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Crowdfunding and the Tax Effects

Fri, 06 Jan 2023 14:32:42 GMT

Crowdfunding is a national and international phenomenon. Over $17 billion is raised yearly in North America through world-famous websites such as GoFundMe and Kickstarter .

Donation-based crowdfunding is the best-known and largest type. Individuals use crowdfunding sites such as GoFundMe to solicit donations for themselves or others. Donations can be solicited for any purpose but typically involve raising money for medical expenses, youth sports, or education costs.

With this crowdfunding model, donors do not receive any goods or services in return for their money. As a result, the donations ordinarily qualify as tax-free gifts.

Donors get no charitable deduction for money they give to individuals through crowdfunding websites, even if the recipients are needy. But donations from these websites made directly to Section 501(c)(3) tax-qualified charities are deductible.

All this crowdfunding activity leads to an obvious question: Is the money raised this way taxable income for the recipients?

You might be surprised to learn that the courts and the IRS have provided almost no guidance on this issue. The authorities have largely left it up to taxpayers to figure it out by applying general tax principles.

Under general tax principles, all income you receive is taxable unless an exception in the tax law makes it tax-free. Some exceptions apply to some types of crowdfunding.

There are four main types of crowdfunding:

Donation-based
Rewards-based
Debt-based
Equity-based

Rewards-based crowdfunding is used by businesses to raise money. Contributors receive products or services from the business in return for their money. The best-known websites for rewards-based crowdfunding are Kickstarter and Indiegogo .

The expenses incurred to undertake the crowdfunding campaign, including crowdfunding website fees and the cost of rewards, would be deductible business expenses. The money received this way is ordinarily taxable income to the business. It is clearly not a gift if the contributors receive something of value in return for their money.

With debt-based crowdfunding, also called peer-to-peer lending, businesses raise money through specialized websites that provide loans financed by the general public. Loans that have to be paid back are not taxable income.

Equity-based crowdfunding enables businesses to sell shares or other securities to investors through the internet. Funds raised by issuing securities to investors are not taxable income for the business. But to prevent fraud and other abuses, companies that use equity crowdfunding must comply with federal and state securities laws.

If you have any questions about crowdfunding, please don't hesitate to contact us.

When is your income subject to self-employment tax?

Tue, 12 Jul 2022 19:22:54 GMT

If you own an unincorporated business, you likely pay at least three different federal taxes. In addition to federal income taxes, you must pay Social Security and Medicare taxes, also called the self-employment tax.

Self-employment taxes are not insubstantial. Indeed, many business owners pay more in self-employment taxes than in income tax. The self-employment tax consists of

a 12.4 percent Social Security tax up to an annual income ceiling ($147,000 for 2022) and
a 2.9 percent Medicare tax on all self-employment income.

These amount to a 15.3 percent tax, up to the $147,000 Social Security tax ceiling. If your self-employment income is more than $200,000 if you’re single or $250,000 if you’re married filing jointly, you must pay a 0.9 percent additional Medicare tax on self-employment income over the applicable threshold for a total 3.8 percent Medicare tax.

You pay the self-employment tax if you earn income from a business you own as a sole proprietor or single-member LLC, or co-own as a general partner in a partnership, an LLC member, or a partner in any other business entity taxed as a partnership. (There is an exemption for limited partners.)

You don’t pay self-employment tax on personal investment income or hobby income. For example, you don’t pay self-employment tax on profits you earn from selling stock, your home, or an occasional item on eBay.

The tax code bases your self-employment tax on 92.35 percent of your net business income.
That means your business deductions are doubly valuable since they reduce both income and self-employment taxes. In contrast, personal itemized deductions and “above-the-line” adjustments to income don’t decrease your self-employment tax.

Some types of income are not subject to self-employment tax at all, including

most rental income,
most dividend and interest income,
gain or loss from sales and dispositions of business property, and
S corporation distributions to shareholders.

You calculate your self-employment taxes on IRS Form SE and pay them with your income taxes, including your quarterly estimated taxes.

If you have questions about the self-employment tax, please don't hesitate to call out office at 716-875-2100

Last Minute Business Deductions

Wed, 10 Nov 2021 16:48:21 GMT

The purpose of this letter is to get the IRS to owe you money.

Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.

Here are six powerful business tax deduction strategies that you can easily understand and implement before the end of 2021.

1. Prepay Expenses Using the IRS Safe Harbor

You just have to thank the IRS for its tax-deduction safe harbors.

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

Under this safe harbor, your 2021 prepayments cannot go into 2023. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Friday, December 31, 2021, you mail a rent check for $36,000 to cover all of your 2022 rent. Your landlord does not receive the payment in the mail until Tuesday, January 4, 2022. Here are the results:

You deduct $36,000 in 2021 (the year you paid the money).
The landlord reports taxable income of $36,000 in 2022 (the year he received the money).

You get what you want—the deduction this year.

The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.

2. Stop Billing Customers, Clients, and Patients

Here is one rock-solid, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2021. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)

Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Jim, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2021 income by moving that income to 2022.

3. Buy Office Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2021.

Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

4. Use Your Credit Cards

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that happens on the date of reimbursement. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.

5. Don’t Assume You Are Taking Too Many Deductions

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.

If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years, but the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.

What does this all mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

6. Deal with Your Qualified Improvement Property (QIP)

In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made when enacting the TCJA.

QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers) if you place the improvement in service after the date you place the building in service.

The big deal with QIP is that it’s not considered real property that you depreciate over 39 years. QIP is 15-year property, eligible for immediate deduction using either 100 percent bonus depreciation or Section 179 expensing. To get the QIP deduction in 2021, you need to place the QIP in service on or before December 31, 2021.

I trust that you found the six ideas above worthwhile. If you would like to discuss any of them, please give us a call.

Armenia CPA PLLC

Are you ready for an IRS Audit?

Wed, 15 Sep 2021 16:39:30 GMT

Dear Client:

As a business owner, you are in partnership with the IRS, like it or not.

You share your net profits with the IRS according to your partnership agreement (known to you as the Internal Revenue Code).

To make sure you are sharing fairly, the IRS can audit your tax return. You have to hate the idea of an IRS audit.

But your big audit worry is not about the potential bills for unpaid taxes, interest, and penalties. No, your big worry is the additional time the audit will take.

Tax audits can go on for months or even years. Time and resources spent preparing for and participating in an IRS audit are time and resources that are not available for you to run your business.

So, you should consider two things here:

1. How can you spend less time in an IRS audit?

2. How can you pay the IRS nothing extra, or at least as little as possible, in an audit?

You need to get ready for the audit every day, because you are in business. The major chunk of records you need for the audit are the records that help you run your business.

Keeping the minor additional records you need to prove certain tax deductions for your vehicles, entertainment, and travel takes only minutes a day.

Planning point. Keep good records every day.

If you would like my help with your records, please don't hesitate to reach out to us.

Armenia CPA PLLC

Re: Important changes to the child tax credit

Fri, 25 Jun 2021 15:00:07 GMT

Dear Clients

Recently, there were changes made to the child tax credit that will benefit many taxpayers. As part of the American Rescue Plan Act that was enacted in March 2021, the child tax credit:

· Amount has increased for certain taxpayers

· Is fully refundable (meaning you can receive it even if you don’t owe the IRS)

· May be partially received in monthly payments

The new law also raised the age of qualifying children to 17 from 16, meaning some families will be able to take advantage of the credit longer.

The IRS will pay half the credit in the form of advance monthly payments beginning July 15. Taxpayers will then claim the other half when they file their 2021 income tax return.

Though these tax changes are temporary and only apply to the 2021 tax year, they may present important cashflow and financial planning opportunities today. It is also important to note that the monthly advance of the child tax credit is a significant change. The credit is normally part of your income tax return and would reduce your tax liability. The choice to have the child tax credit advanced will affect your refund or amount due when you file your return. To avoid any surprises, please contact our office.

Qualifications and how much to expect

The child tax credit and advance payments are based on several factors, including the age of your children and your income.

· The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.

· The credit for children ages six to 17 is up to $3,000 –– with up to $250 received in monthly payments.

To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:

· Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool

· A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year

· A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number

· Income less than certain limits

You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.

Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.

Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.

IRS’s child tax credit update portal

Using the IRS’s child tax credit and update portal , taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. Parents may also use the online portal to elect out of the advance payments or check on the status of payments.

The IRS also has a non-filer portal to use for certain situations.

Let us help you.

With any tax law change, it’s important to revisit your full financial roadmap. We can help you determine how much credit you may be entitled to and whether advance payments are appropriate. How you choose to receive the credit (partially advanced via monthly payments or solely on your next year’s return) could have many impacts to your financial plans.

Please contact our office today to discuss your specific situation. As always, planning ahead can help you maximize your family’s financial situation and position you for greater success.

Sincerely,

Armenia CPA PLLC

A Note to Our Community About the Coronavirus (COVID-19)

Sat, 28 Mar 2020 16:25:23 GMT

Dear Clients,

As the coronavirus (COVID-19) continues to affect local communities and global economies, we want you to know that maintaining business continuity is a priority for us. We’re working to minimize disruptions and impacts to you so that we can still offer the same level of superior service and support you have come to expect from our team.

Our firm is open to serve you

Our firm remains open and available to serve you. We are limiting face-to-face meeting as much as possible. We continue to be available via phone and email 7 days a week.

Relief available

COVID-19 has probably caused some concerns about your financial well-being. However, there are relief measures available that may benefit you, such as:

· The IRS extended the April 15, 2020 federal income tax filing and payment deadline to July 15, 2020. However, we continue to work on filing returns as soon as possible.

· First quarter estimated tax payments usually due April 15, 2020 are now extended to July 15, 2020.

· States are also providing tax relief for individuals and businesses.

· Emergency paid sick and family leave benefits are available to employees (with some limitations and exceptions).

· Employers, including those self-employed, have available refundable tax credits to offset the costs for providing coronavirus-related leave benefits.

Helpful resources

Resources are also available to address some of your concerns.

· AICPA Coronavirus Resource Center

· AICPA State Tax Filing Relief Chart for Coronavirus

· IRS Coronavirus Resource Center

· U.S. Small Business Administration: Coronavirus Small Business Guidance and Loan Resources

· Stimulus Check Calculator

Our commitment to you

Whether you have tax or financial planning questions or need advice on ways to navigate business challenges, we’re here for you. If you have any questions or concerns, please don’t hesitate to contact us at:

1. Joe Jr. (716) 818-1948 joejr@armeniacpa.com

2. Joe III (716) 860-5678 joe3@armeniacpa.com

During this unpredictable and challenging time, it’s more important than ever to stay connected. We’re in this together.

Thank you for your continued support.

Stay safe and healthy,

Armenia CPA PLLC

Review of the 2019 Rules for Itemizing Your Deductions

proadAccountId-374868 — Tue, 03 Dec 2019 20:26:11 GMT

Medical Expenses

For 2019, medical expenses are deductible to the extent they exceed 10% of your Adjusted Gross income (AGI). The IRS also allows a deduction of 20 cents/medical miles driven so don’t forget to track your medical mileage.

Planning Opportunity: Check out IRS Publication 502, Medical and Dental Expenses. If your allowable medical expenses will exceed 7.5% of your AGI this year, then paying your outstanding medical and dental bills prior to 12/31/18 will increase the allowable deduction. Same goes for pre-paying for medical expenses even if the services won’t be provided until next year.

Home Mortgage Interest

Big changes with the deductibility of home mortgage interest:

· Interest on a total of up to $1 million of pre-12/14/17 outstanding debt on your primary residence and a second home is fully deductible.

· New mortgages debt (excluding refinancing of pre-12/14/17 mortgages) taken after 12/14/17 limited to $750k for this deduction.

· Interest on home equity debt used to improve the residence securing the debt is still deductible subject to the $1 million and $750k limits above.

· All other home equity loans no longer qualify for the mortgage interest deduction.

Planning Opportunity: Read the IRS’ explanation of the new rules for deducting mortgage interest and home equity loan interest and consider refinancing outstanding debt accordingly, but only if the current interest rates permit. You might also consider claiming the home office deduction to write off a portion of your mortgage interest and real estate taxes that are now non-deductible under the new rules.

Charitable Donations

The amount of charitable donations you can make and deduct each year are 60% of your AGI.

Planning Opportunity: Consider donating appreciated securities to a charity since you don’t pay taxes on the appreciation but can still write off the full value of the securities donated. You will claim the deduction based on the asset’s FMV.

You might also consider setting up and funding a Donor Advised Fund to frontload the tax deduction on your donations while still allowing you to disburse the contributions to the charities over a number of years.

Miscellaneous Itemized Deductions

Investment management fees, tax prep fees, and unreimbursed employee business expenses continue to be deductible.

Planning Opportunity: Consider claiming these expenses if possible against your business income reported on your Schedule C, rental income on the Schedule E, page 1, or partnership income on Schedule E, page 2.

Casualty Losses

Non-business casualty losses are now only deductible if the loss occurs in a Presidentially declared disaster area. Personal casualty losses and theft losses are no longer deducible as of 1/1/18.

Tougher To Itemize in 2019

With a $24.4k standard deduction and state and local taxes (SALT), including real estate taxes, limited to just $10k annually, married couples without a large mortgage might find themselves struggling to itemize their deductions under the new tax rules. Unmarried individuals can also deduct $10k in SALT taxes but have a standard deduction of just $12.2k, so will have a much easier time to itemize just by owning a home, having significant medical expenses, or donating a few thousand dollars to charity each year.

