The flurry of tax provisions, meant to alleviate the economic dislocation of the Covid plague, have made many tax practitioners sensitive to the possibility of Married Filing Separately yielding a lower tax for a couple. Back in the day, it was rare enough that many felt they could safely ignore it. Lindsay Starrett of Baker Starrett in Grinnell, Iowa, gave me an example of saving taxpayers $3,500. I am not going to try to parse the details of that or other examples. I will just refer you to Reilly’s Sixth Law of Tax Planning: Don’t do the math in your head. Have good software and code income items as taxpayer, spouse, or joint. You may need to run multiple computations moving the dependent’s around. Also be aware, the IRS may not be as cooperative as it should be in allocating estimated tax payments. One of my old friends wrote me: "In 2020, we did MFS returns for the $10,200 unemployment exclusion and learned the IRS is unable to …" Click here to continue reading.

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If you’re like most tax professionals, you’re probably working tax-prep season hyper-focused and -vigilant, refusing to hit pause except on absolute demand. You’re keeping a sharp eye on the ball, the players, and the end goal: maximizing your resources and providing impeccable service to your clients. Now, when you have lots of familiar, practiced work to do in little time, working like this can produce great results. However, tax-prep season is ending, and tax-reduction planning season is beginning. Therein, hyper-focus, hyper-vigilance, and workdays, weeks, and months without meaningful rest can backfire and steal from you the results you hope to produce. That’s because reactively responding to external demands and deadlines (set by clients and the IRS, for example), requires something different from you doing proactive designing and selling high-end tax plans. Consider this, as you shift from tax-prep to tax planning, you: ● Soften your focus on computers, numbers, and speed and sharpen your focus on talking with prospective clients about their finances, their hopes and worries about their business and family, and how you might best serve them. This requires a shift from grinding and discipline to presence and attunement. ● Soften your focus on meeting immediate deliverables and sharpen your focus on developing long-term strategies for products you offer and your business overall. This requires a shift from following rules, structures, and guidance to thinking creatively and working socially. ● Soften your focus on external deadlines and client demands and sharpen your focus on your own ambitions and drive to get things done. This requires a shift from aligning your priorities with others’ agendas to aligning your priorities with your own dreams and goals. Making shifts like these can be challenging, particularly if tax-prep season devours you and you enter tax-reduction planning season depleted and drained. However, taking time now to recharge and reset can help you pivot and produce powerful results in the end. Did Tax Season Devour and Deplete You? When it comes to personal performance in business, I like to contrast two modes of working: Depleted Mode and Resourced Mode. These modes aren’t binary; rather, they’re two ends of a continuum that we all constantly move along. Generally, when you find yourself highly distracted and distractible, pushing yourself to keep going, and working excessive hours to make up for lost time, you’re in Depleted Mode. Tax-prep season unfailingly produces this outcome for the best of tax pros. Exhaustion (or simple tiredness), frustration, and a taxed mind (pun intended) live here. When you’re drawn into your work, interested in the results you produce, and loving what you do, you’re in Resourced Mode. Enthusiasm, creativity, and connection live here. Resourced Mode offers an ideal environment to tax pros for engaging with the demands of tax planning season. You’ve probably seen yourself operate in both of these modes and along the continuum. Many tax professionals start the tax-prep season in Resourced Mode but end in Depleted Mode after months of hyper-focus and -vigilance, both of which you can only sustain in short bursts. There’s nothing wrong with Depleted Mode; most people land themselves there through hard work and commitment. (Incidentally, you can build systems and structures to reduce or avoid Depletion Mode over time, but that’s a topic for another day.) Many people produce great work in Depleted Mode, and that can trick them into thinking it’s effective for every kind of work. You can do tax prep in Depleted Mode, for example, because the work is familiar, somewhat predictable and consistent, and ultimately requires less mental engagement. However, Depleted Mode renders fewer productive results in tax-planning season because there you need deeper thought, mental space and physical energy to develop a strategy, a connection to people, and effectively sales. Ultimately, even in situations where Depleted Mode works decently, Depleted Mode can lead to: ▪ Procrastination: Being overworked and under-rested drains your mental capacity and leads to internal resistance on projects that require more mental energy. ▪ Distractibility: Quick changes of focus habituate your brain to prioritize distractions instead of focused work, so you might find yourself putting “easy” work ahead of “valuable” work. ▪ Agitation: Fast pacing can create agitation, or a constant background sense of worry, which can hinder progress when you try to settle into something that requires deeper thinking, such as tax or business strategy (which requires divergent, non-linear thinking). ▪ Lower pay for more work: procrastination, distractibility, and agitation make it difficult to approach valuable work (higher-paying, more satisfying), leaving you to do easy work instead (lower-paying, less satisfying) so you feel as if you accomplish something. ▪ Cyclical depletion: In Depleted Mode, you produce less per hour, make up for it by working more hours, and stay in Depleted Mode by overworking yourself. Still working in depleted mode? Click here to learn how to shut down the grind and turn on the productivity.

