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Separation and Divorce Tax Issues to Consider

Separation and Divorce Tax Issues to Consider

Singer Neil Sadaka was right: breaking up is hard to do. For clients in the process of ending their marriage, there is more to consider than a simple separation of assets. Whether legally separating or divorcing, they could be facing big changes in their individual tax situations—and the Internal Revenue Service recently highlighted information that could help. 

One of the first issues is timing. The Internal Revenue Service considers a married couple to be wed until they get either a separate maintenance decree or a final divorce decree. So, until there is an official court ruling, they’ll still be viewed as a married couple for tax purposes.

Another early issue is withholding. When a taxpayer divorces or legally separates from their partner, they will normally need to modify their withholding setup at work. This means filing a new Form W-4 with their employer.

For some, the process may not be more complicated. Taxpayers who receive alimony payments, for example, may have to make estimated tax payments. However, help is available through the Tax Withholding Estimator tool on IRS.gov. This tool can determine whether current withholding amounts are correct for a specific situation.

What are the tax considerations of alimony and separate maintenance?

The IRS could view money “paid to a spouse or a former spouse under a divorce decree, a separate maintenance decree, or a written separation agreement may be alimony or separate maintenance payments for federal tax purposes.” Why is this important? Some payments are deductible for the payer and have to be included in income by the payee. However, there are exceptions.

“Individuals can’t deduct alimony or separate maintenance payments made under a divorce or separation agreement executed after 2018 or executed before 2019 but later modified if the modification expressly states the repeal of the deduction for alimony payments applies to the modification,” the IRS explains. “Alimony and separate maintenance payments received under such an agreement are not included in the income of the recipient spouse.”

What about child custody?

Figuring out which partner can claim a dependent child is often a hotly contested topic among those on the brink of a breakup. According to the IRS, “the parent who has custody of the child can [generally] claim the child on their tax return.” However, the situation gets murky if parents split custody 50-50 but can’t agree who gets to claim the child(ren).

In that situation, there are tie-breaker rules that can apply. Further, under this arrangement, the IRS says these “child support payments aren’t deductible by the payer and aren’t taxable to the payee.”

What filing statuses are available to separating or divorced couples?

The IRS lists four basic filing statuses available for individuals who are divorced or separating:

  • Married filing jointly. On a joint return, married people report their combined income and deduct their combined allowable expenses. For many couples, filing jointly results in a lower tax than filing separately.
  • Married filing separately. If spouses file separate tax returns, they each report only their own income, deductions, and credits on their individual return. Each spouse is responsible only for the tax due on their own return. People should consider whether filing separately or jointly is better for them.
  • Head of household. Some separated people may be eligible to file as head of household if all of these apply:
    • Their spouse didn’t live in their home for the last six months of the year.
    • They paid more than half the cost of keeping up their home for the year.
    • Their home was the main home of their dependent child for more than half the year.
  • Single. Once the final decree of divorce or separate maintenance is issued, a taxpayer will file as single starting for the year it was issued, unless they are eligible to file as head of household or they remarry by the end of the year.

See Publication 504, Divorced or Separated Individuals, and Topic No. 452, Alimony and Separate Maintenance, for more information on tax issues for divorcing or separating couples.

Helping a client plan for the future?

Easily compare clients’ current tax situation to customizable tax scenarios—like a change in filing status—with the Drake Tax Planner. Since it’s accessed directly within Drake Tax, you have the tools you need to efficiently help clients plan for the future. Sign up for the free trial to see for yourself!

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Source: IRS Tax Tip 2022-92

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2022 Mileage Rates Increasing

2022 Mileage Rates Increasing

Due to rising gasoline prices, the Internal Revenue Service has taken the rare step of increasing its optional standard mileage rates for the last six months of the 2022 tax year. These rates are significant since taxpayers use them to calculate the deductible costs of operating a vehicle for business purposes.  

Typically, the IRS tweaks mileage rates for the upcoming tax year in the fall. However, record fuel prices pushed the agency to act now for the current year. The last time the IRS made a midyear adjustment was 2011.

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What are the new mileage rates for 2022?

