While the tax code changes slightly with each passing year, substantial changes were made towards the end of 2017 that went into effect for the 2018 tax year. From tax bracket changes to alterations with standard deductions, there are many tax changes that you will need to be aware of when getting your tax return ready.
Tax Bracket Changes
Whether you're filing a joint return or a head of household return, the tax bill that was signed into law at the end of 2017 has altered the tax rate that you can expect to pay. While there are still seven separate tax brackets, these tax brackets have lowered somewhat. The previous brackets included separate tax rate percentages of 10, 15, 25, 28, 33, 35, and 39.6 percent. The 2018 changes have altered the tax rate percentages to 10, 12, 22, 24, 32, 35, and 37 percent, which are marginally lower. The amount that you can earn before falling into these brackets has also changed. For instance, the highest rate of 39.6 percent under the old tax laws applied to any individual earning more than $426,700. Under the current law, the highest rate of 37 percent applies to any individual earning more than $500,000
Standard Deduction Increases
For the 2018 tax year, the standard deduction has been nearly doubled. If your tax filing status is "single", the previous standard deduction of $6,500 is now $12,000. However, the personal exemption has been eliminated with these changes, which means that you won't necessarily be able to deduct twice as much as you have done in previous years.
Additional Tweaks and Eliminations of Deductions
The mortgage interest deduction can now only be used with mortgage debt that reaches $750,000 as opposed to $1 million. The medical expenses deduction has been reduced to 7.5 percent from 10 percent of your adjusted gross income. Some deductions that are being completely eliminated include tax preparation expenses and moving expenses. If you need help identifying which changes to the tax code are set to affect you, you might consider speaking to a Las Vegas CPA who can assist you in filling out your tax return without making mistakes.
Even if gambling isn't your full-time profession and your participation is limited to casual excursions, your winnings can still be counted as income by the IRS. Before consulting a Las Vegas CPA, you can take steps to account for and substantiate your gambling profits and losses before tax time. This will make it easier to file your taxes and prevent you from under-reporting your income.
Keep a Gambling Diary of Profits and Losses
Recording your gambling profits and losses in a personal diary can be useful for substantiating your gambling income when filing your taxes. Make sure that your diary contains the date and precise location of the amounts that you won or lost. In a separate file, keep the verifiable documentation that supports your diary entries, such as bank statements, wagering tickets and casino receipts.
Remember That Not All Gambling Profits Are Cash Earnings
Use the Fair Market Value (FMV) of your in-kind earnings. Sometimes you might win a paid vacation or a new car. The FMV is the price that your item would be worth if you'd bought it on the open market. If you have difficulty calculate the FMV of your non-cash gambling profits and recording them for tax purposes, you might want to contact an expert for CPA Las Vegas advice.
Deduct Professional Gambling Expenses
You can always deduct your gambling losses for tax purposes, whether you're a casual or a professional gambler. The only limit for gambling losses is that they not exceed your reported gambling income. However, if you're a professional gambler, you can calculate the total of your business expenses and deduct them from your income. These expenses might be casino entry fees, minimum bets, or travel expenses. If you're unsure as to whether amounts you've spent count as professional gambling expenses, you may want to seek counsel from a CPA.
If you're starting to get your tax forms ready and are taking a look at all of your options, one aspect of taxes for you to consider is what your filing status is going to be, which could be single, married filing jointly, or head of household, the latter of which is oftentimes misunderstood by individuals who are filling out their annual tax forms. The head of household filing status can bring with it a variety of benefits that could apply to you.
What Is a Head of Household Filing Status?
Head of household is a type of filing status that's used for unmarried or single taxpayers who maintain a house for a qualifying person, which is typically referred to as a dependent. Anyone who qualifies for this type of filing status will be able to receive a higher deduction and a lower overall tax rate than individuals who use the single filing status.
How Do You Qualify as Head of Household?
You need to meet three filing status requirements in order to properly qualify for the head of household filing status. First, you must not be married on the final day of the tax year. You must also pay for over 50 percent of the total costs pertaining to keeping up a home for the entire tax year, which includes costs such as mortgage payments, rent payments, utilities, and property taxes. The third and final requirement is that a qualifying person must live with you in your home for at least half of the year.
What Is a Qualifying Person?
When you're trying to determine whether you qualify for head of household filing status, a qualifying person refers to a child, parent, or relative who lives with you but pays less than half of what it takes to maintain a household. If you're having issues with understanding every facet of your tax forms, you may be able to avoid making a mistake by retaining the services of a tax accountant in Las Vegas.
Many people like to work with CPA firms in Las Vegas for the early filing of their federal income taxes. The December 2018 shutdown of the federal government extended into 2019, causing the IRS to shut down some of their operations. It is important to know how this government shutdown could affect your 2018 federal income tax filing and refund status.
Delays in Customer Service
If you have questions about your federal income tax returns, expect long delays for the IRS phone lines. Customer service representatives may not be available to answer your questions. You may be better off speaking directly with your CPA in order to get your questions answered in a reasonable amount of time.
Reduction in Website Maintenance
Website maintenance for the portions of the IRS website that allow for electronic filing of your tax returns may be decreased. Any site problems or glitches may not be taken care of as quickly as they typically would be when the government is operating at its full capacity. This delay in site maintenance could affect individuals as well as CPA firms who electronically file taxes on behalf of their customers.
Delays in Refund Processing
The tax changes that were passed in 2018 mean that more Americans should be getting a refund for their federal income tax returns. However, the shutdown of the federal government means that all tax return processing is delayed. The IRS will process income tax returns in the order in which they were received. People who file early in the calendar year will have their refunds processed earlier, but there will still be delays. Early income tax return filers tend to be people who are owed a refund, which means that they could be waiting for several extra weeks.
Natural disasters can be unexpected, and you should be prepared. It can be difficult to organize your financial affairs in the aftermath of a natural disaster. Here are some accounting tips to help you financially recover from a natural disaster.
Keep Digital Copies of Key Documents
If you have signed insurance policies, car rental agreements or property deeds, then make sure that you have digital versions of these documents available. Natural disasters can force you from your home before you have the opportunity to collect these valuable accounting documents. If these documents are destroyed, or inaccessible for long periods of time before a safe return to your property, it can hinder or prevent your timely financial recovery. Scan these documents and email them to yourself so you can print them from any location and submit them as evidence.
Contact Your Utility Companies
Don't expect your water or electricity provider to know that a natural disaster has forced you from your home, and you are unable to pay the utilities. If the aftermath of a natural disaster keeps you away from your address for months at a time, the resulting unpaid bills can severely damage your credit and impede your financial recovery. A simple and quick accounting strategy is to update your utility company with your new forwarding address and inform them that you are no longer on the premises, so they can be on the lookout for unnaturally high bills incurred by squatters in your absence.
Be on the Lookout for Scammers
When you have additional financial obligations in the aftermath of a natural disaster, you become vulnerable to fraudsters. If you coordinate with one of the reputable accounting firms in Las Vegas, experienced accountants may be able to assist you in assessing your losses, loan obligations, insurance payouts and financial recovery strategy. You will no longer be at the mercy of scammers.
The only thing worse than paying taxes is finding out that you have IRS penalties. You might end up paying hundreds or thousands of dollars in additional charges. But you could get out of paying these penalties completely or at least getting them reduced.
Don't write that tax check yet. You may want to check with your accountant Las Vegas to see what you can do to reduce your tax burden. Meanwhile, this blog post will tell you about three common IRS penalties and the loopholes you can use to pay less money.
Late Payment Penalty
Paying your taxes late is what is known as a late filing penalty. The fees added on top of the original debt can quickly add up if you're not careful. To avoid paying really high fees, ask for an extension if you know that you will need more time to pay your taxes. Note that when you file an extension, you will still need to pay your debt by the IRS deadline.
If you get a late payment penalty for the first time, the IRS will likely not throw the book at you. If you went three years without getting a tax penalty, you might get what is called a "first-time penalty abatement." This means that you will no longer have to pay the penalty fees. But you can only use this loophole one time.
Not Paying Estimated Taxes
As a business owner, you have to pay taxes and fees throughout the year. If you miss these deadlines, you'll get assessed a penalty. To avoid this problem, pay your estimated taxes on time whenever you're required.
The only time you can escape paying this type of penalty is if you missed a payment due to circumstances such as a natural disaster or another unusual life event. To file an appeal, fill out Form 2210 and turn it in with your tax return. You'll also need to provide documentation that proves that you didn't have the ability to pay your estimated taxes by the deadline.
Health Insurance Tax Penalty
Changes in the tax code removed the penalty for not having health insurance. However, these changes won't take effect until 2020. The only way to avoid paying this penalty is to qualify for an extension. Some of the qualifications include financial hardship, living out of the country or not having a long gap in health coverage. You could also reduce the penalty fees you have to pay if you can prove that one of the exemptions applied to you at some part of the past year.
If you are many people who are working more than one job just to get by, it can have important tax implications. While no one is suggesting that you spend your precious free time reading the 70,000 pages of federal tax law, it is important to consider how much money that you need to have your employers withhold so that you do not get hit by a large penalty. Here are some helpful tips.
Filling Out Your W-4 Forms
If you work for other people, listing your dependents on your W-4 form correctly can leave you needing to pay a lot of money come tax season. The amount that you would need to pay depends on your tax bracket and other factors. Most people, however, will come out without having to pay a large tax bill if they take the right number of deductions on their highest-paying job and then enter 0 on the form at all their other jobs. It is always a good idea to meet with a tax accountant because some will need to enter an additional amount at the bottom of the form or they could still end up having to make a payment.
Social Security Withholding Tax
You also need to be very careful or you will overpay your social security taxes. The government sets a maximum amount each year. For the 2019 tax year, the maximum amount is $132,900. You will need to enter the amount of overpayment on your 1040 tax form to recoup this money.
If you work for someone else and run a business on your own, then you need to think ahead about the tax implications of running a business. When you work for yourself, then many different things are deductible. Unfortunately, you get hit with the total burden of paying your social security taxes that most employers pay 50 percent of normal. Therefore, you need to seek advice before the year begins, so you do not have to pay as much in April.
Each person's tax situation is truly unique. New laws are added each year. Therefore, make sure that you are working with a competent accounting firms in Las Vegas.
Regardless of when your divorce becomes official, you may be entitled to alimony from your former spouse. However, the tax treatment of those payments will change after the start of the 2019 calendar year. On Jan. 1, payments received are no longer treated as income, which can influence the size of each check you get and the benefits derived from that money.
You Can't Put Alimony Payments Into an IRA
Since alimony is no longer income, it no longer qualifies to be put into an IRA. In 2019, you can contribute up to $6,000 to such a fund, and those 50 and over qualify for another $1,000 in catch-up contributions. However, you will need to find a job with an employer or find freelance work if you are interested in contributing to your retirement in 2019 and beyond.
Your Spouse May Not Pay as Much
Your ex-spouse may not want to pay as much in alimony as he or she won't get to use it to reduce his or her taxable income. Under the current system, the spouse who earned more would pay as much as possible in alimony to get a large tax break. In some cases, it would be enough to push that person into a lower tax bracket, which meant that the tax savings would significantly offset any amount being paid to the spouse making less money.
Don't Rush Your Divorce Based on One Issue
It is generally not a good idea to sign a divorce in haste based on the tax treatment of alimony or other assets gained in a settlement. Ideally, you will work with a tax accountant in Las Vegas as part of an overall divorce team to help you determine the best way to structure a settlement.
When it comes to your life or health insurance policies, you might not know whether you're entitled to a tax deduction or whether you're going to owe the I.R.S. money. Below are a few examples of life and health policies, along with what you can generally expect.
Are Individual Health Insurance Premiums Tax Deductible?
An individual health insurance policy is one where you're responsible for all of the expenses of the policy. Instead of sharing any costs with your employer, you'd foot the bill for the down-payment of the policy, along with the ongoing premiums. You'd have complete ownership of the policy certificate too.
In this case, since you're handling all of the costs on your own, then according to the IRS, your premiums are tax deductible. But keep in mind that all of your medical expenses must be above 7.5% of your adjusted gross income or your AGI per tax year.
Are Individual Life Insurance Premiums Tax Deductible?
Unlike individual health insurance policy premiums, individual life insurance premiums are not tax deductible.
The I.R.S. says that these are personal expenses, and therefore, they should not receive favorable treatment from the government. The only exception is when the policyholder is paying premiums on a policy that's designated to satisfy an alimony agreement.
Are Employer-Sponsored Health Care Policy Premiums Tax Deductible?
If you are an employer, and if you're sponsoring most if not all of the cost of your employee healthcare premiums, then you'll receive a nice tax deduction. But if you're the employee, then you're not entitled to any tax deductions, since you're not the policyholder.
There are lots of complicated rules governing whether or not an insurance policy is tax deductible. And in fact, there are several types of life and health policies that require policyholders to pay a tax liability!
It's crucial for you to completely understand your tax benefits and responsibilities for each type of insurance product and policy you hold. CPA firms in Las Vegas become very busy at the top of every year, but if you set an appointment as soon as possible, then you can work with an accountant to figure out what the government expects from you if anything.
In most cases, failing to file a tax return on time is considered a more serious offense than not paying your taxes owed on time. Typically, you will face a penalty of 5 percent of the overall tax balance owed for each month or partial month the return is late up to 25 percent. The penalty may increase if you don't file a return 60 days after your applicable due date.
When Do Penalties Start to Take Effect?
Financial penalties are assessed from the moment a return is filed late. For instance, if a personal income tax return was due on April 15, the IRS could start assessing penalties starting on April 16. A CPA in Las Vegas may be able to keep you informed of when a personal tax return is due and if you owe money to the federal government.
What If a Tax Return Is Filed More Than 60 Days After the Due Date?
Let's say that your tax return was due on April 15, but you didn't file your return until July. Since that would be more than 60 days after the return was due, you would owe the lesser of $205 or 100 percent of the tax owed. It is important to note that the government will waive this and other penalties if you can show reasonable cause for not filing a tax return in a timely manner. Reasonable cause may involve being a victim of a scam or being a victim of a natural disaster.
You Can File an Extension
The IRS will generally allow you to request six extra months to file your tax return for a given year. This can be helpful if you are waiting on documents from a brokerage or other source to complete a return. Your accountant can file an extension on your behalf if necessary.
If you make a mistake on a tax return, the government is likely to let you hear about it. Therefore, it is better that you correct the error before that happens. While you may have to pay the balance owed and interest, it may be possible to avoid a large financial penalty. Depending on the scope of the error, amending a return could help you avoid criminal charges as well.
Check Your Records to Confirm the Error
Before you amend a return, it is important to be sure that an error actually occurred. Ideally, you will review the original return as well as any documents that you used as the basis filling out the return. In some cases, this may mean consulting with your Las Vegas CPA or contacting other sources for documentation. Once you have identified and confirmed the error, the next step is to fill out Form 1040X.
How to Fill Out and Submit Form 1040X
Filling out a 1040X is just like filling out the original 1040A or 1040EZ used when submitting your original tax return. if necessary, you can have your accountant complete the form for you. Computer software programs may also be able to assist in the process of amending a return. Once the form is completed, a paper copy must be mailed to the IRS. The new return will take as many as 16 weeks to process.
