Aspects of your financial life to review as the year closes.

 

The end of the year can remind us of last-minute things we need to address and the goals we want to pursue. Here are some aspects of your financial life to consider as this year leads into the next. 

Remember that this article is for informational purposes and is not a replacement for real-life advice. Contact a tax or legal professional before modifying your tax strategy. The ideas presented are not intended to provide specific advice. Also, tax rules are constantly changing, and there can be no guarantee that the rules will stay the same for any period. 

Investments: If you still need to, consider contributing the maximum to your retirement accounts and review any existing retirement accounts from work. If you are eligible to make any catch-up contributions, consider making that decision.  

Retirement strategy: If you still need to, consider contributing the maximum to your retirement accounts and review any existing retirement accounts from work. If you are eligible to make any catch-up contributions, consider making that decision. 

Taxes: It's a good idea to consider checking in with your tax or legal professional before the year ends, especially if you have questions about an expense or deduction from this year. Also, it may be prudent to review any sales of property as well as both realized and unrealized losses and gains. Look back at last year's loss carried forward. If you've sold securities, gather up cost-basis information. As always, bringing all this information to your financial professional is wise.  

Charitable gifting: Plan charitable contributions or contributions to education accounts and make any desired cash gifts to family members. The annual federal gift tax exclusion allows you to give away up to $17,000 in 2023, meaning you can gift as much as $17,000 to as many individuals as you like this year. Such gifts do not count against the lifetime estate tax exemption amount as long as they stay beneath the annual federal gift tax exclusion threshold. Besides outright gifts, you can explore creating and funding trusts on behalf of your family. The end of the year is also an excellent time to review any trusts. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, could you work with a professional familiar with the rules and regulations? ¹ 

Life insurance: The end of the year is an excellent time to double-check that your policies and beneficiaries are up to date. Review premium costs and beneficiaries and consider whether your insurance needs have changed. Several factors could impact the cost and availability of life insurance, such as age, health, the type of insurance purchased, and the amount purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, you may pay surrender charges, which could have income tax implications. Before implementing a life insurance strategy, consider whether you are insurable. Finally, please remember that any guarantees associated with a policy depend on the ability of the issuing insurance company to continue making claim payments. 

Life events: Evaluating any significant life changes in the last year:

 

• Marital status
• Moving
• Changing jobs
• Buying a home
• Starting a business
• Inheritance
• Gifts
• Additions to the family.

 

All these circumstances can financially impact your life and how you invest and plan for retirement and wind down your career or business. While it's likely that you have already discussed these matters with your financial professional this year, bring them up in your review.

 

Citations

1. IRS.gov, September 15, 2023

Navigating the Maze: How Living and Working in Different States Affects Your Taxes

 

In an increasingly interconnected world, it's not uncommon for individuals to live in one state while working in another. This lifestyle choice can come with various benefits, such as better job opportunities, a lower cost of living, or proximity to family.

However, the complexity of the U.S. tax system can make this arrangement more intricate than it initially seems. Understanding how living and working in different states affect your taxes is crucial to avoiding potential pitfalls and optimizing your financial situation.

Residency vs. Domicile

Before delving into the tax implications, it's essential to distinguish between two key concepts: residency and domicile. Residency typically refers to where you physically live, while domicile is your permanent legal home. For tax purposes, your domicile is usually where you have the closest connections and intend to return, even if you temporarily live and work elsewhere.

State Income Tax

One of the most significant impacts of living and working in different states is the variation in state income taxes. While some states have no income tax (e.g., Texas, Florida), others impose significant income tax rates (e.g., California, New York). If you live in a state with an income tax but work in a state without one (or with a lower rate), you might be subject to non-resident or part-year resident taxation in the state where you work.

Double Taxation

The prospect of being taxed by two states—your resident state and the state where you work—can be daunting. Fortunately, most states have agreements in place to prevent double taxation. These agreements, known as reciprocity agreements, allow you to pay taxes only to your resident state, even if you're working across state lines. However, these agreements vary, and it's essential to check the specifics of the states involved.

