Categories
Taxes

Can I Report All Capital Gains Directly on Schedule D?

So you’ve sold some stocks, bonds, mutual funds, or other investments, and tax time has arrived. Any time you sell an asset that is determined to be a capital asset, you have to determine your holding period and gain or loss and report it on Schedule D.

There are a few caveats with Schedule D, though, and its accompanying forms. 

So Can I Report My Gains or Losses Directly on Schedule D?

Schedule D has a partner form, called Form 8949. Schedule D is the summary of the transactions that are required to be broken out on Form 8949. 

If the only assets sold are normal investments of stocks, bonds, or mutual funds, and they are covered with no adjustments needed, you may report them directly on the Schedule D of Form 1040.

These are broken out on Schedule D as the sum or the short-term investments and then the long-term investments.

So When Would I Have to Use Form 8949?

If your investments are noncovered, you would have to break out each sale on Form 8949 and then carry the results to Schedule D.

The terms noncovered and covered securities simply refers to whether the basis of your investment was required to be reported to the IRS.

If you had purchased your investment prior to 2012 then your investment is likely considered noncovered and the basis likewise not reported to the IRS.

Because the basis is not reported to the IRS, it is your responsibility to break out the transactions on Form 8949 for the IRS’ scrutiny.

If you’ve sold many, many investments and would not like to use Form 8949, you may mail in Form 8453 separately and attach with it a print-out of all investments sold and their details from your brokerage company.

If you would like to skip mailing, some tax software supports the ability to include your investment details as a PDF to include with your e-filed tax return.

Is Having Noncovered Securities the Only Reason I Would Have to Use 8949?

While there are many reasons you would have to use Form 8949 in addition to Schedule D, two are most common: Having noncovered securities, like we’ve discussed, or having an adjustment to your investments that needs to be reported.

If you have an adjustment that needs to be made, such as a wash sale disallowed, you would need to file Form 8949 with Schedule D to show this detail.

Generally, Form 8949 is needed whenever more detail is needed than just what is shown on Schedule D.

 


For questions regarding this topic, please leave a comment below and we would be happy to help.

This article should not constitute legal or tax advice. For help regarding your situation, please consult a local advisor.

Categories
Taxes

Can I Deduct R&D Expenses for a Patent?

Everyone who begins a business is starting something new, but when you’re in the business of creating something to be patented, you go a step further: you’re inventing something new.

It can take time to develop a new product or process, and in the meantime you’re likely to incur expenses in creating it. 

There’s expenses that are directly related to creating the patent, and other ancillary expenses like driving your car for business purposes, or meeting with potential partners or investors.

All of these expenses add up, and you’re likely to ask: If it takes so long to create an income from this patent, what kind of current benefits can I receive?

Luckily for you, there are some options our kind government has allowed you to take advantage of. 

Generally when you create something new, you have to capitalize the expenses and then deduct them annually through the process of either depreciation or amortization

This is in contrast to expensing an ordinary payment for an item in full in the year it is paid for. 

And while most of these expenses that are directly related to the patent, like legal fees, must be capitalized into the cost of the patent, and then amortized ratably over a 15 year period starting from the time the patent is allowable, you may take advantage of a provision for Research and Development costs.

That’s right, for Research and Development expenses for the patent, you may elect to deduct them in the year incurred, or capitalize them into the cost of the patent and then amortize them like the legal fees.

To make this election you simply deduct the Research and Development costs on the business portion (Schedule C if you are a disregarded entity) of your tax return in the first year you incur any; no special statement is required to be attached to your return.

Once the election is made, you must continue deducting Research and Development costs every year. You may not switch back and forth between deducting and capitalizing the expenses.

While it seems to be more beneficial to deduct the expenses immediately, one reason you may want to consider capitalizing the expenses is if you do not need the current write-off.

If your current income is low, and you expect your income to grow significantly and place you in a higher tax bracket when the patent is in service, you may want to consider capitalizing the expenses and taking the write-offs in future years.

 


To have your question featured in a future article, please leave a comment below. 

This article should not constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.

Categories
Taxes

Where is Form 2106 In My Tax Software?

You’ve done your own taxes for years, and thanks to advances like TurboTax, you’ve done them flawlessly. So this year, you go to itemize your deductions, but you’re having trouble finding the form to list your employee business expenses.

Where Did Form 2106 Go and Why Can’t I Itemize My Employee Business Expenses?

That’s right, you’re not going crazy: Form 2106 has been removed from your software after tax year 2017.

