Taxes

What’s the Difference Between Filing Jointly or Separately as a Married Couple a Business as a Sole Proprietor Here’s How It Could Impact Your Taxes

What’s the Difference Between Filing Jointly or Separately as a Married Couple?
What’s the Difference Between Filing Jointly or Separately as a Married Couple? 850 500 smolinlupinco

You know that you must choose a filing status when you file your tax return, but do you know what your choice really means?

Picking the right filing status matters because the status you select will influence your tax rates, eligibility for certain tax breaks, standard deduction, and correct tax calculation.

And there are plenty of filing statuses to choose from: 

  • Single
  • Married filing jointly
  • Married filing separately
  • Head of household
  • Qualifying surviving spouse

Married individuals may wonder whether filing a joint or separate tax return will yield the lowest tax. That depends. 

If you and your spouse file a joint return, you are “jointly and severally” liable for the tax on your combined income. That means you’re both on the line for getting it right and settling up. You’ll also both be liable for any additional tax the IRS assesses, including interest and penalties.

In other words, the IRS can pursue either you or your spouse to collect the full amount you owe. 

“Innocent spouse” provisions may offer some relief, but they have limitations. For this reason, some people may still choose to file separately even if a joint return results in less tax overall. For example, a separated couple may not want to be legally responsible for each other’s tax obligations. Still, filing jointly usually offers the most tax savings, especially when the spouses have different income levels.

While combining two incomes may put you in a higher tax bracket, it’s important to recognize that filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. These rates are less favorable than the single rates.

Still, there are situations where it’s possible to save tax by filing separately. For example, medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in a larger total deduction.

Tax breaks only available on a joint return

Some tax breaks are only available to married couples on a joint return, including: 

  • Child and dependent care credit
  • Adoption expense credit
  • American Opportunity tax credit
  • Lifetime Learning credit 

If you or your spouse were covered by an employer retirement plan, you may not be able to deduct IRA contributions if you file separate returns. Nor will you be able to exclude adoption assistance payments or interest income from Series EE or Series I savings bonds used for higher education expenses.

Unless you and your spouse lived apart for the entire year, you won’t be able to take the tax credit designated for the elderly or the disabled, either. 

Social Security benefits

When married couples file separately, Social Security benefits may be taxed more.

Benefits are tax-free if your “provisional income” (AGI with certain modifications, plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return but zero on separate returns (or $25,000 if the spouses didn’t live together for the whole year).

Questions? Contact your accountant

Choosing a filing status impacts your state or local income tax bill, in addition to your federal tax bill. It’s important to evaluate the total taxes you might owe before making a final decision.

Considering these factors and deciding whether to file jointly or separately may not be as straightforward as you’d think. That’s where we come in. Contact your Smolin accountant for a fuller picture of the potential tax impacts of each option.

Is Qualified Small Business Corporation Status Right for You

Is Qualified Small Business Corporation Status Right for You?
Is Qualified Small Business Corporation Status Right for You? 850 500 smolinlupinco

For many business owners, opting for a Qualified Small Business Corporation (QSBC) status is a tax-wise choice.

Potential to pay 0% federal income tax on QSBC stock sale gains

For the most part, typical C corporations and QSBCs are treated the same when it comes to tax and legal purposes, but there is a key difference. QSBC shareholders may be eligible to exclude 100% of their QSBC stock sale gains from federal income tax. This means that they could face an extremely favorable 0% federal income tax rate on stock sale profits.

However, there is a caveat. The business owner must meet several requirements listed in Section 1202 of the Internal Revenue Code. Plus, not all shares meet the tax-law description of QSBC stock. And while they’re unlikely to apply, there are limitations on the amount of QSBC stock sale gain a business owner can exclude in a single tax year. 

The date stock is acquired matters

QSBC shares that were acquired prior to September 28, 2010 aren’t eligible for the 100% federal income tax gain exclusion. 

Is incorporating your business worth it?

Owners of sole proprietorships, single-member LLCs treated as a sole proprietorship, partnerships, or multi-member LLCs treated as a partnership will need to incorporate their business and then issue shares to themselves in order to attain QSBC status in order to take advantage of tax savings. 

There are pros and cons of taking this step, and this isn’t a decision that should be made without the guidance of a knowledgeable accountant or business attorney. 