The IRS issued Announcement 2022-13 to make the new rates official, setting forth the associated legal language, guidance, and limitations for the new rates. Here is a short breakdown from the agency:

  • The standard mileage rate for business travel will be 62.5 cents per mile
  • The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents per mile
  • The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute
  • These new rates become effective July 1, 2022

Moving expenses are only available to active-duty service members “pursuant to a military order and incident to a permanent change of station” (Announcement 2022-13). Taxpayers who traveled prior to this update—from January 1 to June 30, 2022—should use Notice 2022-03 to calculate their mileage rates.

What are the limits on who can claim a deduction?

Announcement 2022-13 states that the Tax Cuts and Jobs Act (TCJA) passed in 2017 limits which taxpayers are eligible to claim a deduction. The TCJA suspends all miscellaneous itemized deductions that are tied to the 2% of adjusted gross income floor until 2026, including unreimbursed employee travel expenses.

So, how do reservists, some state or local government officials, and some performance artists get to claim the mileage rate whereas other taxpayers do not? They are paid on a fee basis, and the IRS considers the deduction in these cases to be an adjustment to income.

What is the big picture?

Fuel costs are, no doubt, a significant factor for determining mileage rates, but other factors also play a part, such as depreciation, insurance, and other costs. Taxpayers can use the optional business standard mileage rate to help calculate the deductible costs of operating a vehicle for business purposes, instead of keeping track of the actual cost.

In addition, the federal government and some businesses use the rate to reimburse employees for their mileage. The IRS notes that taxpayers always have the option to use their vehicle’s actual costs rather than the optional standard mileage rates.

We can help you stay up to date!

Here are just a few recent IRS updates we covered:

Sources: IRS increases mileage rate for remainder of 2022; Announcement 2022-13 

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Prior-Year Info Added to Where’s My Refund

Prior-Year Info Added to Where's My Refund

The Internal Revenue Service continues to add functionality to its online tools, now putting more muscle behind its Where’s My Refund? feature. Used more than 776 million times in 2021, it is one of the agency’s most popular online offerings—and it can reduce client questions about refund status.

“Previously, Where’s My Refund? only displayed the status of the most recently filed tax return within the past two tax years,” the IRS explains. Now, users can view information for any of the last three tax years on their status report.

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While this additional information will undoubtedly be more convenient for taxpayers with Internet access, it also marks a reduction in phone service that available to callers. The agency notes that those who call the refund hotline will only receive information related to their 2021 return.

Punctuating this shift, the IRS says, “There’s no need to call the IRS to check on refund status unless it has been more than 21 days since the return was filed or the tool says the IRS can provide more information.”

How do taxpayers access Where’s My Refund?

Where’s My Refund? is accessed through IRS.gov or IRS2Go, the agency’s mobile app. The identification verification process requires their Social Security Number or ITIN, filing status for the requested tax year, and amount of the refund they’re checking on, using the original filed return.

The IRS says validated online users of Where’s My Refund? can get the status of a refund within:

  • 24 hours after e-filing a tax year 2021 return
  • Three or four days after e-filing a tax year 2019 or 2020 return
  • Four weeks after mailing a return

For details on a taxpayer’s adjusted gross income, a balance due, or other account information, taxpayers should check their Online Account.

Speeding up 2021 returns

IRS Commissioner Chuck Rettig says the upgrade to Where’s My Refund? can help speed up the processing of TY 2021 returns—especially for taxpayers who chose to request an extension of time to file.

“We encourage those who expect a refund, but requested an extension, to file as soon as they’re ready. We process returns on a first-in basis, so the sooner the better,” said Rettig. “There’s really no reason to wait until October 17 if filers have the relevant information to file now.”

Rettig reminds that electronic filing is available 24 hour per day and his agency is actively taking in returns, processing and issuing refunds.

More improvements to come

If taxpayers are happy with this latest round of upgrades, Rettig said, more improvements are in the works.

“The IRS is committed to identifying opportunities to make improvements in real time for taxpayers and the tax professional community,” said Rettig. “This enhancement to Where’s My Refund? is just one of many.”

SourceIRS updates feature on Where’s My Refund?

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IRS Shares Info for Tax-Exempt Applications

IRS Shares Info for Tax-Exempt Applications

Organizations seeking tax-exempt status with the Internal Revenue Service should know that there is more to the process than merely signing on the dotted line. The process for being declared tax-exempt under Section 501(c)(3) of the Internal Revenue Code can vary based on the applicant organization’s specific situation.

