The Health Savings Account (HSA) is one of the most misunderstood and underused benefits in the Internal Revenue Code. Congress created HSAs as a way for individuals with high-deductible health plans (HDHPs) to save for medical expenses that are not covered by insurance due to the high-deductible provisions of their insurance coverage.

However, an HSA can act as more than just a vehicle to pay medical expenses; it can also serve as a retirement account. For some taxpayers who have maxed out their retirement-plan options, an HSA provides them another resource for retirement savings – one that isn’t limited by income restrictions in the way that IRA contributions sometimes are.

Although the tax code refers to these plans as “health” savings accounts, they can also be used for retirement, as there is no requirement that the funds be used to pay medical expenses. Thus, a taxpayer can pay medical expenses with other funds, thus allowing the HSA to grow (through account earnings and further tax-deductible contributions) until retirement. In addition, should the need arise, the taxpayer can still take tax-free distributions from the HSA to pay medical expenses.

Withdrawals from an HSA that aren’t used for medical expenses are taxable and – depending on the taxpayer’s age – can be subject to penalty. Once a taxpayer has reached age 65, nonmedical distributions are taxable but not subject to a penalty (the same as for a traditional IRA once the IRA owner reaches age 59½). At the same time, regardless of age, a taxpayer can always take tax-free distributions to pay medical expenses.

Example: Henry is age 70 and has an HSA account from which he withdraws $10,000 during the year. He also has unreimbursed medical expenses of $4,000. Of his $10,000 withdrawal, $6,000 ($10,000 – $4,000) is added to Henry’s income for the year, and the other $4,000 is tax-free.

Eligible Individual – To be eligible for an HSA in a given month, an individual:

  1. must be covered under an HDHP on the first day of the month;
  2. must NOT also be covered by any other health plan (although there are some exceptions);
  3. must NOT be entitled to Medicare benefits (i.e., generally must be younger than age 65); and
  4. must NOT be claimed as a dependent on someone else’s return.

Any eligible individual – whether employed, unemployed or self-employed – can contribute to an HSA. Unlike with an IRA, there is no requirement that the individual have compensation, and there are no phase-out rules for high-income taxpayers. If an HSA is established by an employer, then the employee and/or the employer can contribute. Family members or any other person can also make contributions to HSAs on behalf of eligible individuals. Both employer contributions and employee contributions made via the employer’s cafeteria plan are excluded from the employee’s wage income. Employees who make HSA contributions outside of their employers’ arrangements are eligible to take above-the-line deductions – that is, they don’t need to itemize deductions – for those contributions.

The Monetary Qualifications for an HDHP –

health savings accounts
health savings account

Example – Family Plan Does Not Qualify: Joe has purchased a medical-insurance plan for himself and his family. The plan pays the covered medical expenses of any member of Joe’s family if that family member has incurred covered medical expenses of over $1,000 during the year, even if the family as a whole has not incurred medical expenses of over $2,800 during that year. Thus, if Joe’s medical expenses are $1,500 during the year, the plan would pay $500. This plan does not qualify as an HDHP because it provides family coverage with an annual deductible of less than $2,800.

Example – Family Plan Qualifies: If the coverage for Joe and his family from the example above included a $5,000 family deductible and provided payments for covered medical expenses only if any member of Joe’s family incurred over $2,800 of expenses, the plan would then qualify as an HDHP.

Maximum Contribution Amounts – The amounts that can be contributed are determined on a monthly basis and are calculated by dividing the annual amounts shown below by 12. Thus, if an individual’s health plan only qualified that person for an HSA for 6 months out of the year, then that person’s contribution amount would be half of the amount shown.

health savings account

In addition to the amounts shown, an eligible individual who is age 55 and older can contribute an additional $1,000 per year.

How HSAs Are Established – An eligible individual can establish one or more HSAs via a qualified HSA trustee or custodian (an insurance company, bank, or similar financial institution) in much the same way that an individual would establish an IRA. No permission or authorization from the IRS is required. The individual also is not required to have earned income. If employed, any eligible individual can establish an HSA, either with or without the employer’s involvement. Joint HSAs between a husband and wife are not allowed, however; each spouse must have a separate HSA (and only if eligible).

