Established as a new type of tax-advantaged investment vehicle for U.S. children, a Trump Account functions similarly to a traditional IRA until the beneficiary reaches adulthood.
The Core Mechanics
The Government Seed: Every U.S. citizen born between January 1, 2025, and December 31, 2028, qualifies for a one-time $1,000 government contribution.
The “Growth Period”: The account is managed by an “authorized individual” (typically a parent or guardian) until December 31st of the year before the child turns 18.
No Early Access: Funds generally cannot be withdrawn before the year the child turns 18, except for death or specific rollovers to an ABLE account for children with disabilities at age 17.
Investment Guardrails: By law, funds must be invested in low-cost U.S. equity index funds (e.g., S&P 500). Annual fees are strictly capped at 0.10% of the account balance.
Contribution Limits and Strategy
While the government provides the starter, the real power lies in the annual contribution capacity from private sources.
Annual Cap: Families, friends, and others can contribute up to $5,000 per year per child. This limit will be indexed for inflation starting in 2028.
The Employer Benefit: Employers can contribute up to $2,500 annually toward an employee’s dependent child’s Trump Account. These contributions are excluded from the employee’s taxable income.
Philanthropic “Top-Offs”: Private donations are already supercharging these accounts. A $6.25 billion pledge from Michael and Susan Dell aims to provide an additional $250 to 25 million children aged 10 and under in qualifying income areas.
Important Dates and Deadlines
You cannot fund these accounts immediately, but you should prepare your filings now to claim the government seed.
Claiming the $1,000 Seed: Parents can make the election by filing IRS Form 4547. This can be filed alongside your 2025 income tax return in early 2026.
Account Activation: The Treasury Department will begin sending activation instructions in May 2026.
First Contributions: Private and employer contributions will officially be accepted starting on July 4, 2026.
Arrache PC Advisory: Trump Account vs. 529 Plan
It is important to remember that a Trump Account does not replace a 529 Plan; it complements it.
Feature
Trump Account
529 College Savings Plan
Primary Goal
Generational Wealth / Retirement
Education Expenses
Tax Treatment
Tax-Deferred (Taxed as ordinary income later)
Tax-Free (For qualified education)
Contribution Limit
$5,000/year (Aggregate)
Varies by State (Often $300k+ total)
Withdrawal Age
Restricted until 18
No age limit (linked to expenses)
Post-18 Status
Converts to Traditional IRA
Remains a 529 or Roth IRA Rollover
Next Steps for 2026
For families looking to maximize this “low-friction” win for their estate plan, we recommend three immediate actions:
Prepare Form 4547: Ensure your tax preparer has the valid Social Security numbers for your qualifying children to claim the seed money on your upcoming return.
Evaluate Employer Benefits: If you are a business owner, consider adopting a written Trump Account contribution plan to offer this tax-free benefit to your employees.
Audit Your Legacy Plan: As these accounts eventually convert to Traditional IRAs, we need to ensure they align with your broader succession and multi-generational wealth goals.
Don’t leave government and philanthropic money on the table. Schedule a consultation with Michael Arrache to integrate Trump Accounts into your 2026 wealth architecture.
As a Certified Public Accountant (CPA), Enrolled Agent (EA), and licensed Realtor, I am a tax expert who works closely with small business owners and real estate investors. My firm, Arrache CPA, Inc. dba Mr. Smart Tax, provides a range of specialized financial and real estate services, including tax planning, business transactions, and real estate advisory. With over 15 years of experience, my mission is to help clients achieve their financial and business goals by providing strategic advice and tailored solutions. I write these articles to serve as a starting point to guide you through the business or real estate process, and I am committed to providing the strategic guidance you need to help preserve and grow your wealth.
https://mrsmarttax.com/wp-content/uploads/2025/12/Mr_Smart_Tax_Trump_Savings_Account.png10241024mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2025-12-20 22:32:322025-12-20 22:32:33What is a Trump Account?
For the profitable business owner or real estate investor, the single most costly tax mistake isn’t an audit—it’s the failure to use the right entity structure. This simple oversight leaves you vulnerable to the Self-Employment (SE) Tax Vampire, which can legally drain 15.3% of your profits year after year.
This article breaks down the S-Corporation structure, the strict rules you must follow, and the common pitfalls that require proactive CPA guidance.
1. The Core Trap: Unnecessary Self-Employment Tax
The primary reason to form an S-Corporation (S-Corp) is to reduce the amount of income subject to the 15.3% Self-Employment (SE) Tax (Social Security and Medicare).
