Tax Guide

Being self-employed, what sort of deductions can I take?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

If I have a large capital gain this year, what can I do?

If you have a large capital gain this year from an investment, it may be advisable to hold onto the investment until next year to put the gain into next year’s taxes. You may also want to sell off any investments that you have that are losing value at the moment to claim your losses.

What investments can I make to help defer taxes?

The interest gained from state and local bonds is usually exempt from federal income taxes. These investments generally pay back at a lower interest rate than commercial bonds of similar quality.

Since Treasury Bonds are similarly exempt from state and local income tax, they can be a particularly good investment for those who are in high tax brackets and live in high-income-tax states.

What retirement plans are available to aid in the deferral of taxes?

You have the ability to invest some of the money that you would have paid in taxes to add to your retirement fund. Many employers will offer the opportunity to defer a portion of your earnings and contribute them directly to your retirement account. Some of them may even match a portion of your savings. If this is the case, it is always advisable to save at least the amount that your employer will match. This will give you an automatic 100% gain on your money.

If you are self-employed, look into getting a Keogh, SIMPLE or a SEP IRA.

What other ways can I defer this year's income?

If you own your business you may want to postpone sending certain invoices to ensure that you will receive payment in the following tax year. This can help greatly if some of this income would push you into a higher tax bracket. You may want to accelerate paying for expenses to cover your taxes in the current year.

Getting Married

How does legal treatment differ between married and unmarried couples?

Unmarried couples don’t:

  • Inherit each other’s property automatically. Married couples have the state intestacy laws to support them if they do not have a will. Under the law, the surviving spouse will inherit (at the minimum) a fraction of the deceased spouse’s property.
  • Have the privilege to speak for one another in a medical crisis. In the case that your life partner loses capacity or consciousness, someone will have to make the go-ahead decision for a medical purpose. It should be you, but if you haven’t filed certain paperwork, you may not have the ability to do so.
  • Have the privilege to handle one another’s finances in a crisis. A married couple that jointly own assets is less affected by this problem than an unmarried couple.
How should unmarried couples protect their estate and financial holdings?

Here are some important steps to take for couples that are unmarried:

  • Draft wills. The chances of the intentions being followed through with after a death are greater if both partners make wills. Without wills, the probability of the unmarried surviving partner having no rights is more likely.
  • Think about owning property together. This is a way to guarantee that property will pass to the other joint owner at the time of the other’s death due to the right of survivorship.
  • Make a durable power of attorney. This will permit the partner to sign papers and checks and take care of other financial issues on his/her behalf should one become incapacitated.
  • Make a health care proxy. Also known as a medical power of attorney, this permits the partner to talk on your behalf to make medical decisions, should you become injured.
  • Have a living will. This lets your wishes regarding artificial feeding and other measures to prolong your life be known.
Is more insurance necessary for married couples?

In the case of death, life insurance will provide a form of income for your dependents, children or whoever is your beneficiary. Because of this, married couples usually require more life insurance than singles.

Having someone dependent on your income will determine if you need to have life insurance. If someone such as a child, parent, spouse or other individual is dependent on your income, you should have life insurance. The following are situations where life insurance is necessary:

  • Single parents or families with young children or other dependents. The younger your children, the more insurance is necessary. Insurance should be in proportion to the amount earned. If both spouses are working, they should both be insured. If both earners cannot afford to be insured, the primary wage earner should be the first to be insured and the secondary will follow. To fill the insurance gap, a less expensive term policy may be used. Insurance should be bought to cover the absence of services such as childcare, bookkeeping, housekeeping, which are provided by the spouse that works within the home. The insurance that covers the non-wage earner is secondary to the insurance that covers the wage earner’s life, if funds are scarce.
  • Adults that have no children or other dependents. You will need less insurance than people in the previous situation if your spouse can live comfortably without income. However, some form of life insurance is still necessary. You will want at least enough to cover burial expenses, to pay off any debts you may have acquired, and to provide an easy transition for the surviving spouse. You may want to buy more insurance if you think your spouse would go through financial hardship without your income or if your savings aren’t adequate. This depends on your salary level as well as the amount of your spouse’s, the amount of savings you have and the amount of debt incurred.
  • Single adults without dependents. Unless you would like to use insurance for the purposes of estate planning, you will only need insurance to cover expenses for burial and debts.
  • Children. Typically, children only need life insurance to cover burial expenses and medical debts. An insurance policy could also be used as a long-term savings instrument, in some instances.
Who needs to be notified if a spouse changes their name after marriage?

All organizations that you had correspondence with while using your unmarried name should be notified. You can begin with the following list:

  • The Social Security Administration
  • Department of Motor Vehicles
  • Post Office
  • Investment and bank accounts
  • Employer
  • Voter’s registration office
  • School alumni offices
  • Credit cards and loans
  • Club memberships
  • Retirement accounts
  • Subscriptions
  • Passport office
  • Insurance agents
Should I update my will when I get married?

Definitely. When an important life event occurs such as marriage, it should be updated. If not, your spouse and other beneficiaries will not get what is meant for them at the time of your death.

After marriage, what are the tax implications?