Planning Opportunity: Married couples might save some taxes by bunching their deductions every other year.

New SSN Scam

proadAccountId-374868 — Tue, 03 Dec 2019 20:25:32 GMT

Scammers are at it again, this time calling up taxpayers, impersonating the IRS, and threatening to suspend or cancel social security numbers. According to the IRS, these calls can come in as “robocall” voicemails, requesting people to call back.

The scammers may mention overdue taxes. If you receive a call threatening to suspend your SSN for an unpaid tax bill, hang up and do not give out any sensitive information over the phone.

There are several telltale signs of this scam. The IRS and its authorized private collection agencies will never:

· Call to demand immediate payment using a specific payment method such as a prepaid debit card, iTunes gift card or wire transfer. The IRS does not use these methods for tax payments.

· Ask a taxpayer to make a payment to a person or organization other than the U.S. Treasury.

· Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.

· Demand taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.

Gifting Rules

proadAccountId-374868 — Tue, 03 Dec 2019 20:25:00 GMT

Does part of your family's financial planning include gifting? If so, here are a dozen tips to follow:

1. Annual gift exclusion is $15,000 per year by an individual to another individual, or

2. Annual gift exclusion is $30,000 per year gifted jointly from a married couple to another individual (assuming the gift is joint property). However, a Form 709 is required if the gift is in excess of $15,000 and only from assets belonging to one spouse (typically gift-splitting would be elected on the Form 709 to take advantage of the $15,000 annual exclusion for both spouses).

3. Gifts in excess of the annual exclusion amounts noted above are reported by filing a Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return . The giver is responsible for filing the tax return.

4. The receipt of a gift from another is not taxable income to be reported by the receiver of the gift.

5. Gifting is tracked and reported on a calendar year (and not through April 15 of the following year as IRA contributions are tracked).

6. A gift in the form of a check payment is not considered a gift until the check is cashed and clears the bank. Be careful with gifts made near the end of the year – i.e., if a check is given to your grandchild on December 31, 2019 but not deposited into the child’s bank account until January 2, 2020, then the gift would be considered a calendar year 2020 gift.

7. Gifts are not a charitable deduction.

8. For gift tax purposes, payments made directly to an educational institution or medical facility for another person’s respective tuition or medical expenses are not reportable gifts even if the amounts exceed the annual gift exclusion amount.

9. Gifts to a political organization in excess of the exclusion amount are not reportable gifts (nor are they deductible charitable gifts).

10. Individuals are allowed to gift into a 529 plan $75,000 ($150,000 jointly) in a calendar year – being a frontloaded gift of 5 years – and spread the gift over the following 4 years. The filing of a gift tax return is required to report this gift, but will fall under the annual exclusion threshold. Additional gifts to such individuals over the next 4 years would be considered a reportable gift.

11. Non-cash gifts are gifted at the fair market value as of the date of the gift, not the giver’s basis. (Be aware of the gifting rules when the property is eventually sold by the receiver of such gifts.)

12. If an individual receives a gift (or multiple gifts in a calendar year) from a nonresident alien or foreign estate and the total of the gifts received from that foreign individual or entity exceeds $100,000 in a calendar year, the individual/receiver is required to file Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts .

Checklist to Cut Your 2019 Taxe

proadAccountId-374868 — Tue, 03 Dec 2019 20:24:11 GMT

It's not too late to cut your 2019 tax bill. Prior to Dec. 31st:

· Increase your 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year. If you’re self-employed, consider setting up a Solo 401(k) by 12/31.

· Take a look at your withholdings and instruct your employer to withhold additional taxes if you haven’t had enough taxes withheld during the year and might get hit with an underpayment penalty.

· Consider selling your non-retirement investments that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds), and then can be used to offset up to $3,000 of wages and other income.

· Send in your January 2019 mortgage payment early enough so it will be processed prior to 12/31/18. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.

· Clean out your closets and donate your clothing and household items to a charitable organization since "non-cash" contributions are deductible if you itemize. Don’t forget to get a receipt. And make sure to put together a list or photos of the donated items, including each item’s condition since only donations of clothing and household items in "good condition or better" qualify for a deduction.

· For gifts of money , making your donation by credit card before December 31st allows you to deduct the donation on this year's return, even if you don't pay your credit card bill until 2020. And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.

· Consider contributing to a Donor Advised Fund if you are married and no longer have a substantial mortgage.

· Pre-pay or pay off your medical bills if your total medical expenses exceed 7.5% of your income and you itemize.

· Consider the simplified method home office deduction if you are self-employed, maintain an area of your house used exclusively and regularly as a home office, but don’t maintain accurate records documenting expenses for your house. Claiming the simplified home office method as a tax deduction can lower your self-employment net income by as much as $1,500.

· Fund a 529 education savings plan and give a tax-free gift to a beneficiary of any age. You can give up to $15k per beneficiary annually ($30k from a married couple who gift-split) without needing a federal Gift Tax Return. You may also front-load and give five years’ worth of contributions (up to $150k for a couple) into a 529—front-loading does require a Gift Tax return filing.

IRS Gets Serious About Cryptocurrency

proadAccountId-374868 — Tue, 03 Dec 2019 20:23:10 GMT

Have you been dabbling in cryptocurrency trading? The IRS is stepping up its efforts to provide guidance to taxpayers around cryptocurrency transactions and has enacted some new compliance measures.

On 2019 tax returns, the IRS will require taxpayers to check off a box if they engaged in any virtual currency transactions during the year. The question will appear on the Schedule 1, as follows: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”

The IRS has confirmed that virtual currency is to be treated as a capital asset if it can be converted to cash. This means that capital gains rules apply to any gains or losses on the sale or transfer of virtual currency, and should be reported on a Schedule D.

Digital currency exchanges like Coinbase are now required to issue a 1099-K if there are at least 200 transactions with a total value equal to or exceeding $20,000 or gross proceeds that exceed the state’s threshold, which for most states is $20,000. These are high thresholds, so the IRS is heavily relying on taxpayers’ complying on their own. The gross proceeds threshold for MA residents, however, is much lower—at only $600.

The IRS has published a complete list of frequently asked questions regarding cryptocurrency on their website at www.IRS.gov .

Audit 101

Mon, 14 Oct 2019 20:38:00 GMT

Why Did You Get Audited?

The IRS uses random selection as one method to choose which tax returns to audit.

They may also flag tax returns because:

1 You’re in a higher income tax bracket
2 You have math errors on your tax return
3 You report no income or not all of your income
4 Your tax return involves issues with other taxpayers whose returns are being audited
5 You reported too many losses
6 You deducted too many work expenses
7 You claimed too many charitable contributions

What To Do If You’re Audited:

> Ask for help from your accountant
> Send your notice to us as soon as possible
> Discuss with your accountant what is being questioned
> Gather any forms or source documents that relate to the item(s) being requested
> Respond in a timely manner
> Check IRS.gov to review its Audit Techniques Guides (ATGs)

Know Your Rights:

According to the IRS, the taxpayer has a right to:

> Professional and courteous treatment by IRS employees
> Privacy and confidentiality about tax matters
> Know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided
> Representation, by oneself or an authorized representative
> Appeal disagreements, both within the IRS and before the courts.

How Far Back Can the IRS Audit?

The IRS can include returns filed within the last three years in an audit. However, if they determine fraud or a substantial error, they can go back additional years.

There are two types of audits:

Field audit: An in-person interview and review of records. It often happens at the taxpayer’s home, business or accountant’s office.

Correspondence audit: A written request for more info about a specific tax return item or issue handled via mail.

DiD YOU KNOW? Approximately 2/3 of audits are handled through the mail

IRS Audit Rate Decreases in 2018

Mon, 14 Oct 2019 20:36:21 GMT

Continuing a downward trend from the prior year, the IRS audited 7% fewer tax returns in 2018 than they audited in 2017. Of the 150 million personal tax returns filed for the 2017 tax year, only 892,000 were audited – a meager 0.59% of all personal tax returns being filed. That rate is the lowest since 2002.

The percentage of tax returns subject to a live field audit was even more meager – with only 169,000 audits resulting in a live meeting between an IRS agent and a taxpayer or the taxpayer’s representative. The remainder of the audits were via computer generated letters sent to taxpayers by the IRS based on discrepancies uncovered by the IRS’ matching program where data filed by employers and financial institutions are compared with income reported on everyone’s tax returns.

Why the continued decrease in IRS audits? The primary reason is due specifically to their budget. In 2010, the IRS’ operating costs slightly exceeded $14 billion. Since that time, the IRS has seen their budget slashed by 17%. A smaller budget has resulted in a smaller IRS work force available to conduct IRS audits. In fact, there are now 15% fewer IRS employees than there were in 2013.

Even with a shrinking workforce, the IRS was able to assess an additional $9.1 billions dollars of federal income taxes for 2017, or approximately $10,000 per audit. The 2017 personal tax returns most scrutinized by the IRS in 2018 were as follows:

2.2% of tax returns that included a Schedule C (sole proprietor) reporting gross receipts in excess of $100,000.
3.2% of tax returns reporting total income in excess of $1,000,000.
3.4% of International tax returns that were filed.

The lowest audit rate in 2018 were audits of S-corporation and partnership tax returns. Business owners filed nearly 9 million tax returns for 2017 in this category. The audit rate for these tax filings was only 0.2%.

However, this low rate for these business tax returns is expected to change in the near future. The IRS plans to increase audits of shareholder basis that are recorded as part of these tax returns. The IRS’ concern is a lack of taxpayer compliance regarding shareholder distributions and shareholder pass through losses which may be limited if they are in excess of basis. Both of these items result in an under-reporting of personal income by taxpayers.

Will the downward trend in audits continue? Unless, the IRS’ budget is increased in the next few years, taxpayers can breathe a sigh of relief as there shouldn’t be much of an uptick in the audit rates of tax returns in the near future.

New Opportunity to Defere (And Possibly Eliminate) Capital Gains Tax

Mon, 14 Oct 2019 20:33:13 GMT

One of the most interesting wrinkles of the Tax Cuts and Jobs Act was the creation of Opportunity Zones.

According to the IRS, Opportunity Zones are particular distressed communities throughout the country in need of economic revitalization. Under a nomination process completed in June 2018, 8,761 communities in all 50 states, the District of Columbia, and five U.S. territories were designated as qualified Opportunity Zones. Investing in an Opportunity Zone can provide substantial tax benefits to an investor, namely deferral on capital gains tax.

Investors may defer tax on almost any capital gain up to Dec. 31, 2026 by making an appropriate investment in a zone, making an election after December 21, 2017, and meeting other requirements.

Generally, to qualify for deferral, the amount of a capital gain to be deferred must be invested within 180 days of the gain being realized into a Qualified Opportunity Fund (QOF). The QOF must be an entity treated as a partnership or corporation for Federal tax purposes and organized in any of the 50 states, D.C. or five U.S. territories for the purpose of investing in qualified opportunity zone property.

The QOF must hold at least 90 percent of its assets in qualified Opportunity Zone property. Investors who hold their QOF investment for at least 10 years may qualify to increase their basis to the fair market value of the investment on the date it is sold, which would effectively eliminate any capital gains tax on the appreciation. Plus, anyone who holds the QOF investment for 7 years will exclude 15% of the original gain from being taxed. Holding the QOF for 5 years yields a 10% exclusion.

Still Waiting For Your Refund?

Wed, 07 Aug 2019 19:19:15 GMT

Did you file your tax return this spring and are still waiting for your refund? The IRS issues more than 9 out of 10 refunds in fewer than 21 days. However, it’s possible that some tax returns require further review and take longer to process.

Some common reasons that your refund is delayed:

If you had to submit a tax return via paper rather than electronically, the IRS is slower to process
A social security number of someone listed on the tax return was incorrect.
Your return was flagged for ID theft. If any social security number on your return has already been submitted, your return will be delayed until it gets manually reviewed.
You may also experience delays if you claimed the Earned Income Tax Credit or the Additional Child Tax Credit.

The IRS does allows taxpayers to check on the status of their returns. You can use the Where’s My Refund tool on the IRS website.

Here’s the 411 on Who Can Deduct Car Expenses on Their Tax Returns

Wed, 07 Aug 2019 19:18:01 GMT

From IRS News – Tax Tip July 29, 2019

Taxpayers who have deducted the business use of their car on past tax returns should review whether or not they can still claim this deduction . Some taxpayers can. Some cannot.

Here’s a breakdown of which taxpayers can claim this deduction when they file their tax returns.

Business owners and self-employed individuals
Individuals who own a business or are self-employed and use their vehicle for business may deduct car expenses on their tax return. If a taxpayer uses the car for both business and personal purposes, the expenses must be split. The deduction is based on the portion of mileage used for business.

There are two methods for figuring car expenses:

Using actual expenses

These include:
- Depreciation
- Lease payments
- Gas and oil
- Tires
- Repairs and tune-ups
- Insurance
- Registration fees

Using the standard mileage rate

Taxpayers who want to use the standard mileage rate for a car they own must choose to use this method in the first year the car is available for use in their business.
Taxpayers who want to use the standard mileage rate for a car they lease must use it for the entire lease period.
The standard mileage rate for 2018 is 54.5 cents per mile. For 2019, it‘s 58 cents.

There are recordkeeping requirements for both methods.

Employees
Employees who use their car for work can no longer take an employee business expense deduction as part of their miscellaneous itemized deductions reported on Schedule A. Employees can’t deduct this cost even if their employer doesn’t reimburse the employee for using their own car. This is for tax years after December 2017. The Tax Cuts and Jobs Act suspended miscellaneous itemized deductions subject to the 2% floor.

