Frequently Asked Questions

You pay tax as a percentage of your income in layers called tax brackets. As your income goes up, the tax rate on the next layer of income is higher. When your income jumps to the higher tax bracket, you don't pay the higher rate on your entire income. You pay the higher rate only on the part that's in the new tax bracket. (Source: irs.gov)

2025 Federal Income Tax Rates- Source: IRS.gov

Keeping documents for tax purposes is important for several legal, financial, and practical reasons. Here are some reasons why it matters:

1. To support your tax return- Proof of income, deductions, and credits is required if the IRS or your state tax agency audits your return.
2. To defend against audits- The IRS may request backup for items reported on your tax return-such as receipts, mileage logs, bank statements, or 1099's. 
3. For amended returns or corrections- If you discover an error and need to file an amended return, having your original documents makes the process much easier and faster. 
4. Because the IRS has a Statute of Limitations- The IRS generally has 3 years to audit a return, but this extends to 6 years if income is underreported by more than 25%.
5. For loan, mortgage, and financial applications- Lenders may request copies of past tax returns, W-2s, or proof of income when you apply for varies loans.
6. For business owners and self-employed filers- You are required to keep records to justify business expenses, contractor payments and equipment purchases. 
7. For tracking depreciation and basis- For assets like homes, vehicles, or stocks, documentation helps determine the cost basis and calculate capital gains or losses when sold.

How Long Should You Keep Records?

• Most personal tax documents: Keep for at least 3-7 years
• Business tax documents: Keep for at least 7 years
• Property and investment records: Keep until you sell the asses, plus 3 years
• Indefinitely: Keep copies of you tax returns and proof of payments.

Here is a list of items you should keep on file for tax purposes.

 Yes! We proudly offer a variety of discounts to show our appreciation and support.  Please ask us for details — we are committed to helping you save wherever we can. 

Discounts are available for:

• Real Estate Professionals 
• Active-duty military and veterans: Thank you for your service-enjoy exclusive savings!
• Client referrals: Send your friends and family our way and get rewarded!
• Home Warranty Bonus: Purchase a home warranty through our preferred provider and unlock extra discounts. 
• Preferred Lender Advantage: Work with our trusted lending partner and receive a credit toward your closing costs!

All income is presumed taxable unless specifically excluded by law. Some income (like Social Security) may only be partially taxable depending on your other earnings. You often need to report even non-taxable income on your tax return to properly qualify for credits or other benefits.

Here are some types of income that are Taxable: 

Earned Income

• Wages, salaries, tips 
• Commissions, bonuses
• Self-employment income (business profits) 
• Union strike benefits

Unearned Income

• Interest (bank accounts, bonds)
• Dividends (stock investments)
• Capital gains (profits from selling assets)
• Unemployment compensation
• Rental income (after expenses)
• Royalty income

Retirement Income

• Pension distributions
• 401(k) and IRA withdrawals
• Social Security benefits (may be partially taxable depending on your total income)

Other Income

• Alimony (only if divorce finalized before 2019) 
• Gambling winnings
• Jury duty pay 
• Prizes and awards (cash or fair market value of goods) 
• Canceled debts (sometimes taxable) 
• Hobby income (even if it’s not a full business)
• Virtual currency transactions (crypto)

Here are examples of Non-Taxable Income:

(You still may need to report some of these even if they aren't taxed)

• Gifts and inheritances
• Life insurance proceeds after someone's death 
• Child support payments 
• Welfare benefits
• Workers' compensation for injury
• Qualified scholarships and grants (used for tuition)

Whether you need to file a federal income tax return depends on several factors, including your gross income, filing status, age, and other specific circumstances. 

Here are the general threshold that determine the requirements to file:

Single 

• Under 65: $14,600
• 65 or older: $16,550

Head of Household       

• Under 65: $21,900
• 65 or older: $23,850 

Married filing jointly      

• Both under 65: $29,200
• One spouse 65 or older: $30,750
• Both spouses 65 or older: $32,300                                           

Married filing separately     

• Any age:  $5

Qualifying surviving spouse      

• Under 65: $29,200
• 65 or older: $30,750

Self-Employed

• Net earnings of $400 or more

Dependents

• Unearned income over $1,300 or 
• Earned income over $14,600 or
• Gross income over the larger of $1,300 or earned income (up to $14,150) plus $450

Even if you're not mandated to file, you should consider doing so if you've had any taxes withheld and/or refundable tax credits you might qualify for like the Child Tax Credit. 

The IRS offers an Interactive Tax Assistant to help determine if you need to file based on your specific situation. 

Yes! If  your business expenses are greater than your income, you may have a Net Operating Loss (NOL). You can carry forward the loss to offset up to 80% of you taxable income in future years- and (under the new tax law) you can keep carrying it forward until the full amount is used! You must track and apply the NOL properly each year - IRS requires you to attach statements to returns when using a carryforward. 

Yes! While federal and California state tax rules are often similar, there are important differences that can impact your tax return. When we prepare your taxes, we carefully review both federal and California rules to ensure you receive all the benefits you're entitled to. 

Here are two key examples:

• Non-Reimbursed Employee Expenses:
  At the federal level, unreimbursed employee expenses (like uniforms, supplies, and travel costs) are no longer deductible for most taxpayers due to changes under the Tax Cuts and Jobs Act (2017).
  However, California still allows many of these expenses as deductions if they are ordinary and necessary for your job and you itemize your deductions on your state return.
   
• Social Security Income:
  The IRS generally taxes Social Security benefits if your overall income exceeds certain limits.
  California does not tax Social Security income at all — it is completely exempt from state income tax, regardless of your total income level.

• Other examples include Moving Expenses, Health Savings Account (HSA) Contributions, Alimony Payments, Mortgage Insurance Premiums (PMI), Student Loan Interest Deduction and 529 Plan Contributions. 

It depends on your situation, but many homeowners do not have to pay taxes on capital gains when they sell their primary residence, thanks to Section 121 of the Internal Revenue Code. 

 If you meet these requirements:

• Own the home for at least 2 of the last 5 years, and 
• Live in the home as your primary residence for at least 2 of the last 5 years (730 days, not necessarily consecutive),

you can usually exclude up to $250,000 of gain if you’re single (or married filing separately), or up to $500,000 if you’re married filing jointly.  Section 121 only excludes gains — it does not provide any tax benefit for losses when selling your home 

You generally cannot claim this exclusion if you’ve used it on another home sale in the last 2 years.

Partial exclusions may apply if you sell due to work, health, or unforeseen circumstances.

If you have questions about your situation, reach out to Axe Tax & Accounting! We’re here to help you understand your capital gains and maximize your tax benefits.