Tax Tips for Individuals

Untying the Knot: The Tax Implications of a Divorce

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From the division of marital property to child custody settlements, ending a marriage often includes complex legal ramifications that can impact your family’s finances. But have you considered the tax implications?

Just as there are financial and legal to-dos for newlyweds, there are also tax-related administrative tasks to tackle once a divorce is finalized.

Most divorcees want to maximize their tax position — and minimize their pay out to Uncle Sam. While every situation is unique, here are some common tax reminders related to a divorce:

Tax filing status. Your marital status controls your filing status. When changing from married to divorced, your standard deduction and income tax payment will likely change as well.

Filing statuses are dependent on when a divorce is finalized. If the new year begins before a divorce is official, you’re still married in the eyes of the IRS and must file a joint return for the previous year or choose married filing separately.

Tax withholding. If you’re working, you need to update the amount withheld from your paycheck. Complete a new Form W-4 to revise your tax withholding amount within 10 days of signing your final divorce papers.

Child support. If you’re receiving child support, the amount is not included as part of your taxable income. If you’re the one paying the support, that expense is not deductible.

Alimony. Alimony is also not deductible by the party on the paying end. And similar to child support, the recipient doesn’t have to include it as taxable income.

Dependents. The custodial parent may claim a child as a dependent for tax purposes. By definition, this is the parent with whom the child spends the majority of nights.

Property settlements. If a marital property is sold as part of your divorce settlement, there can be significant tax ramifications due to unrealized capital gains.

These are general considerations and should not be taken as financial or legal advice.  Consult with your legal or tax professional regarding your personal situation for guidance tailored to your specific needs.

Turning the page on a difficult time of life

Divorce can be the start of an exciting new chapter. But as you settle back into the single life, it’s important to handle financial and administrative chores for a clean a slate. The professionals at Magone & Company have the guidance and expertise in dealing with these tax matters and more. Don’t hesitate to give us a call today at (973) 301-2300.

Tax Penalties: How to Get the IRS to Forgive & Forget

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Whether you didn’t file your tax return on time or didn’t prepare an accurate return, one thing is for certain: the IRS will come after you waving a penalty flag.

Mistakes happen, but the price tag per penalty varies. For example, the failure-to-file penalty is 5% of your unpaid taxes for each month that the return is late. If five months go by and you haven’t paid up, the failure-to-file penalty will max out, but the failure-to-pay penalty continues to grow until it’s settled, up to 25%.

There is some good news, however. If the IRS issues a penalty, there are circumstances that may grant you some relief:

Reasonable cause

The IRS may remove or reduce a penalty if you attempted to comply with tax laws but were unable due to conditions out of your control, such as:

  • Death or serious illness of a close family member
  • System issues that delayed a filing
  • A fire or other natural disaster

First-time abatement or other administrative waiver

A first-time abatement penalty waiver is the most common administrative waiver for individual taxpayers and businesses that receive their first tax penalty. To qualify, you must meet the following conditions:

  • You’ve demonstrated past compliance, meaning you’ve filed the same type of return for the past three years and didn’t receive any penalties during that time.
  • You’re currently compliant, having filed all required returns or filed a valid extension, and you’ve paid all other taxes due or are under a payment plan.

Statutory exception

According to the IRS, the following reasons may constitute what is known as a statutory exception:

  • Mailed a return on time but still received a penalty
  • Received incorrect IRS advice
  • Lived in an area affected by a federal disaster
  • Were stationed in a military combat zone

Wiping the slate clean

To apply for relief due to any of these reasons, your first step is to contact the IRS via the toll-free number on your penalty notice. If the IRS is unable to approve your request over the phone, you’ll be given next steps toward appealing your penalty.

Our advice? Don’t go it alone. A trusted tax advisor can help you sort through the IRS rules and ensure you have a case for penalty forgiveness. Reach out to the tax resolution experts at Magone & Company today at (973) 301-2300 for assistance.

Tax ID Theft Prevention: You Are Your Own Best Defense

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Any form of identity theft can be costly and unsettling. And it can take months — sometimes years — to fully recover. But tax-related identity theft can be particularly disturbing because it involves the IRS.

While the government agency has taken significant steps in recent years to help minimize the occurrence of tax-related identity theft, fraud continues to occur. Before you become a victim, learn how to spot it and stop it in its tracks.

4 red flags for possible identity theft

If you find yourself in any of these situations, proceed with caution.

  1. Your return is rejected. The most unambiguous indication of tax-related identity theft is when the IRS rejects your return based on a duplicate Social Security Number (SSN) or Employer ID Number (EIN).
  2. You’re asked to pay additional taxes. To trigger a refund payment, criminals often submit fictitious information to the IRS.
  3. IRS records are incorrect. Criminals often invent sources of income to appear legitimate to the IRS and facilitate a refund. If, for example, the IRS issues an EIN you didn’t request, a criminal may be using your business’s identity to submit fraudulent returns.