However, certain taxpayers may still deduct unreimbursed employee travel expenses, this includes Armed Forces reservists, qualified performing artists, and fee-basis state or local government officials.

More information:
Publication 535 , Business Expenses

August 2019 Tax-Saving Tips

Tue, 06 Aug 2019 14:10:31 GMT

Roth IRA versus Traditional IRA: Which Is Better for You?

Roth IRAs tend to get a lot of hype, and for good reason: because you pay the taxes up front, your eventual withdrawals (assuming you meet the age and holding-period requirements—more on these below) are completely tax-free.

While we like “tax-free” as much as the next person, there are times when a traditional IRA will put more money in your pocket than a Roth would.

Making the Decision on What’s Best

Example. Say that your tax rate is 32 percent and that you will invest $5,000 a year in an IRA and earn 6 percent interest. Should you put the $5,000 a year into a Roth or a traditional IRA?

Say further that neither you nor your spouse is covered by a workplace retirement plan, so you can contribute the $5,000 a year without worry because it’s under the contribution limits. If your income is too high for the Roth IRA, you make the $5,000 contribution via the backdoor.

Traditional IRA

If you invest the $5,000 in a traditional IRA, you create a side fund of $1,600 ($5,000 x 32 percent). On the side fund, you pay taxes each year at 32 percent, making your side fund grow at 4.08 percent (68 percent of 6 percent).

Roth IRA

Roth contributions are not deductible; this means no side fund, so your annual investment remains at $5,000.

Cashing Out

For the Roth, your marginal tax rate at the time of your payout doesn’t matter because you paid your taxes before the money went into the account. The whole amount is now yours, with no additional taxes due.

But for the traditional IRA, your current tax bracket matters a great deal. You have taken care of the taxes on the side fund annually along the way, but the traditional IRA (both growth and contributions) is taxed at your current marginal tax rate at the time you cash out.

The table below shows you how this looks with tax rates of 22 percent, 32 percent, and 37 percent at the time you cash out (winners are in bold):

Marginal tax rate at cash-out

10 years @ 6%

20 years @ 6%

30 years @ 6%

40 years @ 6%

22%

Trad: $74,557

Roth: $69,858

Trad: $202,074

Roth: $194,964

Trad: $421,482

Roth: $419,008

Trad: $801,048

Roth: $820,238

32%

Trad: $67,571

Roth: $69,858

Trad: $182,578

Roth: $194,964

Trad: $379,581

Roth: $419,008

Trad: $719,024

Roth: $820,238

37%

Trad: $64,079

Roth: $69,858

Trad: $172,830

Roth: $194,964

Trad: $358,630

Roth: $419,008

Trad: $678,012

Roth: $820,238

You can see that the traditional IRA needs a low tax rate at the time of cash-out to win. But even in the 22 percent cash-out tax rate, the Roth wins at the 40-year mark.

Rate of Growth

What about your rate of growth? Do variances here change things any? Let’s take a look.

Here, we’ll look at different rates of growth for a fixed period (30 years) before you withdraw your money. Once again, we’ll consider three different marginal tax rates at the time you cash out—22 percent, 32 percent, and 37 percent.

Marginal tax rate at cash-out

3% for 30 years

6% for 30 years

9% for 30 years

12% for 30 years

22%

Trad: $257,760

Roth: $245,013

Trad: $421,482

Roth: $419,008

Trad: $716,547

Roth: $742,876

Trad: $1,256,032

Roth: $1,351,463

32%

Trad: $233,259

Roth: $245,013

Trad: $379,581

Roth: $419,008

Trad: $642,260

Roth: $742,876

Trad: $1,120,886

Roth: $1,351,463

37%

Trad: $221,008

Roth: $245,013

Trad: $358,630

Roth: $419,008

Trad: $605,116

Roth: $742,876

Trad: $1,053,312

Roth: $1,351,463

In the scenarios above, the traditional IRA/side fund combo wins only when your marginal tax rate is lower at the time of withdrawal and only at the lower growth rates.

At higher rates of return—9 percent and 12 percent, in our examples above—the Roth still wins, even if you’re in a higher tax bracket when you withdraw your money.

Tax Factor

What’s going on here? For starters, the side fund is not tax-favored in any way. Plus, taxes hobble your cash-out on the traditional IRA:

· You pay taxes as you earn the money in the side fund.

· You pay taxes on the accumulated growth inside the traditional IRA when you withdraw the money.

Creating More Business Meal Tax Deductions After the TCJA

Here’s good news for business meals: the Tax Cuts and Jobs Act (TCJA) removed the “directly related and associated with” requirements from business meals.

The net effect of this change is to subject business meals once again to the pre-1963 “ordinary and necessary” business expense rules.

You are going to like these rules.

Restaurants and Bars

Question 1. If, for business reasons, you take a customer to breakfast, lunch, or dinner at a restaurant or hotel, or to a bar for a few drinks, but you do not discuss business, can you deduct the costs of the meals and drinks?

Answer 1. Yes. Even though you did not discuss business, the law provides that if the circumstances are of a type generally considered conducive to a business discussion, you may deduct the expenses for meals and beverages to the extent they are ordinary and necessary expenses. Consider this “no discussion” meal a “quiet business meal.”

Question 2. What are circumstances conducive to a business discussion?

Answer 2. This depends on the facts, taking into account the surroundings in which the meals or beverages are furnished, your business, and your relationship to the person entertained. The surroundings should be such that there are no substantial distractions to the discussion.

Generally, a restaurant, a hotel dining room, or a similar place that does not involve distracting influences, such as a floor show, is considered conducive to a business discussion. On the other hand, business meals at nightclubs, sporting events, large cocktail parties, and sizable social gatherings would not generally be conducive to a business discussion.

Meals Served in Your Home

Question 3. Does a business meal served in your home disqualify the deduction?

Answer 3. No, as long as you serve the food and beverages under circumstances conducive to a business discussion. But because you are in your home, the IRS adds that you must clearly show that the expenditure was commercially rather than socially motivated.

Goodwill Meals

Question 4. If, for goodwill purposes, you take a customer and his or her spouse to lunch and don’t discuss business, will the cost of the lunch become non-deductible?

Answer 4. Not if, in light of all facts and circumstances, the surroundings are considered conducive to a business discussion, and the expenses are ordinary and necessary expenses of carrying on the business rather than socially motivated expenses.

Question 5. Is the situation the same if the taxpayer’s spouse accompanies the taxpayer at a dinner for business goodwill reasons?

Answer 5. Yes, the meal is deductible. This is true whether or not the customer’s spouse is present. Again, the meal must meet the ordinary and necessary business expense standards.

Document the Meal Deductions

You need to keep records that prove your business meals are ordinary and necessary business expenses. You can accomplish this by keeping the following:

1. Receipts that show the purchases (food and drinks consumed)

2. Proof of payment (credit card receipt/statement or canceled check)

3. Note of the name of the person or persons with whom you had the meals

4. Record of the business reason for the meal (a short note—say, seven words or fewer)

The costs of your business meals continue to be 50 percent deductible (as they were before the TCJA).

Beware: IRS Error in Rental Property Deduction Publication

Here’s a heads-up on mortgage insurance.

Personal Residence Mortgage Insurance

The deduction for mortgage insurance on a qualified residence ended on December 31, 2017. But don’t give up on the deduction.

The personal residence mortgage insurance deduction is part of what is called “tax extenders,” and it’s highly possible that lawmakers will reinstate the deduction retroactively for all of 2018 and 2019. That’s the good news. The bad news is that to claim the retroactive deduction we will need to amend your 2018 tax return.

Rental Property Mortgage Insurance—IRS Mistake

Online at the IRS frequently asked rental property questions, you will find the following question and incorrect answer:

Question: Can you deduct private mortgage insurance (PMI) premiums on rental property? If so, which line item on Schedule E?

Answer: No, you can’t claim a deduction for private mortgage insurance premiums.

This is wrong.

The cause for the error comes from IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes), where on page 1 in the “What’s New” section, the IRS states that the deduction for mortgage insurance premiums expired and you can’t claim that deduction for premiums after 2017 unless lawmakers extend the break.

The mistake that the IRS makes in its publication and FAQ is that the expiration of the mortgage insurance deduction applies to your qualified personal residence, not your rental property.

Rules for Rental Property Mortgage Insurance

You generally treat mortgage insurance on rental property loans and mortgages as an ordinary and necessary business rental expense that you deduct on Schedule E against the income from that rental property. Depending on the type of loan, you could pay the mortgage insurance either in a lump sum or annually as you make your mortgage payments.

How you treat the mortgage insurance premiums depends on how the proceeds of the loan are used, rather than on the character of the property that you mortgage. For example, you could take a mortgage on your personal residence and use the proceeds from the loan for a rental property, an investment, or personal purposes.

Planning note. You deduct the mortgage insurance on the rental properties over the period of benefit. For example, if you make a one-time payment, you amortize the mortgage insurance over the life of the loan.

If you make annual payments because of, say, a mortgagor requirement of a loan-to-equity ratio or other formula, you deduct the mortgage insurance premiums as you pay them.

Interesting Metrics for Personal Tax Returns – 2018 vs. 2017e

Tue, 30 Jul 2019 00:00:00 GMT

2018 was the first year that incorporated the majority of the tax law changes resulting from the Tax Cuts and Jobs Act of 2017 (TCJA) enacted just prior to the end of 2017. While many taxpayers were very concerned with the loss of certain tax deductions that had benefited them over the past tax years, the TCJA did attempt to offset such lost deductions by lowering the tax rates for taxpayers as well as by enhancing certain tax credits.

As a result of the TCJA, we actually saw that most of our clients paid a lower federal tax on their 2018 tax returns as compared to their 2017 tax returns. We’re pleased to share with you the following metrics highlighting how our healthcare professional clients were impacted by the TCJA.

Lower tax rates.

The TCJA lowered the bracketed income tax rates for individual taxpayers. In comparing the average tax per tax return (total income tax as a percentage of adjusted gross income), we observed a decrease in the average federal tax rate paid by our clients by 1.4%. In 2018, the average tax rate for our clients base of mostly physicians, dentists, and psychologists ran at 24.6% as compared to an average rate of 26.0% in 2017.

Tax refunds.

The number of our clients that received a federal tax refund in 2018 was consistent with the number of our clients that received a refund in 2017. 38% of our clients received refunds each year.

Federal income taxes owed.

Similarly, the number of our clients owing additional federal income taxes when their tax returns were completed was consistent for 2018 and 2017. However, we noted an increase in the average amount of taxes due with those clients that owed money to the IRS. For these clients, their federal balance due on average increased by almost one-third: from $6,700 per tax return in 2017 to $8,600 in 2018.

State and local tax (SALT) limitation.

One of the major concerns of most taxpayers was the limitation on the SALT deduction, now being capped at $10,000. As a result of this change, the average SALT deduction for our clients nose-dived by $22,423 to $8,181 from the 2017 amount of $30,604.

Standard deduction.

The new tax law increased the standard deduction to $24k for married couples and $12k for single individuals. With the new limitation on certain itemized tax deductions as noted above coupled with the increased standard deduction amounts, 36% of our clients claimed the standard deduction on their tax return in 2018 whereas only 10% of prepared tax returns in our office claimed the standard deduction on their 2017 tax return.

Alternative Minimum Tax (AMT).

One huge sigh of relief for many healthcare professionals resulting from the TCJA was the virtual disappearance of the AMT for nearly all our clients. The AMT was assessed on 47.5% of the tax returns prepared in our office in 2017. That amount dropped to less than 1% in 2018,with only 7 tax returns in our office paying any amount of AMT in 2018.

Child Tax Credit.

Changes to the Child Tax Credit rules is another tax break that was greatly expanded by the TCJA. The dollar amount of the tax credit increased in amount from 2017 to 2018. Additionally, the income limitation where taxpayers no longer qualified for the tax credit significantly increased as well. As a result, the number of our clients that claimed the credit increased by 742. This tax credit was claimed on 818 of our clients’ tax returns in 2018 compared to only 76 of our clients’ tax returns in 2017. The average Child Tax Credit reported per tax return claiming this tax credit increased from $1,114 in 2017 to $3,093 in 2018, a jump of $1,979 per tax return qualifying for this enhanced tax credit.

Qualified Plug-in Electric Drive Motor Vehicle Credit.

One final item we noted (and not a result of the TCJA) was an increase in our clients that purchased automobiles qualifying for the Qualified Plug-in Electric Drive Motor Vehicle Credit . The number of tax returns for our clients reporting this tax credit on a From 8936 increased by 30 from 2017 to 2018. In 2018 the tax credit was reported on 46 tax returns compared to being reported on only 16 tax returns in 2017. It seems that the Tesla is the auto of choice regarding this tax credit. In 2017 five tax returns in our office claimed the purchase of a new Tesla. In 2018 the number of tax returns reporting a new Tesla purchase increased to 31. With the new Tesla Model 3 being priced at the more affordable MSRP of $35,000 and becoming available only later in the 2017 tax year, our clients’ tax returns reported a total of 18 Model 3 purchases in 2018. A second reason for the spike in Tesla purchases being reported on tax returns is the knowledge by taxpayers that the tax credit was becoming limited to only $3,750 for a Tesla purchased beginning January 2019 . Prior to 2019, taxpayers qualified for a $7,500 tax credit for Tesla purchases.

You’ve Got Questions ~ We’ve Got The Answer: Family Loans

Tue, 02 Jul 2019 00:00:00 GMT

Q: My parents would like to give me a loan of $150k. How can we structure this loan so that we are in compliance with any rules from the IRS?