President Trump’s sweeping tax law changes effective tax years 2018-2025 removed all itemized deductions that were subject to the 2% of AGI limitation. And unfortunately for all those that paid expenses at work out of pocket and were not reimbursed for them, these changes include those expenses.

Surely There Is Some Way I Can Deduct These Expenses! I Was Never Reimbursed For Paying Them!

Until 2026, there is no way for an employee to deduct these expenses on their tax return.

Self-employed individuals (those individuals issued 1099’s, not W-2’s) can still take these kinds of expenses on their individual tax returns on Schedule C.

The silver lining here is you may discuss setting up an accountable plan with your employer.

This allows your employer to reimburse you for all expenses you’ve paid out of pocket (including mileage), take a tax deduction for it, and do so all employment tax-free. 

In other words, they can reimburse you without you or your employer being subject to tax.

There are some strict rules that separate this kind of reimbursement from being a qualified accountable plan from being a nonaccountable plan, which would subject the transaction to tax on both parties.

First, the arrangement has to be in writing. Next, it has to apply to every individual at the company and cannot only apply to executives or highly paid individuals.



This article is not intended to constitute tax or legal advice. For help regarding your specific situation, please consult a local advisor.

Categories
Taxes

I Received a 1099-R for a Rollover. Is it Taxable?

Earlier the previous year you moved money out of one retirement account and into another; most commonly this happens when a person leaves their job and moves their money from their 401(k) into their new employer’s retirement plan, or into an IRA.

The transfer went smoothly, going directly from one account and into another. 

But then something weird happens; after the first of the next year, you receive a tax form that references your rollover.

But that doesn’t make sense, right? You completed the rollover specifically so you would not have to pay any tax. After all, that is what those retirement accounts are for!

And you’re right! Assuming the rollover was completed correctly, and was done as a trustee-to-trustee transfer (from one brokerage company to another), and the rollover was not from a Traditional account to a Roth, then you will pay no tax.

So Why Did I Get a 1099-R Tax Form?!

Despite being nontaxable, the rollover is still a reportable transaction for your tax return. 

Check to make sure that there is a Code G in Box 7 Distribution Code(s). This code signifies that a rollover was completed properly. 

If you think the rollover was done properly and there is not a code G, contact your brokerage company to see if you can have the 1099-R reissued correctly.

So How Do I Report the 1099-R on my Tax Return?

To report the rollover, write in the line that says Pensions and Annuities the full amount of the rollover. In the box next to it- Taxable Amount- write in 0, unless you have other taxable pensions or annuities to include in that line. 

On the line in between these two boxes, write in capital letters ROLLOVER. This should, hopefully, signify to our friends at the IRS that this transaction is indeed a rollover.

To ask your questions, please leave a comment below.

 


This article does not constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.

Categories
Taxes

I Was Given a 1099. What Do I Do With It?

Most Americans work for an employer and that’s it. When you work for an employer, you generally receive a W-2 tax form and, if that is all you have for the year, filing your taxes can be fairly straightforward.

Although, more commonly now, many Americans are opting for freelance or gig work. This could be their full-time “job,” or for many it is just to supplement their day job income.

When you work for someone and are not classified as their employee, you will generally be given a 1099-MISC at the end of the year in place of receiving a W-2.

On a 1099-MISC form you will likely notice something a little different about it from the usual W-2: More of the fields are likely to be blank.

The reason for this is the employer is generally not required to withhold any federal income tax or FICA taxes from your pay. In addition to this, they generally do not pay any fringe benefits like health insurance or offer any 401ks to their contractors.

But your question is not just what this form is, but what to even do with it. Well, if you were not an employer’s employee and box 7 Nonemployee Compensation has an amount in it, then this might come as a surprise: You’re a business owner!

Yes, if you are not an employee then by default you are a contractor and the employer is actually your client.

There are a few drawbacks and also a few pleasant features about being a contractor. 

The biggest drawback is that the company will not withhold your tax liabilities and you are expected to pay them yourself out of your earnings. On top of this, you are also expected to pay twice as much FICA taxes as an employee. 

The reason for this is there is an employer’s portion of Social Security and Medicare taxes as well as the employee’s portion. Each portion is currently 7.65% of your earnings. Together, it is 15.3% of your earnings. As a contractor, you must pay both portions yourself.

As for your tax return, the amount from the 1099-MISC will be reported on Schedule C Profit or Loss From Business, under Gross Receipts. Unlike an employee, you are allowed to deduct unreimbursed expenses, including business costs of your cell phone and mileage, against your earnings.