If you have questions related to how an HSA could improve your long-term retirement planning or health coverage, please call this office.

According to one recent study, about 27% of people in the United States between the ages of 55 and 67 years old have less than $10,000 saved for retirement. If you needed just one statistic to outline how important it is to plan ahead when you’re younger, let it be that one.

Similarly, you need to understand that planning isn’t about simply making sure that you CAN retire. It’s also about doing what you can to maximize those benefits when they do start to arrive. The system itself is designed to reward certain actions and, if you make the right financial decisions today, you’ll be able to succeed after you retire.

Thankfully, getting to that point isn’t necessarily as difficult as many believe it to be. If your goal is to maximize your Social Security benefits by planning ahead, all you need to do is keep a few key things in mind.

Maximize Your Social Security, Maximize Your Retirement

One of the most important reasons why you want to start planning now about what your retirement years look like comes down to the fact that a lot of the decisions you’ll be faced with aren’t ones you can make overnight.

Case in point: the choice of when, exactly, you’ll end up formally retiring. While it’s undoubtedly true that you’ve already worked incredibly hard and would probably like to retire sooner rather than later, it isn’t always necessarily a good idea to do so. The longer you delay your retirement, the bigger those benefits get.

Everybody has a “full retirement age” which, as the term suggests, is when you get to start collecting your full benefits. Full benefits are dictated based on how much money you’ve earned in your lifetime. If you retire before you hit this age, you’ll still get money – but you won’t get as much as you would if you had delayed.

If your full retirement age is 67, and you retire at 62, for example. You’ll only get 70% of your benefits. If you wait until the age of 70 to retire, you’ll get 124% of your benefits.

However, this may not be an easy choice to make depending on what you have going on in your life (with your health being a top consideration), which is why you should start thinking about it and planning now.

Another reason why it’s so important to start planning today to maximize your Social Security income has to do with how the system works, to begin with. Remember that while your age is important, ultimately it is the amount of money that you make that will dictate how much you get in benefits after you retire.

Therefore, the more you make, the more you’ll eventually get. While “make more money” may seem like obvious advice if you still have 30 years before you retire simply keeping this in mind could influence a lot of the decisions you’ll make during your career. It may be a motivating factor when deciding to move from one employer to the next, or whether you should switch careers altogether. Again, these are not decisions that will come to you instantly – they’ll take a lot of careful consideration to get right which is why you should always be proactive.

Planning is also critical to maximize your income because it allows you to work certain elements into your long-term strategy that may have otherwise gone overlooked. Case in point: spousal benefits. If you happen to be married but haven’t earned too much in the way of your own income during your relationship, you might be able to sign up for what is called spousal benefits. This allows you to get up to 50% of your husband or wife’s eligible amount after you retire. Even divorced people are eligible for spousal benefits, so long as they haven’t gotten married to someone else.

Dependent benefits are similar in concept, albeit from a different perspective. If you’re about to retire but still have a dependent who is under 19 years old, they may be able to get up to 50% of your benefits without decreasing the amount of money you get, too.

As so much of success in terms of retirement involves a solid long-term financial strategy, it stands to reason that these are all things that you’ll want to incorporate now so that you can reap the benefits (no pun intended) later on.

Finally, one of the biggest reasons why planning ahead will help you maximize your financial strategy is because it helps bring your spouse into the conversation as early on in the process as possible.

If you’re married, both of you will eventually retire. Depending on your situation, it may make more sense for one of you to delay collecting Social Security benefits while the other retires either at or possibly even before their “full benefits age.” In some scenarios, this would be a way to protect whoever makes less money.

You won’t know whether this is the case, however, if you don’t A) plan your retirement alongside that spouse, and B) start planning as soon as you’re able to. Doing so will allow you to come up with the type of joint strategy you need to make sure that both of you can retire without worry or regret when the time comes. 

