Withholding tax. Admit it. No one likes looking at their paycheck stub and seeing the amount of withholding tax, social security tax, medicare tax, and insurance that is taken out leaving you with the net amount on the check.

When it comes to tax returns, taxpayers fall into two categories. You either have a refund or you have an additional tax liability. It’s a balancing act between owing and refunds when it comes taxes.

When it comes to tax refunds for some reason, people enjoy seeing large tax refunds. However, if you were to adjust your dependents or changing your martial status on the W-4, you could receive your refund throughout the year as an increase to your paycheck. The government isn’t going to give you interest on this large overpayment unless they hold your refund because if an audit or another reason.

The only exception is that if you’re receiving a refund because of one of the refundable credits (Earned Income Credit, American Opportunity Credit). In this case, you still have to wait until the end of the year to file your tax return and receive the refund. You could still change (raise) the number of dependents.

Withholding tax is based your martial status, number of dependents you have listed, and any additional tax you have taken out on the Form W-4 that you give to your employer.

You should update your Form W-4 with your employer is you have a change in the number of dependents, change in martial status, an additional job, receiving self-employment income or other income in addition to your job where you are having withholding tax withheld.

The IRS W-4 calculator and the W-4 form can be located here.

When it comes to adoption, the tax code has provisions in it to help you recover some of the costs associated with an qualified adoption.

The 2017 adoption credit is $13,570. The adoption credit phaseout begins at $203,540 and completely phases out at $243,540.

The adoption credit is not available for the taxpayers filing as married filing separately.

The adoption credit is a non-refundable credit and may be carried forward for five years if the credit can be fully used in the first year. Qualified expenses for adoption credit:

1. Must be reasonable and necessary adoption fees and expenses
2. Court cost and attorney fees
3. Traveling expenses including lodging and meals
4. Other expenses that are directly related and for the purpose of the adoption

An eligible child for adoption and qualified expenses are defined as
1. An individual under the age of 18 or is physically and mental incapable of self-care
2. Don’t include expenses that taxpayer pays to adopt the child of the taxpayer's spouse.
3. Expenses paid by a registered domestic partner who lives in a state that allows same-sex second parent or co-parent to adopt his or her partner's child, as long as those expenses otherwise qualify for the credit.

You can claim the adoption credit on a tax return for
Domestic adoption is the adoption of a U.S. child (a citizen or resident of the U.S. or its possessions before the adoption effort begins). Qualified adoption expenses that are paid before the year that the adoption becomes final are can be claimed as a credit for the tax year following the year of payment (even if the adoption is never finalized and even if an eligible child was never identified).

Foreign adoption is the adoption of an eligible child who isn't yet a citizen or resident of the U.S. or its possessions before the adoption effort begins. Qualified adoption expenses paid before and during the year can be claimed as a credit for the year when the adoption becomes final.

When the adoption becomes final, and under the limitation, qualified adoption expenses paid during or after the final year can be claimed as a credit for the year of payment, regardless whether the adoption is foreign or domestic.

As a result of the timing rules, qualified adoption expenses that are allowable in the current year could include expenses paid in the previous year(s).

The Form 8839 Instructions, Form 8839, and the adoption credit information can be found here.

There are several misconceptions about home office deductions. One of which is that if you take the home office deduction, you have a greater chance of getting audit. Not necessary true; but, the there is a chance you can be audited.

You must use your home exclusively and regularly to conduct business to qualify for the home office deduction. Your home must be your principal place of business where you meet your customers and clients.

The IRS rules and regulations made it simpler a couple of years ago to deduct a home office deduction under a simplified method. The home office simplified method is $5 a square foot multiplied by the square footage you are using in your home for an office up to a maximum of 300 square feet which is a $1,500 home office deduction.

https://www.irs.gov/pub/irs-pdf/p587.pdf

Then there’s the non-simplified method. Under the non-simplified method, you need to know the total footage of you home, the amount of square footage you are using for your home office. This will give you a percentage of the amount of space you are using for a home office. Ex 300/4000 where 300 is the amount of space you are using for an office and 4,000 is the total square footage of your home. In this example, you are using 7.5% of your home as an office. This 7.5% of your home will be depreciated resulting in a possible capital gain if you sell your home in the future.

Under this method and example, you can deduct 7.5% home owner’s insurance, property taxes, mortgage interest, utilities, garbage, cable, telephone, gas, etc. or the percentage of the home that you are using for an office. For example, if you total expenses for those home expenses were $10,000 then your home office tax deduction would be $750.

