individuals and threaten immediate arrest if a payment related to a phony liability is not immediately made. Just the threat of arrest is enough to understand that the call is from a scammer, and you should immediately hang up.

Bottom line: you must be on guard against these scammers at all times. Your life can become a nightmare if your identity is stolen. Identity thieves will even file tax returns under your Social Security number, claiming huge refunds and leaving you with a horrendous mess to clean up with the IRS. Don’t be a victim. Please contact us if you believe your tax ID has been compromised.

Employer’s Pension Startup Credit Substantially Increased

Article Highlights:

  • Eligible Plans
  • Eligible Expenses
  • Qualification Rules
  • Credit Amount

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including retroactively extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.

If you are considering establishing a qualified pension plan for your business, you may be entitled to the Credit for Small Employer Pension Startup Costs. Eligible small employers that adopt a new plan, such as a 401(k), a SIMPLE plan, or a simplified employee pension plan (SEP), may claim a non-refundable credit.

The first credit year is the tax year that includes the date when the plan becomes effective or, electively, the preceding tax year. Examples of qualifying expenses include the costs related to changing the employer’s payroll system, consulting fees, and set-up fees for investment vehicles.

There are some qualification rules, the most predominant being:

  • The business did not employ, in the preceding year, more than 100 employees with compensation of at least $5,000.
  • The plan must cover at least one not–highly compensated employee.
  • The plan must be a new plan; during the three prior years, the employer must not have had a qualified employer plan for which contributions were made or in which benefits accrued for substantially the same employees who are in the plan for which the credit is being claimed.
  • If the credit is for the cost of a payroll-deduction IRA plan, the plan must be made available to all employees who have worked with the employer for at least three months.

Before 2020, this non-refundable credit was limited to the lesser of $500 or 50% of administrative and retirement-education expenses for the plan, for each of the plan’s first three years.

The Appropriations Act of 2020 increased the maximum credit for years beginning after 2019 to the greater of $500 or, the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan, or (b) $5,000.

The term “highly compensated employee” generally means any employee who (a) was a 5% owner at any time during the year or the preceding year, or (b) had compensation from the employer over $130,000 (2020 amount, which is inflation-adjusted for future years) during the year.

If you have questions related to starting a company pension plan or qualifying for this credit, please contact us. 

Understanding Tax Lingo

Article Highlights

  • Filing status
  • Adjusted gross income (AGI)
  • Taxable income
  • Marginal tax rate
  • Alternative minimum tax (AMT)
  • Tax Credits
  • Underpayment of the estimated tax penalty

When discussing taxes, reading tax-related articles, or interpreting instructions, it’s helpful to understand the lingo and acronyms used by tax professionals. It can be difficult to understand tax strategies if you are not familiar with the basic terminologies used in taxation. The following article provides the necessary details associated with the most frequently encountered tax terms.

Filing Status

Generally, if you are married at the end of the tax year, you have three possible filing status options: married filing jointly, married filing separately, or, if you qualify, head of household. If you were unmarried at the end of the year, you would file as single, unless you are eligible for the more beneficial head of household status. A special status applies to some widows and widowers.

When using the married joint status, the income, deductions, and credits of the spouses are combined for reporting on the tax return. If the spouses file using the married separate status, they each file a separate tax return, and if they reside in a separate property state, each spouse includes just his or her own income and deductions on their individual return. In community property states, generally, the incomes and deductions of the spouses are combined and then split 50%/50% for married separate tax return reporting purposes.

Head of household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND:

  • pay more than one half of the cost of maintaining as his or her home a household that was the principal place of abode for more than one half of the year of a qualifying child or certain dependent relatives, or
  •  pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year.

A married taxpayer may be considered unmarried for the purpose of qualifying for head of household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year.