Sole Proprietorship/Single-Member LLC: The Tax Drain
If your profitable business operates as a Sole Proprietorship or a simple Single-Member LLC, 100% of the net profit is subject to the 15.3% SE tax.
The S-Corp Solution: Protection
An S-Corp offers protection because the owner can take money from the business in two forms:
Salary (W-2 Wages): This portion is subject to the 15.3% FICA/payroll tax (split between the employee/owner and the corporation).
Distributions: These are the profits paid to you as a shareholder and are not subject to the 15.3% SE tax.
The goal is to optimize the split: pay a reasonable salary, and take the rest as a tax-advantaged distribution.
2. The Strict Rule: Defining Reasonable Compensation
The IRS is highly aware of the incentive to pay a minimal salary and maximize distributions. If challenged, the IRS can reclassify your distributions as wages, subjecting the entire amount to payroll taxes, penalties, and interest.
To stay compliant, the law requires S-Corp shareholder-employees who provide substantial services to the business to receive “Reasonable Compensation”.
How is “Reasonable Compensation” Determined?
There is no fixed formula, but the determination is based on a “facts and circumstances” analysis. If audited, the IRS will evaluate:
Market Approach: What a comparable business would pay for someone to perform the same services in your industry and geographic area.
Time and Effort: The specific duties, responsibilities, training, and experience you bring to the business.
Financial Health: The corporation’s ability to pay the compensation.
3. The Compliance Mandate: Basis Tracking (Form 7203)
For the IRS to accept your deductions, you must be able to prove you have sufficient basis in your S-Corp stock or debt. If you are allocated a loss, the deduction is limited to your total basis.
The Form 7203 Requirement
Starting with the 2021 tax year, S-Corporation shareholders who claim losses or deductions or receive non-dividend distributions are now required to file Form 7203 (S Corporation Shareholder Stock and Debt Basis Limitation) with their personal tax return (Form 1040).
This mandate formalizes the annual basis tracking requirement and gives the IRS a clear digital data point to cross-match, making the risk of an automated audit higher than ever if your basis is inaccurate.
4. Tax Trap: Shareholder Loans and Debt Basis
Shareholder loans to the corporation can be a strategic tool to increase your debt basis and allow you to deduct losses that exceed your stock basis.
However, this strategy carries a major, often overlooked trap:
The Repayment Trap: If the S-Corp repays a reduced-basis loan (a loan whose basis was lowered because losses were deducted against it) to the shareholder, part or all of that repayment is treated as taxable income. This can generate unexpected ordinary income or capital gains for the shareholder.
Documentation is Key: To maximize loss deductions and minimize the risk of the loan being reclassified as a disguised distribution (which is immediately taxable), the loan must be formally documented with a written, binding note that outlines terms and interest.
5. W-2 Benefits: S-Corp vs. Sole Proprietorship
Beyond the tax savings, establishing a W-2 salary as an S-Corp shareholder grants access to state and federal safety nets and financial perks that are generally unavailable to pure self-employed sole proprietors.
Benefit Category
S-Corp Shareholder (W-2 Employee)
Sole Proprietor (Self-Employed)
Unemployment Insurance (UI)
W-2 wages in most states qualify for unemployment benefits if the business situation changes.
Generally ineligible for UI benefits based on self-employment earnings.
Disability/Family Leave
W-2 wages allow contributions to and eligibility for state-mandated State Disability Insurance (SDI) and Paid Family Leave (PFL) programs, providing replacement income.
Access to these state programs is typically ineligible or requires opting-in and paying the full, higher self-employment rate.
Health Insurance
Health insurance premiums paid on behalf of a greater than 2% shareholder are deductible by the S-Corp and included as wages on the owner’s W-2 for income tax purposes, but not subject to FICA/FUTA.
Must take a deduction for the premiums (Self-Employed Health Insurance Deduction) on Form 1040, but does not receive the same favorable employment tax treatment.
🛑 S-Corp Is Not For You: When the Vampire is a Friend
The S-Corp structure is a powerful tax-saving tool, but it is not suitable for every business owner. Adopting S-Corp status can create new headaches or liabilities if your circumstances don’t align with the strict IRS rules:
You Are Not Profitable: If your business is consistently operating at a loss, the payroll and compliance costs (Reasonable Compensation, payroll filings) often outweigh the tax savings, as there are no profits to protect from the SE tax.
Shareholder Limitations: An S-Corp has strict limitations on ownership. It generally cannot have more than 100 shareholders and cannot have C-corporations, partnerships, or certain trusts as shareholders.
Compliance and Payroll Cost: You must run payroll for yourself, even if you are the only employee. This adds administrative time, complexity, and mandatory costs (payroll services, payroll tax filings) that a simple disregarded entity avoids.