Credits and Deductions

In situations with no reciprocity agreement, you might be eligible for tax credits or deductions to mitigate double taxation. The resident state might offer a credit for taxes paid to another state, reducing your overall tax liability. Additionally, the federal tax return allows you to deduct any state income taxes paid, softening the impact of dual taxation.

Filing Considerations

Living and working in different states often means filing tax returns in both states. You'll likely need to file a non-resident or part-year resident return in the state where you work and a resident return in your home state. Filing requirements, deadlines, and forms can vary significantly, so seeking professional tax advice is advisable to ensure compliance and maximize deductions.

Impact on Other Taxes

Aside from state income tax, living and working in different states can also influence other taxes. Sales, property, and local taxes can differ between states and impact your overall financial situation. Additionally, your domicile state might have specific estate and inheritance tax laws that apply to your situation.

Living and working in different states can offer numerous benefits, but the intricate web of state tax laws can complicate financial matters. To navigate this complex landscape, it's essential to understand your residency status, potential tax treaties, and available credits and deductions.

Seeking advice from tax professionals or financial advisors with expertise in cross-state taxation can help you make informed decisions, optimize your tax situation, and ensure compliance with tax laws. As you live and work across state lines, remember that staying informed is your best tool for financial success.

A Taxing Story: Capital Gains and Losses

 

Chris Rock once remarked, “You don’t pay taxes – they take taxes.” That applies not only to income but also to capital gains.

Capital gains result when an individual sells an investment for an amount greater than their purchase price. Capital gains are categorized as short-term gains (a gain realized on an asset held one year or less) or as long-term gains (a gain realized on an asset held longer than one year).

Keep in mind that the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Long-Term vs. Short-Term Gains

Short-term capital gains are taxed at ordinary income tax rates. Long-term capital gains are taxed according to different ranges (shown below).¹

Long Term Capital Gains Tax Brackets (for 2023)

Tax Bracket/Rate	Single	Married Filing Jointly	Head of Household
0%	$0 - $44,625	$0 - $89,250	$0 - $59,750
15%	$44,626 - $492,300	$89,251- $553,850	$59,751 - $523,050
20%	$492,300+	$553,850+	$523,0500+

It should also be noted that taxpayers whose adjusted gross income is in excess of $200,000 (single filers or heads of household) or $250,000 (joint filers) may be subject to an additional 3.8% tax as a net investment income tax.²

Also, keep in mind that the long-term capital gains rate for collectibles and precious metals remains at a maximum of 28%.³

Rules for Capital Losses

Capital losses may be used to offset capital gains. If the losses exceed the gains, up to $3,000 of those losses may be used to offset the taxes on other kinds of income. Should you have more than $3,000 in such capital losses, you may be able to carry the losses forward. You can continue to carry forward these losses until such time that future realized gains exhaust them. Under current law, the ability to carry these losses forward is lost only on death.⁴

Finally, for some assets, the calculation of a capital gain or loss may not be as simple and straightforward as it sounds. As with any matter dealing with taxes, individuals are encouraged to seek the counsel of a tax professional before making any tax-related decisions.

1. Investopedia.com, July 19, 2022
2. IRS.gov, 2023
3. Investopedia.com, May 4, 2022
4. Investopedia.com, February 24, 2023

Tips for When You Can't Pay Your Taxes

Tax season can be stressful for anyone, especially if you face financial difficulties and cannot fully pay your taxes. While it's essential to fulfill your tax obligations, there are steps you can take to manage the situation and ease the burden on your finances.

In this blog, we'll explore some practical tips to help you navigate the challenging scenario of being unable to pay your taxes on time.