Additional considerations

Gains exclusion break eligibility

Only QSBC shares held by individuals, LLCs, partnerships, and S corporations are potentially eligible for the tax break—not shares owned by another C corporation. 

5 Year Holding period
QSBC shares must be held for five years or more in order to be eligible for the 100% stock sale gain exclusion. Shares that haven’t been issued yet won’t be eligible until 2029 or beyond. 

Share acquisition 

Generally, you must have acquired the shares upon original issuance by the corporation or by gift or inheritance. Furthermore, only shares acquired after August 10, 1993 are eligible.

Not all businesses are eligible

The QSBC in question must actively conduct a qualified business. Businesses where the principal asset is the reputation or skill of employee are NOT qualified, including those rendering services in the fields of:

  •  
  • Law
  • Engineering
  • Architecture
  • Accounting
  • Actuarial science 
  • Performing arts 
  • Consulting 
  • Athletics 
  • Financial services 
  • Brokerage services 
  • Banking
  • Insurance 
  • Leasing 
  • Financing 
  • Investing
  • Farming
  • Production or extraction of oil, natural gas, or other minerals for which percentage depletion deductions are allowed 
  • Operation of a motel, hotel, restaurant, or similar business 

Limitations on gross assets

Immediately after your shares are issued, the corporation’s gross assets can’t exceed $50. However, if your corporation grows over time and exceeds the $50 million threshold, it won’t lose its QSBC status for that reason.

Impact of the Tax Cuts and Jobs Act

Assuming no backtracking by Congress, 2017’s Tax Cuts and Jobs Act made a flat 21% corporate federal income tax rate permanent. This means that if you own shares in a profitable QSBC and decide to sell them once you’re eligible for the 100% gain exclusion break, the 21% corporate rate could be the only tax you owe.

Wondering whether your business could qualify? Smolin can help.

The 100% federal income tax stock sale gain exclusion break and the flat 21% corporate federal income tax rate are both strong incentives to operate as a QSBC, but before making your final decision, consult with us.

While we’ve summarized the most important eligibility rules here, additional rules do apply. 

Answers to Your Tax Season Questions

Answers to Your Tax Season Questions
Answers to Your Tax Season Questions 850 500 smolinlupinco

Ready or not—the 2024 tax season is officially open! The IRS is now accepting and processing 2023 income tax returns

Just as in years prior, we’re receiving an abundance of questions about this tax season. Let’s take a look at seven of the most relevant ones. 

1. What are the 2024 tax season deadlines?

For most taxpayers, returns and extensions must be filed by Monday, April 15, 2024.

However, Massachusetts and Maine state holidays will earn some taxpayers an extra two days. You may also be granted additional time to file if you live in a federally declared disaster area.

2. If I request an extension, when is my return due?

Taxpayers who request an extension must file before October 15, 2024.

Of course, it’s important to note that you will still need to pay any taxes owed before April 15. If not, you could face penalties. 

3. When’s the best time to file?

Filing for an extension or waiting until the last minute can be tempting, but filing early has its benefits. Namely, filing your return early in the tax season offers some protection against tax identity theft. 

4.  How does early filing help protect me from tax identity theft? 

When a thief uses another person’s sensitive information to file a fake tax return and claims a fraudulent refund, we call this tax identity theft.

Oftentimes, taxpayers only discover these scams once it comes time to file their return, and the IRS informs them their return is being rejected since a tax return with the same social security number has already been filed for the year. 

Proving which return is valid and which one is the fraud can be a frustrating, time-consuming process. It may also delay your refund.

If you file early, however, the IRS will reject fraudulent returns filed after your return.

5. Why else should I try to file my return early? 

If you want your refund as soon as possible, filing early can help.

In fact, the IRS asserts that “most refunds will be issued in less than 21 days.” If you choose to file electronically and elect to receive your refund via direct deposit, your wait could be shorter.

As an added benefit, receiving a refund via direct deposit eliminates the odds that your refund check could be caught in a mail delay or returned to the IRS as undeliverable, stolen, or lost.  

6. When should I expect to receive my W-2s and 1099s?

Before you can file your tax return, you’ll need all of your Forms 1099 and W-2.

January 31, 2024, is the deadline for employers to file 2023 W-2s and, generally, for businesses to file Form 1099s for recipients of any 2023 interest, dividends, or reportable miscellaneous income payments (including those made to independent contractors).