You Could Get a Refund
It is important to know that you could get a refund after filing your amended return. This could happen if you forget to claim a deduction or credit that you were entitled to because of a lack of paperwork or other issues. Such a scenario could also unfold if you accidentally claimed income twice or forgot to take a legitimate business expense.
While many Americans love the idea of universal healthcare, they hated the expensive tax penalty levied by the IRS for failure to carry an 'Obamacare' compliant policy.
The law that governs 'Obamacare' is formally known as the American Care Act. In short, it's meant to be an extremely comprehensive health care policy that allows as many citizens to obtain healthcare, due to its lack of restrictions on pre-existing conditions.
One of the problems with the Act rested with its I.R.S. penalty feature: If citizens failed to purchase a healthcare policy from designated healthcare exchanges, or if their existing healthcare policy wasn't compliant with ACA requirements, then citizens would face an annual tax penalty.
According to the AARP, for tax year 2018, the penalties came up to $649 for adults per year, and $347.50 for each child per year, up to a maximum of $2,085 per family, or 2.5 percent of the household income, whichever is greater.
What If You Had a Compliant Health Care Policy Through Part of Tax Year 2018?
Many citizens were able to obtain and carry an ACA-compliant policy through their employer's group plan. However, some found that after they left their employer, they no longer had access to their policy. And vice versa. Some became employed during the latter part of the year, preventing them from carrying a policy until later on.
The IRS allows citizens a three-month grace period for tax year 2018. This means that for three consecutive months, citizens won't be taxed for being non-compliant. But any period of noncompliance outside of the grace period will be taxed based upon a prorated amount.
What If You Had Health Care Outside the ACA Exchange Program?
Some will be shocked to learn that even if they carried a healthcare policy all through tax year 2018, they could still be charged an I.R.S penalty if their policy wasn't purchased from the ACA exchange program.
This is because several of the major insurance carriers pulled out of the exchanges, leaving their policyholders without ACA-compliant healthcare policies.
Will You Receive the ACA Tax Penalty for 2018?
While you might be liable for the penalty in tax year 2018, the good news is, thanks to federal legislation, this isn't an issue that you'll need to worry about, moving forward in 2019.
Your accountant in Las Vegas will help you to accurately sort through this complicated issue.
Cybercriminals are becoming more sophisticated than ever in their attempts to take your identity and make it their own. Tax season is one of the most profitable times of year for these unscrupulous folks, so right now phishing scams are running rampant. To keep your identity safe, you’ll want to stay one step ahead of the game, and that means informing yourself as to what kind of ruses are trending with these thieves.
IRS Website Fishing
It’s very common these days to see counterfeit copies of the official IRS site being hosted to steal users’ personal information. What might look exactly like the IRS front page could easily be a duplicate on a hacker’s server. In some cases, once you’ve given away your personal information, you’ll be rerouted to the IRS’s real e-policy page so the hackers can avoid suspicion.
To counter this phishing attempt, make sure that the URL in your address bar is www.irs.gov. Even one character’s variation can be the difference between complete security and a financial migraine.
TurboTax Website Phishing
Similar to IRS website phishing scams, the Intuit TurboTax website is often duplicated to fool careless users into giving their personal information away to third parties. TurboTax is an incredibly popular software suite that is used all over the country, so scammers cast their nets around it just as often as the IRS website. Your defense against TurboTax scammers should be the same as for false IRS sites: check the URL to the letter.
Stay safe this tax season. HTTP scams are the most common out there. Be very wary of any unsolicited emails you might get from the IRS or from TurboTax, as they might actually be the accounts of phishers. Vet all such messages, and if you do follow any links, first ensure that their domain is letter-for-letter exactly as you have seen it on the official site. Better yet, just hire an accountant. If you live in the area, a Las Vegas CPA should not be hard to find.
For large corporations, an audit is an annoying but routine part of doing business. But, for small business owners and sole practitioners, audits are enough to cause a panic. They may not have a full-time CPA in Las Vegas at their disposal to oversee accounts. There may also be some question about whether their deductions will come into question.
Most audits are routine, and you probably have nothing to worry about. But, there are s few things you can do to lessen the odds of being scrutinized by the IRS.
Resist the Temptation to Pocket Cash
Small businesses and independent contractors often do business on a cash basis. It's tempting to pocket some of that cash and under report your income. The thing is, the IRS keeps a close eye on businesses like landscapers, construction companies and salons, and independent professionals like DJs and entertainers. Agents have an idea what the average income should be in your area for businesses and professions whose main revenue stream is cash.
File Paper Returns
Electronic filing is more convenient, and the IRS encourages paperless returns. However, filing the old-fashioned way reduces your chances of being one of the random audit picks. Just make sure that your returns don't raise red flags and are filed on time, and don't file early.
Don't Take Risky Deductions
The IRS allows some leeway in what independent contractors and small, home-based businesses can deduct as a business expense. However, there are guidelines as to what's permissible. For example, you can deduct a portion of your wardrobe, but only clothes that you wear solely when conducting business. Utilities, rent, and other operating expenses are deductible for home offices, but they have to be located in a separate part of the home than your living quarters, and use a separate phone line and internet connection than that used by your family. Consulting with an accountant before you file will help you avoid mistake.
Audits of small businesses are up as more people are leaving traditional employment and striking out on their own. These tips can help you avoid triggering a visit form an IRS auditor, but turning your bookkeeping duties over to a professional CPA will allow you to get rid of worry and focus on your work.
Since the Tax and Jobs Act was passed earlier in 2017, big changes are in the works for both individuals and businesses in their tax preparation methods. New limits to deductions have been introduced, withholding has been reformed, and even your income taxes will see changes in 2019. What do you need to know in order to prepare for this upcoming tax season?
Tax withholding has changed
Be sure to check out the tax withholding tables from the IRS, as they have been completely overhauled. If you’ve chosen a low withholding because, for example, you decided to itemize deductions this year, you could be in for a nasty surprise. The new standard deduction has practically doubled to $12,000 if you’re single. For married couples filing jointly, the standard deduction is now $24,000.
Itemized deduction overhaul
Many itemized deduction possibilities have been eliminated this year. Although the standard deduction is almost twice what it used to be, certain businesses and individuals can expect to take a loss if they planned to itemize deductions. You’ll want to talk to your accountant to see how you can offset this loss, for example by reviewing your property assessments and challenging them wherever possible. If you live in the area, look for a tax accountant in Las Vegas.
A final word of advice
If you are barely below the standard deduction, and if you’re inclined to help your community already, charity is the way to go. Bump yourself up just above that $12,000 line with a contribution to your favorite cause. If you are over the age of 70, you can get ready for your required minimum distributions from your IRA to kick in. If you don’t desperately need that money, give it to those in need and save up for yourself next year.
If you’re a small business owner, you might think that your taxes are simple enough to handle yourself. In most cases, you can get away with doing your own business taxes without getting into trouble, but there are a number of reasons that it’s best to hire a CPA anyway. If you are the head of a business that’s growing, or if you find your financial situation changing abruptly, you’ll want to have a professional look over your books to make sure that you get the beast deal possible this tax season.
What kind of questions should you ask a prospective accountant?
This really depends on your business. Basically, think of any changes your company might go through in upcoming years. Bring them all to your prospective accountant, and if they have answers that suit you, they might end up being a good fit. Think about whether or not you’re interested in loans in the near future, cash flow opportunities, and estate planning can be a significant consideration as well.
Ask for referrals
Ask your fellow business owners if they have any recommendations. Some of them will have connections to reliable CPA’s already. Of course, you’ll still want to make sure that they can handle your business’s needs uniquely, but references are a great way to start your search. Don’t neglect to vet them in person as well though. Be ready with your interview questions mentioned in the previous section.
There happen to be a number of reliable CPA firms in Las Vegas if you live in that area. Don’t waste time and money trying to do your taxes yourself. You will almost certainly benefit more by having a professional go over them with you. An added benefit to this route is that a CPA worth its salt will give you advice and guidance moving forward with your business account. You won’t be kicked out the door with a bill in your hand; you’ll take valuable knowledge home with you.
For a certain kind of person, it's tempting to do everything yourself. It seems like there are so many good reasons to do so. You can save a money, you can learn new skills, and you can take pride in a job well done. But as it turns out, there are some things that really are better left to the professionals. Tax preparation is probably one of them. In case you need proof, read on.
You won't actually save that much money
This might seem counter-intuitive. If you don't hire someone, you obviously won't spend as much money, right? Not necessarily. First of all, you will have the expense of your time to look forward to, and this can add up when life continues at its usual pace around you. You'll be stuck at your desk trying to figure out whether such-and-such a deduction applies to you when you could be enjoying time with your family and friends - or working to cover the expense of an accounting firm, which will save you money for the following reasons.
Accountants know how taxes work
This might seem like a truism, but it's easy to look past when you realize how complicated tax policy can be. If you don't have the inside view on the machinery of the tax system, you'll miss a lot of deductions that you could potentially qualify for. Also, errors in your calculations could end up costing you.
DIY accounting software probably won't cut it
There is the alternative of having tax software automatically calculate your taxes for you. Unless your financial situation has remained unchanged and simple all year long, you will probably miss out on a few key deductions if you don't get the opinion of a specialist. There are accounting firms in Las Vegas known for their good work if you decide that the task might be over your head after all.
When you are cleaning house and have a lot of books that you need to get rid of, you might not be sure of their fair market value. Some books are more valuable than others. Factors that go into their value include rarity, condition, age and binding type. If you plan to work with an accountant in Las Vegas for itemizing your taxes, you can use some of these strategies for determining the value of books that you donate to a school, library or another organization.
Type of Book
The type of book plays a role in its value. Mass-market romance novels and mysteries will have a low resale value. In many thrift stores and garage sales, these books are priced around $1 each. Old books with obsolete information may also have a low value unless the book is considered to be rare.
Hardcover books have a higher initial sales price compared to soft cover books. The donation value should be adjusted accordingly. If the binding is made of leather, this is worth more than a cloth binding. An exception to this would be a book made in the 1800s or earlier, which could have a high value if it is in good condition.
For rare or historically significant books, appraisers use a guide that consists of very fine, fine, near fine, very good, good and fair to poor ratings. Those ratings are given based on the conditions of the cover, binding and pages. Books with missing or torn pages would get a lower rating than books that are intact. Stained pages in books would also elicit lower ratings. It is never a good idea to donate books that have been exposed to water or pest damage because pests and mold can spread.
If you suspect that an employee is stealing, you need to have proof. One way to get that proof is to work with a Las Vegas CPA. The CPA can take a look at your accounting and ensure that every dollar has been properly accounted for. You can also take these actions to safeguard your company's financial information.
It is important to limit access to your company's electronic financial records. Your accountant and you should have access. You may not want to share access beyond that. If there are co-owners of your company, they should have access. If your company has a bookkeeper for payroll purposes, limit that employee's access to payroll only and nothing else.
Create Procedures and Follow Them
If you have a bookkeeper to handle the payroll, that person should do everything but the final action. You should be the final one to review and click to make the payments happen. Keep track of all financial documents and track who uses them. Make sure that you maintain records of who bills you, how much the bill is, how much you paid and who paid the bill. These practices also help increase the efficiency of your organization.
Set Up a Two-Factor Authentication System
Just like a two-factor authentication system keeps your personal digital records safer, this practice can also keep your business records and inventory safer. If you have a bookkeeper handling payroll, that person should not also handle accounts receivable. Your accountant should do that activity. If one person is responsible for recording inventory deliveries, another person should be in charge of deciding whether a damaged item is salvaged or sold. It is a good idea to keep as close of an eye on your inventory as you do on your bill payments for accounts receivable.
When you start a business, you will need to choose between accrual and cash accounting. Even if you have a CPA in Las Vegas do the accounting for you, it is still your choice to make. The choice affects how you handle income taxes, deductions and other aspects of your company's finances. Understanding the differences between these accounting practices will help you make an informed decision.
What Cash Accounting Is
Cash accounting is the practice of recording money when it changes hands. Income is recorded when you receive the money, and expenses are recorded when you pay the amount due. For example, if you perform a service for a client on October 1, and the client pays on October 30, you count the income on October 30. For an expense, you count a bill on the date that you pay it.
What Accrual Accounting Is
Accrual accounting is the practice of accounting for the money as soon as the transaction is established. For example, if you perform a service on July 1 and send the bill on July 2, you count the income on July 2. This is the case even if the customer does not pay you until August 1. For an expense, you count the deduction of money on the date you receive the bill rather than the date that you pay it.
Making a Choice
Many small businesses choose cash accounting because it is simpler and easier to follow. However, the Internal Revenue Service requires that you use an accrual method of accounting if your business has an annual income of more than $5 million. You must also use the accrual method of accounting if you have a stock of inventory valued at $1 million that you sell to the public.
A gift of a small value that is irregularly given is considered a "de minimis" gift by the Internal Revenue Service (IRS). Accounting for these gifts could be an unreasonable burden on an employer. If your business offers de minimis gifts to employees, it is a good idea to work with a tax accountant in Las Vegas in order to understand their full federal income tax implications.
What a De Minimis Gift to Employees or Clients Is
The IRS has definitions of what constitutes a de minimis gift. Several parts of the tax code state what most other gifts are and how they affect federal income taxes for businesses. The IRS explains that a de minimis gift could include controlled and occasional use of a business copier, rare personal use of an employer-provided cell phone for work or a group life insurance policy valued under $2,000. Other de minimis gifts include coffee or doughnuts occasionally provided by the employer, tee shirts with the company's logo or pens with the company's logo for personal use.
Frequency of the Gift
A de minimis gift must be infrequent and irregular. Employees should not come to expect it, and it should not be provided on a routine basis. For example, providing coffee and doughnuts once every couple of weeks or months would be a de minimis gift. Having them available every day would not qualify as de minimis.
Value of the Gift
The value of the de minimis should be low, and it should not be traded for cash benefits. For example, the value of a cup of coffee and doughnut provided by the employer to the employee is low. It could not be traded for a cash benefit to the employee. The IRS states that any gift, no matter how infrequently it is given, cannot be considered de minimis if it has a value of $100 or higher.
No matter what type of business you operate, there will always be a customer who does not pay. Even if you send out multiple statements, call or even threaten to take the customer to small claims court, you might be left with no payment for the products or services you provided. You may be able to reduce your business income for the amount of the bad debt by working with experienced CPA firms in Las Vegas.
What a Customer Bad Debt Is
A bad debt is an amount that you have been unable to collect from a customer, client or patient. This also applies to your business if you are a creditor. At the end of the year, you may be able to write off the bad debt as a deduction from your yearly earnings. According to the Internal Revenue Service (IRS), bad debts include loans you provided to customers or suppliers, credit sales to customers and business loan guarantees.
How Writing Off the Bad Debt Works
In order to write off the bad debt, your business must follow the accrual practice of accounting. This means that you show income when you bill it and not when you collect the money. If your company does cash accounting, then you cannot write off the bad debt because it was never counted as income.
