 Income tax 2023-2024, filing status definitions. Get ready and some coffee because we're looking to get the tax man off our back with income tax preparation 2023-2024. First a word from our sponsor. Actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our trust me I'm an accountant product line. It's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Most of this information can be found in the line instructions for form 1040 instructions tax year 2023 which can be found on the IRS website irs.gov irs.gov. We've been thinking about filing statuses such as single versus married versus head of household and so on. As we think about filing statuses we want to consider and visualize what effect those will have on the tax return. The major line items impacted by changes to filing status being the standard deduction and the tax rates. Other changes could of course reverberate throughout the tax return. When we look at the standard deduction we have the changes on the left hand side of the form 1040 single filers 13,850. We can double that for married filing joint 27,700 head of household in between 20,800. There still could be differences based on age and blindness for example we'll talk about them in more detail later. We listed out the major filing statuses including married filing separately, single, head of household, married filing jointly, qualifying surviving spouse noting that although this is basically in order of the least favorable to most favorable from a tax standpoint obviously again it's probably not favorable for most people to be a qualifying surviving spouse but for taxes it could result in the biggest of a tax benefit or tax advantage however in practice usually you can think of two main categories people are either not married or they are married if they're not married then they could be single or if they qualify head of household they would rather be head of household than single because that would be a better tax advantage you typically need a dependent for that. If married usually people will default to married filing jointly which is usually the best filing status but in certain circumstances might choose to file married filing separately and then of course the qualifying surviving spouse would be applicable possibly if there was say a death to one of the spouses for a situation where they were married in which case the year in which the death occurred would still be filing married filing jointly generally and then the question would be do you default back to single or head of household after that year or could you qualify for qualifying surviving spouse. Now most of these are pretty straightforward right if someone is single and they don't have any dependence they're pretty much going to be single filing status not much to think about there however sometimes it's not as straightforward because you might have custody issues for example for a child that have two parents that are separated for example in which case that child's impact on a tax return can be significant because then you have the dependent which could qualify for a child tax credit and the status could change from single to head of household which also could have significant impacts on say for example the standard deduction and possibly the tax rates. So then we have to get into the weeds here on some of those questions where you don't know where or what filing status would be applicable in a certain situation so we talked about some of those situations and now we just want to look at some definitions that could apply to those situations and whenever you have something that's kind of in between you that's where you want to of course do your research and dig in deeper but here we're going to dive into some definitions. So we mentioned qualifying child a few times so in general to find out if someone is your qualifying child you can see step one under who qualifies for your dependent. So note when we talk about dependence which some of the filing statuses had involved in possible qualifications such as for the head of household for example or possibly qualifying widow or widower situation then we can jump on over to the dependence and do our research there which we will do in a future presentation. So again a dependent if there's a qualification of a dependent as part of the process for filing status to find out if someone is your dependent you can see who qualifies as your dependent will touch in on that later tip. The dependence you claim are those you list by name and social security number in the dependence section on form 1040 and 1040 SR. In other words the general process is going to be obviously if they are a dependent you're going to put them generally on the first page of the form 1040 in the dependence area listing name social security number so that the IRS can determine who they are. If you have custody questions about a dependent that's where the issue comes into play often times because if two spouses claim the same dependent you're going to run into problems because the IRS is going to see the social security number on two different returns and only one person can basically get the benefits of the dependency. So what happens in practice in those situations the person who files first is probably going to have their tax return process more easily because that dependent social security number had not yet been used at least. And then the second person that files the tax software might even kick the return back even if it's a legitimate filing because the other spouse should not have or the other parent or whatever guardian should not have filed them as a dependent possibly even if that's the case the social security number would already have been claimed and you could have the return kicked back in which case you would then question as to whether you want a paper file or something like that and then it could be an extended kind of time to kind of work out who should be claiming the dependent. So ideally of course if there's a dependent situation in a custody situation whether it's a divorce or just a child single child situation who has custody over them you would like to get that straight from the start and work into any kind of divorce or custody agreement the tax implications because they can be significant so that you don't run into these problems of kind of battling over who files first to try to claim the dependent and then getting into struggles with the IRS which ultimately leads to lawyers and everyone knows the only one wins in those situations are the lawyers who further make you fight further because they love it. They just get more money from exception to time lived with you. So temporary absences by you or the other person for special circumstances such as school vacation business medical care military service or detention in a juvenile facility count as time lived in the home. So we saw some of the qualifications come up to what about the time lived with you they live with you for more than half of the year and you can imagine a whole bunch of these kind of situations where it's like well it seems like it should still qualify so these are those general kind of exceptions also see kidnapped child later under who qualifies as your dependent if applicable so if the person whom you kept up a home was born or died in 2023 you