If early February arrives and you still haven’t received a W-2 or 1099, contact the entity that should have issued it. If that doesn’t work, contact your accountant. 

7. When should I contact Smolin to prepare my return?

An accurate, timely return is crucial to ensure you avoid penalties and receive all of the tax breaks you’re entitled to. Make sure you contact us as soon as possible to get the ball rolling. 

Questions? Smolin can help.

If you still have questions about the 2024 tax season, you’re not alone. Reach out to the friendly accountants at Smolin for more personalized tax advice.

Will your court awards and out-of-court settlements be taxed

Will your court awards and out-of-court settlements be taxed? 
Will your court awards and out-of-court settlements be taxed?  850 500 smolinlupinco

Courts grant monetary awards and settlements for a range of reasons. 

For example, you may receive compensatory and punitive damage payments for personal injury, discrimination, or harassment. In this situation, some of the awarded amount you receive may be taxed by the federal government, and perhaps some will be taxed by your state government. 

Hopefully, you’ll never need to know how payments for personal injuries are taxed, but here are the basic rules if you or a loved one receive an award or settlement and need to understand the tax implications.

Under current tax law, you’re permitted to exclude from your gross income the damages received on account of a personal physical injury or a physical sickness. It doesn’t matter if the compensation is from a court-ordered award or an out-of-court settlement, and it makes no difference if it’s paid in a lump sum or installments.

Exceptions: Emotional distress, punitive damages, back pay

Emotional distress isn’t considered a physical injury or physical sickness and is excluded from the tax exemption. So, for example, you would need to include an award under state law that’s meant to compensate for emotional distress caused by age discrimination or harassment in your gross income. However, if you require medical care for treatment of the consequences of emotional distress, then you may exclude the amount of damages not exceeding those expenses from gross income.

Punitive damages for any personal injury claim, whether physical or not, aren’t excludable from gross income unless the court awards it under certain state wrongful death statutes that provide for only punitive damages.

The law doesn’t consider back pay and liquidated damages you may receive under the Age Discrimination in Employment Act (ADEA) to be paid in compensation for personal injuries. Therefore, if you receive an award for back pay and liquidated damages under the ADEA, you must include those awards in your gross income.

Court case examples

As you may suspect, the IRS and courts often decide that awards and settlements are taxable even if the recipient feels they should exclude them from taxable income. 

In one case, a taxpayer sustained an injury while at a hospital. She sued for negligence but lost her case. She then sued her attorney for legal malpractice, and the court awarded her $125,000. The IRS said the amount was taxable because her award wasn’t for any physical injuries. The U.S. Tax Court and the 9th Circuit Court of Appeals agreed. (Blum, 3/23/22)

In another case, the Tax Court ruled that married taxpayers weren’t entitled to income exclusion for a settlement the husband received from his former employer in connection with an employment discrimination and wrongful termination lawsuit. Although the settlement agreement provided for payment “for alleged personal injuries,” there was no evidence to support that it was paid on account of physical injuries or sickness. (TC Memo 2022-90)

Legal fees

You aren’t allowed to deduct attorney fees you incur to collect a tax-free award or settlement for physical injury or sickness. However, to a limited extent, attorney’s fees (whether contingent or non-contingent) or court costs paid by, or on behalf of, a taxpayer in connection with an action involving certain employment-related claims are currently deductible from gross income to determine adjusted gross income.

After-tax recovery

Keep in mind that while you want the best tax result possible from any settlement, lawsuit, or discrimination action you’re considering, non-tax legal factors, together with the tax factors, will determine the amount of your after-tax recovery. Consult with your attorney on the best way to proceed, and we can provide any tax guidance that you may need.

Questions? Smolin can help.

This article provides a basic overview of the tax implications of court awards and out-of-court settlements. If you need tax information about your award or settlement, the best course of action is to consult with your accountant.

Navigating Tax Implications Restricted Stock Awards

Navigating the Tax Implications of Restricted Stock Awards
Navigating the Tax Implications of Restricted Stock Awards 850 500 smolinlupinco

Equity-oriented executive compensation can take many forms, but restricted stock awards are a popular option. In fact, many businesses offer them as an alternative to stock option awards in light of the fact that options can lose most or all of their value if the price of the underlying stock decreases. This is less of an issue with restricted stock. If the price declines, companies can issue additional restricted shares to balance the difference. 