1. Stay Calm and Communicate:
   The first step when facing a tax payment challenge is to remain calm. Remember that you're not alone – many individuals and businesses encounter this situation. Instead of ignoring the issue, immediately communicate with the IRS or your relevant tax authority. Ignoring the problem will only lead to increased penalties and interest. You might be surprised at their willingness to work with you to find a solution.
2. Explore Payment Options:
   Government tax agencies understand that unexpected financial setbacks can happen. They often offer various payment options to help taxpayers manage their obligations. These options include setting up an installment plan or negotiating a temporary delay in payment. Assess your financial situation and discuss the available payment plans with the tax authorities to find one that best fits your circumstances.
3. File Your Tax Return on Time:
   Even if you can't afford to pay your taxes immediately, filing your tax return on time is crucial. Filing your return by the deadline helps you avoid additional penalties for failure to file. If you cannot pay, the penalties for not filing are much steeper than those for not paying on time.
4. Consider an Extension:
   Consider filing for an extension if you need more time to gather funds. While this won't excuse you from paying any taxes owed, it can give you an extra six months to make the payment without facing failure-to-file penalties. Remember that you'll still be subject to interest and late payment penalties on your owed amount.
5. Explore Available Tax Credits and Deductions:
   Ensure you're taking full advantage of all available tax credits and deductions. Research tax breaks that apply to your situation, as they lower your tax liability. While these won't solve the issue, they can help reduce your debt.
6. Avoid Using High-Interest Credit Cards:
   While using a credit card to pay your taxes might be tempting, it's generally not advisable, especially if you cannot pay off the card immediately. High-interest rates on credit card balances can exacerbate your financial situation in the long run. Explore other options before resorting to credit cards.
7. Seek Professional Advice:
   If your financial situation is complex or you are unsure about the best course of action, it's wise to seek advice from a tax professional. A certified public accountant (CPA) or tax attorney can provide guidance tailored to your circumstances and help you navigate the complexities of tax payments.
8. Adjust Your Withholding or Estimated Payments:
   If your inability to pay taxes stems from a recurring issue, such as insufficient tax withholding from your paycheck or inconsistent estimated tax payments (for self-employed individuals), consider adjusting these amounts moving forward. This can prevent future tax payment problems.

While facing the inability to pay taxes can be stressful, taking proactive steps to address the situation is essential. By staying calm, communicating with tax authorities, and exploring available options, you can find a way to manage your tax obligations without further damaging your financial well-being.

Remember, you're not alone in this; resources and professionals can help you navigate these challenges.

A Practical Guide Through Divorce and Taxes

 If you’ve gone through a divorce, you know your world gets turned upside down. Put together divorce and taxes and the complexity can feel overwhelming. 

There are a lot of challenges you're facing – the confusion, the uncertainty, and the worry about making the right decisions. 

In the midst of this upheaval, having someone in your corner to help you navigate your finances and tax standing with confidence is breath to your lungs. 

That’s one of the goals of this guide — but I’m here to sit down with you at any time to discuss the tax logistics of your divorce as well.

www.afitonline.com/appointments

Here’s a practical, 6-step guide to help you navigate things with greater ease and understanding.

1. Filing status: Your first step

Your filing status depends on your marital status as of December 31. If divorced by that date, you cannot file jointly. If still married, you have the option to file jointly or separately. For 2023, the standard deductions are $27,700 for joint filers, $13,850 for singles and married filing separately, and $20,800 for heads of households.

2. Update your W-4

Once you're divorced, it's crucial to update your W-4 form with your employer. This form determines your tax withholding based on your marital status. After a divorce, your tax situation changes, and updating your W-4 ensures that the correct amount of tax is withheld from your paychecks.

3. Child support and dependency

Child support payments are neither taxable income nor tax-deductible. However, determining which parent claims the child as a dependent is crucial for tax benefits, such as the Child Tax Credit. The primary custodial parent typically has the right to claim the child, but this can be adjusted based on your divorce agreement.

4. Asset division

The division of assets during a divorce can have significant tax implications. Transferring properties and splitting retirement accounts can trigger capital gains taxes or penalties. Understand the tax basis of each asset and plan accordingly.