A: To structure a loan in compliance with the IRS rules, you need to take the following steps:

• Prepare a written loan document. It’s best to have one drafted by a lawyer but in a pinch, you can create one from various websites that feature legal document templates.
• Include a stated interest rate with the rate being no lower than the IRS published Applicable Federal Rate (AFR) listed at: https://apps.irs.gov/app/picklist/list/federal-Rates.html .
• Also include an amortization schedule showing the dates that payments are due and reflecting the interest that will be accruing and due with each payment. Bankrate.com has a great online loan amortization tool.
• Stick to the payment schedule.

One strategy is for your parents to forgive the interest that you need to pay each year by making a Gift to you. In that case, the person lending the money won’t pick up the interest earned on their tax returns as income. And the borrower won’t deduct the interest paid.

A portion of the loan balance can be Gifted too. The total amount of the interest and principal that can be Gifted each year is limited to the $15k per person per year Gift limit. That means your parents can Gift you and your spouse $60k per year, assuming they are both still living and married. The amount that can go towards the principal and interest would be $60k less any other gifts made to you during the year. (Gifts in excess of the $15k per person per year need to be reported on a Form 709 Gift Tax return and reduce the total wealth a person can shield from Estate Taxes when they die.)

On the other hand, if you use the money to purchase or improve your primary residence or second home, or to refinance an existing mortgage, you can deduct the interest paid during the year that does not exceed a total of $750k of mortgage debt (or up to $1 million if refinancing a mortgage in existence prior to 12/2017). To claim the mortgage interest deduction you would need a lawyer to record this loan at your state’s Registry of Deeds as a mortgage and attach it to your deed.

Interest rates are still quite low. And your parents or other relatives might be looking to get a little higher interest rate on a portion of their savings than they can currently earn on bank CDs and Money Market accounts. In situations like that, a family loan might end up being a Win-Win for both parties involved.

Is A Gift of Money Reportable?

The general rule is that any gift is reportable but there are exceptions. The following gifts are usually NOT:

• Gifts that are not more than the annual exclusion for the calendar year (currently $15,000).
• Tuition or medical expenses you pay for someone (the educational and medical exclusions).
• Gifts to your spouse.

Refinancing This Summer? Buying A New Home?

Wed, 12 Jun 2019 00:00:00 GMT

Don’t forget these 10 points when considering and selecting your lender and loan officer:

1. Research the lender and loan officer to ensure they are a good fit for you.
2. What is their knowledge, experience, and commitment to service?
3. Are they local and respected by the realtor community?
4. Will your lender be willing to meet in person, if that is important to you?
5. Will they help you with budgeting, credit cleanup, and other information to customize a financing plan that is best for you?
6. Will they be available to you, your realtor, listing agent, and attorney to help win your offer and throughout the loan process?
7. Will they be available in the evening and during weekends when you might be submitting an offer or have questions?
8. Will they have the best loan programs for which you qualify?
9. Do they offer rates and programs from many banks to help with more program flexibility and better rates?
10. Will the loan officer be accessible post-closing to answer any questions you may have? Will they provide periodic mortgage check-ups and help with possible refinancing, home equity lines of credit, or other loans in the future?

Tips for Kids with a Summer Job

Thu, 06 Jun 2019 00:00:00 GMT

Will your child be working at a summer job? If so, here are a few items to consider:

How to complete Form W-4. When you child begins their summer job and will be paid as a W-2 employee, their new employer will require them to complete a Form W-4, instructing the employer how to withhold income taxes from your child’s paycheck. While completing the form, be aware that IRS will allow a taxpayer to claim an exemption from federal tax withholdings if:

Last year the taxpayer had a right to a refund of all federal income tax withheld because the taxpayer had no tax liability, and
This year the taxpayer expects a refund of all federal income tax withheld because the taxpayer expects to have no tax liability.

Thus, if your child expects a small amount of wage income to be earned this summer and did not owe taxes the prior year, your child can write “Exempt” on line 7 of the Form W-4 and no federal income taxes will be withheld from his or her pay. With the new tax rules, most likely if your child has no investment income and his or her wages earned will be less than $12,200 for the year, then there will be no federal tax liability for your child for 2019. (Although there will be no federal income taxes withheld from the paycheck your child will still be subject to social security and Medicare taxes being withheld from his or her paycheck.) Additionally, if no federal income taxes are withheld, your child’s wages are below $12,200 for the year, and there is no other income received by your child then no federal tax return will be required to be filed by your child.

Consider making a Roth IRA contribution. If your child has earned income from a summer job, he or she will be eligible to make a contribution to an IRA under their name, even if no tax return is required to be filed by your child. The maximum IRA contribution amount will be limited to the lesser of the child’s earned income or $6,000. In most cases, the income earned by your child will be free from income taxes, assuming total income for your child will be less than the new standard deduction of $12,200; thus, in this situation there would be no tax benefit to contributing to a traditional IRA. Your child will want to make the IRA contribution into a Roth IRA. The earnings in the Roth IRA grow tax free over your child’s lifetime. Additionally, the Roth IRA contribution can be funded by the parents as a gift to the child, but must be funded into an IRA under the child’s name.

E-file your child’s federal income tax return for free. If your child’s employer does withhold income taxes from your child’s pay, your child can easily file a tax return early the following year in order to get the withheld taxes refunded back by accessing the IRS website. The IRS allows a taxpayer to e-file their tax return for free via the IRS website if the taxpayer’s income is below $66,000. The IRS link to this free e-filing option is https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free .

IRS Warns That the “Dirty Dozen” Represents the Worst of Tax Scams

Mon, 03 Jun 2019 00:00:00 GMT

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire someone to help with their taxes. Don’t fall prey.

IRS concludes “Dirty Dozen” list of tax scams for 2019: Agency encourages taxpayers to remain vigilant year-round – See IR-2019-49 .

For a detailed description of each scam, please refer to the list below:

Abusive tax shelters, trusts, and conservation easements – See IR-2019-47
Frivolous tax arguments – See IR-2019-45
Failure to report offshore funds remains a crime – See IR-2019-43
Improper claims for business credits – See IR-2019-42
Scams involving disasters and charitable causes – See IR-2019-39
Inflated deductions and credits – See IR-2019-36
Falsification of income and the creation of bogus documents – See IR-2019-35
Promises of inflated tax refunds – See IR-2019-33
Tax return preparer fraud – See IR-2019-32
Identity theft – See IR-2019-30
Phone scams – See IR-2019-28
Pervasive phishing schemes – See IR-2019-26

Are You Eligible for a Refund of Underpayment Penalties Assessed?

Tue, 07 May 2019 00:00:00 GMT

Most taxpayers saw their federal income taxes decrease thanks to the new tax rules issues at the end of December 2017. Many taxpayers also saw their refunds fall or their balance due increase for their 2018 taxes as compared with prior years.

That’s because the 2018 withholding tables were adjusted to reduce people’s withholding by more than the amount of taxes they would save under the new tax rules. (Whether or not this was intentional or accidental is a whole other issue.)

The IRS knew that many taxpayers who normally don’t get refunds each would end up owing more taxes than usual when filing their 2018 returns. In most years, one of the safe harbors to avoid paying any underpayment penalties is 90% of your total federal tax. In other words, if the taxes you pay in during the year through withholdings and estimates exceed 90% of your total federal taxes for the year, you would not generally be hit with the Form 2210 underpayment penalty.

Going into the filing season for 2018 tax returns, this safe harbor was reduced to 85%. Even at this reduced safe harbor threshold, however, too many taxpayers were paying underpayment penalties, so on March 22nd, the IRS announced that the safe harbor would be reduced to just 80%.

The problem is that many people already filed their tax returns prior to 3/22/19 and those returns based the underpayment penalty at a safe harbor rate of 85%. If you paid an underpayment penalty (reflected on the Form 1040, Line 23) because your total tax bill was more than 15% of your total tax liability, please check your 2018 Form 1040 to see if your tax bill was less than 20% of your total tax (Form 1040 Line 22 divided by Line 15), and then follow these IRS issued instructions to get that penalty refunded:

Taxpayers who have already filed for tax year 2018 prior to March 22, 2019 but qualify for this expanded relief may claim a refund by filing Form 843, Claim for Refund and Request for Abatement and include the statement “80% Waiver of estimated tax penalty” on Line 7. This form cannot be filed electronically.

While you’re at it, please also read a recent news feed issued by the IRS called: Done with taxes this year? Use 2018 return to get the 2019 withholding right

TCJA provides new rules for taxpayers’ home mortgage interest deduction

Tue, 12 Feb 2019 00:00:00 GMT

The newly enacted Tax Cuts and Jobs Act of 2017 (TCJA) both simplified and complicated many of the tax rules beginning with the 2018 tax filing season. One of these changes, new rules with regard to taxpayers’ mortgage interest deduction, on the surface seems simple but in reality is quite the opposite.

The new rule with regard to home residence mortgages allows a deduction for interest on a taxpayer’s mortgage and equity debt, where the combined debt is capped at $750,000 ($375,000 if married filing separate status). This cap is for residences purchased after December 15, 2017. However, for taxpayers that have an existing mortgage on their residence obtained prior to December 16, 2017, the debt limit remains $1,000,000 ($500,000 if MFS). This “older” mortgage debt is considered “Grandfathered Debt” and is not impacted by the new $750,000 cap. Additionally, just to confuse taxpayers a bit more, the TCJA made an exception to the new rule where a taxpayer who enters into a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, will be considered to have incurred the home acquisition debt prior to December 16, 2017; thus, making the cap on this debt $1,000,000.

Prior to 2018, interest on up to $100,000 of home equity debt was allowed as a tax deduction and taxpayers were not restricted in their use of the home equity loan. Personal use of home equity debt was allowed to qualify for a mortgage interest deduction. The TCJA only allows a deduction for home equity interest if the proceeds of a home equity loan are used for renovating or improving the home. If the proceeds of the debt are used for personal items, the interest paid on the debt will no longer be deductible. For mortgages taken out after 2017, the combined total of mortgage debt plus additional home equity debt (used to improve or renovate a house) is capped at the new $750,000 threshold.

Are you thinking of purchasing a second home? Assuming your total debt combined on both homes will be under the new $750,000 cap, be sure the new mortgage will be secured by the new home. If you take out an equity loan on your primary residence which is then used to purchase the second home, the interest on the home equity loan will not qualify to be deductible mortgage interest – even if the combined loans on the primary residence are less than $750,000. Only interest on mortgage and home equity debt used to purchase, improve, renovate or construct the home being mortgaged will qualify for the mortgage deduction. Taking a loan out that is collateralized by one home in order to purchase a second home will not qualify as deductible mortgage debt.

Refinancing also poses numerous complexities depending on the amount of debt to be refinanced and when the original loan was taken out. Refinancing a mortgage is considered acquisition debt to the extent that the new debt does not exceed the outstanding principal on the old debt immediately before refinancing. Taxpayers that refinance grandfathered debt, are allowed to deduct mortgage interest on the new debt in full, up to the amount of grandfathered debt outstanding just prior to the refinance. For example, if your current mortgage outstanding is $950,000 and this mortgage was in place prior to December 16, 2017, after refinancing you can deduct mortgage interest on the refinanced debt of $950,000. Your refinanced debt will not be capped to the new $750,000 threshold, even if the refinance occurs in 2018.

If a taxpayer does a “cash out” refinance (even if the cash out is solely for closing costs), the amount of new debt in excess of the old debt outstanding just prior to refinancing will not qualify as mortgage debt even if the total new debt is less than the $750,000 threshold. For example, if a taxpayer refinances their existing debt in the amount of $400,000 with a new debt in the amount of $450,000 and does not use the additional $50,000 “cash out” for a home renovation or improvement, then only interest paid on $400,000 will qualify for the mortgage interest deduction..

With the new rules for mortgage debt and home equity debt fully in place as of December 15, 2017, taxpayers will need to pay close attention to the tax ramifications of refinancing existing home mortgages and of using home equity loans, prior to making their financial decisions.

Clock Is Ticking For The Tesla Tax Credit

Fri, 01 Feb 2019 00:00:00 GMT

Is one of your New Year’s resolutions trading in your current automobile for a new environmentally friendly vehicle? One of the more popular “green” vehicles available for purchase has been a Tesla. The purchase of a qualifying Tesla made prior to 2019 qualified a taxpayer to claim a plug-in electric motor vehicles tax credit in the amount of $7,500.

However, once a manufacturer sells 200,000 vehicles that qualify for the tax credit, the credit begins to phase out. Tesla reached that cap in late 2018. Tesla vehicles qualifying for the tax credit are the models S, X, and 3. As a result, in 2019 the plug-in tax credit for Tesla purchases will be limited as follows:

A qualifying Tesla purchase (including delivery) made between January 1, 2019 – June 30, 2019 will qualify for a plug-in electric motor vehicle tax credit in the amount of $3,750.
A qualifying Tesla purchase (including delivery) made between July 1, 2019 – December 31, 2019 will qualify for a plug-in electric motor vehicle tax credit in the amount of $1,875.
A qualifying Tesla purchase (including delivery) made after December 31, 2019 will no longer qualify for the plug-in electric motor vehicle tax credit.

More interested in the tax credit than a Tesla? Check out the information provided by the IRS at: https://www.irs.gov/businesses/irc-30d-new-qualified-plug-in-electric-drive-motor-vehicle-credit .