First and foremost, it has to be organized and operated for one of the following purposes defined by the IRS:

  • Charitable, religious, educational, scientific, or literary purposes
  • Testing for public safety
  • Fostering national or international amateur sports competition
  • Preventing cruelty to children or animals

Application for 501(c)(3) status is made using a Form 1023-series application.

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The Process

The circumstances around the organization determine how simple or complex the process will be. The IRS has created a step-by-step application process guide—but the agency also recently highlighted additional information that can help.

Before filling out the application, candidate organizations should apply for a nine-digit Employer Identification Number (EIN)—even if they don’t have any employees. EINs are issued by the IRS to identify companies and tax-exempt organizations when they file and report taxes, and every 501(c)(3) application requires this number.

To apply for an Employer Identification Number, organizations can simply apply online through the IRS website. Once the Form 1023-series application has been filled out, it must be sent to the IRS electronically using Pay.gov online.

Keep in mind, however, that not every organization seeking tax-exempt status has to apply for 501(c)(3) exemption. Churches (including integrated auxiliaries) and public charities with yearly gross receipts of no more than $5,000 are already considered tax-exempt.

Time and Other Considerations

Just when a candidate organization is deemed tax exempt depends on its Form 1023. “If they submit this form within 27 months after the month they legally formed, the effective date of their organization’s exempt status is the legal date of its formation,” the IRS explains. “If an organization doesn’t submit this form within those 27 months, the effective date of its exempt status is the date it files Form 1023.”

Once an organization has been approved as a tax-exempt entity by the IRS, it is considered a private foundation unless the group can meet the standards to be considered as a public charity. Approval for 501(c)(3) status also brings a responsibility to those in the new tax-exempt organization. As such, charitable organizations have to make certain documents available to the public for their inspection.

Among these public documents are the organization’s application for exemption and its annual information tax returns for the past three years. Publication 557, Tax Exempt Status for Your Organization has more information on public inspection requirements.

Additional information, including help for applying organizations, is available from the IRS website:

Source: Things organizations should know about applying for tax-exempt status

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IRS Updates FAQs for 2021 CTC and ACTC

IRS Updates FAQs for 2021 CTC and ACTC

The Internal Revenue Service has once again revised the frequently asked questions (FAQs) for the 2021 Child Tax Credit (CTC) and Advance Child Tax Credit (ACTC). These revisions take into account several changes, including the end of filing season for the 2021 tax year.

The American Rescue Plan expanded the Child Tax Credit to include advance estimated payments during the last half of 2021. While filing season has concluded, some taxpayers can still file a late return to take advantage of the credit.

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This new issue of FAQs covers eight topics, including:

  • Topic A: General Information: Updated questions 1, 2, 3, 4, 5, 8, 9, 10, 11, 13, 14, 15, 16
  • Topic E: Advance Payment Process of the Child Tax Credit: Updated questions 2, 3
  • Topic F: Updating Your Child Tax Credit Information During 2021: Removed questions 1, 2 and updated 3,4
  • Topic G: Receiving Advance Child Tax Credit Payments: Updated questions 1, 6, 7, 9, 10, 11
  • Topic H: Reconciling Your Advance Child Tax Credit Payments on Your 2021 Tax Return: Updated questions 1, 2, 9 and removed 10
  • Topic J: Unenrolling from Advance Payments: Updated question 1 and removed 2, 3, 4, 5, 6, 7
  • Topic K: Verifying Your Identity to View your Payments 2021 Child Tax Credit: Updated 2, 3, 5, 6 and removed 7
  • Topic L: Commonly Asked Shared-Custody Questions: Updated 1 and 2

Complete details for each of the updated topics and questions are available on the IRS website in Fact Sheet 2022-29. The 22-page fact sheet instructs that those with questions should consult the FAQs rather than call IRS assistance lines, as IRS operators do not have any additional information.

The agency also makes it clear that any frequently asked questions are meant to communicate information quickly to the general public, rather than to state official IRS policy or tax law. FAQs, the IRS says, should not be the basis for any arguments or positions before formal legal bodies, such as the Tax Court.

Details of the IRS stance on reliance on FAQs can be found here.

Sources: IRS revises 2021 Child Tax Credit and Advance Child Tax Credit frequently asked questions; Fact Sheet 2022-29

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