Writing Off the Bad Debts
To write off the bad debts, you have to wait until the end of the calendar year. This gives the client a chance to pay the debt. You will need to prepare or have your accountant prepare an accounts receivable aging report. This shows who owes you, how much they owe and since when they have owed. Total all of the bad debts you are owed. On your federal income taxes, you will need to file a Schedule C.
When your company has had a good year financially, it may behoove you to reward your employees with a bonus. You might also choose to reward high-performing employees with a year-end bonus for their efforts. With the help of accounting firms in Las Vegas, you can gain a clear understanding of how paying employee bonuses will affect your corporate or small business federal income tax returns.
What Constitutes a Bonus
The Internal Revenue Service (IRS) has a slim description of what qualifies as a bonus from employers to employees. The bonus must be a special one-time or annual payment from the employer to the employee for a special event or circumstance. The bonus is an additional payment beyond the employee's hourly or annual salary. Employees receiving a bonus could be part-time, full-time, contractual or freelance.
Deduction of Employee Bonuses on Federal Income Taxes
Bonus payments to employees are considered to be payments to employees. This makes them tax-deductible per IRS rules. If you do not plan to make bonuses an annual event year after year, it may be a good idea to qualify the bonus with the reason why you are paying it. If not all employees will receive a bonus, it is important to delineate why with a clear explanation. For example, you might state that employees who increased their sales by 5 percent over the previous calendar year got the bonus.
Bonus Payment Tax Implications to Employees
Bonuses paid to employees are taxable income. The taxes on the bonus are eligible for federal and state income taxes and FICA taxes. Any bonus amounts paid to your employees must also be factored into unemployment compensation rates, the Social Security maximum taxes and the additional Medicare taxes. You must pay your part of the FICA tax on the bonus as the employer. The bonus should be paid out as a regular paycheck to the employee.
Holding an end-of-the-year or holiday party at your office brings everyone together for a festive celebration. You might be surprised to learn that some of those expenses may be tax deductible on your business's federal tax returns. If you have questions about what is and what is not tax-deductible contact an accountant in Las Vegas for additional details.
If your company gives out employee gifts, it is important to note that the allowable deduction on federal tax returns is $25 per employee per year. If you give your employees a $200 gift card, you can only deduct $25 of that on your federal income tax returns. The cost of the card, envelope, wrapping or shipping of a gift cannot be added to the value of the gift for tax deduction purposes.
Many parties include entertainment, such as a comedian, piano player or disc jockey. The IRS allows organizations to deduct 50 percent of the cost of reasonable and ordinary entertainment on federal tax returns. The entertainment must not be lavish, and it must be for employees or associates and not for people with no vested interest in the company or for the general public. In order to take that tax deduction, the company's owner must be in attendance at the event.
Meals served to your employees at a holiday party may also be tax-deductible at a rate of 50 percent. In order to take that deduction, the company owner must also be at the event and partake in the meal. There are no limits on the quantities or types of food served at workplace holiday parties that can be deducted on federal income tax returns. However, the meals should not be what the IRS could subjectively consider as lavish or extravagant. For example, a taco bar is not lavish, but plates of caviar are.
If your company makes more than $1 million per year, it may be necessary to use the accrual method. The same is true if your business has inventory or is run as a traditional corporation. In the event that you need to make the switch from cash to accrual accounting, there are two important steps that you need to take.
File Form 3115
Form 3115 is the IRS form that asks permission to switch from cash to accrual accounting. Typically, the IRS will grant this request if it feels that your company will more accurately report income or expenses this way. It will also generally approve the request if your company meets income requirements or other criteria that dictates the need to make the switch. In most cases, you will send a copy of this form to the IRS as well as attach a copy to your tax return.
Don't Forget About Section 481 Adjustments
When making a change in accounting methods, it is possible that your company could owe more in taxes. This is because it may now be accounting for income that would otherwise have been pushed out to the following year. The IRS understands that a change in accounting tactics may result in a change of your company's tax bill, and it expects that taxes will be paid in full and in a timely manner. You account for any changes by filling out Section 481 on Form 3115. If you owe additional tax, it can usually be paid out over four years.
Financial Professionals Have More Information
Working with your Las Vegas CPA or other financial professional may make it easier to learn about your responsibilities when it comes to organizing your company's books. It may also be possible to contact the IRS directly if you have any questions about accepted accounting methods or any other tax question.
Many people are required to wear specific clothes such as a uniform for work. If you have to pay for this uniform yourself or pay to have the pieces cleaned and maintained, you may qualify for a tax deduction on your federal income taxes. Working with a CPA in Las Vegas could help you determine if you qualify for this Internal Revenue Service benefit.
Determine Which Clothing Is Only Used and Required for Work
Take a look at what you wear to work. Certain gear such as steel-toed work boots, a hard hat or a theatrical costume might qualify if you only use that item for your paid work. Clothing items that could possibly be used in other ordinary situations do not qualify. For example, overalls do not qualify, even if you have to wear them to work.
Document Your Workplace Requirements
Keep a copy of your workplace requirements for uniforms and gear. You might need to have this information in case you get audited by the IRS. If your employer makes a change to the required dress code, keep a copy of those changes or any supporting documentation. For example, an email from your employer that you are now required to wear an orange safety vest on the job and that you must maintain it yourself is something that you should save.
Save all receipts for the purchase and maintenance of work-related clothing and gear. When you claim the deduction, the expenses must total at least 2 percent of your adjusted gross income. The work clothing and gear is itemized under miscellaneous. You might have other deductions there, too. For example, tools that you are required to provide for yourself in order to do your job might fall into that category.
The accrual method of accounting is used by most corporations, companies that make over $5 million in revenue per year, and those with physical inventory. It can also be ideal for businesses that sell items on credit, when payment doesn’t arrive until after the sale is made. If your company uses this method, it will acknowledge payment when a product is purchased even if no money changes hands. A tax accountant in Las Vegas can help you understand the concepts behind this accounting method.
Businesses May Pay Taxes Before Receiving Revenue
Since the money from a sale is recorded when the sale is made as opposed to when the money is received, it may be necessary to pay taxes on money before getting paid. If your company chooses this accounting method, an accountant may be able to help you find ways to reduce your taxable income or obtain short-term financing to pay the government.
Expenses Are Also Recorded As They Occur
Companies that use the accrual method must record the expense when it occurs. This can mean that a company cannot accelerate future costs to the current tax year to obtain a tax advantage. On the other hand, your company may be allowed to buy on credit or pay employees days or weeks after performing services, so it may be possible to deduct an expense before the bill is actually paid.
You Must Generally Stick to One Accounting Method
Once your company has determined its accounting method, it must generally stick to it. However, it is possible to ask the IRS for a change from accrual to the cash method or another accounting strategy using Form 3115. In some cases, the government will use a different method if it believes that your current tactics don't accurately reflect your company's income and expenses.
When you are in college or one of your dependents is in college, you may have educational expenses that qualify you for federal income tax deductions or credits. These credits and deductions have a lot of rules, and working with CPA firms in Las Vegas can help you to know if you qualify or not. These programs could help you reduce your tax burden for the year or years of enrollment.
American Opportunity Tax Credit
The American Opportunity Tax Credit is a program that reduces the amount of taxes that you owe. It could lower your owed amount to zero or even yield a refund. You must be a legal resident of the United States, the person attending the college must be claimed on your tax return and the education must take place at a qualifying educational institution.
Lifetime Learning Credit
The Lifetime Learning Credit is another tax credit that could lower your tax owed. You must be a legal United States resident with a Social Security number. You can claim this for yourself or a dependent. It counts even if you are not working toward a degree. You cannot claim the American Opportunity Tax Credit and the Lifetime Learning Credit during the same tax filing year.
Income Tax Deductions
Income tax deductions lower your taxable income when filing your federal taxes. The Tuition and Fees Deduction is a program offered by the IRS. It reduces your taxable income by up to $4,000. You or your dependent must attend a listed college and be legally residing in the USA. The student loan interest deduction allows you to deduct what you paid in student loan interest from your taxable income. Not all loan interest qualifies for the deduction. You or your dependents may claim this deduction for the year's taxes.
Businesses generally have leeway when it comes to how they account for their income and expenses. As long as the method is generally accepted or specifically approved by the IRS, it can be used provided it is applied consistently. Remember that accounting firms in Las Vegas can help ensure you stay in compliance with federal regulations. Let's take a closer look at the cash method of accounting and why it can be useful for a company.
What Is the Cash Method of Accounting?
This accounting philosophy states that a company should record income when it is received, and expenses are recorded when they are paid. It is important to point out that traditional corporations are prohibited from using the cash method under the Tax Reform Act of 1986, as are companies with one or more partners structured as traditional corporations.
Why a Small Business Should Use Cash Accounting
The cash method of accounting can be helpful when it comes to both short and long-term income tax planning. For instance, an organization could choose to pay future business expenses before the end of a calendar year to maximize deductions on those expenses. This also can allow delaying receipt of payment for goods sold or services rendered until the next year, effectively lowering taxable income. If the company is a pass-through entity, this method can also reduce the personal income taxes paid by owners or shareholders.
Could This Method Benefit Your Company?
It is important to think carefully about your business and how it is structured prior to choosing an accounting method. Most accountants have experience helping companies manage their books using the cash method. Additionally, a professional can help you learn more about the pros and cons of using this strategy.
It's not easy to run your own small business as everything is on your head. Getting everything right at the same time is a virtual impossibility. However, the good news that Las Vegas business owners can take to heart is that every person has their own weak and strong points. That's why you need the help of an accountant in Las Vegas.
Misconception #1: Only Business Owners With Limited Funds Need a Budget
All business owners need a budget. When you have a budget, your funds have a plan and purpose. Not having one can cause you to overspend easily if you're not careful. Start by setting a yearly budget and then break it down by month. Go over your budget with your CPA every month to see if it needs any readjustments.
Misconception #2: Having a Tax Bill Is Always a Bad Thing
Owing money at tax time merely means that you made more money than the amount that you spent on expenses. Some business owners want to spend their profits by the end of the year so that they don't owe anything when the tax bill comes. To avoid a nasty surprise at the end of the year, put some money aside to pay your quarterly tax bill.
Misconception #3: Sales Tax and Income Tax Are One and the Same
To tell the difference between income tax and sales tax, you will need to know about a few distinctions. Sales tax acts as a tax that Nevada looks over and gets assessed to your clients on services and products. All you do as the business owner is collect the tax. You don't have to return this money until your sales tax return is due to the state.
Income tax operates as a tax at both the local and federal level for the states that collect one. Nevada acts as one of the few states that don't collect income tax from its residents.
Many people have a home-based business at some time in their lives. Whether you sell clothing, candles or cosmetics from your home, you may need collect and remit sales tax to local or state governments. If you are new to this, working with a Las Vegas CPA could help ensure that you do everything that is required by the state law.
Identifying What Products or Services to Collect Sales Tax On
Different places have different requirements on which items or services you need to collect sales tax. For example, some places require sales tax to be collected on prepared food, but other jurisdictions may not tax prepared food. Some places have different tax rates. Local taxes might apply in some cities or townships. The state department of taxation has guidance on tax rates and which items are taxable. If you sell in different locations, such as different farmer's markets, you need to charge the correct sales tax rate for each location.
Get Registered to Collect Sales Tax
In order to collect sales tax, you have to be registered with the state. You can do this online or with paper forms. You will get an identification number for collecting and remitting taxes. You will also need this for filing your quarterly and annual taxes.
Sales Tax on Internet Versus In-person Transactions
A 2018 Supreme Court ruling stated that under certain circumstances, internet transactions are subject to sales tax in all states. This issue is still under some level of confusion, particularly around how interstate sales tax should be calculated and remitted. While you definitely need to collect sales tax in the state where your business is located, you will have to check with other states to see if they have a physical presence requirement.
Street performers, also known as buskers, find many creatives to earn a daily income. For those who are able to work on the Las Vegas Strip, the prospect of earning a decent living is realistic, but it also involves a lot of hard work, along with a lot of long hours.
Las Vegas Strip performers are often busy hustling for dollars, and they forget to tend to their taxes. What's more, they don't realize that as self-employed performers, not only are they responsible for paying their own taxes, they're also entitled to a host of tax deductions at the end of the when they file annual taxes.
Costume Expenses Are Often Tax Deductible
Tourists who walk along the Las Vegas Strip will find a handful of performers dressed in costumes. The performers engage tourists by making them laugh, dancing, and taking fun photos. The activities are funny, and the performers commonly ask for a few dollars from each group that they entertain, especially if photos are involved.
Since costume street entertainers generate attention by dancing and performing in costume, the costume is an important business expense. A CPA Las Vegas professional would most likely advise their creative client to keep records of any expenses involved with the purchase and the care of the costume, since they'll claim these as tax deductions.
Dance Crews Can Claim Deductions, Too
Another common sight that tourists can find on the Las Vegas Strip are various dance performances. Sometimes the performances are conducted by individuals, but often, the performances are orchestrated by local dance crews who are promoting themselves for attention while earning money.
Street dancers are under the same tax codes as any other performer in the U.S. They'll need to claim any earnings that they generate over $600 in a tax year, but the good news is, they can work with an accountant to claim as many tax deductible expenses as possible.
Don't Pay More Than You Have To
Working as an independent creative performer is exciting, but it entails lots of hard work. Although it might be tempting to ignore your taxes, you may want to make an appointment with a CPA. At the very least, you might not owe as much tax money as you'd think!
A tax nexus is a network. It refers to your presence in the state or doing business there. If you have an online business, then you have a nexus. For tax purposes, a nexus refers to how much and how often you do business in a state. If you have a nexus in a state, you have to collect and remit sales tax and pay income taxes based on those sales. Working with a tax accountant in Las Vegas can help you understand your responsibilities related to tax payments.
Nexus for Income Tax Purposes
Each state has its own nexus rules. When it comes to income taxes, you may be responsible for paying income and property taxes if you have a nexus in the state. Property taxes apply if your business owns property in the state. Income taxes apply to your nexus if you have employees or capital assets in a state or you derive any business income there.
Nexus for Sales Tax Purposes
Sales tax nexus rules are more confusing. You might have a sales tax nexus if you have property in a state. This includes intangible property. If you have remote employees working in a state, you may have a sales tax nexus there. Owning or leasing property in a state also means that you have a sales tax nexus. When you have sales people soliciting consumers in a state, their activity constitutes a sales tax nexus.
Online Sales Nexuses
There are two types of online sales nexuses that could apply to your business. The first type is a click-through. This refers to direct contact between the buyer and seller. The second type is an affiliate nexus. This means that there is an affiliate between the buyer and seller.
It's time to do your annual taxes and you have to write off all of your deductions. These help you save money, but the problem is that there are so many deductions that you may not know what you qualify for. Here are three overlooked deductions that may help you save a little money this year.
Traditional IRA Contribution
Have you placed money into an IRA account this year? As long as it was a traditional IRA and not a Roth RIA, then you are able to write off your contributions. You are able to contribute up to $5,500 per year towards a traditional IRA unless you are over 50, in which case you can contribute $6,500. You can deduct the whole contribution and save a good amount of money on your taxes. Speak with local CPA firms in Las Vegas for more information.