State Compliance: While federal rules may be advantageous, some states (like California) charge an annual franchise tax simply for maintaining corporate status.
Bonus Planning
The LLC Retroactive S-Corp Election Bonus
If you are currently a profitable LLC operating as a Sole Proprietorship and realized you missed the S-Corp election deadline for the current year, all is not lost. You may be eligible for relief for a late election. An eligible LLC that can show the failure to file Form 2553 on time was due to reasonable cause can request that the S-Corp status be made retroactive to January 1st of the intended tax year. This requires prompt action and an explanation submitted to the IRS.
Call to Action
Don’t wait for the IRS to define your reasonable compensation or deny your loss deductions. Proactive planning is your only defense against the Self-Employment Tax Vampire.
Contact us today for a complimentary Free Discovery Meeting to discuss your S-Corp setup, conduct a Reasonable Compensation analysis, and ensure your Form 7203 basis is audit-proof.
Contact us at info@mrarrachecpa.com.
About the Author
Michael R. Arrache, CPA, EA, DRE
As a Certified Public Accountant (CPA), Enrolled Agent (EA), and licensed Realtor, I am a tax expert who works closely with small business owners and real estate investors. My firm, Arrache CPA, Inc. dba Mr. Smart Tax, provides a range of specialized financial and real estate services, including tax planning, business transactions, and real estate advisory. With over 15 years of experience, my mission is to help clients achieve their financial and business goals by providing strategic advice and tailored solutions. I write these articles to serve as a starting point to guide you through the business or real estate process, and I am committed to providing the strategic guidance you need to help preserve and grow your wealth.
https://mrsmarttax.com/wp-content/uploads/2025/10/arrache_cpa_business_tax_self_employment_vampire.png10241024mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2025-10-28 01:17:512025-11-03 22:55:06The Self-Employment Tax Vampire: Why an S-Corp Failure is Draining Your Profits
Twelve years ago, our business began with a simple idea and a lot of determination.
Our office wasn’t a sleek corporate space; it was a kitchen table, a public library, and sometimes, a quiet corner at Panera Bread with free Wi-Fi. Our client list was humble—one dedicated restaurant owner and a handful of individuals who put their trust in us.
Today, as we celebrate our 12th anniversary, we are humbled and incredibly proud to say we serve hundreds of business owners and real estate investors not just across the country, but around the world. That small handful of clients has grown into a thriving community, and we wouldn’t be here without each and every one of you.
A Landmark Year of Service
The past year has been a landmark for our firm. We’ve invested heavily in our team, focusing on new skill training and bringing on new talent to ensure we provide the highest level of expertise. As we continue to grow, we’ve formalized our expertise into a set of services designed to help you succeed.
Our Real Estate Expertise
We’ve honed our expertise to offer a unique, comprehensive real estate service. We can act as your trusted financial consultant, providing essential guidance on everything from tax implications and cash flow analysis to accounting and long-term planning. We can also serve as your dedicated realtor, offering full-service representation for buying, selling, or leasing properties. Our hands-on experience ranges from revitalizing major residential properties to spearheading new property developments and navigating the sale of commercial buildings, allowing us to serve you with real-world knowledge and seamless, integrated advice.
Embracing the Future: Technology and AI
We were at the forefront of the new tax laws under OBBBA, providing our clients with early-stage guidance and implementation to help them navigate the changes successfully. As we look ahead, we are embracing the coming AI-powered revolution by implementing new software and technology that will improve our capabilities and allow us to serve you even more efficiently.
This year, we have implemented new client facing technology, which offers better user experience and helps us serve you more efficiently. While this implementation has been beneficial in streamlining our work, we understand that with every new software, there is a learning curve. Please know that we are here to help you with any questions and to find the best way to communicate with you, ensuring a smooth and productive experience.
Introducing a New Resource for Restaurant Owners
Our journey began with a single restaurant owner, and that community remains at the heart of what we do. In 2025, we had the privilege of helping clients in a variety of ways: guiding a San Diego restaurant through a complex lease exit and asset sale, assisting another with a successful rebranding strategy, and providing the crucial financial planning and operational strategies needed to build out a new space and thrive in seasonal markets.
Now, we’re thrilled to give back to this community with the upcoming release of our self-published guide, The Bean Counter’s Bible for Restaurants. This guide is the ultimate source for all things financial and operational, providing restaurant owners with the knowledge they need to successfully start, run, grow, or sell their business.
Our journey from that first client to a global presence is a testament to our commitment to your success. We are dedicated to continuing to grow our team and our capabilities to better serve you as your trusted CPA professionals and real estate advisors.