Update on IRS Contingency Plan

Wed, 16 Jan 2019 00:00:00 GMT

On January 15, 2019 the government invoked the Lapsed Appropriations Contingency Plan (Tax Year 2018 Filing Season). This is a plan that is updated annually and which outlines procedures for the IRS to follow when there is a temporary lapse in appropriations. As the government shutdown continues, this plan allows for the IRS to recall workers for the coming tax season. Prior to the shutdown the IRS employed 80,200 employees. Approximately 10,000 (12%) of the IRS employees have been retained during the current shutdown. The plan allows for a return to work of an additional 45% of its work force, to bring the total number of employees to 46,100.

Although the IRS will not be fully staffed, the recall of staff will allow the IRS to process both tax returns for and tax refunds to taxpayers. The opening of tax filing season is January 28, 2019. Additionally, although there are currently no IRS employees available to answer phone calls in the IRS call centers, it is anticipated that the recall of employees will allow the IRS to allocate a small number of staff to man IRS call center phone lines. However, the wait to get through to a live person on customer service phone lines is expected to be long due to the heavy call volume typical of this time of year coupled with a smaller than normal amount of staff available to answer the customer service phone lines.

Additionally, no new audits will be initiated during the partial reopening of the IRS. Audits currently in process will continue to be on hold until the IRS fully reopens.

Partial Government Shutdown Impacts IRS

Thu, 10 Jan 2019 00:00:00 GMT

Although most Americans have not felt the impact of the recent government shutdown, now closing in on three weeks in length and making it the second longest shutdown in US history, this impact may soon change as tax filing season is less than a month away. With the recent partial shutdown “non-essential government workers” have been told to not come into work. This “stay home” request includes employees at the IRS – as many as 85% of the employees of that government agency! If you have tried to reach a live person at any of the IRS customer service lines, you will be greeted with a message informing you that “live telephone assistance is not available at this time and normal operations will resume as soon as possible.” Additionally, if you have been scheduled for an IRS audit, it is temporarily on hold as well.

In response to the situation, the House recently passed an appropriations bill that would enable the IRS to operate again with funding through September 2019. However, the bill is not expected to pass the Senate.

The good news is that on January 10, 2019, the IRS announced that the tax filing season will begin on January 28, 2019 and refunds will be paid out to taxpayers owed refunds with the filing of their tax return, even if the government remains partially shutdown. The IRS plans to recall numerous workers back to work without pay.

The bad news is that, according to various new sources, the IRS may not have the authority to call back non-essential workers and demand that they work without pay. Additionally, according to Barron’s news outlets, “the federal government can pay for certain services during the shutdown if they are deemed “essential,” meaning that they are important to “protect life and property.” But Steve Rosenthal, a senior staff member at the Tax Policy Center, told Barron’s that “historically, the government has not viewed tax refunds as essential.” In short: It’s one thing to say that the government needs to process some tax returns, as the IRS already planned on doing, to keep funds going for other services deemed essential. But it’s harder to argue that tax refunds are truly essential to taxpayers under the definition that the federal government has used. So whether the government, which is literally running out of money, can really pay for tax refunds remains legally murky.”

With no end to the shutdown in sight and just two and a half weeks to the planned start of tax-filing season, it will be interesting to keep a close watch on US taxpayers looking to get a quick turnaround on their anticipated 2018 tax refund checks.

Checklist To Cut Your 2018 Taxes

proadAccountId-374868 — Tue, 27 Nov 2018 18:23:20 GMT

It's not too late to cut your 2018 tax bill. Prior to Dec. 31st:

- Increase your 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year. If you're self-employed, consider setting up a Solo 401(k) by 12/31.

- Take a look at your withholdings and instruct your employer to withhold additional taxes if you haven't had enough taxes withheld during the year and might get hit with an underpayment penalty.

- Consider selling your non-retirement investments that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds), and then can be used to offset up to $3,000 of wages and other income.

- Send in your January 2019 mortgage payment early enough so it will be processed prior to 12/31/18. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.

- Clean out your closets and donate your clothing and household items to a charitable organization since "non-cash" contributions are deductible if you itemize. Don't forget to get a receipt. And make sure to put together a list or photos of the donated items, including each item's condition since only donations of clothing and household items in "good condition or better" qualify for a deduction.

- For gifts of money , making your donation by credit card before December 31st allows you to deduct the donation on this year's return, even if you don't pay your credit card bill until 2019. And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.

- Consider contributing to a Donor Advised Fund if you are married and no longer have a substantial mortgage.

- Pre-pay or pay off your medical bills if your total medical expenses exceed 7.5% of your income and you itemize.

- Consider the simplified method home office deduction if you are self-employed, maintain an area of your house used exclusively and regularly as a home office, but don't maintain accurate records documenting expenses for your house. Claiming the simplified home office method as a tax deduction can lower your self-employment net income by as much as $1,500.

Time to Take a Good Look at HSAs

proadAccountId-374868 — Tue, 27 Nov 2018 18:21:07 GMT

Contributing to a Health Savings Account (HSA) is a great investment opportunity that allows for tax-deductible contributions and tax-free withdrawals. Please note that only individuals with a qualifying high-deductible health insurance in place are allowed to contribute to an H.S.A. You can ask your health insurance provider if the plan you have qualifies.

Insurance is set up to protect individuals from a financial catastrophe. Over the years, however, health insurance evolved to more of a system that paid for all of the healthcare costs for individuals and families. I'm guessing that was to encourage people to have their annual physicals and to seek out medical care as soon as possible, since treating an illness early could end up being a lot less expensive than having a person avoid seeing a doctor to save the cost of the visit. Pay a doctor $100 now for a consult and save thousands later on treatments that potentially could have been avoided with some preventative visits.

Due to skyrocketing healthcare costs, a larger portion of the cost of early visits now falls on the individual. Since you are looking for your health insurance to protect you against the catastrophic and not to pay all your small health related bills, that's actually fine.

If you and your family are reasonably healthy, take a look at switching to a qualifying high-deductible health insurance plan and start contributing to a Health Saving Account to receive the following tax breaks:

- Amounts contributed to an HSA are tax-deductible whether your employer contributes or you contribute on your own.

- Amounts invested within the HSA grow tax-deferred.

- Amounts withdrawn to pay your family's healthcare cost are tax-free.

- Any money remaining within the HSA once you turn 65 can supplement your retirement. You will owe income taxes on money distributed. Most likely you will have medical and dental expenses to pay from your HSA that will would be tax-free.

The maximum you contribute to an HSA for 2018 is $6,900 for a family or $3,450 for an individual. Anyone 55 or older by 12/31/18 can add another $1,000 this year.

And as we wrote earlier this spring, HSAs make a great Buy and Hold Proposition . Instead of using money from your HSA to pay routine healthcare bills for your family, pay those bills out of your household account and keep more money in your HSA growing in a tax-deferred envelope that will ultimately be available for tax-free distributions down the road. You can purchase low-cost Vanguard funds through HSA Bank .

Beware of Year End Distributions Beware of Year End Distributions Beware of Year End Distributions

proadAccountId-374868 — Tue, 27 Nov 2018 18:17:52 GMT

With the year-end upon us, many investors see it as the time to rebalance their investment portfolios. However, savvy investors need to be aware of just when the timing is "right" or "wrong" to make that buy or sell trade happen.

Mutual funds are required by law to distribute the income earned within the fund each year to the shareholders of the mutual funds in the form of dividends and capital gain distributions. Typically, the bulk of these distributions occur near year end, late in the month of December. The dividends and interest earned within the mutual fund as well as capital gains from sales must be distributed to the shareholders. At the time of the distribution, the net asset value (NAV) of the fund decreases by the amount of the per share distribution because those assets are no longer held within the fund. The result is taxable income to the shareholder and a reduction in the NAV of the mutual fund.

Thus, the date to be aware of is the ex-dividend date â€“ the first day that buyers of the mutual fund will not receive the dividend being paid out by a mutual fund.

Buyers will want to wait until after the ex-dividend date to buy into a mutual fund. After that date they are buying into the fund at a lower NAV, because of the dividend distribution. If they buy the mutual fund prior to the ex-dividend date, they are buying the fund at the higher NAV, receiving a taxable distribution, and then being left with the mutual fund at the lower NAV. The major dilemma of purchasing before the ex-dividend date is that although the buyer will receive income in the form of a dividend and/or capital gain distribution, he will also have to report the income on his tax return and pay taxes on that distribution. After having been hit with a tax bill on the distribution, the buyer would be left with less money in his wallet than if the mutual fund was simply purchased without the dividend payment.

The opposite is true for sellers. Sellers want to sell their mutual fund shares before the year-end distribution. Selling before the ex-dividend date end will result in the entire gain being subject to lower capital gain tax rates. Waiting until after the ex-dividend date, the seller will receive a taxable distribution. This scenario would result in income from the sale of the mutual fund being taxed at a capital gain, but the dividend distribution portion being taxed at a higher ordinary income tax rate.

Bottom line is as follows â€“ buyers want to purchase shares after the ex-dividend date while sellers should sell shares before the ex-dividend date. Following these rules should help investors to lessen their tax exposure on their mutual fund income.

Social Security Max Increase to $132,900 for 2019

proadAccountId-374868 — Tue, 27 Nov 2018 18:14:19 GMT

Most years, the government bumps up the maximum Social Security taxes that you can pay. For 2019, the maximum wage base jumps to $132,900, an increase of $4,500, or 3.5%, over the max of $128,400 that was in place for 2018.

At a rate of 6.2%, the maximum Social Security taxes that your employer will withhold from your salary is $8,240. This is $279 higher than the 2018 max of $7,961.

How is this increase calculated? According to the Social Security Administration, the annual change is based on the National Wage Index .

Calculating the Self-employment Tax:

If you're self-employed and earn more than $400 in net profit from your business, you're subject to social security and Medicare taxes as well. Known as the "self-employment tax", you'll need to complete a Schedule SE to calculate this tax, and then report the amount due on page 2 of your Form 1040.

The self-employment tax is based on a social security tax rate of 12.4% and a Medicare tax rate of 2.9%. These rates are double those paid by employees, since a self-employed person must pay both the employee's portion and the employer's portion of both taxes. Remember, when you work as an employee, your employer matches the Social Security and Medicare taxes withheld from your pay.

Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay in taxes. If you earn income as an employee and as an independent contractor, and your combined income exceeds $128,400 in 2018, make sure to complete Section B of the Schedule SE. Otherwise, your tax calculation will be incorrect and you'll end up overpaying your self-employment taxes.

Do You Work For More Than One Employer in 2018 and Earn More Than $128,400?

For 2018, each of your employers withholds social security taxes from the first $128,400 that you earn from them. If you work for more than one employer and your total salary from all sources exceeds that threshold, you'll have excess social security taxes withheld. Make sure to claim a credit for these excess taxes on your 1040 as additional federal taxes paid in.

For Example:

Let's say you work for two employers and earn $100,000 from each employer. Employer #1 withholds $6,200 in social security taxes ($100,000 * 6.2%). Employer #2 also withholds $6,200 in social security taxes â€“ for a total of $12,400 in social security taxes withheld during the year. Since the maximum social security taxes that you should pay through payroll withholdings for 2018 is limited to $7,961, the excess of $4,439 counts as additional federal income taxes paid in by you.

VISIT www.ssa.gov

A great place to find out more about your social security taxes and projected benefits is at the Social Security Administration's website located at www.ssa.gov , or learn about what's new for the 2019 Social Security Changes

IRS Announces Higher Retirement Plan Limits for 2019

proadAccountId-374868 — Tue, 27 Nov 2018 18:10:15 GMT

Most working professionals have access to a 401(k) plan or a 403(b) plan at work. Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred. You can contribute up to $19,000 into a 401(k) or 403(b) plan through salary deferrals in 2019.

Anyone 50 or older by December 31, 2019 can contribute an extra $6,000 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $25,000. That is an increase of $500 over what was allowed during 2018.

Many smaller employers offer their staff access to SIMPLE/IRAs instead. SIMPLE's work just like 401(k) plans, which means it's up to you to fund the bulk of this retirement savings account through salary deferrals. For 2019, the maximum contribution into your SIMPLE increases to $13,000. Anyone 50 or older by December 31st can sock away an additional $3,000 in 2019, for a total annual contribution of $16,000, up $500 from 2018.

And if you are self-employed, you can contribute up to 20% of your net self-employment income into a SEP IRA. The maximum contribution into your SEP IRA for 2019 increases to $56,000, up $1,000 from 2018.

Re-Set Your 2019 Budget:Â Most people won't be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month. With 2018 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2019.

2019 Maximum Retirement Account Contributions:

Retirement Savings Option	Under the age of 50	50 or older by December 31st
401(k) or 403(b) deferrals	$19,000 ($1,583/month)	$25,000 ($2,083/month)
SIMPLE IRA deferrals	$13,000 ($1,083/month)	$16,000 ($1,333/month)
SEP IRA	$56,000 ($4,667/month)	$56,000 ($4,667/month)
Solo 401(k)	$56,000 ($4,667/month)	$62,000 or ($5,167/month)
IRA or Roth IRA	$6,000 ($500/month)	$7,000 ($583/month)

Review of the 2018 Rules for Itemizing Your Deductions

proadAccountId-374868 — Tue, 27 Nov 2018 17:56:38 GMT

Medical Expenses

For 2018, and only for 2018, medical expenses are deductible to the extent they exceed 7.5% of your Adjusted Gross income (AGI). Staring 1/1/19, the threshold reverts to 10% of AGI.

