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So, before you make big moves to separate or divorce, know the potential tax consequences, and take steps to protect yourself from further trauma and financial pain.

Here are seven tips on some of the most questioned tax topics for people who are divorced or divorcing:

When Are You Actually Divorced?

The IRS sees things differently about your divorce than you might, including the actual date of your divorce. If you get divorced this January 1^st , you will have to file last year’s tax return as married.  The IRS sees your status on December 31^st of the prior year as the story for the whole year.  On the contrary, if your divorce became final in December, you won’t be able to file as married even if that was your status for most of the year.

What Are Your Filing Options?

Even if you are legally still married as of the end of the year but divorce is impending, you may have some options in how to file for that year and can determine which route is most advantageous to both individuals. You could obviously file married filing jointly or married filing separately; however, in some cases, the head of household status – originally created for single taxpayers – might apply to you as well and could save you money.

To qualify as head of household, you have to be “considered unmarried” as of the end of the year (even if legally still married): you must have lived apart from your spouse for the last six months of the year, have paid over half the cost of keeping up your main residence (and it was the main home of your child(ren)), and be able to claim your child(ren) as your dependent(s) under the rules for children of divorced or separated parents. Also, you have to file a separate tax return from your spouse, even if you are still legally married.

The head of household route could significantly improve the overall tax outcome because of more favorable tax rates and higher thresholds for certain deduction items, so it’s worth checking into all of your filing options and determining what’s best for your particular situation.

Watch Out for Capital Gains Tax on the House

You don’t have to pay income taxes on assets that are transferred during a divorce. But keep in mind that if you do get the house in the settlement but want to sell, you will be subject to capital gains tax on the sale as a single person.

Normally, a married couple doesn’t have to pay taxes on a gain of up to $500,000 on their primary residence. If you are single, you can only exempt half of that. So if your house sells for more than $250,000 over what you and your former spouse paid for it, you will owe taxes, and the rate will depend on your income bracket.

Your Kids Aren’t Your Dependents…Unless the Court Order Says So

Custody agreements are often quite creative.  The arrangements are varied compared to the old days, when mothers typically got custody of the kids.  Now, custody is often shared, and the right to claim kids as dependents must be stated in the decree.

Generally, you can claim the kids as dependents only if you were designated to do so by your separation agreement or divorce decree. When there is no such agreement or order, or when joint custody applies, the custodial parent is considered to be the parent who has physical custody of the child for most of the year.

What happens when you share custody equally?  You will need to decide who claims the child, as you both can’t claim him/her as a dependent.  If there is more than one child, couples will often split the dependency of each child between the two parents. If you have two children, the mother can take one and the father can take the other as dependents.

Child Support Is Never Deductible

While alimony is considered a taxable event, child support is always non-taxable.  This basically means that it doesn’t affect your taxes in any way.  It is troublesome for some who are making large child support payments to understand that there is no tax break.  Likewise, the recipient of the child support payments does not have to report them as income.

It can be tempting for some to try to classify child support as alimony to get a tax deduction.  This is never a good idea and can get you in a lot of financial trouble later.  Remember, no matter how much you have to pay or for how long, you can’t deduct child support!

Alimony Affects Both Your Taxes

In 2017, individuals paying alimony get a lower tax bill because they can deduct it even if they don’t itemize.  The recipient must report the alimony as income, thereby increasing his or her tax bill.  What’s more, you most definitely need a written separation or divorce decree stating that alimony payments are not child support.  No written order means no tax break.

Couples who are facing extended divorce proceedings due to finances, custody battles or state laws need to be sure that support during long periods of separation is clearly defined.  If you pay the bills for your spouse while separated, it cannot be deducted as alimony without a written agreement.

The Tax Cuts and Jobs Act of 2017 changes the alimony rule.  For divorce agreements entered into after December 31, 2018 or existing agreements modified after that date that specifically include this amendment in the modification, alimony is no longer deductible by the payer and is not income to the recipient.

Be Aware of Community Property Rules

If you live in a state subject to community property rules (nine states total) and you file separate returns while still technically married (whether as Married Filing Separately or Head of Household), you will be required to report 50 percent of all income generated by community assets during the time you were married. This includes wage income and any income earned from community property (property acquired during marriage), like rental and investment income.

This can have multiple implications, and the most advantageous filing status (joint or separate) can vary largely depending on how long you were married, assets brought into the marriage vs. those acquired while married, income earned by one spouse vs. another, etc. Furthermore, these community property/allocation rules are handled differently in each state , and the interpretation can become somewhat complex.