Thank you for being a part of our story. We can’t wait to see what the next 12 years bring.
https://mrsmarttax.com/wp-content/uploads/2025/09/Michael_arrache_cpa_business_anniversary_12_logo_flyer.png6401632mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2025-09-21 22:29:572025-09-21 22:35:28From a Panera Table to a Global Reach: Celebrating 12 Years of Growth
Newport Beach, California, a hub of affluent investors, has recently seen several individuals fall victim to a sophisticated diamond investment scheme that has since been exposed as a multi-million dollar Ponzi. (full article here) The elaborate fraud, perpetrated by a local dealer, promised exorbitant returns on high-value diamond acquisitions, luring unsuspecting investors with the allure of a seemingly tangible and exclusive asset. As the dust settles and the true nature of the operation comes to light, many victims are now grappling with significant financial losses. However, there may be a silver lining in the form of tax relief, specifically the ability to write off these losses against ordinary income.
The Anatomy of the Diamond Ponzi
The fraudulent scheme, reportedly orchestrated by a well-known local diamond dealer, capitalized on the perceived stability and value of diamonds. Investors were presented with meticulously crafted prospectuses detailing opportunities to purchase rare and investment-grade diamonds, with promises of substantial profits upon resale within a short timeframe. The dealer allegedly used funds from new investors to pay off earlier investors, creating the illusion of a legitimate and profitable enterprise. This classic Ponzi model inevitably collapsed, leaving a trail of shattered dreams and depleted bank accounts. Investigations are ongoing, and legal proceedings are anticipated against the alleged perpetrator.
Understanding Tax Deductions for Ponzi Scheme Losses
For victims of Ponzi schemes, the Internal Revenue Service (IRS) offers specific guidance and relief regarding the tax treatment of their losses. Generally, investment losses are treated as capital losses, which have limitations on how much can be deducted against ordinary income in a given year. However, for losses stemming from a theft, such as a Ponzi scheme, the IRS provides a more favorable treatment, allowing for a deduction against ordinary income.
Theft losses are not subject to the $3,000 annual limit that typically applies to capital losses, making this deduction significantly more valuable for Ponzi scheme victims. Also, for tax years 2018 through 2025, an individual can only deduct theft losses if the loss is from a transaction entered into for profit, which a fraudulent investment scheme qualifies as.
Two Paths to Claiming Your Loss
The IRS provides two primary ways for victims of this scheme to claim their deduction.
Path 1: The IRS Safe Harbor (The Easiest Method)
Recognizing the difficulty in proving the exact nature and timing of a Ponzi scheme loss, the IRS created a “safe harbor” in Revenue Procedure 2009-20. This simplifies the process for victims. To use this safe harbor, you would generally claim the loss in the year the scheme’s lead figure is indicted or a criminal complaint is filed against them.
Under the safe harbor, you can deduct a percentage of your “qualified investment”. The deductible amount is calculated as follows:
95% of your qualified investment if you do not pursue any recovery from a third party (like an accountant or lawyer).
75% of your qualified investment if you are pursuing or plan to pursue third-party recovery.
The qualified investment includes the total amount of cash or property you invested, plus any fictitious income you reported on past tax returns, minus any cash or property you received back.
This deduction is filed on Form 4684, Casualties and Thefts, and you must include a statement with your tax return that you are electing the safe harbor.
Path 2: The 100% Deduction (The More Complex Method)
If you want to deduct 100% of your loss, you must forgo the safe harbor and claim the loss under the general tax rules of Internal Revenue Code (IRC) Section 165. This method is more complex and has a higher burden of proof.
You can only deduct the loss in the year you discover it and also determine there is no reasonable prospect of recovery. Proving this to the IRS can be very difficult, as it requires you to show with certainty that you will not recover any funds from the scheme’s assets or any legal claims. The IRS safe harbor was specifically created to bypass this difficult process by allowing an immediate deduction (at 95% or 75%) without requiring proof of a lack of recovery.
Comparison of the Two Methods
Feature
IRS Safe Harbor (Rev. Proc. 2009-20)
General Rules (IRC § 165)
Deduction Amount
95% or 75% of qualified investment.
Up to 100% of the qualified investment.
Required Proof
Relatively simple; requires an indictment or criminal complaint against the lead figure.
Highly complex; requires you to prove “no reasonable prospect of recovery”.
Deduction Timing
Claimed in the year of the promoter’s indictment or complaint.
Claimed only when it can be determined there is no reasonable prospect of any recovery. This could be years later.
Filing Process
Simplified with specific instructions on Form 4684 and a signed statement.
