As a reminder, taxpayers have the right to pay only the amount of tax legally due, including interest and penalties. They also have the right to have the IRS apply all tax payments properly. This is one of 10 fundamental rights known collectively as the Taxpayer Bill of Rights.

The Taxpayer Bill of Rights (TBOR) is a cornerstone document highlighting the ten fundamental rights taxpayers have when dealing with the Internal Revenue Service. Every taxpayer needs to be aware of these rights in the event they need to work with the IRS on a personal tax matter.

With this in mind, taxpayers should know six important things about their right to pay no more than the correct tax owed. Here is a summary of what taxpayers can expect:

• File for a refund if they believe they overpaid their taxes.
• Contact the IRS by calling the number listed on the notice or bill if they believe there is an error on a notice or bill. Taxpayers may also write to the IRS office that sent the notice or bill within the time frame given and should provide photocopies of any records that may help correct the error.
• File an amended tax return if an error is discovered after the original return was filed. An amended return should also be filed if there is an error or change in your filing status, income, deductions, or credits.
• Request that any amount owed be removed if it exceeds the correct amount due under the law, if the IRS has assessed it after the period allowed by law, or if the assessment was done in error or in violation of the law.
• Request that the IRS remove interest from the account if the agency caused unreasonable errors or delays.
• Submit an offer in compromise using Form 656-L, Offer in Compromise. Taxpayers use this form to ask the IRS to accept less than the full amount of tax debt. Taxpayers do this if they believe all or part of the debt is not owed.

For general information about taxpayer rights, take a look at IRS Publication 1, Your Rights as a Taxpayer, which includes a full list of taxpayers’ rights. If you have specific questions, don’t hesitate to contact the office. Help is just a phone call away.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

If you’re a small business owner who is just starting out, you may not realize that some rent expenses may be deductible on your tax return. Here are some things small business owners should keep in mind when it comes to deducting rental expenses:

How Rent is Defined

Rent is any amount paid for the use of property that a small business doesn’t own. Typically, rent can be deducted as a business expense when the rent is for property the taxpayer uses for the business.

Lease or Purchase

• Sometimes a business must determine whether its payments are for rent or for the purchase of the property, because different tax rules may apply.
• Businesses must first determine whether an agreement is a lease or a conditional sales contract.
• Payments made under a conditional sales contract aren’t deductible as rent expense.

Unreasonable Rent

Businesses can’t take a rental deduction for unreasonable rents paid. Rent is unreasonable for deduction when it is higher than market value or a professional appraisal.

• Usually, unreasonable rent becomes a problem when business owners and the lessors are related.
• Rent paid to a related person is reasonable if it’s the same amount a business owner would pay to a stranger for use of the same property. The definition of a related person is not limited to family members. Please call for more information.

Office in the Home

A business owner’s workplace can be in their home if they have a home office that qualifies as their principal place of business.

• Business owners who rent their home and have a home office as their principal place of business may also qualify for a deduction.
• IRS Publication 587, Business Use of Your Home, Including Use by Daycare Providers, has more details about this deduction.

Rent Paid in Advance

Rent paid for a business is usually deductible in the year it is paid.

• If a business pays rent in advance, it can deduct only the amount that applies to the use of the rented property during the tax year. The business can deduct the rest of the payment over the period to which it applies.
• Business owners can review Publication 535, Business Expenses, for detailed examples on rent paid in advance.

Canceling a Lease

A business can usually deduct the costs paid to cancel a business lease.

Questions?

If you have any questions about whether rental expenses are tax deductible for your small business, please contact the office.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Whether your child attends trade school, private college or public university, you already know that higher education in the United States is expensive. The good news is that many taxpayers are able to take advantage of two education tax credits to help offset these costs: the American opportunity tax credit and the lifetime learning credit. Taxpayers, their spouses, or their dependents who take post-high school coursework, may be eligible for this tax benefit.

How the Credits Work

These credits reduce the amount of tax someone owes. If the credit reduces tax to less than zero, the taxpayer could even receive a refund. To be eligible to claim either of these credits, a taxpayer or a dependent must have received a Form 1098-T, Tuition Statement from an eligible educational institution. There are exceptions for some students.

Key Things to Know

The American opportunity tax credit is:

• Worth a maximum benefit of up to $2,500 per eligible student.
• Only available for the first four years at an eligible college or vocational school.
• For students pursuing a degree or other recognized education credential.
• Partially refundable. People could get up to $1,000 back.

The lifetime learning credit is:

• Worth a maximum benefit of up to $2,000 per tax return, per year, no matter how many students qualify.
• Available for all years of postsecondary education and for courses to acquire or improve job skills.
• Available for an unlimited number of tax years.

Claiming the Credit

Taxpayers can use the Interactive Tax Assistant tool on IRS.gov to figure out if they’re eligible for either of these credits. If eligible, taxpayers who paid for higher education in 2021 can see these tax savings when they file their tax return. To claim either credit, taxpayers should complete Form 8863, Education Credits, and file it with their tax return.