Surviving spouse (also referred to as qualifying widow or widower) is a rare status used only for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. Joint rates are used. In the year the spouse passes away, the surviving spouse may file jointly with the deceased spouse if not remarried by the end of the year. In rare circumstances, for the year of a spouse’s death, the executor of the decedent’s estate may determine that it is better to use the married separate status on the decedent’s final return. The married separate status would then also require the surviving spouse to use the married separate status for that year.

Adjusted Gross Income (AGI)

 AGI is the acronym for adjusted gross income. AGI is generally the sum of a taxpayer’s income less specific subtractions called adjustments (but before the standard or itemized deductions). The most common adjustments are penalties paid for early withdrawal from a savings account, and deductions for contributing to a traditional IRA or self-employed retirement plan. A taxpayer’s AGI limits many tax benefits and allowances, such as credits, specific adjustments, and some deductions.

Modified AGI (MAGI)

Modified AGI is AGI (described above) adjusted (generally up) by tax-exempt and tax-excludable income. MAGI is a significant term when income thresholds apply to limit various deductions, adjustments, and credits. The definition of MAGI will vary depending on the item that is being limited.

Taxable Income

Taxable income is AGI less deductions (either standard or itemized). For years 2018 through 2025, another item that is subtracted when figuring taxable income is the deduction for qualified business income (generally 20% of qualified income from pass-through businesses such as partnerships, rentals, and sole proprietorships). Your taxable income is what your regular tax is based upon using a tax rate schedule specific to your filing status. The IRS publishes tax tables that are based on the tax rate schedules and that simplify the tax calculation, but the tables can only be used to look up the tax on taxable income up to $99,999.

Marginal Tax Rate (Tax Bracket)

Not all of your income is taxed at the same rate. The amount equal to your standard or itemized deductions is not taxed at all. The next increment is taxed at 10%, then 12%, 22%, etc., until you reach the maximum tax rate, which is currently 37%. When you hear people discussing tax brackets, they are referring to the marginal tax rate. Knowing your marginal rate is important because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 24%, and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $240 in federal tax ($1,000 x 24%). Your marginal tax bracket depends upon your filing status and taxable income. You can find your marginal tax rate using the table below.

Keep in mind when using this table that the marginal rates are step functions and that the taxable incomes shown in the filing-status column are the top value for that marginal rate range.


Marginal Tax Rate Single Head of Household Joint* Married Filing Separately
10% 9,700 13,850 19,400 9,700
12% 39,475 52,850 78,950 39,475
22% 84,200 84,200 168,400 84,200
24% 160,725 160,700 321,450 160,725
32% 204,100 204,100 408,200 204,100
35% 510,300 510,300 612,350 306,175
37% Over 510,300 Over 510,300 Over 612,350 Over 306,175

*Also used by taxpayers filing as surviving spouse

Capital Gains Tax Rates

Lower tax rates apply for gains upon sale of most property, such as stocks and real estate, held for over one year. These rates are 0%, 15% and 20%. Which rate applies depends on the amount of your taxable income.

Taxpayer & Dependent Exemptions

Before the changes made by the 2017 tax reform, you were allowed to claim a personal exemption for yourself, your spouse (if filing jointly), and each individual qualifying as your dependent. The deductible exemption amount was adjusted for inflation annually; the amount for 2019 is $4,200. However, the tax reform suspended the deduction for exemptions for 2018 through 2025.


To qualify as a dependent, an individual must be the taxpayer’s qualified child or pass all five dependency qualifications: the (1) member of the household or relationship test, (2) gross income test, (3) joint return test, (4) citizenship or residency test, and (5) support test. The gross income test limits the amount a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support. However, there are special rules for divorced parents and situations where several individuals together provide over half of the support.

Qualified Child

A qualified child is one who meets the following tests:

  1. Has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences;
  2. Is the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual;
  3. Is younger than the taxpayer;
  4. Did not provide over half of his or her own support for the tax year;
  5. Is under age 19, or under age 24 in the case of a full-time student, or is permanently and totally disabled (at any age); and
  6. Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund).