It’s important to know what income/deduction/credit items should be split 50/50 on the return.  For example, while sole proprietorship income of one spouse is community income that should be split, the self-employment tax on that income is imposed solely on the spouse carrying on the business.

Because of these complexities, it is important to understand the rules of your state and seek guidance in navigating them. If you need help filing your personal or business taxes, reach out to us at P.T. Anderson Accounting.

The income statement can give you all kinds of insights as to whether you are bringing in enough sales, if your prices are generating enough profit, and how your expenses are running.  Let’s take a look at the report, step by step.

Revenue

The report starts by listing the revenue for the period of time covered.  Revenue includes all sources of income, including sales from operations, interest and investment income, revenue from insurance claims, sales from assets or other parts of the business, and any other source of revenue. In most small businesses, sales will be the largest part of the revenue, if not all of it. In some countries, the term used for sales is turnover.

If you sell more than one item or have more than one location, it might be a good idea to be able to view the sales detail from these categories.  This may or may not be on your income statement depending on how formal it is, but you should be able to get a drill down report on your sales detail.

Look for exceptions to what you expect to see.  There can be some decisions you can make and actions you can take from the insights you discover.

Cost of Goods Sold

This section of the income statement includes costs you incur directly on items you sell. If you maintain an inventory, it’s the cost you paid for the inventory items that you sold during the period. If your business is a manufacturer, cost of goods sold, or COGS, will include costs of materials and labor to produce the items.

COGS will typically be zero, if you own a service business.  As a service business, you may incur direct costs when providing services, and these costs can be booked in a variety of expense accounts, including supplies.

Gross Profit

Some income statement formats will include a gross profit number which is sales minus cost of goods sold.  This number is important for businesses with inventory.

Expenses

The expenses section of the income statement is the longest part. It includes all of the expenses you incurred in your business, including advertising and marketing, rent, telephone, and utilities, office supplies and meeting expenses, travel, meals, and entertainment, payroll and payroll taxes, and several more.

You might also hear the term overhead. Overhead is a subset of expenses that have to be met whether you sell zero items or millions. They include items like rent and utilities, management payroll, and office supplies.

To review your expenses, check line by line to see if anything looks out of sorts, and take the appropriate action.

Net Profit or Loss

The final number on your income statement represents whether you made or lost money in the period the report covers. The formula is simple: revenue less COGS less expenses equals net profit or loss.

Net profit/loss can go by many names, depending on the size of your business and your accountant’s vernacular. You may also see EBITDA: Earnings before interest, taxes, depreciation, and amortization. Earnings is another word for net profit.

Perspective

It’s a good idea to compare your income statement numbers to other periods in your business. Common comparisons include last period, last several periods, and same period last year.

It’s also a great idea to have a budget that sets goals for your income statement numbers. Then you can compare budget to actual numbers and take action on the variances.

If your business falls into a standard type of business, you may also be able to see how it is doing compared to others in your industry.  This is called benchmarking, and the income statement is a very common format that’s used in benchmarking.

Do spend some time each period reviewing your business’s income statement. It can help you make a faster course correction in your business so you can be even more successful than you already are.

If you need help preparing and understanding your financial statements, contact us at P.T.A and let us help your business.

Exemption

On your 2017 1040 tax return, you likely received an exemption of $4,050 per person.  Check line 42 of your own return. In 2018, this exemption is discontinued, but you won’t really lose out because the standard deduction has increased to compensate for this elimination.

Standard Deduction

In 2017, your standard deduction was $6,350 per person in general and $9,350 for head of household.  In 2018, the standard deduction will increase to $12,000 per person and $18,000 for head of household filers.

Quite a few itemized deductions have been eliminated or capped for 2018, so more taxpayers will be using the standard deduction going forward.

Tax Brackets

There are seven tax rates or brackets, just like there were before, but the threshholds and rates have changed. The rates now range from 10 percent to 37 percent:

1. 10 percent
2. 12 percent
3. 22 percent
4. 24 percent
5. 32 percent
6. 35 percent
7. 37 percent

Here are the details depending on your filing status:

The new withholding tables are posted here:

https://www.irs.gov/pub/irs-pdf/n1036.pdf

If you have questions about this or anything about the new law, please feel free to reach out to us at P.T. Anderson at any time.

In order to claim the home office deduction, you MUST QUALIFY. To qualify, you are required to meet two tests: 1) regularly used and 2) exclusively used for business.