Your Financial Future Begins Now

In the end, it’s pivotal to understand that retirement success is all about playing the long game. It’s not like you’ll just hit a certain day on the calendar, leave your job for the last time and everything is guaranteed to go smoothly from there on out.

If you truly want to enjoy the retirement lifestyle you’ve always seen for yourself, you need a financial plan. You need to look at the moves you’re making as an investment in your future. That requires not just the best strategy to help accomplish your goals but years of action to get to that point.

Ultimately, that’s why if you want to maximize your Social Security income, you need to start planning – not next year, not six months from now, but today.  

If you could not complete your 2021 tax return by April 18, 2022 and are now on extension, that extension expires on October 17, 2022. Failure to file before the extension period runs out can subject you to late-filing penalties.

There are no additional extensions (except in designated disaster areas), so if you still do not or will not have all the information needed to complete your return by the extended due date, please call this office so that we can explore your options for meeting your October 17 filing deadline.

Although the October due date is normally October 15th, for 2022, the 15th falls on a weekend, so the due date automatically moves to the next business day which is Monday October 17th.

If you are waiting for a K-1 from a partnership, S-corporation, or fiduciary return, the extended deadline for those returns is September 15 (September 30 for fiduciary returns). So, you should probably make inquiries if you have not received that information yet.

Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return and do not do so, the state will also charge a late-file penalty. The filing extension deadline for individual returns is also October 17 for most states.

In addition, interest continues to accrue on any balance due, currently at the rate of .5% per month.

If this office is waiting for some missing information to complete your return, we will need that information at least a week before the October 17 due date. Please call this office immediately if you anticipate complications related to providing the needed information, so that a course of action may be determined to avoid the potential penalties.

Additional October 17, 2022, Deadlines – In addition to being the final deadline to timely file 2021 individual returns on extension, October 17 is also the deadline for the following actions:

  • FBAR Filings – Taxpayers with foreign financial accounts, the aggregate value of which exceeded $10,000 at any time during 2021, must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The original due date for the 2021 report was April 18, 2022, but individuals have been granted an automatic extension to file until October 17, 2022. 
  • SEP-IRAs – October 17, 2022, is the deadline for a self-employed individual to set up and contribute to a SEP-IRA for 2021. The deadline for contributions to traditional and Roth IRAs for 2021 was April 18, 2022. 
  • Special Note – Disaster Victims – If you reside in a Presidentially declared disaster area, the IRS provides additional time to file various returns and to make payments. 

Please call this office for extended due dates of other types of filings and payments and for extended filing dates in disaster areas.

Bowman & Company, LLP has been named one of the Top 300 accounting firms in the nation, by INSIDE Public Accounting (IPA) – the leading public accounting publication of record.

The IPA 500 ranks firms by net revenues and is known as one of the most thorough, complete and accurate sets of rankings and trends in the profession.

The full list of the IPA 2022 Top 500 firms can be found here.

About Bowman & Company

Established in 1949, Bowman & Company, LLP has earned a reputation for providing innovative, forward-thinking tax planning strategies, reliable financial reporting, and creative business consulting in a personalized, collaborative manner. For more than 70 years, the firm has served as a trusted business and financial advisor to closely-held businesses throughout California and beyond. Bowman & Company is consistently ranked as a top firm for both its exceptional accounting and advisory services and its fun and supportive firm culture. The firm is a proud member of Alliott Global Alliance.

Any seasoned entrepreneur will tell you that coming up with an idea for a startup is ultimately the easy part of this process. Figuring out how you’re going to get the funds necessary to make that vision a reality? That part is a bit trickier.

Selecting investors for your startup can be the hardest part of the process – not only because you want to make sure you’re making the right choices for your new company, but also because it’s important to surround yourself with individuals who will support you both now and years down the road as your business grows.

Thankfully, there are several best practices that you can use to help find not just an investor, but the right investor to meet your current and future needs.

Choosing the Right Investors: Breaking Things Down

By far, one of the most important things to understand about finding an investor for your startup is that you’re trying to find a GOOD fit, not necessarily a PERFECT fit.