No one wants to lose money on their investments, but even those losses can be useful. If you gained more overall, then you can use the losses to offset your capital gains tax. If you just lost money without any gains, then you can actually write off those losses. You can write off up to $3,000 for your capital losses for each year. If your losses exceed this limit, then you can actually carry them over into the next year.
Student Loan Interest Paid by Parents
This tax deduction only applies if you are the student and your parents are helping pay the interest on the bill. If your parents are helping you with your student loan, then according to tax law it's the same as if they gave you the money directly to pay for the bill. In this case, you are able to write off up to $2,500 per year for the interest. Just remember that your parents won't be able to write off the expense since you are technically the only one liable for the bill.
Your business or non-profit organization may be able to save money by getting a tax exemption certificate. This certificate entitles you to buy certain supplies and not have to pay any sales tax on them. Working with one of the experienced accounting firms in Las Vegas could help you identify whether or not your company could qualify for a reseller's or tax exemption certificate.
What the Tax Exemption Certificate Is for
The tax exemption certificate is designed for the supplies and products you buy and resell at your business. For example, if you operate a food truck, the single-serving sizes of packaged potato chips, bottles of soda and bottles of water could be purchased on a tax-exempt basis. The certificate also applies to supplies that you put together for items that you sell at your business. If you sell costume jewelry, you may not have to pay sales tax on the beads, clasps and cords you purchase.
What a Tax Exemption Certificate Does Not Cover
The tax exemption certificate does not exempt you from collecting sales tax on the things that you sell for your business. It also does not exempt you from paying income taxes on the profits or income you earn at your business. Items that you buy and use for your business are not covered by the tax exemption certificate. For example, the receipt paper you buy and use for printing receipts is not tax-exempt.
Who Qualifies for a Tax Exemption Certificate
You need to apply for a tax exemption certificate with the state department of taxation. Some places separate a reseller's certificate for people who buy at wholesale prices and sell at retail prices from the tax exemption certificates for supplies that you use for putting items together. You must provide the details of your business in your application.
Many people collect items throughout the year and hold a garage sale on their property. Garage sales can be an efficient way to get rid of your clutter and earn some money. Before you haul everything to your driveway and start putting price tags on the lot of it, it is important to understand when taxes have to be paid on the income of a garage sale. An accountant in Las Vegas can also advise you about what is and is not taxable income.
Casual Garage Sales
Most garage sales are defined by the Internal Revenue Service as casual sales. This is the type of sale that you might have once per year with your kids' outgrown toys and clothes, books you are done reading and household items you no longer need. Most of these items are sold at a loss. For example, you may have paid $10 for the pair of kids' jeans, and you sell them for $.50. No taxes are due on the money you earn from a casual garage sale.
Hobbyist sales are typically around a niche. For example, you might have a sale of your comic books if you collect them. If you sell the comics at a profit, and you hold the sales regularly, you may need to pay income taxes on your earnings. If you buy items with the intent to resell them at a profit, you owe taxes on the earnings.
When garage sales are your business, you owe taxes on the income. Holding recurring garage sales, such as three or more per year, may meet the definition of a business in some communities. Any sale of a car is also subject to taxes.
Las Vegas offers one of the densest and productive rideshare markets in the U.S. Whether passengers are visiting from out of town or they're locals, most of them don't want to be bothered with driving to and from the tourist areas or convention halls.
This fact keeps rideshare drivers busy and in demand, allowing them to generate lots of money. But as they know, rideshare drivers are self-employed, and they must report their earnings to the IRS.
The good news for drivers is, there are legal ways to receive Uber driver tax deductions and Lyft driver tax deductions. Below are just three ways for drivers to claim rideshare driver tax savings.
Claim Either Vehicle Expenses or Mileage Used
As of the tax year 2017, rideshare drivers have the option of claiming the expenses they incur for the upkeep of their vehicle, or they can claim the actual mileage they consume while driving in support of their business activities.
It's best to consult with a CPA for rideshare drivers in order to figure out which option would be best. Either way, drivers need to keep meticulous records of expenses and mileage. They should also keep all related receipts.
Deduct Beverages and Treats
At the very least, a good Vegas rideshare driver stocks their car with water, candy, or mints for the passengers. If a driver purchases beverages and treats to make their passengers feel more comfortable during their ride, then these should be claimed as tax-deductible expenses.
As usual, the driver should keep receipts of all related purchases, as they can be claimed as business operating expenses.
Deduct Parking Fees Too
There are areas of the city such as downtown and The Strip that charge drivers a parking fee. In short, if a rideshare driver is required to pay for the fees, then the cost of the fees is tax deductible.
There are other deductions that can be claimed, and some of them are more nuanced than others. The best decision for local drivers is to consult with a Las Vegas CPA who not only knows federal tax laws, but also understands how they should be applied to a Las Vegas ridesharing business.
If you are in the market for a tax preparation professional, you will likely find dozens or hundreds of people offering that service. However, not everyone who offers to fill out and file a tax return can do so in a quality and affordable manner. What criteria should you use to find a person or company that meets your needs and your budget?
Ask for a CPA Designation
The first thing that you want to do is ask to see proof that an individual is a CPA or an enrolled agent. These are the people who can represent you during an IRS audit, and they are also most likely to know how to handle tax issues related to individual and business returns. In most cases, business owners will need to file both a personal and business return. Therefore, it is important to have someone who can file tax returns on time and fill them out properly.
How Does a Tax Preparer Charge?
If a tax preparer charges based on the size of a tax refund, it is a red flag to look to work with someone else. Generally, tax preparation professionals will charge by the hour for their services. The amount that you will pay depends on the type of return that you need to file and the amount of time that it takes to compile it.
Talk to Multiple CPAs
If you are looking for a CPA in Las Vegas, make sure to talk to multiple service providers before choosing one to hire. This will help you to find the best price as well as to find someone who you can establish a rapport with. Ultimately, this will allow you to trust your CPA for as long as you have to file a tax return.
When you are starting a business, one of the most important decisions that you will need to make is whether to use an accrual basis or cash basis accounting method. These are different ways that you can keep your financial records and prepare any financial reports. Each of these accounting options come with their own unique advantages that you should be aware of.
This basis of accounting is designed to record expenses and income at the time that they are incurred or earned without any focus on when the cash changed hands from a company or customer to your business. Even if you have yet to receive payment, the revenue is recorded. The same is true with your expenses as they are recorded when they have been incurred as opposed to when you make the payment.
With this accounting basis, all of your income and expenses will be fully recognized in real time as the cash changes hands. Even if expenses are incurred or payments are earned, you do not need to record the payments or expenses until the money has officially changed hands. This method allows you to defer certain taxable income until a later date by placing a delay on the billing. This method is considered to be the simpler one, which is why it's highly advantageous for smaller businesses.
How to Change Accounting Methods
If you have settled on the cash basis or accrual basis of accounting but are not satisfied with the option you chose, it's possible to change the accounting method that you are using. To do so, you will need to obtain formal approval by the IRS, which can be done at any point in time throughout the tax year. Adjustments may need to be made to the income you've received when changing, which you should keep in mind. If you want to make sure that this process goes smoothly, consider using a tax accountant in Las Vegas so that you can avoid making any mistakes.
Accounting costs are fees that every small business will need to deal with, but it can be difficult to identify whether or not you're paying too much. By ascertaining how much accounting should cost, you will be able to manage your costs well and focus on growing your business. Accounting costs are always varied due to the fact that CPA firms will charge different amounts, which is why you need to look at your accounting needs to know how much these services should cost.
Overhead Costs for Accounting
The expenses that you pay for accounting are referred to as overhead costs, which means that these costs won't turn into any kind of profit. They are important, however, as you will need to maintain some form of records of all the transactions that your company has performed. Try to keep these costs low but don't feel as though you should take shortcuts.
Possible Accounting Fees
Your overall accounting fees for the month or year largely depends on how much you will need to use bookkeeping and accounting services. Some of the tasks that you will need to consider when hiring an accounting firm include payroll processing, creating invoices for customers, recording all of your transactions, and balancing your books. These firms will typically charge by the hour.
How to Keep Costs Down
There are a variety of things that you can do to keep accounting costs down, which can be highly beneficial for a small business. Try to take care of some of these tasks yourself. For instance, the payroll can be handled easily with the usage of online software. You should also only use a CPA firm for the accounting services that you absolutely require. Once you've tallied up possible costs and have ascertained how much of the work you want to do yourself, make sure that you look at CPA firms in Las Vegas that have a good reputation and provide you with the exact services you need.
During your search for accounting firms in Las Vegas, there are a large number of things that you may need to consider. It's important to hire a firm that will handle your accounting needs well and without issue. Not only will accounting firms be aware of all of the latest tax laws but they will also provide you with financial assistance that will help you avoid making mistakes.
Certifications and Business Specialties
While standard tax preparation firms offer some basic services for tax preparation, they are usually unable to provide you with comprehensive and in-depth assistance on how to file your taxes, which is something that you may want if you have a small business or complicated taxes to file. Look for accounting firms that have certified public accountants as employees if you want extensive tax services. Consider searching for firms that specialize in several business areas like retail or agricultural. Firms that have specialties may be able to better guide you with your taxes.
Audit Support and Level of Service
If you are ever audited by the IRS, you want an accounting firm by your side that you know will be able to support you in this matter. Accounting firms will be able to handle the auditing requirements for you, which can help to relieve your stress. If you have specific needs with your business, search for a firm that offers the level of service that you require. If extensive bookkeeping services are needed by you, make sure that the firm you hire is able to provide all of these services.
Make sure that you take a long look at any associated fees before making a decision about which accounting firm to go with. These fees are typically different with each firm. Certain firms will charge by the hour or minute while others will charge by each task that you ask them to perform. Ascertain the amount of service you need to better understand how much you will pay.
When you're searching for an accountant in Las Vegas, consider professionals who specialize in different focus areas, such as cost accounting or managerial accounting. By retaining the services of an accountant that offers specialized services, you can be confident that they will be able to handle all tasks related to their specialty.
Cost and Budgetary Accounting
Cost accounting focuses on identifying and adding up all production or manufacturing costs. These documents can then be used to make decisions regarding how your business can grow in the future. If the reports work as intended, you should be able to more confidently create budgets as well as appropriate product pricing in an attempt to increase future profits. Budgetary accounting is meant to help a business compare their overall performance against the budget that they have set, which helps to keep expenditures reasonable and will allow you to avoid making costly errors.
Financial and Managerial Accounting
Financial accounting is designed to record and classify the financial performance of your business in order to satisfy stakeholders or other interested parties. Examples of financial accounting include preparing financial statements and bookkeeping. As for managerial accounting, this refers to accounting reports that are made for internal use only with managers and executives. These prepared reports can vary by weekly or yearly depending on your preference and are usually kept confidential. The reports made with this type of accounting are designed to help with forecasting future sales.
If you are operating overseas with some of your business, this type of accounting is designed specifically to assist businesses with accounting issues that they may have with foreign operations or business activities that are done internationally. One of the big areas of focus with international accounting is helping businesses comply with reporting practices in different countries. Nearly all of the financial tasks that you would need to perform as a multinational company can be handled by an accounting firm that specializes in international accounting.
Filing taxes can be a daunting prospect, which is especially true when you have many different forms that you need to fill out. While making a mistake won't necessarily get you in trouble, it does mean that you will likely need to deal with the IRS more than you want to. Any mistakes that you make will also put a delay on the return that you're owed. Once you have a better grasp of some of the more common mistakes that can be made when filing taxes, you should be able to avoid most of them.
Taking Real Estate or Home Office Deductions That Aren't Necessary
The IRS typically allows you to take different home office and real estate deductions. However, there is a range of requirements for these deductions that many people attempt to sidestep. The problem with doing so is that you will likely owe back taxes when the IRS invariably finds out.
Not Using Standard IRA Deductions to Your Benefit
If you currently have a 401(k) at your work, it's possible to boost your retirement savings while also getting a tax deduction in the event that your income is under the income limits. For singles, this can be around $60,000. Many people forego using this deduction, which only serves to keep you from making money.
Glossing Over Life Changes
Many people believe that life changes have nothing to do with taxes.
However, this couldn't be further from the truth. Whether a parent has moved in with you or your children have left the house, these life changes can have a substantial effect on how much you owe. They can also be beneficial to you. For instance, changing your job may allow you to increase the amount of savings with your taxes. If you believe that your taxes are too complicated to file on your own, you may want to retain the services of a Las Vegas CPA. A certified public accountant won't make any mistakes and will be able to help you get the best return possible.
No matter how large your business is, it is important that you have an organized set of books. This will come in handy when asking for a loan or filling out yearly tax returns. Knowing your numbers can also be helpful when it comes to determining which products make the most money or which locations are the most profitable.
A CPA Can Provide Useful Insights
A certified public accountant can do more than just organize your sales figures or fill out a tax return. He or she can use sales figures or other data to create strategies aimed at better reaching your target market. It may also be possible to learn ways to cut costs or to increase your chances of getting a loan or money from an investor.
CPAs Reduce the Odds of Running Afoul of Tax Laws
If you forget to submit payroll, unemployment insurance or income taxes on time, it could result in significant financial penalties. These penalties could be the difference between making a profit and going out of business quickly. Your CPA will be able to either send reminders as to when tax payments or due or actually make those payments on your behalf.
Your CPA Saves You Time
Working with a certified public accountant can allow you to go home to your family at a reasonable time each night. This is because you won't have to spend hours trying to calculate your profit or loss for the quarter or trying to figure out what your accounts payable are for the quarter. In some cases, the time savings as a CPA in Las Vegas may provide can be just as valuable as the financial savings.
If you own a small business or are looking to start one up, it's important that you make sure that the taxes you file are done properly, which will help your business be successful. When you are attempting to file the taxes yourself, there are many common mistakes that you should try to avoid. No matter what type of small business you own, tax mistakes can be very costly and may delay the growth of your company, which can be damaging to a small business that is trying to gain a foothold in the market.
Having Issues With Recordkeeping
The only way to make sure that your taxes are filed properly is with good recordkeeping. All of your expenses and deductions must be documented. It's recommended that you keep both electronic and paper copies of these documents, the latter of which is essential in the event that you are ever audited. It's also important that you don't wait to deal with your recordkeeping requirements until close to tax time, which will likely cause you to make additional mistakes as you attempt to get all of your records updated.
Paying Employees Improperly
One of the more frustrating aspects of filing taxes as a small business is that you will have to deal with payroll taxes, which are expensive and more comprehensive than other types of taxes. Some small businesses believe that they can avoid these issues by paying cash to their employees or positioning the employees as independent contractors. If the IRS determines that you have attempted to do this, you will likely owe a substantial amount of back taxes and penalty fees.
Missing Out On Useful Deductions
There are a number of deductions that can be easy to miss out on for your business, which will only end up costing you money. For instance, startup costs of up to $5,000 can be deducted in the first year of your business. If you've never filed taxes before as a small business, you should consider hiring a tax accountant in Las Vegas to assist you in the preparation of the necessary forms. This should help you avoid making some costly mistakes.