If you’re in a position to receive a restricted stock award, it’s important to know what to expect in regard to your taxes. 

Restricted stock: How it works 

Typically, when a company grants an employee restricted stock, the shares are subject to certain limitations. The restricted shares are transferred to the employee, but the employee won’t actually own them until they become vested.

Oftentimes, you must continue working for the company for a particular length of time. If you leave the job before the designated date, you may be forced to forfeit the restricted shares. 

Tax rules for awards of restricted stock

Before the shares become vested, you won’t have taxable income from a restricted share award. In other words, there won’t be an immediate tax obligation associated with the shares.

Once the shares become vested, however, you’ll receive taxable compensation income equal to the difference between the value of the shares on the vesting date and the amount they paid for them (if anything).

Federal income tax for compensation is up to 37%, and you may also owe an additional 3.8% net investment income tax (NIIT). You could also owe state income tax on the income.

Appreciation occurring after the shares are vested will be treated as capital gain. If you hold the stock for a year or more after vesting date, you’ll be subject to a lower-taxed, long-term capital gain on that appreciation. For long-term capital gains, the current maximum federal tax rate is 20%, but you may also be subject to state income tax and the 3.8% NIIT. 

Section 83(b) election

You’ll also have the option to make a special Section 83(b) election, which gives you the option to be taxed at the time they receive the restricted stock award rather than when the shares vest. In this case, income will equal the difference between the amount that you paid for the shares (if anything) and the value of them.

This income will still be treated as compensation and subject to federal employment taxes, federal income tax, and state income tax. However, making a Section 83(b) election offers the benefit that further appreciation in the value of the stock will be treated as lower-taxed, long-term capital gain if the stock is held for over a year. It also provides a level of protection against higher tax rates that could be in place when the shares become vested. 

However, recognizing taxable income the year the restricted stock award is received does come at a risk. The election can be a financial disadvantage in the event that the shares are later forfeited or decline in value. If you do go on to forfeit the shares, you may be able to claim a capital loss for the amount paid for them (if anything).

To make a Section 83(b) election, you must notify the IRS either before the stock is transferred or within the following 30 days. 

Questions? Smolin can help. 

While the tax rules for restricted stock awards are fairly simple, deciding whether to make a Section 83(b) election is still a time-sensitive decision that has the potential to impact the true financial benefit of your award.

Before making the decision to opt for a Section 83(b) election, contact your accountant for more personalized guidance. 

Accounting M&As

Accounting for M&As
Accounting for M&As 850 500 smolinlupinco

Mergers and acquisitions (M&A) transactions significantly impact financial reporting, especially the balance sheet, which will look markedly different after the business combination. Keep reading for basic guidance on reporting business combinations under U.S. Generally Accepted Accounting Principles (GAAP).

Understanding the purchase price allocation process

Under GAAP, the buyer must allocate the purchase price to all acquired assets and liabilities based on their fair values. 

Estimate the purchase price

The purchase price allocation process begins by estimating a cash equivalent purchase price. Of course, this is simpler if the buyer pays 100% cash upfront. (The purchase price is already at a cash equivalent value.) If a seller accepts non-cash terms, however, the cash equivalent price is less clear. An example of this could be accepting stock in the newly formed entity or if an earnout is contingent on the acquired entity’s future performance. 

Identify assets and liabilities

Next, the buyer needs to identify all intangible and tangible assets and liabilities acquired in the merger. While the seller’s presale balance sheet is likely to report tangible assets and liabilities—like inventory, payables, and equipment—intangibles can be more difficult to nail down. They might only be reported if they were previously purchased by the seller. Since intangibles are generated in-house, they’re not often included on the seller’s balance sheet. 

Determining the fair value of acquired assets and liabilities

When a company acquires another company, the acquired assets and liabilities are added to its balance sheet at their fair value on the acquisition date. Any difference between the sum of these fair values and the purchase price is recorded as goodwill.

Generally, goodwill and other intangible assets with indefinite lives, such as brand names and in-process research and development, aren’t amortized under GAAP. Rather, goodwill must be tested for impairment on an annual basis. 

Testing for impairment

It’s also a good idea to test for impairment when certain triggering events—like the loss of a major customer or enactment of unfavorable government regulations—occur. If an impairment loss is reported by a borrower, this may signal that the business combination isn’t quite meeting management’s expectations. 

