Taxable or Not Taxable?

Some of these items may surprise you.                 11/15/2024

There are a number of areas in the tax code that cause confusion as to the taxability of money received. Here are some of the most common areas of confusion.

Unemployment compensation. Unemployment compensation is typically required to be reported as taxable income. So you could be facing a tax surprise if you received unemployment income this year. There are historic cases where federal and state taxing authorities are authorized to exempt unemployment income from taxation, so this is an area worth watching for possible future legislation.

Free services. Receiving free services is almost always taxable as ordinary income under IRS barter regulations. You should report the fair market value of services received as income on your tax return. If you exchange services, you can deduct allowable business expenses against the value of the services provided. So if you are trading goods or services, now is the time to be tracking this information.

Illegal activities. Even income received from illegal activities is considered taxable income and must be reported on your tax return. The IRS even states that stolen items should be reported at their fair market value on the date the thief stole the item!

Jury duty pay. This is taxable as ordinary income. Yes, even doing your civic duty can be a taxable event.

Legal settlements. A general rule of thumb with legal settlements is to consider what the settlement replaces. If the settlement replaces a taxable item, like lost wages, the settlement often creates taxable income. This area is complex and often requires a detailed review.

Life insurance proceeds. Life insurance proceeds paid to you because of the death of an insured are generally not taxable. There are, however, a number of exceptions to this general rule. For example, you could have taxable income if you receive benefits in installments above the value of the life insurance policy at the time of death or if you receive a cash payout of a policy.

Prizes. Most prizes received should be reported as ordinary income using the fair market value of the item received. This area has been a major surprise to contestants on game shows, along with celebrities who receive large gifts at events like the Academy Awards.

Alimony. Alimony is taxable to the person who receives it and deductible to the person who pays it for divorce decrees prior to 2019. For all divorces finalized in 2019 and later, alimony is neither deductible by the person who paid it nor deemed additional income by the person receiving it. So be aware of these new rules if you are considering a change to old divorce decrees. Make sure you have proper documentation as part of a divorce decree to support your tax position.

Child support. Child support is not taxable to the person who receives it on behalf of the dependent. It is also not deductible by the person who pays it.

Some of these areas can be complicated, so please call to discuss if any of these situations apply to you.

15 Year-End Tax Tips

11/08/2024

At the end of each year there are a number of things to consider that may have a positive impact on your tax obligation. Here is a list of fifteen ideas that may be worth a quick review.

1. Make last minute charitable donations. Pay attention to your itemized deduction limit to ensure your deduction will count.

2. Review and maximize use of the $18,000 annual gift giving limit.

3. Review your investment portfolio for capital gain and loss planning.

4. Use your annual $3,000 net capital loss limit to lower ordinary income if appropriate.

5. Maximize the kiddie tax threshold rules ($2,600 of unearned income taxed at your child’s lower tax rate).

6. Consider fully funding retirement accounts with your annual contributions.

7. Identify any potential household employees.

8. Consider donating appreciated stock owned one year or longer.

9. Review retirement accounts for required minimum distributions (RMD).

10. Review medical and dependent care funding accounts to ensure you do not lose contributions that do not roll over into the new year.

11. Consider retirement plan rollover options into Roth IRAs.

12. Estimate your tax liability and make any final estimated tax payments.

13. Create a list of expected 1099 and other tax forms you will be receiving.

14. Review your W-2 withholdings and file any changes with your employer for the upcoming year.

15. Begin organizing your tax records.

Should you have any questions on these ideas, ask for help prior to taking action. In many cases, the requirements and documentation needed are important to ensure you receive the full tax savings benefit.

Elections. Elections. Elections.

Tax savings can be found in the elections you make!         11/01/2024

Every year is an election year when it comes to making decisions on your annual income tax return. Here are four common examples that can create tax savings opportunities if you elect the correct option.

1. Tax filing status. Typically, filing a joint tax return instead of filing separately is beneficial to a married couple, but not always! For instance, if one spouse has a high amount of medical expenses and the other doesn’t, your total medical deduction may be greater by filing separately due to the 7.5% of adjusted gross income (AGI) threshold before you can deduct these expenses.

2. Higher education expenses. Many parents of college students face a decision: Whether to take one of the two credits for higher education expenses or the tuition and fees deduction. To complicate matters, the credits and the deduction are all phased out based on different modified adjusted gross income (AGI) levels. Before you elect which tax benefit makes the most sense, you will need to evaluate all options.

3. Investment interest. Investment interest expenses can be deducted up to the amount of net investment income for the year. This income does not usually include capital gains, because of favorable tax treatment of this type of gain. However, you can elect to include capital gains to help you deduct your interest expense. You can even cherry-pick which capital gains to use for this deduction. If you take this election, you could forego the favorable tax rate for long-term gains.

4. Installment sales. If you sell real estate or other assets in installments over two or more years, the tax liability is spread over the years that payments are received. Thus, you may be able to postpone the tax due. This technique can reduce the total tax paid depending on your effective tax rate each year. However, you can also elect out of installment sale treatment by paying the entire tax in the year of the sale. You may wish to take this election if your income is lower in the year of the sale.

Thankfully there is help navigating these key tax elections. Simply call with any questions.

Hike in Social Security Benefits Announced for 2025

2025 Cost-of-Living Adjustment (COLA) changes          10/25/2024

The Social Security Administration announced a 2.5% boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2025, another rate drop versus last year's increase of 3.2%. The increase is based on the rise in the Consumer Price Index over the past 12 months ending in September 2024.

For those contributing to Social Security through wages, the potential maximum income subject to Social Security taxes is increasing to $176,100. This represents a 4.4% increase in your Social Security taxes! What's of interest here is the percent increase in income subject to tax is much higher than the benefit increase. Here's a recap of the key dollar amounts:

Understanding Tax Terms: Contemporaneous Records

10/18/2024

If you have problems getting to sleep at night and you turn to the IRS tax code for help, you might find some vocabulary that is very foreign to you. One of the more uncommon words used by the IRS is the term "contemporaneous." So what does it mean and why should you care?

Contemporaneous defined

According to the IRS, it means that the records used to support a claim on your tax return are created and originated at the same time as your claimed deduction. In other words, if you realize that you forgot to get a receipt for something, you are out of luck if you try to get one at a later date.

Not fair!

Perhaps you know you had the expense, but you simply forgot to get a receipt. You can cry foul, but time and time again the tax courts have upheld the IRS's elimination of a taxpayer's deduction for lack of contemporaneous documentation. Here are some areas where the term contemporaneous is especially important:

Charitable contributions
Business deductions for expenses and capital purchases
Mileage logs
Tip records
Gambling losses
Business travel expenses

The donation of vehicles, boats, and planes is often the most cited area where lack of contemporaneous documentation is a problem because these types of donations have a high estimated market value that changes from month to month. But timely, written acknowledgement from the charitable organization is also required for any donation of $250 or more.

What you need to know

Always get a receipt. Before you leave a donated item, always ask for a receipt. In the case of a vehicle, make sure the charitable organization gives you a Form 1098-C that is fully filled out. In addition, make sure the organization uses your vehicle or is a qualified charitable group that allows you to take the full market value of your donation.

If you forget, call right away. As soon as you realize a confirmation or receipt is missing, call to get one sent to you. Request that the receipt be dated as of the date of the service or activity.

Think tax year. Understanding the definition of contemporaneous is important, because it is not always precisely defined. If the documentation is received in the same year as the donation or transaction, you are usually in good shape.

Keep a log. Many transactions require the correct documentation at the time the activity occurs. This is true with deductible mileage, gambling losses, and tip income. So keep a log of your activities as they occur.

Wait to file. To meet the IRS definition of contemporaneous, the receipt or acknowledgement must be received the earlier of either when you file your tax return OR the due date (including extensions) of your tax return. This is particularly true with charitable contributions. So if you want to play it safe, do not file your tax return until all documentation is in hand.

Those Pesky Records!

10/11/2024

Each of us needs to keep records that substantiate our tax return or other important life events for as long as they are needed. So what does this mean?

The basic retention period. Federal tax return substantiation is generally three years from the later of the tax return filing due date OR the actual filing date.

State guidelines could be different. Understand your state and local audit timelines. Often states can review tax returns after your federal return is officially closed to a potential audit. When in doubt figure six months to a year after your federal tax filing retention period.

Keep some things forever. Some items should be kept indefinitely. These include, but are not limited to: copies of your 1040 tax return, major asset purchases and sales (home mortgage, home closing documents, documentation for stock and investment transactions, major asset purchases and sales documents, insurance documentation, and birth/death/marriage certificates).

Keep valuable item receipts. Keep records of any other valuable items purchased. This includes jewelry and other collectibles. You will need this to substantiate any gains or losses when you sell the item.

Finding the cost of stocks is easier...and trickier. Stock and investment companies are now required to report the cost of your investments to the IRS. So you will not need to dig around for old transaction information to prove what you paid for your investment. On the other hand, any errors on your investment statement also get sent to the IRS, so make sure the information provided is correct or it may create an audit trigger.

Digital asset documents must also be saved. If you buy or sell something using cryptocurrency, you must retain all related documents that confirm the purchase date, sales date, and cost.

Others may want your documentation. You may need records for non-tax related purposes. Copies of divorce decrees, records of insurance, and home sales closing paperwork are common examples of documents needed for other reasons.

Federal recordkeeping guidelines could become longer. Federal guidelines for record retention are generally 3 years. However, errors on your tax return for more than 25% of the tax obligation require record retention of 6 years. If fraud is determined, the record holding period is indefinite.

Estate Taxes: What EVERYONE Should Know

10/04/2024

Most taxpayers ignore the federal estate tax, thinking they will never be touched by it. Unfortunately, you do this at your own peril. Why? Because states often have this tax AND politicians have a habit of frequently changing the rules. The most recent change is scheduled to take place after 2025. The best approach for all taxpayers is to understand the basics of the estate tax. Here is a quick summary of common questions you should be able to answer.

Q. Who pays estate taxes?

A. The tax is levied against the estate of a deceased person, which is considered a separate legal entity by the IRS. But the surviving family is effectively responsible for paying the estate tax because it cuts into their inheritance.

Q. What is included in the taxable estate?

A. Your estate includes personal property owned at the time of death, such as a home, cars, cash, collectibles and investments. Investments include securities, real estate, bank accounts and retirement accounts. The total taxable estate is the value of these assets minus deductible expenses and debts.

Q. How are assets valued?

A. The value for tax purposes is generally the property’s fair market value (FMV) on the date of death. Therefore, the basis for computing gain or loss is stepped up to this value. For example, if Diane Monet paid $10,000 for a painting and it’s worth $25,000 at her death, the estate value is $25,000. There are other valuation options in addition to FMV, so this area can get complicated in a hurry.

Q. How is the estate tax calculated?

A. For federal purposes, the tax is 40% of assets in excess of the federal exemption. The federal exemption for 2024 is $13.61 million. However, the exemption amount is scheduled to decrease to $5 million (adjusted for inflation) after 2025. There continues to be an ongoing debate over what this federal exemption amount should be, so it is a good idea to pay attention to future discussions out of Washington, D.C. to understand how it could impact your estate.

Q. Can a married couple double the exemption?

A. Yes. If handled correctly, a couple can effectively shelter up to $27.22 million ($13.61 million times 2) from federal tax in 2024. Remember, this amount is scheduled to be dramatically reduced after 2025.

Q. What is an inheritance tax?

A. Not to be confused with an estate tax, an inheritance tax is paid by those who receive the money from the estate of the person who dies. While there is no federal inheritance tax, six states (Iowa, Pennsylvania, New Jersey, Kentucky, Nebraska, and Maryland) could tax you if you inherit money. The good news? Iowa is phasing out the tax by 2026.

Q. What about estate taxes at the state level?

A. Twelve states and the District of Columbia currently have an estate tax. The exemption amounts in these states vary, with one as low as $1 million! If you live in one of these areas you better know the rules and have a plan: Connecticut, District of Columbia, Hawaii, Illinois, Maine, Massachusetts, Maryland, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.

Q. How are gifts to others handled?

A. When you give a gift to someone, the federal government generally does not care. But when the value of all gifts to one person in a given year exceeds an annual threshold, you must report this to the federal government. This threshold in 2024 is $18,000. The gift tax rules are currently incorporated into the estate tax system. So careful planning is required in this area, especially if you are providing gifts to help finance various items like someone else's education.

Does this cover everything about estate taxes? Not by a long shot. But hopefully by understanding some of the basics, you will have a better idea of knowing when to ask for help.

Correction: Last week’s Tax Tip incorrectly stated that the medical expense itemized deduction threshold is 10% of adjusted gross income. The correct threshold is 7.5% of adjusted gross income.

How to Maximize Deductions for Assisted Living

09/27/2024

It's possible that someone in your family will need assisted living care at some point in their life. This care can be at an assisted living facility, a nursing home, or in their own home. Often, assisted living care is expensive and not fully reimbursable by typical health insurance policies. Thankfully, there is a medical expense itemized deduction when the out-of-pocket amount exceeds 10 percent of your adjusted gross income.

Here’s what you can do to increase the chances for you or a loved one to maximize their tax deduction.

Know the chronically ill definition. To qualify, care expenses must be incurred for rehabilitative, maintenance or personal care services of a chronically ill person under a plan of care created by a licensed health care practitioner. For tax purposes, a chronically ill individual is generally someone who is unable to perform at least two of the five activities of daily living which include eating, toiletry, transferring, bathing, dressing, and continence. The chronically ill definition also includes the need of supervision due to a cognitive impairment such as Alzheimer’s.

Obtain a breakdown. Don’t assume that every expense is a medical deduction. It's always best to get a breakdown of the cost of care. You'll also need to track which expenses have been reimbursed by insurance as those reimbursed costs are not deductible.

Track premium costs. If you have long-term care insurance and pay for health insurance, keep track of these costs as some or all of the premiums may be deductible.

Keep a travel log. Be aware that travel expenses incurred for medical care of the family member may also be deducted. For example, if the resident must be transported to a doctor’s office, dentist’s office, or hospital, the cost can be added to the deductible amount.

Record in-house expenses. Finally, remember that expenses for medical care at the facility are deductible, regardless of whether you can deduct monthly living expenses. For instance, if you’re charged separately for a visiting dentist, the cost is added to the deductible total.

If you have questions regarding your specific situation, please call.

Tax Surprises for the Newly Retired

09/20/2024

You’ve got it all planned out. Your retirement savings accounts are full, you have started receiving Social Security benefits and your pension is ready to go. Everything is planned. What could go wrong? Here are five surprises that can turn your plan on a dime.

1. Health emergencies and long-term care. When a simple procedure could cost thousands, health care costs can put a huge dent in your plan. Long-term care can also cost thousands per month. Have you planned for this? If your health insurance is not adequate, you may need to pull money out of your retirement accounts to pay the bills. While this withdrawal may not be subject to a penalty, it might be subject to income tax if the funds are from a pre-tax account.

Tip: Look into creative ways to enhance your health insurance coverage including supplemental health insurance and prescription drug cost coverage. Consider long-term care insurance and other alternative ways to reduce your potential living needs.

2. Taxability of Social Security benefits. If you have excess earnings, your Social Security benefits could be reduced. Even worse, if you are still working, your benefits could be subject to income tax.

Tip: If this impacts you, consider conducting a tax planning session to better understand your options including the possibility of delaying the receipt of Social Security benefits.

3. Your pension plan. Understand if your pension is in good financial health. Pensions will often offer a lump-sum payout option for you. Should you take it?

Tip: Review your pension plan’s annual statement. How solid is it? If there are risks, consider cash out alternatives and planning for the potential drop in future income.

4. Minimum required distributions. Forgot to take your minimum required distribution from your retirement plans this year? The tax bite, however, could be quite a surprise in future years so you will need to actively manage this aspect of your retirement or a bite could be taken out of your retirement plans.

Tip: Select a memorable date (like your birthday) to review your distribution and take action so this tax surprise does not impact you.

5. Future tax rates. The federal government is spending over $1 trillion more than it brings in each year. Cash-starved states are also looking for new tax revenue. So don’t be surprised when future tax rates continue to rise during your retirement.

Tips:

Create a retirement plan with higher state and federal tax rates
Plan for increases in health care costs through Medicare
Plan for more taxes on Social Security benefits
Plan for higher capital gain and dividend taxes (now 20% versus 15%)

Understanding Tax Terms: Head of Household

09/13/2024

 The tax term head of household is one of the more misunderstood tax phrases inside the U.S. tax code. However, if your situation warrants head of household status, there are two big tax benefits: First, a higher standard deduction. Second, lower effective tax rates for virtually every income level. This is great, but only if you qualify.

Three key qualifications

There are three specific rules to qualify for the head of household status:

1. You are not married. First, you need to be unmarried or considered unmarried as of the last day of the year. Unmarried means single, divorced or legally separated per a court order. You can also be considered unmarried if you are legally married, but you and your spouse are separated and live in different residences for the last half of the year.?

2. You pay half of the cost to keep up your home. Second, you need to support yourself. You do this by showing that you provide at least half the cost to keep up your home. The IRS provides a worksheet to help you calculate this, but the idea is to add up household costs and determine that you pay more than half throughout the year. Here are examples:

Costs to include: Rent, mortgage interest, property taxes, homeowners insurance, repairs, utilities, and food eaten in your home.

Costs not to include: Clothing, education, medical expenses, vacations, life insurance and transportation.

3. There is a qualifying person living with you for at least half the year. This can be the most complicated of the three requirements. Essentially, you must have a dependent that is supported by you. So if you can claim a person as a dependent and they live with you for at least six months during the year in question, you probably meet this requirement. Beyond your son or daughter, a qualifying person can also be a sibling, parent, grandchild, grandparent, and other relatives. There is also a special rule for caring for your parent. You may be eligible as head of household even if your parent doesn't live with you, as long as you provide more than half the cost of keeping up their home.

Making the right decision on filing status can save you thousands of dollars in taxes, but you have to know the rules. If you have questions regarding your current situation or have a life change that may qualify you for the head of household filing status, feel free to call.

Reminder: Third Quarter Estimated Taxes are Due

Now is the time to make your estimated tax payment             09/06/2024

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The third quarter due date is now here.

Due date: Monday, Sept. 16, 2024

You are required to withhold at least 90 percent of your 2024 tax obligation or 100 percent of your 2023 obligation.* A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment is necessary. Here are some other things to consider:

Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. A quick payment at the end of the year may not help avoid the underpayment penalty.

W-2 withholdings have special treatment.  A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough funds to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.

Self-employed. Remember to pay your Social Security and Medicare taxes in addition to your income taxes. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter when you pay your estimated taxes.

Don't forget state obligations. You are also normally required to make estimated state tax payments if you're required to do so for your federal taxes. Consider conducting a review of your state obligations to ensure you meet these quarterly estimated tax payments as well.

If your income is more than $150,000 ($75,000 if married filing separately), you must pay 110 percent of your 2023 tax obligation to be safe from an underpayment penalty.

A Dozen Tax Planning Triggers

08/30/2024

Now is the tax planning season. Those that treat tax filing as an event and not a process often are the ones paying more than they need. So how do you go about moving from the event to planning? By looking at triggers that should stimulate a discussion. Here are some of the more common:

1. You owed tax last year. Having a surprising tax bill is never fun. So if you owed taxes last year, project your current year obligation with a little planning if you have not already done so.

2. Your household income is over $150,000 single and $200,000 joint. As your income grows, so does your tax bill. This occurs because tax rates increase, and tax benefits phase out. This includes things like; lower child tax credit amounts, increases in capital gains tax rates, higher income tax rates, medicare surtaxes plus more.

3. You are getting married or divorced. The tax penalty for being married is higher than ever. Are you prepared? And if going through a divorce, not all assets are treated the same in the eyes of the IRS.

4. You have kids attending college in the next few years. There are a number of tax programs that can help, you may wish to review your options and their impact on your tax return.

5. You have a small business. There are depreciation benefits, qualified business deductions, and numerous small business tax credits to consider. A review is especially important if you have a business that is a flow through entity like Sub Chapter S, partnership or sole proprietor as these entities are taxed on your personal tax return..

6. You plan on selling investments. Capital Gains tax rates can now range from 0% to 37% (or even higher with the Net Investment Tax).

7. There are changes in your employer provided benefits. These changes could impact your taxable income this year. It is especially important if you are provided with high deductible insurance options.

8. You buy a home, sell one, or go through home foreclosure. There are great tax benefits within your home, but only if you know about them and plan accordingly.

9. You have major medical expenses. It is harder than ever to itemize deductions, but one way it's possible to itemize is if you have a major medical expense. When this happens it is time to review ALL itemized deductions to minimize your taxes.

10. You recently lost or changed jobs. Understanding the tax impact of unemployment benefits is crucial.

11. You have not conducted a tax withholding review. To avoid under withholding penalties, you need to ensure your withholdings are sufficient.

12. Your estate has not been reviewed in the past 12 months. Recently passed estate laws and potential changes in these rules make an annual review a must.

If any of these triggers apply to you, please schedule a tax planning appointment.

Play the Match Game. Or Else...

A great tip to stay out of the audit spotlight.     08/23/2024

One of the best audit tips available can be summed up in one simple word – Match.

Spend a minute or two pretending you work for the IRS. What would you do to identify tax returns worth auditing? If you suggest matching information on filed tax returns with the information provided about that taxpayer from other sources, you would be right on the mark. The IRS runs an automated matching program that kicks out mismatches and helps identify audit targets without much effort on their part. Knowing this:

Double check name matches. If you are recently married or divorced, ensure your filed tax return matches the name on file with the Social Security Administration. This may mean filing a tax return with an outdated name until the name change can be processed.

Create a master list of tax forms given to you. Who is sending information about you to the IRS? The most common sources are your employer, your bank, your investment bank, your health insurance company, and your retirement accounts. Make a list of these sources and ensure your tax return matches the information they are providing.

Correct before filing. Try not to file tax returns with incorrectly reported information on your W-2s or 1099s. Contact the provider of the form as soon as possible and try to have the form corrected and resubmitted to the government.

Match incorrect, then correct. If you have incorrect information on forms already sent to the government, first enter the incorrect information on your tax return. This is for the benefit of the IRS matching program. Then correct the information. Include comments explaining why the original form is in error. Save the documentation that supports your position. With this approach, you will be filing a correct tax return without triggering the government's matching program.

If you receive a notice from the IRS that something does not match what was submitted by you, consider requesting a copy of the information reported to them to determine where the mismatch occurred.

Deductions for Non-Itemizers

Can't itemize? There are still tax breaks for you.         08/16/2024

A common misconception in tax filing has been that if you use the standard deduction versus itemizing your deductions you have few additional benefits available to reduce your tax bill. This is often not the case.

Standard or Itemize?

Every taxpayer can take the standard deduction to reduce their income prior to applying exemptions. However, if your deductions are going to exceed the standard amount you may choose to itemize your deductions. The primary reason someone itemizes deductions is generally due to home ownership since mortgage interest and property taxes are deductible and are generally high enough to justify itemizing.

Common sources of itemized deductions are: mortgage interest, property taxes, charitable giving, and high medical expenses.

What is Available

So what opportunities are available to reduce your taxable income if you use the standard deduction? Here are some of the most common:

IRA Contributions (up to $7,000, or $8,000 if age 50 or over)
Student Loan Interest (up to $2,500)
Alimony Paid (if divorce or separation agreement is effective prior to 1/1/2019) Health Savings Accounts (if you qualify)
Donating appreciated long-term capital gain stock.
Self-employed health insurance premiums
One-half of self-employment tax
Numerous education incentives such as Savings Bond Interest, Coverdell accounts, American Opportunity (Hope) Credit and Lifetime Learning Credit Plus numerous other credits including the Earned Income Credit, Child & Dependent Care Credit, Child Tax Credit, and Elderly or Disabled Credit.

Income limitations often apply to these tax reduction opportunities, but for those who qualify, the tax savings can be significant. This list is by no means complete. What should be remembered is to rely on a complete review of your situation prior to jumping to the conclusion that tax breaks are just for someone else. That someone else might just be you, the standard deduction taxpayer.

Understanding Tax Terms: Basis

Covering the bases on basis          08/09/2024

Basis is a common IRS term, but probably does not enter into your everyday conversation. This IRS term is important because it impacts the taxes you pay when you sell, exchange or give away property.

What basis is

The IRS describes basis as:

The amount of your capital investment in a property for tax purposes.  Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange or other disposition of the property.

In plain language, basis is the cost of your property as defined by the tax code.

There are a few different types of basis that apply to different situations, including cost basis, adjusted basis, and basis other than cost.

Types of basis

Cost basis. Your basis usually starts with what the item cost. Cost basis also includes sales tax paid, freight, installation, testing, legal fees, and other fees to purchase the property. If you acquire a business you must often allocate the purchase price to each of the assets to establish their basis.

Tip: Retain records of any major transaction. Ensure the documentation includes all allowable costs that could be applied to your basis. This will help reduce taxes when you sell or dispose of the property.

Adjusted basis. When you sell, exchange or dispose of property, such as your home, you may have to adjust its basis to account for changes to the property since you acquired it. This is known as its adjusted basis. A common example of adjusted basis is when you add the costs of capital improvements to property that have a useful life for more than one year.

Adjusted basis can decrease the value of property as well. This is the case when property is affected by things such as casualty or theft losses, depreciation and other deductions.

Home tax tip: Adjusted basis applies to many home improvements. These could include a full roof replacement, adding a room to your home, or even special assessments for local improvements. Create a folder and retain all documentation that could add to your home’s basis. It may lower your capital gain when you sell your home.

Basis other than cost. What is the basis when you inherit property, receive property for services or receive property as a gift? In most cases, the basis is the fair market value of the item. This is the price a willing buyer would pay for the item and a willing seller would be willing to receive for that item. But there are also special basis rules for:

Inherited property
Like-kind exchange of property
Involuntary conversions
Property transferred to a spouse

Should any of these situations apply to you, please ask for a review of your circumstances, as establishing basis can become fairly complex.

Social Security: Know the Variables

It's never too early to understand how it works           08/02/2024

Determining the best time and best way to take Social Security benefits can make a big difference in the amount you receive over the balance of your lifetime. What is prudent, is understanding how it works and, if appropriate, running calculations prior to making your benefit decision. Here are some things to consider.

Full retirement age is quickly becoming 67. Your full Social Security retirement benefit can be claimed when you reach your target retirement age. This is age 66 for those born between 1943 and 1954. Those born after 1954 have their full retirement age increase by two months per year until full retirement age becomes 67 years old for those born in 1960 or later.

Taking it as early as 62. You may begin taking your Social Security benefit as early as age 62. But if you do so, your full retirement benefit amount will be reduced for each month you are short of your full retirement age. The Social Security Administration estimates up to a 30% reduction in your benefits if you choose to take benefits when you reach age 62.

Delaying the benefit up to age 70. After your full retirement target age, for each year you delay the start of receiving your Social Security retirement benefits (up to age 70), the benefit amount increases by approximately 8%.

Receiving survivor benefits. If a spouse dies, the surviving spouse is eligible to receive a Social Security Survivors benefit. The survivor benefit can be collected by as early as age 60. However, the benefit received is reduced for each month the survivor is short of their own full retirement age. You may not receive both a Survivor Benefit and your own Social Security retirement benefit, but you can switch from Survivor's Benefits to your own retirement benefits and vice versa.

Taxability of benefits. Up to 85% of Social Security Benefits can be taxable. This can happen when you still work or are taking taxable funds out of retirement accounts.

Life expectancy comes into the calculation. Once you start your Social Security benefits, you will receive them until you pass away. Receiving benefits at an earlier date means receiving more payments over your lifetime, but at a lower benefit amount. Delaying the start means fewer, but higher, payments during your lifetime.

Benefit reduction risk. In addition to having your benefits subject to tax, you can also have your benefits reduced. This may occur when you are not at your full retirement age and you are also receiving wages or business income subject to Social Security tax.

Spousal benefits. Another variable to consider is the availability of receiving spousal benefits instead of receiving your own Social Security retirement benefit.

So what is your best bet? The best tip for all of us is to know how it works long before retirement and develop a plan before you begin receiving Social Security benefits.

PII. Know it. Protect it.

The importance of personally identifiable information            07/26/2024

Personally Identifiable Information, or (PII), is in the spotlight at the IRS, the Federal Trade Commission (FTC) and the Department of Labor (DOL), plus other federal agencies. Moving beyond the buzz and into understanding what it means for you relates directly to protecting your personal information from would-be thieves.

The Concept

PII is information that identifies you or relates specifically to you. This includes the obvious: name, address, phone number, and Social Security number. It also includes information that identifies your financial data, such as credit card information, emails, account numbers, user IDs, and passwords.

The point is that federal agencies are now focusing on identifying who legitimately has your PII and requiring that they have an active plan to protect it from hackers and thieves. In fact, anyone who has PII or other financial information must now have a Written Information Security Plan to outline how they plan to protect this information.