Americans tend to move from one apartment, condo or house to another every eight years or so. A move can be a complicated process, and you will likely incur a variety of fees and expenses. Working with CPA firms in Las Vegas can help you to make sure you get all of the tax deductions you qualify for when selling your primary residence.
Property taxes are a big expense for most homeowners. If you close on the sale of your house on June 30, you may be able to deduct 50 percent of the year's property taxes. This could help to lower your overall burden, especially if you will be dealing with capital gains taxes on the sale of your property and home.
There are a lot of costs associated with the sale of a home. If you paid a home staging expert to prepare your house for sale, those costs may be deductible either directly or on a basis if you will be dealing with capital gains. You may also be able to deduct the advertising fees you paid in order to list your house for sale. If you are doing a for sale by owner transaction, you probably paid for listing your house on the Multiple Listing Service, in local print or digital media and other venues. These all count as advertising expenses.
Legal and Transaction Fees
Many home sellers work with a real estate agency. The agency and agent usually charge a fee based on the final sales price. They may charge a flat fee in other cases. Either way, those fees are deductible either directly or from your capital gains amount. If you use a lawyer with your real estate transaction, the legal fees may be deducted. If you pay points for the buyer, pay the buyer's closing costs or pay the buyer's agent's fee, you may deduct them.
Many employers offer a healthcare flexible spending account as a way to reduce the burden of out-of-pocket healthcare expenses. It is important for you to know which things can be paid for with these accounts. If you have any questions about how the accounts affect your tax obligations, consult with experienced accounting firms in Las Vegas.
Many health-related products can be paid for with a flexible spending account. Some of the covered products include your prescriptions that have a co-pay. First-aid products, such as antibiotic ointment, bandages, and ACE bandages may be covered. Over-the-counter medications are covered if you have a prescription, such as a doctor's prescription to take an aspirin tablet each day.
Healthcare flexible spending accounts also provide reimbursement for many health-related services. Your doctor's office co-pays, laboratory test co-pays, facility co-insurance fees and diagnostic service fees may be reimbursed with these accounts. You may also use the accounts for alternative medical care services, such as acupuncture, chiropractic care or physical therapy if you have a doctor's prescription for it.
Products and Services That Are Not Covered
Some products and services will not be covered by a healthcare flexible spending account. The ineligible products include, but are not limited to items such as clothing or shoes. Feminine hygiene products, baby wipes,
and diapers are not eligible expenses. Some services are also not eligible for coverage or reimbursement through flexible healthcare spending accounts. For example, medical procedures that are purely cosmetic, such as a liposuction or lip augmentation surgery, are not eligible for reimbursement. Experimental medical procedures are typically not eligible for reimbursement. Swimming lessons, exercise classes, meditation classes and yoga instruction are not reimbursable, even if they were recommended for you buy your doctor to help with a known medical condition.
The Salvation Army, Goodwill, and independent charity shops collect gently used items and resell them as a way of generating funds for their activities. These non-profit organizations offer you a receipt when you donate items. You may be eligible to receive a tax deduction for the value of the items, but it is important to work with your accountant in Las Vegas in order to make sure that the value you place on the donated items is accurate.
Research the Value of Collectibles
Perhaps you are donating your old baseball card collection or some old Hot Wheels toys. These items may have a higher value if they are in good condition and have collectible status. Consider researching several price guides for specialty items and valuing the donation at about the lowest point in the pricing guide. Retain the pricing guide or a copy of it for your tax records.
Consider the Purchase Price
Consider the price you paid when you purchased the item. For example, if you paid $70 for the silk blouse, it may be fair to value it at $7 to $14 for donation purposes. Value it at $7 if it is in fair condition and closer to $14 if it is in pristine condition or still has its original tags.
Use the Thrift Store's Pricing
Another good way to set the value of items you donate is to take a walk through the thrift store you donated the items to. Look at the prices they put on items. Perhaps all men's pants are $4.99. Use this value for your taxes. Maybe items have different prices within a range, such as $1.99 to $9.99 for women's dresses.
Whether you're selling your writing services as an article writer, an author, a blogger, or as a journalist, you're known in the writing industry as a freelance writer. When it comes to the structure of your business, the IRS classifies you as a self-employed professional.
One of the greatest benefits of generating income as a self-employed professional includes all of the legal tax deductions you're entitled to. Below are three examples of entitlements you'll receive that will help to ease your tax burden at the end of a tax year.
Tax Deductions on Business Tools
At a minimum, today's freelance writer needs working tools such as a computer, a printer, a scanner, and a telephone. All of these are examples of equipment that you can deduct as business expenses on your taxes. Just be sure to keep your receipts for your expenses during the previous tax year.
You'll also need to pay out of pocket for things such as telephone service, internet service, and electricity. Hold on your monthly bills for telephone and internet service, because you'll be able to claim these, too. And if you work from home, then you'll be able to claim a percentage of your home's electricity bill as a tax deduction.
Claim Tax Deductions for Travel Expenses
Whether you take the bus across town, or whether you'll fly inside of a plane, if the reason for your travel is business-related, then your travel expenses automatically become tax deductible. This includes the cost of taxi and rideshare vehicle fees. If you're driving your own vehicle, then you can deduct the cost of gas, according to the mileage used.
If your business trip includes an overnight stay, then the cost of food and lodging can also be deducted. Keep all of your receipts, and keep a log of any and all reasonable expenses.
A CPA Can Help You Save More Money
If you're new to freelancing as a writer, or if you have questions about any other deductions that you can claim, a Las Vegas CPA may be able to help. Never try to guess a deduction on your own. This could lead to fines, increased fees, and in some cases, you could trigger a tax audit!
Over the last few years, there's been a sharp upswing in the self-employment movement. If you're one of the former employees who decided to work for themselves, then you already know that you're responsible for paying your own taxes. Specifically, you'll be responsible for filing a 1099 tax form to the Internal Revenue Service.
However, one of the greatest benefits of working for yourself is a term called tax deductions. Tax deductions are the expenses that the government will allow you to claim on your tax return forms. The deductions allow you to pay a reduced tax bill when you turn in your forms.
Below are just a few of the tax-deductible expenses you'll be allowed to claim.
You Can Write Off a Portion of Your Rent or Mortgage
If you operate your business out of your home, then the IRS will allow you to claim a percentage of your yearly rent or mortgage expenses off of your taxes. How much of a percentage you'll be allowed to claim is determined by the government, and the amount can change depending upon the tax year that you're filing.
It's best to ask an accountant for the amount. They'll be able to give you an exact calculation, but be sure to show the accountant proof of payment for your housing.
You Can Write Off Business Travel Expenses
Are you required to travel for any of your business-related activities? You can write off your expenses for transportation, housing, food, and certain miscellaneous expenses.
It doesn't matter how near to your home or how far you'll need to travel. As long as the trip involved a business transaction, then you can claim the expenses for your taxes. However, it goes without saying that you'll need to provide proof of the expenses.
When you travel, keep all receipts of things such as gas mileage, transportation tickets, rideshare or taxi cab fares, hotel, Airbnb, and restaurant receipts. If you're uncertain as to anything else you can claim, then ask an accountant.
You Can Write Off Business Operation Expenses
Of course, any money that you spend on customary business operation supplies and equipment will be able to be claimed as deductions on your taxes. It can all seem exciting, but be sure to only claim legal deductions.
Consulting with a CPA in Las Vegas will educate you on what your rights are. The consultation will also keep you out of trouble with the IRS!
Every year, some individuals receive a letter from the IRS stating that they are under audit, which means that you will be required to provide the IRS with various documents that prove some aspect of your taxes. There are many reasons as to why you could be placed under an audit, from issues with a home office deduction to business usage of a vehicle. In most cases, these errors will have been made unintentionally and the issue will take only a small amount of time to correct, but it's still very important that you take the right steps when under an audit.
How to Prepare for An Audit
An audit notice is made either by mail or by phone. You will be told which documents you will need to present to the IRS and will have 30 days to do so. Make sure that all of the documents you gather are copies and not the originals. These documents can include everything from brokerage statements to previous tax returns. To handle the audit properly and ensure that all of the necessary documents are in order, a tax accountant in Las Vegas may be of assistance.
What to Do During the Audit
If an actual appointment is made with an IRS agent due to a more complex audit, you can attend alone or have a tax accountant handle this for you. Make sure to be polite with the IRS agent and only provide them with the necessary documents that they requested.
How to Protect Yourself From Audit in the Future
In order to make sure that you're always prepared for an audit, keep all of your tax returns and related documents for at least the past three years. You could also consider keeping your receipts, especially if you are making use of a variety of deductions on your tax return.
When working with CPA firms in Las Vegas, you might wonder if you should purchase a big-ticket item or course to avoid paying taxes. Instead, you should ask yourself if you need the course or item to advance your business. Or do you just want to lower your tax burden?
Is Your Small Business a Hobby?
If your business didn't turn a profit in three out of the past five years, then the IRS will call your company a hobby rather than a business. If your business becomes an official "hobby," you can't claim a business-related loss. As a small business owner, you worked too long and too hard for your company to be called a "hobby." You can find better ways to lower your taxable income every year.
Retirement and Health Savings Accounts
If you put money into a SIMPLE IRA, a SEP IRA, or a 401k, you can reduce your taxable income and save for the future at the same time. You'll want a SEP IRA if you plan to make tax-deductible contributions to this account. A SIMPLE IRA will work if you employ less than 100 people and will fund the majority of their retirement. A solo 401k will suffice if you run your business by yourself.
Everyone needs money to cover emergency medical expenses. If you pay high deductibles on a medical plan, then you could have the option of putting money into a health savings account. Any contributions you don't use will not roll over, but you won't need to pay taxes on them.
Learn New Skills
You can also reduce your tax burden by learning new skills. If you take a course or two in the calendar year, then you could be eligible for the Lifetime Learning Credit. This $2,000 credit helps Americans pay for college and vocational courses that will help broaden their professional horizons.
When you want to make sure your company remains financially viable, you already know that your accountant has your back. However, accounting firms in Las Vegas provide more than just bookkeepers and number crunchers. Some accounting professionals are more like business partners who identify potential internal problems to devise and implement liability reduction measures. To be an effective management accountant means competency in areas like cost and performance management, budgeting and expense forecasting, and analyzing decisions that can affect your bottom line. Here are some other risk management functions.
Analyzing Investment Decisions
Overseeing investment decisions is a big part of risk reduction. This duty goes beyond advising you about buying stock or corporate acquisitions. Your accountant can calculate the internal rate of return, break down the potential tax implications of various investments, and perform a detailed risk analysis. You'll also gain insight into how certain investments affect your corporate cash flow.
Assisting With Daily Operations
From hiring to budget allocation, nearly every business decision you make carries with it financial implications. Daily strategic planning sessions with your account manager will help you understand the financial implications of long- and short-term business planning, forecasting, cost analysis, and various pricing methodologies. Having this kind of insight from a financial expert lends the kind of objectivity that will help you avoid unintended or unforeseen consequences.
Keeping You in Compliance
No matter your corporate structure, you're required to meet certain obligations on a quarterly and annual basis. These obligations can vary from state to state, and it's your accountant's job to keep abreast of the rules and regulations in your state, make sure that you understand them, and help you meet them on time. Doing so keeps you from owing unnecessary fines and penalties.
How to Get an Employer ID Number for Yourself
Many small business owners in Las Vegas think they have to get a Federal Employer ID Number (EIN) to start their company. If you do go to an accountant in Las Vegas and get an EIN, you won't suffer any negative consequences for doing that. However, depending on your circumstances, you might not even need one at all.
About the EIN
Your EIN allows the IRS to link your company's income to you. When you have an EIN, you can complete tax forms such as 1099 forms without giving your social security number to anyone who may request it. You don't even need to own your own business and employ people to get an EIN.
When You Don't Need an EIN
If you're a sole proprietor and you don't mind revealing your social security number when you get requests for 1099s, you don't need to get an EIN. When you provide services and receive more than $600 from an employer, you will need to give out your social security number.
If you find that you need an EIN, you can set one up for free. To ensure that you don't fall victim to a scammy website, make sure that you get your EIN through the IRS' official website. Once you go through this process, you can give people your EIN instead of your social security number.
What You Will Need for the EIN Application Process
To become eligible for an EIN, your business must reside in either the U.S. or the U.S. territories. At the time you fill out the application, you will need either your social security number or your individual taxpayer identification number.
You will need to have this information readily available when you're filling out the application because you can only complete the process in one sitting. However, the entire application process should take no more than ten minutes.
If it seems like a new scam alert is released by the media every day, your perception is likely to be correct. Scam artists are always seeking ways of separating people from their money, and college loans are no exception. Working with CPA firms in Las Vegas and following these tips could help you to avoid the top student loan scams.
Advance Fee Scams
In an advance fee scam, the scammer tells you that the interest rate on your student loans could be lowered by what is a significant amount. The only catch is that you have to pay a fee in order to get that interest rate lowered. It might seem realistic enough, but it is a scam. Chances are good that the person will simply pocket the fee you pay, leaving you with the same interest rate you already head. There are no legitimate loan programs in which you pay money to get a student loan.
Loan Consolidation Scams
Upon graduation, many students have multiple loans. A common scam is a loan consolidation scam, in which the scammer tries to get you to pay a fee to consolidate the loans. If your loans are from the federal government, you can consolidate them yourself at the government's student loan website. Loans from private lenders typically involve refinancing, which is taking out a new loan and rolling the other loans into it.
Law Firm Student Loan Scam
This scam is more complex. A group claiming to be a law firm may offer a way out of your student debt. They may claim that paying your full student loan payment to them will allow them to negotiate better terms for you. What really happens is they keep the money and your loan goes into a default state.
Many people seek out a second job to make ends meet or to save some money for a special event or extra purchase. If you do side gigs as an independent contractor or get a regular paycheck from the second job, there might be some tax implications that you were not aware of. An experienced tax accountant in Las Vegas could help you properly file your federal income tax returns.
Keep Accurate and Detailed Records
If you do not receive a regular paycheck with your wages, taxes and other details listed, you will need to keep accurate and detailed records yourself. You will need to have the name and contact number of the business that employed you, how much you earned and the dates or hours that you worked.
Be Aware of Estimated Tax Payments
You may have to pay quarterly estimated tax payments. This is because federal income taxes are a pay as you go sort of deal. When an employer pays you, taxes are deducted as you earn income. When you have a side gig working as an independent contractor, those taxes are not collected. You may have to do it yourself or work with an accountant to estimate how much you need to pay and submit the payments by the quarterly deadlines that are imposed by the Internal Revenue Service.
Apply for an Employer Identification Number
If you do not want to give out your social security number to the people who pay you for your side jobs, apply for an employer identification number. You can put this on your W-9 forms. You will use the number when you file your federal taxes and any applicable state or city taxes that are required for your location.
Many states collect sales tax on commonly purchased items such as pens, paper, books, clothing and computers. In recent years, some states have instituted temporary breaks in the collection of sales tax on such items. If you want to know how the sales tax holidays could benefit you as an individual or a small business owner, your CPA in Las Vegas may be able to offer advice.