If you are an employee, your business use of your home be at the convenience of your employer. You must not rent any part of the your home to your employer and rent the portion to your employer to perform services as an employee.

The IRS Home Publication can be found here.

There are many reasons why taxpayers file a tax return using the married filing separately status. One spouse could have a previous tax liability where the IRS is seizing the tax refunds to pay down the tax liability. The tax refunds could be seized to pay back unpaid child support. They taxpayers could have decided to keep their tax liability separate.

Things to consider when using the married filing separate filing status.

1. Your tax rate normally higher than it would be on a joint return.

2. Your exemption amount for calculating the alternative minimum tax is half of that allowed on a married filing jointly tax return.

3. In most cases, you can’t take the credit for child and dependent care expenses. The income amount you can exclude from under an employer's dependent care assistance program is limited to $2,500 (instead of $5,000 on a joint return). If you are legally separated or living apart from your spouse, you may be able to file a separate return and still take the credit.

4. You are unable to take the earned income credit.

5. You are unable to take the exclusion or credit for adoption expenses in most cases.

6. You are unable to take the credit for higher education expenses including the American opportunity and lifetime learning credits, the student loan interest deduction, or any of the tuition and fees deduction.

7. You are unable to exclude qualified savings bonds interest used for higher education expenses.

8. If you lived with your spouse at any time during the tax year:

You are unable to claim the credit for the elderly or the disabled, and

You have to included up to 85% of any social security or equivalent railroad retirement benefits you received as taxable income.

9. Some credits and deductions are reduced at income levels are half of what the deduction would be for a joint married filing jointly return including.

The child tax credit.

The retirement savings contributions credit.

The deduction for personal exemptions.

Itemized deductions.

10. Capital loss deduction is limited to $1,500 (instead of $3,000 on a joint return).

11. If your spouse itemizes deductions, you can’t claim the standard deduction. If you can claim the standard deduction, your basic standard deduction is half the amount allowed on a joint return.

12. If either you or your spouse (or both of you) file a separate return, you can generally change the status to a married filing jointly filing status within 3 years from the due date (not including extensions) of the separate return or returns by filing an amended tax return using Form 1040x. This applies to a tax return either of you filed claiming married filing separately, single, or head of household filing status.

13 After the due date of filing a married filing jointly tax return, you and your spouse can’t file separate returns if you previously filed a joint return.

Exception. A personal representative for a decedent can change from a married filing jointly tax return elected by the surviving spouse to a separate return for the decedent. The personal representative has one year from the due date (including extensions) of the joint return to make the status change.

In episode 200, I just wanted to take a moment to thank you the listener and to look back over the last 199 episodes.

When I started the Your Tax Teacher podcast, I had not envisioned that there would be 200 episodes much less 201. In the past two episodes, I have covered many tax topics. Some were probably more technical than others.

There have been episodes where I discussed how to increase your taxable income to using tax law reduce your tax liability in addition getting through the IRS and State tax audits. In the beginning, I had tax updates included with the podcast and in the past eighteen months I phased the tax headlines and changes out to move them over to the free “Navigating the Tax Headlines Newsletter”.

Sales Tax, Nexus, Amazon Tax, Non-profits, Choosing an Entity type have all been part of the episodes on the business side.

I evened appeared as a guest on the Michael Gonzales’s podcast “Ent-Head” in episode nine (9) between Colin Powell and Jack Welch.

Going forward, I envision maybe changing the name of the podcast to “Navigating the Tax Jungle with Jeff England and adding a video podcast of the tax topic or headline of the week (or month) that will be available on the Your Tax Teacher website.

I just wanted to take a moment to say thank you for making the Your Tax Teacher Podcast a success.

Jeff England

When to comes to foreclosures and short sales of real property, nothing is easy.

The events leading up to foreclosure are not easy on the family. Nor, are the events that take place after the foreclosure. Back in 2007, cracks in the financial began showing up in loan portfolios being held by banks and investments. With mortgagees under water, they begin walking away from the loan commitments which saw an increase in foreclosures and short-sales.

To give you a little background on how bank and finance companies work, you have to understand the banks would rather have their money now versus later. When you walk into the bank or finance to get a loan, they assign you a risk number. Are you a good risk or a bad risk based on past credit history and if they believe that your will be able to pay back your loan obligation.

