Tax credit versus tax deduction
One of the most common misconceptions about filing an income tax return is the distinction between deductions and credits. Deductions lower a taxpayer's taxable income before the tax is calculated. For instance, on an individual return, you can either claim the standard deduction or itemize deductions, depending on which option reduces your taxable income more.
Credits, however, directly reduce the tax due, dollar-for-dollar, generally making them more valuable than deductions. Some credits, such as the Child Tax Credit, are partially or fully refundable, meaning that if the credit exceeds the tax owed the taxpayer may receive the difference as a refund.
Do you know your filing status?
As you likely know, marital status affects many federal tax filing requirements, including your standard deduction, credit eligibility, and tax owed. However, you may not know that informally separated couples are considered married by the IRS. Unless you became divorced or legally separated by Dec. 31, 2024, you must file as married filing jointly or married filing separately for tax year 2024. If, on the other hand, you finalized a legal divorce or separation in 2024, you should file as single or head of household for the entire year. Annulments may be subject to different filing rules. Contact us for more information.
Social media posts in court
Can posts on social media be evidence in a tax dispute? In one case, the U.S. Tax Court said yes. The court allowed the IRS to present a woman's blog posts as evidence.
Why was that allowed? The taxpayer and her husband allegedly underpaid tax for multiple years. After the husband died, the wife sought "innocent spouse" relief, which the IRS denied. The blog posts were relevant because they revealed knowledge of the taxpayer's assets, lifestyle, business and her relationship with her spouse. For example, they included pictures of her and her husband on vacation. The court ruled that even though the posts weren't part of the administrative record, they were "newly discovered evidence." (160 TC No. 4)
Claiming digital assets on your tax return
Do you possess digital assets, such as convertible virtual currencies and cryptocurrencies, stablecoins or non-fungible tokens (NFTs)? If so, you must report any digital asset-related income on your 2024 federal income tax return. According to the IRS, a digital asset is one that can be stored electronically and can be bought, sold, owned, transferred or traded. The IRS recommends that if you had digital asset transactions last year, be sure to keep records that prove your purchase, receipt, sale, exchange or any other disposition of the digital assets. Contact us if you have questions regarding accounting for your digital assets. For more information from the IRS, click here.
Unpaid state or federal debts?
Each year, some taxpayers file their tax returns and eagerly await a refund, only to find it has been reduced or withheld. When taxpayers have unpaid federal or state tax debts, including child support, tax law allows the IRS to offset the debt by applying a refund toward it. For some taxpayers, this refund is essential for covering necessary expenses, and losing it can create a hardship.
The National Taxpayer Advocate (NTA) advises eligible taxpayers to document the economic hardship and seek an offset bypass refund (OBR). The NTA warns that this must be done before the IRS offsets the refund. So if you need an OBR, gather your documentation now. Click here for more about OBRs.