Requires detailed documentation and proof to support a 100% loss.
Next Steps
Given the complexities of this type of tax deduction, it is crucial to ensure you are following the correct procedures to maximize your recovery. If you have been a victim of the Lugano Diamonds scheme or a similar fraudulent investment, I can help you:
Determine your qualified investment and the correct deductible loss amount.
Properly document and file your tax return with the required forms.
Navigate the process of carrying back a Net Operating Loss to get a refund.
Please feel free to contact me for a confidential consultation to discuss your specific situation and ensure you receive the tax relief you are entitled to. Michael@mrarrachecpa.com or 949-877-3143
https://mrsmarttax.com/wp-content/uploads/2025/09/arrache_business_tax_deduction_theft_1o6l1y1o6l1y1o6l.png9381024mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2025-09-12 02:28:582025-09-12 02:28:59Newport Beach Investors Caught in Diamond Ponzi Scheme: Tax Implications of Their Loss
This time of year we are busy meeting with taxpayers, business owners and real estate owners, and it is very interesting to hear their battle stories and predictions for the economy ahead.
One common story that we hear, but more so this year, is that people are taking emergency money from their 401k’s and IRA’s to cover their monthly expenses for bills, mortgages, etc.
While most of the time, it is not a large amount, it is still indicative of a bigger problem. Is it time to sell your home?
Before we answer that, we need to deal with the problem at hand.
IF you took a early withdrawal from your retirement account you could face Federal and State penalties and taxes on the distribution. Contact your Tax Advisor immediately to discuss strategies to avoid the penalties (i.e. financial hardship, etc.) and prepare for the tax impact.
Back to the bigger problem; is it time to Sell your Home?
Thanks to inflation and rising interest rates, many households are making the most money ever, but still struggling to pay bills and the mortgage. On top of that, the housing market is indicating a top forming (California), and other areas are already experiencing rapid declines in the housing and rental markets (Arizona, Nevada, Oregon, Washington, Idaho, Wyoming, Texas, Florida). What to do o what to do….is it time to sell your home?
This article will not read like tea leaves telling the future, but, if you want to sell your home, contact us right away to go over our expert Tax and Selling Strategies. FREE intro consult for new customers.
Our team of licensed Tax and Real Estate Professionals can work with you in any U.S. State; we are here to help you today! 800-425-0570 (United States toll-free)
Tax Strategies to Avoid or Reduce Taxes on the Sale
Sale of Primary
Sale of Investment Property
Sale of Vacant Land
Sale of Improved Land (solar, cell, agriculture, aquaculture, mining, RV Park, etc.)
Charitable Conservation Contributions
Selling Strategies for a Successful Transaction
How to Negotiate the Highest Sales Price for your home
How to Mitigate Buyer Claims and Reduce Seller Credits
https://mrsmarttax.com/wp-content/uploads/2020/04/1586800760486_cpa_arrache_business_tax.jpg10801080mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2024-03-21 15:22:012024-03-21 15:22:02Is it Time To Sell Your Home?
Get ready for tax season and meet your local business professionals at the highly anticipated Mammoth Business Mixer Professional Networking event. Whether you’re a seasoned entrepreneur, a budding startup owner, or simply curious about the world of business, this event is the perfect opportunity to make meaningful connections, gain valuable insights, and expand your network.
At the Mammoth Business Mixer, you’ll have the chance to meet professionals from various industries, including finance, marketing, technology, and more. Engage in conversations with like-minded individuals who share your passion for success and exchanging ideas. With a diverse range of attendees, you’ll have the opportunity to connect with potential clients, partners, and mentors that can propel your business forward.
In addition to networking opportunities, the Mammoth Business Mixer offers a wide array of resources and workshops designed to enhance your business acumen. Attend informative seminars hosted by industry experts, where you can learn about the latest trends, strategies, and best practices in the ever-evolving business landscape. Whether you’re looking to optimize your marketing efforts, improve your financial management skills, or explore new business opportunities, you’ll find valuable knowledge and insights throughout the event.
Being part of a supportive and knowledgeable community is crucial for business growth. The Mammoth Business Mixer fosters an environment of collaboration and growth, allowing you to build relationships that extend far beyond the event itself. Connect with fellow attendees on social media platforms, join industry-specific groups, and continue the conversation long after the business mixer concludes.
Don’t miss out on this unique opportunity to connect, learn, and grow. Mark your calendar, spread the word, and make sure to join us at the Mammoth Business Mixer Professional Networking event. Prepare to unlock new possibilities for your business and take it to new heights. We look forward to welcoming you and witnessing the positive impact this event will have on your entrepreneurial journey.