Straight-line amortization

As an alternative to testing for impairment, private companies may opt to amortize goodwill over 10 years straight-line. Even with this approach, though, the company will need to test for impairment when triggering events occur. 

Occasionally, a buyer negotiates a bargain purchase. In this circumstance, the fair value of the net assets exceeds the fair value of consideration transfer (the purchase price). Instead of recording negative goodwill, the buyer reports a gain from the purchase on their income statement. 

Questions? Smolin can help.

Accurately allocating your purchase price is crucial to minimize write-offs and restatements in subsequent periods. Contact Smolin from the start to ensure every detail of your M&A accounting is correct. We’ll help ensure your fair value estimates are supported by market data and reliable valuation techniques.

Tax Depreciation Rules Business Automobiles

How do tax depreciation rules apply to business automobiles?
How do tax depreciation rules apply to business automobiles? 850 500 smolinlupinco

If you use an automobile in your trade or business, you may question how depreciation tax deductions are determined. The rules are complex. In particular, special limitations apply to business vehicles classified as passenger autos (which include many pickups and SUVs). Often, these limitations result in longer-than-expected wait times to depreciate a vehicle completely.

As you review the details below, remember that the rules are different if you lease an expensive passenger auto you use for business. (Reach out for more details.) 

The cents-per-mile rate includes the cost of depreciation

For passenger autos, separate depreciation calculations only apply if you use the actual expense method to determine your deductions. If you use the standard mileage rate instead, depreciation is already included in that rate. For 2023, the standard mileage rate is 65.5 centers per business mile driven. 

Using the actual expense method to calculate depreciation for passenger automobiles

You must make a separate depreciation calculation for each year until the vehicle is fully depreciated if you choose to use the actual expense method to calculate your allowable deductions for a passenger automobile.

Generally, you can calculate depreciation over a six-year span as follows:

Year 1: 20% of the cost

Year 2: 32% of the cost

Year 3: 19.2% of the cost

Year 4: 11.52% of the cost

Year 5: 11.52% of the cost

Year 6: 5.76% of the cost

Note: If 50% or less of the use of the vehicle is for business purposes, you MUST use the straight-line method to calculate depreciation deductions, NOT the percentages listed above.

Depreciation ceilings

You’re limited to specified annual depreciation ceilings for passenger autos that cost more than the applicable amount for the year the vehicle is placed in service. These ceilings may change annually and are indexed for inflation.

For example, for a passenger auto placed in service in 2023 that cost more than a certain amount, the Year 1 depreciation ceiling is $20,200 if you choose to deduct first-year bonus depreciation. The annual ceilings for later years are as follows: Year 2, $19,500; Year 3, $11,700; and for all later years, $6,960 until the vehicle is fully depreciated.

To account for non-business use, these ceilings are proportionately reduced depending on the amount the vehicle is used for business vs. personal use. 

Reminder: Bonus depreciation will be phased out

Under the Tax Cuts and Jobs Act, bonus depreciation will be phased down to zero in 2027 unless Congress acts to extend it. 

In 2023, the deduction is 80% of eligible property. In 2024, it’s scheduled to decrease to 60%. 

Pickups, Heavy SUVs, and vans

If you have heavy SUVs, vans, or pickups that you use for business purposes over 50% of the time, you may be able to take advantage of more favorable depreciation rules. That’s because vehicles with a gross vehicle weight rating (GVWR) of over 6,000 pounds are treated as transportation equipment for depreciation purposes.

To determine whether your vehicle falls into this category, check the inside edge of the driver’s side door for the vehicle’s GVWR.

Depreciation limits change the after-tax cost of passenger autos used for business

These depreciation limits impact the after-cost tax of your business vehicles. The true cost of business assets is decreased in proportion to the tax savings from related depreciation deductions.

To the extent depreciation deductions are reduced and thereby deferred to future years, so is the value of the related tax savings, thanks to time-value-of-money considerations. Therefore, the true cost of the asset may be that much higher.

Questions? Smolin can help.

As you can see, tax depreciation rules for business automobiles are complex and constantly evolving. If you’re considering purchasing a new business vehicle soon, please contact us for the most personalized, up-to-date guidance.

Listing home vacation rental tax impacts

Listing your home as a vacation rental? Here are the tax impacts to watch for
Listing your home as a vacation rental? Here are the tax impacts to watch for 850 500 smolinlupinco

Whether in the mountains or a waterfront community, many Americans dream of owning their perfect vacation home. If you already own a second house in a desirable area, you might consider renting it out for part of the year.

