An “Innocent Spouse” May Be Able to Escape Tax Liability

When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full amount of tax on the couple’s combined income. That means the IRS can pursue either spouse to collect the entire tax, not just the part that’s attributed to one spouse or the other. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest. In some cases, however, one spouse may be eligible for “innocent spouse relief.” This generally occurs when one spouse was unaware of a tax understatement that was attributable to the other spouse.

Qualifying for Relief

To qualify for innocent spouse relief, you must show not only that you didn’t know about the understatement, but also that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. Innocent spouse relief is available even if you’re still married and living with your spouse. In addition, if you’re widowed, divorced, legally separated or have lived apart for at least one year, you may be able to limit liability for any tax deficiency on a joint return.

Election to Limit Liability

If you make the innocent spouse relief election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns. For example, you’d generally be liable for the tax on any unreported wage income only to the extent that you earned the wages.

The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items or had reason to know when you signed the return, unless you can show that you signed the return under duress. Also, the limitation on your liability is increased by the value of any assets that your spouse transferred to you in order to avoid the tax.

An “Injured” Spouse

In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint refund to one spouse.

In these cases, an injured spouse has had all or part of a refund from a joint return applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt (such as a student loan) owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your share of the refund.

Moving On

Whether, and to what extent, you can take advantage of the above relief depends on the facts of your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. Even if you’re not in need of any such relief now, as you file tax returns in the future, be mindful of “joint and several liability.” Generally filing a joint tax return results in lower taxes for a married couple. But if you want to ensure that you’re responsible only for your own tax, filing separate returns might be a better choice for you, even if your marriage is intact.

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Contact the office with any questions:

San Jose: (408) 252-1800
Watsonville: (831) 726-8500

Kids’ Day Camp Expenses May Qualify for a Tax Credit

Day camps are common during school vacations and the summer months. And their cost may count towards the child and dependent care credit.

Here are five things parents should know:

1. Care for Qualifying Persons: You may qualify for the credit whether you pay for care at home, at a daycare facility, or a day camp. Your expenses must be for the care of one or more qualifying persons, such as your dependent child under age 13.

2. Work-Related Expense: In other words, you must be paying for the care so you can work or look for work.

3. Expense Limits: The total expense you can claim in a year is limited. The limit is generally $3,000 for one qualifying person or $6,000 for two or more.

4. Credit Amount: The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on your income.

5. Excluded Care: Certain types of care don’t qualify for the credit, including:

  • Overnight camps,
  • Summer school tutoring,
  • Care provided by your spouse or child under age 19 at the end of the year, and
  • Care given by a person you can claim as your dependent.

Remember that this credit is not just a school vacation or summer tax benefit. You may be able to claim it at any time during the year for qualifying care. For more information, please call the office.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Get Ready for Tax Season: What to Expect

With the end of the year and tax season quickly approaching, the IRS has issued a press release regarding stimulus payments and the additional child tax credit.

The IRS will be issuing two letters to taxpayers in January of 2022 that you should be aware of and keep for your records to assist with your individual tax return preparation:

  • Letter 6419 – Advance Child Tax Credit Payments
    • This letter provides the total amount of the advance Child Tax Credit payments that were sent to you in 2021
  • Letter 6475 – Economic Impact (stimulus) Payment
    • This letter provides the total amount of the third Economic Impact (Stimulus) payment that you may have received in 2021.
    • While this is not included in your gross or taxable income, you need this information in case you are eligible for additional stimulus

It is important for your individual tax return that you keep these letters and provide them to your tax preparer. If the information provided to the IRS does not match the letters it could delay the processing of your tax return or your refund.

Have questions? Don’t hesitate to reach out email@wheelercpa.com or call our offices.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Year-End Charitable Giving Tips

As we approach the end of the year, thoughts turn to generosity and gift-giving. Many people choose to do most or all their charitable gifting at the end of the year.

For those that itemize, charitable contributions are taken as an itemized deduction on their individual tax return. For tax year 2021, even if you don’t normally itemize on your tax return you can take an adjustment to your adjusted gross income of up to $300 ($600 for married individuals filing joint returns) for your cash donations.

Below is our list of year-end charitable giving tips:

  • Save all records of cash and non-cash donations
    • This includes donations made by check or credit card
    • If your donation is a cash donation of $250 or greater, you should receive a letter of acknowledgment from the receiving organization
    • Take pictures of your non-cash donation receipts
      • Goodwill
      • Salvation Army
      • Etc.
  • Consider making the donation with your credit card for cash flow purposes
    • You can make the donation by 12/31/2021 and not need to pay until the statement date in 2022
  • You may be eligible to deduct travel and out-of-pocket expenses incurred for charities
    • Must be a qualified charity and your time must be for real and substantial services to the charity
      • You cannot deduct for your time or services provided to the charity
    • Travel you can deduct (you cannot deduct travel if a significant portion of your trip is for recreation/vacation)
      • Flights and public transportation
      • Vehicle expenses
      • Lodging costs
      • Cost of meals
      • Taxi, rideshare, or other transportation costs between the airport or station and your lodging
    • Out-of-pocket expenses that can be deducted must be necessary and must be
      • Unreimbursed
      • Directly related to the time/services provided to the charity
      • Directly related to services provided
      • Not personal, family, or living expenses

Other tax-advantaged charitable giving includes Qualified Charitable Distributions (QCDs) and donations of appreciated stock or other assets.

To learn more about how your generosity can benefit you come tax time, please reach out to email@wheelercpa.com or call our office:

San Jose: (408) 252-1800

Watsonville: (831) 726-8500