Divorce can be a complex and emotionally challenging process, with numerous financial and legal considerations to address. One crucial aspect often overlooked is the impact of alimony on your taxes. Alimony, also known as spousal support or maintenance, is a regular payment made by one spouse to another after divorce or separation. While it’s essential to ensure financial stability for the receiving spouse, it’s equally important to understand the tax implications of alimony, as they can significantly affect your financial situation. In this article, we’ll explore how alimony affects your taxes and what you need to be aware of during and after divorce.
Tax Treatment of Alimony Payments
One of the most critical aspects of alimony is how it is treated for tax purposes. Understanding this treatment is essential for both the paying and receiving spouses. The laws have recently changed under the Tax Cuts and Jobs Act (TCJA) of 2017.
For the Paying Spouse:
The key date to remember is December 31, 2018. If your divorce was final on or before this date, alimony payments are generally tax-deductible, even if you don’t itemize your deductions. This means that if you’re the spouse making alimony payments, you can deduct these payments from your taxable income to reduce your overall tax liability. However, if your divorce was final after December 31, 2018, the payments cannot be deducted.
For the Receiving Spouse:
Alimony received is considered taxable income if your divorce was legal on or before December 31, 2018. This means that if you’re the spouse receiving alimony, you must report these payments as income on your tax return and you’ll owe income tax on the alimony you receive. However, if your divorce was final after December 31, 2018, the payments are not considered taxable income.
Requirements for Alimony to Be Tax Deductible
Not all payments between former spouses qualify as alimony for tax purposes. Alimony is tax-deductible for the paying spouse and is taxable income for the receiving spouse. However, certain criteria must be met:
The payments must be made under a divorce or separation agreement. Informal arrangements do not qualify for tax benefits.
The payments must be in cash, money order, or check. Property transfers or non-cash payments are generally not considered alimony.
The divorce or separation agreement must not designate the payments as non-deductible and non-taxable. Both parties should be aware of the tax implications.
The spouses must not be living in the same household when the payments are made. Cohabitating ex-spouses may not claim alimony deductions or pay taxes on the received amount.
The spouses must not file a joint tax return with their ex-spouse.
Changes in Tax Law
It’s important to keep in mind that tax laws can change over time. While the TCJA made changes to the tax treatment of alimony, it’s possible that future legislation may alter these rules. Therefore, it’s advisable to consult with a tax professional or attorney who specializes in family law. Stay up to date with any tax law changes that may affect your alimony arrangement.
Tax Help for Those Who Pay or Receive Alimony
Alimony can play a crucial role in ensuring financial stability for spouses after divorce or separation. However, understanding the tax implications of alimony is essential to avoid unexpected financial consequences. Whether you’re the paying or receiving spouse, it’s wise to seek professional guidance from tax experts or legal professionals who can help you navigate the complex terrain of alimony and taxation. By following the IRS guidelines, you can ensure that your alimony arrangement is both fair and tax compliant. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses penalties and interest again, but this time gives tips on how to mitigate and even remove them.
Penalties and interest can quickly get out of hand. The best way to mitigate them is to pay your tax liability. We understand that this may not be an option for everyone. If you can’t pay your tax bill in full, you can set up an installment agreement with the IRS. This will reduce your penalty from a 0.5% accrual per month to 0.25% per month.
Removing Penalties and Interest
If you’re looking to remove your penalties and interest, you have some options. The IRS offers penalty abatement for reasonable cause and first-time abatement. To request penalty relief for reasonable cause, you must prove to the IRS that you tried to file or pay but could not. Examples can include fires, natural disasters, inability to obtain records, death, serious illness, system issues, and some others. It does not include a reliance on a tax profession, lack of ignorance, errors, or lack of funds.
The IRS also offers penalty abatement by administration waiver, more commonly known as first-time abatement. You can request a first time abate if you failed to file, failed to pay, or failed to deposit. To qualify, you must have a good history of tax compliance and did not have any penalties during the prior 3 years, or a penalty was removed for good reason other than a first-time abatement.
While interest cannot be removed from your account, it can be adjusted if penalties are abated. Only the interest related to the abated penalty will be reduced or removed.
Don’t miss next week’s episode where Phil will discuss the Employee Retention Credit. See you next Friday!