Before you post that listing, though, take a moment to learn about the tax implications. Taxes for these transactions can be complicated. They are determined based on how many days the home is rented, as well as a few other factors.

Vacation use by yourself and family members (even if you charge them rent) may impact that amount of taxes you pay. Use by nonrelatives will also affect your rate if market rent isn’t charged.

Tax rates for short-term rentals

Did you know that if you rent a property out for less than 15 days during the year, it’s not treated as “rental property” at all? For tax purposes, any rent you receive for this timeframe won’t be included in your income. This can lead to revenue and significant tax benefits in the right circumstances.

There is a drawback to this, though. You can only deduct property taxes and mortgage interest—not depreciation or operating costs. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

Tax rates for longer rentals

You must include rent received for property rented out more than 14 days in your income for tax purposes. In this scenario, you may deduct part of your depreciation and operating expenses (subject to certain rules). 

However, navigating the numbers can prove challenging. You must allocate which portion of certain expenses are incurred via personal use days vs. rental days, such as: 

  • Maintenance
  • Utilities
  • Depreciation allowance 
  • Taxes
  • Interest

Both the personal use portion of taxes and the personal use part of interest on your second home may be deducted separately. To be eligible, the personal use part of interest must exceed the greater of 14 days or 10% of the rental days. Depreciation on the personal use portion of time is not deductible. 

Losses may be deductible

If allocable deductions are lower than your rental income, you must report the deductions and the rent to determine the amount of rental income you should add to your other income. If expenses exceed the income, it may be possible to claim a rental loss.

The number of days you use the house for personal purposes is important here. If you used the home for more than the greater of 14 days or 10% of the rental days, you used it “too much” to claim your loss.

In this instance, you may still be able to wipe out the rental income using your deductions. However, you can’t create a loss. Deductions you can’t claim will be carried forward, and you may even be able to use them in future years. 

If you can only deduct rental expenses up to the amount of rental income you received, you must prioritize the following deductions:

  • Interest and taxes
  • Operating costs
  • Depreciation

Even if you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, though, rental deductions that exceed rental income may be claimed as a “passive” loss (and will be limited under passive loss rules.) 

Questions? Smolin can help.

Tax rules regarding vacation rental homes can be confusing. We only discuss the basic rules above, and additional rules may apply to you if you’re considered a small landlord or real estate professional.

That’s why it’s best to consult with a tax professional before planning your vacation home use. Contact the friendly tax experts at Smolin to learn more.

Hit the jackpot? Tax bill

Hit the jackpot? Here’s what it means for your tax bill.
Hit the jackpot? Here’s what it means for your tax bill. 850 500 smolinlupinco

Everything comes at a cost—even “free money.” If you’ve won a sizable cash prize recently, congratulations! But be prepared. Your good fortune will likely impact your tax bill. Contacting your accountant or wealth advisor as soon as possible is probably in your best interest. 

Money earned from gambling 

Whether you win at a tiny bingo hall or a major casino, the tax rules are the same. 100% of your winnings must be reported as taxable income on the “Other income” line of your 1040 tax return. 


When it comes to reporting winnings for a particular wager, you’ll need to calculate your net gain. For example, if you bet $50 on the Super Bowl and win $140, you should report $90 of income rather than the full $140.

What about losses? They’re deductible, but only as itemized deductions. You can’t take the standard deduction and deduct gambling losses. Even so, they’re only deductible up to the amount of gambling winnings reported. In other words, losses can be used to “wipe out” gambling income, but your forms can’t report a gambling tax loss.

Still, it’s worth keeping a thorough record of your losses during the year. Hang onto any checks or credit slips and be sure to document the place, date, amount, and type of loss. It may also be helpful to keep track of the name of anyone who was with you. 

Note: If you’re a professional gambler, different rules apply. 

Lottery winnings

Did you know that lottery winnings are taxable? Hitting the jackpot is rare, but getting audited by the IRS for failing to follow tax rules after winning isn’t.

Winners are required to pay taxes on cash prizes and the fair market value of non-cash prizes, too, like vacations or cars. Your exact federal tax rate may vary, but it could be as high as 37% depending on the amount of your winnings and your other income. State income tax may also apply.