What a Sales Tax Holiday Is
A sales tax holiday is a short break from paying sales tax on certain items. Many states do this just before the start of a school year. It is a way to provide an incentive for individuals to go out and purchase essential supplies and not have to pay the sales tax. The tax holiday typically lasts for one to seven days.
Types of Eligible Items
Each state institutes its own limits on what is included in the sales tax holiday. In addition to category limitations, there are also price limitations. For example, in Ohio, individual items of clothing priced at $75 or less and individual school supply items priced at $20 or less are included. In South Carolina, computers, printers, linens and software are included, and the state has no upper price limit. Some states allow cities to continue to collect local taxes.
Sales Tax and Out-of-State Purchases
Ordinarily, you would need to keep track of your out-of-state purchases if the vendors do not collect sales tax at the point of payment. With a sales tax holiday, this may not be needed for the eligible items that you purchase during the eligible dates. Your tax accountant may be able to provide additional advice on item eligibility and in-state versus out-of-state transactions.
While there are a large number of different software solutions available when filing your tax return, most of these solutions don't take into account some of the more complicated circumstances that you may need to report on your taxes, such as rental property, grantor trusts, and unincorporated businesses. Unless your taxes are simple and straightforward, it's recommended that you consider retaining the services of a Las Vegas CPA to ensure that your taxes are completed properly.
What is a CPA?
A CPA, certified public accountant, can engage in such tasks as preparing taxes, financial statements, internal auditing, and financial accounting. When retaining the services of a CPA, you can be confident that they have the knowledge necessary to understand your taxes.
How You Can Benefit From a CPA
There are a wide array of benefits related to obtaining the services of a professional CPA. For one, they have received licensing that states they are a CPA, which requires a substantial amount of testing and education. These accountants also have the ability and knowledge to offer advice on how to maximize your tax savings, both for your current tax return as well as any future returns.
No matter what your situation, whether you're a small business owner or someone who runs a farm, a CPA will be able to inform you about any special tax rules pertaining to your situation.
Mistakes to Avoid When Choosing a CPA
When you are searching for the right CPA to suit your tax needs, there are several mistakes you should try to avoid. For one, make sure that you interview any prospective CPA that you're considering, as this is not the type of decision you want to make without doing your research. You also want to select a CPA who offers guarantees with their services, which helps to ensure that any mistake they might make is covered by them.
Legislators tweak tax laws every year, making it nearly impossible for the average person to keep up with them. You probably don't have time in your busy schedule to learn these new rules, but accounting firms in Las Vegas can do it for you. Below are a few things that you should keep in mind to find the right company to help you make sound financial decisions.
Fixed or By-the-Minute Fees
No accounting firm will handle your finances for free. However, you don't want to choose an accounting firm that will add a bunch of extra fees. Some companies charge set rates for each task that you have them complete. Others charge by the minute. Consider these fees and rates when you select an institution that's right for you.
Certifications Are Essential
You don't want just anyone helping you with your financial records. You want someone who you can trust. That's why it's always a good idea to check out a company's certifications before you hire it. For instance, some companies are only trained to assist people with filling out their taxes. Others are certified to file taxes for them. Take a look at your needs to determine whether you want help with the paperwork or also want someone to file on your behalf.
Setting Goals for the Future
Lastly, you want an accounting firm that can help you set financial goals. These can be objectives for your personal and business lives. When they help you set goals, they can give you milestones to keep you on track. Having objectives to strive for is the best way to reach financial freedom.
The cost of a college or higher education has risen at a pace much higher than the rate of inflation. Even public state colleges have dramatically increased their prices. Working with an accountant in Las Vegas could help you to prepare for a financial future so that your child does not have to graduate with tens of thousands of dollars in student loan debt.
Start a 529 College Savings Plan
As soon as your child has a social security number, you can open a 529 college savings plan in his or her name. By opening this account early in your child's life, the money can grow for a long period of time. You can open up a 529 savings plan no matter what age your child is, including when your child is a high school senior. These savings plans allow you to contribute after-tax dollars that do not incur taxes on their growth. Relatives can also add to the account.
Coverdell Savings Accounts
Coverdell savings accounts also allow for tax-free growth when after-tax dollars are invested. The investment portfolios are like those of an IRA. Up to $2,000 can be added to the account per year. These savings accounts may also be used for preschool through college educational expenses.
UGMA Custodial Account
A UGMA custodial account is not necessarily just for paying for college, but it can be used for that purpose. It is used to gift monetary assets to minors. These accounts are often used for estate tax purposes since the assets would be taxed at the child rate and not the adult's income rate. It is important to note that these accounts could affect financial aid applications.
For most people and sole proprietors, tax returns are due on or about April 15 each year. However, corporate tax filers may have different deadlines and additional paperwork that they need to fill out and file by those deadlines. Those who are confused about what the government expects from them could make mistakes that increase their odds of an audit. However, working with a certified public accountant (CPA) could reduce this risk.
Learn More About Your Filing Obligations
To reduce your state or IRS audit risk, be sure that all forms are filed by their appropriate due date. For instance, corporate tax forms are generally due by March 15 or 75 days after a company's fiscal year is over. There may also be sales and other excise tax forms that need to be submitted quarterly. Your CPA can make sure that these forms are completed and sent to the IRS or state agency on time. A CPA may also be able to work with you to ensure that personal and corporate returns are filled out with accurate information.
The Risk of an Audit Is Relatively Small
While there is no guarantee that a return won't be picked for further examination, the national audit rate is relatively low at about 1 percent. For the most part, you will have little or nothing to worry about as long as you haven't taken deductions or credits that you can't justify. Even then, the government may be lenient assuming that you submitted a return in good faith and made an honest mistake.
Tax Accountants Can Help at Any Time
You can contact a tax accountant in Las Vegas at any time to learn more about services offered. Scheduling an appointment may make it possible to get your books organized or to learn more about what to do if your personal or corporate tax return has been selected for audit.
If your company has been chosen for an IRS audit, a variety of thoughts may be going through your head. However, the best way to respond to an audit is to talk with your CPA to assemble the information necessary to handle the examination. If necessary, a CPA can actually represent the business during the audit.
CPAs Understand What the IRS Wants
A CPA is worth having during an audit because he or she generally has a solid understanding of small business taxes. Therefore, he or she may be able to come up with a defense or a plausible explanation for why a deduction was taken or why information may have been missing on an initial return. This could help a sole proprietor or corporate business owner obtain a favorable ruling after the examination has been completed.
A CPA Can Put Your Situation Into Context
It isn't uncommon for a new company to take a loss in its first year. If the IRS thinks that a loss is suspicious, your CPA could show evidence that it has made a profit in previous months or that it intends to make a profit. It may also be possible for your representative to explain why the company took a loss or why it took a deduction that left it with a net loss.
An additional benefit to having a CPA represent your company is that this person will not intentionally say or do anything that could increase the scope of the audit. This reduces the odds that the company is assessed additional penalties or interest.
Don't Wait to Handle Your Company Finances
Even if a CPA can't help with a current audit, CPA firms Las Vegas could help a company get its finances together. This may reduce the odds that it experiences an audit in the future or make it easier to present a positive picture to lenders or investors in the future.
If you've recently filed for or are faced with filing for personal bankruptcy, you may be wondering how it will affect your tax status and your income tax refund. Here's some information to help you manage your taxes before and after bankruptcy.
How Chapter 7 Bankruptcy Affects Income Taxes
Your tax refund may be considered an asset by the bankruptcy court, and it's possible that it can be used by the trustee to repay some debts. One option is to determine if your tax refund qualities for an asset exemption. Timing is an important consideration in determining how Chapter 7 will affect your tax refund. If you file for bankruptcy early in the year or during tax filing season, there are a few ways to protect your refund. First, if you've already received your refund, use it to pay attorney’s fees and court costs. Another option is to spend the money on living expenses and necessities such as housing costs and medical expenses. The key is to avoid purchasing significant assets with your tax refund. If you file bankruptcy late in the year, consider strategies such as making a larger contribution to your 401K or IRA.
How Chapter 13 Bankruptcy Affects Income Taxes
Chapter 13 bankruptcy involves a three- to five-year debt repayment plan. During that time, the bankruptcy trustee may be able to deem your tax refund as disposable income and require it be used for repayment of your debts. One way to protect your income tax refund during a Chapter 13
repayment period is to reduce the amount of taxes withheld from your paycheck, thereby reducing any expected tax refund.
Seek Advice From a Qualified Accountant
Seek the advice of an accountant or CPA to help you to plan and structure any asset purchases. Tax specialists at accounting firms in Las Vegas are available to help you structure any changes to your withholdings and deductions to ensure that you don't owe any additional taxes on top of your debt repayment obligations.
Tax season isn't always the easiest time of year for small business owners. This is especially true for those who keep receipts in a shoe box or stuffed in a drawer somewhere. Even those who have an accounting program may not know how to use it or use it properly. Fortunately, a small business can partner with an accountant to organize important information and use it to stay compliant with the tax code.
Send Your Files to Your Accounting Professional
If you do log transactions into an accounting software program, it may be possible to send it to your accounting services firm electronically. From there, an accountant can use that information to fill out tax forms and send them to the IRS. Forms can also be sent back to the company for review before they are submitted to the government. The same is also true of any state or local tax documents that need to be sent in.
An Accountant Can Create an Actual Balance Sheet
If you are the type who has no accounting background or any type of process for keeping track of transactions, an accountant can create your books for you. This can make it easier to determine
how much the company has made, what its liabilities are and what tax deductions it is entitled to. When you guess on a tax return, it opens the business up to an IRS audit or extra scrutiny from state or local tax authorities.
Accountants Can Help Throughout the Year
While some companies primarily talk with their accountants during tax time, they can be of service throughout the year. An accountant in Las Vegas may help business owners get started organizing a company's financial information.
If you're attempting to file your own taxes, the most important thing is that you don't rush to finish them quickly. Trying to hurry your taxes along will only increase the chances of a costly or critical error that results in a lower return or causes you to owe money. Knowing more about the most common errors made on tax returns should keep you from making them when filling out the requisite paperwork.
One of the most readily noticeable mistakes on tax forms is when the math is incorrect. You'll almost immediately receive a notice by the IRS in the event that you've miscalculated a number or transferred one number into the wrong space on the forms. While you can use tax software to avoid most of these math issues, a calculator should also help you avoid errors in your math, although it's heavily recommended that you check and recheck your math before filing the tax forms.
Incorrect Social Security Numbers
While it's likely that you have memorized your social security number, many people make the mistake of inputting a wrong number or leaving one out entirely due to an issue caused when typing. Have your social security card beside you when you fill out your tax return to easily avoid this mistake. If you record your social security number incorrectly, you will get a notice and your tax return could be delayed.
Issues with Deductions or Tax Credits
One of the most difficult aspects of filing a tax return is identifying which deductions and tax credits apply to you and how to properly claim this deduction or credit without making an error in your tax return. It's possible that one deduction you're considering applying for is only available if you don't claim another tax credit. Closely read all instructions related to these deductions on your tax forms before filing. One way to make sure that you avoid making this type of issue when filing your tax return is to retain the services of a tax accountant in Las Vegas.
Many online sales platforms have sprouted up over the past five to ten years, making it easy for an artisan or producer of materials to set up a shop and sell their materials or finished goods. While setting up the shop is easy, handling the financial details of this type of a business could be a lot trickier. Find out how CPA firms in Las Vegas could help you to manage the income, expenses and taxes that you have as an Etsy seller.
Tracking Your Operating Expenses
CPAs could help you track your operating expenses as the owner of an Etsy shop. Some of the most common expenses for operating one of these shops include PayPal fees, credit card transaction fees, listing fees, postage, mailing supplies and raw materials. The accountants can also help you to determine if your business is operating at a loss or a profit based on the tally of your expenses.
Collecting and Submitting Sales Tax
Depending on where you are located, Etsy's transaction platform will automatically charge certain customers sales tax. If Etsy handles the payment of the sales tax to the states that require it, you might not have to do anything else. If the system does not properly make the submissions, it is your responsibility to do so. CPAs can help you with that.
Filing a Tax Return
The CPAs at an accounting firm can help you figure out if your Etsy store qualifies as a hobby or a business, based on your profit level. If it is determined to be a business, you will have to file a federal tax return and possibly a state tax return.
When you want to start a small business, there are a lot of administrative issues to take care of before you can even open your doors. Experienced accounting firms in Las Vegas can help you with many of the financial aspects of starting and maintaining a small business. Their expertise can increase your chances of becoming a successful small business owner and a pillar of the community.
Applying for a Small Business Loan
Many entrepreneurs do not have the cash needed to get a small business going. An accounting firm can help you apply for a small business loan. In particular, the accountants can help with the financial aspects of the loan application, showing the particulars of your business plan, your expected expenses and your estimated income. These details will be helpful to the application as well as any requests that you make for bringing investors or partners into your business.
Managing Your Business Budget
Accountants could also help you manage your small business budget. You might be tempted to go all-out on decor for your retail space or a big grand-opening party. The accountants can help you to set budgets for operations, staff, payroll, taxes, marketing and inventory. They can also help you to select a piece of accounting software for tracking your business expenditures and income.
Filing Your Small Business Tax Returns
Accountants will be essential to filing your small business tax returns. Businesses need to do quarterly estimated taxes, and the accountants will be able to assist you make sure the required forms are filed on time with state and federal authorities. The accountants can also ensure that all income and expenditures are properly accounted for. Accountants are also able to stay on top of small business deductions.
Three Ways to Lower Your Risk of Financial Identity Theft
Identity theft is a growing crime and it affects people of all ages and from all walks of life. Even young children could be the victims of identity theft. Your accountant in Las Vegas could be a first line of defense against identity theft by helping keep your information secure and file your income taxes early. Consider these three ways that you can take action and lower your risk of financial identity theft.
File Your Taxes Early
Bring all of your documents to your accountant as quickly as possible. The earlier you file your taxes, the lower the risk of someone else using your social security number to file a tax return with your information. If you have dependents, filing an early tax return also helps to reduce their risk of identity theft. Someone else could try to list your children as their dependents in order to get a refund. Early filing through your certified public accountant lowers this risk. You or your accountant can ask the IRS for a secure code to include on your federal tax filing if you have been an identity theft victim in the past.
Regularly Check on Your Accounts
Many people have multiple types of accounts. You might have a checking, savings and investment accounts at the bank. Many people have one or more credit or debit cards. Be sure to check all of these accounts regularly for signs of unauthorized activity. Enable two-factor authentication or instant notifications when possible. Put a fraud alert on your accounts if you find suspicious activities.
Safeguard Your Personal Information
Ask how your accountant secures your financial information, including hard copies and digital files. Implement strong passwords on your own digital files. Consider keeping confidential documents in a safe deposit box at the bank. Use RFID sleeves on your credit cards. Opt out of mailings for credit card offers. You can also sign up for USPS informed delivery so that you know what is coming in the mail.