Planning Opportunity:

Check out IRS Publication 502, Medical and Dental Expenses. If your allowable medical expenses will exceed 7.5% of your AGI this year, then paying your outstanding medical and dental bills prior to 12/31/18 will increase the allowable deduction. Same goes for pre-paying for medical expenses even if the services won't be provided until next year.

Home Mortgage Interest

Big changes with the deductibility of home mortgage interest:

- Interest on a total of up to $1 million of pre-12/14/17 outstanding debt on your primary residence and a second home is fully deductible.

- New mortgages debt (excluding refinancing of pre-12/14/17 mortgages) taken after 12/14/17 limited to $750k for this deduction.

- Interest on home equity debt used to improve the residence securing the debt is still deductible subject to the $1 million and $750k limits above.

- All other home equity loans no longer qualify for the mortgage interest deduction.

Planning Opportunity:

Read the IRS' explanation of the new rules for deducting mortgage interest and home equity loan interest and consider refinancing outstanding debt accordingly, but only if the current interest rates permit. You might also consider claiming the home office deduction to write off a portion of your mortgage interest and real estate taxes that are now non-deductible under the new rules.

Charitable Donations

The new rules increased the amount of charitable donations you can make and deduct each year to 60% of your AGI, up from 50% based on the pre-1/1/18 rules.

Planning Opportunity:

Consider donating appreciated securities to a charity since you don't pay taxes on the appreciation but can still write off the full value of the securities donated. You might also consider setting up and funding a Donor Advised Fund to frontload the tax deduction on your donations while still allowing you to disburse the contributions to the charities over a number of years.

Miscellaneous Itemized Deductions

Investment management fees, tax prep fees, and unreimbursed employee business expenses are no longer deductible effective 1/1/18.

Planning Opportunity:

Consider claiming these expenses if possible against your business income reported on your Schedule C, rental income on the Schedule E, page 1, or partnership income on Schedule E, page 2.

Casualty Losses

Non-business casualty losses are now only deductible if the loss occurs in a Presidentially declared disaster area. Personal casualty losses and theft losses are no longer deducible as of 1/1/18.

Tougher To Itemize in 2018

With a $24k standard deduction and state and local taxes (SALT), including real estate taxes, limited to just $10k annually, married couples without a large mortgage might find themselves struggling to itemize their deductions under the new tax rules. Unmarried individuals can also deduct $10k in SALT taxes but have a standard deduction of just $12k, so will have a much easier time to itemize just by owning a home, having significant medical expenses, or donating a few thousand dollars to charity each year.

Planning Opportunity:

Married couples might save some taxes by bunching their deductions every other year.

Phase-out of the Phase-out

Here is one last bit of good news. The new tax rules eliminate the phase-out of itemized deductions starting 1/1/18. Previously, high income taxpayers saw that their itemized deductions began to be phased-out once their income exceeded $313,800 if married or $287,650 if single.

The New Section 199A Qualified Business Income Deductions

proadAccountId-374868 — Thu, 11 Oct 2018 14:51:36 GMT

This is a subtitle for your new post

What is qualified business income deduction?

Section 199A qualified business income deduction is available from 2018 to 2025. Taxpayers may deduct 20% of Qualified Business Income from Partnerships, S Corporations, Sole Proprietorships (Schedule C's) and Real Estate Rental Activities (Schedule E's). This deduction was enacted to help pass-through entities who didn't receive the benefit of 21% C-corporation tax rate.

A sole proprietor with net Schedule C income of $100k can now take a tax deduction of $20k on his or her personal tax return, subject to income limitations discussed below.

Calculation of Section 199A deduction

The deduction is a function of the taxpayer's taxable income, net business income, and the wages paid and/or property owned by the business, and is generally based on the following:

· 20% of taxpayer's qualified business income.

· The greater of 50% of the business's W-2 wages or 25% of the business's W-2 wages plus 2.5% of the original cost of all qualified property.

Full QBI deduction for Single taxpayers with taxable income below $157,500 and Married Couples with joint income below $315,000

For the single taxpayer with total taxable income below $157,500 ($315,000 for married filing jointly), the W-2 wages limit does not apply. Instead, the deduction will be limited to the lesser of 20% of the qualified business income or 20% of the total taxable income. It does not matter what kind of trade or business the taxpayer has.

Fully phased-out QBI deduction for Single taxpayer with taxable income exceeding $207,500 and Married Couples with joint income in excess of $415,000

Once the single taxpayer's taxable income exceeds $207,500 ($415,000 for MFJ), taxpayer's section 199A deduction is limited to the lesser of 20% of taxpayer's qualified business income or the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of depreciable property.

But a "specified service business" is no longer eligible for this deduction.

A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

Partially phased-out QBI deduction for Single taxpayer with taxable income between $157,500 to $207,500 and Married Couples with joint income between $315k to $415k

When a single taxpayer's taxable income exceeds $157,500 ($315,000 for MFJ), the W-2 limitation is phased in. The deduction is limited to the lesser of 20% of taxpayer's qualified business income or the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of depreciable property. The qualified business income should be adjusted by an exclusion amount.

For example: An individual has taxable income of $177,500, QBI of $100,000. Base is $157,500. Top range is $207,500. The difference is $50,000. Amount over base is $20,000. Percentage that should be excluded from QBI: $20,000/$50,000=40%. So, the exclusion amount is $40,000. Adjusted QBI is $60,000. Deduction is $30,000 ($60k*20%).

How the New Tax Law May Impact Taxpayers with High Incomes, Dependents, or Complex Returns

proadAccountId-374868 — Thu, 11 Oct 2018 14:51:34 GMT

The Tax Cuts and Jobs Act, the tax reform legislation passed last December, made major changes to the tax law, including increasing the standard deduction, removing personal exemptions, increasing the Child Tax Credit, limiting or discontinuing certain deductions and changing tax rates and tax brackets. Any of these far-reaching changes could have a big impact on the tax refund or balance due on your tax return next year.

Changes that affect high-income taxpayers:

For 2018, the standard deduction nearly doubled to $24,000 for joint filers and $12,000 for singles. There were also numerous changes to itemized deductions, including:

· A $10,000 cap on deductions for state and local property, sales and income taxes.

· Reduced limits on deductions for some mortgage interest and home equity debt.

· Higher limits on the percent of income a taxpayer can deduct as charitable contributions.

· No deduction for those miscellaneous expenses that, in prior tax years, had to exceed 2 percent of a filer's income to qualify. These included investment expenses and un-reimbursed employee expenses such as travel, meals, entertainment and uniforms.

Many who itemized in the past may find they'll pay less tax in 2018 by taking the standard deduction.

Changes that could affect the withholding of parents and caretakers:

Child tax credit

· The maximum child tax credit doubled from $1,000 to $2,000 per qualifying child.

· Taxpayers whose income was too high to benefit from the Child Tax Credit in prior years may now find they qualify.

· The credit now phases out at $400,000 for couples and $200,000 for singles, compared with 2017 amounts of $110,000 for couples and $75,000 for singles.

Additional child tax credit

The maximum additional child tax credit increased from $1,000 to $1,400.
The ACTC is a refundable credit for taxpayers who owe little or no federal income tax.

Credit for other dependents

There's a new $500 credit that can benefit taxpayers who support other dependents.
The taxpayer will claim the credit when filing a tax return.
For purposes of this new credit, other dependents count including qualifying children or qualifying relatives, such as a college student or an elderly parent.

Personal exemption

The new law removes the personal exemption that taxpayers formerly claimed for themself, their spouse and dependents.

Contact Your Preparer to do a "Paycheck Checkup"

Checking and adjusting how much tax is withheld from your pay now can prevent an unexpected tax bill and penalties next year at tax time. It can also help you avoid a large tax refund, if you'd prefer to have your money in your paychecks throughout the year.

Please contact your tax preparer for help with adjusting your withholdings or to answer any questions about the tax changes.

Are Scholarships and Fellowships Taxable?

proadAccountId-374868 — Thu, 11 Oct 2018 14:51:33 GMT

We recently received an interesting question from a client that we know many of you may have as well:

"M y daughter-in-law is doing a PhD and has an NSF Fellowship from the government. Interestingly, the government does not take out taxes nor provide a W2 or 1099 form. I presume that the income is taxable but the government site says "it may be taxable income". Are there any situations when this income would not be taxable?"

It's our understanding that this income is subject to federal and state income taxes, but is not subject to Social Security or Medicare taxes. A lot of people receiving these grants don't think the income is taxable since no tax form is provided. Grants and scholarships are taxable to the extent that the money received exceeds tuition paid. Here are the rules from the IRS:

Scholarships and Fellowships

A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.

A scholarship or fellowship is tax free only if you meet the following conditions:

· You are a candidate for a degree at an eligible educational institution.

· You use the scholarship or fellowship to pay qualified education expenses.

Qualified Education Expenses

For purposes of tax-free scholarships and fellowships, these are expenses for:

Tuition and fees required to enroll at or attend an eligible educational institution.

Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses.

Expenses that Don't Qualify

Qualified education expenses do not include the cost of:

· Room and board

· Travel

· Research

· Clerical help

· Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.

IRS Introduces New Tax Transcript to Better Protect Taxpayer Data

proadAccountId-374868 — Thu, 11 Oct 2018 14:51:32 GMT

The IRS has recently launched a new format for individual tax transcripts to protect taxpayer data from unauthorized disclosure and theft.

The new format will redact personally identifiable information from the Form 1040 series. Financial entries will remain visible, which will give taxpayers and third-parties the data they need for tax preparation and income verification.

As of September 23, the new transcripts became the default format available through the IRS's "Get Transcripts Online" and "Get Transcripts by Mail" program.

Additionally, the IRS also has created a new Customer File Number that lenders, colleges and other third parties that order transcripts for non-tax purposes can use as an identifying number instead of the taxpayer's SSN. The Customer File Number can be created by the taxpayer or third party and will be visible on the requested tax transcript, allowing the third party to match the document to the taxpayer. A Customer File Number can be, for example, a loan account number and can't be the taxpayer's social security number.

There is no change in the process for students seeking income verification through Free Application for Federal Student Aid (FAFSA) or disaster victims seeking FEMA assistance. Business tax transcripts will not change as well.

Please visit the IRS website's to read About the New Tax Transcript: FAQs for additional details and see a sample of the new transcript format.

July 2018 Tax-Saving Tips News Letter

Mon, 09 Jul 2018 18:41:07 GMT

How the 90-Day Mileage Log Rule Works for You

Often in an IRS audit, the examiner will ask for your mileage log at the beginning of the audit. If you do not have a mileage log, then you are in danger of losing more than just vehicle deductions. Think about it.

If you don’t have a log for mileage, what is the IRS examiner going to think about your other records? Right—he or she is going to think you are a bad taxpayer with bad tax records who needs extra scrutiny.

The IRS says that you may keep an adequate record for part of a tax year and use that part-year record to substantiate your vehicle’s business use for the entire year.

To use a sample record, you need to prove that your sample is representative of your use for the year.

By using your appointment book as the basis for your mileage, you not only build great business-use proof, but you also do a great job of showing that your sample vehicle record mirrors your general appointments during the year.

(If you are using a mileage app, synchronize the app results with the appointment book.)

The IRS illustrates two possible sampling methods:

· One identical week each month (for example, the third week of each month)

· Three consecutive months

We don’t recommend the one-same-week-each-month method because it is difficult to start and stop a record-keeping process. (Think about how hard it would be to create a habit, undo it, and then create it again—every month.)

The three-consecutive-months log requires only one start and one stop, and you are rewarded with nine months of mileage-log freedom.

For this reason, the three-month log is the superior alternative.

Before getting into the three-month method, we should note that once you have done three months, you are in the habit. You might find it easier to continue all year, rather than stop this year and then have to start again next year.

Here are the basics of how the IRS describes the three-month test:

· The taxpayer uses her vehicle for business use.

· She and other members of her family use the vehicle for personal use.

· The taxpayer keeps a mileage log for the first three months of the taxable year, and that log shows that 75 percent of the vehicle’s use is for her business.

· Invoices and paid bills show that her vehicle use is about the same throughout the year.

According to this IRS regulation, this three-month sample is adequate to prove 75 percent business use.

Will Renting Your Home Destroy Your $250,000 Exclusion?

The days when you could convert your rental property or vacation home to a principal residence and then use the full $250,000/$500,000 home-sale exclusion to avoid taxes are gone.

Here’s how the $250,000/$500,000 exclusion works today. You must divide your period of home ownership into two categories—qualified and nonqualified use:

· Qualified use means the time you or your spouse uses the home as your principal residence.

· Nonqualified use means any time on January 1, 2009, or later in which neither you nor your spouse (or your former spouse) uses the property as a primary residence.

You allocate gain on the sale of your home between the periods of qualified and nonqualified use, and the gain allocated to nonqualified use doesn’t qualify for the $250,000/$500,000 home-sale exclusion.

You have one important exception to the nonqualified use definition: nonqualified use does not include rental use during the five-year period that’s after the last date you or your spouse used the property as your principal residence.

In other words, if you live in your principal residence for two years or more and then rent it out for three years or less, the rental period is not a “period of nonqualified use,” and you qualify for the $250,000/$500,000 home-sale exclusion.

Be Alert to the TCJA Tax Reform Attack on IRA Recharacterizations

When you convert your existing traditional IRA into a Roth IRA and then reverse the transaction by switching the account back to traditional IRA status, the reversal is called a recharacterization in IRS-speak.

If you had a sizable accumulation in your traditional IRA, the ability to convert that traditional IRA to a Roth IRA and also change your mind when things were backfiring was a terrific tax and financial planning break.