For non-cash prizes, you’ll need to report your winnings in the year the prize is received. If you take a cash prize in annual installments, you should report each year’s installment as income for the year you receive it. 

Winnings over $5,000

If you win over $5,000 from the lottery or certain types of gambling, 24% will be withheld for federal tax purposes. The payer (agency, casino, lottery, etc.) will send you and the IRS a Form W-2G listing the federal and state tax withheld and the amount paid to you. Hang onto this form for your records.

If a federal tax rate between 24% and 37% applies to you, the 24% withholding may not be enough to cover your federal tax bill. In this instance, you may need to make estimated tax payments. If you fail to do so, you could be assessed a penalty. You might be required to make state and local estimated tax payments, too. 

Since your federal tax rate can be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments—and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.

Questions? Smolin can help.

This article only covers the basic tax rules. Additional rules could apply in your situation. You may also have additional concerns after winning a large sum of money, such as updating your estate plan.

If you want to stay in compliance with tax requirements, minimize what you owe, and manage your winnings more effectively, we’re here to help. Contact us now. 

could you benefit health savings account

Could You Benefit from a Health Savings Account?
Could You Benefit from a Health Savings Account? 850 500 smolinlupinco

The cost of healthcare is rising. As a result, many people are on the hunt for a more cost-effective way to pay for their medical bills. 

If you’re eligible, a Health Savings Account (HSA) may offer a way to set aside funds for a future medical “rainy day” while also enjoying tax benefits, like: 

  • Withdrawals from the HSA to cover qualified medical expenses aren’t taxed
  • Earnings on the funds in the HSA aren’t taxed
  • Contributions made by your employer aren’t taxed to you
  • Contributions made by you are deductible within certain limits 

Who is eligible for an HSA? 

HSAs may be established by, or on behalf of, any eligible individual.

If you’re covered by a “high deductible health plan,” you may be eligible for an HSA. In 2023, a health plan with an annual deductible of at least $1,500 for self-only coverage or at least $3,000 for family coverage may be considered a high-deductible plan.

In 2024, these numbers will increase to $1,600 for self-only coverage and $3,200 for family coverage.

Deductible contributions are limited to $3,850 for self-only coverage in 2023 and $7,750 for family coverage. (Again, these numbers are set to increase in 2024 to $4,150 for self-only coverage and $8,300 for family coverage.)

Other than for premiums, annual out-of-pocket expenses required to be paid can’t exceed $7,500 for self-only coverage or $15,000 for family coverage in 2023. In 2024, these numbers will climb to $8,050 and $16,100, respectively. 

If an individual (or their covered spouse) is an eligible HSA contributor and turns 55 before the end of the year, they may make additional “catch-up” contributions for 2023 and 2024 up to $1,000 per year.  

Limits on deductions

Deductible contributions aren’t governed by the annual deductible of the high deductible health plan. You can deduct contributions to an HSA for the year up to the total of your monthly limitation for the months you were eligible. 

The monthly limitation on deductible contributions for someone with self-only coverage is 1/12 of $3,850 (or just over $320) in 2023. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,750 (or just under $646). 

At tax time, anyone eligible on the first day of the last month of the tax year will be treated as eligible for the entire year. This is relevant to computing the annual HSA contribution.

That said, if the individual is enrolled in Medicare, they’ll no longer be eligible per the HSA rules and can no longer make HSA contributions. 

Taxpayers may withdraw funds from an IRA and transfer them tax-free to an HSA—but only once. The amount allowed varies, depending on the maximum deductible HSA contribution for the type of coverage that is in effect at the time of transfer. 

The amount moved between the accounts will be excluded from gross income and thus won’t be subject to the early withdrawal penalty of 10%. 

HSA Distributions

Distributions from your HSA account that you use to pay for qualified medical expenses of those covered aren’t taxed. Typically, the qualified medical expenses in question would qualify for the medical expense itemized deduction.

However, funds withdrawn from your HSA for other reasons are taxed. Unless the person covered by the HSA is over 65, disabled, or dies, they will also be subject to an extra 20% tax. 

Questions? Smolin can help.

HSAs offer a very flexible option for providing health care coverage. However, as you can see, the rules can be quite complicated. 

If you have questions about tax rules regarding your HSA or the most favorable way to manage the funds within it, please reach out. The friendly accountants at Smolin are always happy to walk you through your options and help you determine the most tax favorable way to manage your money. 

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