Companies and freelancers have their plate full during tax season. Whether you’re self-employed as of last year or it’s business as usual for you, the advisors of TPI Group have often been asked the same questions by our clients. Here is a list of some frequently asked questions.
Most of our questions and answers will pertain to normal years and circumstances, however, the COVID-19 situation has impacted the United States’ tax filing process this year. Some extensions have been made to compensate for its effects.
COVID-19 Exception
In terms of deferred federal income tax payments, individuals have an extension from April 15th to July 15th because of the COVID-19 situation. Individuals can defer a combination of up to $1 million. If you pay your taxes from last year within this period, you will not have to pay any penalties or interest.
Companies have the same extension of July 15th and can defer a combination of up to $10 million. Penalties and interest will be waived during this period.
If you want to know more, refer to this article, or contact us at (703) 288-1998 for more updates.
#1 – If I Have a Home Office, Can I File Automobile Deductions?
Yes, you can. If you have a home office, that probably means that you meet with clients at their place of business or drive to your main office. Having a home office increases your automobile deduction limit.
Additionally, if you own and use a vehicle for work purposes, you can apply it to your automobile deductions. Remember that Section 179 has exceptions. For instance, you can deduct up to $25,000 for a vehicle that weighs between 6,000-14,000 pounds provided it meets several other conditions.
#2a – I Want to Reduce My Taxes. If I Shift Some of My Income from Last Year to My Children, Is that Legal?
Shifting income to your children is a legal practice. However, it’s not called shifting. You will be paying them since you want to give them earned income. If your dependent children work for you and you’re giving them a salary for the work, that money will be taxed according to the tax bracket and rates that apply to your children.
Dependent children have a standard maximum deduction of $12,200.
#2b – What About Unearned Income? Can I Shift that to My Children?
Yes. Many high-income families have shifted unearned income to children as a tax-saving strategy for decades. Unearned income, such as dividends and real estate income, are subject to the Kiddie Tax. Children under 19 years of age or between 19 and 23 who are full-time students and earning an income that is below half of their annual expenses are subject to the Kiddie Tax. There are other stipulations, including what defines the child as a student.
Since the Tax Cuts and Jobs Act in 2018, some modifications have been made to the Kiddie Tax, and they will remain in effect until 2026. For 2019, if a child’s unearned income is over the threshold amount of $2,200, it will be taxed according to the brackets and rates of trusts and estates. Prior to 2018, a child’s unearned income was taxed according to their parent’s highest income tax rate when it was over the threshold amount.
Here are the Kiddie Tax rates for 2019:
- Unearned income of up to $2,600 is subject to a tax rate of 10%.
- Unearned income from $2,601 to $9,300 is subject to a tax rate of 24%.
- Unearned income from $9,301 to $12,750 is subject to a tax rate of 35%.
- Unearned income over $12,750 is subject to a tax rate of 37%.
#3 – How Can I Qualify for Head of Household Status?
If you and your partner have separated or divorced and your partner is the non-custodial parent, you may still qualify as a head of household.
Among the many qualification rules, you must be categorized as unmarried at the end of the year and have at least one child living dependently upon you to qualify as a head of household. Additionally, you must have paid over half of your home’s maintenance costs for over half of the year.
Stay Informed with TPI Group
With the coronavirus pandemic throwing a wrench into the works, it’s essential for you to stay on top of what’s going on health-wise and tax-wise. Our TPI team hopes you and your loved ones are staying safe, and want you to know that we are available to answer all of your financial questions.
Fill out our online form, or call us today at (703) 288-1998.