Watch for These Tax Surprises




>> News Listing

Aug 01, 2022

Our tax code contains plenty of opportunities to cut your taxes. There are also plenty of places in the tax code that could create a surprising tax bill. Here are some of the more common traps.

Planning.jpgHome office tax surprise. If you deduct home office expenses on your tax return, you could end up with a tax bill when you sell your home in the future. When you sell a home you have been living in for at least two of the past 5 years, you may qualify to exclude from your taxable income up to $250,000 of profit from the sale of your home if you are single or $500,000 if you are married. But if you have a home office, you may be required to pay taxes on a proportionate share of the gain.
For example, let us say you have a 100-square-foot home office located in a garage, cottage, or guest house that is on your property. Your main house is 2,000 square feet, making the size of your office 5% of your house's overall area. When you sell your home, you may have to pay taxes on 5% of the gain. (TIP: If you move your office out of the detached structure and into your home the year you sell your home, you may not have to pay taxes on the gain associated with the home office.)
Even worse, if you claim depreciation on your home office, this could add even more to your tax surprise. This depreciation surprise could happen to either a home office located in a separate structure on your property or in a home office located within your primary home. This added tax hit courtesy of depreciation surprises many unwary users of home offices.

Kids getting older tax surprise. Your children are a wonderful tax deduction if they meet certain qualifications. But as they get older, many child-related deductions fall off and create an unexpected tax bill. And it does not happen all at once.
As an example, one of the largest tax deductions your children can provide you is via the child tax credit. If they are under age 17 on December 31st and meet several other qualifications, you could get up to $2,000 for that child on the following year's tax return. But you will lose this deduction the year they turn 17. If their 17th birthday occurs in 2022, you cannot claim them for the child tax credit when you file your 2022 tax return in 2023, resulting in $2,000 more in taxes you will need to pay.

Limited losses tax surprise. If you sell stock, cryptocurrency, or any other asset at a loss of $5,000, for example, you can match this up with another asset you sell at a $5,000 gain and - presto! You will not have to pay taxes on that $5,000 gain because the $5,000 loss cancels it out. But what if you do not have another asset that you sold at a gain? In this example, the most you can deduct on your tax return is $3,000 (the remaining loss can be carried forward to subsequent years). Herein lies the tax trap. If you have more than $3,000 in losses from selling assets, and you do not have a corresponding amount of gains from selling assets, you are limited to the $3,000 loss. So if you have a big loss from selling an asset in 2022, and no large gains from selling other assets to use as an offset, you can only deduct $3,000 of your loss on your 2022 tax return.

Planning next year's tax obligation tax surprise. It is always smart to start your tax planning for next year by looking at your prior year tax return. But you should then take into consideration any changes that have occurred in the current. Solely relying on last year's tax return to plan next year's tax obligation could lead to a tax surprise.

Please call to schedule a tax planning session so you can be prepared to navigate around any potential tax surprises you may encounter on your 2022 tax return. The accountants at Terry Lockridge & Dunn can be reached in Cedar Rapids at 319-364-2945, or in Iowa City at 319-339-4884.



Tags: Tax Planning
Category: Featured