Tag Archives: Khorshed Alam

What Filing Status is Right For You?

Your federal income tax filing status can affect exemptions, reportable income, deductions, credits, tax rates, liability, the type of form you file, and whether you need to file at all. In addition, some states require that you use the status reported on your federal return. That can affect the amount of state tax you pay. Here’s an overview to help you determine what’s right for you.

Single. You’re considered single if you’re unmarried, divorced, or legally separated as of the last day of your taxable year (generally December 31).

Married filing jointly. When you’re legally married under the laws of your state, you and your spouse can elect to combine your income and file a joint return. In cases of divorce or separate maintenance decrees, the laws of your state determine whether you’re considered married. Under proposed regulations issued in 2015, same-sex marriages are recognized for federal income tax purposes when the marriage is recognized by any state.

Married filing separately. As a married couple, you can choose to file joint or separate returns. When you file separately, you can change your mind later and amend your return to file jointly. However, you can’t switch from joint status to married filing separately after the due date of the original return. Joint returns offer benefits such as a higher standard deduction. But separating your tax liability from your spouse’s by filing separate returns can be beneficial in some situations. Just be aware that certain breaks, such as the child and dependent care credit, may not be available if you chose this filing status.

Head of household. This is the filing status to use if you’re single and provide more than half the cost of maintaining a household for a dependent who lives with you. You may also be able to use head of household status when you’re single and maintaining a separate household for a parent—including one living in a nursing home. Head of household tax brackets are more generous than those for single filers, but less broad than the brackets for married filers who complete a joint return.

Qualifying widow or widower. If you were widowed during the year and have not remarried, you have the option of filing jointly with your late spouse. When you’re widowed and have dependent children, you can continue to use joint tax rates for two additional years following the year your spouse died. This status lets you benefit from the favorable tax rates of joint filers and claim the highest standard deduction.

Khorshed Alam is a practicing CPA and business valuation analyst. He is the President and CEO of Alam Accountancy Corporation. Check outhttp://alamcpatax.com or call (408) 445-1120.

Is Your Pastime a Hobby or Business?

If you’re like some taxpayers, you have a pastime that brings in cash but produces a loss after you deduct your expenses.

Example: an amateur artist who spends money for paint and canvas but who only occasionally sells a painting. If you could deduct “hobby” losses on your tax return, you could reduce taxes owed on your salary or other income.

Actually, you can deduct your losses, but only if you establish that you are carrying on your pastime with the motive of making a profit.

If you can’t prove you have a profit motive, the IRS views your activity as a hobby, not as a business. Expenses of a hobby can be deducted only up to the amount of income from the hobby. You can’t deduct hobby losses from your salary or other income.

You can help establish your profit motive in one of two ways. If you show a profit in three out of five years (two out of seven years for horse activities), the IRS will presume you’ve got a business and not a hobby. However, you can’t simply manipulate deductions and income to create profit years.

The other way to demonstrate that you’re operating with a profit motive is to conduct your activity in a business-like manner.

Get advice from an accountant to assist with keeping accurate books and records. Maintain a separate checking account, advertise your services or products, and get a business phone listing.

If you have losses, try to turn your business around by taking classes, consulting with experts, and changing your methods of operation.
Be sure you spend enough time at your activity to demonstrate that you’re serious about profits.

Remember, you don’t have to earn a profit, but you must try to do so. If you don’t have profits in three out of five years, the burden of proof will be on you to show the IRS that this activity is a business and not a hobby.

Khorshed Alam is a practicing CPA and business valuation analyst. He is the President and CEO of Alam Accountancy Corporation. Check outhttp://alamcpatax.com or call (408) 445-1120.