November 13th, 2023 4p-6p (FREE EVENT) Hosted Bar at Mammoth Rock n Bowl 3029 Chateau Rd Mammoth Lakes, CA 93546
California Department of Tax and Fee Administration (“CDTFA”) updates and education events to help business owners successfully operate their business.
Reminder, Businesses most report taxable gross receipt including money receive from sales before deducting COGS or Labor or Expenses unless there is a specific exception provided by tax laws.
What is Taxable Sales for Sales Tax?
Additionally, if there are additional sales charges that you chargre your customer, those additional charges are subject to sales tax. Examples of additional charges subject to sales tax are:
Merchant Credit Card Processing Fees charged to customer
COVID-19 Surcharges
Tourism Fees
Restaurant Surcharges
Auto Gratuity
Event space rental if food and beverage included in rental fee
For more info on what is taxable sales for sales-tax purposes you can review Revenue and Taxation Code (R&TC) Section 6012.
CDTFA Education Events
CDTFA offers online webinars for basics of sales and use tax, basic bookkeeping and industry specific for different types of businesses including presentations specific for:
Restaurant Industry
Construction Contractors
Gas Station Owners
To get a list of events and webinars Visit CDTFA Tax Education Events webpage www.cdtfa.ca.gov/seminar/
Have Questions about your Sales Tax? We’re here to help you along the way! Schedule your CPA Meeting now.
https://mrsmarttax.com/wp-content/uploads/2020/04/1586800760486_cpa_arrache_business_tax.jpg10801080mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2023-09-20 15:01:432023-09-20 15:01:45Sales Tax Updates 2023 from California Department of Tax and Fee Administration
Taxpayers interested in the adoption process should be aware of tax benefits available for the 2022 tax year.
Important, we will go through each of the following in more detail:
Employer Adoption Assistance
Adoption Tax Credit
Sepcial Needs
When to Claim
Income Limits
Filing Status
Qualified Adoption Expenses
Emloyer Adoption Assistance
Your employer can provide up to $14,890 (2022 tax year) tax free adoption assistance.
Adoption Tax Credit
Taxpayers are eligible for $14,890 (2022 tax year) tax credit for qualified adoption expenses.
Special Needs
If you adopt a U.S. child that a state has determined to have special needs, you’re generally eligible for the maximum amount of credit in the year of finality. Even if you did not spend the money, The exclusion may be available, even if you or your employer didn’t pay any qualified adoption expenses, provided the employer has a written qualified adoption assistance program
Did you adopt a child with special needs? A child is special needs if:
Citizen or US Resident
State Government Agency determined child can not be returned to parents
State Government Agency determined child probably will not be adopted without assistance
Important Child with Special Needs is not the same as “Special Needs Adoption” for tax purposes when claiming the adoption credit.
When to Claim
The tax year for which you can claim the credit depends on the following:
When the expenses are paid;
Whether it’s a domestic adoption or a foreign adoption; and
When, if ever, the adoption was finalized.
Income Limit
If your modified adjusted gross income is over $223,410 (2022 taxyear) then your employer assistance exclusion or adoption credit will be limited. At $263,410 MAGI then your exclusion or credit is $0.
Filing Status Married Filing Separate
If you filed your return using the married filing separately filing status in the year particular qualified adoption expenses are first allowable, you generally can’t claim the credit or exclusion for those particular expenses. You may need to file an amended return to change to a qualifying filing status within the period of limitations. However, see Married Persons Not Filing Jointly in the Instructions for Form 8839PDF, which describes an exception for certain taxpayers living apart from their spouse and meeting other requirements.
You may be able to take the credit or exclusion if all of the following apply.
Statements (2) and (3) under Who Can Take the Adoption Credit or Exclude Employer-Provided Adoption Benefits are true.
You lived apart from your spouse during the last 6 months of 2022.
The eligible child lived in your home more than half of 2022.
You provided over half the cost of keeping up your home.
Additionally, a person who is filing separately may claim an adoption credit carryforward from a prior year or years, provided that, if the person was married in the year in which the qualified adoption expenses first became allowable for the credit, the person filed a joint return for that year.
Qualified Adoption Expenses
Per the IRS,
For both the credit and the exclusion, qualified adoption expenses, defined in section 23(d)(1) of the Code, include:
Reasonable and necessary adoption fees,
Court costs and attorney fees,
Traveling expenses (including amounts spent for meals and lodging while away from home), and
Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.
An expense may be a qualified adoption expense even if the expense is paid before an eligible child has been identified. For example, prospective adoptive parents who pay for a home study at the outset of an adoption effort may treat the fees as qualified adoption expenses.