What you need to know

Your tax information is key PII. As you can imagine, your tax information is loaded with data that's a target for thieves. So be aware of how you store this information. Also let vendors know you don't want your Social Security number exposed on any mailed forms like W-2s and 1099s.

Know who has your PII. Be aware who has your personal data and be deliberate about deciding who really needs it. Close unused accounts and ask them to delete their records as soon as possible. Remember, this is not just your bank or tax professional. It includes any vender that stores your credit card number for future transactions or anyone you autopay with a link to your bank account.

Be watchful. As part of the federal requirements, any suspected security breach incident is to be reported to you on a timely basis. But despite these requirements, this does not always happen. So be diligent, and take advantage of the free annual credit report from each of the major credit reporting agencies to double check for any suspicious activity.

Your information is secure. As your tax professional, we protect your personal information and take this task seriously. While no one can guarantee something bad won’t happen (just look at recent cases of data theft at United Health Care and AT&T), it is our obligation to identify personally identifiable information, have a plan to protect it, and be constantly vigilant.

Don't Fall for These 5 Audit Myths

07/19/2024

When it comes to the perception of IRS audits, conjecture reigns supreme. The combination of the complex tax code and a government agency with the full authority to enforce it leads to some pretty wild ideas. Here are five audit myths that, if believed, can cost you during an audit:

Myth 1: Audits only happen shortly after tax returns are filed.

False! Audits for the most recent tax year start to ramp up a couple months after the filing deadline, but that doesn’t mean the IRS solely focuses its attention on your current tax return. It often goes back up to three years to look at your tax returns (indefinitely if fraud is suspected). Because of this, tax returns should be kept forever and supporting documents should be saved for a minimum of three years for federal purposes.

Myth 2: If audited, all necessary records can be reconstructed.

False! If you don’t have a good filing system for your tax records, trying to track down tax receipts from up to three years ago is challenging and may be impossible to obtain. Without proper documentation to prove a deduction or credit, you are left to negotiate with the IRS to determine a reasonable estimate. If you don’t have a good record keeping system, start now to avoid problems during an audit.

Myth 3: The IRS can only audit certain items.

False! Audits typically start with a focus on a few items, but can quickly grow depending on what the IRS finds. Providing the proper documentation and answering their questions accurately and succinctly are important to keep the scope of the audit as small as possible.

Myth 4: Only rich people get audited.

False! While the odds of being audited are higher for taxpayers on the lower and higher end of the income spectrum, no one is exempt from an audit. Solid audit preparation practices are important for everyone regardless of how much money they make. And with all the media noise about focusing on wealthy taxpayers, this one can become a real problem.

Myth 5: Going through an audit is a disaster.

False! Getting an audit notice from the IRS is certainly unnerving, but it doesn’t have to raise your stress levels. Having an expert in your corner to deal with the IRS will help give you peace of mind. Together, we can review the audit request and make a plan to ensure the best possible result for you.

Please call if you are facing an audit or want to discuss an audit preparation plan.

Turning Your Hobby Into a Business

07/12/2024

The business-versus-hobby test

If your dog training business (or any other activity) falls under any of the hobby categories on the right side of the chart, consider what you can do to meet the business-like criteria on the left side.

The more your activity resembles the left side, the less likely you are to be challenged by the IRS. If you need help to ensure you meet the IRS’s criteria for business-like activity, reach out to schedule an appointment.

Understanding Tax Terms: Wash Sales

Surprise! Your stock loss is not deductible.         07/05/2024

You may be considering booking stock losses due to recent market drops. Selling losers can be a great strategy when these losses can offset other gains and up to $3,000 of your ordinary income. However, there is a little-known rule called the wash sale rule that could surprise the unwary taxpayer.

Wash sales explained

If the wash sale rule applies to your transaction, you cannot immediately report a loss you take when selling a security. Per the IRS:

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade,
Acquire a contract or option to buy substantially identical stock or securities, or
Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

Why the rule?

Many investors were selling stock they liked simply to book the loss for tax reasons. They then turned around and immediately re-purchased shares of the same company or mutual fund. If done repeatedly, shareholders could constantly be booking short-term losses on a desired company while still owning the shares in a chosen company’s stock indefinitely. Clever shareholders would even purchase the replacement shares prior to selling other shares in the same company to book the loss.

Some ideas

How does one take action to ensure the wash sales rule works to your advantage?

Check the dates. If you decide to sell a stock to book a loss this year, make sure you haven’t inadvertently acquired the same company’s shares 30 days prior to or after the sale date.

Dividend reinvestment. If you automatically re-invest dividends, you will want to make sure this doesn’t inadvertently trigger the wash sales rule.

It's only for losses. Remember, the wash sales rule only applies to investments sold at a loss. If you are selling stock to capture gains, the rule does not apply.

Consider similar transactions. The wash sales rule applies to buying and selling ownership in the same company or mutual fund. With the exception of some common versus preferred stock of the same company, buying and selling similar – but not identical – shares does not apply to the wash sales rule.

If your loss is ever disallowed because of the wash sales rule, you can add the disallowed loss on to the cost of the new security. When the security is eventually sold in the future, the previously-forfeited loss will be part of the calculation of future gain or loss. This also includes the original stock's holding period to help define the transaction as a short-term or long-term sale.

Five Big Tax Mistakes

Don't let them happen to you!         06/28/2024

Every year taxpayers are hit with tax surprises that could be avoided if they just knew the rules. Here are five big ones that are easy to avoid with some simple planning.

Mistake #1. Withholding too little. This results in a tax surprise when filing your income tax return. Don’t be too hard on yourself if this happens to you. Social Security withholdings change each year and not understanding how your employer calculates how much tax to withhold can also contribute to withholding too little.

The plan: Check your withholdings after filing each year’s tax return. Make adjustments as necessary by filing a new Form W-4 with your employer. This is especially important if you have received unemployment benefits or need to make estimated tax payments due.

Mistake #2. Inadvertently withdrawing funds from retirement plans. Amounts taken out of pre-tax retirement plans like 401(k)s and IRAs can create taxable income. The most common inadvertent withdrawal occurs when you roll over funds from one retirement plan to another. If done incorrectly, the entire rollover could be deemed taxable income.

The plan: Do not touch your retirement accounts if at all possible. (Exception: When you reach age 73, you may be subject to required minimum distribution rules.) If you do withdraw funds, ensure you have the proper tax withholdings taken out at the time of withdrawal. Direct rollovers into your new plan are always a better alternative than receiving the withdrawal from the retirement plan administrator and then conducting the transfer yourself.

Mistake #3. Not taking advantage of tax-deferred retirement programs. There are numerous opportunities to shelter income from tax through tax-deferred retirement programs.

The plan: Review your retirement savings options and plan to contribute as much as possible to your retirement accounts. Pay special attention to plans that include an employee match component. This review can reduce your taxable income each year.

Mistake #4. Direct deposit mix-ups. You can directly deposit tax refunds into as many as three bank accounts. The problem: what if one of the account numbers is entered incorrectly? Unfortunately, unlike replacing a lost check, the IRS does not have a good means of correcting this type of error. There have been instances where taxpayers have lost their refund when this occurs.

The plan: Many taxpayers do not feel comfortable giving the IRS direct access to their bank account. If you are in this camp, the digital deposit problem is solved as you will receive a physical check for any overpayment. If you use direct deposit, avoid depositing your refund into more than one account. Ideally, have a second person double check the account number on your tax form prior to submitting the return.

Mistake #5. Not keeping correct documentation. You know you drove the miles, donated the items to charity, incurred the medical expense, and paid the daycare. How can the IRS be disallowing your valid deductions? Remember, the IRS is quick to disallow a valid deduction without proper documentation.

The plan: Set up good record keeping habits at the beginning of each year. Create both a digital and paper folder organized by income and expense type. Keep a contemporaneous mileage log and properly document your charitable contributions.

Clues You are About to be Scammed

06/21/2024

Mention the word IRS and everyone's blood pressure tends to go up a bit. Unfortunately, thieves know this too and often use the IRS as a threat to get you to fall for their latest scam.

Every year the IRS mentions their dirty dozen tax scams and repeatedly tries to keep us all on alert. A review of recent alerts outlines some common traits of these scams. By being aware of them, you increase the chances of discovering the newest threat, even before anyone becomes a victim. Here are some common traits:

Personal information is always the target. Scammers are always going to ask for personal information. This is typically your Social Security number, your age, address, and birth date.

Getting your ID is a bonus. Thieves would love a copy of your passport or driver's license. This ID is often required to prove your identity. So a common tax scam is to tell you that you have unclaimed refunds and must prove your ID to get the unclaimed money.

The more significant the threat, the more likely the scam. Threatening arrest, levy of your bank accounts, or sending the sheriff or police to your residence or business are great ways to intimidate. The IRS does not work this way.

The wording doesn't seem right. If you see an IRS notice with title case or mixed fonts, or perhaps the margins don't look right, these are all signals that the notice may be fraudulent.

Demands for payment. Demands for payment of any kind over the phone or via email is not how payments to the IRS are made. All payments are paid to the U.S. Treasury. So that request for your credit card number is a clear scam attempt.

Your best defense against scams is to be wary and alert. When in doubt, go to www.irs.gov and contact the agency along with your tax professional. This is the best way to get independent confirmation of any claims being made on your tax record.

An Option to Deduct Summer Activity Expenses

Don't forget to save receipts                 06/14/2024

 The kids are out of school, which means now is a great time to review the rules to deduct eligible summer activities on your tax return. Tax deductible related daycare expenses through the use of the Child and Dependent Care Credit can be a great opportunity to reduce your child care expenses this summer. Here is what you need to know.

What is deductible?

The credit equals 20% to 35% of qualified unreimbursed expenses with a maximum amount of expenses being $3,000 for one person (maximum credit of $1,050) and $6,000 for two or more qualifying persons (maximum credit of $2,100).

How it works

To receive the credit you must:

have a dependent under the age of 13 or have a spouse or dependent who is physically or mentally unable to care for themselves

have earned income (wages) to support the dependent

have qualified expenses (that allow for care while you work or look for work)

financially support and maintain a home for the dependent

if married, both you and your spouse must be working or looking for work

Some summertime tips

Daycare expenses are the most common qualifying expense for the Dependent Care Credit.

In-home daycare during the summer months also qualifies. Your sitter cannot be a dependent, a spouse, or someone under the age of 19.

Day camps qualify for the credit.

OVERNIGHT camps and summer school/tutoring do NOT qualify.

Track the mileage of transportation to and from any qualified activity. For instance, if your daycare provider takes the kids on a field trip, the mileage would be part of the qualified activity.

Even cooking and housekeeping expenses can count if at least partly done for the protection and safety of a qualifying person.

Placing your child in a day camp while one of you volunteers at a charity would not work in determining qualified dependent care expenses.

Remember to get the provider’s name, address, and Social Security number/Tax ID number. Also retain any receipts and canceled checks to support your proof of payment. This information will be required when you fill out your tax return.

Reminder: Second Quarter Estimated Taxes Are Due

Now is the time to make your estimated tax payment                06/07/2024

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The second quarter due date is now here.

Due date: Monday, June 17, 2024

You are required to withhold at least 90 percent of your 2024 tax obligation or 100 percent of your 2023 tax obligation.* A quick look at your 2023 tax return and a projection of your 2024 tax obligation can help determine if a payment is necessary. Here are some other things to consider:

Avoid an underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year.

W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.

Self-employed workers need to account for FICA taxes. In addition to your income taxes, remember to also account for your Social Security and Medicare taxes. Creating and funding a savings account for this purpose can help avoid a possible cash flow hit each quarter when you pay your estimated taxes.

Don't forget state obligations. With the exception of a few states, you are often also required to make estimated state tax payments if you have to do so for your federal taxes. Consider conducting a review of your state obligations to ensure you also comply with these quarterly estimated tax payments.

If your income is over $150,000 ($75,000 if married filing separate), you must pay 110 percent of your 2023 tax obligation to avoid an underpayment penalty.

Roth versus Traditional IRA: Which is Better?

05/31/2024

For most taxpayers, you have until April 15th of the following year to contribute up to $7,000 ($8,000 if age 50 or over) into a Traditional IRA or a Roth IRA. Is an IRA an option worth considering for you? If so, which is better?

Traditional IRA

A Traditional IRA is an individual savings account that allows you to contribute money for your retirement. Depending on your income level, you may deduct the contributions from your taxable income. Any earnings made in a Traditional IRA account remain tax-deferred until the money is withdrawn from the account. After the account holder reaches age 73 you may no longer make contributions into your Traditional IRA and minimum required distributions must be taken from the account each year. Anyone with earned income can create a Traditional IRA, but if you also have a retirement account with an employer, there are income limits to the amount you can contribute to your IRA in pre-tax dollars.

Roth IRA

A Roth IRA is an individual retirement account that allows you to contribute income that has already been taxed (after-tax dollars). Withdrawals of earnings on contributions from Roth IRA accounts are federal income tax-free so long as a 5-year holding period has been met and the account holder is at least 59 1/2 years old, disabled, or deceased. Withdrawals of contributions are always tax-free since you already paid the tax on the contributions. There are no required minimum distributions nor are there age limits for contributions. In 2024, individuals who earn more than $161,000 and married joint filers who earn more than $240,000 are ineligible to contribute to a Roth IRA.

Which is better?

Traditional IRA contributions that qualify for pre-tax treatment will allow a larger beginning investment to compound over time versus a Roth IRA.

Roth IRA contributions, though smaller because of tax treatment, could create earnings that are never taxed.

Roth IRA accounts have more flexible contribution and withdrawal rules.

So the answer is. . .it all depends.  If you think tax rates will be significantly higher when you withdraw your retirement savings, then think seriously about a Roth IRA. This is the case in 2026 when temporary tax laws expire and the maximum tax rate returns to 39.5% (currently 37%).

If you think your retirement account investments will perform well, then perhaps the earnings growth in a Traditional IRA will more than pay for the additional tax at time of withdrawal.

Great Tax Reduction Ideas

05/24/2024

 The tax code is about 75,000 pages long, so it’s not surprising there are many overlooked money-saving deductions hidden within it. And with the much higher standard deduction amounts, those who do not itemize think there are no longer ways to reduce your taxes. Since mid-year is a good time to review great tax reduction ideas, here are some to consider:

1. Maximizing HSA contributions

If you have qualified high deductible health insurance you can reduce your taxable income by contributing to a Health Savings Account (HSA). That way you not only reduce your taxable income, but you pay out-of-pocket qualified medical, dental and vision care with pre-tax dollars! And remember to contribute up to the annual limit ($4,150 for single or $8,300 for married in 2024 PLUS and additional $1,000 if you are age 55 or older).

2. Student loan interest

You can deduct up to $2,500 in interest paid on student loans from your tax return. This is true even if someone else helps you pay your loans. Parents who have co-signed student loans (creating legal obligation for the debt) often forget that they are also now eligible for the deduction on payments made by them.

3. Leveraging your itemized deductions

While many taxpayers do not have enough deductions to itemize, if you can bundle two or three years of deductions into one tax year you can maximize your deductions in all tax years. Here's an example: You budget and make deductions to your favorite charities and church every year. Don't change that practice, but prior to the end of the year, prepay all of next year's donations if it helps exceed the itemized deduction threshold. The following year use the full standard deduction with lower-to-no charitable donations.

4. Donating appreciated assets (stocks, mutual funds and other investments)

If you itemize deductions, instead of donating cash, consider donating appreciated assets you have owned for more than one year. Your charity gets the same financial value, but you not only get a great charitable donation, you also avoid paying capital gains tax on the investment. This could be a great idea if you feel stuck in a down market, but don't want the tax exposure by selling a long-held investment.

5. Understand taxability of state refunds

Remember if you use the standard deduction, your state refund does not add to your taxable income and should not be added to income. Even if you do itemize, your state refund may only apply if it provides a tax break. So couple a large state tax refund with your itemized versus standard deduction plan and save even more in taxes.

6. Taking full advantage of state tax deductions

Remember when you itemize, you can claim up to $10,000 in total taxes as an itemized deduction. But even if you do not have much in the way of state income taxes or property taxes, you can still deduct state sales tax. Even better, if you have a small business, many states now allow you to pay their tax at the entity level and avoid the $10,000 limit all together!

7. Leveraging retirement accounts to their fullest

There are numerous retirement tax plans that are great tools to help reduce your taxable income. They include 401(k), 403(b) and SIMPLE IRA plans offered through employers and numerous other versions of IRAs. The key is each has an annual contribution limit, and if you don't use that limit for the year, it is gone. So review your options and try to take full advantage of the tax benefits within each plan.

As with any part of the tax code, certain qualifications must be met and limits apply. Please feel free to ask for help if you think any of these ideas apply to you.

Take Advantage before Changes Occur

Plan now for tax changes coming at the end of 2025         05/17/2024

Unless Congress takes action, a number of temporary tax laws are going to expire at the end of 2025. This means you have this year and next to take advantage of the current rules. That doesn’t mean Congress won't extend the current laws, but why take the chance? Here are some of the larger changes to consider:

Tax rates will go up, with very different income brackets.

Result: Most taxpayers will be subject to higher tax rates with the top rate moving from 37% to 39.5%. The income subject to these rates will also change dramatically. Now is the time to effectively manage tax brackets to avoid higher rates!

Many more taxpayers will itemize deductions and have them subject to phase outs.

Result: Standard deductions may go down and your deductions may be lowered if your income exceeds certain thresholds. There is good news as the $10,000 tax limitation will be removed, and currently-excluded deductions are planned to be reintroduced.

More will be impacted by the alternative minimum tax

Result: Many more families will be subjected to a potential second tax calculation with the higher of the two tax rates being used to tax your income.

The child tax credit will be reduced, as will the phaseout for qualifying for the credit

Result: Most families with children will see a higher tax bill.

There will be different capital gain tax rules

Result: Planning sales of assets will be more important than ever and is a tremendous tax planning opportunity to consider prior to the tax change! Exemptions will be re-introduced Result: This tax reduction provision may take some of the sting out of the rollback of temporary tax laws.

Small businesses may lose their 20% QBI deduction

Result: While small businesses in flow through tax entities, such as S Corporations, partnerships and sole proprietorships, will lose a valued tax break, look for Congress to re-introduce other tax incentives to combat the perceived lack of tax fairness when compared with other countries.

Given these pending changes on the tax horizon, now is a great time to see if you can take advantage of the current tax laws BEFORE they are scheduled to change.

Understanding the Home Gain Exclusion

When is a tax planning session essential?           05/10/2024

One of the biggest tax benefits available today is the exclusion of gains when you sell your qualified home. Here is what you need to know.

The tax benefit explained

For those who qualify, a married couple can exclude up to $500,000 ($250,000 for unmarried taxpayers) in capital gains from the sale of your principal residence. This exclusion can be taken once every two years as long as you pass two tests; a two-years out of five residency test and an ownership test before you sell the property.

Special situations can cause complications

Often tax planning is required to ensure you maximize this tax benefit. Here are some situations that require a review prior to selling your home.

Ownership and principal residency tests met using different years. As long as the two-year requirement is met for both tests you can take the deduction. It does not matter that you use different years for each test. The most common example of this occurs when you rent a home or condo and then buy it later.

Life events complicate things. Marriage, divorce, and death are common life-events that require planning to maximize the gain exclusion tax benefit. For example, you can take advantage of the full $500,000 gain exclusion after the death of a spouse, but usually only during the time you are able to file a joint tax return.

Selling a second home requires planning. While you can use the gain exclusion every two years, you need to be careful with a second home. You may be able to plan your living arrangements to make each home a primary residence during different tax years to meet the two-year requirement for both properties. This means you need to determine your primary residence each year with good record keeping in case you are audited.

Business use of your home. You will need to adjust your home basis (cost) for any business activity and depreciation of your home. This can create a depreciation recapture tax event when you sell your home.

A partial gain exemption is possible. There are exceptions to the two-year tests when certain events occur. The normal exceptions include a required move for work, health reasons, or unforeseen circumstances. Since the IRS definition of each is vague, you should review your options if you are required to move.

Record keeping matters. Be prepared to document the gain on your property and how you meet the residency and ownership tests. Please keep all documents relating to the purchase and sale of your property. Save any receipts that document improvements to your home. Also keep an accurate record to support your claim of principal residence if you own a second home.

Given the potential for tax savings, please ask for help before selling your home or vacation property.

Ideas for a Great Refund

05/03/2024

Three of every four Americans got a refund check last year according to IRS statistics. With a little planning, you can maximize the benefit of your refund. Here are some ideas:

Pay off debt. If you have debt, a great spending priority can be to reduce or eliminate it. This is especially true if you have any credit card debt. With rate increases, credit card interest can cripple you financially. Start by paying down debts with the highest interest rates and work your way down the list until you bring your debt burden down to a manageable level.

Save for retirement. Saving for retirement works like debt, but in reverse. The longer you set aside money for retirement, the more time you give the power of compound earnings to work for you. This money can even continue working for you long after you retire. Consider depositing some or all of your refund check into a Traditional or Roth IRA. You can contribute a total of $7,000 to an IRA in 2024, or $8,000 if you're 50 years old or older.

Save for a home. Home ownership is a source of wealth and stability for many Americans. If you don't own a home yet, consider building up a down payment fund using some of your refund. If you already own a home, consider using your refund to start paying your mortgage off early. This is especially important if you have a recent mortgage with higher interest rates.

Invest in yourself. Sometimes the best investment isn't financial, but personal. If there's a course of study or conference that would improve your skills or knowledge, that could be a wise use of your money in the long run.

Give some of it away. Helping people, and being able to deduct gifts and charity from your next tax return, isn't the only benefit of giving to a good cause.  

Seeing Inside the Mind of the IRS

Using the IRS Audit Technique Guidelines (ATGs)       04/26/2024

While most of us are never audited, when it happens we can often feel overwhelmed. Remember that the IRS auditor performs these audits every day. They know what to look for, and may ask leading questions that are easy to answer incorrectly. Here are some tips to help you when you are in the crosshairs of an IRS audit.

Timely address IRS correspondence. Do not let any issues raised in an IRS correspondence letter get to a point where a face-to-face examination is required.

Ask for help. Do this right away. Too many taxpayers think the problem is easy to resolve, but inadvertently say the wrong thing, resulting in another audit issue.

Understand what's being asked. Clearly understanding the core question behind the audit can simplify the solution. Why is the IRS asking to see your 1099s? Do they have a form that you do not? Why are they asking about your small business profits? Are they thinking your business is a hobby?

See the audit the way an IRS auditor is trained to see it. The IRS focuses auditor training in several areas. These are published in Audit Techniques Guides (ATGs) and are available for review on their web site at www.irs.gov (search for Audit Techniques Guides in the search bar). They are invaluable in identifying areas for potential audits, and can help you understand what the IRS likes to question. While most of the ATGs deal with business taxation, reviewing the topics can be useful in understanding where audit risks are most likely and what you can do to prepare yourself in case of an audit.

Common ATG Topics: * Architects * Art Galleries * Attorneys * Business Consultants * Capitalization versus Repairs * Cash-Based Business * Child Care Provider * Construction * Research Credits * Farmers * Hobbies (activity not engaged for profit) * Lawsuit Awards and Settlements * Ministers * Partnerships * Retail * Veterinary Medicine * Wineries and Vineyards

If you have one or more business activities that touch any of these topics, it makes sense to understand how IRS auditors are trained. By reviewing the specific ATG, you can understand the process of an IRS audit and gain some insight into how the auditor will proceed.

Tax Tips to Aid in Retiring Early

04/19/2024

 Wouldn’t it be nice to check out of the workforce early and not need to worry about having enough money for retirement? While good financial planning can help you get there, leveraging the tax code as part of your retirement plan is also a good idea. Here are some tax tips that could help you reach your early retirement goal.

Maximize tax-advantaged retirement accounts. Retirement accounts like traditional IRAs and 401(k)s allow you to save pre-tax money, invest the funds, and not pay taxes until the funds are withdrawn during retirement years. In other words, the IRS allows you to invest their potential tax receipts along with your money and will take its share of your investment earnings at a later date.

Leverage the catch-up provisions within retirement accounts. Most retirement accounts allow older taxpayers to invest even more money in these retirement savings accounts. Even better, the catch-up contribution amounts are now indexed to inflation so the amount will rise more quickly over time. The key retirement fund limits for 2024 are:

401(k), 403(b), 457: $23,000 ($30,500 if 50 or over)
Traditional/Roth IRAs: $7,000 ($8,000 if 50 or over)
SIMPLE IRA: $16,000 ($19,500 if 50 or over)

Consider Tax-Free Retirement Choices. Roth IRAs and Roth 401(k)s are an interesting alternative to other qualified retirement plans. Within Roth accounts you invest money in your plan with after-tax dollars, but any earnings are tax-free as long as you follow the withdrawal rules. While this lowers your potential initial investment, you create a source of funds that can earn money without being taxed in the future. Even better, both Roth IRAs and Roth 401(k)s no longer have required minimum distribution rules.

Roth Rollovers. You may also roll money from most qualified retirement accounts into Roth retirement accounts. When you do this, you must pay the tax on the funds rolled over, but the rollover makes any future earnings within this account tax-free as long as you follow the distribution rules. These funds will then be free from taxes when you retire.

Consider Health Savings Accounts and their catch-up provisions. Health Savings Accounts allow you to set aside money to pay for qualified health expenses in pre-tax dollars. To be eligible to set up this type of savings account, you must be enrolled in a qualified high deductible medical insurance plan. The good news is that unused funds can be invested and carried forward to future years. Use this money to augment your retirement plan.

Consider state taxes. Part of your retirement plan is understanding where you wish to live. It is important to note that states are not created equal on this front. Many states have no state income taxes, while others like Hawaii and California are in excess of 10%. Some states tax Social Security payments, while others do not. Many states are also trying to take the position that you must pay them state taxes on all retirement plan withdrawals from money earned while you lived in their state, even though you moved years ago! So pay attention to how your chosen state views your retirement income as a source of tax revenue for them.

Consider additional deductions and benefits. There are also a number of other benefits to be considered as you reach retirement age. These include:

Additional standard deduction when you reach age 65
Credit for being elderly/disabled
Timing of when to begin Social Security benefits
How your Social Security benefits will be taxed
Medicare and Medicaid plans

It's Tax Time! Don't Forget 1st Quarter Estimated Payments.

Now is the time to pay your taxes AND make your estimated tax payment.               04/12/2024

Both your individual tax return AND first quarter estimated tax payment are due. Here is what you need to know.

First quarter due date: Monday, April 15, 2024     

The estimated tax payment rule You are required to withhold or prepay throughout the 2024 tax year at least 90 percent of your 2024 total tax bill, or 100 percent of your 2023 federal tax bill.* A quick look at your 2023 tax return and a projection of your 2024 tax obligation can help determine if a quarterly payment might be necessary in addition to what is being withheld from any paychecks.

Things to consider

Underpayment penalty. If you do not have proper tax withholdings throughout the year, you could be subject to an underpayment penalty. A quick payment at the end of the year may not be enough to avoid the penalty.

W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may be able to adjust your W-2 wage withholdings to make up the difference.

Self-employed. In addition to paying income taxes, self-employed workers must also pay Social Security and Medicare taxes. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter to pay your estimated taxes.

Use your refund. An alternative option to pay your first quarter estimated tax is to apply some or all of your tax refund.

Pay more in the first quarter. By paying a little more than necessary in the first quarter, you can be in a position to adjust future estimated tax payments downward later this year if your tax obligation trends lower than you originally thought.

Not sure if you need to make a quarterly payment? Take a quick look at your tax return to see the amount of tax you paid last year. Divide this amount by the number of paychecks you receive each year and compare to your most recent paycheck. Is enough being withheld from each paycheck? Talk to your employer if you decide you need to adjust your withholdings to cover next year's tax bill.

If your income is more than $150,000 ($75,000 if married filing separate), you must pay 110 percent of your 2023 tax obligation to avoid an underpayment penalty on your 2024 tax return.

IRS Notices Creating Alarm

Here is what to know          04/05/2024

Beginning In April a number of IRS notices began hitting mailboxes. Unfortunately, the notices are coming in cold, as the IRS is turning on mailing their notices after a long time of being turned off. Their process is creating a lot of undue alarm.

Example: A small business, current in their tax payments, receives a right to levy asset notice. In other words, pay this tax, interest and penalties or we will have the immediate right to take your assets and keep you from leaving the country. Typically a number of notices are sent before the levy notice, but the levy notice is the first notice received. Even worse, the cause of the problem was the IRS incorrectly appling their tax payment to tax year 2024 instead of 2023.

Example: An individual receives a notice of the IRS assigning their account to a collection agency. In reality, the taxpayer paid their tax and was waiting for the IRS to clarify what, if any, interest was due on their late payment. No response was ever sent by the IRS.

What is happening

The IRS turned its notice system back on after a long hiatus during the pandemic. Unfortunately, it appears no review or adjustments were made before the notices were turned back on. So,

There was no correspondence back from taxpayers to clear up errors over this time period. These are errors the taxpayer did not know about because notices were turned off.