A taxpayer generally can choose to itemize deductions or use the standard deduction. The standard deductions, which are adjusted for inflation annually, are illustrated below for 2019.

Filing Status Standard Deduction
Single $12,200
Head of Household $18,350
Married Filing Jointly $24,400
Married Filing Separately $12,200

The standard deduction is increased by multiples of $1,650 for unmarried taxpayers who are over age 64 or blind. For married taxpayers, the additional amount is $1,300. The extra standard deduction amount is not allowed for elderly or blind dependents. Those with significant deductible expenses can itemize their deductions instead of claiming the standard deduction. The standard deduction of a dependent filing his or her return will often be less than the single amount shown above.

Itemized deductions generally include:

  1. Medical expenses which are limited to those that exceed 10% of your AGI for 2019.
  2. Taxes consisting primarily of real property taxes, state income (or sales) tax, and personal property taxes, but limited to a total of $10,000 for the year.
  3. Interest on qualified home acquisition debt and investments; the latter is limited to net investment income (i.e., the deductible interest cannot exceed your investment income after deducting investment expenses).
  4. Charitable contributions, generally limited to 60% of your AGI, but in certain circumstances, the limit can be as little as 20% or 30% of AGI.
  5. Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax is another way of being taxed that has often taken taxpayers by surprise. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with massive write-offs and tax-sheltered investments pay at least a minimum tax. However, even taxpayers whose only “tax shelter” is having a large number of dependents or paying high state income or property taxes were being affected by the AMT. Your tax must be computed by the regular method and also by the alternative method. The higher tax must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.

  • The standard deduction is not allowed for the AMT, and a person subject to the AMT cannot itemize for AMT purposes unless he or she also itemizes for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT.
  • Itemized deductions:

Interest in the form of home equity debt interest that cannot be traced to a deductible use. For years 2018–2025, interest paid on home equity debt is also not allowed for regular tax purposes.

  • Nontaxable interest from private activity bonds is tax-free for regular tax purposes, but some is taxable for the AMT.
  • Statutory stock options (incentive stock options), when exercised, produce no income for regular tax purposes. However, the bargain element (the difference between the grant price and exercise price) is income for AMT purposes in the year the option is exercised.
  • Depletion allowance in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.

A certain amount of income is exempt from the AMT, but the AMT exemptions are phased out for higher-income taxpayers.

Filing Status Exemption Amount Income Where Exemption Is Totally Phased Out
Married Filing Jointly $111,700 1,467,400
Married Filing Separate $55,850 $797,100
Unmarried $71,700 $733,700
AMT Taxable Income Tax Rate
0 – $194,800 (1) 26%
Over $194,800 (1) 28%
(1) $97,400 for married taxpayers filing separately

Your tax will be whichever is the higher of the tax computed the regular way and by the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation, and business tax credits only allowed against the regular tax. All of these can powerfully impact your bottom-line tax and raise a question of possible AMT. Fortunately, due to tax reform that the increased AMT exemption amounts and set higher thresholds before the exemption is phased out, fewer taxpayers are now paying AMT. Tax Tip: If you were subject to the AMT in the prior year, you itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be taxable in the regular tax computation. To the extent that you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not included in the subsequent year’s income.

Tax Credits

Once your tax is computed, tax credits can reduce the tax further. Credits reduce your tax dollar for dollar and are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to succeeding years. Although most credits are a result of some action taken by the taxpayer, there are some commonly encountered credits that are based simply on the number or type of your dependents or your income. These and other popular credit are outlined below.

Child Tax Credit

Thanks to tax reform, the child tax credit has been increased to $2,000 per child (up from $1,000 in 2017). If the credit is not entirely used to offset tax, the excess portion of the credit, up to the amount that the taxpayer’s earned income exceeds a threshold of $2,500, but not more than $1,400, is refundable. The credit begins to phase out at incomes (MAGI) of $400,000 for married joint filers and $200,000 for other filing status. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the threshold.