An eligible child is an individual who is under the age of 18 or is physically or mentally incapable of self-care.
Qualified adoption expenses don’t include expenses that a taxpayer pays to adopt the child of the taxpayer’s spouse.
Qualified adoption expenses include 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.
If you are currently paying for your education, then good news you are entitled to some awesome tax deductions and credits that will help you Save Money and Reduce Taxes! The following list is a condensed summary of some of the Education Related Tax Benefits followed by Excerpts from IRS.gov
Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntarily pre-paid interest payments. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.
You claim this deduction as an adjustment to income, so you don’t need to itemize your deductions.
You can claim the deduction if all of the following apply:
You paid interest on a qualified student loan in tax year 2022;
You’re legally obligated to pay interest on a qualified student loan;
Your filing status isn’t married filing separately;
Your MAGI is less than a specified amount which is set annually; and
Neither you nor your spouse, if filing jointly, can be claimed as dependents on someone else’s return.
A qualified student loan is a loan you took out solely to pay qualified higher education expenses that were:
For you, your spouse, or a person who was your dependent when you took out the loan;
For education provided during an academic period for an eligible student; and
Paid or incurred within a reasonable period of time before or after you took out the loan.
If you paid $600 or more of interest on a qualified student loan during the year, you should receive a Form 1098-E, Student Loan Interest Statement from the entity to which you paid the student loan interest.
On page 21 of the 2021 Pub. 525PDF, several exceptions are listed for the inclusion of canceled student loan debt in income. Please note the following additional information for certain student loans.
The American Rescue Plan Act of 2021 modified the treatment of student loan forgiveness for discharges in 2021 through 2025. Generally, if you are responsible for making loan payments, and the loan is canceled or repaid by someone else, you must include the amount that was canceled or paid on your behalf in your gross income for tax purposes. However, in certain circumstances, you may be able to exclude this amount from gross income if the loan was one of the following.
A loan for postsecondary educational expenses.
A private education loan.
A loan from an educational organization described in section 170(b)(1)(A)(ii).
A loan from an organization exempt from tax under section 501(a) to refinance a student loan.
n education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. There are two education credits available: the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC).
Don’t overlook these important credits.
Who can claim an education credit?
There are additional rules for each credit, but you must meet all three of the following for both:
You (or your spouse) were a non-resident alien for any part of the year and did not choose to be treated as a resident alien for tax purposes (find more information in Publication 519, U.S. Tax Guide for Aliens)
Compare the education credits
The education credits have some similarities but some very important differences. Find out which credit you qualify for, see our handy chart to compare the education credits.
What should I do if I receive a letter from the IRS or I’m audited?
Taxpayer rights
You will benefit from knowing your rights as a taxpayer and being familiar with the IRS’s obligations to protect them. The goal of the Taxpayer Rights Corner is to inform you of your rights during every step of your interaction with the IRS.
Did you receive a letter?
If you receive a letter or are audited by the IRS, it may be because the IRS did not receive a Form 1098-T, Tuition StatementPDF, verifying the student’s enrollment or we need additional information to support the amounts of qualified expenses you reported on Form 8863PDF. Review your Form 1098-T PDF to make sure the student’s name and social security number are correct. If they do not match, contact the school to correct the information for future 1098-T reporting. If the student should have and did not receive the Form 1098-TPDF, contact the school for a copy. Note: There are a few exceptions in which educational institutions are not required to furnish Form 1098-TsPDF. For details, please see “What is Form 1098-T, Tuition StatementPDF and how do I get it?”
If you claimed expenses that were not reported on the Form 1098-T PDF in Box 1 as amounts paid or if your school reported the amount you were charged for qualified expenses in Box 2, please send us copies of paid receipts, cancelled checks or other documents as proof. See your letter for further instructions for what documents to send. If you do not have the letter, see our page Forms 886 May Help You for the Forms 886-H-AOC and 886-H-AOC-MAX for examples. Form 886-H-AOC is also available in Spanish.
Audit and examination process
IRS selects income tax returns for examination identified by computer programs showing a return has incorrect amounts. The examination may or may not result in a change to your tax or credits.
Use the following links for additional information:
529 Plans States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student’s qualified education expenses at a postsecondary institution. Eligible educational institutions may establish and maintain programs that allow you to prepay a student’s qualified education expenses. If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. You can’t deduct either payments or contributions to a QTP. For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it.
No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary’s adjusted qualified education expenses. Qualified expenses include required tuition and fees, books, supplies and equipment including computer or peripheral equipment, computer software and internet access and related services if used primarily by the student enrolled at an eligible education institution. Someone who is at least a half-time student, room and board may also qualify.