The letter cycle clock never stopped. This means instead of getting the next notice in the series, you might receive the fourth or fifth letter in a series.

To make matters worse

In the first example, the IRS representative could see the payment, see it was erroneously applied to next year’s, as yet unfiled, tax return, but the IRS representative was not authorized to correct the error. After calling the department with authorization, the accountant learned the ability to transfer payments was disabled for up to 30 days.

Even worse, just because the error is now known, that communication does not necessarily get passed to the collections (levy ) group. So the levy activity may still be going on, even though the error (theoretically) is now known. And these notices were mailed in April, right in the middle of tax filing season.

What to do

If you receive a notice, don’t panic, but don’t ignore it.

Call for help in order to respond to the IRS in a timely manner. This almost always means 30 days, so it can generally be handled right after the upcoming tax filing deadline.

Since little review appears to be done on many of these open tax cases, that missing step will typically be your first step to help clarifying and fixing the problem.

Keep Track of Home Improvements

The large gain exclusion creates a tax risk           03/29/2024

One of the more popular provisions in the tax code is the $250,000 capital gain exclusion ($500,000 for a married couple) of any profit made when selling your home. As long as you follow the rules, most home sales transactions are not a taxable event.

But what if the tax law changes?
What if you rent out your home?
What if you have a home office?
What if you cannot prove the cost of your home?

Your best defense to a potentially expensive tax surprise in your future is proper record retention.

The problem

The gain exclusion is so high, that many of us are no longer keeping track of the true cost of our home. This mistake can be costly. Remember, this gain exclusion still requires documentation to support the tax benefit.

The calculation

To calculate your home sale gain, take the sales price received for your home and subtract your basis. Basis is an IRS tax term that equals the original cost of your home including closing costs, adjusted by the cost of any improvements you have made in your home. You might also have a reduction in home value due to prior damage or casualty losses. As long as the home sold is owned by you as your principal residence in at least two of the last five years, you can usually take advantage of the capital gain exclusion on your tax return.

To keep the tax surprise away

Always keep documents that support calculating the true cost of your home. These documents should include:

Closing documents from the original home purchase All legal documents Canceled checks and invoices from any home improvements Closing documents supporting the value when the home is sold There are some cases when you should pay special attention to tracking your home's value: You have a home office. When a home office is involved, it can impact the calculation of the capital gain exclusion. This is especially true if you depreciated part of your home for business use.

You live in your home for a long time. Most homes will rise in value. The longer you stay in your home, the more likely the value of your home will rise over time. For example, a sizable gain can occur when an elderly single parent sells their home after living in it for over 40 years.

You live in a major metropolitan area. Certain areas of the country are known to have rapidly increasing property values.

You rent your home. Any time part of your home is depreciated, it can impact the calculation for available gain exclusion. Home rental also can impact the residency requirement calculation to receive the home gain tax exclusion.

You recently sold another home. The home sale gain exclusion can only be used once every two years. If you recently sold a home for a gain, keeping all documents related to your new home will be critical.

The best way to protect this tax code benefit is to keep all home-related documents that support calculating the cost of your property. Please call if you wish to discuss your situation.

Anticipating your Refund

What you should know            03/22/2024

If you e-file your tax return, you can generally expect to receive your refund within three weeks of it being accepted by the IRS. Expect four or more weeks if you mail in your tax return. But delays can happen.

Refund Delays: The common culprits

These are the most common reasons that refunds are delayed, according to the IRS:

Errors or incomplete information. It could be an error in a Social Security number or a mismatch with how a name is recorded with the Social Security administration.

Needs further review. In this case the IRS may be highlighting known areas of error or fraud.

Affected by identity theft or fraud. This delay is very common and can be as simple as a thief having already filed a tax return using your Social Security number.

Bank or creditor refers your information to the IRS due to suspicious activity.

Certain credits. If your tax return includes either the Earned Income Tax Credit or the Additional Child Tax Credit, the IRS may want to double-check your calculation because these credits often contain errors.

Your return includes Form 8379 (injured Spouse Allocation). These returns can take up to fourteen weeks.

Check the status of your expected refund

If you expect a refund and it goes beyond the stated time frame AND it does not include one of the items listed above, visit Where's my refund? at the IRS website. To check on the status of your refund, you'll need

Your Social Security Number
Your filing status
The exact refund amount

The Where's my refund? tool is getting better every year. Your refund status is typically available within one to two business days of the IRS accepting your tax return. If your tax return is not found, it means there may be a problem that requires a follow up on your part.

Audit Proof Your Tax Return

03/15/2024

 No one likes the stress involved when your tax return is under the audit spotlight. Here are some ideas to avoid some of the more common audit triggers.

Report everything that has an informational tax return. If you are like most Americans, you will receive numerous 1099s and W-2s in the mail. The IRS receives them too. If your tax return does not meet or exceed this reported income you can count on receiving a notice from the IRS. Some hints:
-Make a list of the forms received last year
-Update the list with any new vendors or employers
-Check off each of them when you receive them

Match the reports…even when they are wrong. When reviewing your tax return make it easy for the IRS programs to match what is being reported to them. If an amount on a 1099 or W-2 is incorrect, try to get it changed before you file your tax return. If not possible, report the incorrect amount (so it matches the IRS records) and then correct it with an explanation.

Get your key information right. Social Security numbers must be valid. Names must match Social Security numbers. Mismatches here are sure to be noticed.

Get your dependents right. You and an ex-spouse must consistently report your dependents. Both of you cannot claim a child as a dependent. If an ex-spouse claims paying you alimony, it must match alimony income on your tax return.

Get your documents in order. While the chance of being audited is historically low, it is expected to rise with all the recent hires at the IRS. Your best defense is to be prepared. So act now to organize your tax records. That way if you are audited, you will be ready to defend your deductions.

Homeowner Alert! Review Your Tax Forms

New tax rules are creating confusion             03/08/2024

Because of many home-related tax changes over the years, it can easily confuse taxpayers on what, when and how much can be used to qualify for a home mortgage related deduction. So when your mortgage company reports tax-related information to you and the IRS using Form 1098, it no longer means all the interest and points reported on these statements are tax deductible. Here is what you need to remember:

Mortgage interest deductions loan amount limits. For mortgages starting on or after Dec. 15, 2017, you can deduct interest on up to $750,000 of the loan (it is $1 million for mortgages initiated before Dec. 15, 2017). If your original mortgage is above the threshold, a calculation will have to be done to determine the deductible amount of interest. You can’t simply deduct the full amount of interest being reported on your Form 1098.

Proceeds not used to buy a home add complexity. Proceeds from home equity debt that are not used to build, buy, or substantially improve a qualified home are not tax deductible. This includes mortgage or home equity proceeds used to pay for college expenses, debit consolidation, or other purposes. Mortgage companies issuing these loans will still send you a Form 1098, but it’s up to you to prove how you use the funds during the current year and any prior year.

Mortgage points requires review of settlement statements. Points are paid as a way to obtain a lower interest rate. Generally, points are deductible in the year they are paid, but they have more restrictions than mortgage interest. Points paid to refinance an existing mortgage, for example, may need to be deducted over the life of the loan. If you bought or refinanced a home this past year, a review of your mortgage settlement statement may be required to ensure proper tax treatment of the cost of your points.

Mortgage insurance premiums are not deductible. If you pay mortgage insurance, your mortgage insurance premiums are not deductible. This on again, off again deduction is now in the off position.

With the rise in interest rates over the past several years, more taxpayers will be itemizing their deductions due to mortgage interest. So for each Form 1098 you receive, make a note on the form to explain what the loan is for to ensure a proper deduction.

Your Business Tax Return is DUE!

March 15th is quickly approaching             03/01/2024

March 15th is the tax-filing due date for 2023 calendar year S corporations and partnerships. While this filing deadline does not require making a tax payment, missing the due date could cost you a hefty penalty.

The penalty

The penalty is calculated based on each month the tax return is late multiplied by each shareholder or partner. So a business tax return with no tax due, filed the day after the March 15th due date, could cost a married couple who jointly own an S corporation $490 in penalties!

Take action

Here are some ideas to help you avoid penalties:

File on time. If you are a partner or shareholder of an S corporation or partnership, remind your fellow owners to file on or before March 15th. In addition to the penalties, filing late shortens the time you have to file your individual tax return.

Consider an extension. If your entity cannot file the tax return in time, file an extension on or before March 15th, which gives you an extra six months to file your business return. Remember, you pay the taxes for your flow-through business on your Form 1040 tax return at this year's April 15th filing deadline.

Your personal tax return may be delayed. Do not file your Form 1040 tax return until you receive all your K-1s from each of your S corporation and partnership business activities. But be prepared if your business files an extension, as it's possible you may need to extend your personal tax return while you wait for the K-1. Remember that an extension to file doesn't mean an extension to pay your taxes. You may need to estimate how much you'll owe so you can make a payment by April 15th.

Challenge the penalty. If your business does get hit with an IRS penalty for filing late, try to get the penalty abated. This is especially important if you file and pay your personal taxes on time.

If you haven't filed your S corporation or partnership return for 2023, there's still time to get it done or file an extension.

The penalty calculation for 2023 S-corporations and partnerships is $245 for each month or part of a month (up to 12 months) the return is late, multiplied by the number of shareholders or partners.

No Check! Where's Your Proof?

What you need to do NOW!         02/23/2024

Preparing to file your tax return is a great time to ensure you have proper documentation to substantiate your tax deductions. This is important as many banks start deleting online documentation that is over one year old.

Background

Two things have happened over the past ten years that have greatly reduced the ability to have a canceled check as proof when the auditor comes calling. The first is the advent of online bill paying services. The second is a regulation commonly known as Check 21. With online bill paying, you pay a bill via an online banking service. Your only receipt is often just an entry in your checking account. With Check 21, the law allows banks to digitally capture the check and then destroy the paper copy without returning it to you. So what do you do if you need proof that you paid for a tax deductible item?

Some Tips

Know your bank. Understand what your bank keeps and for how long. This includes digital statements and digital copies of checks (both front and back). Understand if there are any fees charged if you need to request copies of payments.

Retain copies of all bank statements. Review your records to ensure you have copies of all monthly bank statements. This is often the starting point for an IRS agent that wants proof of payment, so it should be yours as well. These copies may be in either paper or digital format. Download online copies of your statements and place them in a password protected file.

Collect copies of tax related proof of payment. Go through your statements and mark the payments that will, in all likelihood, be used as a tax deduction. Make sure you have copies of the front and back of each of these payments. If you do this work now, the copies are often still available online for no fee. Even online bill payments often have a digital copy that can be used.

Get independent acknowledgements. If you have larger payments you should also make sure you have independent acknowledgement from the merchant or organization to substantiate the deduction. This is true for charitable contributions of $250 or more, and any business or medical expenses.

While having the traditional proof of an expenditure is now harder to come by, the IRS understands that approved technologies are changing the type of substantiation available for them to review. By being on top of this documentation each year, you can save yourself a lot of headaches should you ever need to prove your deductions.

The $500,000 Homeowner Tax Break

Understand the rules now to avoid a tax surprise later                  02/16/2024

 There is large tax break that allows you to exclude up to $250,000 ($500,000 married) in capital gains on the sale of your personal residence. But making the assumption that this gain exclusion will always keep you safe from tax can be a big mistake. Here is what you need to know:

The basics

To qualify for the capital gains tax exclusion when you sell your home, you need to pass three hurdles:

It's your main home. It can be a traditional home, a condo, a houseboat, or mobile home. Main home also means the place of primary residence when you own two or more homes.

You pass the ownership test. You must own your home during two of the past five years.

You pass the residency test. You must live in the home for two of the past five years.

There are some additional quirks to know about, including:

You can pass the ownership test and the residence test at different times.
You may only use the home gain exclusion once every two years.
You and your spouse can be treated jointly OR separately depending on the circumstances.

When to pay attention

You have been in your home for a long time. The longer you live in your home the more likely you will have a large capital gain. Long-time homeowners should check to see if they have a capital gains tax problem prior to selling their home.

Two homes into one. Newly married couples with two homes may have a potential tax liability as both individuals may pass the required tests on their own property but not on their new spouse’s property. Prior to selling these individual homes, you may wish to create a plan of action that reduces your tax exposure.

Selling a home after divorce. Property transferred as a result of a divorce is not deemed a sale of your home. However, if the ex-spouse that retains the home later sells the home, it may have an impact on the amount of gain exemption available.

You are helping an older family member. Special rules apply to the elderly who move out of a home and move into assisted living and nursing homes. Prior to selling property, it is best to review options and their related tax implications.

You do not meet the five-year rule. In some cases you may be eligible for a partial gain exclusion if you are required to move for work, disability, or unforeseen circumstances.

Other situations. There are a number of other exceptions to the home gain exclusion rules. These include foreclosure, debt forgiveness, inheritance, and partial ownership.

Recordkeeping is key

The key to obtaining the full benefit of this tax exclusion is in retaining good records. You must be able to prove both the sales price of your home and the associated costs you are using to determine the gain on your property. So keep all sales records, original home purchase records, improvement costs, and other documents that support your home’s capital gain calculation.

Common Missing Items = DELAYS

Review these common causes of filing delays                       02/09/2024

Double-check this list of items that often cause delays with both filing your tax return and getting your much anticipated refund.

Missing W-2 or 1099. Using last year's tax return, make a list of W-2s and 1099s. Then use the list to ensure they are received and applied to your tax return. Remember, missing items will be caught by the IRS's matching program.

Missing or invalid Social Security number. E-filed tax returns will come to a screeching halt with a missing or invalid number.

Dependent already claimed. Your return cannot be filed if there is a conflict in this area.

Name mismatch. If recently married or divorced, make sure your last name on your tax return matches the one on file with the Social Security Administration.

No information for a common deduction. If you claim a deduction, you will need to provide support to document the claim.

Missing cost information for transactions. Brokers will send you a statement of sales transactions. If you do not also provide your cost and purchase information, the tax return cannot be filed.

Not reviewing your return and signing your e-file approval. The sooner you review and approve your tax return, the sooner it can be filed.

Forms with no explanation. If you receive a tax form, but have no explanation for the form, questions could arise. For instance, if you receive a retirement account distribution form it may be deemed income. If it is part of a qualified rollover, no tax is due. An explanation is required to file your information correctly.

Hopefully by knowing these commonly missed pieces of information, you can prepare to have your tax filing experience be a smooth one.

IRS Identity Theft Season Begins Now

01/26/2024

Each year thieves try to steal billions in federal withholdings by stealing your identity. As the IRS focuses more attention on this quickly growing problem, now is the time of year to be extra vigilant.

Early tax filing season is the worst time

Your federal tax account at the IRS currently has plenty of money withheld from your paycheck during the course of the year. Until you file your tax return, the IRS is not sure if it needs to pay some of it back to you in the form of a refund.

Thieves know this too, and will try to file a fraudulent tax return before you have time to submit your own. When thieves file early, they can steal some of your withholdings and be long gone by the time you file your own tax return.

What you can do?

Beat them to the punch. The sooner you file your tax return, the less likely a thief will beat you to your refund.

Get an Identity Protection PIN. All taxpayers who can verify their identity can get an Identity Protection PIN (IP PIN) from the IRS. The IP PIN is a six-digit code known only to you and the IRS that helps prevent identity thieves from filing fraudulent tax returns. If you want an IP PIN, visit irs.gov/IPPIN.

Check your credit reports. See if there is any suspicious activity on your accounts and on your credit reports.

Protect your ID. Be suspicious. Never give out your Social Security Number, do not leave your credit card unattended, never give ID information to someone who calls you, use the password function on your phone, be aware of strange mail, and shred important documents. Your best defense to IRS ID theft is to use best practices to protect your information.

The IRS is becoming better at spotting fakes

If the IRS suspects something is wrong with your filed tax return they will send you a notice. If this happens to you:

Respond immediately. Get the direct contact information from the IRS website and let them know that you have a possible identity theft problem.

File an Identity Theft Affidavit (IRS Form 14039). This will record your problem with the IRS and they will take extra steps to ensure your account activity is coming from you and not the ID thief.

File a police report.

Contact the credit bureaus.

Having your tax withholding stolen and then needing to unravel this problem within the IRS is a major hassle. Try to stay vigilant and know that there are steps to help protect your tax records. Thankfully, if the IRS pays out a refund to someone stealing your identity, they are on the hook for this loss, not you.

SMALL BUSINESS ALERT: New Federal Reporting Required

Especially important for new business startups               01/19/2024

Beginning in 2024, many small businesses will have to report information about their owners to the Financial Crimes Enforcement Network (commonly referred to as FinCEN), a bureau of the U.S. Department of the Treasury that collects and analyzes information to help fight financial crimes. Here is what you need to know.

Determine if your business must comply with the new reporting rules. Any company created in the United States that has registered with a secretary of state or any similar office under the laws of a state or Indian tribe, or foreign companies registered to do business in the U.S., must comply with these new reporting requirements.

Many small businesses that are C corporations, S corporations, partnerships, or LLCs (including single-member LLCs) must comply. There are, however, nearly two dozen types of businesses that are exempt from these new reporting requirements, including sole proprietors, accounting firms, insurance companies, banks, certain large businesses, and tax-exempt entities.

Know when you MUST report. The reporting deadline varies depending on when your business was created or registered:

Created before January 1, 2024. For existing companies that were created before January 1, 2024, you must file your FinCEN report, commonly referred to as a Beneficial Ownership Information (BOI) report, sometime this year (before January 1, 2025).

Created during 2024. Companies formed this year have 90 days to file their FinCEN BOI report after they are created or registered.

Created in 2025 and beyond. The BOI report must be filed within 30 days of being registered or legally created.

Immediately report any changes. After your initial BOI report is filed, an updated BOI report must be filed within 30 days following any change in information previously filed with FinCEN. Any inaccuracies discovered on previously-filed reports must also be reported within 30 days.

Why they want to know. The Federal government wants to know who owns or is a beneficial owner of businesses in the U.S. This information is meant to protect national security by making it easier to find corruption, money laundering operations, tax evasion, and drug trafficking organizations. They will be sharing this information with approved agencies including Federal and State law enforcement and Federal tax authorities.

There are penalties for noncompliance. You may be liable for up to $5,000 or more in fines for each defined violation for non-compliance or false information provided on the form. There are also daily fines for potential errors and omissions.

Where to register and learn more. When filing, be prepared to not only identify owners and beneficial owners of your business, but also be prepared to submit visual proof of each owner's identity (i.e. Driver's license, passport, etc.) Click here to learn more: www.fincen.gov/boi

Remember, existing companies have until the end of 2024 to complete their BOI report, and FinCEN just put the reporting system live in early January 2024. So don’t delay, but you may wish to wait a bit to ensure the reporting tool is working properly.

2024 Mileage Rates are Here!

New mileage rates announced by the IRS                01/12/2024

Mileage rates for travel are now set for 2024. The standard business mileage rate increases by 1.5 cents to 67 cents per mile. The medical and moving mileage rates are now 21 cents per mile. Charitable mileage rates remain unchanged at 14 cents per mile.

2024 New Mileage Rates

Reminder: Fourth Quarter Estimated Taxes Now Due

Now is the time to make your estimated tax payment                 01/05/2024

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The 4th quarter due date for the 2023 tax year is now here.

Due date: Tuesday, January 16, 2024

You are required to withhold at least 90 percent of your 2023 tax obligation or 100 percent of your 2022 federal tax obligation.* A quick look at your 2022 tax return and a projection of your 2023 tax return can help determine if a payment is necessary. Here are several other things to consider:

Underpayment penalty. If you do not have proper tax withholdings, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. So a fourth quarter catch-up payment may not help avoid an underpayment penalty if you didn't pay enough taxes in prior quarters.

Self-employment taxes. Remember to also pay your Social Security and Medicare taxes, not just your income taxes. Creating and funding a savings account for this purpose can help avoid a cash flow hit each quarter when you pay your estimated taxes.

Don't forget state obligations. With the exception of a few states, you are often required to make estimated state tax payments when required to do so for your federal tax obligations. Consider conducting a review of your state obligations to ensure you meet these quarterly estimated tax payments as well.

If your income is over $150,000 ($75,000 if married filing separate), you must pay 110% of last year’s tax obligation to be safe from an underpayment penalty

Great Tax Tips to Start the New Year

yes, really some tax tips                  12/29/2023

The old year is ending and the new one is about to start. Here are some tax tips to get you going into the new year with a brighter tax future on your horizon.

1. Review beneficiaries. Now is the time to review beneficiaries in all your retirement accounts and insurance policies. While it might not impact your tax situation, it could impact others if not structured correctly.

2. Fully fund FSA or MSA. Flexible Savings Accounts and Medical Savings Accounts are a great way to pay for qualified, medical, dental and vision care. But it only works if you fund your account. So check with your employer and plan to take full advantage of this great tax benefit.

3. Planfully fund retirement accounts. Plan now to take advantage of the many retirement planning options. Whether it be a 401(k) or on of many versions of IRAs, they are a great way to manage your tax obligation, while planning for your future.

4. Consider any anticipated tax events. Life events are the biggest cause of tax surprises. So if you are planning to move, retire, get married or divorced, have kids or change jobs you should know of the tax impact BEFORE it happens. You could save thousands.

5. Review withholdings. Coupled with number 4, any changes could impact your tax obligation and should impact how much you have withheld during the year. So consider an annual review of your situation and adjust your withholdings accordingly.

6. Consider the child factor. This one is important because of the numerous tax benefits associated with children. It can mean funding a 529 program, or opening a Roth IRA if your older children have earned income. It can mean understanding when benefits expire as your children age or planning for college age children. The bottom line, conduct a tax review specific to your children.

7. Consider your property. Selling a home, stocks, bonds or digital currency all have potential tax implications. So if any of these are on the horizon consider taking a planned approach. It could save you a bundle.

Babies and Children. Tax Tips Everyone Should Know

Especially parents, grandparents and relatives                  12/22/2023

For parents, challenges come from every direction – feeding times, car seats, sleep schedules, strollers, child care and of course ... taxes. What most parents do not consider is that these bundles of joy complicate their tax situation!

Whether you are a parent, grandparent, or know someone who is expecting, here are some tax tips to consider:

Initiate a 529 education savings plan. 529 education savings plans are a great way to kick off the baby’s savings for the future. These plans offer low-cost investments that grow tax-free as long as the funds are used to pay for eligible education expenses (including elementary and secondary tuition). States administer these plans, but that doesn’t mean you are stuck with the plan available in your home state. Feel free to shop around for a plan that works for you. Starting to save early, even a little bit, maximizes the amount of tax-free compound interest you can earn in the 18+ years you have before going to college.

Bonus tip for family and friends: Anyone can contribute up to $17,000 per year ($18,000 in 2024) to the plan for each child! In addition, there is a special provision for 529 plans that allows five years worth of gifts to be contributed at once — a great estate-planning strategy for grandparents. And new this year, there is an opportunity for grandparents to open these accounts with grandchildren as beneficiary and not have it impact their federal needs calculation!

Update Form W-4. Every year, parents need to review their tax withholding. Remember the birth of a child brings new tax breaks including a $2,000 Child Tax Credit and Child and Dependent Care Credit for child-care expenses. These credits can be taken advantage of now by lowering tax withholdings and increasing take-home pay to help cover diapers and other needs that come with babies and children. On the other side of the coin, these benefits fall away as your kids age. The Dependent Care Credit is for children under the age of 13 and the Child Tax Credit is available under the age of 17. So plan accordingly.

Prepare for medical expenses. Having a baby is expensive. So is having kids! Fortunately, there are ways to be tax smart in covering the predictable medical and dental expenses. The first thing to do is try to pay for as many out-of-pocket expenses with pre-tax money. Many employers offer tax-advantaged accounts such as a Health Savings Account (HSA) or a Flexible Spending Account (FSA). So check this out and fund them as much as possible. And while it is more difficult to use medical expenses as an itemized deduction, it is impossible to do if you do not have receipts.

Given the tax considerations of having a family, review this information and forward this tip to anyone who has children. Taking full advantage of the tax benefits that come with being a parent can make a difference. Please call if you have any questions.

Know What the IRS Knows About You

Here is how you can find out...                       12/15/2023

There are multiple situations where you need to find out what the IRS knows about you. It could be for the purpose of obtaining a loan, filing past year tax returns, or simply getting a copy of tax records for your files. A great place to start is understanding the IRS’s new online account function.

Background

In the past, if you needed a copy of a tax return or wanted copies of W-2s and 1099s you called the IRS or filled out a form and sent it to them. You then waited. Now this information is available online through their Get Transcripts function.

How it works

Get registered using ID.me. To get copies of your information from the IRS, you must first register and have your identity confirmed. The identity confirmation process is either an interview or verification using an approved government issued id like a passport or a valid driver’s license. So before starting the process it is best to be prepared with:

Original copies of either your drivers’ license or passport
A cell phone to take a selfie and to access software required by ID.me
Have a secure email and cell phone number
A secure computer on a private network

Getting access to your records. Once you have your identity confirmed, the IRS will allow you to set up a password and multi-factor authentication to access to your account.

Options within the account. Once your account is set up you can see:

Your account status
Payment function and activity
Copies of notices and letters
Any authorizations to access information or help you
Tax records

Available tax records

In the Get Transcripts function, you can retrieve copies of W-2s and 1099s filed by others on your SSN, review copies of original 1040 transcripts and any changes or modifications of the tax return. You can also retrieve history of advanced child credit payments and any economic impact payments.

Some Tips

Use caution. Setting up an online account with the IRS requires sharing sensitive information. So only do this on a secure device, on a home or private network. Make sure you are on the IRS website. DO NOT use a link to the site.

You do it. The online retrieval service is for individuals. Do not have someone else set up your account and do not share your login information with anyone.

Online versus phone or mail. This new retrieval service saves a lot of time versus filing out forms or requesting information. So consider signing up only if you are in need of a form and cannot get it any other way.

The online service is not for everyone. While it does save time, if you are at all wary of the service, ask for help. It is just a phone call away.

Plan Your 2024 Retirement Contributions

12/08/2023

 As part of your planning for next year, now is the time to review funding your retirement accounts in 2024. Recent cost of living calculations means much higher contribution limits for next year. Plus the higher income phaseouts for eligibility will make many more taxpayers eligible for fully-deductible contributions. So plan now to take full advantage of this tax benefit. Here are annual contribution limits for the more popular programs:

Late Breaking News: New 1099-K Requirements Delayed

You will be surprised how many are impacted                  12/01/2023

 In the fourth move in three years, the IRS in late November changed the reporting requirements for Form 1099-K. So why should you care? Well pay attention if you’ve ever sold anything on Amazon or eBay, have ever sold tickets to sporting events or concerts, or received money from payment apps like Venmo.

Background

The IRS wants to track the receipt of money from third-party credit card and other payment processors. This is because much of this activity is deemed business activity AND it is under-reported. The IRS uses Form 1099-K to report these transactions and for years the threshold for reporting was $20,000 and 200 transactions per payment processor. The law was then changed to lower the threshold to $600 and any number of transactions.

Current situation

After delaying the implementation of the $600 threshold two times in prior years, the IRS once again rolled back the reporting threshold for 2023 to $20,000 and 200 transactions. This repeated change, albeit a welcome one for many taxpayers, is also creating mass confusion as the delay was put in place a mere 45 days before the forms start hitting inboxes.

What you need to know

The income is reportable whether you receive the form or not. So if you have a side hustle on Amazon, or have a business reselling tickets, you are required to report it.

You may OR may not receive a Form 1099-K. Given the late change, you may still receive a Form 1099-K this January or February even if the payment processor is not required to report it. So if you receive a form, please keep it. The activity is still being reported to the IRS.

The limits are still coming down, so be prepared. The recent change is only temporary. The IRS will be lowering the threshold over the next few years to get to the $600 limit, so be forewarned.

How to report business activity varies. If you have a side hustle, sell or resell tickets online, or use digital payment systems to receive payment for goods or services you are in business. This needs to be reported. How it is reported can vary so call for help..

Tax Planning Triggers

When to know to conduct a tax review                   11/24/2023  

Here are some tips that should trigger you to conduct a full tax planning session to ensure your tax bill next year is not higher than it needs to be.

1. You owed tax last year. If you have not adjusted your withholdings, you could be in for a big tax bill. Time to take a look and plan accordingly.

2. Your household income changes dramatically. Whether higher OR lower, a change in income will impact your taxes, especially if it impacts availability of deductions or credits.

3. You are getting married or divorced. Married filing joint brings benefits and tax surprises. So does the impact of being single once again.

4. You have kids attending college next year. There are a number of tax programs that can help.

5. You have a small business. There are depreciation benefits plus the qualified business income deduction to consider. Plus you will need to understand the flow through impact your business profits will have on your personal tax return.

6. You plan on selling investments. Capital Gains tax rates can now range from 0% to 37% (depending on long or short term gains and your income level).

