Husband-Wife Partnerships: The Tax Angles
When both members of a married couple participate in an unincorporated business venture, must it be treated as a husband-wife partnership for federal tax purposes? Answer: maybe, or maybe not. Figuring out the answer is important because it can have a huge impact on the couple’s self-employment tax situation.
Husband-wife partnerships must also file annual federal returns on Form 1065 along with the related Schedules K-1. As you know, partnership returns can be a pain. For these reasons, you generally want to avoid husband-wife partnership status when possible.
When Does the Husband-Wife Partnership Actually Exist for Tax Purposes?
Good question. As you can see from the preceding example, the self-employment tax can make the husband-wife partnership an expensive proposition. Of course, the IRS would love it if you had to treat it that way.
Not surprisingly, several IRS publications attempt to create the impression that involvement by both spouses in an unincorporated business activity usually creates a partnership for federal tax purposes.
IRS Publication 334 (Tax Guide for Small Business) says the following:
If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement.
In other words, you don’t have to believe that you have a husband-wife partnership to have a husband-wife partnership for tax purposes.
Similarly, IRS Publication 541 (Partnerships) says:
If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065.
But in many (if not most) cases, the IRS will have a tough time prevailing on the husband-wife partnership issue. Consider the following direct quote from IRS Private Letter Ruling 8742007:
Whether parties have formed a joint venture is a question of fact to be determined by reference to the same principles that govern the question of whether persons have formed a partnership which is to be accorded recognition for tax purposes. Therefore, while all circumstances are to be considered, the essential question is whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise.
The following factors, none of which is conclusive, are evidence of this intent:
In many (if not most) real-life situations where both spouses have some involvement in an activity that has been treated as a sole proprietorship, or in an activity that has been operated using a disregarded single-member LLC that has been treated as a sole proprietorship for tax purposes, only some of the five factors listed in Private Letter Ruling 8742007 will be present. Therefore, in many such cases, the IRS may not succeed in making the husband-wife partnership argument.
Regardless of the presence or absence of the other factors listed above, the husband-wife partnership (LLC) argument is especially weak when (1) the spouses have no discernible partnership agreement and (2) the business has not been represented as a partnership to third parties (for example, to banks and customers).
C corporations cause double taxation for business owners, so you probably think you want to avoid them at all costs.
And for many of you, this is true, as the S corporation often provides the lower overall tax outcome.
But for some of you, the C corporation could provide the best tax outcome because it bypasses the $10,000 state and local tax (SALT) deduction cap, which was introduced by the Tax Cuts and Jobs Act (TCJA).
Prior to the TCJA, you could deduct as itemized deductions on your Form 1040, Schedule A—without limit—the following foreign, state, and local taxes:
Tax reform took two direct actions against your Form 1040 itemized deductions for foreign, state, and local taxes. Beginning in tax year 2018,
If you operate your business as an S corporation, the S corporation passes its net income to your individual tax return. This causes you, the individual, to pay state income taxes on the S corporation income. Those state income taxes are subject to the $10,000 cap.
C Corporation Loophole
But there is an exception: This $10,000 limit applies only to individuals—meaning, taxes deducted on your Form 1040, Schedule A. The limit does not apply to C corporations.
If you operate your business as a C corporation, then your C corporation pays state income taxes on its net income and deducts those taxes on its corporate income tax return.
– Notice 2020-18
The IRS has now extended the deadline for filing and paying federal income tax. The due date for any taxpayer with a federal income tax payment or a federal income tax return due April 15, 2020 is automatically postponed to July 15, 2020. Taxpayers do not have to file Forms 4868 or 7004. There is no limitation on the amount of the payment that may be postponed.
Any taxpayer refers to an individual, a trust, estate, partnership, association, company, or corporation.
The relief provided for in this notice is available solely with respect to federal income tax payments (including payments of tax on self-employment income) and federal income tax returns due on April 15, 2020, in respect of a taxpayer’s 2019 tax year, and federal estimated income tax payments (including payments of tax on self-employment income) due on April 15, 2020, for a taxpayer’s 2020 tax year.
No extension is provided for the payment or deposit of any other type of federal tax, or for the filing of any federal information return.
As a result of extending the deadline for filing and paying federal income taxes, the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the federal income tax returns or to pay the federal income taxes postponed by this notice.
