Tax FAQs
- I filed bankruptcy last year, how does that affect my tax return?
- I got divorced last year, how does that affect my tax return?
- My spouse died last year, how does that affect our tax return?
- I am about to sell my business, should I sell the ownership interest in the business or the assets?
- My business lost money last year, how can I carry the loss forward or backward? (what tax consequences does this raise?)
- Is an early distribution from a retirement plan taxed?
- How is the gain or loss on the sale or transfer of a capital asset determined?
- What are the tax consequences of the sale of a principle residence?
- What are the rules for deducting home office expenses?
Q: I filed bankruptcy last year, how does that affect my tax return?
A: The type of bankruptcy filed may have an affect on how you file your tax return. In a chapter 7 or 11 case, the bankruptcy estate is treated as a separate taxable entity from the debtor (a debtor is the individual or entity that filed for bankruptcy). This creates two separate taxable interests, the bankruptcy estate and the debtor.
The estate is usually assigned a trustee, or sometimes the debtor is allowed to remain in possession. The trustee or the debtor-in-possession is responsible for preparing and filing the estate’s tax returns and paying its taxes. While the cancelation of debt is not included as income, the estate must reduce certain losses, credits and the basis in property by the amount of canceled debt.
The debtor remains responsible for paying his or her own returns and paying taxes on income that does not belong to the estate. If the debtor is an individual, the income, deductions or credits that belong to the bankruptcy estate are not to be included on the debtor’s individual income tax return.
These are only a few of the many issues that may arise from filing bankruptcy. Ultimately, filing taxes for either an estate in bankruptcy, or an individual or entity that has filed bankruptcy may be complicated.
Q: I got divorced last year, how does that affect my tax return?
A: Division of community property in connection with a divorce or property settlement does not result in gain or loss for tax purposes. For the part of the year before the marital community ends, each spouse is taxed on half of the community income (the income from both husband and wife). Any income received after the marital community ends is separate income and is taxed to the person that earned it. Since the amount of tax liability is dependent upon when the marital community is legally deemed to have ended, this must be determined before filing income taxes and may have a substantial effect on your income tax liability. A final decree of divorce ends the marital community absolutely, but in some cases it may end earlier if “legal separation” occurs.
Q: My spouse died last year, how does that affect our tax return?
A: The personal representative of the estate of the decedent is responsible for filing any income tax return and the estate tax return when due. The surviving spouse may file a joint return for the taxable year in which the death occurred, and if the death occurred before the date that the decedent’s return for the immediately preceding year was due, for the taxable year immediately before the year of death. It must be signed by the personal representative of the estate if one has been appointed. If no personal representative has been appointed, the surviving spouse should sign the return and write in the signature area “Filing as surviving spouse.” If the decedent is owed a refund, it may be necessary to file another tax form in order to collect it.
Q: I am about to sell my business, should I sell the ownership interest in the business or the assets?
A: Generally, in the sale of a business by assets, the sale of each asset is treated as being sold separately for determining the treatment of gain or loss. Additionally, there are many different classifications of assets, such as, capital assets, depreciable property used in the business, real property used in the business, and property held for sale to customers. Each of these types of assets are treated differently under the Internal Revenue Code.
Selling the interest in either a partnership or corporation, may be treated as a capital gain or loss to the individual owning the interest.
Either of these transactions have personal and business tax liability implications. The decision should be based upon what the ultimate goal of the sale of the business is and the specific circumstances of the business and the individual(s) selling.
Q: My business lost money last year, how can I carry the loss forward or backward (what tax consequences does this raise)?”
A: A corporation figures its net operating loss (NOL) the same way it figures taxable income: gross income minus deductions. If this number is negative, or there are more deductions than income, the corporation has an NOL. However, there a number of rules that apply in computing and carrying-back an NOL. For instance, in determining NOL, a corporation cannot increase its current year NOL through carry-backs or carryovers from other years. As a general rule, a corporation must carry an NOL back two years prior to the year the NOL is generated. If the NOL is not used in the prior two years, the remaining NOL may be carried forward up to twenty years after the tax year in which the NOL was generated. In addition to the limitations in carrying-back an NOL, there are also many tax forms that must be filed, and records that should be kept in case of audit.
Q: Is an early distribution from a retirement plan taxed?
A: The general rule is if an individual withdraws from his or her qualified retirement plan before reaching the age of 59 ½, those amounts are considered early or premature distributions. Unless an exception applies, an additional 10% early withdrawal tax is imposed upon an early withdrawal and must be reported to the IRS. An individual may not have to pay the additional 10% tax if one of the exceptions applies.
Q: How is the gain or loss on the sale or transfer of a capital asset determined?
A: Capital assets are those assets used for personal or investment purposes, including: a home, home furnishings, and stocks or bonds in personal accounts. When a capital asset is sold, the difference between the basis in the asset (generally, what you bought the asset for) and the amount it sold for, is the capital gain or loss. If the asset was acquired by gift or inheritance, the basis will need to be determined according to different rules. Additionally, how long you have owned the property will determine whether you have a short-term or long-term capital gain or loss. Such a determination has a number of tax implications, for instance, the rate at which the gain is taxed, and the amount of loss that may be deductible will depend upon whether the gain or loss is short term or long term.
Q: What are the tax consequences of the sale of a principle residence?
A: As discussed above, a home is a capital asset and there are particular rules in determining the rate at which gain is taxed, and loss is deducted. In determining the gain or loss, you must know the selling price, the amount realized, and the adjusted basis. Selling price is the total amount you receive when selling your home—among other things, this includes any mortgages that are taken over by the buyer. However, selling price does not include any personal property sold with the home. Personal property would be anything not considered a fixture; for instance rugs, draperies, furniture, etc. Amount realized is selling price minus selling expenses. Selling expenses include: commissions, advertising fees, legal fees, and loan charges paid by the seller. The basis of your home is determined by how you got the home—cost if purchased on the market, cost to build if built, if inherited may be the fair market value when you received it, or the basis of the previous owner. This basis is adjusted by different actions a homeowner may take over the ownership period. For example, if additions and other improvements that have a useful life of more than one year, then the cost of these improvements is added into your original basis. This is only one example of how basis may be adjusted. Additionally, it is important to keep diligent records of such improvements, as they will have the effect of potentially decreasing the amount of gain realized for tax purposes.
To determine whether you have a gain or loss, compare the amount realized to the adjusted basis. A gain is generally taxable, except for any part you may exclude under the Internal Revenue Code. If the sale is a loss, the amount may not be deducted because of the general prohibition on deductions for personal losses.
Q: What are the rules for deducting home office expenses?
A: You may be able to deduct business expenses related to a business use of part of your home if you meet very specific requirements. Even if these requirements are met, your deduction may be limited. There are three different ways a home office may qualify; two of those ways require that the office space be used exclusively and regularly. Exclusive use means that you must use a specific area of your home only for your trade or business. This area may be a room or another separately identifiable space. The space does not need to be partitioned off. To be considered regular use, it must be used on a regular basis. Incidental or occasional use will not qualify the space under this test. There are other elements that must be met before a trade or business deduction is allowed for a home office. If the exclusive use and regular elements are met, it may be worth discussing the matter with an accountant or tax attorney.