You are entitled to file a joint income tax return upon marriage. Although this simplifies the filing process, you will more than likely discover that your tax bill is either higher or lower than when you were single. It’s higher when you file together, as more of your income is taxed in the higher tax brackets. This is commonly known as the marriage tax penalty. In 2003, a tax law that intended to reduce the marriage penalty went into effect, but this law didn’t get rid of the penalty for higher bracket taxpayers.

Once married, you may not file separately in an attempt to avoid the marriage penalty. Actually, filing as married filing separately can raise your taxes. For the optimal filing status for your situation you should speak with your tax advisor.

Can married couples hold property?

Yes. After marriage, there are many ways of owning property. They differ from state to state.

  • Sole tenancy, which is when one individual has ownership. The property is passed on in accordance with the will at death.
  • Joint tenancy, with the privilege of survivorship. Two or more people have equal ownership. The property is passed to the joint owner upon death. This should be used to effectively avoid probate.
  • Tenancy in common, property has joint ownership with the privilege of survivorship. The property is passed on according to your will upon death.
  • Tenancy by the entirety, like joint tenancy, with privilege of survivorship. This doesn’t allow a spouse to get rid of the property without the other’s consent and is only possible for spouses.
  • Community property, property that is gained through marriage that has equal ownership. States such as AZ, CA, ID, LA, NV, NM, TX, WA, and WI allow community property.

Record Keeping for Taxes

What do I need to keep for tax reasons?

It is a good idea to keep all of your receipts and any other records that you may have of your income and expenses. These will come in very handy if you are audited.

How should I separate and organize these?

It is advantageous to categorize your expenses:

  • Income
  • Exemptions
  • Medical Expenses
  • Taxes
  • Business Expenses
  • Education
  • Travel
  • Auto
How long should I hold onto these documents?

It is recommended that you keep these documents for three to seven years, depending on the document. Check the Retention Guide on this site for additional details.

How long should I keep old tax returns?

If you are audited, it is very likely that the auditor will ask to see the last few tax returns. It is recommended to keep these tax returns forever.

An added benefit of keeping your tax returns is that you can see what you claimed last year, allowing you to adjust for the current year.

What other records should I keep?

If you purchased goods that you plan to sell later, you should keep the receipts to calculate your gain or loss on it correctly.

  • Anything regarding the property you own and any fixes and repairs that you perform.
  • Receipts for any jewelry or other valuable collector’s items
  • Records for capital assets, stocks, bonds and such
What recordkeeping system should I have?

If you are an employee of a company, your system needn’t be complex – you can keep your records separated in folders.

If you are a business owner, you may want to consider hiring a bookkeeper or accountant. Check the Financial Guide for Business on this website.

Education Expenses

Are there available tax breaks for my children's education?

There are many different ways to use tax breaks for the higher education of your children. Be aware that you can only receive one type of relief for one item. It is best to consult with a professional to determine which would be the most advantageous.

What is the education tax credit?

You must make a choice between two types of tax education credit.

  • The American Opportunity Tax Credit will work for the first 4 years of college for at least full-time study.
  • The Lifetime Learning Credit applies for as long as the student studies, but the percentage of savings per year decreases drastically.
What is a Coverdell (Section 530)?

An education IRA is different than a standard IRA in these ways:

  • Withdrawals aren’t taxed if used for qualified education expenses.
  • Contributions can be made only up until the point that the client reaches 18, and all funds must be distributed by the time that they are 30.
  • Contributions are not tax deductible
How can I best use the Coverdell (section 530)?

It is possible to have various 530 accounts for the same student, each opened by different family members or friends. There is no limit to the number of people that can open an account like this for a child.

The account can be transferred to another family member at any time. If the original child decides against going to college or is granted a scholarship, another family member can still utilize the money that has been saved.

What is a qualified tuition program?

The Section 529 is a college savings program available in most states. Money is invested to cover the costs of future education. These investments grow tax free and the distributions may also be tax-free.

What differentiates the Coverdell Section 530 and the Section 529?
  • The Section 529 allows for much larger yearly investments, whereas the Section 530 currently only allows for $2000 annually.
  • The choice of investments in the Section 529 is extremely conservative and limited while the Section 530 allows for many different options.
  • The Section 530 is a nationwide program while the 529 varies from state to state.
  • The Section 530 will let you use its funds for primary and secondary education, while the Section 529 can only be used to pay up to a total of $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year at an elementary or secondary (k-12) public, private or religious school of the beneficiaries choosing.
Can I take money from my traditional or Roth IRA to fund my child's education?

Yes, you can take distributions from your IRAs for qualifying education expenses without having to pay the 10% additional tax penalty. You may owe income tax on at least part of the amount distributed, but not the additional penalty. The amount of the distribution that is more than the education expense does not qualify for the 10% tax exception.

What tax deductions can be used for college education?

There is a limited deduction allowed for higher education and related expenses. In addition, business expense deductions are allowed, without a dollar limit, for education related to the taxpayer’s business, employment included.

Is student loan interest tax deductible?

In certain instances, yes, although deductions need to adhere to a few guidelines. The deduction is also subject to income phaseouts.

  • The deduction ceiling is $2,500.
  • If you are a dependent, you may not claim the interest deduction.
  • You need to be the person liable for the debt and the loan must be purely for education.
Can I deduct for education that helps at the workplace?
If you are receiving this education to maintain or improve skills at your current job, yes, but not if it is to meet the minimum requirements.

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