This article is not meant to constitute legal or tax advice. For help regarding your situation, please consult a local professional.

Categories
Taxes

Can I Deduct Health Insurance If I’m Self-Employed for Taxes?

The government outlines certain expenses that a self-employed person is allowed to take against their earnings, some explained explicitly and some implicitly. 

The general rule is that any expense is allowable if it is “ordinary and necessary” to that person’s trade or business. As you can see, that is vague.

However, health insurance is something that, up until recently, not only felt like a necessity, but if you wanted to avoid a tax penalty it was a necessity. So, obviously, there were and are certain things that the government allows to help with the high cost of obtaining health insurance.

Most people in the United States obtain their health insurance through the workplace, where it is not only much cheaper for group rates, individuals and their businesses are allowed to pay for the health insurance expenses on a pre-tax basis, meaning essentially that the money used for the health insurance premiums are not taxed.

So, if you are not employed through a normal workplace, and instead are either a contractor, are self-employed, or otherwise own a business, what are your options? 

You can’t necessarily easily obtain group health insurance coverage, so that is likely not an option. You can’t pay on a pre-tax basis, because you don’t have an employer paying you a wage to not withhold taxes from, so you can’t do that.

So what kind of benefits for health insurance has the government concocted for you?

Now, as a self-employed person, you can’t take health insurance expenses like a normal expense on your Schedule C, or partnership return, or S-Corporation return.

However, you still can deduct the expense. Health insurance premiums are taken as an adjustment to income, not as an expense on the business part of a tax return. The reason for this is, you cannot deduct more health insurance expenses than you have net self-employment income. 

In other words, the deduction for health insurance for a self-employed person is limited to their net business income. Essentially, the expense of health insurance cannot create a business loss, only reduce business income to $0.

While it is great that health insurance for the self-employed has some tax advantages, self-employed people generally still lose out on preferential group rates. However, if you do a little digging, you can find groups that band together self-employed individuals, freelancers, and contractors to receive the group rates for insurance. 

For questions or further discussion, please leave a comment below.

 


This article does not constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.

Categories
Taxes

Can I Still Deduct Charitable Contributions for Taxes?

Nothing feels better than helping others, so much so that many people willingly give their money to organizations and people that are needy. To both incentivize and reward people for doing so, the government decided that it would give a tax break for doing so many, many years ago.

Many people make use of this tax break every year by itemizing their deductions on Schedule A of their personal tax return. We often get letters and questions regarding whether someone can still take their charitable contributions on their tax return after 2017’s tax overhaul.

The simple answer is yes, you can still deduct your charitable contributions against your income for a tax benefit. Whether doing so is beneficial for the average lower-to-middle class couple is a little tougher to pinpoint. 

The question for most people now is not whether they can take their deductions, but whether they should. You see, you are allowed to take the higher or your standard deduction or the total of your itemized deductions, which include things like medical expenses, mortgage interest, state and local taxes, and of course, charitable contributions. 

The standard deduction has nearly doubled to $12,000 for a single person and $24,000 for a married couple (these amounts increased in 2019 slightly and will likely continue to increase with inflation every year).

The average person or couple will find it difficult to spend enough to come close to these amounts, choosing to take the simpler standard deduction instead of adding up their receipts for charity and medical expenses.

In doing so, life is much simpler for the average person come tax time. However, it should be noted that charities were afraid that this would negatively affect giving and have strongly lobbied against this change in our tax code.

In most studies since the tax changes, data have shown that Americans are giving significantly less than previous years, indicating that the deductibility of charitable expenses was a big incentive for the ordinary American.

But what do you think? Would you rather see filing taxes become an easier process for the average American or the charitable contributions to your favorite organizations increase?

Leave a comment below and let us know.

 


Thank you for reading. This article should not constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.

Categories
Business Taxes

I Just Formed a Partnership. What Does it Mean for Taxes?

Most of us have entrepreneurial thoughts at some point in our lives. Some of us even act on those thoughts and pursue our dreams. While doing so, there’s plenty to think about, depending on the type of business, like inventory, customers, and business processes. 

Most of those starting out don’t think of other implications, like taxes, until they become relevant. And the relevance of taxes to a small business comes into play generally sometime between December 31st and April 15th.

Jonathan writes in, “Hey Mike, my brother and I just started a business together in May of last year. Do we just report our income on our own separate returns and take the expenses that each of us paid for or how does that work? Any insight would be incredibly helpful. Thanks!”