Dependent Credit – A nonrefundable credit is available to taxpayers with a dependent who isn’t a qualifying child, and like the increased child tax credit is designed to offset the loss of the exemption deduction as a result of tax reform. The dependent credit is $500. A qualifying child, the taxpayer, and if married, the spouse are not eligible for this credit. A child who isn’t a qualifying child but who qualifies as a dependent under the dependent relative rules would qualify the taxpayer to claim this credit.

Earned Income Credit

This is a refundable credit for a low-income taxpayer with income from working either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI, and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $3,600 (for 2019) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available.

Number of Children Joint Return Others Maximum Credit
None $14,450 – $21,370 $8,650 – $15,570 $529
1 $24,820 – $46,884 $19,030 – $41,094 $3,526
2 $24,820 – $52,493 $19,030 – $46,703 $5,828
3 $24,820 – $55,952 $19,030 – $50,162 $6,557

Residential Energy-Efficient Property Credit

This credit is generally for energy-producing systems that harness solar, wind, or geothermal energy, including solar-electric, solar water-heating, fuel-cell, small wind-energy, and geothermal heat-pump systems. These items qualify for a 30% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2021. The credit rate reduces to 26% in 2020 and 22% in 2021. The credit expires after 2021.

Withholding and Estimated Taxes

Our “pay-as-you-earn” tax system requires that you make payments of your tax liability evenly throughout the year. If you don’t, it’s possible that you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-earn” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer’s payroll department to take out the right amount of tax, based on the information shown on the Form W-4 that you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of:

1) 90% of the current year’s tax liability; or

2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing as married separate), 110% of the prior year’s tax liability.

If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date.

Please contact us if we can be of assistance with your tax planning needs.

Divorced, Separated, Married or Widowed This Year? You May Face Complications at Tax Time

Article Highlights:

  • Separated Taxpayers
  • Divorced Taxpayers
  • Recently Married Taxpayers
  • Widowed Taxpayers
  • Filing Status
  • Joint and Several Liability
  • Who Claims the Children
  • Alimony
  • Community Property States
  • Affordable Care Act

Taxpayers are frequently blindsided when their filing status changes because of a life event such as marriage, divorce, separation or the death of a spouse. These occasions can be stressful or ecstatic times, and the last thing most people will be thinking about is their taxes. But the ramifications are real, and the following are some of the major tax complications for each situation.


Separating from a spouse is probably the most complicated life event and is undoubtedly stressful for the family involved. For taxes, a separated couple can file jointly, because they are still married, or file separately.

  • Filing Status

     If the couple has lived apart from each other for the last 6 months of the year, either or both of them can file as head of household (HH), provided that the spouse(s) claiming HH status paid over half the cost of maintaining a household for a dependent child, stepchild or foster child. A spouse not qualifying for HH status must file as a married person filing separately if the couple chooses not to submit a joint return. The married filing separate status is subject to a host of restrictions to keep married couples from filing separately to take unintended advantage of the tax laws.

  • In most cases, a joint return results in less tax than two returns filed as married separately. However, when married taxpayers file joint returns, both spouses are responsible for the tax on that return (referred to as joint and several liability). What this means is that one spouse may be liable for all of the tax due on a return, even if the other spouse earned all of the income on that return. This holds true even if the couple later divorces, so when deciding whether to file a joint return or separate returns, taxpayers who are separated and possibly on the path to a divorce should consider the risk of potential future tax liability on any joint returns they file.
  • Children

     Who claims the children can be a contentious issue between separated spouses. If they cannot agree, the spouse with custody for the greater part of the year is entitled to claim the child as a dependent along with the associated tax benefits. When determining who had custody for the more significant part of the year, the IRS goes by the number of nights the child spent at each parent’s home and ignores the actual hours spent there in a day.