The odds are good that no investor will be 100% perfect for the vision you have for your startup – such is life. Even if you could find a startup investor who would tick every box, it would probably take so long that it wouldn’t be worth the effort. You would ultimately delay the building of your company, not to mention the amount of time it would then take to get your products or services to consumers.

Finding the Best Investor For You

The first step to finding the best investor for you is to make a list of characteristics and standards that are important to you. Remember, you are looking for someone who can help you bring your vision to life, so it is imperative for all of your startup investors to add value to your organization. Prioritize certain qualities above others and if you don’t check all of the boxes in the end, that’s okay — hardly anyone does, and there are still numerous successful startups.

Another best practice to follow when finding an investor for your startup involves trying to sell them not on what your product or service can do in a literal sense, but on what problem it is trying to help people solve. In other words, don’t communicate in terms of technical specifications, but by sharing the unique value that you’ll be able to bring to the table with a little help from a qualified investor.

Investors want to see that you’re not pushing a “solution in search of a problem,” so to speak. They want to see that you’ve identified a potential gap in the marketplace that you – and you alone – can fill with your business concept. That’s how to get people excited and that’s how you get people to invest.

What Types of Startup Investors Are There?

If you would prefer not to go the route of working with a venture capitalist or professional startup investor, there are numerous other options available to you as a small business owner.

Especially in those precarious early days, for example, some entrepreneurs often turn to friends and family members for assistance. They won’t necessarily be permanent investors, but they can certainly help get you off the ground and buy more time until you can land something more stable. If you take this approach, make sure that you clearly communicate what the money will be going towards in terms of your current business needs and what type of positive impact it will make. Rarely will someone be willing to give you money based on a “great idea” alone.

Some new business founders also apply for loans from the Small Business Administration rather than immediately seeking out a private investor. The Small Business Administration doesn’t lend money directly, but the organization does have a handy lender match tool that you can use to find financial institutions that have been pre-approved for situations like yours, whatever your specific circumstances happen to be. The benefit here is that the SBA also guarantees certain types of loans, which usually translates to lower interest rates and better repayment terms than you might be able to find elsewhere.

If you do choose to go with a private investor, such as a venture capitalist, one of the ways that you’ll want to protect yourself involves understanding what a fair percentage is. Again, nobody is going to give you capital for your startup just for the sake of it – they’re going to expect something in return (you’ve watched ABC’s Shark Tank, right?).

But you don’t want to offer a percentage of your net profits that is too low – say, 5%- – because that isn’t worth the effort on the investor’s part. Likewise, offering a percentage that is too high will almost immediately begin to eat into any profit you earn. Always spend time working out a fair percentage based on the amount of money you’re being given and other situation-specific variables to create a deal that is beneficial for all involved.

If you have any additional questions about the qualities to look for in an investor for your startup, or if you’d just like to go over the details of your unique situation feel free to reach out to our practice.

Throughout your life, there will be certain significant occasions that will impact not only your day-to-day living but also your taxes. Here are a few of those events:

Getting Married – If you just got married or are considering getting married, you need to be aware that once you are married you no longer file returns using the single status and generally will file a combined return with your new spouse using the married filing jointly (MFJ) status. When you file MFJ all of the income of both spouses is combined on one return, and where both spouses have substantial income, that could mean your combined incomes could put you in a higher tax bracket. However, when filing MFJ you also benefit by being able to claim a standard deduction equal to twice that of the standard deduction for a single taxpayer. It may be appropriate for a couple planning a wedding, or even those who just got married, to estimate the differences between filing as unmarried and filing married so there are no unpleasant surprises at tax filing time. It may be appropriate to adjust withholding to compensate for the MFJ status.

