Like many people, I enjoy a good tradition. Whether it’s a familiar tradition like a family vacation or nightly family dinners, one of our favorites is naming the new year.
The New Year Name is chosen before the year begins and reflects the important plans, challenges, and opportunities ahead. We typically use a simple format: action + animal. This has led to some memorable names over the years:
2019 – Riding Tiger
2020 – Running Bear
2021 – Soaring Eagle
2022 – Hanging Man
2023 – Hungry Hummingbird
2024 – Bucking Bull
2025 – Screeching Hawk
The Value of a Name
In my experience, this tradition has been inspirational, accurate, and at times, even foreboding. For example, 2023’s “Hungry Hummingbird” was incredibly accurate for the volatile housing markets and the unexpected but awesome rebound of the stock markets. Hummingbirds are fiercely protective of their small territories and need to constantly feed to survive, much like entrepreneurs had to stay nimble and seize every opportunity in the market.
For us as entrepreneurs and business owners, it’s important to work in our business as well as work on our business. The New Year’s name helps us associate an idea that is larger than any one person, while at the same time allowing us to focus 100% on the work at hand.
Our name for 2024, “Bucking Bull,” was a year of energy, enthusiasm, and competition. Much like riding a bucking bull, smart businesses had to navigate an uncertain economy and avoid getting dragged into uncontrolled situations. It was more important than ever to stay enthusiastic and align your journey with your competitive advantages.
This brings us to our name for the coming year: 2025’s “Screeching Hawk.”
Embracing the “Screeching Hawk”
A hawk is a powerful predator known for its patience and keen eyesight. It soars above the landscape, surveying its surroundings with a clarity and perspective that few others possess. Its screech is a sharp, confident sound—a declaration of its presence and a warning to others.
The “Screeching Hawk” will be a year of strategic planning and decisive action. We anticipate a year where a broad perspective will be key to spotting opportunities from a distance. The most successful businesses will be the ones that have a clear vision and the confidence to act quickly and boldly when the time is right.
For many, this may sound like a year of challenges, but for those of us who appreciate tradition, we see it as a year of clarity and purpose. We wish you a happy and safe New Year, and we extend our best wishes for success in 2025.
Info@mrarrachecpa.com
https://mrsmarttax.com/wp-content/uploads/2025/08/image-2.png7681024mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2025-08-26 23:39:592025-08-26 23:44:38Naming the New Year: 2025 “Screeching Hawk”
That moment when a relative steps in to help their family business is truly special. It’s a testament to family support, trust, and love. Recently, I had a client, whose relative generously lent them a large amount of money to help open their business. While the gesture was heartwarming, my immediate advice was clear: Get a promissory note signed.
You might be thinking, “It’s family! Does it really need to be so formal?” And my answer as a CPA is an unequivocal yes. A promissory note isn’t about distrust; it’s about smart financial planning, clear communication, and protecting both parties.
Let’s break down why this simple document is a must for any family loan:
The Promissory Note Checklist: What Needs to Be in It?
Think of a promissory note as the blueprint for your loan. It should clearly lay out all the terms to prevent any future confusion. Here’s what it should include:
Lender and Borrower Information: Full legal names and addresses for both your relative (the lender) and you (the borrower).
Principal Amount: The exact loan amount, written in both numbers and words.
Interest Rate: This is crucial! To avoid the IRS classifying the loan as a gift, the rate must be at least the Applicable Federal Rate (AFR), which changes monthly. We can look up the current rate together.
Repayment Schedule: Details on how and when payments will be made – monthly, quarterly, or a single lump sum, and specific due dates.
Maturity Date: The final date by which the entire loan, including interest, must be repaid.
Signature and Date: Both parties need to sign and date the note to make it legally binding.
Default Clause: What happens if payments are missed? This clause protects your relative and clarifies the process.
Prepayment Clause: Allows you to pay off the loan early without penalty – a common and fair clause for family loans.
The Pros of a Promissory Note: More Than Just Paperwork
Now, let’s talk about the significant benefits this document provides:
1. Legal and Financial Protection for Everyone
Avoids Nasty Tax Surprises: Without a note, the IRS might consider the money a gift from your relative. This could trigger gift tax liabilities for them on any amount over the annual exclusion limit. A promissory note provides undeniable proof it’s a loan.
The “Bad Debt” Lifeline: This is a big one! If, for unforeseen reasons, you are unable to repay the loan, the promissory note becomes critical documentation for your relative. It allows them to potentially claim a non-business bad debt deduction on their taxes. Without the note, the IRS would likely view the unpaid amount as an unrecoverable gift, and they’d lose out on that deduction.
Legal Enforceability: It’s a legally binding agreement. While no one wants to think about legal action against family, having this in place protects your relative’s assets.