Notice 2020-18 supersedes Notice 2020-17, which had previously limited the amount of federal income tax payments that could be extended. Notice 2020-18 has no limit on the amount of federal income tax payments that may be postponed until July 15, 2020.
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As a tax preparer, I hear questions like this from time to time.
The short answer to you claiming your boyfriend as a tax dependent is: No.
While I like the way you’re thinking, it’s not possible. Your boyfriend is awfully lucky to have your help and support but the IRS is not going to provide you with a tax benefit for your relationship.
The IRS has a seven-part test for dependency. And someone has to qualify by answering ‘yes’ to all of them.
The first three apply to everyone:
Now, the next four tests depend on whether the prospective dependent is a “qualifying child” or a “qualifying relative”.
As your boyfriend is not a child, then you have to use the “qualifying relative” tests.
I think you’ll be hard-pressed to have your boyfriend qualify as a relative even if you stretch the “any other person who lived with the taxpayer” test above.
If you need help filing your taxes, reach out to Steve Stanganelli, CFP(r) of Boston Tax Planners.
Have you taken money out of a Roth IRA? At this time of year, it is common for tax preparation clients to ask me about Roth IRAs and taxes. So, are withdrawals from a Roth IRA taxable?
Let’s say you withdrew $10,000 from a Roth IRA and you’re trying to prepare your taxes on your own. How do you calculate the taxable amount if any?
Before I can answer this, we need to know some of the background. So let’s meet Dan.
Dan has had a Roth IRA account for three years. He withdrew $10,000 from this account to pay off some debt. He was taxed on 10% of the total amount, which left him a balance of only $9,000. Currently, Dan lives in Texas which has no state income taxes. He received a Form 1099-R showing a taxable amount in Section 2A of the form as blank. How can he calculate the taxable amount? His 1099-R form has his prior Washington, DC address, but as a member of the military he has been relocated to Texas now.
Boston Tax Planner Answer:
You only pay taxes on the gains above what you invested. Your initial and subsequent investments into the Roth IRA form your basis. I recommend that you go back to your statements to calculate the amount of your investments. If you need help, reach out to the investment custodian (the folks who prepared the 1099). They should also be able to tell you what the amount invested was.
It’s possible that you have no taxable gain and this is why there is no taxable amount listed on the 1099. For example, if you invested $10,000 and withdrew $1,000, then for tax purposes you received a partial return of your principal. There is no tax on this in a Roth IRA.
When you contact the custodian you should update your address information. But it should not be a problem for filing your federal income taxes. Since you live in Texas where there is no state income tax, you shouldn’t have to worry about that either. Whether or not you need to file a different state tax return will depend on which state and how long you lived there.
If you are like Dan and need help with your taxes, please contact Steve Stanganelli, CFP(r) at BostonTaxPlanners.com.
Raise your children well. They may choose your nursing home and may even provide support you with financial support in your old age. If you’re lucky to have a child who turns the tables on you and provides you with support, you may get a question like I did: Are gifts to parents tax deductible?
A taxpayer sends a portion (about $1,500 each month) of his income to his parents who live overseas. While he is employed, his wife is not. So, when he sends money to the parents, is is considered a gift and is it tax deductible? In his case, his parents live overseas but the response is still the same.
I can only hope that my children will be as generous to us in our later years as you are with your parents. Your gift is probably greatly appreciated by your parents and helps them enrich their quality of life. While your monthly payment can technically qualify as a gift, it has no impact on your personal income taxes under current tax rules.
Technically, you and your spouse may gift a maximum amount of $14,000 per year per person. This would equal a total gift of $28,000 by your wife to your parents. Add that to the $14,000 per year per person that you can gift. That means you can gift a total of $56,000 from your household to their household. But this gifting only makes a real difference when calculating gifts to reduce the total of a taxable estate for estate tax purposes. If your personal estate is worth less than the federal exemption (currently about $5.2M and possibly a non-issue next year if the tax bill winding its way through Congress is finalized), then it’s not likely to be an issue.
On the other hand, if your parents could qualify as dependents and you paid for their medical services directly, then you could find that some or all of your cash transfers may qualify as itemized medical deductions.
After January 1, 2018 the new tax law will be in effect. Based on what I see, this itemized medical deduction option may be moot as there will be a lower incentive to itemize after the standard deduction increases.
If you’d like an objective second opinion about your taxes and are looking for a road map on how to live better by planning well, please reach out to Steve Stanganelli, CFP®, CRPC®, AEP® at Boston Tax Planners, a service of CVWA LLC. Email him at Steve@BostonTaxPlanners.com.