  • Alimony

    Alimony is the term for payments made by one spouse to the other spouse for the support of the latter spouse. Under tax law before tax reform, the recipient of the alimony includes it as income, and the payer deducts it as an above-the-line expense, on their separate returns. The tax reform rule is that alimony is non-taxable to the recipient if it is received from divorce agreements entered into after December 31, 2018, or pre-existing agreements that are modified after that date to treat alimony as non-taxable. Therefore, post-2018 agreement alimony cannot be handled by the recipient as earned income for purposes of an IRA contribution and can’t be deducted by the payer.

  • Payment for the support of children is not alimony. To be treated as alimony by separated spouses, the payments must be designated and required in a written separation agreement. Voluntary payments do not count as alimony.
  • Community Property

    Nine U.S. states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin – are community property states. Generally, community income must be split 50–50 between spouses according to their resident state’s community property law. This often complicates the allocation of income between spouses, and they generally cannot file based upon their income alone.


Once a couple is legally divorced, tax issues become clearer because each former spouse will file based upon their own income and the terms of the divorce decree related to spousal support, custody of children and division of property.

  • Filing Status

     An individual’s marital status as of the last day of the year is used to determine the filing status for that year. So, if a couple gets divorced during the year, they can no longer file together on a joint return for that year or future years. They must, unless remarried, either file as single or head of household (HH). To file as HH, an unmarried individual must have paid over half the cost of maintaining a household for a dependent child or dependent relative who also lived in the home for more than half the year. There is an exception: a dependent parent doesn’t need to live in their child’s home for the child to qualify for HH status). If both ex-spouses meet the requirements, then both can file as head of household.

  • Children

     Normally, the divorce agreement will specify which parent is the custodial parent. Tax law specifies that the custodial parent is the one entitled to claim the child’s dependency and associated tax benefits unless the custodial parent releases the dependency to the other parent in writing. The IRS provides Form 8332 for this purpose. The release can be made for one year or multiple years and can be revoked, with the revocation becoming effective in the tax year after the year the revocation is made.

  • Most recently, family courts have been awarding joint custody. If the parents cannot agree on who can claim a child as a tax dependent, then the IRS’s tie-breaker rule will apply. This rule specifies that the one with custody the more significant part of the year, measured by the number of nights spent in each parent’s home, is entitled to claim the child as a dependent. The parent requesting the dependency is also eligible to take advantage of other tax benefits, such as childcare credits and higher education tuition credits.
  • Alimony

    See alimony under “separated.”

Recently Married

When a couple marries, their incomes and deductions are combined, and they must file as married individuals.

  • Filing Status

    If a couple is married on the last day of the year, they can either file a joint return combining their incomes, deductions and credits or file as married separately. Generally, filing jointly will provide the best overall tax outcome. But there may be extenuating circumstances requiring them to file as married separately. As mentioned earlier, married filing separate status is riddled with restrictions to keep married couples from taking undue advantage of the tax laws by filing separate returns. 

  • Combining Income

     The tax laws include numerous provisions to restrict or limit tax benefits to higher-income taxpayers. The couple’s combined incomes may well be enough that they’ll encounter some of the higher income restrictions, with unpleasant tax results.

  • Affordable Care Act

     If one or both spouses acquired their insurance through a government marketplace and were receiving a premium supplement, their combined incomes may exceed the eligibility level to qualify for the supplement, which may have to be repaid.


When one spouse of a married couple passes away, a joint return is still allowed for the year of the spouse’s death. Furthermore, the widow or widower continues to use the joint tax rates for up to two additional years, provided the surviving spouse hasn’t remarried, and has a dependent child living at home. This provides some relief for the survivor, who would otherwise be straddled with an unexpected tax increase while also facing the potential loss of some income, such as the deceased spouse’s pension and Social Security benefits.

If any of these situations are relevant to you, please contact us for additional details that may also apply concerning your specific set of circumstances.

Will Independent Contractors Become Extinct?