still may be able to file as head of household so if person is your qualifying child the child must have lived with you for more than half the part of the year the child was alive if the person is anyone else you can see publication 501 so if there's a qualification that you have to meet that the child is basically living with you and the child passes away dies in that year then of course well they may not have lived with you for that whole part of the year but then you would think the question would be were they living with you for the part of the year that they were with us during that time frame so that would be again somewhat of an unusual hopefully exception so similarly if you adopted the person for whom you kept up a home in 2023 the person was lawfully placed with you for legal adoption by you in 2023 or the person was an eligible foster child placed with you during 2023 the person is considered to have lived with you for more than half of 2023 if your main home was this person's place main home for more than half the time since the person was adopted or placed with you in 2023 so you can see whenever we put in these kind of laws in place obviously if you get imaginative you can start to think of many different exceptions and the country being as large as it is there are those exceptions have come to play most of the time so if the laws been in place these questions have probably been thought about so we can basically drill down and do some research on it and see what the applicable process would be in that type of situation so married person who live apart so even if you weren't divorced or legally separated at the end of 2023 you are considered unmarried if all of the following apply so here's another kind of messy situation because we're talking about federal income taxes which have a designation of married versus single so then there's a question well what does it mean to be married the idea of being married is typically a state issue which means it can change from state to state which means the laws about marriage from state to state could have a federal impact on the federal tax return so now the federal tax return might try to say okay we would like to come up with you can have the marriage is your business state but for federal income taxes could we carve out something that will be uniform for the country just for federal income tax purposes you can see this kind of argument or interplay between the fed and the state okay so you lived apart from your spouse for the last six months of 2023 temporary absences for special circumstances such as for business, medical care school or military service count as time lived in the home so you file a separate return from your spouse you paid over half the cost of keeping up your home for 2023 your home was the main home for your child, step child or foster child for more than half of 2023 if half or less see exception to time lived with you earlier you can claim this child as your dependent or could claim the child except that the child's other parent can claim the child under the rule for children of divorced or separated parents under who qualifies as your dependent later so again unfortunately that custody issue often becomes a big issue and is exacerbated by the tax implications and possible benefits of claiming a child so when those issues come up like I say if you can get it down if you could take in all the implications at the time you come up with an agreement that would be great if there's still kind of gray area then it could be a kind of a messy situation and you want to get your research down on it and see what you can do from any point in time so adopted child an adopted child is always treated as your own child and adopted child includes a child lawfully placed with you for legal adoption foster child a foster child is any child placed with you by an authorized placement agency or by judgment decree or other order of any court of competent jurisdiction so keeping up a home so we've seen this in the code what does it mean to keep up a home because that would be part of the things for some of the possible dependent situations in order to claim say head of household or something like that well in general to find out what is included in the cost of keeping up a home you can see publication 501 so again if you if you're in like a situation like well I don't know if I've paid enough you know over half of the support or enough to qualify for keeping up the home and you want to like actually you know go through the calculations on that then you could take a look at publication 501 and drill into that in a bit more detail digital assets digital assets or any digital representation of value that are recorded on a cryptograph cryptographically secured distributed ledger or any similar technology for example digital assets include non fungible tokens NFTs and virtual currencies such as cryptocurrencies and stable coins if a particular asset has the characteristics of a digital asset it will be treated as a digital asset for federal income tax purposes now the digital assets come into play because when you start to value things or think about income and whatnot the digital assets are kind of a new thing and so the IRS is trying to keep on top of transactions taking place with digital assets as well as valuations of people that are holding digital assets so you have to check the yes box next to the question on digital assets on page one of form 1040 or 1040 SR if at any time during 2023 UA received as a reward or payment for property or services or be sold exchanged or otherwise disposed of a digital asset or any financial interest in any digital asset so the IRS is trying to see if people are getting you know basically income in the form of digital assets possibly trading digital assets in the event that you might think that there would be like capital gain kind of situations through it where you're not going to get the kind of documentation you would if you were trading other types of assets such as stocks and bonds which typically go through a broker if you're on a large exchange so the IRS is trying to lock people down on that so that if obviously you say that you did have transactions with digital assets the IRS might expect to see like a schedule D for example showing income relation to the schedule to the digital assets if you say you did not then the IRS is you would think they're trying to be able to say well you can at least you cannot claim that you didn't know about it because we told you here that you had to check that you had these transactions off and so I think they're trying to basically lock people down to recognize that they might have tax implications on the digital assets and not be able to claim that they didn't know because the digital assets are a new thing okay so for example check yes if any time during 2023 you received digital assets as payment for property or services provided so IRS why would the IRS be skeptical of that well if you get paid with digital assets possibly that's you're not going to have the same kind of documentation as maybe if you got paid in other formats now that's kind of weird because the digital assets actually have more of an audit trail oftentimes than other types of assets like if someone pays you with cash that's probably the