If You Need Help Removing Your IRS Penalties, Contact Us Today for a Free Consultation
The taxation of long-term and short-term rentals can differ significantly. These differences are primarily driven by the distinct nature of these rental arrangements and the objectives of tax authorities. Here’s an overview of the key differences in how long-term and short-term rentals are taxed.
The 14-Day Rule
Under the 14-day rule, if you rent out your primary residence or a second home for 14 days or fewer during the tax year, you are generally not required to report the rental income on your federal income tax return. In other words, the income you earn from these short-term rentals is tax-exempt. To qualify, you must have also occupied the property for at least 14 days.
If you use the 14-day rule you cannot deduct rental-related expenses, such as advertising, cleaning, and maintenance, against that income. However, you can deduct property taxes and mortgage interest paid. The 14-day rule is a federal tax provision, and state and local tax laws may vary.
Active vs. Passive Income
If you have a rental property, how you are taxed also depends on whether your income is passive or active.
Passive Rental Income
Usually, rental income is considered passive, meaning it doesn’t require active participation. This is usually the case for long-term rentals in which you might just collect a rent check each month. This income is generally taxed at the same rate as your regular income. In addition, you may deduct operating expenses including advertising, commissions, repairs, maintenance, landscaping, insurance, HOA fees, property taxes, mortgage interest, depreciation, and more. Passive rental income should be reported on Schedule E of Form 1040.
Active Rental Income
There are a few instances in which rental income becomes active. These include:
If you are classified as a real estate professional (work at least 750 hours in real estate per year, and 50% of work being in real estate)
If you are renting your property through an LLC or S Corporation
If you have short-term rentals (STRs) that have an average stay length of 7 days or less
If you occupy your rental for more than 14 days, or 10% of the number of days the property is rented out
If you provide “substantial services” to your tenants, including meals, transportation, daily housekeeping, and more.
If one of these scenarios applies to you, your income will likely be considered active in the IRS’s eyes. This means the IRS will consider you to be self-employed and will require you to pay self-employment tax. However, you can deduct up to $25,000 of loss from activity if you are single or married filing jointly. You can deduct up to $12,500 if you are married but file separately. Active rental income and expenses should be reported on Schedule C.
Qualified expenses include rental expenses like advertising, credit checks, and agency fees. You can also deduct general expenses like cleaning fees, repairs, depreciation, mortgage interest, property taxes, utilities, etc. However, you may only deduct a percentage of general expenses that is equal to the occupancy rate for the year. For example, if your rental was occupied for 150 days out of the year, you could deduct 41% of the expenses (150/365).
Tax Help for Those with Rental Income
It’s essential for property owners to be aware of the tax implications associated with their rental activities. Consult with tax professionals or local authorities to ensure compliance with relevant tax laws and regulations. Tax laws can vary significantly by jurisdiction. That said, it’s crucial to stay informed about the specific rules that apply to your rental situation. Additionally, tax laws and regulations can change over time, so regular updates and compliance checks are essential for all rental property owners. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Tax season can be a stressful time for many individuals, but it can also bring some relief in the form of deductions that can lower your overall tax liability. While itemizing deductions can often yield significant tax savings, not everyone has enough eligible expenses to make it worthwhile. However, you can still benefit from various tax deductions without the need to itemize your deductions. In this article, we’ll explore some of the tax deductions you can claim without itemizing.
Traditional IRA Contributions
Contributions to a Traditional Individual Retirement Account (IRA) are tax-deductible up to certain limits. For the tax year 2023, you can contribute up to $6,500 ($7,500 if you’re 50 or older) and deduct that amount from your taxable income. Keep in mind that Roth IRAs are not eligible for this deduction.
HSA Contributions
Contributions to your Health Savings Account (HSA) are tax-deductible, and you don’t need to itemize to claim this deduction. HSAs are a great way to save for future medical expenses while reducing your taxable income. For the tax year 2023, you can contribute up to $3,850 if you are an individual and up to $7,300 if you have family coverage. In addition, those who are 55 or older can contribute an extra $1,000 per year.
Early Withdrawal Penalties
If you had to pay penalties for early withdrawal of savings from a CD or other interest-bearing account, you can deduct those penalties without itemizing. This does not include early withdrawals from retirement accounts.