Asset Protection for Both: In unfortunate events like bankruptcy or divorce, a promissory note clearly establishes the funds as a legitimate debt, protecting both your relative’s claim and your financial standing.
2. Crystal-Clear Clarity and Accountability
No More “He Said, She Said”: The note meticulously spells out all the terms – interest, payments, dates. This eliminates those awkward, “I thought we agreed on…” conversations that can damage relationships.
Fosters Responsibility: Formalizing the loan encourages the borrower to treat it with the same seriousness as a bank loan, fostering financial discipline and accountability.
3. Preserves Your Precious Family Relationship
Business is Business, Family is Family: A written agreement compartmentalizes the financial transaction. It allows you to keep the loan on a professional footing, preventing it from bleeding into and potentially straining your personal bond.
Head Off Disputes Before They Start: By defining the rules of engagement upfront, a promissory note removes the primary source of conflict in family money matters: misunderstandings, forgotten details, or differing expectations.
Potential Drawbacks and Tax Implications
While promissory notes offer many benefits, it’s also important to be aware of potential tax implications for both parties:
Interest Income for the Lender: For your relative (the lender), any interest received on the loan is considered taxable interest income that must be reported to the IRS. Even if the interest is not actually paid but is required by the note (especially if using the AFR), it may still need to be reported as “imputed interest.”
Cancellation of Debt (COD) Income for the Borrower: If for some reason the loan is partially or entirely forgiven, the amount forgiven can be considered Cancellation of Debt (COD) income for you (the borrower). This is generally taxable income to the borrower, unless specific exceptions or exclusions apply (e.g., insolvency, bankruptcy).
🏠 Bonus Section: A Special Note on Real Estate Loans
If a family loan is for a real estate purchase or is secured by a home in California, it’s considered a residential loan and requires extra steps for the lender’s protection. A promissory note is still essential, but it is not enough on its own.
In this scenario, the loan must also be formalized with a trust deed that is recorded with the county recorder’s office. This crucial step legally attaches the debt to the property, turning your relative into a secured lien holder. This protects their interest and establishes their priority over other potential liens. This is a critical legal process that an attorney must handle. They will ensure all documents are prepared and filed correctly to fully protect the lender and make the loan enforceable.
How to Record Real Estate Family Loans in Other States
The legal instrument used to secure a real estate loan varies by state, but the principle of recording the document is the same.
Arizona: In Arizona, the instrument is a Deed of Trust. It must be signed by the borrower and recorded with the county recorder’s office where the property is located.
Texas: In Texas, the instrument is a Deed of Trust. It must be signed by the borrower and recorded with the county clerk’s office where the property is located.
Tennessee: Like Texas, Tennessee uses a Deed of Trust. It must be recorded with the Register of Deeds in the county where the property is located.
Washington: In Washington, the instrument is also a Deed of Trust. It is recorded with the county auditor’s office where the real estate is situated.
The Bottom Line for Families
A family loan is a wonderful act of support. But to truly protect that generosity, that relationship, and everyone’s financial well-being, a promissory note isn’t just a good idea – it’s an essential one.
Disclaimer:As a CPA, I can help you with the financial and tax implications of this loan. However, the information provided here is for general educational purposes and is not legal advice. When dealing with any legally binding document, it is best practice to consult with your attorney.
If you or your family are considering a loan, let’s connect. I can help you navigate the financial and tax considerations of the loan, ensuring all parties are protected. Don’t let a kind gesture turn into a future headache; plan wisely from the start.
https://mrsmarttax.com/wp-content/uploads/2025/08/Arrache_CPA_image_business_loan_residential.png10241024mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2025-08-26 23:17:482025-08-26 23:44:16The Smart Family Loan: Why a Promissory Note is Essential (Even for Family!)
A client recently asked a crucial question: “If Spouse A deeds their portion of a home to Spouse B who is terminally ill, and then inherits it back after Spouse B passes away, does Spouse A get a full step-up in basis?”
This scenario brings up a critical, but often misunderstood, tax rule: IRC Section 1014(e). This “deed-to-die” rule states that if a person gives appreciated property to a dying relative and then inherits it back within one year of the death, they do not receive a step-up in basis. This prevents the intentional use of a death to avoid capital gains taxes.
The solution to a full step-up in basis depends on how the property is owned:
Community Property States
The following are community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, the entire property generally receives a full step-up in basis upon the death of the first spouse. According to IRC Section 1014(b)(6), if at least half of the community property is included in the deceased spouse’s gross estate, the entire property’s basis is stepped up to its fair market value on the date of death. This is a significant advantage, as it erases capital gains tax on the appreciation of the entire property. The strategy of deeding the property is unnecessary and could complicate the situation. For more information, refer to IRS Publication 555, Community Property.
