For many people buying a home – whether it’s a fixer-upper in an up and coming neighborhood or that custom home you’ve always dreamed of – is a milestone event. While there is often a steep learning curve associated with buying and owning a home, there are also some perks – at least when it comes to taxes.

The first thing taxpayers should understand is that when it comes to home ownership is how the IRS defines a home as: a house, condominium, cooperative apartment, mobile home, houseboat or house trailer that contains a sleeping space, toilet and cooking facilities. It’s important to note that even if you own several homes, an individual has only one main home at a time. Generally, people own and live in just one home. If so, then that property is your main home.

Most home buyers take out a mortgage loan to buy their home and then make monthly payments to the mortgage holder. This payment may include several costs of owning a home. The only costs the homeowner can deduct are:

• State and local real estate taxes (SALT) – subject to the $10,000 limit
• Home mortgage interest – within the allowed limits
• Mortgage insurance premiums

Taxpayers must file Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Income Tax Return for Seniors, and itemize their deductions to deduct home ownership expenses. Taxpayers cannot, however, take the standard deduction if they itemize.

Non-deductible Payments and Expenses

Homeowners can’t deduct any of the following items:

• Insurance, other than mortgage insurance, including fire and comprehensive coverage, and title insurance
• The amount applied to reduce the principal of the mortgage
• Wages you pay for domestic help
• Depreciation
• The cost of utilities, such as gas, electricity, or water
• Most settlement or closing costs
• Forfeited deposits, down payments, or earnest money
• Internet or Wi-Fi system or service
• Homeowners’ association fees, condominium association fees, or common charges
• Home repairs

Mortgage Interest Credit

The mortgage interest credit is meant to help individuals with lower income afford home ownership. Those who qualify can claim the credit each year for part of the home mortgage interest paid.

A homeowner may be eligible for the credit if they were issued a qualified Mortgage Credit Certificate (MCC) from their state or local government. An MCC is issued only for a new mortgage for the purchase of a main home. The MCC will show the certificate credit rate the homeowner will use to figure their credit. It will also show the certified indebtedness amount and only the interest on that amount qualifies for the credit.

Homeowners Assistance Fund

The Homeowners Assistance Fund program provides financial assistance to eligible homeowners for paying certain expenses related to their principal residence to prevent mortgage delinquencies, defaults, foreclosures, loss of utilities or home energy services, and also displacements of homeowners experiencing financial hardship after January 21, 2020.

Minister’s or Military Housing Allowance

Ministers and members of the uniformed services who receive a nontaxable housing allowance can still deduct their real estate taxes and home mortgage interest. They don’t have to reduce their deductions based on the allowance.

As always, please contact the office if you have any questions about this important tax topic. Help is just a phone call away.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Many people find themselves in situations where they need to withdraw money from their retirement plan earlier than planned. Doing so, however, can trigger an additional tax on top of any income tax taxpayers may have to pay. Here are five things taxpayers should know about early withdrawals from retirement plans:

1. Early Withdrawal.An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59 1/2 years old.

2. Paying Additional Tax.If a taxpayer took an early withdrawal from a plan last year, they must report it to the IRS. They may have to pay income tax on the amount taken out. If it was an early withdrawal, they might have to pay an additional 10 percent tax.

3. Nontaxable Withdrawals.The additional 10 percent tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the plan. A rollover is a form of nontaxable withdrawal. A rollover occurs when people take cash or other assets from one plan and put the money in another plan. They normally have 60 days to complete a rollover to make it tax-free.

4. Exceptions.There are many exceptions to the additional 10 percent tax. Some of the rules for retirement plans are different from the rules for IRAs.

5. Form 5329.If someone took an early withdrawal last year, they may have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return.

Please call if you have any questions about early withdrawals or filing Form 5329.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

When the IRS needs to ask a question about a taxpayer’s tax return, notify them about a change to their account, or request a payment, it often mails a letter or notice to the taxpayer. Taxpayers should know that the IRS sends millions of these letters and notices to taxpayers for a variety of reasons. Many of these letters and notices can be dealt with simply, without having to call or visit an IRS office. The IRS sends notices and letters for the following reasons:

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Understanding marginal and effective tax rates is important for tax planning purposes; however, many taxpayers don’t fully understand the differences. Let’s take a closer look:

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Lending money to a cash-strapped friend or family member is a noble and generous offer that just might make a difference. But before you hand over the cash, you need to plan ahead to avoid tax complications for yourself down the road.

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Wheeler is excited to announce that Joseling Torrez has passed her final CPA exams and ethics test, bringing her one step closer to being the newest licensed CPA at the firm.

She passed the last two of the 4 major exams this summer, having asked to work part-time for a few weeks to make a final push, then received the passing scores on September 15th, which marked the passing of a big deadline. She decided she also wanted to pass the Ethics exam as soon as possible, knowing that once she passed the Ethics exam there were still September 30th and October 15th deadlines up ahead. Unsurprisingly, Joseling “really looks forward to celebrating fully after the October 15 deadline.”

When asked what else she’d like to share about the experience, she said “I felt relieved when I saw my last score! (I did not want to spend busy season studying again).” As an encouragement to others on this path, Joseling shared “I would say to not be scared to fail and if you do fail an exam, you can always go up from there. The toughest part for me was finding a schedule that would fit working full-time and feeling motivated after working, but consistency is key and I’m happy I did not let myself give up after receiving a failing score.”