Regular Use:

This test is clear – you use the area on a continuing basis. Occasional or incidental business use does not meet the test.

Exclusive Use:

A specific part of a taxpayer’s home is used for business only. There is no requirement that the business portion of a room be physically separated by a wall or partition. But, any personal use of the space, no matter how small, means that it is not exclusive. There are two exceptions: storage space and daycare facility.

You can have several offices. The key issue is to determine your PRINCIPAL PLACE OF BUSINESS.

Home Office Qualifications

Your home can qualify as a principal place of business if:

• The office is used regularly and exclusively for administrative or management activities (billing clients, keeping books, ordering supplies, setting appointments, writing reports)
• There is no other fixed location where the taxpayer conducts these activities

A business use of the home deduction is allowed when the taxpayer meets clients in their home. For example, if an attorney works four days a week in his downtown office and 1 day at his home office, he can deduct the home office if he meets with his clients there too. It will qualify for the deduction even though it is not the principal place of business.

The best thing about qualifying your home as the principal place of business is that the miles that you drive from your home to the first business stop are now deductible. If your home is not the principal place of business, your first stop is considered commuting and not deductible.

What is Deductible?

The easiest way to determine the business percentage is to take the total square footage exclusively and regularly used for business and divide that by the total square footage of your home. Then, you can deduct the following categories on your return for the business percentage:

• Mortgage interest
• Rent
• Property taxes
• Utilities (gas, electricity, garbage)
• House insurance
• Security system
• Home maintenance/repairs
• Depreciation (straight line method over 39 years)

Repairs and Maintenance

Note: Lawn care/landscaping expenses are not deductible according to the IRS regulations. However, the Tax Court allowed the deduction where the taxpayer’s clients regularly visited the taxpayer’s home office and where the taxpayer was a daycare provider and the children used the lawn as a play area.

If you painted the office area only, that cost would be 100 percent deductible. This is called direct expenses. However, if you paid for garbage for the home, only the business percentage used is deductible which is called indirect expenses.

Income vs. Expenses

If  total income is less than total expenses, home office deduction for certain expenses will be limited. However, these deductions can carry over the next year. Be aware of that carry over number if this happens in your situation.

If you take depreciation on your home office and you sell your home, you have to “recapture that amount.” What this means is that the amount you deducted for depreciation reduces your ordinary income – this is good. But when you sell your home, that amount will increase your capital gains. The capital gains rate is typically less than your personal income tax bracket.

Years ago, many tax preparers would never take the home office on an LLC, S-Corp or C-Corp return. If they did, it would be a Schedule A deduction as an employee, which is not a great deduction due to the two percent limitations. However, now some preparers are taking the home office for these entities.

The only thing I recommend is not to take mortgage interest or real estate taxes. Only take the business portion of rent, utilities and insurance.

When you know the rules, there should be no fear around taking a deduction that you qualify for. So…do you qualify?

Feel free to reach out to us to determine if your specific situation qualifies for a deduction and/or to determine the impact of the new tax law changes for 2018.

No longer do you need to go out for lunch if you are having a busy day or just need to stay in the office for any reason. You can simply order lunch on your cell phone, and it will be delivered approximately 45 minutes later to your door.

There’s an app for that

It used to be that you could only get pizza or Chinese food delivered, but those days are over. Some restaurants will deliver directly, but there is an easier way. Food delivery apps such as GrubHub will let you order from hundreds of different restaurants in your area while they send a driver to collect it and deliver it to your door.

How much will it cost me?

First, ask yourself how much you are worth per hour to your company. Or, if you will get home earlier because you don’t have to go out for lunch, ask yourself what the value of spending more time at home or with your family is worth to you.

Besides the cost of food, you’ll pay a delivery fee of $0 to $5 and a tip for the driver. When you factor in the cost of your time, gasoline, and wear and tear on your vehicle, using a food delivery company is a no-brainer. Not only will you be helping yourself, you’ll be helping a hard-working driver, too.

What are my options?

The specific options in your location will vary, but some of the companies that are offering food delivery services include:

• GrubHub and Seamless
• DoorDash
• Eat24
• Postmates
• Caviar
• UberEats
• Delivery.com
• Amazon Prime Now

All you need to do is download the app, set up an account, choose a restaurant, and order your food. You can also order from your PC or Mac using a browser and visiting their website.

Try these food delivery apps, and while you’re at it, treat the entire office to a meal.