Taxpayers should keep in mind that although there may be four academic years, there are five tax years. As such taxpayers can take advantage of both the American Opportunity Tax Credit (four tax years) and the lifetime learning credit (the fifth tax year), if eligible.

Don’t hesitate to call the office if you have any questions about these and other tax credits that could reduce your tax bill this year.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

As part of final guidance issued that pertains to the Tax Cuts and Jobs Act of 2017, new rules and limitations are in effect for taxpayers who deduct depreciation for qualified property acquired after September 27, 2017. As a business owner, they could affect your tax situation. Let’s take a closer look:

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Being debt-free is a worthwhile goal; unfortunately, for most people, it is unrealistic – especially for those of pre-retirement age with children, a car payment or two, and a mortgage. As such, most people need to focus on managing their debt first since it’s likely to be there for much of their adult life. With inflation on the rise (and subsequent interest rate hikes), your credit card debt could be even more difficult to pay off.

Eliminating debt is especially crucial for anyone approaching retirement age. However, the good news is that when debt is handled wisely, you won’t need to shell out every cent of your hard-earned money to your lender because of exorbitant interest rates or feel like you’re always on the verge of bankruptcy.

Here’s how you can pay off debt the smart way while at the same time-saving money to pay it off even faster:

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Cash flow is the lifeblood of every small business but many business owners underestimate just how vital managing cash flow is to their business’s success. In fact, a healthy cash flow is more important than your business’s ability to deliver its goods and services.

While that might seem counterintuitive, consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. If you fail to have enough cash to pay your suppliers, creditors, or employees, you are out of business.

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Crowdfunding websites such as Kickstarter and GoFundMe have become an increasingly popular way for small business owners to stay afloat. The upside is that it’s often possible to raise the cash you need; the downside is that the IRS considers that money taxable income. Let’s take a closer look at how crowdfunding works and how it could affect your tax situation.

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If you haven’t contributed funds to an Individual Retirement Account (IRA) for tax year 2021, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 18, 2022, due date (April 19 if you live in Maine or Massachusetts), not including extensions.

Be sure to tell the IRA trustee that the contribution is for 2021. Otherwise, the trustee may report the contribution as being for 2022 when they get your funds.

Generally, you can contribute up to $6,000 of your earnings for tax year 2021 (up to $7,000 if you are age 50 or older). You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.

Traditional IRA. You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer’s pension plan.

Roth IRA. You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Each year, the IRS announces the cost of living adjustments and limitations for retirement savings plans.

Saving for retirement should be part of everyone’s financial plan, and it’s important to review your retirement goals every year to maximize savings. If you need help with your retirement plans, give the office a call.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

The credit for other dependents is a tax credit available to taxpayers for each of their qualifying dependents who can’t be claimed for the child tax credit. The maximum credit amount is $500 for each dependent who meets certain conditions. These include:

• Dependents who are age 17 or older.
• Dependents who have individual taxpayer identification numbers.
• Dependent parents or other qualifying relatives supported by the taxpayer.
• Dependents living with the taxpayer who aren’t related to the taxpayer.

The credit begins to phase out when the taxpayer’s income is more than $200,000. This phaseout begins for married couples filing a joint tax return at $400,000.

A taxpayer can claim this credit if:

• They claim the person as a dependent on the taxpayer’s return.
• They cannot use the dependent to claim the child tax credit or additional child tax credit.
• The dependent is a U.S. citizen, national or resident alien.

Taxpayers can claim the credit for other dependents in addition to the child and dependent care credit and the earned income credit. The worksheet in Publication 972, Child Tax Credit and Credit for Other Dependents helps taxpayers determine if they can claim the credit for other dependents.

For more information about this important tax credit for families, please call the office.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Are you wondering if there’s a hard and fast rule about what income is taxable and what income is not taxable? The quick answer is that all income is taxable unless the law specifically excludes it. But as you might have guessed, there’s more to it than that.

Taxable Income

Taxable income includes any money you receive, such as wages, tips, and unemployment compensation. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Nontaxable Income

Here are some types of income that are usually not taxable:

• Gifts and inheritances
• Child support payments
• Welfare benefits
• Damage awards for physical injury or sickness
• Cash rebates from a dealer or manufacturer for an item you buy
• Reimbursements for qualified adoption expenses

Under the CARES Act, emergency financial aid grants made to students at a higher education institution because of an event related to the COVID-19 pandemic are not included in the student’s gross income.

In addition, some types of income are not taxable except under certain conditions, including:

• Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
• Income from a qualified scholarship is normally not taxable; that is, amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts used for room and board are taxable.
• If you received a state or local income tax refund, the amount might be taxable. You should have received a 2021 Form 1099-G from the agency that made the payment to you. The agency might have provided the form electronically if you didn’t get it by mail. Contact them to find out how to get the form. Be sure to report any taxable refund you received even if you did not receive Form 1099-G.

If you have any questions about taxable and nontaxable income, don’t hesitate to contact the office today.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500