I have always thought of separate filing as something that filers should seriously consider for the final year of marriage or in circumstances where you think your spouse has significant audit exposure that you don’t want to share. The circumstances in which two married filing separate returns would yield a lower aggregate tax than a joint return were so rare that everyone I knew entirely discounted it. Things are different in 2021 (Also in 2020, but that is water under the bridge). What is driving the phenomenon are recovery rebate credits (which many received as economic income payments) and child tax credits. Be sure and read this before sending those electronic returns before the 18th. You may just have some savings there. Click here to keep reading.

We’ve all done it. And most other business owners are doing it, too. What is “it”? Succumbing to the promise of “there’s an app for that” and registering for technology of all kinds – and then not using them. You should review and curate your tech stack at least once a year. Why? Because in business, plans often change. Priorities change, new challenges arise, and new opportunities appear. Curating your tech stack annually is just good business. Curating isn’t simply about getting rid of products and services that aren’t meeting your needs it’s also about mindfully adding technology that will help your business to grow (if that’s your goal), help you provide better customer service, and help you manage your business in a way that, one hopes, frees up your time for other activities whether those activities are business- or life-related. Nevertheless, it’s often necessary to clear bandwidth-sucking technological clutter before shifting our focus to identifying problems that tech can solve. Too much tech clutter (like too much physical clutter) can prevent you from seeing problems (and potential solutions) clearly. Additionally, this is an activity that can cut unnecessary expenses from your bottom line and improve upon technological advances. It is possible since the time you first subscribed to an application that there are better, cheaper alternatives. Here’s what to consider step-by-step to grow your take home pay and improve your business practice.

Question: How do community property states affect tax returns? Answer: While fairly easy to determine your filing status when married (either joint or separate), tax rules get more complicated when you live in a community property state. Generally, the state laws where you live govern whether you have community property and community income or separate property and separate income for federal tax purposes. Not only do these rules affect how much income is taxable to you, but they also impact rules in things such as deductions, credits, taxes and payments, basis for things like capital gains, and participation rules. In some states, the income you earn after you separate and before a final divorce decree continues to be community income. In other states, it is separate income. Under special rules, income that can otherwise be characterized as community income may not be treated as community income for federal income tax purposes in certain situations. This year particularly is important for evaluating whether or not to file separately if married, especially if there is a big difference in each spouse’s income. What may appear on the surface to qualify for stimulus and child tax credits, may, in fact, be disqualified once you report community property income. Click here to see if these disadvantages impact you and how to avoid them.

Federal, state, and local governments, as well as private organizations, have collectively given trillions of dollars in financial support to individuals and businesses during the pandemic through a maze of government and private programs. These benefits will help taxpayers to a greater extent if they are tax-free, but are they? In some cases, we have a definite answer. For many, it is the classic tax law answer: “It depends.” We’ll review the general tax law rules applicable to deciding, then show three ways you can use the tax law to exclude these benefits from a taxpayer’s income.

Most of the Tax Code is “gray.” No, I don’t mean the color font it is written in. Unlike a lot of rules, the Tax Code is difficult to judge what is right and wrong. Perhaps it has to be written this way because to try and define every possible money situation is unfeasible. Perhaps, the writers like it this way because as we’ve said here many times at Think Outside the Tax Box, the gray area provides opportunity for tax savings. Take for example the official Tax Code definition of taxable income. Rather than affirmatively define it, the authors chose to negatively define it. Generally, an amount is part of taxable income unless the law specifically exempts it. Certain types of income get taxed twice. If, for example, you are subject to net investment income tax, you’ll not only pay income or capital gains tax, but an additional tax, as well. The same is true for royalty income. In some instances, it is necessary to pay income tax and self-employment tax on royalty checks you receive. To take advantage of breaks we must examine what loopholes or gray areas exist for royalties, and more importantly, how can you shield it from as much tax as possible. Continue reading to learn how.