Student Loan Interest
If you have student loans, you can deduct up to $2,500 of the interest paid on those loans, even if you don’t itemize deductions. This deduction is subject to income limitations. Specifically, the amount you are able to deduct begins to phase out at $70,000 in AGI and is completely eliminated for those who earn more than $85,000 a year. For married couples, these amounts increase to $145,000 and $175,000 respectively.
Educator Expenses
If you’re a teacher or educator, you can deduct up to $300 of unreimbursed expenses for classroom supplies and materials. This deduction can help offset some of the out-of-pocket costs associated with teaching.
Alimony Payments
If you make alimony payments as part of a divorce or separation agreement finalized before 2019, you can deduct those payments without itemizing. However, this rule doesn’t apply to agreements made after December 31, 2018.
Self-Employed Expenses
If you’re self-employed, you can deduct half of your FICA taxes paid during the year. In addition, if you paid health insurance premiums, you can deduct these costs as an adjustment to your income, reducing your taxable income. This includes any premiums paid for your spouse and children. There are some limitations here so please consult a qualified tax professional before claiming this deduction.
Moving Expenses (for Military Personnel)
Members of the military who move due to a permanent change of station (PCS) can deduct certain moving expenses, such as travel and lodging costs, even if they don’t itemize deductions.
Conclusion
While itemizing deductions can provide substantial tax benefits for some taxpayers, it’s not necessary for everyone. These deductions you can claim without itemizing can still help lower your tax liability and put more money back in your pocket. It’s essential to stay informed about the latest tax laws and consult with a tax professional if you have any questions about your specific situation. By taking advantage of these deductions, you can optimize your tax return and keep more of your hard-earned money. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Taxes are an integral part of our financial lives, but not all income is subject to taxation. Understanding which income types are taxable and which are not can help you make informed financial decisions and potentially reduce your tax burden. In this article, we’ll explore various income sources that are not taxable, shedding light on some lesser-known exemptions.
Gifts and Inheritance
Gifts and inheritances are generally not considered taxable income for the recipient. If your wealthy aunt leaves you a sizable inheritance, you won’t have to pay income tax on that windfall. However, some exceptions and nuances may apply. For example, there is a federal estate tax for very large estates, but it generally doesn’t affect the average person.
Life Insurance Proceeds
The death benefit paid out by a life insurance policy to a beneficiary is typically not subject to income tax. This is true for both term and permanent life insurance policies. However, if you cash in your life insurance policy while you’re still alive and receive more than the total premiums paid, the excess amount may be taxable.
Scholarships and Grants
Scholarships and grants used for qualified education expenses, such as tuition, books, and fees, are usually not taxable. However, if you use the funds for non-qualified expenses like room and board, they may become taxable income.
Child Support Payments
Child support payments received from your ex-partner are not considered taxable income. On the flip side, the parent making these payments generally cannot deduct them from their taxable income.
Return of Capital
If you sell an investment, like stocks or real estate, for the same amount you originally paid or less, the proceeds are considered a return of capital and are not subject to income tax. However, any gains from the sale of investments are typically taxable, unless they qualify for specific capital gains tax exclusions or reductions.
Municipal Bond Interest
Interest income from municipal bonds is typically exempt from federal income tax. In some cases, it may also be exempt from state and local taxes if you reside in the issuing state or locality. This tax advantage is designed to encourage investment in local infrastructure projects.
Disability Benefits
Disability benefits, whether from a private insurance policy or a government program like Social Security Disability Insurance (SSDI), are generally not taxable. However, there are exceptions when disability benefits can become taxable, such as if you receive substantial additional income from other sources while receiving disability payments.
Roth IRA Distributions
Distributions from Roth Individual Retirement Accounts (IRAs) are usually not taxable as long as certain conditions are met. Generally, you must be at least 59½ years old and have held the account for at least five years. Contributions to a Roth IRA are made with after-tax dollars, so qualified withdrawals are tax-free.
Conclusion
Understanding which income types are not taxable is essential for managing your finances and optimizing your tax liability. While many types of income are taxable, these exemptions can offer financial relief and peace of mind. However, tax laws can be complex and subject to change, so it’s wise to consult with a tax professional or financial advisor to ensure you’re correctly interpreting and applying these rules to your specific situation. By staying informed and making strategic financial decisions, you can legally minimize your tax obligations and keep more of your hard-earned money. For a full list of taxable and nontaxable income types, you can view IRS Publication 525. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