7. There are changes in your employer provided benefits. These changes could impact your taxable income this year.

8. You buy, sell or go through home foreclosure. There are tax benefits AND tax surprises when you buy or sell a home. A planful approach can make all the difference.

9. You have major medical expenses. The threshold for itemizing medical deductions is 7.5%. This means to itemize these expenses, they must exceed 7.5% of your income. But with proper planning, there are other ways to pay these expenses with pre-tax money!

10. You recently lost or changed jobs. Federal unemployment benefits are taxable and need to be accounted for in your tax plan.

11. Your estate has not been reviewed in the past 12 months. New gift tax and estate tax laws make 2013 a key year for an estate tax review.

12. You have a new child or dependent. These treasures bring joy AND a different tax obligation!

If any of these triggers apply to you, please schedule a tax planning appointment.

Selling Property to Family Creates Tax Complications

11/17/2023   

Selling property to a family member or loved one is deemed a related party transaction by the IRS. If contemplating a transaction like this, you need to review the tax consequences of your decision BEFORE you act. As you might imagine, related party transactions covers relatives like your children, grandchildren and siblings, but it also applies to business entities you own. Here are four common situations you may encounter, and tips to help you avoid tax trouble:

1. Installment sales. When selling your property over two or more years, your transaction is deemed an installment sale. With an installment sale you can defer tax on your gain until the tax years in which payments are actually received. However, if you sell the property to a related party who disposes of it within two years, the remaining tax is due immediately!

Tip: To solve this problem, insert language in the legal agreement with your related party that does not allow the disposition of the property within two years.

2. Selling at a discount. If you’re selling a house to a related party, you may wish to give that person a sweetheart deal. Unfortunately, the IRS may reclassify the transaction as a gift if the property is sold at considerably less than its fair market value (FMV). Fortunately, you have some wiggle room. If you discount the sale by less than 25 percent, you should be OK.

Tip: Err on the side of safety by having an appraisal of the property before the transfer date OR build documentation that justifies the FMV.

3. Transferring remainder interests. In some cases, a homeowner may transfer an interest in a home to his or her estate while continuing to live there. Although this may meet certain objectives, the estate can’t take advantage of the $250,000 home sale exclusion ($500,000 for joint filers). However, if the heirs subsequently meet the two-out-of-five-year ownership and use requirements, the exclusion becomes available.

Tip: Prior to transferring interest in your home to anyone (including a trust or an estate), understand the impact of this action on the tax-free home gain exclusion.

4. Like-kind exchanges. Often, instead of selling business or investment property, an owner may trade for another, similar property hoping to either defer or avoid taxable gains. Under recent legislation, tax-free exchanges of like-kind properties are eliminated, except for qualified real estate transactions. Tax is generally deferred until the replacement property is sold, but the tax law imposes a two-year holding requirement on the parties to the deal. Alternatively, you may qualify under a special exception, such as proving tax avoidance wasn’t the purpose of the sale.

Tip: Related property transactions of this type can get complicated. Ask for a review of your situation before trading any property.

Transferring assets, including property, to family gets the attention of the IRS. Should you be contemplating this, reach out for assistance before making the move.

Surprise! The Mutual Fund Tax Trap

11/10/2023         

Too often taxpayers receive tax surprises at year-end due to actions taken by mutual funds they own. What can add insult to injury is the unsuspecting taxpayer who recently purchases the shares in a mutual fund only to be taxed on their recent investment. How does this happen and what can you do about it?

Tax surprises

Towards the end of each year, many mutual funds pay a dividend to the holders on record as of a set date. The fund might also distribute funds deemed as capital gains based upon buying and selling activity that takes place in the fund throughout the year. This can create many problems:

Taxable paybacks. If you purchase shares in a mutual fund just before a distribution of dividends, part of your purchase includes the dividends that are effectively paid right back to you. Not only will the asset value of your recently purchased shares in the mutual fund go down after the distribution, but you will owe tax on a distribution that is effectively your own money!

Kiddie tax surprise. Many taxpayers purchase mutual funds in their children's names to take advantage of their lower-tax rates. By keeping their child’s unearned income below $2,100 the tax is low or non-existent. A surprise dividend or capital gain could expose much of this unearned income to higher tax rates.

The $3,000 loss strategy. Each year, you may take a net of up to $3,000 in investment losses. Your losses can offset high rates of income tax with correct tax planning. But first, these losses need to offset capital gains. If you receive a surprise capital gain, you could be reducing the effectiveness of this tax strategy.

What to do

Here are some ideas to help reduce this mutual fund tax surprise:

Limit year-end activity. Plan your mutual fund moves with this year-end surprise in mind. Consider reviewing and rebalancing your funds at the beginning of the year to avoid fund purchases just prior to dividend distributions.

Research your mutual funds. If you wish to avoid a year-end surprise, do a little research on your mutual funds to anticipate what will happen with the fund. Check out the historic trends of your funds to determine which are most likely to issue a surprise Form 1099 DIV or Form 1099 B (capital gain/loss).

Use the knowledge to your benefit. If you like a fund and it has a practice of creating taxable events each year, consider investing in these funds within a retirement account. That way the tax implications can be part of your retirement planning.

No one likes a surprise at tax time. The best course of action regarding your mutual funds is to consult with an expert who can help you navigate the options that are best for you.

Audit Proof Your Deductions

11/03/2023             

The IRS is being very public about increasing the review of tax returns. The best defense for you is to be prepared before it happens. Here are some suggestions:

The one-two punch

To prove your deduction, most auditors look for two key documents: receipts and proof of payment.

1. Receipts. This is the first of the key documents you must have to validate a deduction. The receipt should clearly show the company or entity, the date, the value of the activity and a clear description of the activity. In the case of donations, the receipt should also have a statement that confirms you received no benefit in return for your donation. It should also state that you are not retaining part ownership of the donation.

2. Proof of payment. The second key document to defend your deduction is proof of payment. You will need a canceled check, a bank statement or a credit card receipt and related statement.

Contemporaneous is key

Your proof of payment and receipts should generally match the date of the activity. The IRS is quick to dismiss receipts that are obtained after the fact. A good rule of thumb is to ensure receipts and proof of payment are received at the time of the activity. If not, at least make sure you have receipts and payment proof within the tax year the deduction is taken.

Other proof is often required

In addition to the above, there are certain deductions that require additional documentation. Here are the most common;

Mileage logs. You will need to show properly-maintained mileage logs for business miles, charitable miles and any medical mile deductions.

Business records. You will need financial statements for any business-related activity with supporting documentation.

Residency. If you live in multiple states or multiple countries, you may have to prove where you lived during the year. In addition, to receive the capital gain exclusion for a home sale, you will need to prove residency for two of the last five years. So keep records that show your physical presence to support your tax filings.

Non-reimbursement. If you claim any education credits, you will need to show that you actually spent money for qualified expenses at qualified institutions. You will also need to show that your claimed expenses were not reimbursed through scholarships or grants.

Defending your tax return during an audit can seem daunting. Fortunately, with some thoughtful planning, an audit can readily turn into a NO CHANGE audit.

Time to Reconsider Municipal Bonds

10/27/2023                    

Everybody likes getting something for free, and taxes are no different. If you invest in securities such as municipal bonds (munis) or municipal bond funds, you can generate tax-free interest income. Here is what you need to know.

Advantages of municipal bonds

You pay zero federal tax on municipal bond investment income. This makes municipal bonds more attractive than many comparable taxable investments. A municipal bond paying 6 percent to an investor in the 24 percent tax bracket is actually a better investment than a taxable bond paying interest at 7.9 percent, due to the federal income tax break.

What’s more, municipal bond income isn’t counted for net investment income tax purposes. So if you are subject to this 3.8 percent surtax, municipal bonds provide an additional tax break to you. And, if the bond is issued by an authority within the state where you reside, it’s also exempt from any state income tax.

For these reasons, municipal bonds are a popular investment, especially among retirees because they are often stable, and most bonds carry a relatively low risk.

Potential consequences

While the benefits of municipal bonds make it an attractive option for many investors, there are potential downsides:

Alternative minimum tax. If you invest in certain private activity bonds — such as some bonds used to finance projects like a stadium — the income may cause alternative minimum tax complications.

Capital gains tax. When you sell a municipal bond at a profit, you owe capital gains tax on the sale. For instance, if you buy a bond for $5,000 and sell it for $6,000, you’re taxed on the $1,000 gain.

State tax possibility. If you invest in municipal bonds issued by another state, the interest income is taxable by the state where you reside.

Bond risk. Municipal bonds, just like corporate bonds, carry a risk of default. So it is important to understand what you are buying and the likelihood of repayment risk.

Taxes on Social Security benefits. Interest income from municipal bonds could make up to 85 percent of your Social Security benefits taxable. The taxation of Social Security benefits is based on a calculation that specifically includes tax-free municipal bond income.

Investing in municipal bonds can provide tax-free, stable income, but you need to understand how the investments fit with your situation to maximize the tax savings.

Tax Efficient Retirement Requires Planning

Large retirement account balances can cause tax problems              10/20/2023                       

Putting off distributions and holding assets in your retirement accounts as long as possible may seem like a good idea, but waiting too long can cause a major tax problem. When you reach age 73, the trigger requiring minimum distributions (RMDs) from qualified retirement accounts is initiated, potentially causing unwanted tax obligations.

RMDs explained

Required minimum distributions is a formula applied to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and other defined contribution plans that calculates how much you must withdraw from your retirement accounts each year. If you fail to take out the minimum distributions, amounts not distributed on a timely basis can be subject to a 25% penalty (or 10% if the problem is corrected within two years).

ALERT: Prior to 2023, the RMD penalty was a whopping 50%!

Thankfully, there are other beneficial rule changes that impact required minimum distributions:

No distributions required while you are still working. You may now delay withdrawing funds from employer plans like a 401(k), past age 73 as long as you are still working and are not a 5%-or-greater owner of the company.

RMD rules are different for Roth accounts. Roth IRAs are not subject to the RMD rules while you are still living. And beginning in 2024, Roth 401(k) and Roth 403(b) minimum withdrawals are not required.

The RMD rules ensure the deferred tax benefit for certain retirement accounts does not extend indefinitely into the future. In other words, the IRS wants their cut by applying income taxes to your tax-deferred savings account balances. The amount you must take out each year is based upon your age, your spouse’s age, and your filing status.

The tax planning opportunity

If you wait to start taking money out of your retirement accounts, the balance in your accounts may be very high when you reach age 73. These higher balances mean a higher annual taxable withdrawal amount. If your required retirement plan distribution is large enough, it may apply a higher marginal tax rate on your withdrawals, and trigger taxes on your Social Security benefits. Depending on your income and filing status, up to 85 percent of your Social Security benefit can be subject to income tax.

The key is to be tax efficient in your withdrawals every year, and long before the required minimum distribution rules take away your planning flexibility.

Some tips

Plan withdrawals. Once you hit age 59½, you may withdraw money from qualified, tax-deferred retirement accounts without experiencing an early withdrawal penalty. To reduce future tax risk on your Social Security benefits, manage annual disbursements from your retirement account(s) to be more tax efficient when you reach age 73.

Start receiving Social Security. You may begin full Social Security benefits after reaching the minimum retirement age. But remember, your benefit amount can increase if your start date for receiving Social Security benefits is delayed until age 70. Consider this as part of your plan to be tax efficient.

See an advisor. There are many moving parts in planning for retirement. These include Social Security benefits, pension plans, savings, and retirement accounts. Ask for help to create the proper plan for you and your family. One element of the plan should include being tax efficient to avoid the tax torpedo.

Hike in Social Security Benefits Announced for 2024

How much you pay and checks received are all going up!                10/13/2023                         

 The Social Security Administration announced a 3.2% boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2024, a big drop from last year's increase of 8.7%. The increase is based on the rise in the Consumer Price Index over the past 12 months ending in September 2023.

For those contributing to Social Security through wages, the potential maximum income subject to Social Security taxes is increasing to $168,600. This represents a 5% increase in your Social Security taxes! Here's a recap of the key dollar amounts:

How to Maximize Your Social Security

What every taxpayer should know                      10/06/2023                               

You can begin receiving your Social Security retirement benefit as early as age 62. But by putting off your benefit start date you can receive a check that is approximately 8 percent higher for each year you delay receiving your benefit.

The basics

Full retirement age. Those born between 1943 and 1954 reach their full Social Security benefit payment at age 66*. This is called your full retirement age.

Early benefit penalty. Those same retirees can begin receiving their benefit at age 62. But if you start your benefits before reaching your full retirement age, the amount paid to you is permanently reduced.

Bonus payment amounts. But there is also a bonus for each year you delay receiving benefits past your full retirement age. Your Social Security benefit is increased by 8 percent per year.

The maximum cap amount. After age 70, the Social Security benefit is maximized. Further delay in starting your benefits adds no additional payments.

Is a delay worth the wait?

Here are reasons to delay receiving your Social Security benefits until you reach age 70:

You expect to live longer. If your parents and grandparents lived long lives, you may wish to delay receipt of your initial Social Security benefits. The opposite is true if you have a shorter life expectancy.

You do not need the income. If you are still working or have alternative income sources, it may be better to delay receiving your benefits. An 8 percent increase in monthly payments is a good increase versus other investment alternatives.

Your spouse has died. You will need to review the possibility of receiving survivor benefits based on your spouse’s earnings. Later, you could then start collecting your own Social Security retirement benefits based on your earnings.

Your benefits are taxed. If you have other income, your Social Security retirement benefits could be subject to income tax if you are not yet at the full retirement age.

Should you delay receiving your Social Security benefits? There often is not one answer that fits all situations. Consider reviewing your situation prior to making a decision. 

Full retirement age increases by two months each year after 1954 until reaching full retirement age of 67 for those born in 1960 or later.

Employee Tax-Free Income

09/29/2023

While most income received from your employer quickly ends up on a W-2 tax form at the end of the year, here are some common employee benefits that often avoid the impact of Federal taxes.

Health benefits. While now reported on W-2's, employer provided health insurance premiums are currently not required to be reported as additional income by the employee. This includes premiums paid for the employee and qualified family members. In addition, the employee portion of premiums can be paid in pre-tax dollars.

Credit card airline miles. Credit card benefits like miles are not generally deemed as taxable income. So those miles earned on corporate credit cards that go to you as an individual are not likely to increase your tax bill.

Employee tuition reimbursement. Up to $5,250 of tuition reimbursed to you by your employer are not deemed to be additional taxable income.

Commuting expenses. You can generally exclude the value of transportation benefits you receive up to $300 per month for combined commuter highway vehicle transportation and transit passes. There is also up to $300 per month for tax-free qualified parking benefits.

Company Health Savings Account (HSA) contributions. Up to specified dollar limits, cash contributions to the HSA of a qualified individual are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax.

Group term life insurance. You can generally exclude the cost of up to $50,000 of group-term life insurance from your wages.

Small gifts. Small-valued gifts are not included in income and could include things like the use of the company copy machine, occasional meals, reasonably priced holiday gifts and tickets to a sporting event.

Knowing what benefits can avoid a tax bite, try to maximize their use to your greatest advantage and reach out with any questions you may have.

Understanding Tax Terms: Depreciation Recapture

09/22/2023

One of the more unpleasant surprises that can hit a taxpayer occurs when you sell personal property, rental property or assets from your small business. This tax surprise is often associated with depreciation recapture rules.

Defined

Depreciation recapture refers to reducing the cost of an asset sold by prior period’s depreciation expense to determine whether taxes are owed on the sale of an asset and to determine the type of tax that must be paid on the sale of the asset.

When you have business property with a useful life of over one year, you often have the ability to deduct part of the cost of that property over the estimated useful life (recovery period) of that property. The most common users of these depreciation rules are small businesses and rental property owners.

When the asset is later sold the IRS wants you to determine if any tax is due as either ordinary income or as a capital gain. A simplified example: Assume you run a small business out of your home. You purchase a new computer used 100% by your small business. The cost of the computer is $3,500. IRS rules determine you may recover the cost of this type of asset over five years. So each year you can deduct $700 as depreciation (1/5 of the cost of the computer assuming straight-line depreciation is used) on your business tax return.

Next assume the computer was sold at the end of year three for $2,000. This will result in a taxable event that includes depreciation recapture.

Deduct Business Meals the Right Way

09/15/2023

Suppose you take your best client out to dinner to celebrate your business relationship. If you own a business, are self-employed or run a side business, can you deduct any of the cost?
Here are some tips to stay on the right side of the new rules:

Make clear it’s a business meal

In the past, small businesses could deduct 50 percent of the costs of both business meals and entertainment with clients. Now, the meal deduction remains but entertainment costs are no longer deductible.

The problem is that separating a business meal from client entertainment is not always clear-cut. If you treat your best clients every year to dinner and tickets to a sporting event, the tickets are not deductible, but the meal may be.

If you use the meal to discuss business, you should be safe to take the deduction. But if it’s just a social event and business is not discussed, the deduction is now harder to justify. That means it’s up to you to make clear it’s a business meal.

Document it

The easiest way to do this is to keep a business log for your meal expenses that includes a field labeled business purpose. In addition to recording the time, date, place, and cost of the meal, list each attendee, their company affiliation and professional title. Then add a short description of the specific business purpose, such as: Discussed new products and competitive price structure.

For the strongest defense of your deduction, try to define the purpose of the meeting as something that could have an impact on your bottom line. Simply chatting about trends in your industry may not pass muster if you are audited under the new rules.

Avoid luxury meals

Deductions for extravagant expenses on meals and entertainment will always be hard to defend. So if you are having a serious business discussion over dinner, make sure it’s not at a luxury restaurant that will give you a huge dinner bill.

Remember, business meals are still deductible, but must be properly documented. If done correctly this deduction should withstand any audit risk.

Reminder: Third Quarter Estimated Taxes Due

Reminder: Third Quarter Estimated Taxes Due         09/08/2023

 If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The third quarter due date is now here.

Due date: Friday, Sept. 15, 2023

You are required to withhold at least 90 percent of your 2023 tax obligation or 100 percent of your 2022 obligation.* A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment is necessary. Here are some other things to consider:

Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. A quick payment at the end of the year may not help avoid the underpayment penalty.

W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough funds to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.

Self-employed. Remember to pay your Social Security and Medicare taxes in addition to your income taxes. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter when you pay your estimated taxes.

Don't forget state obligations. You are also normally required to make estimated state tax payments if you're required to do so for your federal taxes. Consider conducting a review of your state obligations to ensure you meet these quarterly estimated tax payments as well.

If your income is more than $150,000 ($75,000 if married filing separately), you must pay 110 percent of your 2022 tax obligation to be safe from an underpayment penalty.

Understanding Tax Terms: Unearned Income

Not all income is the same in the eyes of the tax code         09/01/2023

 Tip Image Tip Category: Your Income The tax code uses jargon that can be confusing for the unwary. One of them that impacts most of us is the term unearned income. Unearned income is often defined as anything that is not earned income. If you find this kind of definition a little too vague, here is some clarity.

Tax code definition

Before providing the definition of unearned income, take a quick look at what is typically included in both earned and unearned income.

Earned income includes salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants. Employees will typically see this recorded in an annual W-2 tax form.

Unearned income includes taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, and distributions of unearned income from a trust. Much of this income is often (but not always) recorded using 1099 tax forms.

Why does it matter?

If the tax code was simple, it wouldn't matter one bit whether your income was earned income or unearned income. But this isn't the case. Here are some things to consider:

Different tax rates. While most earned income is subject to ordinary income tax rates up to 37%, unearned income can be subject to different tax rates. Long term capital gains and certain dividends, for instance, are generally subject to lower capital gains tax rates. These tax rates can max out at 20% before a potential net investment income tax of 3.8% is applied.

Kiddie tax rules. The tax code limits the amount of unearned income that can be taxed at your dependent's (usually lower) income tax rate. Amounts over this limit are taxed at the parent’s rate. The amount is $2,500 in 2023.

Tax benefit limits. Many tax credits and deductions will limit the amount of unearned income you may have and still qualify for a tax break. As an example, the Earned Income Tax Credit limits disqualified (unearned) income to $11,000 in 2023.

Timing matters. Sometimes the timing of an event can shift unearned income from ordinary income tax rates to preferential gain tax rates. This is the case with investment sales. Hold an investment for one year or less before selling it and your unearned investment gain is taxed as ordinary income. Hold it longer than one year and the unearned income is taxed at capital gains tax rates.

It's all in the details

It's important to understand how all elements of income apply to different aspects of the tax code. This is where working with someone familiar with the code can help..

Oops. An IRA Contribution Error

08/25/2023

If you contribute too much money into your IRA during the year, how do you correct the problem without facing a tax penalty? Here are some tips.

Remember the annual limits

2023 Annual IRA contribution limits

$6,500 per individual
$7,500 per individual if age 50 or older ($1,000 catch up provision)

This limit applies to the combination of contributions to both Traditional IRAs and Roth IRAs.

What causes excess contributions

Excess contributions can be caused by:

Combined total problem. This occurs when you have more than one IRA. Remember the annual limit is a combined total of all accounts. (Traditional IRA and Roth IRA combined)

Contributions without income. A contribution can only be made if you have income. Contributions made above your income but below the account limits are still considered excess contributions.

Whether your spouse is covered by a plan.

You are subject to a phaseout of your contribution. There are income limits that allow you to contribute each year. If you exceed the limit, all your contribution is deemed excessive. However, sometimes you can contribute to an IRA, but not the full annual amount because the allowed contribution can phase out with excess income.

Note: Age limits no longer apply. Remember you now contribute to Traditional IRAs at any age. The old rules required you to stop contributions in the year you reach age 70 1/2 or later.

Corrective action and penalty If you place too much money into your retirement account you have until the tax filing deadline including any extensions to remove the excess contribution. Any excess amount will be subject to a 6% penalty for each year the excess contribution remains in your account. You may also owe tax on contributions and earnings created by the excess contribution.

In addition:

Traditional IRAs. You will need to account for the additional income on your tax return. So if you discover the problem after you file your income tax return, you may need to file an amended tax return.

Roth IRAs. You can move excess contributions into the next year as long as IRA contributions in the following year are below the maximum allowed. Any earnings made during the time the excess contributions were in your account is taxable.

Some ideas

What can you do to minimize the risk of excess contributions?

Make it automatic. Set up an automatic withdrawal from your checking account to fund your IRA. Conduct the math to ensure you will never contribute too much.

Make a lump sum contribution. Make a one-time contribution at the beginning or end of each year. Want to wait for your refund? Remember you have until April 15th of the following year to fund your IRA. Consider taking advantage of this additional time.

Rollovers are not contributions. Remember rollovers ARE NOT contributions so the annual contribution limits do not apply. If you wish to roll funds from a qualified plan into your IRA, the excess contribution limits will not impact you as long as the rollover is handled correctly. It is a good idea to seek expert help in this area to ensure your rollover is compliant with tax code. For instance, there are usually tax obligations if the rollover is from a traditional IRA into a Roth IRA.

A Tip to Avoid Late Payment Penalties

What to do if you miss a quarterly estimated tax payment              08/18/2023

Many clients like to keep their Federal Tax withholdings as low as possible to avoid the IRS having their funds interest-free throughout the year. Other taxpayers, especially those with non-payroll income, must make quarterly payments to the IRS. As long as these quarterly payments are made timely and the amount of the payments is sufficient in the eyes of the IRS you will not be subjected to underpayment penalties. However, if under paid, the IRS applies late payment penalties in addition to the income tax owed. This penalty applies even if you file your 1040 tax return on or before April 15th.

The Safe Harbor rule

The tax code has a basic set of rules to determine if you owe a late tax payment penalty. The rule is call The Safe Harbor Rule. Here is a recap of the rule.  If you follow the rules, you can avoid any penalties.

If your federal tax obligation is less than $1,000 no underpayment penalties apply.
You withhold at least 90% of this year's federal tax obligation.
You withhold at least 100% of last year's tax obligation
If your gross income is greater than $150,000 ($75,000 if you are married filing separately) you must withhold the smaller of 90% of this year's tax obligation OR 110% of the tax shown on last year's tax return.

If you find federal tax withholdings made so far this year to be too low, what can you do?

Late Payment Penalty Avoidance Tip

If you are an employee there may be a way to avoid a penalty if you underpaid or neglected to pay your estimated tax payment for a quarter. Increase your payroll withholdings in later months of the year to build up your federal withholdings to cover the shortfall. Trying to catch up by paying more on your next estimated quarterly tax payment wouldn't work since the prior quarter's shortfall remains per IRS penalty calculations.

For whatever reason, in calculating a potential underpayment penalty, payroll withholdings are treated as if they were all made at the beginning of the year, while quarterly tax payments (form 1040-ES) are tracked by the date received.

To increase your withholdings simply provide your employer with a revised W-4. Just be careful that you leave enough in your paycheck to avoid other financial hardships.

The Taxability of Prizes

What everyone should know                08/11/2023

When you win a prize, there are really two winners: you and the taxing authorities. Should you be fortunate enough to win that trip of a lifetime to the French Riviera in your new yacht, here is what you need to know.

Prizes and taxes

Prizes are taxable. Almost all prizes are taxable income. You report them on your income tax return as other income. This is the case whether your prize is cash, merchandise, or free services.

The prize may be reported to the IRS. Prizes valued at $600 or more must be reported to the IRS. Prize values below this reporting threshold may also be reported at the discretion of the sponsor of the prize. As the winner, you should look to receive the proper Form 1099-MISC.

Employee awards are different. When you receive a prize or something of value from your employer, different rules apply. These fall under business expense, fringe benefits, and award rules. Things like a holiday turkey or occasional service awards are often (but not always) a non-taxable award. On the other hand, a bonus or prize points for merchandise as a sales award usually needs to be reported as income.

Gifts and prizes have different tax rules. A different part of the tax code applies to gifts. In short, gifts received from someone that are less than the annual gift threshold ($17,000 in 2023 or $34,000 for a married couple) are not deemed prizes.

Other considerations and tips

Should you receive a prize during the year, here are some tips to consider:

Donate to charity. If you wish to avoid paying tax on the prize you can refuse the prize or opt to donate the prize to a charity. It is best to sign appropriate paperwork to assign ownership of the prize to the charity and have the prize sent directly to them as you cannot use the prize before donating it.

Establish fair market value. Should you win property, like a car or vacation trip, establish the fair market value (FMV) of what you won. Hosts of prize contests often over-value the prize to aid in marketing their contest. You do not want to pay tax on an over-inflated value. So if you win merchandise, get copies of advertisements for the item. If it is a trip, document hotel rates, transportation costs and cost of meals to build a case for a lower FMV. If there is a discrepancy with the value received, show your documentation to the provider of the prize and get your Form 1099 value corrected.

Keep good records. When you win a prize, fill out a sheet outlining the details of the event. Record the identity of the sponsor, the date, a detailed description of what was won, copies of documentation, photos of the items won, and the approximate retail value assigned to the prize by the sponsor.

Plan for the tax. Using the value provided to you by the sponsor, determine if you will be able to pay the tax for the prize. You may need to plan to make an estimated tax payment to avoid any surprises when you file your tax return.

Remember should you be lucky enough to win a prize, ask for help to determine what steps need to be taken to manage your tax obligation.

Save Those Receipts!

These tips are money in your pocket                  08/04/2023

When it comes to taking qualified deductions on your tax return, having proper documentation to prove your expenditure is a must. Here are some typical areas where taxpayers often fall short, costing them plenty during tax filing season and during IRS audits:

Cash donations to charity. Donations of cash need to be supported by a canceled check or a receipt from the organization. Donations of $250 or more MUST have written acknowledgment from the charity at the time of the donation — a canceled check and bank statement are not sufficient.

Non-cash contributions. Additional support is required for non-cash donations to prove their value. This includes creating a detailed list of items donated, their condition, and estimated fair market value. While this level of detail is not required for small donations, it's always good practice to take photos and create a detailed listing of items donated.

Investment purchases and sales. If you bought or sold an investment, you need to know the original cost. Today’s regulations require brokers to report the cost of sales to the IRS, but many of these historical costs are reported incorrectly. So review your brokerage accounts and correct any errors. It is very difficult to defend yourself in an audit when records reported to the IRS are in error.

Copies of divorce decrees, alimony and child support agreements. There are often conflicts between two taxpayers regarding who is claiming a child on their tax return. Do you have the necessary proof to defend your position? The same is true with alimony and child support. Keep these documents in a safe place and be ready to use them if necessary.

Copies of financial transactions. Keep copies of documents from any major financial transaction. This includes real estate settlement statements, refinancing documents and any records of major purchases. These documents are necessary to ensure your cost basis in the property is properly recorded. The documents will also help identify any tax-related items like mortgage insurance, property taxes, points and possible sales taxes paid.

Mileage documentation. Tracking deductible miles is one of the most commonly overlooked documentation requirements. Properly recording charitable, medical and business miles can really add up to a large deduction.

If the record is not available, the IRS is quick to disallow your deduction. If you aren't sure whether a document is important, it’s best to retain it and file it in a way that you can easily retrieve it if needed at a later time.