Great question, Jonathan, and truly, congratulations on going after your business idea. 

Unfortunately, things will likely only get more complicated from here because any time there is more than one person involved in ownership of a business, filing only your personal income tax return to report the income is generally not an option.

Since this is your brother, and if this venture was started together with the idea of sharing ownership in a business for each other’s skills and not just a way to split expenses, then you will need to file a Form 1065 U.S. Return of Partnership Income

The reason you have to do this is, well you guessed it, you’re in a partnership! The way the income and expenses are split up depends on how the agreement between the two of you was thought up.

If the agreement is for 50/50 ownership, then you each get to claim half of the expenses and half of the income on your personal return.

But all of that information will flow from the Form 1065 to the K-1’s that will get reported on your personal returns. 

Now, you might be wondering why the other partner gets to claim half of the expenses if only one partner paid the expenses. The reason is simple: the partner that paid the expenses actually invested the money into the partnership first (which increased his/her basis in the business), and then the partnership itself incurred the expense.

Unfortunately, we won’t be able to go into all the intricacies of a partnership tax return in this single article, but for more in-depth questions about the taxation of partnerships, please feel free to ask in a comment below.

 


Thank you for reading. This information should not be used to constitute legal or tax advice. For more personalized discussion, please leave a comment below.

Categories
Taxes Uncategorized

Who Qualifies Me for Head of Household on My Taxes?

Do you pay for more than half of the costs of keeping up your home?

Are you unmarried?

Do you have someone else living with you that you care for?

Well, you’re in luck! Congress decided you need a break. A tax break, that is! You may qualify for a beneficial filing status, called Head of Household.

But not so fast!

Just because you meet these criteria, does not mean that there are no more criteria that you must meet. 

For a person that lives with you to qualify you for the Head of Household filing status, they must be related to you in a way that is closer than a cousin is related to you.

For example, the person can be your parent, sibling, child, or a descendant of any of these. In-laws count also in this case. Even ex-in-laws! That’s right, if you divorce your spouse and are still taking care of one of their family members, you may still claim them as your qualifying person for the purposes of Head of Household filing status. 

Further, you can claim a person that meets these criteria for the Head of Household filing status, even if you cannot claim them as your dependent. There is a special spot on the Form 1040 that you can put this person’s name in case they do not show up elsewhere on the return as a dependent. 

Nonetheless, most dependents will qualify you for the Head of Household filing status.

However, if you can claim someone as a dependent that meets the Member of Household test, and that is the only reason they qualify as your dependent, then you may not use them as your qualifying person for the Head of Household status. 

For more information, please click here


Thank you for reading. This article should not be regarded as legal advice. For information on your specific situation, please consult a local professional. 

If you are a tax or financial professional, hang around awhile. Feel free to leave a message. We’d love to hear from you and chat. Thanks!

Categories
Taxes Uncategorized

I Started a Business With My Spouse. Do We Have to File a Tax Return?

There’s a million things to consider when first starting a business, and unfortunately many of those items revolve around tax and tax reporting. In addition to federal filing and paying requirements, you may also have state and local reporting requirements.

If you’ve just recently started a business with your spouse, you know you and your new business partner have a lot to do. And filing a tax return is one of those things.

Your spouse and you will likely be required to file a Form 1065 Partnership Information Return. This information return is purely to report the income and expenses of the business. After these items are reported on the Partnership return, the net income and other items (such as Health Insurance paid on behalf of the partners) are reported on Schedules K-1. 

Think of Schedules K-1 like a W-2 for a wage earner. The net income is essentially the wages that would have been paid to an employee. However, tax likely was not withheld from this income. Also, the income reported to each partner is distributed based on percentage of ownership in the business. 

If no other percentage is specified, it is generally assumed that each owner has equal percentage ownership (for spouses, 50% each). 

It should be noted that Form 1065 and Schedules K-1 are considerably more difficult to fill out than a Schedule C attachment on a normal tax return for a sole proprietor.

Because of this, the IRS allows a special rule for married couples starting a new business. If you are what is considered a Qualified Joint Venture, you and your spouse can elect to file two separate Schedules C (each reporting equal amounts of revenues and expenses) and attach them to your tax return.

In order to make this election, you must not be recognized as a state organized entity (like an LLC). 

The rules are set up this way specifically to give both spouses credit for Social Security and Medicare earnings under their Social Security Numbers.

 


This article is not meant to constitute tax or legal advice. For help regarding your situation, please consult a local professional.