But if you make a Roth conversion transaction in 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) eliminates your ability to recharacterize the account back to traditional IRA status. And unlike most of the TCJA changes that affect individual taxpayers, this one is permanent.

Look at the new TCJA rule this way: when you make the decision to convert your existing traditional IRA or other retirement plan to a Roth, that’s a final decision for 2018 and beyond.

Tax Reform Changes Affecting Partnerships and LLCs and Their Owners

The Tax Cuts and Jobs Act (TCJA) includes several changes that affect partnerships and their partners, and LLCs that are treated as partnerships for tax purposes and their members. Most of the changes are good news. Here are five highlights:

1. Technical Termination Rule Repealed (Good)

Under prior law, a partnership or an LLC treated as a partnership for tax purposes was considered terminated for federal income tax purposes if, within a 12-month period, there was a sale or exchange of 50 percent or more of the partnership’s or LLC’s capital and profits interests. Fortunately, the TCJA repealed the technical termination rule, effective for partnership or LLC tax years beginning in 2018 and beyond. This is a permanent change.

2. Lower Tax Rates for Individual Partners and LLC Members (Good)

For 2018 through 2025, the TCJA retains seven tax rate brackets for ordinary income and net short-term capital gains recognized by individual taxpayers, including income and gains passed through to individual partners and LLC members. Six of the rates are lower than before. In 2026, the rates and brackets that were in place for 2017 are scheduled to return, but skeptics doubt that will happen.

3. Unchanged Rates for Long-Term Gains and Qualified Dividends (Not Good)

The TCJA retains the 0, 15, and 20 percent tax rates on long-term capital gains and qualified dividends recognized by individual taxpayers, including gains and dividends passed through to individual partners and LLC members. After 2018, these brackets will be indexed for inflation.

4. New Pass-Through Business Deduction (Good)

For tax years beginning in 2018-2025, the TCJA establishes a new deduction based on your share of qualified business income (QBI) passed through from a partnership or LLC. The deduction generally equals 20 percent of QBI, subject to restrictions that can apply at higher income levels.

5. New Limits on Deducting Business Losses (Not Good)

For 2018-2025, the TCJA made two changes to the rules for deducting an individual taxpayer’s business losses. Unfortunately, the changes are not in your favor.

For tax years beginning in 2018-2025, you cannot deduct an excess business loss in the current year. An excess business loss means the amount of a loss in excess of $250,000, or $500,000 if you are a married joint-filer. The excess business loss is carried over to the following tax year, and you can then deduct it under new rules for deducting net operating loss (NOL) carryforwards, explained below.

Key Point: This new loss disallowance rule applies after applying the passive activity loss (PAL) rules. So if the PAL rules disallow your business loss, you don’t get to use the new loss disallowance rule.

For NOLs arising in tax years beginning in 2018 and beyond, the TCJA stipulates that you generally cannot use an NOL carryover to shelter more than 80 percent of taxable income in the carryover year. Under prior law, you could generally use an NOL carryover to shelter up to 100 percent of your taxable income in the carryover year.

Another TCJA change stipulates that NOLs arising in tax years ending after 2017 generally cannot be carried back to an earlier tax year. You can carry such losses forward only. But you can carry them forward indefinitely. Under prior law, you could carry an NOL forward for no more than 20 years.

TCJA Changes to Your Tax-Free Supper Money

Here’s how the TCJA applied its tax reform to your supper money meal allowances. Before tax reform, you deducted 100 percent of the supper money cost. Now, because of tax reform, your tax deduction for supper money is subject to a 50 percent cut for amounts paid during tax years 2018 through 2025.

The regulations allow supper money as an excludable fringe benefit when the benefit satisfies the following four conditions:

1. You provide the benefit only occasionally.

2. You pay no more than a reasonable amount.

3. The meal enables you or the employee to work overtime.

4. You do not calculate the benefit based on the number of hours worked. For example, a $20 allowance per hour of overtime is a no-no. You can’t do that. The way to provide the benefit is to give a discretionary meal allowance, such as $56.

If the payment of supper money does not meet the four rules, it is taxable compensation to the recipient, and if that’s an employee, the money is subject to withholding and payroll taxes.

Corporate owners and the self-employed qualify for the supper money allowance under the four rules explained above. The law does not discriminate. It makes supper money available to all who work in the business.

Checklist To Cut Your 2017 Taxes

Tue, 05 Dec 2017 18:55:55 GMT

It's not too late to cut your 2017 tax bill. Prior to Dec. 31st:

· Increase your 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year. This year you can put away up to $18,500 ($24,500 if 50 or older) into your 401(k) or 403(b) plan. If you’re self-employed, consider setting up a Solo 401(k) by 12/31.

· Send in your January 2018 mortgage payment early enough so it will be processed prior to 12/31/17. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.

· For gifts of money , making your donation by credit card before December 31st allows you to deduct the donation on this year's return, even if you don't pay your credit card bill until 2018. And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.

· Pre-pay your projected state tax shortfall if you'll be itemizing your deductions and won’t be subject to the alternative minimum tax.

· Pre-pay or pay off your medical bills if your total medical expenses exceed 10% of your income and you itemize.

Roth or Regular?

Tue, 05 Dec 2017 18:55:53 GMT

These days, most 401k and 403b plans give their participants the option of contributing to the "traditional" version or the "Roth" version.

· With the traditional version, the amount you contribute reduces your taxable income in the current year, and then you pay taxes on distributions down the road.

· With the Roth version, you forego a current year break in exchange for a promise from the federal government that withdrawals from that account won't be taxed when taken out upon reaching retirement age.

With these accounts, unless you are paying no federal income taxes or are in one of the lowest few brackets, our advice is simple:

· If going with the Roth version of the 401k or 403b plan for your salary deferrals, and you won't able to hit the annual max of $18,000 ($24,000 if 50 or older) in 2017 or $18,500 ($24,500 if 50 or older) in 2018, then opt for the traditional version and use the taxes you'll save to increase your salary deferrals.

Your initial goal should be to put away the maximum allowable amount into your retirement account at work each year. With old fashioned pension plans not very common anymore and Social Security a huge question mark, it's up to you to put away enough money to fund a comfortable retirement. Taking advantage of the tax savings for the traditional 401k plan to put away more money each year seems to be the prudent way to go.

Once you can hit that annual max, you can decide whether saving taxes today or saving taxes in the future is more valuable to you and your family.

IRS Announces Higher Retirement Plan Limits for 2018

Tue, 05 Dec 2017 18:53:29 GMT

Most working professionals have access to a 401(k) plan or a 403(b) plan at work. Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred. You can contribute up to $18,500 into a 401(k) or 403(b) plan through salary deferrals in 2018.

Anyone 50 or older by December 31, 2018 can contribute an extra $6,000 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $24,500. That is an increase of $500 over what was allowed during 2017.

Many smaller employers offer their staff access to SIMPLE/IRAs instead. SIMPLE's work just like 401(k) plans, which means it's up to you to fund the bulk of this retirement savings account through salary deferrals. For 2018, the maximum contribution into your SIMPLE remains at $12,500. Anyone 50 or older by December 31st can sock away an additional $3,000 in 2018, for a total annual contribution of $15,500, unchanged from 2017.

And if you are self-employed, you can contribute up to 20% of your net self-employment income into a SEP IRA. The maximum contribution into your SEP IRA for 2018 increases to $55,000, up $1,000 from 2017.

Re-Set Your 2018 Budget: Most people won't be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month. With 2017 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2018.

2018 Maximum Retirement Account Contributions:

Retirement Savings Option	Under the age of 50	50 or older by December 31st
401(k) or 403(b) deferrals	$18,500 ($1,542/month)	$24,500 ($2,042/month)
SIMPLE IRA deferrals	$12,500 ($1,041.67/month)	$15,500 ($1,291.67/month)
SEP IRA	$55,000 ($4,583/month)	$55,000 ($4,583/month)
Solo 401(k)	$55,000 ($4,583/month)	$61,000 or ($5,083/month)
IRA or Roth IRA	$5,500 ($458.33/month)	$6,500 ($541.66/month)

Year End Projections Can Reduce Your Taxes

Tue, 05 Dec 2017 18:52:25 GMT

With the end of the 2017 calendar year quickly approaching, reviewing your specific tax situation may be tax-wise to help reduce your income taxes as well as possible underpayment of tax penalties.

Year-end planning techniques to reduce your taxable income or increase your tax saving deductions may be available for you to consider before the end of the year. Additionally, if you are concerned that you will have a large tax balance due next April, preparing a year-end tax projection can help you prepare for and budget for the funds needed to pay the balance owed.

Some tax issues to consider for this past year may be:

1. Did you have a large or unexpected tax balance owed in 2016 and think 2017 may be similar?

2. Did you realize significant capital gains or unexpected investment income this year?

3. Did your wages increase significantly in 2017 and you are unsure if your tax withholdings will cover the additional taxes on this increased income?

4. Did you receive significant 1099-misc income, consulting income, or other self-employment income in 2017 and paid no or insufficient estimated taxes?

5. Did you pay off your mortgage in 2016 or 2017 and no longer have a mortgage interest deduction?

During December, you should also evaluate whether you'll save any taxes by postponing 2017 income or deductions into 2018 or by accelerating 2018 income or deductions into 2017. While many factors should be evaluated prior to making your final decision, a few items to keep in mind are as follows:

For 2017, a single person will itemize once allowable deductions exceed $6,350 and a married couple will itemize once allowable deductions exceed $12,700.
A taxpayer is no longer subject to Social Security or self-employment taxes once wages and net self-employment earnings exceed $128,700 in 2018, up from $127,200 in 2017.
Miscellaneous itemized deductions, such as unreimbursed employee business expenses, are only deductible to the extent they exceed 2% of adjusted gross income (AGI), and are phased out if you’re subject to the AMT. Items paid with credit cards are deductible in the year charged.
Medical and dental expenses are deductible to the extent they exceed 10% of AGI, and are deductible in the year paid.

Please contact our office in the next few weeks if you would like us to prepare a year-end tax projection for you. Being aware of your tax situation will enable our staff to advise you of year-end tax saving strategies to consider that may be available to your unique situation.

Jan. 2, 2018 is Deadline to Possibly Save Significant Estate Taxes

Mon, 02 Oct 2017 00:00:00 GMT

By Attorney Neil Cohen, guest contributor

By Attorney Neil Cohen, guest contributor

You have until January 2, 2018 to file your portability election. What does that mean and why is it important?

If your spouse or one of your parents died after December 31, 2010 and no federal estate tax return was filed for their estate, you may be missing out on an opportunity to protect over $5 million dollars from federal estate taxes.

Under the federal gift and estate tax laws, every person has the ability to pass a certain amount of assets to anyone else during life (via gift in excess of $14k per year) or at death (via their estate) without being subjected to a gift or estate tax. This exclusion amount, (sometimes referred to as an “exemption” or the “unified credit”) has increased dramatically over the past few decades in response to the calls for estate tax law repeal. The exclusion amount was $600,000 during most of the ‘90’s and after gradually increasing earlier last decade was set at $5,000,000 in 2011.

To allay future calls for repeal, two additional concepts were included in the new law: first, the exclusion amount was indexed for inflation so that it is now $5,490,000 for 2017 and, second, the exclusion amount became portable.

Portability means that if one spouse dies and does not use his or her entire exemption amount, the surviving spouse can still have the benefit of that unused exclusion amount on his or her death. This was a radical departure from the estate tax law of the past because the exclusion amount was a “use it or lose it” proposition. Previously, if one spouse held $10,000,000 of assets in his or her name and the other spouse died first with no assets, then on the surviving spouse’s subsequent death the value of the assets over the exemption amount would be subject to estate taxes. A $10,000,000 estate would be subject to an estate tax in the neighborhood of $2,500,000.

With the advent of portability, however, that same couple is able to shelter the full $10,000,000 because the exclusion amount of the first spouse to die is available to the surviving spouse.

In order to claim what is now referred to as the “deceased spousal unused exclusion” (DSUE) amount, the estate of the first spouse to die must file a “timely filed” estate tax return, including extensions, for no other reason than to claim the DSUE. Before portability, if a person died with an estate that was not over the exclusion amount, an estate tax return was not required. This may explain why no estate tax return was filed for your spouse or parent.

As time passed people began to realize that the DSUE amount was only available if they filed a timely filed estate tax return meaning within nine months after death or 15 months if the automatic 6-month extension is requested. When people realized the filing deadline had passed, their only option was to file a Private Letter Ruling request with the IRS which came at great expense; the filing fee alone approached $10,000. The benefit however is well worth it.

After being inundated with countless identical Private Letter Ruling requests, the IRS recently issued Revenue Procedure 2017-34 which provides for a simplified method to grant relief to estates that have missed their filing deadline. This simplified method requires the executor to complete and file a properly prepared estate tax return on or before the later of January 2, 2018, or the second annual anniversary of the decedent’s date of death.

There are several other requirements as well but the Bottom Line is that estates of people that died between 2011 and 2015 can obtain relief under this streamlined Revenue Procedure instead of by filing a Private Letter Ruling request. It also extends the time to file for certain estates that may have missed their filing deadlines but have not yet exceeded the 24-month period; i.e. estates of decedents who died more than 15 months but less than 24 months prior to the date you are reading this article.

If you have any questions about the DSUE please contact Attorney Neil Cohen of Seegel Lipshutz & Lo, LLP at ncohen@sll-law.com .