IRS Ends Unannounced Revenue Officer Visits

07/28/2023

The IRS recently announced a major policy change that it will end most unannounced revenue officer visits to taxpayers.

This announcement is being picked up by all the major news outlets, but as is usually the case, it lacks context. Here is what you need to know.

Background

The IRS has revenue agents, revenue officers, and criminal investigation employees.

Revenue agents. Revenue agents are the auditors. The ones that review your tax return. This announcement does not impact their activities. And rarely do they visit unannounced. Most audit activity is now done via the mail and is commonly referred to as a correspondence audit.

Revenue officers. This group is responsible for collections of tax debt. Most smaller debts are often handled by collection agencies. The debts handled by revenue officers are typically in excess of $100,000.

Criminal investigation agents. This group within the IRS is the only group that can carry weapons and you can think of them as one of the largest law enforcement agencies in the United States. They are usually investigating criminal activity.

Current Situation

The recent announcement only refers to revenue officers. The reason for the change is two-fold.

1. Unannounced visits to collect a tax debt is putting IRS employees at risk. They are unarmed and can walk into uncertain situations that are truly unsafe.

2. IRS scams are an increasing problem. If you know the IRS will not show up unannounced, you can be more certain that when someone does show up claiming to be from the IRS, it is probably a scam.

Action

If you are ever contacted by the IRS either by phone, mail or in person, your first call should be to ask for professional help. This is the best way to avoid scams AND ensure resolution to any outstanding problem does not increase your tax obligation.

Amending a Tax Return

Not always needed or wise                   07/21/2023

There's usually an element of relief after your annual tax return has been filed. But what do you do if you find an error on your tax return? Should you always file an amended return? Here are some things to consider.

Errors in the IRS's favor

Errors discovered that lead to an additional tax obligation are legally required to be fixed by filing an amended tax return. This is especially true if the discovered error is from missing information found on a Form 1099 or Form W-2. Remember, information is being reported to the IRS and matching programs will typically catch the error.

Errors that result in lower tax

If correcting the error or omission results in a large, additional refund, the answer is usually obvious. File the amended return! But this isn't always the case.

1. Your tax return is now open for a longer period of time. Federal tax returns are typically subject to audit for three years after the original tax return due date OR the date the return was filed whichever is later. If you file an amended tax return, the audit clock may change based on the amended return filing date and degree of change requested. It may trigger a request from the IRS to extend the audit review period. The refund also resets the IRS erroneous refund recovery statute, adding two to five years of possible review based upon the date of the latest tax return refund.

2. The amended return may be examined. Amending a tax return could put a spotlight on your tax return. The IRS has certain topics that often trigger individual examination when amended returns are file. Amended tax returns based on things like the Earned Income Tax Credit, Small Business Income and the Research Tax Credit for small businesses, could result in a visit from your local IRS examiner.

3. Amending one tax return may require amending others. Making a minor change in one year may require you to make changes in other tax years. Is it worth it?

4. Other taxing authorities take an interest. Making a change on your federal tax return may require you to file an amended state or local tax return. Do not assume that an amendment in your favor at the federal level will necessarily be in your favor on the state and local level.

5. Don't expect the refund to be timely. Amended tax returns can take a long period of time to be reviewed. There have been cases where the IRS has delayed initial review of an amended return for more than a year, then decided to examine the return. While not typical, the process could take up to 1 1/2 years to resolve.

6. Timing is important. Remember, there is also a time limit to request a change in your tax return and receive an additional refund. This limit is typically three years after the initial filing deadline of the tax return. Make sure you file these tax returns using certified mail. Should the IRS delay responding to your amended return, you may need to prove it was filed timely.

7. You have a chip in your pocket. If the refund amount is not large enough to justify an amended tax return, you should still keep the documentation. Should you be chosen for an audit, you can often present your case at that time to offset any additional tax.

While finding an error or omission on your tax return can be unsettling, rest assured that there are ways to fix the problem, but it is often worth taking a balanced approach to determining the best solution.

Cash in on 0% Capital Gains Tax Rate

07/14/2023

While the maximum capital gain tax rate can be as high as 23.8 percent, most taxpayers pay 15 percent. But there is the possibility to have your capital gains go tax-free...yes, zero percent! In fact, this tax break has been around for more than a decade and comes into play more often than you may think. Here is what you should know:

Qualifying for the 0% capital gains rate

You qualify for long-term gain treatment if you sell stocks, bonds or real estate (and other capital assets) you’ve owned longer than a year.

For 2023, the zero percent rate applies to long-term capital gains for single taxpayers with taxable income up to $46,625 and married filing joint taxpayers up to $89,250. This zero percent rate can apply if you’re having a low income tax year due to:

Temporary job loss
A tax loss passed through to you from an S corporation or partnership
Income fluctuation for a commission-based job
Retirement
Moving to part-time employment

But you could also have a higher income and qualify for this zero percent rate. For example, if a married couple earns $116,950 in 2023, their taxable income would equal the $89,250 zero percent rate threshold after subtracting the $27,700 standard deduction for a married couple.

Awareness is the key

While you may not always have the zero percent capital gains tax rate available to you, it is important to note when it comes into play.

Here's an example: Adam and Eve Johnson recently retire. They have a number of mutual funds they've owned for years and have retirement savings accounts. Their current income is $58,700. Should they withdraw money from a retirement account or sell some of their mutual funds? Because they're aware of the zero percent capital gains, they decide to sell mutual funds with $25,000 in capital gains to get the money tax free!

Plan your own tax moves

So keep the zero percent capital gains rate in mind as the year winds down. Know your projected income for the year and depending on your situation, you might realize capital gains that are subject to no or lower tax rates. Remember other factors often come into play, including the taxability of Social Security Benefits, so call if you would like a review of your situation.

2024 Health Savings Account Limits

New contribution limits are on the horizon           07/07/2023

 Contribution limits for the ever-popular health savings account (HSA) are set for 2024. And inflation adjustments break through the historic trends of 1 to 2% increase each year. Next year the amount you can save to pay for health costs with pre-tax dollars jumps by more than 7%!

HSA defined

An HSA is a tax-advantaged savings account whose funds can be used to pay qualified health care costs for you, your spouse and your dependents. The account is a great way to pay for qualified health care costs with pre-tax dollars. In fact, any investment gains on your funds are also tax-free as long as they are used to pay for qualified medical, dental or vision expenses. Unused funds may be carried over from one year to the next. To qualify for this tax benefit you must be enrolled in a high-deductible health plan (HDHP).

The limits

Tax Tips for Those Getting Married

Know someone getting married? Send them this tip now.            06/30/2023

"If you recently got married, plan to get married, or know someone taking the matrimonial plunge, here are some important tax tips every new bride and groom should know.

Notify Social Security. Notify the Social Security Administration (SSA) of any name changes by filling out Form SS-5. The IRS matches names with the SSA and may reject your joint tax return if the names don’t match what the SSA has on file.

Address change notification. If either of you are moving, update your address with your employer as well as the Postal Service. This will ensure your W-2s are correctly stated and delivered to you at the end of the year. You will also need to update the IRS with your new address using Form 8822.

Review your benefits. Getting married allows you to make mid-year changes to employer benefit plans. Take the time to review health, dental, auto, and home insurance plans and update your coverage. If both of you have employer health plans, you need to decide whether it makes sense for each of you to keep your plans or whether it’s better for one to join the other’s plan as a spouse. Pay special attention to the tax implication of changes in health savings accounts, dependent childcare benefits and other employer pre-tax benefits.

Update your withholdings. You will need to recalculate your payroll withholdings and file new W-4s reflecting your new status. If both of you work, your combined income could put you in a higher tax bracket. This can result in reduced and phased-out benefits.

Update beneficiaries and other legal documents. Review your legal documents to make sure the names and addresses reflect your new marital status. This includes bank accounts, credit cards, property titles, insurance policies and living wills. Even more importantly, review and update beneficiaries on each of your retirement savings accounts and pensions.

Understand the tax impact of your residence. If you are selling one or two residences, review how capital gains tax laws apply to your situation. This is especially important if one of you has been in your home for only a short time or if either home has appreciated in value. This should be done as soon as possible prior to getting married to maximize your tax benefits.

Sit down with an expert. It is natural for newlyweds to focus their attention on the big day. There are so many decisions to be made from selecting a venue to planning the honeymoon. Because of this, reviewing your tax situation often is an afterthought. Do not make this mistake. A simple tax and financial planning session prior to the big day can save on future headaches and avoid potentially expensive tax mistakes.

If you’d like a review of how marriage will affect your tax and financial situation, call at your earliest opportunity.

Taxpayers may forfeit more than $1.4 billion in refunds

Due date is July 17!                06/23/2023

"Time is running out for more than a million people to get their tax refunds for 2019," said IRS Commissioner Danny Werfel. "Many people may have overlooked filing a 2019 tax return due to the pandemic. We don't want people to miss their window to receive their refund. We encourage people to check their records and act quickly before the deadline."

That deadline is quickly approaching: July 17, 2023

The three year rule

Refunds have to be claimed within three years or they are forfeited to the government. The unclaimed $1.4 billion comes from over 1 million taxpayers who still haven't filed returns for the 2019 tax year. Often the people who leave these refunds behind are young adults, college students, senior citizens and low-income taxpayers.

What's new this year is the July 17 deadline versus the traditional April 15 deadline due to a filing delay during the pandemic.

Why refunds go unclaimed

Most readers of this June alert will breeze right past this friendly reminder. But not so fast, everyone who reads this tip probably knows of someone that will be donating their 2019 refund to the federal government. Here are some examples:

Forgetting withholdings. Even if you have very little income, your employer may have taken some money from your paycheck for federal tax withholdings. The only way to get it back is to file a tax return. This impacts part-time employees and students.

Not claiming refundable credits. Many tax credits are “refundable credits.” This means you can receive a refund even if you owe no income tax. Common examples available to students and parents are the earned income tax credit and the premium tax credit.

Missing information. Some people don’t file because they’ve lost the information they need. If the reason you can’t file is because you lost your data, you can request an online transcript from the IRS that will give you your wage, income and other tax information. You can also mail the IRS a Form 4506-T to get paper copies mailed to you. However, this will take between five and 10 business days, so don’t delay.

Fear of penalties. Sometimes taxpayers fail to file old returns because they think the IRS may penalize them. There is no penalty for filing a late return if you are owed a refund.

Get your money

The IRS is great at tracking down people who owe them money, but not so great at reaching out to people they owe. This irony should motivate you to get your money back. To be safe, send your 2019 return by certified mail early enough so that the IRS receives it before July 17. Any refunds that aren’t claimed within the three-year due date will be gone forever, swallowed up by the U.S. Treasury Department.

Remember, just because you are not required to file a tax return doesn’t mean you shouldn’t. There are more than a billion dollars in unclaimed refunds – make sure you get yours.

Something Old is New Again

Tax Beneficial Savings Alternatives            06/16/2023

With the recent interest rate increases made by the Federal Reserve, it is time once again to actively manage your savings to ensure you are getting the most for your money. Here are some tips to consider.

Maximize the kiddie tax opportunity. Remember, the first $1,150 of your child’s unearned income such as interest and dividends is tax-free and the next $1,150 is taxed at your child’s tax rate. Leverage this information by using the Unified Gifts to Minors Act to manage a savings account in their name. Just understand that when your child reaches adulthood, the account transfers to them.

Look into tax-advantaged bonds. Municipal bonds, most of which are exempt from federal income tax, are starting to make a comeback. In addition, bonds within your home state may also be exempt from state taxes. So with higher interest rates, review the tax benefit of these bonds versus higher interest, taxable alternatives. But understand the underlying risks of individual bonds in case the municipality is unable to pay back the debt.

CDs are making a comeback. Banks are competing for your deposits once again. But what is new this time around are higher, often unpublished, penalties for early withdrawal. So before you leap at that great rate, understand the cost if you need the funds before maturity. Also understand the true after-tax interest rate.

U.S. Treasury Securities. U.S. Treasury investments are generally not subject to state or local tax. So as rates go up, and if banks look uncertain to you, you may wish to consider this tax-advantaged savings alternative. And investing in Treasury alternatives is now easier than ever by visiting www.treasurydirect.gov.

With savings alternatives at interest rates of 4% to 5%, savers now have many choices to manage their money. The key message: review your options, apply an after-tax calculation to understand your true return, and know your risks!

Reminder: Second Quarter Estimated Taxes Are Due

Now is the time to make your estimated tax payment          06/09/2023  

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The second quarter due date is now here.

Due date: Thursday, June 15, 2023

You are required to withhold at least 90 percent of your 2023 tax obligation or 100 percent of your 2022 tax obligation.* A quick look at your 2022 tax return and a projection of your 2023 tax obligation can help determine if a payment is necessary. Here are some other things to consider:

Avoid an underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year.

W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.

Self-employed workers need to account for FICA taxes. In addition to your income taxes, remember to also account for your Social Security and Medicare taxes. Creating and funding a savings account for this purpose can help avoid a possible cash flow hit each quarter when you pay your estimated taxes.

Don't forget state obligations. With the exception of a few states, you are often also required to make estimated state tax payments if you have to do so for your federal taxes. Consider conducting a review of your state obligations to ensure you also comply with these quarterly estimated tax payments.

If your income is over $150,000 ($75,000 if married filing separate), you must pay 110 percent of your 2022 tax obligation to avoid an underpayment penalty.

Five Steps to Take if You're Audited

06/02/2023

Getting audited is no one’s idea of a good time, yet you can minimize the stress if you take the right approach.

Step 1: Understand why and when. While it's possible you were selected randomly, it’s more likely you were selected for a specific reason. One example might be if your deductions for charitable donations or business expenses were greater than is typical for your income or profession. Before proceeding, try to understand what is being challenged and when you must reply.

Analysis: Your chance of being audited rises along with the size of your income. With $200,000 a year in income your chance of being audited nearly doubles (1.01% in FY2016) compared with a person who has half that income. People with more than $10 million in income have a nearly 1-in-5 chance of an audit every year.

Step 2: Consider the type of audit. There are three types of audits, in increasing levels of seriousness: a correspondence audit, (conducted through the mail); an office audit (a visit to the nearest IRS office); and a field audit (an IRS agent comes to visit you). How you prepare will vary depending on the type of audit.

Analysis: About 70 percent of audits are conducted through mail correspondence which typically involves routine issues like providing information about deductions. With proper documentation and prompt attention, they can be relatively painless to resolve. Office and field audits can be trickier and will involve more work and preparation.

Step 3: Gather documents. Once you’ve understood the reason and the type of audit, gather and organize as much of your relevant records as possible to prepare your response. For example, if the audit is specifically about deducting vehicle costs for business use, gather your mileage logbook, receipts and other supporting documentation. This will help prove your case and let the IRS know you are a responsible taxpayer.

Analysis: If you do not have adequate documentation, you can try to get third-party corroboration. For example, if you took charitable deductions but lost the receipts, you could try reaching out to the charity for their records. While the charity cannot create new receipts, they may have copies of confirmations sent out to you at the time of your donation.

Step 4: Know your rights. You have rights to ensure you get a fair chance to state your position. Specifically, you have the right to clear explanations about what the IRS wants and their decision regarding your case. You have the right to appeal the IRS’s decision. You also have the right to have your accountant or lawyer represent you during the audit. In addition, there is a special Taxpayer Advocate Service that is available to help you navigate through problems with your case.

Analysis: While you should stand up for your rights, always be polite with the IRS agent assigned to your case. They are just doing their job and you aren’t doing yourself any favors if you show hostility during your audit.

Step 5: Get help. No matter what, reach out immediately if you get a letter from the IRS. It pays to have the right help, because an experienced professional can guide you away from costly mistakes. Too many taxpayers have corresponded with the IRS without this help and have paid the price. Try as you might, you probably do not know the tax law as well as the IRS.

Audits happen. How you handle them can make all the difference. Please call if you need help.

Understanding Tax Terms: Health Savings Accounts (HSA)

05/26/2023

If Benjamin Franklin were alive today, his famous quote Nothing is certain, except death and taxes might include a third item — paying medical expenses. Fortunately a health savings account (HSA) is a great way to cut your spending on medical expenses.

A major tax break

If you have a high deductible health insurance plan (a plan with a deductible of at least $1,500 for an individual or $3,000 for a family), you can add an HSA to pay for medical expenses with pre-tax income. Contributions to an HSA can be made via payroll deduction or directly to the account and deducted as an adjustment on your tax return. This approach effectively reduces your medical bills by as much as 37 percent!

Tips to maximize your HSA

Once your HSA is established, here are four ideas you can use to take full advantage of this tax-savings vehicle:

Maximize your HSA contributions every year. Set a goal to contribute the full amount allowable by the IRS into your HSA each year. Unlike other funds, unused balances can remain in the account, giving you a great way to build up a nice emergency fund over the years. The 2023 total contribution limits are $3,850 for single taxpayers and $7,750 for a family (add $1,000 if you are 55 or older). You have until April 15 of the next year to make contributions, but when figuring out how much to contribute, remember to include contributions by your employer in your total.

Pay for medical expenses with your HSA. Typically you can pay for medical expenses directly from your HSA account via a debit card. If not, track all payments you make for medical expenses and take matching distributions from your HSA. If you don’t have enough in your HSA to cover an expense, make a contribution to your HSA first and then pay the bill. Keep ALL your medical bills and receipts to prove that the distributions are for qualified medical expenses.

Prioritize HSA contributions. HSA contributions are tax-deductible and distributions are tax-free (for qualified medical expenses). Traditional IRA distributions, on the other hand, are taxable. So it often makes sense to maximize HSA contributions over Traditional IRA contributions.

Look at every year as an opportunity. Remember, each year has an HSA contribution limit. If you do not maximize that year's opportunity, it is gone. So try to find a way to make pre-tax contributions to your HSA up to the annual limit. Most of us will need money for medical, dental, or vision expenses and wouldn't it be nice to do this with pre-tax money?

So knowing you will always have medical expenses, prioritize your HSA contributions to take advantage of its additional tax benefits.

New College Savings Option

How to get more money without reducing need awards     05/19/2023

Beginning in 2023 there is a new way to save money for college that won't impact your student’s ability to qualify for financial aid. This change is in the 529 college saving program and is a change that every parent, grandparent, or friend of a future scholar should know.

Simply put, grandparents can now open up 529 savings plans without hurting the student’s ability to get financial aid!

Background

529 college savings plans provide a way to contribute after-tax money into an account designated for a beneficiary (the student). The plan is controlled by the account holder on behalf of the student, so there is little risk that the funds won't be used as intended for education. As the deposits grow over time, any gains on the deposits are tax-free as long as they are used for qualified educational expenses. Even better, these funds can be used for both college and K through 12 qualified expenses. Funds not used for education will be subject to ordinary income taxes AND a 10% penalty.

The problem

While anyone can open a 529 savings plan for a future student, any time a distribution was made to the student from a non-parent account, that distribution used to be treated as untaxed income to the child. Up to 50% of this distribution could impact the student’s ability to receive other aid through the Free Application for Federal Student Aid (FAFSA). On the other hand, if the account is in the parent’s name, the reduction in aid eligibility is maxed out at 5.64%!

The new opportunity

It appears now that a grandparent (or potentially any non-custodial parent or friend) can open up a 529 savings plan without it hurting the future student’s ability to get federal aid. In the eyes of the new FAFSA, this funding is now virtually invisible to them as they calculate a student’s financial needs because they are no longer asking the questions about the grandparent’s contributions. So not only will the assets in the 529 account be ignored, but the distributions from the 529 account will also not influence the FAFSA results.

Considerations

If you are considering this option to help fund the ever-increasing cost of college, here are some considerations and ideas:

Let grandparents know of the change. Consider having your parent set up an account for the benefit of your child (their grandchild). Then put their gifts into the account, instead of giving cash to your child. Remember, they can contribute up to the gift threshold limit each year (currently $17,000 per person in 2023) or even more with special funding rules.

No college? No problem. If your grandchild does not go to college and there isn't a need to fund K through 12 education, you can change the beneficiary to another grandchild or family member.

Need to pull the money. If you need to pull the money, remember that the original contributions are tax and penalty free. Taxes and penalties only apply to earnings in the account that are distributed.

Consider other applications. If the student goes to a private school, these grandparent contributions may need to be disclosed, so plan accordingly.

Given the ever-increasing cost of college, now is a great time to have more advocates helping to save for future educational expenses. These extra savings could make a big difference in reducing your student’s future debt obligations.

Improve Next Year's Tax Situation Now!

05/12/2023

Whether you receive a big refund or pay your taxes on tax day, taking action now can ensure next year’s tax bill is optimized by not paying a dollar more than necessary.

Update paycheck withholdings and forecast estimated tax payments. Reviewing and updating withholdings now gives you several months to spread out the tax impact on your daily finances. Adjust your paycheck withholdings using Form W-4 with your employer to either increase or decrease your anticipated refund. If you are self-employed, you can instead adjust your quarterly estimated payments. Other factors will change your 2023 tax liability, but using your 2022 refund or tax bill as a baseline to update withholdings is a good first step. Just make sure your withholdings will cover 90 percent of this year’s tax bill or you may be subject to an underpayment penalty.

Organize last year’s tax records. Create a file to hold your completed tax return, supporting schedules and documentation. Organize the file so it matches the flow of Form 1040 — put income documents first, followed by deductions, credits and estimated payments. Doing it this way allows for easy access to your records in the event of an audit. Once you finish with last year’s file, create a checklist of expected documents and a new file for 2023. This will help you keep track of your tax paperwork during the year and speed up the tax filing process in 2023.

Schedule a tax planning appointment. Midyear tax planning is essential to ensure the proper roadmap is in place to realize your tax goals. Using your 2022 tax return is a good starting point for your plan, but it’s not enough. Getting married or divorced, planning for retirement, having or adopting a child, buying a house, paying for college, starting a new job, or getting a raise are just some of the life changes that can dramatically change your tax situation.

Most of us want to forget the hassle of tax season as soon as the form is filed, but the savvy taxpayer uses this time to prepare and plan for a better tax result next year. Please call if you’d like assistance.

Make Your Child's Summer Break a Tax Break

05/05/2023

As a busy working parent, you may be concerned about what activities are available for your kids this summer. There may be a solution that’s also a tax break: summer camp!

Using the Child and Dependent Care Credit, you can be reimbursed for part of the cost of enrolling your child in a day camp this summer.

Am I eligible?

You, and your spouse if you are married, must both be working.
Your child must be below age 13, your legal dependent, and live in your residence for more than half the year.

Tip: If your spouse doesn’t work but is either a full-time student, or is disabled and incapable of self-care, you can still qualify for the credit.

How much can I save?

You can claim a minimum credit of $600 for one child on up to $3,000 in expenses, or $1,200 for two or more children on up to $6,000 in expenses, if your adjusted gross income (AGI) is greater than $43,000. If your AGI is less than that, the credit per child scales up to $1,050 and $2,100, respectively.

What kind of camps?

The only rule is: no overnight camps.

The credit is designed to help working people care for their kids during the work day, so summer camps where kids stay overnight aren’t eligible for this credit.

Other than that, it doesn’t matter what kind of camp: soccer camp, chess camp, summer school or even a simple day care. All of them are eligible expenses for this credit.

Other ways to use this credit

While summer day camp costs are a common way to use this credit, any cost to provide care for your children while you are working may be eligible.

For example, if you pay a day care center, a housekeeper or a babysitter to take care of your child while you are working, that qualifies. You can even pay a relative to care for your child and claim the credit for that expense, as long as the relative isn’t your dependent, minor child or spouse.

This is just one of many possible tax breaks related to children and dependents. Call if you have questions about this credit, or if you’d like to discuss any other tax savings ideas.

Replacing Lost Tax Breaks for Your Growing Children

04/28/2023

Your kids are getting older. Before you know it they’ll be dating, driving and entering college (if they aren't already!). Tax breaks drop dramatically as your children grow up, but you may be able to offset the losses with some timely tax planning. Consider the following tax events based on the age of your child:

Age 13: No more dependent day care credit. The minimum annual credit for the cost of caring for your children while you and your spouse work is generally $600 for one child and $1,200 for two or more children when your adjusted gross income exceeds $43,000. But the credit is only available for children under age 13.

Tax move: Now that your child is a teenager, hire him or her to work at your business. Typically, the child will owe little or no income tax on the wages, and might even be able to claim an exemption from withholding.

Age 17: Child Tax Credit (CTC) no longer available. With the CTC you receive a $2,000 credit ($1,600 of which is refundable) for each child. Unfortunately, the credit disappears when the child turns 17. Remember, a tax credit is a dollar-for-dollar reduction of your taxes due, so as each child reaches 17, your taxes will go up by the full amount of the previously-claimed credit.

Tax move: Claim a nonrefundable $500 credit for a dependent who isn’t a qualifying child for the CTC. This is typically available to parents of high school seniors and college students.

Age 19 or 24: Goodbye kiddie tax. And now some good news. At 19, your child is no longer subject to kiddie tax rules unless they are a full time student. In that case, they stay eligible for another four years (until age 24). This means any unearned income like interest and dividends in excess of the annual threshold ($2,300 in 2023) is no longer taxed at the parent's (usually higher) tax rate.

Tax move: As your child exits exposure to the kiddie tax, it may be time for a planning session. Long-held stocks with capital gains in a child's name can now be sold with little to no federal tax obligation.

As you watch your children grow up and begin gaining their independence, remember to plan ahead for changes to your tax situation. Please call if you have questions about these child tax breaks or to schedule a planning session to discuss what other tax breaks may be available to you.

Put Your Tax Refund to Good Use

04/21/2023

Three-fourths of filers get a tax refund every year, with the average check weighing in at $2,972* so far this tax season. Here are some ideas to put that money to good use:

Pay off debt. Part (or all!) of your refund could be used to reduce or eliminate debt. With interest on credit cards skyrocketing due to inflation, this is a great place to start. Or an extra payment on your mortgage or vehicle could put more money in your pocket over the long haul.

Save for retirement. Saving for retirement works like debt, just in reverse. The sooner you set aside money for retirement, the more time you give the power of compound interest to work for you. Consider depositing some of your refund check into a traditional or Roth IRA. You can contribute a total of $6,500 in 2023, plus an extra $1,000 if you are at least 50 years old.

Save for a home. Home ownership can be a source of wealth and stability for many people. If you dream of owning a home, consider adding your refund to a down payment fund. Or if you own a home, start a maintenance fund you can use to replace an aging roof, furnace, or air conditioner.

Invest in yourself. Sometimes the best investment isn’t financial, it’s personal. A course of study or conference that improves your skills or knowledge could be the best use of your money.

Give to charity. Donating your refund to a charity helps others and gives you a deduction for your next tax return if you itemize.

Beware of fraud! Scammers are using new tactics every year to separate people from their tax refunds. Remember, real IRS agents will never call over the phone and demand immediate payment for any reason.

Finally, consider saving some of your refund to have a little fun. If you use some of the ideas mentioned here, you can feel comfortable you are taking a balanced approach with your refund.

*Source: IRS 2023 tax filing season statistics, cumulative through March 10, 2023.

How to Reduce Your Property Taxes

04/14/2023

 Market values of homes are skyrocketing and higher property tax bills are soon to follow. Prepare now to knock your property taxes back down to earth.

What is happening?

Property taxes typically lag the market. In bad times, the value of your home goes down, but the property tax is slow to show this reduction. In good times, property values go up and higher property taxes are sure to follow.

To make matters worse, you can now only deduct up to $10,000 in taxes on your federal tax return. That figure includes all taxes - state income, property and sales taxes combined! Here are some suggestions to help reduce your property tax burden.

What you can do

Challenge the assessed value on your property as soon as you get the notice of value. Unfortunately, most of us go unprepared to these meetings. Here are some ideas to successfully reduce your home's appraised value.

Do some homework to understand the approval process to get your property revalued. It is typically outlined on your property tax statement.

Understand the deadlines and adhere to them. Most property tax authorities have strict deadlines. Miss one deadline by a day and you are out of luck.

Do some research BEFORE you call your assessor. Talk to neighbors and honestly assess the amount of disrepair your property may be in versus other comparable properties in your neighborhood. Call a few real estate professionals. Tell them you would like a market review of your property. Try to choose a professional that will not overstate the value of your home hoping to get a listing, but will show you comparable sales for your area. Then find comparable sales in your area to defend a lower valuation.

Look at your property classification in the detailed description of your home. Often times errors in this code can overstate the value of your home. For example, if you live in a condo that was converted from an apartment, the property's appraised value could still be based on a non-owner occupied rental classification. Armed with this information, approach the assessor seeking first to understand the basis of the appraisal.

Ask for a review of your property. Position your request for a review based on your research. Do not fall into the assessor trap of defending your review request without first having all the information on your property. Meet the assessor with a specific value in mind. Assessors are used to irrational arguments, so a reasonable approach is often readily accepted.

While going through this process remember to be aware of the pressure these taxing authorities are under. This understanding can help temper your position and hopefully put you in a better position to have your case heard.