5. Legal and professional fees

The cost of legal advice specifically related to tax issues in your divorce can be deductible. However, general legal expenses for divorce proceedings are not.

6. State taxes

Each state has its own set of rules regarding divorce and taxes. This is particularly important for issues like alimony, which can be treated differently for state tax purposes.

Bonus tip: Get expert guidance

Talking to your professional (whether it’s us or someone else) can be invaluable. We can help you make informed decisions and do them in the right way at the right time. This is what we do every day, and we’re happy to do it for you.

Every decision you make at the end of a marriage is also a step towards a new beginning. Finding your footing in a changed landscape, moving forward with confidence and clarity — these can be difficult. 

So, getting the right support and guidance on divorce and taxes as you navigate the transition is the difference-maker. We’re here for you… to help you build a strong foundation for the next chapter of your life.

www.afitonline.com/appointments

 

Your financial well-being matters., 

Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 
F - 816-220-2012

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Strategies for Using the Home Office Tax Deduction

 

Recently, the concept of the traditional workplace has undergone a significant transformation. The rise of remote work has led many individuals to establish their home offices, blurring the lines between personal and professional spaces.

Fortunately, this shift has brought new opportunities to save money through the home office tax deduction. If you utilize a home office for work purposes, understanding the intricacies of this deduction and employing intelligent strategies can help you make the most of it.

Understanding the Home Office Tax Deduction:

The home office tax deduction allows eligible taxpayers to claim a portion of their home-related expenses as business expenses, thereby reducing their taxable income. To qualify for this deduction, the IRS (or your country's relevant tax authority) typically requires your home office space to be used regularly and exclusively for conducting business. Your home office should be your primary workspace solely for work-related tasks.

Strategies for Maximizing Your Savings:

1. Keep Accurate Records:
   Maintaining meticulous records is crucial when claiming the home office tax deduction. Keep track of all relevant expenses, including rent or mortgage payments, utilities, internet, and office supplies. Digital tools like spreadsheets or expense-tracking apps can help you efficiently organize and document these expenses.
2. Calculate Your Deduction Methods:
   There are two methods for calculating the home office deduction: the Simplified Option and the Regular Method. The Simplified Option offers a flat deduction per square foot of your home office space. At the same time, the Regular Method involves more detailed calculations but could potentially result in a higher deduction. Evaluate which method suits your situation better to maximize your savings.
3. Measure Your Space Correctly:
   Accuracy matters when determining the square footage of your home office. Measure the space used for business purposes and calculate the ratio of your office's square footage to the total square footage of your home. This ratio will determine the portion of expenses you can claim.
4. Document Your Workspace:
   Visual evidence of your home office can substantiate your claim in case of an audit. Take clear photos or videos of your office setup, highlighting its exclusivity for work. These visuals can serve as valuable proof of your compliance with the regular and exclusive use requirements.
5. Know What's Deductible:
   While expenses directly related to your home office, such as office supplies, furniture, and technology, are generally deductible, other expenses like personal mortgage interest, insurance, and general home repairs are not eligible. Familiarize yourself with the IRS guidelines or consult a tax professional to understand what expenses can be included.
6. Consider the Future Impact:
   Before claiming the home office deduction, think about potential implications down the road. For instance, taking the deduction might affect your capital gains tax if you plan to sell your home. Balancing short-term tax savings with long-term financial plans is essential.
7. Consult a Tax Professional:
   Tax regulations can be complex and subject to change. Seeking advice from a tax professional can help you navigate the intricacies of the home office tax deduction and ensure you're taking full advantage of the benefits without inadvertently triggering any red flags.

The home office tax deduction is a valuable tool that can significantly reduce your tax liability if used wisely. By maintaining accurate records, understanding the different calculation methods, and adhering to the IRS guidelines, you can successfully leverage this deduction to maximize your savings.

Remember that every individual's situation is unique, so it's important to tailor these strategies to your circumstances. Whether a freelancer, remote worker, or entrepreneur, taking advantage of the home office tax deduction can help you save money and boost your financial well-being.