Article Highlights:

  • New California Legislation
  • Employee or Independent Contractor
  • Dynamex
  • ABC Test
  • Impact on Employers
  • Impact on Workers
  • Safe Harbor

The California legislature recently passed landmark labor legislation that essentially makes it very difficult, if not impossible, to legally classify an employee as an independent contractor (self-employed). Governor Newsom was quick to sign it into law, and it generally became effective on January 1, 2020. Many believe this legislation will suppress entrepreneurship and innovation.

Although this issue currently pertains to California, other smaller states are sure to follow, and this will ultimately become an issue for employers nationwide.


The distinction between employee and independent contractor is governed by both federal law and state law. It has always been a complicated issue at both the federal and state levels, and the state and federal guidelines often differ. However, because of the significant payroll tax revenues involved, the states are generally the most aggressive in classifying workers as employees.

In the California case, the legislation was prompted by a labor case that was ultimately settled by the California Supreme Court. In that case, Dynamex Operations West, a trucking company, was treating its drivers as employees. It started classifying them as independent contractors to reduce costs, which caught the eye of the California Employment Development Department and ultimately reached the California Supreme Court. The court determined the drivers were employees and not independent contractors. However, in making that decision, the California Supreme Court adopted the “ABC test” used by some other states to make their determination.

As a result of this decision, the California Legislature passed legislation (AB-5) codifying, with some exceptions, the ABC test for determining whether a worker is an independent contractor.

The ABC Test

Several states, including Massachusetts and New Jersey, have also adopted the “ABC” test. The test is a broad means of determining a worker’s status as either an employee or a contractor by considering three factors. If a worker passes all three, then he or she is an independent contractor:

(A) That the worker is free from the hirer’s control and direction, in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) That the worker performs work outside the usual course of the hiring entity’s business; and

(C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The objective of the ABC test is to create a more straightforward, clearer test for determining whether a worker is an employee or an independent contractor. It presumes that a worker hired by an entity is an employee and places the burden on the employer to establish that the worker meets the definition of an independent contractor. But California’s AB-5 legislation did not just adopt the ABC test; it also added numerous and complicated exceptions to using the ABC test, which will surely enrich California labor attorneys.

Impacts on Employers

Employers who have been treating a worker as an independent contractor but must treat him or her as an employee must pay at least minimum wage and provide sick time, meal and rest periods, and health insurance. The employer will also have to pay worker’s compensation benefits and health insurance. On top of that, California has severe monetary penalties for misclassifying workers. Impacts on Workers: The impacts on workers vary by occupation. Some workers incur significant amounts of expenses, and under the tax reform, they can no longer deduct employee business expenses on their tax returns. Thus, for example, an Uber driver who must provide the vehicle and pay for the gas, insurance, and upkeep would be unable to deduct these substantial costs of providing the service and would have to pay taxes on his or her gross income.

Large Employers Are Fighting Back

Some larger employers are fighting back and challenging AB-5. Uber and DoorDash have joined forces with some contract drivers to file a suit in the U.S. District Court for Central California, alleging that AB-5 violates individuals’ constitutional rights and unfairly discriminates against technology platforms. The California Trucking Association (CTA) successfully obtained a temporary injunction against AB-5 for CTA drivers by contending that AB-5 is in direct conflict with several federal laws related to motor carriers. Regardless of the outcomes of these cases, they will be appealed, and the ultimate outcome could be months, if not years, away.

This leaves few choices for smaller employers other than to carefully assess the provisions of AB-5 when treating a worker as an independent contractor. For those who are unsure, it might be wise to consult a labor attorney. The safe-harbor option is to treat all workers as employees until all of the legal challenges to AB-5 have run their course.

Please contact us if you have further questions.

Congress Allowing Higher Medical Deductions for 2019 and 2020

Article Highlight:

  • Appropriations Act of 2020
  • Medical AGI Limitations
  • Sometimes Overlooked Deductions
  • Deductible Health Insurance
  • Above-the-Line Health Insurance Deduction for Self-Employed

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included several tax law changes. The changes include extending specific tax provisions that expired after 2017 or were about to expire, some retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.