Where's My Refund?

03/31/2023

The popular Where’s My Refund feature on the IRS website allows you to see the status of your refund after filing your income tax return.

What you should know

Refunds of e-filed returns usually take 10 to 21 days to process. Paper returns take longer than e-filed returns. The IRS states that 90 percent of refunds are processed within this 21-day time period.

Original refund processing projections can change. This can be due to processing backlogs, or errors on your tax return.

Sometimes a delay is a good thing. The IRS acknowledges there is a huge increase in identity fraud as thieves attempt to steal tax withholdings. The IRS is using their data match programs to catch as much of this illegal activity as possible. Because of this, if the IRS is suspicious that there is fraudulent activity, they will hold up processing your refund.

Checking your refund status

In the meantime, if you'd like to check on the status of your refund, visit irs.gov/refunds and click on Check My Refund Status.

When to check

24 hours after an e-filed tax return confirmation is received
4 weeks after a paper-filed tax return is mailed

What you need to provide

Social Security number
Filing status
Exact refund amount

Remember, the information provided to you by the IRS is not a guarantee of payment. So please resist the urge to spend your refund before receiving it. Unfortunately, no amount of calling or checking will change the speed of returning your money. With 150 million tax returns processed each year, sometimes all you can do is wait.

Understanding the Gift Giving Tax

Excess gift giving could cause a tax surprise       03/24/2023

In an effort to keep taxpayers from transferring wealth from one generation to the next tax-free, there are specific limits to the amount of gifts one may give to any one person each year. Amounts in excess of this limit are subject to filing an annual gift tax form. For most of us, this is not something we need to worry about, but if handled incorrectly it can create quite a surprise when the tax bill is due.

The Gift Giving Rule

You may give up to $17,000 (up $1,000) to any individual (donee) within the calendar year 2023 and avoid any gift tax filing requirements. If married you and your spouse may transfer up to $34,000 per donee. If you provide a gift to your spouse who is not a U.S. citizen, the annual exclusion amount is $175,000 for 2023.

Gift Tax Reporting

Amounts given in excess of this annual amount are subject to potential gift tax reporting. The amount of tax is currently unified with estate taxes with a maximum rate of 40%. The donor of the gift is responsible for paying any associated tax. When you exceed the annual gift giving amount, this triggers the need to file a gift tax form with your individual tax return. The excess gift amounts are netted against your lifetime unified credit. If your lifetime gifts do not exceed the credit you may not have additional taxes owed. Here are some instances when a gift tax problem may occur and ways to manage the problem:

Gifts for college. Grandparents like to help out with the tremendous expense of funding a college degree and amounts donated can quickly surpass the annual gift threshold. To avoid the gift tax problem consider making payments directly to the college as this form of payment can be excluded from the annual gift giving limit AS LONG AS the funds are not used to pay for books, room or board on behalf of the donee.
Be careful with 529 plan funding. If your children are anticipating going to college, many consider creating a 529 college savings plan. You may then fund the savings plan (or have someone else fund it) on behalf of your child. However, remember the deposits into 529 accounts are considered a gift and are subject to the annual gift giving limits.
Gifts to cover medical expenses. It is very easy to mount up a large medical bill. While you may want to step in and help out by giving money to the individual with the medical bills, you may be creating a gift tax obligation. Better: make payments directly to health care providers for medical services on behalf of the patient to avoid gift tax exposure.
Gifts to help make a down payment. It is becoming more common to have family members help their kids with the down payment on a first home. This can be tricky. Lenders will look for recent deposits in bank accounts and ask the prospective buyers to substantiate the source of funds. Providing the funds as a loan may disqualify the couple for taking on the mortgage. Even worse, if the purchasing couple claims the funds are a gift, this action may create a gift tax obligation to the person providing the funds. Care must be taken to provide the correct audit trail to prove the gift does not exceed the annual amounts.
Gift of real estate. If you give property to a relative for little or nothing in return, this generates the need to file a gift tax form as well. Recent IRS studies suggest over 50% of taxpayers fail to declare property transfers as gifts.

Other things to consider

You may provide gifts to or receive gifts from ANYONE. There are no limits or restrictions on who you may give a gift to or who may provide a gift to you. Creative gift giving can be a useful tool to help someone in need without creating a tax obligation.
Do not give a lump sum gift for the maximum amount. If you provide a gift for the maximum allowable to an individual, you may not provide any other gifts to this person during the year or the event would be deemed excess gift giving and require filing a gift tax form. For example, a grandmother gives $17,000 to her granddaughter for college. She also pays for a vacation trip to send the family to Disney World and provides a wonderful birthday gift. Technically, the additional gifts are in excess of the annual limit and would present a gift tax event.

The IRS is paying attention to the massive non-compliance in the timely filing of the annual gift tax form. So much so, that it is actively researching property transfers in key states to ensure the gift tax filing is taking place. So identifying when to file the gift tax form is your most important take away from this tax tip.

Audit Target: The Sole Proprietor

03/17/2023

Each year the IRS publishes their activities in a publication called the Data Book. And each year for the past number of years the number one target of audits are those tax returns with a Schedule C for small business activity. So how can you prepare yourself for a possible audit? Here are some tips.

Keep records separate. The quickest way to get a business deduction disallowed is to blend your personal bills with those from your business. Instead, consider opening a separate checking account and use a separate credit card for business expenses.

Keep logs. Keep a logbook for business miles, as well as business meetings and meals. Include the date, time, subject, and who was present at the meeting.

Ordinary and necessary. Two key words to use to qualify legitimate, deductible business expenses per the IRS are:
Ordinary: An expense that is common and accepted in your industry.
Necessary: An expense that is helpful and appropriate for your business.

Business not hobby.  A qualified business activity allows for direct deductibility of appropriate expenses, whereas hobby activity expenses are generally disallowed. There are many facets to this situation, but to stay away from the hobby problem, you need to have a profit motive and active participation in the activity to qualify your activity as a business.

The IRS will know. Starting in 2023, the IRS is requiring third-party payment providers to submit 1099-K forms for all activity over $600. This means if you take credit cards or use digital payment tools to accept payments from customers, the IRS is going to be looking for a business tax return. So keep good records!

Just because the IRS focuses their audit activities in this area does not mean you should be reluctant to take appropriate deductions. Just be prepared to defend your position with excellent records.

The Marriage Penalty is Alive and Well

 03/10/2023

 Despite what you may think, the marriage penalty is still alive and well. Whether you’re changing your filing status in 2022 because of marriage, divorce or another event (or even if your filing status staying the same), you should review this information and plan accordingly.

What is the marriage penalty?

The marriage penalty occurs when the dollar ranges for married taxpayers (joint filers) are not exactly double the dollar ranges for single taxpayers. It results from the way the graduated tax rate system works, based on your tax filing status and other tax return items. Married taxpayers are often taxed more than they’d be as two single filers.

Situations subject to the marriage penalty

Both spouses with high incomes. A disparity for the dollar ranges still exists for the two top tax brackets of 35 percent and 37 percent. That means that the marriage penalty often applies to high-income couples. Wealthy couples may save money by avoiding a marriage certificate! For example, Riley's taxable income was $400,000 per year, while Avery's annual taxable income came in at $300,000. Before getting married, Riley's tax bill using the 2022 tax brackets would be $113,753 using a single filing status, while Avery's tax bill would be $78,753, for a combined tax liability of $192,506. Once they marry, Riley and Avery would have a tax bill of $193,549 using married filing joint tax brackets.

Local taxes over $10,000. Legislation also limits the annual deduction for state and local tax (SALT) payments to $10,000. This limit is the same for a married couple as a single taxpayer. For instance, assume that a couple pays $25,000 in property taxes in 2022. As joint filers, their deduction is limited to $10,000, whereas they could write off a total of $20,000 if they were both single filers.

Tax-planning opportunity

While no one is saying you should get married or divorced because of the marriage penalty, factoring it into your tax planning can make a big difference. Please call if you wish to review your situation.

The Tax-Free Retirement Savings Option

Is a Roth IRA right for you?                 03/03/2023

If you are looking for tax-free income and more flexibility during retirement, perhaps you should look into investing in a Roth IRA. While Roth IRA contributions are not sheltered from current taxes like contributions to traditional IRAs, they offer other tax benefits during retirement.

The Roth IRA advantage

Retirement withdrawals (including earnings) are tax-free. As long as you wait to take distributions until you are 59 ½ or older, the full amount of your Roth account is tax-free!
Save taxes on other earnings. During retirement, withdrawals from traditional IRAs increase your taxable income. This can bump other earnings into a higher tax bracket and potentially increase the taxability of your Social Security benefits. Conversely, Roth withdrawals are not reported as income, keeping tax rates as low as possible.
More flexibility during retirement. In 2023 and later, once you turn 73 the IRS requires that you take required minimum distributions (RMDs) from traditional IRAs. If you don’t, you’ll get hit with a 50% penalty! There is no such requirement for Roth IRAs. You can leave (and even contribute) funds to grow in the account as long as you want.
Contributions can be withdrawn tax-free at any age. If you have a financial hardship and need to make an early withdrawal, only the earnings in a Roth are subject to a 10 percent early withdrawal penalty. Meaning, Roth contributions can be withdrawn tax-free and penalty-free at anytime. This is because you use after-tax funds to make your original Roth contributions. This is not the case with traditional IRAs — the full withdrawal is subject to the penalty if you make it before you turn 59½.

The Roth IRA is not for everyone.

While there are many reasons to consider contributing to a Roth IRA, they are not for everyone. Here are some factors to consider:

Income limits. While there are no income limits if you wish to roll funds from other accounts into a Roth IRA, there are income limits to contribute to a Roth IRA. For 2022 they are $144,000 single ($153,000 in 2023) and $214,000 married ($228,000 in 2023).
Contribution limits. In 2022, you can contribute a maximum of $6,000 ($7,000 if age 50 or over). This amount increases by $500 in 2023.
5-year active account requirement. To receive the full tax-free benefit of Roth investment earnings, you must have your Roth account for five years before making withdrawals.
Future tax uncertainty. While no one knows what the future holds, keeping tabs on tax trends is an important aspect of retirement planning. Increasing or decreasing tax rates may ultimately determine the best type of retirement investment for you. In addition, the government has the power to change the taxability of your IRA if they deem it necessary.

If you are looking to maximize your savings for 2022, you still have until April 18, 2023 to contribute into an IRA.

Three Tax Break Tips for Caregivers

02/24/2023  

If you’ve ever had to care for a sick, elderly or disabled person, you know it can be difficult financially as well as emotionally. A recent study found that many caregivers are forced to make financial sacrifices, including delaying retirement, in order to help their loved ones.

Luckily, there are three key federal income tax breaks available to help lighten the financial burden on caregivers. Here are some tips to help take advantage of them:

Tip #1: Use the “family” credit

This is a $500 tax credit that you can claim for each dependent other than children under age 17. This credit is generally for relatives and others who are members of your household and for whom you provide more than half of their support. The credit begins to phase out at $400,000 for married joint filers and $200,000 for individual filers.

Tip #2: Use the medical expense deduction

Caregiving often comes with medical expenses. The good news is that you can claim a deduction for the medical expenses you pay for your dependents.

The threshold for claiming the medical expense deduction is 7.5 percent for the 2022 and 2023 tax years, meaning that you can deduct any medical expenses higher than 7.5 percent of your adjusted gross income.

Bonus tip: You can still claim the deduction for medical expenses for a relative even if that person wouldn’t otherwise be classified as a dependent (such as when they don’t live in your household), as long as you provide more than 50 percent of their support. In the case where multiple people together provide more than 50 percent of the support for a relative, you can collectively decide who gets to take the deduction as part of a multiple support agreement. This is useful when, for example, siblings share the cost of caring for elderly parents.

Tip #3: Use the Child and Dependent Care Credit

If you are working while acting as a caregiver for a dependent, you may be able to use the Child and Dependent Care Credit to offset part of the cost of their care. The dependent must be physically or mentally incapable of caring for themselves and live in the same home as you for more than half the year. Depending on your income, the credit can be applied against 20% to 35% of qualified expenses, up to a total maximum credit of between $600 and $1,050 for one dependent.

Bonus tip: Both you and your spouse must be working during the year to claim this credit. If your employer provided any dependent support as part of a benefits package, the amount of the credit is reduced by that amount.

If you have any questions about the tax benefits available to you, don’t hesitate to get in touch.

Rejected!

What to do if your e-filed tax return is rejected by the IRS   02/17/2023  

More than 90% of individual tax returns are now filed electronically, and usually the process goes smoothly. When an e-filed tax return is rejected, however, e-filing can become more complicated.

Common causes for rejected tax returns

Simple filing errors. Most rejections are caused by things such as misspellings, typos on Social Security numbers, or missing forms. When an e-filed tax return is rejected, the IRS e-filing system sends back rejection codes. These codes are specific to lines on the tax return and descriptions of the problem are readily available. Most of these errors can be easily corrected.

Dependent errors. This error occurs when someone else has claimed a dependent on a previously filed tax return. This often occurs with divorced and unmarried couples who each claim the same child on their tax return. The IRS does not take sides in this situation, they simply accept the earlier-filed return and reject any subsequent returns.

Identity fraud. Someone else has already filed a tax return using your Social Security number.

What to do

Most errors are simple and easily corrected, which paves the way for resubmitting your tax return for e-filing without much additional delay. However there are two instances that require your immediate attention. When either of these occur, you may need to file your tax return via physical mail and work to correct the error for future tax filings:

1.) Dependent errors. A dependent can only be claimed on one tax return. If a dependent is already claimed on another individual’s tax return you will need to provide proof that the dependent belongs on your return. If this happens, contact the other party who claimed your dependent and ask them to amend their return. Let them know that you’re filing your tax return correctly claiming the dependent. Your filing will target both tax returns for a potential IRS audit. This audit risk often is enough motivation to correct the problem.

2.) Identity Fraud. Criminals using stolen information submit tax returns electronically in an effort to steal your tax withholdings. Fraudulently claimed refunds are then automatically deposited into thieves’ bank accounts. Unfortunately, you may discover the theft when your e-filed tax return is rejected. If this happens to you:

File a paper tax return.

Include Form 14039: Identity Theft Affidavit with your tax return.

Confirm your identity using the IRS Identity Verification Service or by calling the IRS.

Mail your tax return using Certified Mail with Return Receipt Requested so you are certain of timely delivery.

Immediately take steps to protect your financial information. The following link will take you to the Federal Trade Commission’s identity theft area for recommended steps to protect yourself: FTC Identity Theft Assistance

While solving the cause for a rejected e-filed tax return can be a headache, the sooner the problem is addressed, the sooner your refund can be received.

Stop the Clock

Your most important defense against an audit    02/10/2023  

In a tax court decision, a judge ruled that a joint tax return not signed by both spouses is not a validly filed tax return.* This seems like a simple ruling about the signature line on a 1040 tax form. The true reason for the ruling; to keep the statute of limitations open to give the IRS the authority to audit this couple’s prior year tax returns. The lesson here is not only found on the signature line of the tax return, but on closing out past tax returns from the possibility of audit.

The rules

Three (3) year rule. The IRS can audit a tax return for up to three years after the tax return is filed or the original filing due date, whichever is later.

Six (6) year rule. The three year audit window doubles if you understate your income by 25% or more. This includes understating the taxable value of property transferred to you.

The forever rule. There is no time limit if you fail to file a tax return, there is fraudulent activity, or if certain unreported foreign assets are involved.

State rules vary. Each state has its own statute of limitations. Many states add six months to one year to the federal window to allow the state time to react to any federal tax changes due to an audit or amended tax return.

Amended returns. If you amend your federal tax return, the IRS generally has sixty days to review the revision. This may add time to the audit window, but only if the amended tax return is filed near the end of the audit window.

Some tips

Keep the time as short as possible. Try to file your tax return on or before the initial filing deadline. For most of us, this is April 15th. Keep records that document the timing of your filing either by using certified mail or keeping copies of e-file confirmations. But also be aware there are exceptions to this rule. Late law changes often create a need to file an extension, so it is best to discuss your situation.

Start the clock. Remember, until you file your tax return the audit clock never starts. This is the problem our couple had with their unsigned tax return. Without both signatures, the jointly filed tax return was not deemed to have been filed. So the audit time-frame did not start. This left the taxpayers with a very large (and expensive) available audit window.

Understand the permission to extend. On occasion, the IRS may ask you for permission to extend the audit period. They will do this to buy time to finish an audit. If you refuse, the audit window is closed, but the IRS may present you with a tax bill based upon incomplete information. Should this request be delivered to you, ask for assistance before agreeing to an extension.

Know your state's rules. States have different statute of limitation rules. For instance, some states hold their audit periods open indefinitely if you file an amended federal tax return, but fail to file an amended state tax return.

While many look at the April filing deadline with dread, remember each deadline also closes the ability to audit a timely filed prior year tax return.

Those Darn Kids

The risk of having kids file their own tax returns   02/03/2023  

If you have children younger than 19 years old (or 24 if a full-time student), you should coordinate the filing of their taxes with yours. HOW they file, though, is a matter of tax law.

The problem

Your child is away for college. You try to file your family tax return on April 14th after finally receiving all the required documentation. Unfortunately, your e-filed tax return is rejected because your college student filed their own tax return and received a nice refund. Now you have a mess on your hands. You must file an extension, file an amended tax return for your child, return a refund, and potentially paper file your tax return.

A matter of law

The dependency rules and kiddie tax laws are clear and must be followed. If you have a dependent child as determined by the tax code, you will need to conduct the tax calculations to determine what is taxed at your child’s tax rate and what will be taxed at your higher tax rate. The same is true for which tax return receives what level of standard deductions. This requires coordination of your tax filings with that of your dependent children.

Suggestions

Remind your independent-minded kids to hold off filing their tax return until consulting with you.

Claiming oneself as a dependent is not a choice, it is a matter of law. Remind your child there are rules that must be followed before making this tax decision.

Plan for a dependency shift. Sometimes arranging for a shift in dependent from a parent to a student makes financial sense. If you think this might be true, conduct a tax planning exercise prior to making the change.

Consider using the tax filing process to introduce your young adult to the benefits of tax planning. You never know, it could save you money as well as the hassle of undoing an improperly filed tax return.

How to Handle All Those Forms

01/27/2023  

Your mailbox has started filling up with tax forms over the last several weeks and there are likely more to come. Getting your forms organized makes your tax filing easier for everyone involved. Here are some tips on how to handle all the forms you get and to head off any potential problems.

Collect them all

Check last year's tax records, and make a list of the forms you received. Add any new accounts, employers or vendors and check the forms off as you get them.

Gathering all your forms is important because the IRS gets copies of each form sent to them as well. Missing one can trigger an IRS correspondence audit, creating extra work and possibly delaying your refund.

Check for digital forms

More employers, banks and others are making their tax forms available to you electronically, so you may not get a paper form in the mail. Be sure to check your inbox for any missing forms before you file, and don’t forget to check your junk or spam email folders as well, just in case any tax information accidentally ends up there.

Fix errors

Double check to see if there are any errors on the forms you receive. If there are, contact the issuer via phone and in writing to get the problem fixed. If you can't get a corrected form, still report everything on your forms to the IRS, but add a correction explaining the error when you file your return. That way you can still file without waiting for the issuer to send you a corrected form.

Commonly overlooked forms

While getting all your W-2 and 1099 forms is important, there are three forms worthy of special attention before you file:

1095 – Proof of health insurance, required under the Affordable Care Act (ACA). Most taxpayers will no longer receive this form, unless you get your insurance through the Healthcare Marketplace. If you do, you may be entitled to a special premium tax credit. You will need this form to support this deduction.

1098-T – Confirmation of tuition and fees paid to qualified educational institutions. If you're taking an education deduction, you'll need one of these forms from your accredited school.

1099-K – Confirmation of payments you receive from a third party service like Ticketmaster, SeatGeek, Venmo or other digital/credit card payment systems. New rules required many more to receive this form, but the IRS recently delayed the expanded reporting requirement in late December 2022. Too late for many to stop sending out their forms...so look for them AND retain them if you get any of these forms.

As you watch for your forms to arrive, remember to reach out to schedule your tax filing appointment. An early appointment will help ensure you get all questions answered ahead of the April filing deadline.

Reasons to File Early

When it makes sense to file a tax return as soon as you can    01/20/2023

The 2022 tax filing season officially begins when the IRS starts accepting tax returns in late January and early February. There are many reasons to consider filing your tax return as soon as the IRS begins accepting returns. Here are some of the most common:

To get your refund. There's no reason to let the government hold onto your funds interest-free, so file early and get your refund as soon as possible. While legislation delays receiving refunds for tax returns claiming The Earned Income Credit and the Additional Child Tax Credit until after February 15th, the sooner your tax return is in the queue, the sooner you will receive your refund.

To minimize your tax identity fraud risk. Once you file your tax return, the window of opportunity for tax identity thieves closes. Tax identity thieves work early during the tax filing season because your paycheck's tax withholdings are still in the hands of the IRS. If they can file a tax return before you do, they may be able to steal these withholdings via a refund that should have gone to you!

To avoid a dependent dispute. One of the most common reasons an e-filed return is rejected is when you submit a dependent’s Social Security number that has already been used by someone else. If you think there is a chance an ex-spouse may do this, you should file as early as possible.

To deliver your return to someone who needs it. If you are planning to buy a house or anticipate any other transaction that will require proof of income, you may wish to file early. This is especially important if you are self-employed. You can then make your filed tax return available to your bank or other financial institution.

To beat the rush. As the tax filing deadline approaches, the ability to get help becomes more difficult. So get your documentation together and schedule a time to get your tax return filed as soon as you can. It can be a relief to have this annual task in the rear-view mirror.

2023 Mileage Rates are Here!

New mileage rates announced by the IRS   01/13/2023

Mileage rates for travel are now set for 2023. The standard business mileage rate increases by 3 cents to 65.5 cents per mile. The medical and moving mileage rates stay at 22 cents per mile. Charitable mileage rates remain unchanged at 14 cents per mile.

January 2022 through June 2022

Reminder: Fourth Quarter Estimated Taxes Now Due

Now is the time to make your estimated tax payment   01/06/2023  

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The 4th quarter due date for the 2022 tax year is now here.

Due date: Tuesday, January 17, 2023

You are required to withhold at least 90 percent of your 2022 tax obligation or 100 percent of your 2021 federal tax obligation.* A quick look at your 2021 tax return and a projection of your 2022 tax return can help determine if a payment by Tuesday, January 17, 2023 is necessary. Here are several other things to consider:

Underpayment penalty  If you do not have proper tax withholdings, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. So a fourth quarter catch-up payment may not help avoid an underpayment penalty if you didn't pay enough taxes in prior quarters.

Self-employed. Remember to also pay your Social Security and Medicare taxes, not just your income taxes. Creating and funding a savings account for this purpose can help avoid a cash flow hit each quarter when you pay your estimated taxes.

Don't forget state obligations. With the exception of a few states, you are often required to make estimated state tax payments when required to do so for your federal tax obligations. Consider conducting a review of your state obligations to ensure you meet these quarterly estimated tax payments as well.

If your income is over $150,000 ($75,000 if married filing separate), you must pay 110% of last year’s tax obligation to be safe from an underpayment penalty.  

Here They Go Again...

Late-breaking IRS change    12/30/2022

In a last minute about face, the IRS is rolling back the requirement for third-party payment providers to issue 1099-Ks for anyone receiving payments over $600 in 2022. They are moving the reporting requirement back to $20,000 in activity and 200 or more transactions as they transition to the lower threshold in 2023.

Why the change

The bottom line? The IRS is not ready to figure out how to automate the auditing of those under-reporting their income from things like Ebay, Esty and Amazon sales or from sales of tickets and other goods through payment systems like Venmo and Ticketmaster.

What does not change

While this last-minute change may keep you from receiving a 1099-K this year, don’t count on it. Many providers are already geared up to send them out and will probably do so, since the IRS reprieve in reporting is temporary. So keep your eyes open for these forms throughout January and early February.

While the IRS informational return reporting is temporarily changing, what is not changing is your requirement to report this income. So if you have activities that provide income to you, including your side hustle buying and selling event tickets, that activity is reportable on your tax return.

Stay tuned

In further developments, Congress is up to their old tricks in changing the rules at the end of the year. Preliminary review, of the yet unsigned bill, indicates the major changes will impact 2023 and beyond. So stay tuned, future tax tips will lay out the basic tax law changes and how you can take advantage of them.

Social Security Planning Starts Now

Even those in their 20s should review this tip!    12/23/2022

Although you won’t become eligible for Social Security until your 60s, there’s a lot you can do to prepare before then. Here’s a rundown of steps you can take during each decade of your life:

In your 20s: If you’re like a lot of people, you’re embarking on a career. At this point, there’s no guarantee that Social Security will be around in its current form when you’re ready to retire. The smart move is to build up retirement savings on your own. For instance, you should be participating in a 401(k) or other qualified plan at work. If done, Social Security benefits will be a pleasant surprise when you retire.

In your 30s: As you continue making retirement contributions, begin checking on your Social Security wage history. Go to the Social Security Administration (SSA) website to set up and review your account. Eventually, benefits will be based on your work history. Make sure your wages are being reported correctly and correct any errors that occur. As the same time, increase retirement plan contributions.

In your 40s: Typically, this is a time when your earnings increase significantly. Be aware of the key rules relating to Social Security benefits. For example, realize that the SSA uses your average earnings for the 35 highest-earning years to calculate your payments in retirement. So keep track of this and continue to have lower income years be replaced with higher income years. This will result in higher benefit checks when you retire.

In your 50s: Circle a target date for retirement. While not etched in stone, having a target date allows you to analyze whether you’ll be able to sustain your current lifestyle based on your expected income and expenses. This exercise is more important if you’re considering early retirement. Continue to check income being reported to the SSA and create a forecast for the future. If you wait until your 60s to begin this planning process, it may be too late to save enough to meet your retirement goals.

In your 60s: Decide whether you want to begin taking benefits at age 62 (the earliest age), age 67 (the current full retirement age), or somewhere in between. The longer you wait, the greater your monthly benefits will be, but you'll be giving up use of the money in the meantime. Factor in aspects like your health, plan payouts, required minimum distributions and other earnings. Finally, remember that up to 85% of Social Security benefits are taxable at the federal level, so it's worth to start planning now!

Taxes and Uncollectible Debt

Tax ramifications can be good or BAD!     12/16/2022

There are few things as frustrating as not being paid what is owed to you. If it becomes clear the debt is not going to be paid, you might be able to recoup some of the lost money via a tax deduction. The IRS has two classifications for bad debt: business and non-business, each with its own deductibility rules.

Business bad debt

In order to be considered a deductible business bad debt, the IRS states that the debt must be closely related to your trade or business. To qualify as a deduction, both of the following must be true:

The amount is or has already been included as income or as an asset
The debt is considered to be partially or completely worthless

There are many ways to determine the worthlessness of a debt, but at a minimum, you should be able to produce a summary of your collection efforts. If you determine that the debt is indeed bad debt, you can deduct it as a business expense if the aforementioned statements are true.

Non-business bad debt

All bad debt not defined as business-related is classified as non-business. For a non-business bad debt deduction, the debt must be considered 100 percent worthless. There is no partial deduction available. In addition, you need to prove that the debt is a loan intended to be repaid and not a gift – especially if loaned to a friend or family member. The best way to prove this is with a signed agreement.

If you determine the bad debt is valid, you can report the amount as a short-term capital loss. The loss is subject to capital loss limitations and you need to submit a statement with your tax return that includes the following:

Description of the debt
Amount of the debt and when it became due
Name of the debtor
Business or family relationship between you and the debtor
Efforts you made to collect the debt
Why you decided the debt was worthless

The other side of the coin

If, on the other hand, you owe someone money and they write off the debt, the tax code generally requires you to record the forgiven debt as income on your tax return. There are cases, however, when this is not required. So if during the year you have forgiven debt, you should ask for a review of your tax situation. This is especially true if the forgiven debt is a discharge of:

A home mortgage
Student loans (especially for failed schools)
Pandemic-related debt forgiveness

While no one wants to be in a position to write off debt, it’s nice to know that you can at least benefit from a tax deduction. If you find yourself in this situation or are planning to loan funds in the future, call to set up a plan of action.

Fund Your Retirement or Your Child's College?

12/09/2022

 Towards the end of the year, many are undergoing an annual review of their retirement funds. It certainly was a tough year and one of the decisions many parents are grandparents are facing is the difficult decision to either save for retirement or use funds to pay for their children’s or grandchildren's college education. Here are some thoughts on the matter:

Prioritize retirement over education

In most cases it is more important to put the financial needs of retirement ahead of college education. Here's why:

Retirement funds will be used to cover your basic needs for daily life for as many as 20, 30 or even 40 years. While education for children is important - and expensive - it is secondary to your long-term well-being.

Financial aid and numerous other programs are available for your child to take advantage of to help them afford college. This includes current and future student loan forgiveness programs.