Joseling has enough hours and class credits for licensure and will be sending in her application soon. Depending on when the board accepts, she should be licensed by the end of the year or the beginning of next year. We celebrate Joseling’s incredible hard work and dedication and look forward to being part of this next chapter in her career.

If you’ve given money or property to someone as a gift, you may owe federal gift tax. Many gifts are not subject to the gift tax, but exceptions exist. Because gift tax laws can be confusing, here are seven tips you can use to figure out whether your gift is taxable.

1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. In 2022, the annual exclusion amount is $16,000.

2. Gift tax returns do not need to be filed unless you give someone other than your spouse money or property worth more than the annual exclusion for that year.

3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift.

4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).

5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. For example, the following gifts are not taxable:

• Gifts that do not exceed the annual exclusion for the calendar year,
• Tuition or medical expenses you pay directly to a medical or educational institution for someone,
• Gifts to your spouse,
• Gifts to a political organization for its use, and
• Gifts to charities.

6. You and your spouse can make a gift of up to $32,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting.

7. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.

If you have any questions about the gift tax, don’t hesitate to contact the office for assistance.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Business owners can simplify things by filing payroll taxes electronically. E-file software performs calculations and populates forms and schedules using a step-by-step process. It will also alert the filer if they are missing information which reduces the chances of receiving an IRS notice.

Benefits of Filing These Forms Electronically:

• It saves time.
• It’s secure and accurate.
• The filer gets an email to confirm that the IRS received the form within 24 hours.

How Businesses Can E-file:

Employers can have their tax professional file the form. If employers submit the forms themselves, they must purchase IRS-approved software. The IRS website provides links to companies that have passed the IRS Assurance Testing System (ATS) requirements for Software Developers of electronic Employment Tax (94x MeF) Returns. Please note, however, that it is the filer’s responsibility to contact the provider to determine if the software meets their needs.

There may be a fee to file electronically. Also, the software will require a signature in one of two ways:

• The software instructs the user to apply for an online signature PIN. Taxpayers should allow at least 45 days to receive their PIN.
• The user can scan and attach Form 8453-EMP, Employment Tax Declaration for an IRS e-file Return.

Forms Employers Can E-file:

Form 940, Employer’s Annual Federal Unemployment Tax Return – Employers use this form to report annual Federal Unemployment Tax Act tax.

Form 941, Employer’s Quarterly Federal Tax Return – Employers use this form to report income taxes, social security tax or Medicare tax withheld from employees’ paychecks. They also use it to pay their portion of Social Security or Medicare tax.

Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees – Employers file this form if they paid wages to one or more farmworkers and the wages were subject to social security and Medicare taxes or federal income tax withholding.

Form 944, Employer’s Annual Federal Tax Return – Small employers use this form. These are employers whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less. These employers use this form to file and pay these taxes only once yearly instead of every quarter.

The employer must contact the IRS to request to file Form 944. Employers are not permitted to file Form 944 unless they are notified by the IRS.

Form 945, Annual Return of Withheld Federal Income Tax – Employers use this form to report federal income tax withheld from nonpayroll payments.

Do not hesitate to call the office if you need assistance filing payroll taxes electronically or have other questions or concerns about taxes and your small business.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Time is running short for taxpayers who requested an extra six months to file their 2021 tax return. As a reminder, Monday, October 17, 2022, is the extension deadline for most taxpayers. Taxpayers are encouraged to file a complete and accurate return electronically as early as possible once they have gathered all their information. There’s no need to wait until the October deadline.

For those still waiting on their 2020 tax return to be processed, here’s a tip to help with e-filing a 2021 tax return: To validate and successfully submit an electronically filed tax return to the IRS, taxpayers need their Adjusted Gross Income, or AGI, from their most recent tax return. Those waiting on their 2020 tax return can still file their 2021 return by entering $0 for their 2020 AGI on their 2021 tax return. Remember, if using the same tax preparation software as last year, this field will auto-populate.

For taxpayers who have not yet filed, here are a few things to keep in mind about the extension deadline and taxes:

1. Taxpayers can still e-file returns. Electronic filing is the easiest, safest, and most accurate way to file taxes. Taxpayers who haven’t filed a 2021 tax return yet – including extension filers – can file electronically any time before the October deadline and avoid the last-minute rush to file.

2. Choose direct deposit. For taxpayers owed a refund, the fastest way to get it is to combine direct deposit and e-file. The IRS processes most e-filed returns and issues direct deposit refunds in less than three weeks.

3. Taxpayers who owe taxes should consider using IRS Direct Pay, a simple, quick, and free way to pay from a checking or savings account using a computer or mobile device. There are also other online payment options. Please call the office if you need details about other payment options.

4. Members of the military and those serving in a combat zone generally get more time to file. Military members typically have until at least 180 days after leaving a combat zone to file returns and pay any tax due.

5. Taxpayers should always keep a copy of tax returns for their records. Keeping copies of tax returns can help taxpayers prepare future tax returns or assist with amending a prior year’s return.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

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Keeping full and accurate homeowner records is not only vital for claiming deductions on your tax return, but also for determining the basis or adjusted basis of your home. These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. You should also keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis.

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