What now? Reporting fraud

If it appears your tax-related identity has been stolen, complete IRS Form 14039, Identity Theft Affidavit as soon as possible. The IRS will assign your case to an employee who specializes in identify-theft victims. They will determine the scope of the fraud, make any necessary corrections to IRS records and assign you a personal identification number to prevent criminals from using your SSN or EIN to file returns in the future.

You may also need to notify your state’s tax authority. Although less prevalent (because refunds are generally smaller), it’s possible someone could use your SSN or EIN to file a fake state tax return.

If you’re contacted by the IRS, it’s important to note that the agency typically reaches out via regular mail delivered by the U.S. Postal Service. Special circumstances may warrant a visit or a phone call, including:

  • A delinquent tax return/employment tax payment
  • An overdue tax bill
  • The need to tour a business as part of an audit or investigation

Prevention is the best defense

What can you do to reduce your risk of tax identity fraud? These simple tips can save you the headaches.

  • File early before a potential scammer has an opportunity to file a fraudulent return in your name
  • Ensure that your computer is well-protected from viruses, malware and other hacker weapons
  • Take advantage of the IRS IP PIN program. After you verify your identity through the Secure Access authentication process, the IRS will issue you a six-digit PIN to use for all communications with the IRS, including your tax filings

If you suspect you’ve become a victim of fraud or have questions about protecting your own or your business’ identity, reach out to the knowledgeable CPAs at Magone & Company. Our extensive fraud protection expertise can help keep your sensitive information under wraps. Give us a call today at (973) 301-2300.

Hiring Your Spouse in Your Small Business: 6 Tax Reasons to Say “I Do”

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Many businesses are having trouble recruiting and retaining qualified workers. According to a recent report conducted by the Society for Human Resource Management (SHRM), nearly 90% of employers reported difficulty filling open positions; 73% have seen a decrease in applications for hard-to-fill positions, and only 6% expect labor shortages to diminish any time soon.

If your small business is understaffed with no strong prospects in sight, have you considered hiring your spouse?

If he or she is already familiar with the job, hiring your spouse as an official employee can have many benefits — including various tax-savings opportunities. Here are six ways hiring a spouse may help chip in to lower your taxes.

1. Retirement savings. If certain requirements are met, an employer can deduct contributions made to a qualified retirement plan on behalf of its employees, including your spouse.

For example, if your company has a 401(k) plan in place, your spouse can elect to defer up to $20,500 ($27,000 if age 50 or older) for the year, in addition to any matching contributions by the company. This is a great way for your spouse to save for retirement independently.

2. Business travel expenses. Normally, you can’t deduct travel expenses attributable to a spouse when he or she accompanies you on a business trip. It’s considered a nondeductible personal expense.

But the tax outcome changes if your spouse is a bona fide employee of the company and travels with you for business reasons. As a result, your company may be able to write off your spouse’s business-related travel expenses, such as airfare or other transportation, lodging and 50% of the cost of meals. Plus, the benefit is tax-free to your spouse. The same basic rules apply if your spouse goes on a business trip alone.

3. Health insurance premiums. If you’re currently paying to cover your spouse under the company’s health insurance plan, you may be able to shift more of the cost to the company if your spouse is an employee.

The company can deduct all the health insurance premiums it pays on behalf of your spouse — just like it can for other employees. Similarly, you can deduct 100% of the cost if you operate a self-employed business.

4. Additional health-related breaks. If you operate a C corporation or you’re self-employed, a Health Reimbursement Arrangement (HRA) for your employees can offer even more tax savings if your spouse participates. If certain requirements are met, the company may reimburse your spouse for out-of-pocket medical expenses and health insurance premiums, while the costs are deductible by the company. This is a win-win situation.

Likewise, if your spouse is covered by a qualified high-deductible health plan, he or she can contribute pretax income to an employer-sponsored Health Savings Account (HSA) or make deductible contributions above the line to the HSA. Your business can also contribute to your spouse’s HSA. Alternatively, your spouse can redirect pretax income to an employer-sponsored Flexible Spending Account (FSA).

5. Vehicles. Although you may derive tax benefits for your vehicle’s business use, your spouse’s expenses are purely personal and nondeductible. But as an employee, he or she may be entitled to business deductions under a complex set of rules, including limits on so-called “luxury car” write-offs.

6. Group-term life insurance. An owner’s spouse is entitled to the same group-term life insurance coverage as other company employees (typically, equal to three or four times the individual’s salary).

Under long-standing tax rules, the first $50,000 of employer-paid group-term life insurance coverage is tax-free to the employee. Plus, any additional coverage is taxable at relatively low rates. Thus, having your spouse work for the company provides more insurance protection for your family.

A match made in heaven?

Before you hire your spouse, meet with a professional tax advisor to discuss whether this strategy would be beneficial for your business and your tax circumstances. The CPAs at Magone & Company can help you make the most tax-efficient decisions. Give us a call today at (973) 301-2300 to learn more.

 The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your business or tax situation.

How 3 New NJ State Tax Deductions Work

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Exciting news for Garden State residents who are struggling to pay for higher education! Relief is on the way through the New Jersey College Affordability Act.