If necessary, your child can take out student loans. While it may take years for them to repay a student loan, they will have future income potential to do so. Your income will be lower or even stop upon retirement.

Ways to plan for both

There are plenty of opportunities to fund both retirement and college education in a tax-advantaged way. Consider funding basic retirement needs first, then look at educational savings accounts and related programs. Here are some suggestions:

Start saving early. Use time to help grow the value in your retirement and education savings accounts. Take advantage of employer-provided 401(k) or similar retirement programs, especially if there is an employer match. After that, look into Coverdell Education Savings Accounts and Section 529 plans to maximize your education savings potential.

Research and apply for grants and scholarships. Start researching early, as there are college scholarships available for children as young as 5 years old!

Consider in-state public colleges. They are generally less expensive than private or out-of-state colleges. If an out-of-state college is preferred, check to see if they have reciprocity agreements with your home state.

Look into work-study programs. Many schools provide part-time jobs for students to help them pay for school while keeping up with their studies. These programs vary based on a student's financial needs.

Making financial decisions like this can be tough, but with proper planning and insight, a path that works for you can often be found. Call if you want to discuss your specific situation.

Consider Donating Appreciated Stock & Mutual Funds

12/02/2022

One way to reduce your tax bill this year is to donate appreciated stock to a charity of your choice versus making a cash donation. While this will be a tough challenge in today's market, it is still one of the best tax planning strategies available to you. This part of the tax code provides a tax benefit in two ways:

1. Higher deduction. Your charitable gift deduction is the higher fair market value of the appreciated stock on the date of your donation and not what you originally paid for it.

2. No capital gains tax. You do not have to pay tax on the profits you made after selling the stock. As long as you have owned the investment for more than one year, you can avoid paying long-term capital gains tax on the increased value of your stock.

A Sweet Example

Winnie and Christopher each own 100 shares of Honey, Inc. that they purchased three years ago for $1,000. Today the stock is worth $5,000 (after taking a bit of a sticky hit in the down market). Winnie sells the stock and donates the proceeds to “Save the Bees” while Christopher donates his stock directly to “Honey Overeaters: Finding a Cure”. Assuming a 15% long-term capital gains tax rate*, a 25% income tax bracket, and no other limitations:

Not only does Christopher see $750 in additional federal tax benefit by donating his appreciated stock, but Honey Overeaters has $600 in additional funds to use for their charitable program.

Other benefits

The Alternative Minimum Tax (AMT) does not impact charitable deductions as it does with other deductions.
Remember, this approach also provides more funds to your selected charity. By donating cash or check, those additional funds are instead paid as federal taxes. This tax benefit could be worth even more if our honey lovers have more income. The maximum long-term capital gain tax rate can be as high as 20%, and also be hit by a potential 3.8% net investment income tax.
This benefit is for everyone who itemizes deductions that have qualified assets, not just the wealthy.

Things to consider

Remember this benefit only applies to qualified investments (typically stocks and mutual funds) held longer than one year.
Be careful as investments such as collectibles and inventory do not qualify. Consider this a replacement for contributions you would normally make to qualified organizations.
Talk to your target charitable organization. They often have a preferred broker that can help receive the donation in a qualified manner.
Contribution limits as a percent of adjusted gross income may apply. Excess contributions can often be carried forward as deductions for up to five years.
How you conduct the transaction is very important. It must be clear to the IRS that the investment was donated directly to the charitable organization.

If you think this opportunity is right for you, please contact a trusted advisor to ensure you handle the donation correctly. 

The total tax rate on this type of investment can be as high as 23.8% (20% capital gains tax plus 3.8% net investment income tax) if you have qualified investment income above applicable threshold amounts.

5 Year-End Tax Essentials

11/25/2022

Before 2022 comes to a close, take some time to review these essential items to ensure you are not missing something that could cause tax trouble when you file your tax return:

1. Take required minimum distributions (RMDs). If you are age 72 or older, you need to take RMDs from certain retirement accounts before Dec. 31st to avoid a 50% penalty! This includes most IRAs (except Roth IRAs) and 401(k)s. Your annual RMD is calculated by dividing the prior Dec. 31st balance by the life expectancy factor provided by IRS tables.

2. Watch for your Identity Protection PIN from the IRS. If you are a victim of tax-related identity theft, the IRS will mail you a one-time use identity protection personal identification number (IP PIN) as added security. The IRS mails IP PINs between mid-December and early January, so look for your IP PIN during this time period.

3. Contribute to retirement accounts. Making contributions to tax-advantaged retirement accounts like a traditional IRA or 401(k) is a great way to lower your tax liability, even if you don’t plan to itemize your deductions!

4. Harvest gains & losses. If you expect to have capital gains from your investments, selling stocks in a loss position to offset the gains will lower your tax liability. In fact, you can claim excess losses of up to $3,000 to decrease your ordinary income, such as wages from your job! Timing matters with investment sales and income taxes, so having a year-end strategy can help lower your tax bill.

5. Make last-minute tax moves. Here are a few ideas worth considering:

Donate to charity to maximize itemized deductions
Make a tax-efficient withdrawal from your retirement account if you are over age 59½
Take advantage of 2022's gift-giving limit of $16,000 per person ($32,000 if married)
If you own a small business, delay receipt of income from 2022 into 2023, or accelerate expenses from 2023 into 2022.

Understanding your current situation and having a plan will help maximize your year-end tax savings.

Plan Your 2023 Retirement Contributions

11/18/2022

As part of your planning for next year, now is the time to review funding your retirement accounts in 2023. Recent cost of living calculations means much higher contribution limits for next year. Plus, the higher income phaseouts for eligibility will make many more taxpayers eligible for fully deductible contributions. So plan now to take full advantage of this tax benefit. Here are annual contribution limits for the more popular programs:

Triple Tax: aka The Lottery

11/11/2022

Now that the dust has settled on the big lottery winnings, it is worthwhile to see how the tax math works. Seen in the light of day, it is a great way for federal and state governments to triple tax this income and get even the lowest income households to pay it. So as media outlets shine a light on the lucky winner, consider what the tax looks like.

Should You Expense or Depreciate Your Capital Asset?

11/04/2022

 If you own a business, you know that you may accelerate the expensing of qualified capital purchases. This can be done within two special provisions in the tax code:

Section 179

The annual amount of qualified assets that may be expensed (instead of depreciated) was raised to $1.08 million for 2022. This benefit can be maximized as long as the total assets purchased by your business don't exceed $2.7 million. Qualified purchases can be new or used equipment, as well as qualified software placed in service during the year.

Bonus Depreciation

There is also an option to choose additional first-year bonus depreciation of 100 percent of the cost of qualified property.

To qualify the property must be purchased and placed in service before 2023. After that, an annual phaseout lowers the bonus deduction percentage. Property can be new or used, but it can't be in use by you before it was acquired. There are a few exclusions for electrical energy and gas or steam distribution.

Not interested in claiming the bonus depreciation expense. Then you may choose to opt out of this provision for each category (class) of property you place in service.

What should you do?

Taking advantage of these provisions may be good for your business, but that's not always the case.

Remember, if you use these special asset-expensing provisions, depreciation expense taken this year is given up in future years. How many future years depend on the recovery period of the asset, but the additional tax exposure could be up to two decades! This is especially important to consider if your company is organized as a passthrough entity, like an S Corporation, as more income could be exposed to higher marginal taxes.

The short-term tax savings these two provisions provide is often too good to pass up. However, if you have some predictability in your business, it probably makes sense to forecast your projected pre-tax earnings with and without the accelerated depreciation to ensure you are making the correct long-term tax decision.

Don't Run Afoul of the IRS's Nanny Tax

10/28/2022

 The IRS is more strictly enforcing rules that determine whether a worker is actually your employee, rather than an independent contractor.

So be careful if you regularly pay a gardener, housekeeper, nanny, babysitter or any other household service provider. You don't want to run afoul of the IRS's household employee rules, often referred to as the Nanny Tax.

Do you have a household employee?

Many taxpayers unwittingly establish an employer relationship when they hire someone to help around the house. To decide whether a household worker is your employee, the IRS looks at whether you:

Control how and when their work is done
Provide them with supplies and equipment

The IRS also considers whether the relationship is permanent, and whether a worker is economically dependent on their employment with you. A worker may be considered an employee whether or not their work for you is part- or full-time, or paid hourly, weekly or by the job.

Tip 1: The more independent the worker is, the less likely they are to be considered your employee. Have your worker set their own hours and use their own tools. Also have them invoice you for their work and provide you with receipts.

Tip 2: If the worker works for another company that issues them a W-2, or they run their own company that offers services to the general public, you are generally safe from having them considered as your employee.

Tax consequences

If you think you have a household employee, here is what you need to know:

The $2,400 limit. If you pay less than $2,400 in a year (or $1,000 in any calendar quarter) you generally are not responsible for paying employment taxes. But if your payments are over these limits, you may need to withhold and pay Social Security, Medicare and unemployment insurance taxes.
Overtime. You may be required to pay overtime, depending on federal and state laws.
Timing is important. Employment taxes must be paid regularly throughout the year or you could face fines and penalties.
Other considerations. You may also need to purchase worker's compensation insurance to cover you should there be any accidents while they are working for you.

If you are going to rely heavily on the services of a domestic worker, it’s worth thinking carefully about the relationship at the outset. Consider getting a formal employment contract in place, and call for help to create a plan to handle your tax obligations.

Inflation Spikes Social Security for 2023

How much you pay and checks received are all going up!     10/21/2022

The Social Security Administration announced a whopping 8.7% boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2023. This is on the heels of a 5.9% increase last year. The increase is based on the rise in the Consumer Price Index over the past 12 months ending in September 2022.

For those contributing to Social Security through wages, the potential maximum income subject to Social Security tax increases to $160,200. This represents a whopping 9% increase in your Social Security Tax! Here's a recap of the key dollar amounts:

2023 Social Security Benefits - Key Information

The Social Security and Medicare tax rates do not change from 2022 to 2023.

Note: The above tax rates are a combination of 6.20 percent Social Security and 1.45 percent for Medicare. There is also a 0.9 percent Medicare wages surtax for single taxpayers with wages above $200,000 ($250,000 for joint filers) that is not reflected in these figures. Please note that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.

Lower This Year's Tax Obligation

Action to take now!                                10/14/2022

 Now is a good time to assess your current situation and address those lingering tax moves that may improve your tax picture for 2022. Here are five things to consider:

1. Check on your withholdings. Review your taxable income and the amount of tax you’ve paid to Uncle Sam so far this year. How do the numbers compare to last year? Based on your analysis, you may have to adjust your paycheck withholdings or make estimated tax payments during the balance of the year to avoid underpayment penalties or a surprising tax bill.

2. Build up your retirement accounts. Don’t neglect your retirement savings during the remainder of the year. In fact, setting aside more money for retirement can lower this year’s tax bill. For instance, if you have a 401(k) plan at work, you can defer up to $20,500 of salary in 2022, plus an extra $6,500 if you’re age 50 or older.

3. Identify potential taxable events. It’s easy to overlook one-time events that will have an impact on your 2022 tax liability. For instance, if you win a prize at a church raffle, the prize is generally taxable to you. Perhaps you changed jobs, lost a child as a dependent, or got married. Each of these events can create a change in your tax obligation. Review your records now to avoid any unpleasant tax surprises later.

4. Consider business property needs. If you acquire business property, you can often choose to write off the cost in the first year the property is placed in service under the latest tax laws. If it makes sense, consider combining the benefits of the Section 179 expensing deduction, up to a maximum of $1 million (indexed for inflation), with 100% bonus depreciation for both new and used property.

5. Account for gig taxes. Finally, workers in the gig economy (like Uber and Lyft drivers) should understand the basic tax rules. Generally, income from such jobs is fully taxable, but you may be entitled to offsetting deductions. Essentially, you’re treated like a self-employed individual. Estimated quarterly tax payments are often required for these workers.

Should you wish a review of your situation, call now. It's better to be prepared than surprised when it comes to your tax obligation.

Leveraging Your Children's Lower Tax Rate

One of the best places for parents to look for tax savings        10/07/2022

If you're a parent, your dependent children can be a source of tax savings. There are the well-known provisions in the tax code such as the Dependent Child Care Credit and the Child Tax Credit, but there's also an opportunity to shift some taxable income to your children.

Shifting income to your children works because the tax rate increases as your income rises. This provides an incentive to shift income to your lower-earning dependent children. Here's how to make it work:

Shifting income rules

In 2022, the first $1,150 of unearned income for each child is not taxed and the next $1,150 in unearned income is taxed at the lowest rate of 10 percent. Typical unearned income includes interest, dividends, royalties and investment gains.

Tip: Transfer enough income-producing assets to each child to approach the annual unearned income limits as closely as possible. Depending on your marginal tax rate you could be saving as much as 37 percent in federal income tax on the transferred amounts.

Tip: In addition to the unearned income, consider purchasing investments that will have long-term capital gain appreciation. This may help manage the timing and rate of capital gains tax when the investment is later sold.

Tip: Remember excess investment income could be subject to the additional 3.8% Medicare Surtax. Any investment income that can be shifted to your children could also save you this additional tax bite as well.

Leverage your children's earned income

Income your children make from wages is considered earned income. If you own a small business, finding ways to employ your children can be a way to shift income from your higher tax rate to their lower rate. Care must be taken to be able to defend the work being done by your child and the amount they receive for their work. Some ideas include:

Use your child in an advertisement for your business.
Have your child clean your office a few times per week.
Put your child in charge of making local business deliveries.
Have your child help assemble items or help with mailings.

Tip: If you are a sole proprietor, you may hire your dependent children under age 18 and won't be required to pay Social Security and Medicare taxes.

Caution: Moving assets from you to your children could affect their ability to receive financial aid for college. Make sure to consider how your tax strategy affects college financing.

There are many opportunities to leverage the tax advantages of having children. Reach out if you would like help creating a plan for your family.

October extension deadline fast approaching

09/30/2022

Monday, October 17th marks the extension deadline for filing your 2021 Form 1040 tax return. Given all the recent tax legislation, numerous stimulus checks and COVID-related tax changes, there are more open tax return filings than ever!

If you have not filed a tax return and don't think you need to file one, please reconsider. Billions of refunds go unclaimed each year by taxpayers that really should file a tax return.

Here's a quick checklist of situations when filing a tax return might make sense even if you don't have to:

You are due a refund. Without filing, the government could end up keeping these funds. So double check your stimulus check payments. Did you get them? Were they for the full amount? Preparing a tax return, even if not filed, is a good exercise to ensure you received the full benefit.

You had taxes withheld from your paychecks but end up owing no tax for the year.

You are eligible for Health Insurance Premium Credits. Be aware of this possible benefit if you use the market exchange to purchase your health care insurance.

You are eligible for a refundable credit. This is true with the popular Earned Income Tax Credit, the Additional Child Tax Credit, and a portion of the American Opportunity Tax Credit.

Your state requires a federally filed tax return.

You want the filed tax return for your records.

You wish to start your audit time clock. Remember, the audit timeframe never starts if you do not file your tax return.

Many taxpayers have trouble gathering accurate and complete information necessary to file their tax return. When they cannot get all the necessary information, they get stuck. Should this be your situation, please ask for help. Even a reasonably close tax filing that is later amended when more information becomes available is sometimes a better alternative than not filing at all.

Effective and Marginal Tax: Know Yours!

Understanding the difference between these two tax rates    09/23/2022

The tax code is filled with terms we rarely use in everyday conversation. Two of the more common are Marginal Tax Rates and Effective Tax Rates. Knowing what they mean can help you think differently about your potential tax obligation.

Definition

Marginal Tax Rate: This is the tax rate applied to the next dollar you earn. Since our income tax rates are progressive, the next dollar you earn could be taxed at as little as zero or as high as 37%!

Effective Tax Rate: This is the tax rate you actually pay. It is total taxes paid divided by your total taxable income. Said another way, after taking your income and then applying taxes, deductions, credits, exemptions, and other adjustments, you are left with your true tax obligation. This obligation is a percent of your income.

A Simple Example

Consider two single people; Joe Cool who earns $50,000 and Chuck Browne who earns $500,000. If we had a flat tax of 10%, Mr. Cool would pay $5,000 in tax and Mr. Browne would pay $50,000 in tax. Both of their Effective Tax Rates would be 10% AND their Marginal Tax Rates would also be 10% because each additional dollar they earn would be taxed at the same 10%. However, it is a different picture when you apply our progressive tax rates:

If we use the 2022 U.S. tax table for a single filer, Joe Cool pays $6,617 and Chuck Browne pays $148,753 in federal tax. This is because tax rates applied to Joe Cool’s income are (10 – 22%) while Chuck's income over $50,000 gets Marginal Tax Rates of (22 – 35%). Ignoring other tax factors, our two taxpayers’ tax rates are: Effective and marginal tax rate example

Reduce Your Medical Expenses

Tax smarts that make a difference    09/16/202

Medical expenses are on the rise. According to the Milliman Medical Index, the average family of four on an employer-sponsored plan will spend $30,260 on healthcare in 2022 – a $4,699 increase from 2020. Below are some ways you can save tax dollars when paying those medical bills:

Contribute to a Health Savings Account (HSA). If you have a high deductible health plan, you can open an HSA account to pay your medical bills. If your health insurance deductible is $1,400 ($2,800 for family) or more, you can make contributions to an HSA to reduce your taxable income. The HSA contribution limit is $3,650 for 2022 ($7,300 for family).
Contribute to a Flexible Savings Account (FSA). Unlike an HSA, an FSA has to be set up by your employer. Like an HSA, you and your employer can make pre-tax payroll contributions to the account to cover qualified medical expenses. One benefit of an FSA is your total annual election amount is available to you on Jan. 1. On the flip side, if you don’t use your FSA dollars by year-end, you lose the funds.
Deduct your self-employed health insurance premiums. If you are self-employed, you can deduct amounts paid for health insurance premiums for you and your family. To be eligible to make the deduction, your self-employed business needs to show a profit for the tax year. This is an above-the-line deduction, so it can reduce your taxable income even if you are claiming the standard deduction. Deduct medical expenses as an itemized deduction. For 2022, the IRS will allow you to include medical expenses that exceed 7.5 percent of your adjusted gross income (AGI) as an itemized deduction. For example, using the US Census Bureau’s average household income of $67,500, any medical expense above $5,063 may be deducted. If you are not taking the standard deduction, these medical expenses can be used to reduce your income.

If you would like to discuss how these options may work for you, please call.  Phone: 505-800-5690

The New $7,500 Tax Credit That Isn't

What you need to know      09/09/2022

 A highly-touted tax credit in the recently-passed Inflation Reduction Act is meant to incentivize Americans to purchase clean and electric vehicles. The bottom line, however, is that practically speaking YOU CAN’T GET IT.

Why few credits will be seen

As the new legislation is currently written, nearly all the electric vehicles sold today do not qualify for the new credit that begins in 2023. This is because:

The vehicle must be manufactured in North America AND
Powered by batteries with materials sourced in either the U.S. or from free trade partners
AND If by some stroke of luck you find a new vehicle that qualifies, the price must be below $55,000 for a sedan and $80,000 for a van, truck or SUV.

Tax code as behavior modification

The new electric vehicle tax credit is a classic example of the continued shift from using income taxes to pay for federal spending to using the tax code to get us to do what the government wants. In this case:

The government is trying to get manufactures to shift sourcing away from countries like China.
The government wants to motivate the creation of manufacturing jobs in the U.S.
The government wants to incentivize the manufacturing of lower-priced electric vehicles.

What this means for you

What this means for the average consumer is little to anything…right now. If you have your sights set on getting a clean or electric vehicle, make the decision without the influence of the credit. If maximizing the credit is important for you, you now need to pay attention to income limits and will need to wait for some time to see if the credit influences manufacturers to change their sourcing and assembly plans.

Reminder: Third Quarter Estimated Taxes Due

Now is the time to make your estimated tax payment      09/02/2022

 If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The third quarter due date is now here.

Due date: Thursday, Sept. 15, 2022

Remember, you are required to withhold at least 90 percent of your current tax obligation or 100 percent of last year’s obligation. * A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment is necessary. Here are some other things to consider:

Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. A quick payment at the end of the year may not help avoid the underpayment penalty.
W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough funds to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.
 Self-employed. Remember to account for the need to pay your Social Security and Medicare taxes as well. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter when you pay your estimated taxes.
Don't forget state obligations. With the exception of a few states, you are often also required to make estimated state tax payments if you're required to do so for your federal taxes. Consider conducting a review of your state obligations to ensure you meet these quarterly estimated tax payments as well. 

If your income is over $150,000 ($75,000 if married filing separately), you must pay 110 percent of last year’s tax obligation to be safe from an underpayment penalty.

Understanding Tax Terms: Contemporaneous Records

Everyone needs to know what this means!       08/26/2022

If you have problems getting to sleep at night and you turn to the IRS tax code for help, you might find some vocabulary that is very foreign to you. One of the more uncommon words used by the IRS is the term "contemporaneous." So what does it mean and why should you care?

Contemporaneous defined

According to the IRS, it means that the records used to support a claim on your tax return are created and originated at the same time as your claimed deduction. In other words, if you realize that you forgot to get a receipt for something, you are out of luck if you try to get one at a later date.

Not fair!

Perhaps you know you had the expense, but you simply forgot to get a receipt. You can cry foul, but time and again the IRS has had tax courts uphold their elimination of a taxpayer's deduction for lack of contemporaneous documentation. Here are some areas where the term contemporaneous is especially important:

Charitable contributions
Business deductions for expenses and capital purchases
Mileage logs
Tip records
Gambling losses Business travel expenses

The donation of vehicles, boats and planes is often the most cited area where lack of contemporaneous documentation is a problem because these types of donations have a high estimated market value that changes from month to month. But timely, written acknowledgement from the charitable organization is also required for any donation of $250 or more.

What you need to know

Always get a receipt. Before you leave a donated item, always ask for a receipt. In the case of a vehicle, make sure the charitable organization gives you a 1098-C that is fully filled out. In addition, make sure the organization uses your vehicle or is a qualified charitable group that allows you to take the full market value of your donation.
If you forget, call right away. As soon as you realize a confirmation or receipt is missing, call to get one sent to you. Request that the receipt be dated as of the date of the service or activity.
Think tax year. Understanding the definition of contemporaneous is important, because it is not always precisely defined. If the documentation is received in the same year as the donation or transaction, you are usually in good shape.
Keep a log. Many transactions require the correct documentation at the time the activity occurs. This is true with deductible mileage; gambling loses and tip income. So, keep a log of your activities as they occur.
Wait to file. To meet the IRS definition of contemporaneous, the receipt or acknowledgement must be received the earlier of either when you file your tax return OR the due date (including extensions) of your tax return. This is particularly true with charitable contributions. So, if you want to play it safe, do not file until all documentation is in hand.

IRS Audit Rates

Don't get complacent...resurgence is underway        08/19/2022

The IRS reported audit rates continue to be low...very low. But that is now changing with thousands of auditors being hired for a post-pandemic scale-up of their reviews.

So don’t get complacent. A closer look at the IRS data release reveals some audit pitfalls you should know about.

Audit Rate Statistics for Individuals

You Can't Deduct that Loss

How to ensure your business is not deemed a hobby   08/12/2022

You’ve loved dogs all your life so you decide to breed them and start a dog training business. Is this a business in the eyes of the IRS or a hobby? Knowing what the IRS is looking for and properly positioning your small business can save taxes and headaches if you are ever questioned by the IRS.

Why you should care

If your activity is a business, your income can be reduced by all your qualified business expenses even if it results in a loss. If your activity is deemed a hobby, no losses are allowed on your tax return, and even worse, after 2018 you cannot deduct expenses against this revenue. So, you're telling me if I knit three sweaters and sell them for $1,000, I cannot deduct the cost of the wool if it is a hobby? Technically, yes! Which is why you need to change how you think about these kinds of activities.

Tips to make it a clear business

Here are some tips to ensure full deductibility of your expenses against your business income.

Profit motive. You must show that you intend to make a profit with your activity. The old rule of thumb was to show a profit at least three out of the past five consecutive years to safely qualify your activity as a small business. But this is no longer the case. Although more difficult to substantiate, you can show profit motive without ever showing a profit by your ongoing activities around the business.

Active participation. You need to be actively involved in your pursuit for success. If you simply invest money in the dog business but are never there to care for them or give lessons, you will have a hard time justifying the business nature of the activity.

Be professional. Businesses have separate checkbooks, business cards and stationery. They have financial statements and show the same disciplines one would find in a “for profit” venture of the same type of activity you are pursuing. And they are organized as a business, ideally through a simple business structure like a single member LLC.

Pleasure factor management. If your business has a large enjoyment factor, you will need to be even more cautious about having proper records. If you claim to be a golf pro giving lessons, but then spend all your time playing golf, you will have a hard time justifying the activity as a true business.

Have multiple customers. If you only have one or two customers, who also happen to be relatives, your activity may be deemed a hobby. Having a number of customers, even without profits, can make all the difference in allowing for expense deductions.

Showing profit motive without profits - Part II. How else can you show profit motive when no profit is to be found? Advertising is one way to do this. Keep copies of all ads trying to drum up business. Keep a daily diary of business activities, noting who you meet and for what purpose. Create and keep sample product, even if it is not yet sold.

Understand your risk. There are certain business types that are under the IRS microscope when it comes to hobbies. Key among these are multi-level marketing businesses like Amway, Tupperware and Avon. It also includes the thousands of part-time sellers of goods on internet sites like e-bay. If you are in one of these business activities you will need to prove the business nature of your involvement and be prepared to be challenged.

Quick Checklist

Wondering if your business activity may be considered a hobby? Review this checklist. The more yes answers, the better your chances of defending your position.

Conducted activity in business-like manner? Created a business entity?
Have expertise in your activity?
Put time and effort into the activity?
History of income/profits? Have had prior success in a similar activity?
Is there a low element of pleasure/recreation involved?
Are there appreciating assets or an expectation that there will be?

Remember, having a business activity reclassified as a hobby can mean a big tax bite at tax time. But by keeping proper records and pro-actively knowing the pitfalls, you can avoid most problems.

Hidden Back to School Tax Deductions

08/05/2022

Summer is coming to a close and the back-to-school advertising blitz is underway. Hidden in some of those school expenses are tax deductions you can take advantage of. Here are some ways you can save:

Watch for tax deductions on the supply list. Schools often send a list of requested supplies for the school year. Some of the items on the list are clearly for personal use (such as an eraser or a ruler) while other items on the list are often for school use and classroom use (such as 24 pencils or paper towels). Keep track of these non-cash classroom/school donations for possible charitable deductions. Or even better, donate cash.

Donate funds versus taking the raffle ticket. Raffles, subscription drives and silent auctions are fun ways schools raise money. To maximize your ability to deduct your donations, forgo the possible prize. Then the entire donation is clearly deductible. Remember to ask for a receipt when making the donation.

Don't forget your out-of-pocket expenses for your volunteer activities. Perhaps you donate your time at school functions, donate books to the school library, or help assist the teaching staff. Your out-of-pocket expenses and mileage should be tracked for charitable deduction purposes.

Teachers, save your out-of-pocket expenses. A recent survey found that 94 percent of teachers spend their own money on classroom supplies — some as much as $1,000 per school year. On your 2022 tax return, teachers are allowed to deduct $300 on their tax return even if they claim the standard deduction. If you're married, you can deduct up to $600 of classroom supplies.

Use checks, not cash. If you usually provide donations to the school in the form of cash (like providing additional money to help other kids go on field trips) make those donations in the form of a check. The check will serve to help prove your donation.

Finally, don't forget to review state rules for educational expenses. There are often credits available for out-of-pocket school and other educational expenses.

Correction: Please note the above-the-line deduction for charitable contributions is currently NOT available for the 2022 tax year. This provision expired at the end of 2021. Last week's Tax Tip dated 7/29 did not reflect this change. Sorry for any confusion or inconvenience.

Great Tax Reduction Ideas

07/29/2022

The tax code is about 75,000 pages long, so it’s not surprising there are many overlooked money-saving deductions hidden within it. And with the much higher standard deduction amounts, those who do not itemize think there are no longer ways to reduce your taxes. Since mid-year is a good time to review great tax reduction ideas, here are some to consider:

1. Charitable contributions if you don't itemize

Even if you do not itemize deductions you can still take a deduction of $300 for your charitable contributions ($600 if married). Just ensure you get receipts to prove you made the donation. Too many make donations, but lack proof.

2. Maximizing HSA contributions

If you have qualified high deductible health insurance you can reduce your taxable income by contributing to a Health Savings Account (HSA). That way you not only reduce your taxable income, but you pay out-of-pocket qualified medical, dental and vision care with pre-tax dollars! And remember to contribute up to the annual limit ($3,650 for single or $7,300 for married in 2022 PLUS and additional $1,000 if you are age 55 or older).