Tax season might seem luxuriously far away, but it will be here before you know it. Before the IRS begins accepting returns, it’s a good idea to audit your own situation and take action now, if needed.
Preparing now means completing your taxes will be much easier and faster later. The earlier you file, the earlier you get your refund (if you’re eligible for one) — and the sooner you can use that money to pay down debt, bolster your savings, or buy that TV you’ve been eyeing for months.
Figuring out how to prepare taxes and staying ahead of any potential issues can save you time when you’re ready to submit your return.
1.) Get Organized
2.) Think Now About Extensions Beyond the April 17, 2018 Filing Deadline;
3.) Review Your W-4 and Adjust Your Withholdings;
4.) Research Tax Preparers and Services – Tax planning and tax preparation are not the same thing and not everyone provides both services;
5.) Check for Deductions and Make a File with Needed Documents (see #1);
6.) Start Saving or at least don’t be shocked by the fee to prepare your taxes – the national average for a basic tax return (1040A and state return) is $176 and the cost goes up for more complex returns: Itemized 1040 with Schedule A and one state return is $273 (national average) and $457 for itemized 1040 with Schedule C Business Income or Capital Gains. Other schedules and other state tax returns will likely increase the fee.
As part of my divorce planning practice, I often work with clients to help them chart out their cash flows and projected tax issues to help reduce surprises. Sometimes folks can be confused about what is taxable income.
In one case, a woman asked if the monthly benefit she received from her ex-spouse’s military pension was taxable since it was considered “property” in the divorce decree in the state in which she lived.
For reference, alimony received is considered taxable income. But this is clearly not alimony and wasn’t listed as alimony in her divorce decree. Nonetheless, the monthly income she is receiving from her ex-spouse’s pension may very well be taxable.
Military retirement pay based on age or length of service is considered taxable income for Federal income taxes. However, military disability retirement pay and veterans’ benefits, including service-connected disability pension payments, may be partially or fully excluded from taxable income based on a variety of tests.
It sounds to me like this is retirement pay (and not part of any disability) so this will be added to her total adjusted gross income.
Whether or not it becomes taxable will depend on how much her total income is and home much of this income (from this and all other sources) may be offset by deductions (itemized or standard) and exemptions.
If you’re receiving any military retirement income you will likely receive a Form 1099-R from the US Office of Personnel Management each year detailing what was received and what portion is ‘taxable’.
Taxpayers may want to plan ahead and calculate whether they may have any tax owed and how much, if any, quarterly estimated tax payments that they may want or need to make. Speak with a qualified tax professional or tax adviser to help figure out this detail. Call us and we’ll be happy to help.
Famous Chef Anthony Bourdain Didn’t Pay Taxes for 10 years— Sounds good, right? But here’s What Can Happen.
Death and Taxes. There’s no escaping them. And if you try, you could be in hot water with the IRS — no matter who you are. At age 44, famous chef Anthony Bourdain never had a savings account and hadn’t filed his taxes for a decade. In an article on CNBC.com1, Bourdain explains that he used to always owe money, thanks to constant job-hopping, perpetual debt, and drug use. Ultimately, celebrity chef Anthony Bourdain got in hot water with the IRS because of it.
“I didn’t put anything aside, ever,” he told Wealthsimple in an article on BusinessInsider.com2. “Money came in, money went out. I was always a paycheck behind, at least.” His major turning point came right before his first book, “Kitchen Confidential,” hit store shelves and turned him into the famous chef and travel writer that he is today. After his risky career shift paid off he immediately called the IRS and credit card companies to settle his balances. Now, he is determined to never owe anyone money again.
If you’re behind on filing your taxes, or owe an outstanding balance, know that you have options. Here’s what happens and how you can settle your balance and avoid further consequences.
What happens if you don’t file your taxes?
No one individual’s tax situation is the same, but everyone is subject to the same fees and interest charges if you don’t file or pay on time. The first fee is called the failure-to-file penalty, which comes to 5 percent of your unpaid taxes for each month your tax return is late, up to 25 percent.
In the event you did file your tax return on time but didn’t pay the total amount owed, you could be subject to a failure-to-pay penalty. This penalty is 0.5 percent of your unpaid taxes for each month you don’t pay, up to 25 percent. In addition, you’ll pay interest charges equal to the federal short-term rate, plus 3 percent.