Once you sign the paperwork, the bank takes your loan and bundles it with other loans that have various risk factors. After bundling the loans, the bank then sells the bundled loans to investors. The banks are reducing their risk when they sell the loan bundles to investors. When you make a loan payment, the bank makes a payment to the investors who purchased the loans.

This is the circle of life for loans.

However, what if something happens and you can’t sell the loan. What happens then?

You have several options. Restructure your loan with the bank (finance company) without declaring bankruptcy. Short-sell your real property. Declare bankruptcy and restructure your loan. Walk away from the property and turn the property back over to the bank or finance company.

When you walk away (turn the property back over) to the bank and short-sell your property, you have the possibility of creating a tax liability from the cancellation of debt. Cancellation of debt occurs when your debt has been canceled and the lender has not received full payment on the amount of the debt owed.

For example, if you walked away from a debt where you owed $100,000 and the bank was only able to recover $40,000, you have generated $60,000 in cancellation of debt income unless you sign a promissory note with the lender to repay the different.

Let’s look it a different way with a short. Same $100,000 is owed to the bank. However in this case, you short-sell the property at $75,000 of property resulting in $25,000 of cancellation of debt income unless you sign a promissory note with the lender to repay the $25,000 under a new note agreement.

Things to note about generating cancellation of debt income:

1. Income taxes are not bankruptable.

2. Prior to December 31, 2016, there was a provision in the tax law that allowed you to exempt cancellation of debt income from personal residences. However, this law expired on December 31, 2016 as part of the tax extender provisions that Congress did not extend.

3. You can ask for an offer-in-compromise with the IRS. However, this can be a lengthy process and the IRS will only accept your offer-in-compromise if they believe they do not have a chance of recovering the money or property to pay off the tax liability.

4. Interest and penalties will began accruing on the tax liability if you are unable to make payment.

5, The IRS can seize your property (home, bank accounts, investments, vehicles, other property, tax refunds, garnish your wages, and lawsuit to pay off your tax liability.

6. Tax liability takes priority over other debt.

The IRS is in the process of collecting past-due tax debts after Congress approved the rules and regulations for hiring outside collection agencies to assist in the collection process under the 2015 FAST Act (Fixing America’s Surface Transportation Act). In case you’re wondering what federal income taxes and transportation have in common. The answer is they don’t have anything in common. Several tax provisions and changes came of the FAST Act of 2015.

The IRS has contracted with four private collection agencies. These agencies are:

CBE Group
1309 Technology Pkwy
Cedar Falls, IA 50613
Conserve
200 CrossKeys Office park
Fairport, NY 14450
Performant
333 N Canyons Pkwy
Livermore, CA 94551
Pioneer
325 Daniel Zenker Dr
Horseheads, NY 14845

Before these four private collection agencies contact you, you and your representative will receive a letter from the IRS informing you that your past-due tax debt has been turned over to one of these collection agencies for collection. After you have received the IRS letter, one of these collection agencies will contact you about your past-due tax debt.

These collection agencies collecting on behalf of the IRS must follow the Fair Debt Collections Practice Act and must be courteous and respect your taxpayer rights.

These collection agencies will not collect the debt on behalf the of the IRS. You will be instructed to pay your tax debt online at http://www.irs.gov/payments. If your paying by check, you will make the check out to the “U.S. Treasury”.

Should you have questions about the letter you receive from the IRS, you can contact the IRS or your tax professional.

With all the tax scams and the fraud, going on it’s easy to ignore the collection notice from the IRS; but, this is one letter you should not ignore.

For more information about the IRS and these collection, click here to visit the IRS information page on their website.

A question came in over last weekend that dealt with dependency rules, amended returns, and filing a dependent’s tax return.

When it comes dependency rules, there are several tests to used to whether a dependent can be claimed on a tax return. The dependency tests are:

A. Relationship
What is your relationship to the dependent? Are you the brother, sister, half-brother, half-sister, adopted son or daughter, son, daughter, niece, grandparent, uncle or nephew.

B. Age
Is the dependent under the age of 19 (if not enrolled in school) or 24 (if enrolled in a secondary educational or disabled?

C. Support
Do you supply more than half of the support for the dependent (housing, food, clothing, etc...)

D. Residency
Is the dependent a U.S. citizen? If the dependent is not a U.S. citizen, then the dependent can not be claimed as a dependent (ie foreign exchange student).