3. Student loan interest

You can deduct up to $2,500 in interest paid on student loans from your tax return. This is true even if someone else helps you pay your loans. Parents who have co-signed student loans (creating legal obligation for the debt) often forget that they are also now eligible for the deduction on payments made by them.

4. Leveraging your itemized deductions

While many taxpayers do not have enough deductions to itemize, if you can bundle two or three years of deductions into one tax year you can maximize your deductions in all tax years. Here's an example: You budget and make deductions to your favorite charities and church every year. Don't change that practice, but prior to the end of the year, prepay all of next year's donations prior to December 31 if it helps exceed the itemized deduction threshold. The following year use the full standard deduction with lower-to-no charitable donations.

5. Donating appreciated assets (stocks, mutual funds and other investments)

If you itemize deductions, instead of donating cash, consider donating appreciated assets you have owned for more than one year. Your charity gets the same financial value, but you not only get a great charitable donation, you also avoid paying capital gains tax on the investment. This could be a great idea if you feel stuck in a down market, but don't want the tax exposure by selling a long-held investment.

6. Over-reporting state refunds

Remember if you use the standard deduction, your state refund does not add to your taxable income and should not be added to income. Even if you do itemize, your state refund may only apply if it provides a tax break. So couple a large state tax refund with your itemized versus standard deduction plan and save even more in taxes.

7. Taking full advantage of state tax deductions

Remember when you itemize, you can claim up to $10,000 in total taxes as an itemized deduction. But even if you do not have much in the way of state income taxes or property taxes, you can still deduct state sales tax. Even better, if you have a small business, many states now allow you to pay their tax at the entity level and avoid the $10,000 limit all together!

8. Leveraging retirement accounts to their fullest

There are numerous retirement tax plans that are great tools to help reduce your taxable income. They include 401(k), 403(b) and SIMPLE IRA plans offered through employers and numerous other versions of IRAs. The key is each has an annual contribution limit, and if you don't use that limit for the year, it is gone. So review your options and try to take full advantage of the tax benefits within each plan.

As with any part of the tax code, certain qualifications must be met and limits apply. Please feel free to ask for help if you think any of these ideas apply to you.

2023 Health Savings Account Limits

07/22/2022

Contribution limits for the ever-popular health savings account (HSA) are set for 2023. The new limits are outlined here with current year amounts noted for comparison. So, plan now for your 2023 contributions.

What is an HSA?

An HSA is a tax-advantaged savings account whose funds can be used to pay qualified health care costs for you, your spouse and your dependents. The account is a great way to pay for qualified health care costs with pre-tax dollars. In fact, any investment gains on your funds are also tax-free as long as they are used to pay for qualified medical, dental or vision expenses. Unused funds may be carried over from one year to the next. You must be enrolled in a high-deductible health plan (HDHP) to use an HSA.

The limits

Five Reasons Why the IRS Will Audit You

07/15/2022

CPA Seal top CPA Seal mid CPA Seal bottom Logo Facebook Twitter LinkedIn Google Business Yelp RSS Feed www.affinityaccountingtax.com Phone: 505-800-5690 Your Weekly Tax Tip Five Reasons Why the IRS Will Audit You Tip Image Tip Category: The Audit Each year, the IRS audits over 1 million tax returns. With agency resources shrinking, the IRS is more selective when choosing which tax returns to audit. Knowing what the IRS is looking for can help you understand and reduce your audit risk. Here are five of the biggest reasons the IRS may choose to audit your return:

Your income is high or low. The reasoning is simple – higher earnings may lead to bigger errors and lower earnings may mean incorrect deductions. The adjusted gross income (AGI) range with the least audit risk is $25,000 to $200,000. As your income moves toward the extremes in either direction, the chance of an audit increases.

You fail to report all your income. The IRS Automated Underreporter Program matches W-2 and 1099 information with the information you report on your tax return. When a mismatch occurs, expect to receive an automated CP2000 notice from the IRS notifying you of the discrepancy and the additional tax amount due.

You own a business. Rules regarding business deductions are confusing and constantly changing. The IRS knows this. Incorrectly deducting personal expenses or having your business classified as a hobby, thereby eliminating deductions, can get you in trouble with the IRS. Cash heavy businesses are under increased scrutiny due to higher fraud rates. Solid tracking processes and good records are necessary for income and expense substantiation.

You make a math error. The IRS identified over 2.5 million math errors on recent tax returns. The biggest culprits were tax liability and credit calculations. Math errors can create a two-fold problem for you – additional tax owed and more scrutiny applied to other parts of your tax return.

You claim the earned income tax credit. According to a report by the U.S. Treasury Department, 21 to 26 percent EITC payments are paid in error. Numbers that large are sure to get the IRS’s attention. Eligibility confusion and calculation errors are mostly to blame.

While some of the risk factors are out of your control, many can be minimized. If you are chosen for an audit, don’t deal with the IRS alone – please call for help.

Retirement Basics: Understanding Tax Efficiency

07/08/2022

One of the basics when considering how to fund your retirement is to be as tax efficient with your income as possible. In 2022, income tax rates range from 0 to 37 percent, plus a potential 3.8 percent net investment tax. Understanding how these progressive tax rates apply to ordinary income creates a tremendous retirement planning opportunity.

The basic concept

Many retirees can control their taxable income each year by the amount they work and how much they withdraw from retirement savings accounts like IRAs and 401(k)s. Because you can control the amount of your taxable income by the amount you withdraw from your retirement savings, you can ensure your income is as tax efficient as possible.

Example: A single taxpayer pays 24% on taxable income from approximately $89,000 to $170,000. The next taxable dollar you earn above $170,000 is then taxed at 32%. So if you are making $100,000, you can choose to be tax efficient withdrawing up to $89,000 from your traditional IRA before you jump to the next tax bracket.

Note: Taxable income typically includes wages, interest, non-qualified dividends, short-term capital gains (assets owned for one year or less), taxable Social Security benefits and withdrawals from most 401(k), 403(b), and non-Roth IRAs.

Other factors add complexity

Planning for tax-efficient retirement, however, is never simple. There are other things to consider:

Your age
The taxability of your Social Security benefits
Income phaseouts of other tax benefits
Required minimum distributions at age 72 or older Your state tax situation
Other taxes (estate taxes, inheritance taxes and capital gain taxes)

What to do?

Making tax efficiency an integral part of your retirement plan can be complicated. But the rewards are tremendous for those willing to start early, dedicating the time to planning, and asking for assistance.

IRS Announces NEW 2022 Mileage Rates

New rates begin in July     07/01/2022

 In a recent announcement, the IRS raised the standard mileage rates for travel beginning in July, 2022. Use the previously announced mileage rates for qualified travel in the first half of the year. Use the revised rates for travel in the second half of 2022.

NEW Mileage rates for JULY through DECEMBER 2022

Here are the 2021 mileage rates for your reference.

NON-Retiree Retirement Ideas

Want money when you retire? Here are some tips.    06/24/2022

Here are five common retirement planning ideas and what you can do to take advantage of them. The key is retirement planning starts now, not decades from now when you are reaching retirement age.

1. Having a plan

Surprisingly, most do not know how much money is needed for retirement. This is being made much more difficult with inflation playing a major role in finding the right answer. A retirement plan should consider how long you expect to live, an estimate of the amount of money you will need, and a description of your desired lifestyle during retirement. Your plan should have measurable goals that you aim to achieve.

Action item: If you have a plan, review it for possible revisions. If you do not, consider getting one put together as soon as possible.

2. Start early enough

One of the most powerful tools for a well-funded retirement is to start saving for your retirement at an early age. The sooner you start saving, the better off you will be.

Action item: Open a retirement account and start saving now. Increase the percent of your pay that you place in tax-advantaged retirement saving accounts. This includes IRAs, 401(k)s, and other plans.

3. Maximize employer contributions

Many employers have plans available to help their employees save for retirement. If your company has a pension plan, understand how it works and how much you can expect to receive upon retirement. If your company has a retirement plan contribution-matching program, take full advantage of this free money by making minimum contributions required to receive this employer match.

Action item: Review your employer-provided retirement saving options. Maximize the benefits they are providing.

4. Consider working after retiring

Do you plan on working during retirement or avoiding work at all costs? Do you plan on having a pension or Social Security covering all your retirement needs or none of it? Too often retirees plan the extremes, but reality is something in between. For example, if you are someone who plans to have your pension plan fail and Social Security go broke, you may be taking too conservative an approach.

Action item: Create a range of retirement funding scenarios, not just the worst-case or best-case scenario. Consider no work or part-time work. Think about some contribution from Social Security and potential pension income if your employer has a program.

5. Understand the true nature of your retirement

Are you being realistic in your future retirement plans? Have you correctly estimated the cost of health insurance? Have you really thought about the impact of relocating to a warmer climate? How important is living close to family and friends? Will you really downsize your home after the kids leave?

Action item: If you have a retirement plan that includes relocating or traveling to far-off places, consider test-driving this idea before you implement it. You may be surprised at the result.

Retirement should be something to look forward to, especially with a little planning. 

I'm Being Audited by the IRS!

06/17/2022

Less than 1% of more than 145 million individual tax returns filed during 2021 will be selected for audit. The percentage increases for higher income taxpayers, along with tax returns in areas of specific interest to the IRS. Here's what you should remember if you receive a notice from the IRS of an impending audit:

-IRS computers usually flag the tax returns for audits. The vast majority of them are routine.
-Your audit will usually focus on just a few areas of your tax return.
-Audits do not automatically mean something is wrong. It is possible to receive a "no change" or even an additional refund as the results of an audit.

What to do if you are audited

Don’t panic. Open all correspondence and respond to all requested information in a timely fashion. Remember, many of these notices are only due to the processing backlog at the IRS.

Keep good records. Be prepared to support your tax return details. Do this as you prepare your tax records each year and store the prior year's tax return.

Ask for help. You are not a tax professional, the IRS auditor is. Get help and do so as soon as possible after receiving your notice. Let professionals deal with the IRS as much as possible.

The best defense is a good offense. Identify the information in question and prepare as much as possible to defend your tax return prior to any meetings with auditors.

Answer questions, do not volunteer information. Answer only the questions under review. It helps both you and the often overworked auditor. Avoid attending meetings with an auditor on your own.

Do not make it personal. Remember to be polite and avoid making comments about anything other than what is being asked.

If you feel you are being treated unfairly, remember there are numerous means within the system to help you such as talking to an auditor's supervisor to using the IRS taxpayer advocate service. 

Reminder: Second Quarter Estimated Taxes Are Due

Reminder: Second Quarter Estimated Taxes Are Due      06/10/2022

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The second quarter due date is now here.

Due date: Wednesday, June 15, 2022

You are required to withhold at least 90 percent of your 2022 tax obligation or 100 percent of your 2021 tax obligation.  A quick look at your 2021 tax return and a projection of your 2022 tax obligation can help determine if a payment is necessary. Here are some other things to consider:

Avoid an underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year.
W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.
Self-employed workers need to account for FICA taxes. Remember to account for your Social Security and Medicare taxes, as well as your income taxes. Creating and funding a savings account for this purpose can help avoid a possible cash flow hit each quarter when you pay your estimated taxes.
Don't forget state obligations. With the exception of a few states, you are often also required to make estimated state tax payments if you have to do so for your federal taxes. Consider conducting a review of your state obligations to ensure you also comply with these quarterly estimated tax payments. 

If your income is over $150,000 ($75,000 if married filing separate), you must pay 110 percent of your 2021 tax obligation to avoid an underpayment penalty

Understanding Tax Terms: Pass-through Entities

What everyone should know       06/03/2022

Small business owners have a number of options on how to organize their business for tax purposes. And if you sell items on eBay or Esty, drive for Uber, or offer your services as a writer or programmer, you are probably considered a flow-through entity in the eyes of the IRS. Frankly, so much of individual tax is paid by these small businesses, it is important for all taxpayers to understand this tax code logic as politicians debate trying to increase tax revenues.

How pass-through entities work

Pass-through entities do not pay taxes with a separate business tax return. Instead, the business's taxable income is reported on the owner's individual tax return. A sole proprietor does this on their Schedule C, while other entities like partnerships and S corporations send owners their respective share of profits via a K-1 tax form.

Generally, business owners prefer pass-through entities because:

-The business income is taxed once instead of twice as in the case of C corporations.
-The business format provides owners a level of legal protection that is not available by doing business as a sole proprietor.

What you should know

Individual tax rates. Changes in individual tax rates have an impact on the amount of tax paid by all small businesses that are organized as pass-through entities.
New 20 percent deduction. A 20 percent qualified business income deduction is available for pass-through entities and sole proprietorships. There are limitations and other complexities involved, but the bottom line is many small business owners will see a tax break due to this deduction.
Owing the tax and having money to pay it can be a problem. Small pass-through business owners must pay income tax on their share of business profits. However, the business entity is NOT required to distribute cash from the company to help pay the tax. So pass-through owners could see a tax bill without money to pay the tax.
Concerns for minority shareholders. Minority shareholders in pass-through entities are doubly cursed. They not only may not receive distributions to pay taxes due, but they are often precluded from selling their shares, and they do not have enough ownership to require distribution of funds through shareholder voting.
Popular business entity type. According to statistics from the IRS, the S corporation formation is a popular business entity type with 4.72 million S corporations in 2017 – roughly three times the amount of C corporations. LLCs are quickly becoming the new entity of choice with growth from 120,000 in 1995 entities to over 11 million entities today.

With 95% of business entities being taxed on personal tax returns, it is important to understand that raising individual tax rates is really an increase in tax to most businesses in the United States. 

What's New in 2022

05/27/2022

Here are some key changes to the tax code for 2022. Use this information to help manage your tax obligation, a practice that can pay rich benefits if reviewed throughout the year.

Tax brackets and rates

While there is much discussion in Congress and the Executive branch to raise individual tax rates (currently 0% to 37%), to date no legislation is gaining traction....yet. In the meantime, inflation is impacting the income brackets subject to tax. The cost of living calculation is raising the income brackets subject to tax by approximately 3% to 3.8%.

Standard deductions

The higher standard deductions are still in place.  For 2022, they are:

Single: $12,950 (up $400)
Married Filing Joint: $25,900 (up $800)
Head of Household: $19,400 (up $600)
Married Filing Separate: $12,950 ( up $400)
Taxpayers claimed as a dependent: $1,150 (up $50)

Key tax code changes

Child Tax Credit roll back. The advance payment of one half of this credit and the dollar amount for each qualifying child rolls back to prior year limits (2020) of $2,000 per child. Last year you could earn as much as $3,600 per child.
Dependent Care Credit qualified expenses now lower. The maximum qualified childcare expenses in 2022 are $3,000 for one child and $6,000 for two or more dependents. The one-year expansion of qualified expenses ($8,000 for one and $16,000 for two or more) is now gone.
100% meal deductibility. Business meals are typically only 50% deductible. To help aid restaurants recover from the pandemic, you may deduct 100% of qualified meal expense deductions if the meals are purchased at qualified restaurants thru 2022.
Qualified reporting of receiving digital payments expands dramatically. If you receive more than $600 in payments via third-party platforms and the IRS deems these payments to be business related, you will receive 1099-Ks next January. So if you use reseller platforms, receive digital payments through applications like Venmo, or digitally resell event tickets, expect a more complicated tax return.
Increase tracking of cryptocurrency transactions. Starting in 2023, there will be more strict reporting requirements of any cryptocurrency transactions handled by brokers and dealers. Please be aware that many of these firms are implementing the changes throughout 2022.
Mortgage insurance premium deductibility. Unless extended once again, this deduction is back on the shelf for 2022, so no longer deductible.
Charitable deductions if you do not itemize. If you do not itemize, you can NO LONGER deduct up to $300 in qualified charitable deductions ($600 for married couples).

Outlined here are the major changes for current year tax laws. But stay tuned as there are a number of changes that are being proposed, but seem to stuck in Congressional discussion.

3 Things to Know About Summer Job Taxes

05/20/2022

Summer brings warm weather, fun outdoor activities, and new opportunities to earn some additional income. However, taxes on seasonal income need to be handled with care, whether they're related to your child's first job or an extra income opportunity for you. Here are some tips to help you manage the taxes on your summer earnings:

Students should take advantage of tax-free earnings limits. If you anticipate making less than the annual standard deduction ($12,950 for single taxpayers in 2022), none of your earnings are subject to federal taxes! If possible, earn at least that amount each year to maximize your tax-free earnings. Remember, if you can be claimed as a dependent on someone else's tax return, the limits for tax-free unearned income such as interest and dividends are lower.

Tip: If your annual earnings will be less than the standard deduction, you can claim EXEMPT on your Form W-4. That prevents federal income taxes from being withheld from your paycheck.

Independent contractors need to make estimated payments. As an independent contractor, you are responsible for paying all the taxes on your earnings. To do this, you make quarterly estimated tax payments to the IRS using Form 1040-ES. In addition to federal and state taxes, independent contractors need to pay a self-employment tax of 15.3% of earnings.

Tip: Track your expenses and save receipts. By doing this, you can subtract eligible expenses like mileage, supplies and uniforms from your gross earnings. Use this lower income number to calculate your self-employment tax and correctly estimate your income tax obligation.

Closely monitor tax withholdings. As an employee, your employer withholds taxes based on what you claim on Form W-4. Unfortunately, the tax tables used by this form to calculate your withholdings do not account for seasonal jobs. This typically results in paycheck withholdings being too low for supplemental income workers and too high for students working during the summer.

Tip: If you anticipate earnings in excess of the standard deduction, request a revision of your withholdings. Use tools on the IRS web site, review last year's tax return, or ask for help to estimate the correct amount to withhold. From there, ask your employer to adjust your federal and/or state withholdings up or down.

With a little tax planning, you can ensure that your summer job provides the income you are looking for without the disappointment of unexpected taxes. Please call if you have any questions.  

Withholding Review Required Now

Avoid tax surprises with a simple review        05/13/2022

 With tax season in the rear-view mirror, now is the time to take a hard look at your federal and/or state withholdings to ensure next year's tax bill does not surprise you.

A review is more important than ever

There are a number of tax code changes that will impact the amount of tax you pay next year. So much so, that if you do not forecast your tax obligation now, you may be in for a very unpleasant surprise. This is true because:

No more advance payments for the Child Tax Credit. The one year requirement of the IRS to pay out half of the Child Tax Credit in advance is no longer in place. So you will not only need to plan for this change, it will also impact your tax return.

Child Tax Credits are lower. In addition, the Child Tax Credit amount for each child is rolling back to the 2020 dollar amount of $2,000. This could mean as much as $1,600 in lower credits for each of your children.

Dependent care credits are lower. The dependent care credit is also lower in 2022. So if both you and your spouse work and have daycare expenses, you will need to forecast the impact of this on this year's tax obligation.

New 1099-K reporting may require estimated tax payments. The IRS will be receiving millions of new informational tax forms reporting activity from those using digital payment platforms. So for those reselling event tickets, using sites like eBay, Esty and Amazon, you will now need to account for all this income. It may now require quarterly estimated tax payments throughout the year.

Be aware of life events. In addition, a change in your situation could create the need to review your withholdings. It could be due to a job change, selling or buying a home, getting married or divorced, or having a birth or death in the family. Whatever the cause, be aware of the potential change and put a sharp pencil to revising your withholdings.

High inflation is impacting everything. Finally, consider the impact of inflation on your situation. This is especially important if you have a small business as higher costs of labor and supplies could dramatically impact your pending tax bill.

Calculating and making adjustments

Using the IRS calculator. The IRS has an online tool to help you calculate how much you will need to withhold. In order to get an accurate reading, you need to have a copy of your latest paycheck or last quarterly estimated tax filing (Form 1040 ES) and a copy of your last tax return.

The IRS tool is here: IRS Withholding Calculator

Simply follow the tool's instructions and compare the tool's recommendation to your current withholdings.

Get expert help if necessary. The IRS recently changed the way it calculates recommended withholdings. While the intent is well intended, many are confused by the change. It is always a good idea to call to review your situation if you have any doubts. But do it now, while there is plenty of time in the year to build the proper withholding amount.

File a new withholding form with your employer. Whether you're paying too much or too little, you can fix it by filling out a new W-4 form and giving it to your employer. If you're filing quarterly estimated taxes, you can adjust your next quarter's estimate in a similar way.

In a perfect tax world, you would not owe too much nor get too large of a refund. Think of overpayments as an interest-free loan the government borrowed from you. Conversely, a shortfall means writing a large check when you file your tax return. That's a surprise few of us want. Category: Planning Published: 05/13/2022  

A Tax Nightmare on Your Horizon

MUST READ if using digital payment tools or reselling tickets         05/06/2022

 A recent tax law change by this edition of Congress now requires transaction reporting to the IRS for anyone receiving more than $600 in payments through digital payment tools like PayPal, Venmo, and CashApp. It also impacts anyone using transaction platforms to buy or sell tickets for sporting events and concerts. Here is what you need to know.

What is happening now

They need your Social Security number. If you use digital payment platforms you will now need to provide your Social Security number and a valid name and address to accept digital payments or to buy and sell tickets online.

The IRS will know. Most of these transactions for those receiving funds will now have this activity reported to the IRS if the total for the year exceeds $600. This is true even if you lose money on the transaction. It will be done using Form 1099-K and will be issued to you in January.

Your taxes may be more complicated. If the IRS considers the transaction a business transaction, you will now need to report the transaction on your 2022 tax return, even for casual transactions that lose money. This is often the case when selling event tickets for a loss or taking digital payments at a garage sale.

You may receive many 1099-Ks. You can expect to receive a separate 1099-K from every platform you use where you exceed the $600 threshold.

The IRS watchdog approach. Prior to 2022, the reporting threshold was $20,000 AND more than 200 transactions. But with the perceived under-reporting of income by those in the gig economy, the transaction threshold was eliminated and the dollar threshold was lowered to $600. Now the IRS will use their computer auditing to compare your 1099-Ks with what you report on your tax return and audit you if they do not match.

What to do now

Coach your friends. Whenever you exchange money with friends in a digital format like Venmo, have them mark the transaction as non-business. Each application will handle this differently, but it is critical you do this to avoid getting a 1099-K in error.

Use cash or check. When receiving payments from friends, if there is potential for error ask for a check or cash. This will avoid the 1099-K reporting mess.

Split payments. When splitting a bill at a restaurant, do not have one person pay and then get reimbursement. Instead, ask the restaurant to split the bill and everyone pay their share. You can make this easy on your server if you are willing to split the bill evenly.

Understand the problem. When receiving a digital payment, you are relying on the person paying you to code the transaction correctly. Unfortunately, you cannot make them do it correctly, so you now need to keep track of digital money received, who it was from, and for what purpose.

True business transactions. For those of you in the gig economy, you have a different problem. Many reporting platforms are inconsistent on reporting. Some will report your income twice, once on a 1099-K and again on another tax form (1099-MISC or 1099-NEC). You must actively monitor this information. Plus, you need to know whether the amount reported are gross proceeds (required) or whether they netted out their fees.

Casual users of seller platforms are now in business. Infrequent users of places like E-Bay, Etsy and Amazon are now in business when payments received are more than $600. Be prepared to create a business tax return on Schedule C of your Form 1040.

This seemingly simple change in the tax code is having a wide-reaching impact. It will further complicate filing taxes AND processing taxes for the IRS. Given the level of public outcry, a roll back of this new rule is possible, but given the nature of Congress, do not plan on it. 

Maximizing the Tax Benefit of Charitable Deductions  

04/29/2022

Your charitable contribution deductions are still a great tax savings tool, but they now require more planning. Now is a great time to look at this area as part of your tax planning exercise.

Background

Typically, cash and non-cash charitable donations can be deducted on an itemized return. But with the standard deduction now $12,950 for single filers and $25,900 for married joint filers, itemizing this year is less beneficial for most of us.

This is especially so because many other itemizable deductions have been reduced as well, including miscellaneous itemized deductions, state and local tax deductions, and home loan interest deductions.

Leverage charitable tax planning

If you want to donate and get beneficial tax treatment, you can still make it work. Here's how:

Understand the above-the-line deduction expired. Unless Congress acts the $300 above the line deduction for charitable contributions ($600 joint filers) expired at the end of 2021. So now charitable donation deductions are only available if you itemize your deductions.

Conduct a year-end tax forecast. Plan now to see how close the amount of all your yearly itemizable items will come to exceeding your standard deduction threshold.

Bundle two-in-one. Consider bundling two years of charitable giving into one year. This will allow you to maximize your itemizations in one year, while using the tax savings of the standard deduction in the other year to help pay for your donations. Still not enough? Consider bundling three years of giving into one!

Maximize your charitable deduction. When you can take advantage of the charitable deduction, consider donating appreciated stock held longer than one year. This is a better alternative than writing a check as you avoid paying capital gains and you can deduct the fair market value of the stock as a donation.

Look into a donor advised fund. When you establish this account, you receive an immediate charitable deduction for your contributions, the contributions are then invested, and you can grant the funds to qualified charities over time.

Itemized deduction rules have changed, but you can still take advantage of the tax deductibility of your charitable giving. You simply need to adjust your tax planning. Call if you'd like to discuss this or any other tax-planning strategies.  

If You're Expecting a Refund, Read This!

04/22/2022

If you’re getting a refund, here are four useful tips to know.

1. The average refund is more than $3,500. Through February 18, the IRS reports the average refund is $3,536, which is up 22% versus the same time last year. Since a refund is really your money to begin with, it’s like giving the federal government an interest-free loan.

Tip: If you’re getting a big refund this year due to overpayment of tax, it may be worth adjusting your withholdings to eliminate overpayment for 2022.

2. Most refunds still arrive within three weeks. The IRS says it issues nine of 10 refunds within 21 days. However, electronically filed returns will usually get a refund faster than those filed by paper in the mail. Don't expect that turnaround with a paper filed return, however. The IRS says they are still processing a backlog of last year's returns and don't expect to be caught up until year end.

Tip: The best way to check the status of your refund is by visiting https://www.irs.gov/refunds. While you can see the status of your refund, there isn't a whole lot you can do about it until the IRS processes the refund.

3. Sometimes refunds are wrong. If your refund isn’t the amount you expected, there could be multiple reasons why. The primary culprit may be caused by the numerous incentives available during the 2021 tax year, driven by the increased Child Tax Credit. But there could also be a typo or calculation error, or the IRS may have disallowed some deductions or credits. If you owe other debts to the government, they may have these garnished from your refund check.

Tip: If your refund amount is different than the amount on your tax return, try to understand why this is the case before cashing the check. Follow up with the IRS for an explanation about the missing amount. Amounts cashed that are larger than you expect can actually cause problems if the IRS expects repayment.

4. Con artists prey on refund checks. Year after year, IRS scams are among the most commonly reported frauds. Con artists call unsuspecting taxpayers and claim to be from the IRS. They say that you owe money or that a refund was issued in error and demand immediate repayment.

Tip: An IRS agent will never call a taxpayer over the phone without first sending an official letter and will neither threaten a taxpayer nor demand immediate payment. They’ll also never ask for credit card or debit card numbers over the phone. If you are contacted by a suspected scammer, report it to the IRS by calling 800-366-4484.

Tax Day is Here!

Last-minute details, tips and freebies         04/15/2022

With the individual tax-filing deadline on Monday, April 18, now is the time to complete all filing arrangements and payments. If you have not already done so, ask yourself these questions before it’s too late to act:

Do you need to sign your e-file authorization form? IRS Form 8879 needs to be signed by you before your taxes can be e-filed. If filing jointly, your spouse needs to sign as well. If you haven’t already, please return the signed form ASAP to ensure that your taxes can be e-filed on time.

Do you owe taxes on your 2021 tax return? If yes, make your tax payment now! The IRS has several payment options on their website. If mailing a payment, include Form 1040-V and ensure the mail is postmarked on or before April 18. Sending the payment certified mail will ensure you have proof of timely payment. Late payments, even by one day, are subject to IRS penalties and interest.

Do you need more time to file? If you are not ready to file your taxes before the initial April 18 deadline, you can file for a six-month extension. Be aware that it is only an extension of time to file — not an extension of time to pay taxes you owe. You still need to pay all taxes by April 18.

Do you need to deposit funds in your IRA or HSA? Did you claim an IRA or HSA contribution on your tax return? In order for the deduction to be valid for 2021, all deposits to those accounts need to be made by April 18. Once completed, save proof of the contribution with your 2021 tax files.

Do you need to make an estimated tax payment? The first quarter estimated tax payment for 2022 is also due on April 18. If you owe taxes for 2021, making 2022 estimated payments might make sense for you. A quick way to determine a first payment is to divide the taxes you paid by four, and then adjust the amount for any paycheck withholdings. Send your payment along with Form 1040-ES to the IRS by April 18. Then, schedule a tax-planning meeting to determine the best approach for the remainder of the year.

Do you like free stuff? Who doesn't?! From free sub sandwiches and smoothies to discounted furniture and delivery services, tax day deals are out there waiting to be found. Check out the list from hey it's free to see if there are any deals you can enjoy!

If you miss a deadline, file your return and pay the taxes as soon as you can to stop accruing interest and penalties.