The clock is ticking down to the tax filing deadline. The good news is that you still may be able to save on your impending 2017 tax bill by making contributions to certain retirement plans.
For example, if you qualify, you can make a deductible contribution to a traditional IRA right up until the April 17, 2018, filing date and still benefit from the resulting tax savings on your 2017 return. You also have until April 17 to make a contribution to a Roth IRA.
And if you happen to be a small business owner, you can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for your company’s tax return, including extensions.
Deadlines and limits
Let’s look at some specifics. For IRA and Roth IRA contributions, the maximum regular contribution is $5,500. Plus, if you were at least age 50 on December 31, 2017, you are eligible for an additional $1,000 “catch-up” contribution.
There are also age limits. You must have been under age 70½ on December 31, 2017, to contribute to a traditional IRA. Contributions to a Roth can be made regardless of age, if you meet the other requirements.
For a SEP, the maximum contribution is $54,000, and must be made by the April 17th date, or by the extended due date (up to Monday, October 15, 2018) if you file a valid extension. (There’s no SEP catch-up amount.)
If not covered by an employer’s retirement plan, your contributions to a traditional IRA are not affected by your modified adjusted gross income (MAGI). Otherwise, when you (or a spouse, if married) are active in an employer’s plan, available contributions begin to phase out within certain MAGI ranges.
For married couples filing jointly, the MAGI range is $99,000 to $119,000. For singles or heads of household, it’s $62,000 to $72,000. For those married but filing separately, the MAGI range is $0 to $10,000, if you lived with your spouse at any time during the year. A phase-out occurs between AGI of $186,000 and $196,000 if a spouse participates in an employer-sponsored plan.
Contributions to Roth IRAs phase out at mostly different ranges. For married couples filing jointly, the MAGI range is $186,000 to $196,000. For singles or heads of household, it’s $118,000 to $133,000. But for those married but filing separately, the phase-out range is the same: $0 to $10,000, if you lived with your spouse at any time during the year.
Saving for retirement is essential for financial security. What’s more, the federal government provides tax incentives for doing so. Best of all, as mentioned, you still have time to contribute to an IRA, Roth IRA or SEP plan for the 2017 tax year. Please contact our firm for further details and a personalized approach to determining how to best contribute to your retirement plan or plans.
It’s not uncommon for adult children to help support their aging parents. If you’re in this position, you might qualify for an adult-dependent exemption to deduct up to $4,050 for each person claimed on your 2017 return.
For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled.) Social Security is generally excluded, but payments from dividends, interest and retirement plans are included.
In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with one or more siblings and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption in this situation.
Although Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.
Also, if your parent lives with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence. If the parent lives elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contribute to that housing expense counts toward the 50% test.
Easing the burden
An adult-dependent exemption is just one tax break that you may be able to employ on your 2017 tax return to ease the burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.
If you're looking for a CPA in Las Vegas, Boehme & Boehme has the answers. A good CPA firm in Las Vegas is hard to find. You can trust that Boehme & Boehme is committed to providing our clients with reliable, professional, personalized services and guidance in a wide range of financial and business needs. We provide high quality tax, accounting, and consulting services to a variety of clients worldwide. Give us a call today (702) 871-9393.
The new tax reform law, commonly called the “Tax Cuts and Jobs Act” (TCJA), is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers.
Below are highlights of some of the most significant changes affecting individual and business taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.
More to consider
This is just a brief overview of some of the most significant TCJA provisions. There are additional rules and limits that apply, and the law includes many additional provisions. Contact your tax advisor to learn more about how these and other tax law changes will affect you in 2018 and beyond.
If you’re like many Americans, you might not start thinking about filing your tax return until close to this year’s April 17 deadline. You might even want to file for an extension so you don’t have to send your return to the IRS until October 15.
But there’s another date you should keep in mind: the day the IRS begins accepting 2017 returns (usually in late January). Filing as close to this date as possible could protect you from tax identity theft.
Why it helps
In an increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.
A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.
Tax identity theft can cause major complications to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.
What to look for
Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2017 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2017 interest, dividend or reportable miscellaneous income payments. So be sure to keep an eye on your mailbox or your employer’s internal website.
An additional bonus: If you’ll be getting a refund, filing early will generally enable you to receive and enjoy that money sooner. (Bear in mind, however, that a law requires the IRS to hold until mid-February refunds on returns claiming the earned income tax credit or additional child tax credit.) Let us know if you have questions about tax identity theft or would like help filing your 2017 return early.
If you're looking for a CPA in Las Vegas, Boehme & Boehme has the answers. A good CPA firm in Las Vegas is hard to find. You can trust that Boehme & Boehme is committed to providing our clients with reliable, professional, personalized services and guidance in a wide range of financial and business needs. We provide high quality tax, accounting, and consulting services to a variety of clients worldwide. Give us a call today (702) 871-9393.
Given the astronomical cost of college, even well-off parents should consider applying for financial aid. A single misstep, however, can harm your child’s eligibility. Here are five common mistakes to avoid:
1. Presuming you don’t qualify. It’s difficult to predict whether you’ll qualify for aid, so apply even if you think your net worth is too high. Keep in mind that, generally, the value of your principal residence or any qualified retirement assets isn’t included in your net worth for financial aid purposes.
2. Filing the wrong forms. Most colleges and universities, and many states, require you to submit the Free Application for Federal Student Aid (FAFSA) for need-based aid. Some schools also require it for merit-based aid. In addition, a number of institutions require the CSS/Financial Aid PROFILE®, and specific types of aid may have their own paperwork requirements.
3. Missing deadlines. Filing deadlines vary by state and institution, so note the requirements for each school to which your child applies. Some schools provide financial aid to eligible students on a first-come, first-served basis until funding runs out, so the earlier you apply, the better. This may require you to complete your income tax return early.
4. Failing to list schools properly. The FAFSA allows you to designate up to 10 schools with which your application will be shared. The order in which you list the schools doesn't matter when applying for federal student aid. But if you're also applying for state aid, it's important to know that different rules may apply. For example, some states require you to list schools in a specified order.
5. Mistaking who’s responsible. If you’re divorced or separated, the FAFSA should be completed by the parent with whom your child lived for the majority of the 12-month period ending on the date the application is filed. This is true regardless of which parent claims the child as a dependent on his or her tax return.
The rule provides a significant planning opportunity if one spouse is substantially wealthier than the other. For example, if the child lives with the less affluent spouse for 183 days and with the other spouse for 182 days, the less affluent spouse would file the FAFSA, improving eligibility for financial aid.
These are just a few examples of financial aid pitfalls. Let us help you navigate the process and explore other ways to finance college.
Many people make donations at the end of the year. To be deductible on your 2017 return, a charitable donation must be made by December 31, 2017. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean?
Is it the date you write a check or charge an online gift to your credit card? Or is it the date the charity actually receives the funds? In practice, the delivery date depends in part on what you donate and how you donate it. Here are a few common examples:
Checks. The date you mail it.
Credit cards. The date you make the charge.
Pay-by-phone accounts. The date the financial institution pays the amount.
Stock certificates. The date you mail the properly endorsed stock certificate to the charity.
To be deductible, a donation must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions. The IRS’s online search tool, “Exempt Organizations (EO) Select Check,” can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access it at https://www.irs.gov/charities-non-profits/exempt-organizations-select-check. Information about organizations eligible to receive deductible contributions is updated monthly.
Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making. But act soon — you don’t have much time left to make donations that will reduce your 2017 tax bill.
If you're looking for a CPA in Las Vegas, Boehme & Boehme has the answers. A good CPA firm in Las Vegas is hard to find. You can trust that Boehme & Boehme is committed to providing our clients with reliable, professional, personalized services and guidance in a wide range of financial and business needs. We provide high quality tax, accounting, and consulting services to a variety of clients worldwide. Give us a call today (702) 871-9393.
Many people overlook taxes when planning their mutual fund investments. But you’ve got to handle these valuable assets with care. Here are some tips to consider.
Avoid year-end investments
Typically, mutual funds distribute accumulated dividends and capital gains toward the end of the year. But don’t fall for the common misconception that investing in a fund just before a distribution date is like getting “free money.”
True, you’ll receive a year’s worth of income right after you invest. But the value of your shares will immediately drop by the same amount, so you won’t be any better off. Plus, you’ll be liable for taxes on the distribution as if you had owned your shares all year.
You can get a general idea of when a particular fund anticipates making a distribution by checking its website periodically. Also make a note of the “record date” — investors who own fund shares on that date will participate in the distribution.
Invest in tax-efficient funds
Actively managed funds tend to be less tax efficient. They buy and sell securities more frequently, generating a greater amount of capital gain, much of it short-term gain taxable at ordinary income rates rather than the lower, long-term capital gains rates.
Consider investing in tax-efficient funds instead. For example, index funds generally have lower turnover rates. And “passively managed” funds (sometimes described as “tax managed” funds) are designed to minimize taxable distributions.
Another option is exchange-traded funds (ETFs). Unlike mutual funds, which generally redeem shares by selling securities, ETFs are often able to redeem securities “in kind” — that is, to swap them for other securities. This limits an ETF’s recognition of capital gains, making it more tax efficient.
This isn’t to say that tax-inefficient funds don’t have a place in your portfolio. In some cases, actively managed funds may offer benefits, such as above-market returns, that outweigh their tax costs.
Watch out for reinvested distributions
Many investors elect to have their distributions automatically reinvested in their funds. Be aware that those distributions are taxable regardless of whether they’re reinvested or paid out in cash.
Reinvested distributions increase your tax basis in a fund, so track your basis carefully. If you fail to account for these distributions, you’ll end up paying tax on them twice — once when they’re paid and again when you sell your shares in the fund.
Fortunately, under current rules, mutual fund companies are required to track your basis for you. But you still may need to track your basis in funds you owned before 2012 when this requirement took effect, or if you purchased units in the fund outside of the current broker holding your units.
Do your due
Tax considerations should never be the primary driver of your investment decisions. Yet it’s important to do your due diligence on the potential tax consequences of funds you’re considering — particularly for your taxable accounts.
Sidebar: Directing tax-inefficient funds into nontaxable accounts
If you invest in actively managed or other tax-inefficient funds, ideally you should put these holdings in nontaxable accounts, such as a traditional IRA or 401(k). Because earnings in these accounts are tax-deferred, distributions from funds they hold won’t have any tax consequences until you withdraw them. And if the funds are held in a Roth account, those distributions will escape taxation altogether.
If you recently redeemed frequent flyer miles to treat the family to a fun summer vacation or to take your spouse on a romantic getaway, you might assume that there are no tax implications involved. And you’re probably right — but there is a chance your miles could be taxable.
Generally, miles awarded by airlines for flying with them are considered nontaxable rebates, as are miles awarded for using a credit or debit card. The IRS even addressed the issue in Announcement 2002-18, where it said:
Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.
There are, however, some types of miles awards the IRS might view as taxable. Examples include miles awarded as a prize in a sweepstakes and miles awarded as a promotion.
For instance, in the 2014 case of Shankar v. Commissioner, the U.S. Tax Court sided with the IRS in finding that airline miles awarded in conjunction with opening a bank account were indeed taxable. Part of the evidence of taxability was the fact that the bank had issued Forms 1099 MISC to customers who’d redeemed rewards points to buy airline tickets.
The value of the miles for tax purposes generally is their estimated retail value. If you’re concerned you’ve received miles awards that could be taxable, please contact us.
Well-crafted, up-to-date estate planning documents are an imperative for everyone. They also can help ease the burdens on your family during a difficult time. Two important examples: wills and living trusts.
A will is a legal document that arranges for the distribution of your property after you die and allows you to designate a guardian for minor children or other dependents. It should name the executor or personal representative who’ll be responsible for overseeing your estate as it goes through probate. (Probate is the court-supervised process of paying any debts and taxes and distributing your property after you die.) To be valid, a will must meet the legal requirements in your state.
If you die without a will (that is, “intestate”), the state will appoint an administrator to determine how to distribute your property based on state law. The administrator also will decide who will assume guardianship of any minor children or other dependents. Bottom line? Your assets may be distributed — and your dependents provided for — in ways that differ from what you would have wanted.
The living trust
Because probate can be time-consuming, expensive and public, you may prefer to avoid it. A living trust can help. It’s a legal entity to which you, as the grantor, transfer title to your property. During your life, you can act as the trustee, maintaining control over the property in the trust. On your death, the person (such as a family member or advisor) or institution (such as a bank or trust company) you’ve named as the successor trustee distributes the trust assets to the beneficiaries you’ve named.
Assets held in a living trust avoid probate — with very limited exceptions. Another benefit is that the successor trustee can take over management of the trust assets should you become incapacitated.
Having a living trust doesn’t eliminate the need for a will. For example, you can’t name a guardian for minor children or other dependents in a trust. However, a “pour over” will can direct that assets you own outside the living trust be transferred to it on your death.
There are other documents that can complement a will and living trust. A “letter of instruction,” for example, provides information that your family will need after your death. In it, you can express your desires for the memorial service, as well as the contact information for your employer, accountant and any other important advisors. (Note: It’s not a legal document.)
Also consider powers of attorney. A durable power of attorney for property allows you to appoint someone to act on your behalf on financial matters should you become incapacitated. A power of attorney for health care covers medical decisions and also takes effect if you become incapacitated. The person to whom you’ve transferred this power — your health care agent — can make medical decisions on your behalf.
These are just a few of the foundational elements of a strong estate plan. We can work with you and your attorney to address the tax issues involved.
In today’s economy, many individuals are self-employed. Others generate income from interest, rent or dividends. If these circumstances sound familiar, you might be at risk of penalties if you don’t pay enough tax during the year through estimated tax payments and withholding. Here are three strategies to help avoid underpayment penalties:
1. Know the minimum payment rules. For you to avoid penalties, your estimated payments and withholding must equal at least:
2. Use the annualized income installment method. This method often benefits taxpayers who have large variability in income by month due to bonuses, investment gains and losses, or seasonal income — especially if it’s skewed toward year end. Annualizing calculates the tax due based on income, gains, losses and deductions through each “quarterly” estimated tax period.
3. Estimate your tax liability and increase withholding. If, as year end approaches, you determine you’ve underpaid, consider having the tax shortfall withheld from your salary or year-end bonus by December 31. Because withholding is considered to have been paid ratably throughout the year, this is often a better strategy than making up the difference with an increased quarterly tax payment, which may trigger penalties for earlier quarters.
Finally, beware that you also could incur interest and penalties if you’re subject to the additional 0.9% Medicare tax and it isn’t withheld from your pay and you don’t make sufficient estimated tax payments. Please contact us for help with this tricky tax task.
Health care costs continue to be in the news and on everyone’s mind. As a result, tax-friendly ways to pay for these expenses are very much in play for many people. The three primary players, so to speak, are Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs).
All provide opportunities for tax-advantaged funding of health care expenses. But what’s the difference between these three types of accounts? Here’s an overview of each one:
HSAs. If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself — up to $3,400 for self-only coverage and $6,750 for family coverage for 2017. Plus, if you’re age 55 or older, you may contribute an additional $1,000.
You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.