Be mindful that filing status is determined on the last day of the tax year, so no matter when you get married during the year you will be considered married for the entire year for tax purposes. Once married here are some tasks that should be done:

  • Notify the Social Security Administration − Report any name change to the Social Security Administration so that your name and SSN will match when you file your next tax return. Informing the SSA of a name change is quite simple and can be done on the SSA’s website. Alternatively, you can call the SSA at 800-772-1213 or visit a local SSA office. Your income tax refund may be delayed if it is discovered that your name and SSN don’t match at the time your return is filed. 
  • Notify the IRS – If you have a new address, you should notify the IRS by completing and sending in Form 8822, Change of Address. 
  • Notify the U.S. Postal Service – You should also notify the U.S. Postal Service of any address change so that any correspondence from the IRS or state tax agency can be forwarded to your correct address. 
  • Notify the Health Insurance Marketplace – If either or both of you are obtaining health insurance through a government health insurance marketplace, your combined incomes and change in family size could reduce the amount of the premium tax credit to which you would otherwise be entitled, requiring payback of some or all of the credit applied in advance to reduce your monthly premiums. More complicated yet, if either or both of you are included on your parents’ marketplace policy, those insurance premiums must be allocated from their return to your return. 

Here are a few tax-related items you should be aware of when filing a joint return:

  • New Spouse’s Past Liabilities – If your new spouse owes back taxes, past state income tax liabilities or past-due child support or has unemployment debts to a state, the IRS will apply your future joint refunds to pay those debts. If you are not responsible for your spouse’s debt and do not want your share of any tax refund used to pay your spouse’s past debts, you are entitled to request your portion of the refund back from the IRS by filing an “injured spouse” allocation form. As an alternative, you can file separately using the “married filing separate” filing status; however, that generally results in higher overall tax. 
  • Capital Loss Limitations – If an individual has sold stock or other investment property at a loss, when filing as unmarried, each individual can deduct up to $3,000 of capital losses on their tax return for a possible combined total of $6,000, but a married couple is limited to a single $3,000 loss and if they file married separate, then the limit is $1,500 each. 
  • Spousal IRA – Contributions to “Spousal IRAs” are available for married taxpayers who file jointly where one spouse has little or no compensation; the deduction is limited to the lesser of 100% of the employed spouse’s compensation or $6,000 (2022) for the spousal IRA. That permits a combined annual IRA contribution limit of a certain amount (up to$12,000 for 2022). The maximum amount is $7,000 if you or your spouse is age 50 or older ($14,000 if you are both 50+). However, the deduction for contributions to both spouses’ IRAs may be further limited if either spouse is covered by an employer’s retirement plan. 
  • Deductions – The standard deduction in 2022 for a married couple (both spouses under age 65) is $25,900 and for a single individual is $12,950. So, if both of you have been taking the standard deduction, there is no loss in deductions. However, if in past years one of you had enough deductions to itemize and the other took the standard deduction, and after your marriage you’ll be filing jointly, you would either have to take the joint standard deduction or itemize, which likely will result in a loss of some amount of deductions. 
  • Impact on Parents’ Returns – If your parents have been claiming either of you as a dependent, they will generally lose that benefit. In addition, if you are in college and qualify for one of the education credits, those credits are only deductible on the return where your personal exemption is used. That generally means your parents will not be able to claim the education credits even if they paid the tuition. On the flip side, unless your income is too high, you will be able to claim the credit even though your parents paid the tuition. 

Buying a Home – Buying a home, especially your first home, can be a trying experience. Without a landlord to take care of repairs and upkeep of the property those tasks will become your responsibility as a homeowner. When you rent, you are responsible for making a rental payment that is not tax deductible. On the other hand, when you own a home, in addition to being responsible for its maintenance, you have to make homeowner’s insurance, mortgage, and real property tax payments. While routine upkeep costs aren’t tax deductible, the interest on the mortgage and the property taxes you pay may be tax deductible, providing you with a significant saving in income tax. However, if the standard deduction amount for your filing status exceeds the total of all itemized deductions the law allows you to claim, you won’t get a tax benefit from the home mortgage interest and property tax payments. So, when figuring if you can afford a home be sure to take into account whether you’ll benefit from those home-related tax savings.

Also, consider the long-term benefits of home ownership. Homes have generally appreciated in value in the past, so you can look forward to your home gaining value, and when you sell it, the gain of up to $250,000 ($500,000 for a married couple) can be excluded from income if the property has been owned and used as your primary residence for any 2 of the 5 years just prior to the sale.