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IRS Reminds Taxpayers: Watch Out for Scams

Mon, 02 Oct 2017 00:00:00 GMT

From IRS News Bulletin- 2017-112:

The Internal Revenue Service issued a warning that tax-related scams continue across the nation even though the tax filing season has ended for most taxpayers. People should remain on alert to new and emerging schemes involving the tax system that continue to claim victims.

“We continue to urge people to watch out for new and evolving schemes this summer,” said IRS Commissioner John Koskinen. “Many of these are variations of a theme, involving fictitious tax bills and demands to pay by purchasing and transferring information involving a gift card or iTunes card. Taxpayers can avoid these and other tricky financial scams by taking a few minutes to review the tell-tale signs of these schemes.”

EFTPS Scam

A new scam which is linked to the Electronic Federal Tax Payment System (EFTPS) has been reported nationwide. In this ruse, con artists call to demand immediate tax payment. The caller claims to be from the IRS and says that two certified letters mailed to the taxpayer were returned as undeliverable. The scammer then threatens arrest if a payment is not made immediately by a specific prepaid debit card. Victims are told that the debit card is linked to the EFTPS when, in reality, it is controlled entirely by the scammer. Victims are warned not to talk to their tax preparer, attorney or the local IRS office until after the payment is made.

“Robo-call” Messages

The IRS does not call and leave prerecorded, urgent messages asking for a call back. In this tactic, scammers tell victims that if they do not call back, a warrant will be issued for their arrest. Those who do respond are told they must make immediate payment either by a specific prepaid debit card or by wire transfer.

Private Debt Collection Scams

The IRS recently began sending letters to a relatively small group of taxpayers whose overdue federal tax accounts are being assigned to one of four private-sector collection agencies. Taxpayers should be on the lookout for scammers posing as private collection firms. The IRS-authorized firms will only be calling about a tax debt the person has had – and has been aware of – for years. The IRS would have previously contacted taxpayers about their tax debt.

Scams Targeting People with Limited English Proficiency

Taxpayers with limited English proficiency have been recent targets of phone scams and email phishing schemes that continue to occur across the country. Con artists often approach victims in their native language, threaten them with deportation, police arrest and license revocation among other things. They tell their victims they owe the IRS money and must pay it promptly through a preloaded debit card, gift card or wire transfer. They may also leave “urgent” callback requests through phone “robo-calls” or via a phishing email.

Tell Tale Signs of a Scam:

The IRS (and its authorized private collection agencies) will never:

Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. The IRS does not use these methods for tax payments. The IRS will usually first mail a bill to any taxpayer who owes taxes. All tax payments should only be made payable to the U.S. Treasury and checks should never be made payable to third parties.
Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
Ask for credit or debit card numbers over the phone.

For anyone who doesn’t owe taxes and has no reason to think they do:

· Do not give out any information. Hang up immediately.

· Contact the Treasury Inspector General for Tax Administration to report the call. Use their IRS Impersonation Scam Reporting web page. Alternatively, call 800-366-4484.

· Report it to the Federal Trade Commission. Use the FTC Complaint Assistant on FTC.gov. Please add "IRS Telephone Scam" in the notes.

For anyone who owes tax or thinks they do:

View tax account information online at IRS.gov to see the actual amount you owe. Then review payment options .
Call the number on the billing notice, or
Call the IRS at 800-829-1040. IRS workers can help·

How to Know It’s Really the IRS Calling or Knocking

The IRS initiates most contacts through regular mail delivered by the United States Postal Service. However, there are special circumstances in which the IRS will call or come to a home or business, such as:

when a taxpayer has an overdue tax bill,
to secure a delinquent tax return or a delinquent employment tax payment, or,
to tour a business as part of an audit or during criminal investigations.

Even then, taxpayers will generally first receive several letters (called “notices”) from the IRS in the mail.

Reminders About Charitable Donations Following Recent Hurricanes

Mon, 02 Oct 2017 00:00:00 GMT

In the aftermath of the horrific damage in Florida, Texas and the Caribbean caused by the recent hurricanes, there are multiple ways to provide charitable relief to those in need.

One way is by contributing stock gifts to 501(c)(3) organizations that are helping in the relief efforts. Donating appreciated stock can be a great tax strategy. That's because when you donate shares of stock and other securities, you deduct the fair market value of the donated securities on your tax return and avoid paying taxes on the capital gain.

Let's say you donate stock that you purchased for $1,000 and is now worth $5,000. By doing so, you will avoid paying capital gains tax on the $4,000 of appreciation and still get to deduct the FMV, or $5,000, of the stock. (Please don't donate shares of stocks that have decreased in value. Instead, sell those shares, take the loss, and donate the net proceeds.)

If you donate property or goods other than cash, you may generally deduct the fair market value of the property. The rules relating to how to determine fair market value are discussed in Publication 561 , Determining the Value of Donated Property. Don't forget that the rules changed a few years back and you can only deduct goods that are in good condition or better. Please note that if you want to claim a deduction more than $5,000 for donated goods, make sure to get a written appraisal valuing the items being donated.

As the recovery process from the hurricane damage will take time, charities will need support over the long haul. Thus, you may want to set up recurring donations or give later in the year. For taxes, keep in mind that contributions are deductible in the year made. Donations charged on a credit card by December 31, 2017 are deductible in 2017 even if the credit card bill isn’t paid until 2018.

How much can you donate and still get the full deduction? Donations of money are deductible up to 50% of your Adjusted Gross Income (AGI). Donations of securities are limited to 30% of AGI. Any excess amounts not allowed in the current year can be carried over and utilized during the subsequent five years.

Unfortunately, scam charities sometimes do pop up in the wake of a tragedy. The IRS offers a tool, EO Select Check , that you can use to make sure the charity in question is an exempt organization that is eligible to receive tax-deductible contributions.

IRS Relief for Victims of Recent Hurricanes

Whether you live in an area affected by the recent hurricanes, or you have family or friends who live there, the IRS provides guidance to victims of Hurricanes Harvey, Irma and Maria. Special tax relief and assistance is available to taxpayers in the Presidential Disaster Areas.

For information from the IRS, please visit https://www.irs.gov/newsroom/tax-relief-in-disaster-situations .

For information on government-wide efforts related to these natural disasters, please visit https://www.usa.gov/disasters-and-emergencies .

Need Help Completing a W-4 Form?

Mon, 02 Oct 2017 00:00:00 GMT

If you change jobs, you need to submit a W-4 form with your new employer. What seems like a very straightforward form can often result in a surprisingly large overpayment or balance due when you file your taxes the following year.

Some underlying issues with the W-4 form are:

- If you work for more than one employer, each employer withholds taxes as if they are your only employer.

- If you claim “married” on the W-4, your employer withholds taxes as if your spouse does NOT work.

To address these issues, the IRS has created a new online tool, the IRS Withholding Calculator, to help you complete the W-4 in such a way that you should come close to breaking even on your taxes.

You can check out the tool at: https://apps.irs.gov/app/withholdingcalculator/ (Java script needs to be enabled)

This Year’s Most Interesting Tax Season Observations

Fri, 07 Jul 2017 00:00:00 GMT

by Andrew D. Schwartz, CPA, Founder of The MDTAXES Network

At some point during each tax season, there is a moment when I notice a recurring trend or theme that is unique and fascinating to that specific tax season. So what is this year's most interesting trend?

For the 2017 tax season, what I found most fascinating is the number of clients who installed solar panels on their home during 2016. People who added solar property to their homes are eligible to claim a federal tax credit equal to 30% of the costs incurred.

Remember, a tax credit is a dollar-for-dollar reduction in the taxes you owe. Spending $40k on solar panels for your home, therefore, translates to a $12k reduction in the federal income taxes you'll pay that year. You report this valuable tax break on a Form 5695.

Many states allow taxpayers to claim a solar tax credit as well. For example, Massachusetts allows a tax credit of up to $1,000 while New York allows up to $5,000 in tax savings for installing solar.

Please note that the solar credit has been extended through 2021. However, the full 30% tax credit applies only through 2019, then the credit decreases to 26% of eligible costs incurred for 2020, and then decreases again to 22% for 2021.

According to the Instructions of Form 5695 :

Qualified solar electric property costs. Qualified solar electric property costs are costs for property that uses solar energy to generate electricity for use in your home located in the United States. No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed. The home doesn't have to be your main home.

Qualified solar water heating property costs. Qualified solar water heating property costs are costs for property to heat water for use in your home located in the United States if at least half of the energy used by the solar water heating property for such purpose is derived from the sun. No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed. To qualify for the credit, the property must be certified for performance by the nonprofit Solar Rating Certification Corporation or a comparable entity endorsed by the government of the state in which the property is installed. The home doesn't have to be your main home.

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Maximize Tax Deductions During Your Summer Travels

Fri, 07 Jul 2017 00:00:00 GMT

With the summer travel season nearly upon us, here are some tips and rules about deducting business travel expenses:

· Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.

· You are traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away and before returning home.

· Deductible travel expenses while away from home include, but aren't limited to: travel by airplane, bus, train, or car, meals and lodging, tips you pay for services related to these expenses.

· The government does allow a standard meal allowance / per diem rate that you can deduct in lieu of actual meal expenses. The per diem rates vary based upon location and can be looked up on the GSA website. You will calculate your deduction for meal and entertainment for each trip based on the per diem rates or actual expenses incurred.

· For domestic travel, the trip needs to be primarily for business. For foreign travel, the threshold is exclusively for travel (subject to various exceptions on what actually constitutes exclusivity.)

· You may deduct travel expenses, including meals and lodging, you incurred in looking for a new job as long as you have established yourself in your present trade or business.

· You can deduct travel expenses paid or incurred in connection with a temporary work assignment away from home. The temporary assignment cannot be considered indefinite or cannot be expected to last longer than one year. You also need to intend to return back to your original home to continue working at the end of the assignment.

Want More info?

Visit www.IRS.gov to read IRS Publication 463 on Travel Expenses.

Travel expenses incurred in connection with a job-related move are claimed on IRS Form 3903.

Buying a New Fuel-Efficient Car in 2017?

Fri, 07 Jul 2017 00:00:00 GMT

The IRS still offers tax credits up to $7,500 on all-electric and plug-in hybrid cars that you would claim on your 2017 tax return.

The vehicle must:

· weigh less than 14,000 pounds,

· have at least four wheels,

· be propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of not less than 4 kilowatt hours, and

· is capable of being recharged from an external source of electricity.

For a full list of qualifying cars by make and model, visit the U.S. Dept. of Energy’s website at: https://fueleconomy.gov/feg/taxevb.shtml

Save Yourself $125 or More Next Tax Season If You Have Working Kids

Fri, 07 Jul 2017 00:00:00 GMT

The IRS wants to help parents of working children avoid the headaches and costs of preparing tax returns for their kids who won't earn enough to be taxed. All you need to do is have your child write the word "Exempt" in Box 7 of the Form W-4 that is generally completed the first day of employment. If your child previously submitted an incorrect W-4, please have them file a corrected one with their employer as soon as they can.

Please note that a working child will generally owe no income taxes unless wages earned exceed $6,400 (in 2017) and/or investment income exceeds $350. Needless to say, most of the kids are getting back all the federal and state income taxes withheld during the year.

Here is what the IRS says in their instructions to the Form W-4:

Exemption from withholding. If you are exempt, complete only lines 1, 2, 3, 4, and 7 and sign the form to validate it.

And here are the instructions on the W-4 for line 7:

I claim exemption from withholding for 2017, and I certify that I meet both of the following conditions for exemption.

Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and
This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.

If you meet both conditions, write “Exempt” here.

Do yourself and your kids a favor by having him or her write the word "Exempt" on Line 7 of the W-4 form. Your working child will have more money to spend sooner (and will hopefully ask you for less of your money during that time) since no federal and state income taxes will be withheld from their wages. And you won't get stuck preparing a 1040-EZ for your child or paying your CPA $125 or more so your kid can get back their tax refund on money that didn't need to be withheld in the first place.

Info to Share with Your Millennial Child

We've put together 2 short recorded presentations to help explain these rules to parents and their kids. Visit our MDTAXES YouTube Channel to view:

W-4 Basics: Kids and College Students Earning Less Than $6,400 Should Claim Exempt (2 minutes) - https://www.youtube.com/watch?v=MRVOs1RcS5c

Help Working Kids and Students Correctly Complete a W-4 Form (6 minutes) - https://www.youtube.com/watch?v=7ywlxeq-9nE

Over 50? Your Savings Gets Better With Age

Thu, 06 Jul 2017 00:00:00 GMT

Wisdom isn’t the only benefit you get with age.

Starting the year you turn 50, you can make these additional “catch-up” contributions towards your retirement accounts:

· Up to $6,000 more for 401(k), 403(b), SARSEP, or governmental 457(b)

· Up to $3,000 more for SIMPLE IRA or SIMPLE 401(k)

· Up to $1,000 more for traditional or Roth IRA

These amounts are ON TOP OF the standard limits everyone is allowed to contribute in 2017:

· $18,000 for 401(k), 403(b), SARSEP, or governmental 457(b)

· $12,500 for SIMPLE IRA or SIMPLE 401(k)

· $5,500 for traditional or Roth IRA

Upon turning 55, you can also contribute an extra $1,000 to your Health Savings Account (HSA) over and above the current limits of:

· $3,400 (Self coverage) or $6,750 (Family coverage) for HSA

Remember: it’s never too late to save additional monies towards your retirement. Even a small increase towards your savings made with each paycheck will make a positive impact to your bank account when you’re a retiree.

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