Medical expenses are deductible as an itemized deduction, but only to the extent they exceed a percentage of a taxpayer’s adjusted gross income (AGI). For a long time, the rate was 7.5%, which was then raised for under-age-65 taxpayers to 10% for 2013 through 2016 and then lowered back to 7.5% for all taxpayers for years 2017 and 2018. It was scheduled to go back up to 10% starting with the tax year 2019. However, with the passage of the Appropriations Act of 2020, Congress reduced that percentage back to 7.5% for tax years 2019 and 2020, allowing more taxpayers to qualify for the medical deduction.

However, keep in mind that the total of the itemized deductions must exceed the standard deduction before the itemized deductions provide a tax break. So even if your medical deductions exceed the 7.5% floor, this doesn’t necessarily mean you will have a tax benefit from them.

To help you maximize your medical deductions, the following are some medical expenses other than those for doctors, dentists, hospitals, and prescriptions that are sometimes overlooked:

  • Adult Diapers
  • Acupuncture
  • Birth Control
  • Chiropractor Visits
  • Drug-Addiction Treatment
  • Fertility Enhancement Therapy
  • Gender Identity Disorder Treatments
  • Guide Dog Expenses
  • Health Insurance Premiums

*Including the premiums you pay for coverage for yourself, your dependents, and your spouse, if applicable, for the following types of plans:

    • Health Care and Hospitalization Insurance
    • Long-Term Care Insurance (but limited based upon age)
    • Medicare B
    • Medicare C (aka Medicare Advantage Plans)
    • Medicare D
    • Dental Insurance
    • Vision Insurance
    • Premiums Paid through a Government Marketplace, Net of the Premium Tax Credit

* However, premiums paid on your or your family’s behalf by your employer aren’t deductible because their cost is not included in your wage income. If you pay premiums for coverage under your employer’s insurance plan through a “cafeteria” plan, those premiums aren’t deductible either because they are paid with pre-tax dollars.

  • Home Modifications for Disabled Individuals
  • Lactation Expenses
  • Learning Disability Special Education
  • Nursing Home Costs
  • Nursing Services (which need not be performed by a nurse)
  • Pregnancy Tests
  • Smoking-Cessation Programs

This is not an all-inclusive list, so please contact us with questions related to expenses that you think might qualify as a medical expense.

As a tax tip, if you are self-employed, you may be able to deduct 100% (no 7.5%-of-AGI reduction) of the cost of medical insurance without itemizing your deductions. This above-the-line deduction is limited to your net profits from self-employment. If you are a partner who performs services in that capacity and the partnership pays health insurance premiums on your behalf, those premiums are treated as guaranteed payments that are deductible by the partnership and includible in your gross income. In turn, you may deduct the cost of the premiums as an above-the-line deduction under the rules discussed in this article.

No above-the-line deduction is permitted when the self-employed individual is eligible to participate in a “subsidized” health plan maintained by an employer of the taxpayer, the taxpayer’s spouse, any dependent, or any child of the taxpayer who hasn’t attained age 27 as of the end of the tax year. This rule is separately applied to plans that provide coverage for long-term care services. Thus, an individual who is eligible for employer-subsidized health insurance may still deduct long-term care insurance premiums, as long as he or she isn’t eligible for employer-subsidized long-term care insurance. Also, to treat the insurance as subsidized, 50% or more of the premium must be paid by the employer.

This above-the-line deduction is also available to more-than-2% S corporation shareholders. For purposes of the income limitation, the shareholder’s wages from the S corporation are treated as his or her earned income.

The above-the-line deduction includes the premiums you pay for health coverage for yourself, your dependents, and your spouse, if applicable, for the types of plans listed under “Health Insurance Premiums” above.

If you have any questions related to medical itemized deductions or the self-employed above-the-line deduction for health insurance premiums, please contact us.