Don’t wait until you receive a letter from the IRS before making a plan to file your taxes or pay an outstanding balance. By then your account will already be levied with interest and a host of fees. The sooner you start rectifying your tax situation, the fewer penalties and interest you’ll pay in the future. Follow in chef Bourdain’s footsteps and reach out the IRS to settle your balance before they have to contact you.
Can’t pay your taxes?
The IRS offers options for taking care of taxes that can’t be paid all at once. Whether you have a balance of $10,000 or as much as $50,000, you can apply for various payment plans that offer the chance to pay your tax bill in affordable installments. Look for Form 9465 or head to the IRS website and search for the Online Payment Agreement form.
If you continue to ignore your tax situation, it won’t ever go away. Just like a rotten egg it will come back to ruin any soufflé. And you don’t want to live in fear of not paying your taxes. Mr. Bourdain sums it up nicely, “to me, money is freedom from insecurity, freedom to move, time if you choose to make use of time. If they [IRS] call me in for a full audit, great, here I am. It’s all there. I lived a lot of years afraid of the bank, the landlord, and the government calling. Nowadays, it’s nice to not be afraid.”3
Don’t try to cook the books with the IRS. Sure, there’s nothing wrong with trying to find legal ways to minimize your tax bill. And with the right tax planning help, you may lower your taxes. But if after that, you find that you still owe, then it’s best to make a plan to pay it. Trying to avoid it will ultimately backfire. And that’s a bad recipe that neither you nor any chef will want to cook up.
Need help? Then call Boston Tax Planners and we’ll help you navigate and prepare a plan to pay your past taxes and plan ahead to minimize your next tax bill.
Here’s the latest question to the Tax Corner: Can I still deduct an IRA when contributing to a 401k plan?
Question: I have two part-time jobs. 95% of my wages are generated at job #1 where no 401K plan is offered. I work infrequently at part-time job #2 where a 401K plan is offered and I have participated in the plan. I will only accumulate a couple hundred dollars in taxable wages in 2017 from job #2, and will therefore contribute less than $50 to the 401K plan. Given that, I would like to opt out of the 401K plan and contribute to a self-directed IRA based on the sum of my wages from both jobs. THE PROBLEM. In 2017 I have worked at job #2 and had tax deductible contributions allocated to the employer sponsored 401K plan (the amount is less than $20). Since I have already participated in this plan in 2017 is there a way to have my employer or sponsor ‘recall’ those funds from the employer based 401K account? Then I will not have participated in any employer sponsored plan in 2017 making me eligible to participate in a self-directed IRA.?
Based on my tax research resources, the short answer is participation in an employer plan will make you ineligible for a tax-deductible IRA in the same year.
An employee is covered by an employer retirement plan for a tax year if the employer has a:
• Defined contribution plan (profit-sharing, 401(k), stock bonus, or money purchase pension plan) and any contributions or forfeitures are allocated to the employee’s account for the tax year.
• IRA-based plan (SEP, SARSEP, or SIMPLE IRA) and the employee has an amount contributed to the IRA for the tax year. • Defined benefit plan (403(b) annuity, cash balance, or plans for federal, state, or local government employees, other than section 457(b) plans) and the employee is eligible to participate within the tax year. An employee is covered even if he or she declines to participate, does not make a required contribution, or does not perform the minimum service required to accrue a benefit for the year.
No vested interest: If any amount is allocated to or a benefit accrues to an employee’s account, the employee is covered by that plan even if he or she has no vested interest in (legal right to) the account.
If it’s early in the year, you may be able to talk with your employer about withdrawing from the plan, taking the deferred contribution as income and adjusting your payroll records so that Box 13 on your 2017 W2 will not be checked. That is an operations issue you’ll need to refer to the payroll and 401k administrator. (I personally doubt that an employer would allow such a ‘recall’).
On the other hand, you may still consider a contribution to a non-deductible traditional IRA. It would need to be coded this way with the custodian and reported on your taxes to account for basis (and future tax issues). So if you can’t successfully ‘recall’ funds, consider the non-deductible route.
And depending on your income, you may want to consider a Roth IRA contribution instead. This will provide for ‘tax diversification’ in the future since the funds can be withdrawn without having to pay any income taxes on accrued gains, dividends and interest.
You really should consider having a good tax advisor as part of your team even if you are planning to direct your own investments.