Many taxpayers don’t feel the need to keep home improvement records, thinking the potential gain will never exceed the amount of the exclusion for home gains ($250,000 or $500,000 if both filer and spouse qualify) if they meet the 2-out-of-5-year use and ownership tests. Here are some situations when having home improvement records could save taxes:

(1) The home is owned for a long period of time, and the combination of appreciation in value due to inflation and improvements exceeds the exclusion amount.

(2) The home is converted to a rental property, and the cost and improvements of the home are needed to establish the depreciable basis of the property.

(3) The home is converted to a second residence, and the exclusion might not apply to the sale.

(4) You suffer a casualty loss and retain the home after making repairs.

(5) The home is sold before meeting the 2-year use and ownership requirements.

(6) The home only qualifies for a reduced exclusion because the home is sold before meeting the 2-year use and ownership requirements.

(7) One spouse retains the home after a divorce and is only entitled to a $250,000 exclusion instead of the $500,000 exclusion available to married couples.

(8) There are future tax law changes that could affect the exclusion amounts.

Everyone hates to keep records but consider the consequences if you have a gain and a portion of it cannot be excluded. You will be hit with capital gains (CG), and there is a good chance the CG tax rate will be higher than normal simply because the gain pushed you into a higher CG tax bracket.

Having or Adopting Children – Besides the loss of sleep, changing diapers, middle-of-the-night feedings, and constant attention, a newborn also brings some tax benefits, including a maximum $2,000 child tax credit which can go a long way in reducing your tax liability. If both spouses work, you will no doubt incur childcare expenses which can result in a maximum (can be less) credit of between $600 and $1,050 for one child or twice those amounts for two or more children. The credit amounts are based on a maximum child care expense of $3,000 for one child and $6,000 for two or more multiplied by 20 to 35 percent of the expense based upon a taxpayer’s income. (The amounts noted apply for 2022; there were temporary increases in the credits as part of Covid pandemic relief for 2021. Congress may extend the enhanced credits.)

Of course, the medical expenses are deductible if you itemize your deductions but only to the extent, the medical expenses exceed 7.5% of your adjusted gross income. Although rarely encountered, the expense of a surrogate mother is not deductible.

If you adopt a child under age 18 or a person physically or mentally incapable of taking care of himself or herself, you may be eligible for a tax credit for qualified adoption expenses you paid. The credit, which is a maximum of $14,890 for 2022, is not refundable, but if the credit is more than your income tax, you can carry over the excess and have 5 years to use up the credit. If the child is a special needs child, the full credit limit will be allowed for the tax year in which the adoption becomes final, regardless of whether you had qualified adoption expenses. The credit phases out for higher-income taxpayers.

It is also time to begin planning for the child’s future education. The tax code offers two tax-favored education savings accounts, the Coverdell account allowing a maximum contribution of $2,000 per year, and the Qualified State Tuition plan, more commonly referred to as a Sec 529 plan, which allows large sums of money to be put aside for a child’s education. There is no federal tax deduction for contributing to either of these programs, but the earnings from the plans are tax-free if used for qualified education expenses, so the sooner the funds are contributed the greater the benefit from tax-free earnings.

Getting Divorced – If you are recently divorced or are contemplating divorce, you will have to deal with or plan for significant tax issues such as asset division, alimony, and tax-return filing status. If you have children, additional issues include child support; claiming of the children as dependents; the child, child care, and education tax credits; and perhaps even the earned income tax credit. Here are some details:

  • Filing Status – As mentioned earlier your filing status is based on your marital status at the end of the year. If on December 31, you are in the process of divorcing but are not yet divorced, your options are to file jointly or for each spouse to submit a return as married filing separately. There is an exception to this rule if a couple has been separated for all of the last 6 months of the year, and if one taxpayer has paid more than half the cost of maintaining a household for a qualified child. In that situation, that spouse can use the more favorable head of household filing status. If each spouse meets the criteria for that exception, they can both file as heads of household; otherwise, the spouse who doesn’t qualify must use the status of married filing separately. If your divorce has been finalized and if you haven’t remarried, your filing status will be single or, if you meet the requirements, head of household. 
  • Child Support – Is support for the taxpayer’s children provided by the non-custodial parent to the custodial parent. It is not deductible by the one making the payments and is not income to the recipient parent. 
  • Children’s Dependency – When a court awards physical custody of a child to one parent, the tax law is very specific in awarding that child’s dependency to the parent who has physical custody, regardless of the amount of child support that the other parent provides. However, the custodial parent may release this dependency to the noncustodial parent by completing the appropriate IRS form. 
  • Child Tax Credit – A federal credit of $2,000 is allowed for each child under the age of 17. This credit goes to the parent who claims the child as a dependent. Up to $1,400 of the credit is refundable if the credit exceeds the tax liability. However, this credit phases out for high-income parents, beginning at $200,000 for single parents. 
  • Alimony – For divorce agreements that are finalized after 2018, alimony is not deductible by the payer and is not taxable income for the recipient. Because the recipient isn’t reporting alimony income, he or she cannot treat it as earned income for the purposes of making an IRA contribution. 
  • Tuition Credit – If a child qualifies for either of two higher-education tax credits (the American Opportunity Tax Credit [AOTC] or the Lifetime Learning Credit), the credit goes to whoever claims the child as a dependent even if the other spouse or someone else is paying the tuition and other qualifying expenses. 

Death of Spouse – Losing a spouse is difficult emotionally, and unfortunately, can be accompanied by a number of tax issues that may or not apply to the surviving spouse. Here is an overview of some of the more frequent issues: 

  • Filing Status – If a spouse passes away during the year, the surviving spouse can still file a joint return for that year if the surviving spouse has not remarried. However, after the year of death, the surviving spouse will no longer be able to jointly file with the deceased spouse and will have to use a less favorable filing status. 
  • Notification – If the deceased spouse is receiving Social Security benefits the Social Security Administration must be immediately notified. Likewise, payers of pensions and retirement plans of the deceased spouse need to be advised of the spouse’s death. 
  • Estate Tax – Where the deceased spouse’s assets and prior reportable gifts exceed the current lifetime inheritance exclusion ($12.06 million for deaths in 2022), an estate tax return may be required. However, the lifetime inheritance exclusion can be changed at the whim of Congress. Even when an estate tax return isn’t required because the value of the deceased spouse’s estate is less than the exclusion amount, it may be appropriate to file the estate tax return anyway, as there could be an impact on the estate tax of the surviving spouse when he or she passes. 
  • Inherited Basis – Under normal circumstances, the beneficiary of a decedent’s assets will have a tax basis in those assets equal to the fair market value of the assets on the date of death. Thus, generally, a qualified appraisal of the assets is required. However, for a surviving spouse, this can be more complicated depending upon whether the state of residence is a community property state and how title to the property was held. 
  • Changing Titles – The title to all jointly held assets needs to be changed to the survivor’s name alone to avoid complications in the future.
  • Trust Income Tax Returns – Many couples have created living trusts that, while they are both alive, don’t require a separate tax return to be filed for the trust and can be revoked. But upon the death of one of the spouses, this trust may split into two trusts, one of which remains revocable and the other becomes irrevocable. A separate income tax return for the latter trust will usually have to be prepared and filed annually.

These are just a few of the issues that must be addressed upon the death of a spouse, and it may be appropriate to seek professional help. 

If you have questions about the tax impact of any of your life-changing situations, be sure to give our office a call for assistance.

Mayli Huang

Bowman & Company is pleased to announce the addition of Mayli Huang as an Administrative Assistant. In her new role, Mayli will be working with Ryan Dingler and Daniel Phelps, as well as supporting her administrative teammates and assisting with general tasks for the firm.

Mayli has over six years of Administrative Assistance experience. Prior to joining the team at Bowman, Mayli worked for four years at Padgett Business Services in San Carlos, a firm focused on business and tax consulting. Mayli brings a wealth of experience in bank reconciliations, tax and accounting support, and payroll.

Welcome to Bowman & Company, Mayli!