E. Joint Return
If the dependent is listed on a joint tax return, normally the dependent can not be claimed on your tax return. The exception to this rule is if the dependent is filing a joint tax report to receive a refund for the taxes they’ve paid in and they don’t have a lot of income to report on a tax return.

In the case of the question that I received about dependency, the taxpayer had filed the dependent’s tax return before filing their tax return. The dependent was a student in a community college and did not have a lot of income to report on their tax return and met the dependency tests. The taxpayer provided more than half the student’s support for last tax year.

When the dependent’s tax return was prepared and e-filed using a self-preparation tax software, the taxpayer did not check the box to indicate that the student was a dependent of the taxpayer and was not entitled to a tax deduction on her (student’s) tax return.

In this case, the taxpayer needed to file an amended tax return for her dependent’s (the student’s) tax return and the taxpayer (taxpayer claiming the student as a dependent) needed to file and mail their tax return on paper which takes between six to eight weeks to process.

For some taxpayers, you may have your tax return prepared and you’re almost ready to file when you suddenly realize that you don’t have the money to pay your additional tax liability that you were not expecting.

First of all, know that it’s going to be okay. Unless of course, you decide that you are not going to file. You believe that IRS isn’t going to know that you owe because you forgot the IRS gets a copy of your 1099s, W-2s, and K-1s from your financial institutions, employer(s), and other individuals and companies that send in tax documents.

Of course, not filing most likely will cause other issues later on.

Better alternatives than not filing a tax return are:

1. Get a loan
Whether from the bank, other financial institutions, or family members, the IRS suggests that you can borrow money to pay your tax liability

2. Use a credit card
Using a credit card is similar to a loan. Although, most likely will have a higher interest rate associated with the credit card than a traditional loan with the bank or family member. Realize that your amount will include a transaction fee when you use a credit card.

3. Complete a payment arrangement with the IRS.
If you’re an individual with less than $50,000 or a business with less than $25,000 in tax liability that you can’t pay, you can work out an automatic payment plan with the IRS to pay your tax liability. If the amount you owe is greater than these amounts, your payment plan has to be approved. Click here to the complete the online application.

4. If you have a financial hardship, you may qualify for a offer-in-compromise which must be approved.

In any of these cases, pay as much as you can towards your tax liability and pay your tax liability as quickly as you can to avoid penalties and interest that will keep accruing until your tax debt is paid in full.

Also note, you may need to increase your tax withholdings or make estimated tax payments for the current year to avoid owing additional tax especially if your tax circumstances are similar to the previous year in which you owe.

Some red flags keep us save especially if we’re out on the beach or at an airfield. However, there are other red flags that we need to avoid. Take the IRS and taxes as an example, our tax return(s) should not have a red flag that is trigger a notice or an audit from the IRS.

1. Math Errors
Transposing a number, using a three instead of an eight, leaving off zero or another
number on the tax return line will trigger a notice and a possible additional tax liability with penalties and interest from the IRS when it comes to the IRS matching the amounts on the tax return to the amount on the copies of the tax documents the IRS received.

2. Failure to Report Income
Failing to report income on a tax return will trigger a notice and a possible tax liability with interest and penalties from the IRS depending on the amount of additional income you didn’t include on the tax return.

What you don’t want to happen is to get a gross negligence penalty from not reporting income on the tax return.

3. Excessive Charitable Contributions
Having excessive charitable in relationship to your adjusted gross income will trigger a red flag. As an example, making $45,000 a year but you have $32,000 in charitable contributions.

4. Schedule C Losses

Having years of Schedule C losses will trigger a red flag. Is this a hobby or is this a business? Is you intention to make a profit?

5. Business Expenses
When it comes to business expenses, is the business expenses reported on schedule C or another business return ordinary and necessary. Is that business loan a personal loan or a business loan substantiated by loan documents/

6. Claiming Home Office Deduction
Sometimes a home office deduction will trigger a redflag when it comes to the amount of space in your home that is being used for an home office. What expenses are you reporting or your home office deduction?

The IRS allows you take a home office deduction using a simplified method.

7. Using Nice Neat Numbers
The IRS allows you to round up or round down to the nearest dollar. What is not allowed is allowed is rounding up or rounding down to the nearest hundreds, thousands,.....etc...

As an example, you can not report $10,475 as $10,000 or $11,000.