Coverdell A Coverdell education savings account (Coverdell ESA) is a trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account. This benefit applies not only to qualified higher education expenses, but also to qualified elementary and secondary education expenses. There are certain requirements to set up a Coverdell ESA:
When the account is established, the designated beneficiary must be under the age of 18 or be a special needs beneficiary.
The account must be designated as a Coverdell ESA when it is created.
The document creating and governing the account must be in writing, and it must meet certain requirements.
Contributions
You may be able to contribute to a Coverdell ESA to finance the beneficiary’s qualified education expenses. Contributions must be made in cash, and they’re not deductible. Any individual whose modified adjusted gross income is under the limit set for a given tax year can make contributions. Organizations, such as corporations and trusts can also contribute regardless of their adjusted gross income. Contributors must contribute by the due date of their tax return (not including extensions). There’s no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can’t exceed $2,000.
Distributions
In general, the designated beneficiary of a Coverdell ESA can receive tax-free distributions to pay qualified education expenses. The distributions are tax-free to the extent the amount of the distributions doesn’t exceed the beneficiary’s qualified education expenses. If a distribution exceeds the beneficiary’s qualified education expenses, a portion of the earnings is taxable to the beneficiary. Amounts remaining in the account must be distributed within 30 days after the designated beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. If the beneficiary dies before attaining the age of 30, amounts remaining in the account must be distributed within 30 days after the date of death. Certain transfers to members of the beneficiary’s family are permitted.
For information on contributions and how to determine the part of any distribution that is taxable earnings, refer to Chapter 6 of Publication 970, Tax Benefits for Education.
Page Last Reviewed or Updated: 26-Jan-2023
Employer Education Assistance
If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2.
To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.
If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.
Education Expense Deduction (Above-the-Line)
Educators can deduct up to $250 ($500 if married filing jointly and both spouses are eligible educators, but not more than $250 each) of unreimbursed business expenses. The educator expense deduction, claimed on either Form 1040 Line 23 or Form 1040A Line 16, is available even if an educator doesn’t itemize their deductions. To do so, the taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.
Those who qualify can deduct costs like books, supplies, computer equipment and software, classroom equipment and supplementary materials used in the classroom. Expenses for participation in professional development courses are also deductible. Athletic supplies qualify if used for courses in health or physical education.
https://mrsmarttax.com/wp-content/uploads/2023/03/20221223_060834_arrache_cpa_education_learn_earn_lead_services_tax_business-scaled.jpg19202560mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2023-03-01 19:21:222023-03-01 19:40:42Pays to Learn – Tax Benefits Of Education
If you are currently renting out your Primary or Secondary Home or using a Rental Property to vacation, then make sure that you are aware of all the tax rules and tax traps.
Self-Employment IncomeTax Trap typically rental income is not subject to Self-Employment Taxes. But if you provide any additional services to the renters such as daily housekeeping or concierge services then the income become subject to Self-Employment Taxes. Reference IRS Ruling 57-108. Ultimately finding that “if services are rendered for the occupants and the services rendered (1) are not clearly required to maintain the space in a condition for occupancy, and (2) are of such a substantial nature that the compensation for these services can be said to constitute a material portion of the rent, then the net rental income received is not excluded under § 1402(a)(1) and is included in NESE.”
Personal Use Deduction Limitations If you also use your rental property as a *”Residence”, meaning more than 14 days OR 10% of the time the property is rented, then you will be limited on your rental deductions for that property. Important, some of the disallowed rental deductions might be deductible as elsewhere on your tax return such as itemized deductions.
Planning Tax Free Rental Income Special rule for minimal use of residence that you rented property fewer than 15 days. You do Not have to report Rental Income or Deductions if the property was rented less than 15 days. Important, some of the disallowed rental deductions might be deductible as elsewhere on your tax return such as itemized deductions.
Real Estate Professional Best of both worlds. With this rare and desired tax status you will get the benefit of ordinary income and losses not subject to self-employment taxes. IF you are designated as a Broker/Dealer then your tax classification will change dramatically in terms of Self-Employment Tax. For more information Reference IRC 469
If you own or manage Rentals or active Real Estate Broker/Agent, we are here to help you along the way. Meet your New CPA Today! Schedule Intro Consultation here.
https://mrsmarttax.com/wp-content/uploads/2023/02/arrache_cpa_tax_business_20230124_180217-scaled.jpg25601920mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2023-02-20 22:25:022023-02-20 22:25:04Personal Use of Rental / Vacation Rental Tax Traps and Planning