thing that most likely people will not report because it has the least audit trail if it doesn't go in and out of basically a bank account but because the digital assets are new they're going to be skeptical of that receive digital assets as a result of a reward or award so if you get a reward or an award then you still could have tax implications with that and of course the IRS wants their piece of it even if you get paid in digital assets receive new digital assets as a result of mining staking and similar activities receive digital assets as a result of a hard fork disposed of digital assets in exchange for property or services in which case you would think you might have to report that like on a schedule D because you had digital assets you sold them then you would say the sales price minus the cost similar to selling stocks you would think disposed of digital assets in exchange or trade for another digital asset so just because you purchased another digital asset just like if you sold stock and you traded it for other stock there could be a tax implication for it even though you took the money and bought basically another stock in essence sold a digital asset or otherwise disposed of any other financial interest in a digital asset so you have a financial interest in a digital asset if you are the owner of record of a digital asset or have an ownership stake in an account that holds one or more digital assets including the rights and obligations to acquire a financial interest or you own a wallet that holds digital assets the following actions or transactions in 2023 alone generally don't require to check yes so in other words you might have digital assets and you might be skeptical of saying well what does it mean for me to because I'm not trying to do anything funny here I'm just holding on to the digital assets so holding a digital asset in a wallet or account because you haven't sold it you would think it wouldn't be a tax triggering event in that case so if you're just holding on to the digital asset similar to holding on to stocks when you hold on to stocks it's when you sell the stocks that you have a tax implication typically because that's when you're receiving money and if the money that you received is greater than the cost of the stock you had to gain which is basically income similarly here if you bought the digital assets with assumedly dollars then now you're holding on to the digital assets which is fluctuating in value with relation to dollars if you sold them then that's when you might have a triggering event for taxes you would think transferring a digital asset from one wallet or account you own or control to another wallet or account that you own or control so if you're just holding them within a digital wallet then and you're just transferring them from one to another again you haven't actually sold it you're just holding it in a different wallet the value has not changed you haven't exchanged the value of the asset for something else of value such as dollars or something else purchasing digital assets using US or other real currency including through the use of electronic platforms so when we purchase the digital asset like when we purchase stock usually not a tax triggering event at that point in time because we're not earning any income when we purchase it we earn the income on the stocks when we get paid dividends or when we sell them in this case we're probably not going to get paid any dividends so we earn money on it if the value of the currency went up after we purchased it now if someone gave us digital assets as a form of payment then that's when it would be possibly income because instead of getting cash you got paid in digital assets and then you have the issue of trying to convert the digital assets to dollars in a similar way as you would with other kinds of currency and that becomes an issue but if you just took your own dollars bought digital assets then you haven't incurred any revenue at that point in time you might incur revenue when you sell them if they went up in value such as PayPal and Venmo so how to record digital asset transactions if in 2023 you disposed of any digital asset which you held as a capital asset through a sale trade exchange payment or other transfer check yes and use form 8-9-4-9 to calculate your capital gain or loss and report that gain or loss on schedule D so that would be similar to a stock kind of transaction you bought something you sold it so did it go up in value if it went up in value you'd have a gain if it went down possibly having a loss which could possibly be good for tax purposes if not good for the actual investment so if you received any digital asset as a compensation for services or disposed of any digital asset that you held for sale to customers in a trade or business you must report the income as you would report other income of the same type for example W2 wages on form 1040 or 1040 SR line 1 or inventory or services on schedule C so if you got paid in the form of digital assets then it's just like if you got paid cash you can't say well it didn't hit my bank account I just got cash I'm just going to put it in my pocket and I don't have to report it well that's not how it works you're supposed to report it even though with cash there's not an audit trail that's still the most risky thing the IRS and from that but if you get paid in something else like digital assets then you still got paid now the question of course the problem being what do you record on the tax return the tax return is in dollars if you're in US taxes right so then you have a conversion issue in a similar way as you have a conversion issue if someone paid you in Mexican pesos or something you can't put that you got a bunch of Mexican pesos on the United States tax return because the tax return is measured in dollars and therefore you have an exchange issue generally but it would be a similar thing similar process like I said if you got paid in something other than dollars like another currency so if you disposed of any digital assets by gift you may be required to file form 709 see who must file and transfer subject to gift tax in the instructions for form 709 so a gift remember that we have an income tax system and the gifts are kind of interesting because basically the government also tried to impose a death tax right and that would be like so if you die then the government comes and picks your pocket when they roll you over and then pick your pockets but and that's an estate tax but it's usually for wealthy individuals now when they put in the estate tax obviously what people do is they say right before I die on my death bed I'm going to gift all my money to my son or daughter typically and therefore I'll be when the IRS comes to pick my corpses bones for money I won't have any because I gave it all away right on my death bed and then the IRS of course doesn't like that so the IRS then said well you can't do that you can't do that so then they tied together kind of the gift tax with this estate tax so that you have to report gifts that are over a certain dollar amount and so on and so forth so that when you die your corpse still has the money on it so the IRS could come and take it so anyways that's a whole other topic on the gift tax but you have to be aware of that as well