Beginning in tax year 2022, three tax deductions are available to residents earning fewer than $200,000 a year.

1.     $10,000 in contributions are deductible through the NJBEST savings trust.

The first tax incentive is available to residents who participate in the New Jersey Better Education Savings Trust (NJBEST.) During the 2022 tax year, accountholders may deduct up to $10,000 in contributions that they make to their savings trust.

Plus, earnings from contributions to the NJBEST 529 College Savings Plan are not subject to federal income tax–provided funds are withdrawn for qualified higher education expenses, or up to $10,000 is paid toward principal or interest of a student loan.

Funds in an NJBEST account may also be invested, by the contributor, in portfolios that would meet the educational goals of the investor.

Depending on the market, this option can offer you significant advantages — especially if you’re walking the line between saving for a dependent’s higher education and saving for your retirement. Higher earnings in your NJBEST savings plan would, under some circumstances, allow you to add additional funds into a tax protected plan for your retirement. Consulting with an experienced tax expert will help steer you and your financial goals in the right direction.

2.     Up to $2,500 deductible in principal and interest for NJCLASS loans.

The second tax incentive offered by the state is the New Jersey College Loans to Assist State Students (NJCLASS.) It’s a loan program that’s used to shore up education expenses not covered by other aid, including Federal Direct loans.

NJCLASS loans are available to Garden State students who attend approved schools in- or out-of-state. The loans are also available to state students attending online classes or classes abroad. NJCLASS loans are also accessible to non-resident students attending an approved school in New Jersey.

Up to $2,500 of principal and interest paid on NJCLASS student loans may be deducted per year. Again, annual gross income must fall at or below $200,000.

3.     Up to $10,000 for in-state higher education costs.

The third tax deduction is for specific higher education costs for in-state schools.

State residents may deduct the cost of tuition, books, computers and other expenses associated with their higher education. The deduction may not exceed $10,000 and includes the costs of the taxpayer, a spouse or a dependent.

New Jersey Senator Sandra Cunningham (D-Hudson), Senate Higher Education Committee Chair was co-sponsor of the New Jersey College Affordability Act. According to Cunningham, “Our hope with this bill is that by providing tax incentives to families, we can assist with the financial burden they may incur sending a child to college.”

The bill was unanimously approved by the New Jersey Senate and signed into law in June 2021 for the 2022 tax year and beyond.

Check in with Magone & Co 

Saving for college isn’t easy — especially with the current economy and other financial demands, like assisting older parents or putting money away for your own retirement. Give us a call to see if our Family Advisory Services could be right for you.

Getting Ahead of 2023 IRS Cryptocurrency Reporting Requirements

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Know those 1099-B forms that show up at tax time from your broker? Well, if you’re dabbling in cryptocurrency, you’ll soon be seeing more of them.

Starting in 2023, U.S. legislation now extends the same transaction reporting rules to cryptocurrency exchanges, custodians or platforms (e.g., Coinbase, Gemini or Binance), as well as digital assets, such as cryptocurrency (e.g., Bitcoin, Ether or Dogecoin). The same legislation also puts into effect cash reporting rules for payments of $10,000 or more to cryptocurrency. That means businesses accepting payments of $10,000+ in cryptocurrency will have to report those earnings to the IRS (using Form 8300).

How is this different than in the past?
The legislation, enacted in 2021, expanded the definition of “brokers” who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets (also known as virtual currencies) on behalf of another person (for example, cryptocurrency exchanges). Thus, any platform on which you can buy and sell cryptocurrency will have to report digital asset transactions to you and the IRS at the end of each year.

The cryptocurrency exchanges/platforms will have to gather information from customers, so that they can properly issue Forms 1099-B. But it’s not yet known whether an exchange/platform will have to file Form 1099-B itself (modified to include digital assets) or some other new IRS form.

Digital assets defined
For these reporting requirements, a “digital asset” is any digital representation of value recorded on a cryptographically-secured distributed ledger or any similar technology. The definition could also potentially include some non-fungible tokens (NFTs) that use blockchain technology for one-of-a-kind assets like digital artwork.

Separate from the broker reporting rules, a business that receives $10,000 or more in cash must report the transaction to the IRS on Form 8300. For this cash reporting requirement, businesses will treat digital assets like cash.

What to expect moving forward
If you use a cryptocurrency exchange or platform, and it has not already collected a Form W-9 from you (seeking your taxpayer identification number), expect it to do so.

Cryptocurrency exchanges and platforms, in addition to collecting information from their customers, will begin tracking the holding period, and the buy and sell prices of the digital assets in your accounts. Be aware that transactions subject to the new reporting rules will include not only the selling of cryptocurrencies for fiat currencies (government-issued currency, such as the U.S. dollar), but also exchanges of cryptocurrencies for other cryptocurrencies. 

It’s also good to keep in mind that the cryptocurrency exchanges or platforms may not have all the information they need to meet their reporting requirements under the new rules. So be patient, because it may be a challenging first year to get the information you need.