Common Law States (Joint Tenancy)
In the majority of U.S. states, which are common law states, property is often owned as joint tenants with rights of survivorship (JTWROS). In this case, only the deceased spouse’s half of the property receives a step-up in basis. The surviving spouse’s half retains its original cost basis. The plan to deed the property in a common law state falls directly under the “deed-to-die” rule, meaning a full step-up would not be achieved. The most effective solution here for getting a full step-up would be to transfer the property to a living trust.
A revocable living trust is a key strategy for this scenario. By transferring the home to a trust, the entire property is included in the deceased spouse’s gross estate under IRC Section 2038, which allows the entire asset to receive a full step-up in basis under IRC Section 1014, effectively resetting the cost basis for the surviving spouse and eliminating capital gains on the entire home. This is not a tax loophole, but a legitimate legal and tax strategy.
California Property Tax Reassessment Exclusion
For clients in California, an important additional layer to consider is property tax. The state has an interspousal transfer exclusion which states that a transfer of property between spouses does not trigger a property tax reassessment. Additionally, under Proposition 19, a transfer of a primary residence from a parent to a child is now subject to a property tax reassessment, unless the child uses the property as their own principal residence. However, the original property tax base can be retained with an adjustment. It is critical to consult a professional to ensure this transfer is handled correctly and a reassessment is not triggered unnecessarily.
Texas Property Tax Notes
In Texas, while property is reassessed annually to market value, the homestead exemption provides a significant benefit for primary residences. For properties with a homestead exemption, the appraised value for tax purposes can only increase by a maximum of 10% per year, regardless of the increase in market value. This is known as the homestead cap. When a spouse inherits a home, they can continue to claim the homestead exemption, and the transfer generally does not reset the 10% cap. This provides a valuable, ongoing property tax benefit to the surviving spouse.
Washington Property Tax Notes
In Washington, a transfer of property between spouses or registered domestic partners does not trigger a change in ownership for property tax purposes. This means that deeding a property to a spouse will not cause a property tax reassessment. A transfer of property upon death to a surviving spouse is also exempt from reassessment. The tax basis of the property will be stepped up, but the property’s assessed value for property tax purposes remains the same. This allows the surviving spouse to avoid a potentially significant increase in their annual property tax bill.
Property Tax Reassessment Notes for Other Community Property States
In Arizona, Idaho, Louisiana, Nevada, New Mexico, and Wisconsin, the laws for property tax reassessment are similar to those in Texas and Washington. Generally, a transfer of property between spouses, including through inheritance upon the death of one spouse, is exempt from being considered a “change in ownership.” This is a key benefit that allows the surviving spouse to inherit the property without a new, and potentially much higher, tax assessment. This complements the federal full step-up in basis and helps preserve the long-term affordability of the home
It’s a reminder that sophisticated tax and estate planning requires a deep understanding of complex regulations. Always consult a professional for legal and tax advice to ensure your clients’ strategies are sound.
https://mrsmarttax.com/wp-content/uploads/2025/08/image.png7681024mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2025-08-18 21:57:012025-08-18 22:10:11Did your spouse leave you real estate? 💡
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
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Whether it is a familiar tradition like the family vacation or nightly family dinners, One of our favorite Traditions is Naming the New Year.
The New Year Name is chosen before the new year starts and will reflect important plans, challenges, obstacles, etc. ahead in the New Year.
Typically We’ve used a simple nomenclature = action + name
For instance,
2019 – “Riding Tiger”
2020 – “Running Bear”
2021 – “Soaring Eagle”
2022 – “Hanging Man”
2023 – “Hungry Hummingbird”
2024 – “Bucking Bull”
Why is this important?
In my experience, the tradition of naming the New Year has been at times inspirational, accurate and foreboding.
2023 “Hungry Hummingbird”, for example, was pretty accurate for the volatile Housing Markets and true to form, unexpected but awesome, rebound of the Stock Markets.
As entrepreneurs and business owners, it is important to work IN your business as well as work ON your business. The New Year name helps us associate an idea larger than any 1 person and at the same time focus 100% on the work at hand.
2024 “Bucking Bull” will be a year of energy, enthusiasm and competition. Much like riding a Bucking Bull, Smart Business will navigate uncertain economy and avoid getting dragged into uncontrolled situations. It will be more important then ever to stay enthusiastic and align your journey with competitive advantages.
A lot of people probably stopped reading when I said “nightly family dinners”, but for those of you who appreciate a tradition, We wish you a happy and safe New Year and best wishes in 2024.
https://mrsmarttax.com/wp-content/uploads/2024/01/pexels-photo-5787600-1.jpeg13001040mrarrachehttp://mrsmarttax.com/wp-content/uploads/2016/04/header_logo-300x83.pngmrarrache2024-01-01 19:39:432024-01-01 19:39:44Naming the New Year: 2024 “Bucking Bull”
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.
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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.
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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