FSAs. Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit — not to exceed $2,600 in 2017. The plan pays or reimburses you for qualified medical expenses.
What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 2½-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.
HRAs. An HRA is an employer-sponsored arrangement that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. And there’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.
Please bear in mind that these plans could be affected by health care or tax legislation. Contact our firm for the latest information, as well as to discuss these and other ways to save taxes in relation to your health care expenses.
Disaster planning is usually associated with businesses. But individuals need to prepare for worst-case scenarios, as well. Unfortunately, the topic can seem a little overwhelming. To help simplify matters, here are five keys to disaster planning that everyone should consider:
1. Insurance. Start with your homeowners’ coverage. Make sure your policy covers flood, wind and other damage possible in your region and that its dollar amount is adequate to cover replacement costs. Also review your life and disability insurance.
2. Asset documentation. Create a list of your bank accounts, titles, deeds, mortgages, home equity loans, investments and tax records. Inventory physical assets not only in writing (including brand names and model and serial numbers), but also by photographing or videoing them.
3. Document storage. Keep copies of financial and personal documents somewhere other than your home, such as a safe deposit box or the distant home of a trusted friend or relative. Also consider “cloud computing” — storing digital files with a secure Web-based provider.
4. Cash. You may not receive insurance money right away. A good rule of thumb is to set aside three to six months’ worth of living expenses in a savings or money market account. Also maintain a cash reserve in your home in a durable, fireproof safe.
5. An emergency plan. Establish a family emergency plan that includes evacuation routes, methods of getting in touch and a safe place to meet. Because a disaster might require you to stay in your home, stock a supply kit with water, nonperishable food, batteries and a first aid kit.
Are you a highly compensated employee (HCE) approaching retirement? If so, and you have a 401(k), you should consider a potentially useful tax-efficient IRA rollover technique. The IRS has specific rules about how participants such as you can allocate accumulated 401(k) plan assets based on pretax and after-tax employee contributions between standard IRAs and Roth IRAs.
In 2017, the top pretax contribution that participants can make to a 401(k) is $18,000 ($24,000 for those 50 and older). Plans that permit after-tax contributions (several do) allow participants to contribute a total of $54,000 ($36,000 above the $18,000 pretax contribution limit). While some highly compensated supersavers may have significant accumulations of after-tax contributions in their 401(k) accounts, the tax law income caps block the highest paid HCEs from opening a Roth IRA.
However, under IRS rules, these participants can roll dollars representing their after-tax 401(k) contributions directly into a new Roth IRA when they retire or no longer work for the companies. Thus, they’ll ultimately be able to withdraw the dollars representing the original after-tax contributions — and subsequent earnings on those dollars — tax-free.
Participants can contribute rollover dollars to conventional and Roth IRAs on a pro-rata basis. For example, suppose a retiring participant had $1 million in his 401(k) plan account, $600,000 of which represents contributions. Suppose further that 70% of that $600,000 represents pretax contributions, and 30% is from after-tax contributions. IRS guidance clarifies that the participant can roll $700,000 (70% of the $1 million) into a conventional IRA, and $300,000 (30% of the $1 million) into a Roth IRA.
The IRS rules allow the retiree to roll over not only the after-tax contributions, but the earnings on those after-tax contributions (40% of the $300,000, or $120,000) to the Roth IRA provided that the $120,000 will be taxable for the year of the rollover.
Alternatively, the IRS rules allow the retiree to delay taxation on the earnings attributable to the after-tax contributions ($120,000) until the money is distributed by contributing that amount to a conventional IRA, and the remaining $180,000 to the Roth IRA.
Under each approach, the subsequent growth in the Roth IRA will be tax-free when withdrawn. Partial rollovers can also be made, and the same principles apply.
Golden years ahead
HCEs face some complex decisions when it comes to retirement planning. Let our firm help you make the right moves now for your golden years ahead.
If you’re an investor looking to save tax dollars, your kids might be able to help you out. Giving appreciated stock or other investments to your children can minimize the impact of capital gains taxes.
For this strategy to work best, however, your child must not be subject to the “kiddie tax.” This tax applies your marginal rate to unearned income in excess of a specified threshold ($2,100 in 2017) received by your child who at the end of the tax year was either: 1) under 18, 2) 18 (but not older) and whose earned income didn’t exceed one-half of his or her own support for the year (excluding scholarships if a full-time student), or 3) a full-time student age 19 to 23 who had earned income that didn’t exceed half of his or her own support (excluding scholarships).
Here’s how it works: Say Bill, who’s in the top tax bracket, wants to help his daughter, Molly, buy a new car. Molly is 22 years old, just out of college, and currently looking for a job — and, for purposes of the example, won’t be considered a dependent for 2017.
Even if she finds a job soon, she’ll likely be in the 10% or 15% tax bracket this year. To finance the car, Bill plans to sell $20,000 of stock that he originally purchased for $2,000. If he sells the stock, he’ll have to pay $3,600 in capital gains tax (20% of $18,000), plus the 3.8% net investment income tax, leaving $15,716 for Molly. But if Bill gives the stock to Molly, she can sell it tax-free and use the entire $20,000 to buy a car. (The capital gains rate for the two lowest tax brackets is generally 0%.)
Few purchases during your lifetime will be as expensive as buying a home. Whether it’s your primary residence, a vacation home or an investment property, how you choose to pay for it can have a significant impact on your financial situation over time. If you’re considering a mortgage loan, understanding the main categories of mortgages — fixed-rate and adjustable-rate — and the situations they’re best designed for will help you match the right type for your needs.
Fixed-rate loans offer stability
A fixed-rate mortgage, as its name suggests, is a loan whose interest rate remains constant for the life of the loan — typically 15 or 30 years. One of the primary benefits of a fixed-rate loan is that it provides a measure of certainty about one of the biggest expenses in your monthly budget. With interest rates likely to rise after an extended period of historically low rates, you won’t have to worry about potentially higher payments in the future if you select a fixed-rate loan.
That said, if interest rates were to fall again, your fixed-rate loan would leave you unable to take advantage of the shift unless you refinance, which might involve fees. You’re also paying a premium for the stability offered by a fixed-rate mortgage. You could consider a 15-year fixed-rate loan, which would charge a lower rate than a 30-year loan, but the tradeoff will be higher monthly payments.
ARMs provide flexibility
Adjustable-rate mortgages (ARMs) typically offer a fixed interest rate for an initial period of years. This rate, which is usually lower than that of a comparable fixed-rate mortgage, resets periodically based on a benchmark interest rate. For example, a 5/1 ARM means that your interest rate is fixed for the first five years and then will adjust every year after that.
Paying less interest in the beginning frees your cash for other investments. You might also take advantage of an ARM if you’re confident that you’ll have more money in the future than you do today, or if you plan on selling your house before or soon after the initial fixed-rate period expires. When considering an ARM, you’ll need to assess your ability to keep up with potentially higher payments — say, if the initial period expires, your rate goes up and you’re unable to sell the home, or if your income changes.
The best for you
The right loan type depends, naturally, on your financial position. But whether you’re buying a primary residence, vacation home or investment property also plays a role. Regardless of which type of home you’re purchasing, having a basic knowledge of the loan types can help ease the buying process. Let our firm assist you in evaluating the best mortgage for your needs.
A royal flush can be quite a rush. But the IRS casts a wide net when defining gambling income. It includes winnings from casinos, horse races, lotteries and raffles, as well as any cash or prizes (appraised at fair market value) from contests. If you participate in any of these activities, you must report such winnings as income on your federal return.
If you’re a casual gambler, report your winnings as “Other income” on Form 1040. You may also take an itemized deduction for gambling losses, but the deduction is limited to the amount of winnings.
In some cases, casinos and other payers provide IRS Form W-2G, “Certain Gambling Winnings” — particularly if the entity in question withholds federal income tax from winnings. The information from these forms needs to be included on your tax return.
If you gamble often and actively, you might qualify as a professional gambler, which comes with tax benefits: It allows you to deduct not only losses, but also wagering-related business expenses — such as transportation, meals and entertainment, tournament and casino admissions, and applicable website and magazine subscriptions.
To qualify as a professional, you must be able to demonstrate to the IRS that a “profit motive” exists. The agency looks at a list of nonexclusive factors when making this determination, including:
But don’t “go pro” for the tax benefits, since doing so is a major financial risk. If you enjoy the occasional game of chance, or particularly if you’re considering gambling as a profession, please contact our firm. We can help you manage the tax impact.
From time to time, a business may find that its operating expenses and other deductions for a particular year exceed its income. This is known as incurring a net operating loss (NOL).
In such cases, companies (or their owners) may be able to snatch some tax relief from this revenue defeat. Under the Internal Revenue Code, a corporation or individual may deduct an NOL from its income.
3 ways to play
Generally, you take an NOL deduction in one of three ways:
1. Deducting the loss in previous years, called a “carryback,” which creates a refund,
2. Deducting the loss in future years, called a “carryforward,” which lowers your future tax liability, or
3. Doing a little bit of both.
A corporation or individual must carry back an NOL to the two years before the year it incurred the loss. But the carryback period may be increased to three years if a casualty or theft causes the NOL, or if you have a qualified small business and the loss is in a presidentially declared disaster area. The carryforward period is a maximum of 20 years.
Direction of travel
You must first carry back losses to the earliest tax year for which you qualify, depending on which carryback period applies. This can produce an immediate refund of taxes paid in the carryback years. From there, you may carry forward any remaining losses year by year up to the 20-year maximum.
You may, however, elect to forgo the carryback period and instead immediately carry forward a loss if you believe doing so will provide a greater tax benefit. But you’ll need to compare your marginal tax rate — that is, the tax rate of the last income dollar in the previous two years — with your expected marginal tax rates in future years.
For example, say your marginal tax rate was relatively low over the last two years, but you expect big profits next year. In this case, your increased income might put you in a higher marginal tax bracket. So you’d be smarter to waive the carryback period and carry forward the NOL to years in which you can use it to reduce income that otherwise would be taxed at the higher rate.
Then again, as of this writing, efforts are underway to pass tax law reform. So, if tax rates go down, it might be more beneficial to carry back an NOL as far as allowed before carrying it forward.
Whatever the reason
Many circumstances can create an NOL. Whatever the reason, the rules are complex. Let us help you work through the process.
Sidebar: AMT effect
One tricky aspect of navigating the net operating loss (NOL) rules is the impact of the alternative minimum tax (AMT). Many business owners wonder whether they can offset AMT liability with NOLs just as they can offset regular tax liability.
The answer is “yes” — you can deduct your AMT NOLs from your AMT income in generally the same manner as for regular NOLs. The excess of deductions allowed over the income recognized for AMT purposes is essentially the AMT NOL. But beware that different rules for deductions, exclusions and preferences apply to the AMT. (These rules apply to both individuals and corporations.)
When buying a vacation home, the primary objective is usually to provide a place for many years of happy memories. But you might also view the property as an income-producing investment and choose to rent it out when you’re not using it. Let’s take a look at how the IRS generally treats income and expenses associated with a vacation home.
Mostly personal use
You can generally deduct interest up to $1 million in combined acquisition debt on your main residence and a second residence, such as a vacation home. In addition, you can also deduct property taxes on any number of residences.
If you (or your immediate family) use the home for more than 14 days and rent it out for less than 15 days during the year, the IRS will consider the property a “pure” personal residence, and you don’t have to report the rental income. But any expenses associated with the rental — such as advertising or cleaning — aren’t deductible.
More rental use
If you rent out the home for more than 14 days and you (or your immediate family) occupy the home for more than 14 days or 10% of the days you rent the property — whichever is greater — the IRS will still classify the home as a personal residence (in other words, vacation home), but you will have to report the rental income.
In this situation, you can deduct the personal portion of mortgage interest, property taxes and casualty losses as itemized deductions. In addition, the rental portion of your expenses is deductible up to the amount of rental income. If your rental expenses are greater than your rental income, you may not deduct the loss against other income.
If you (or your immediate family) use the vacation home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. In this instance, while the personal portion of mortgage interest isn’t deductible, you may report as an itemized deduction the personal portion of property taxes. You must report the rental income and may deduct all rental expenses, including depreciation, subject to the passive activity loss rules.
This has been just a brief examination of some of the tax issues related to a vacation home. Please contact our firm for a comprehensive assessment of your situation.
Once a relatively obscure concept, income in respect of a decedent (IRD) can create a surprisingly high tax bill for those who inherit certain types of property, such as IRAs or other retirement plans. Fortunately, there are ways to minimize or even eliminate the IRD tax bite.
How it works
Most inherited property is free from income taxes, but IRD assets are an exception. IRD is income a person was entitled to but hadn’t yet received at the time of his or her death. It includes:
IRD isn’t reported on the deceased’s final income tax return, but it’s included in his or her taxable estate, which may generate estate tax liability if the deceased’s estate exceeds the $5.49 million (for 2017) estate tax exemption, less any gift tax exemption used during life. (Be aware that President Trump and congressional Republicans have proposed an estate tax repeal. It hasn’t been passed as of this writing, but check back with us for the latest information.)
Then it’s taxed — potentially a second time — as income to the beneficiaries who receive it. This income retains the character it would have had in the deceased’s hands. So, for example, income the deceased would have reported as long-term capital gains is taxed to the beneficiary as long-term capital gains.
What can be done
When IRD generates estate tax liability, the combination of estate and income taxes can devour an inheritance. The tax code alleviates this double taxation by allowing beneficiaries to claim an itemized deduction for estate taxes attributable to amounts reported as IRD. (The deduction isn’t subject to the 2% floor for miscellaneous itemized deductions.)
The estate tax attributable to IRD is equal to the difference between the actual estate tax paid by the estate and the estate tax that would have been payable if the IRD’s net value had been excluded from the estate.
Suppose, for instance, that you’re the beneficiary of an estate that includes a taxable IRA. If the estate tax is $150,000 with the retirement account and $100,000 without, the estate tax attributable to the IRD income is $50,000. But be careful, because any deductions in respect of a decedent must also be included when calculating the estate tax impact.
When multiple IRD assets and multiple beneficiaries are involved, complex calculations are necessary to properly allocate the income and deductions. Similarly, when a beneficiary receives IRD over a period of years — IRA distributions, for example — the deduction must be prorated based on the amounts distributed each year.
We can help
If you inherit property that could be considered IRD, please consult our firm for assistance in managing the tax consequences. With proper planning, you can keep the cost to a minimum.
Married couples don’t always agree — and taxes are no exception. In certain cases, an “innocent” spouse can apply for relief from the responsibility of paying tax, interest and penalties arising from a spouse’s (or former spouse’s) improperly handled tax return. Although it isn’t easy to qualify, potentially affected taxpayers should review the rules.
Applicants may qualify for various forms of relief if they can meet the applicable IRS conditions. One factor that’s considered is whether the applicant received any significant direct or indirect benefit from the tax understatement. For instance, an applicant’s case could be weakened if he or she had used unreported income to pay extraordinary household expenses.
The IRS will also look at the distinctive aspects of the case. The fact that a spouse applying for relief has already divorced his or her partner is significant. Whether the applicant was abused physically or mentally will also play a role, as will whether he or she was in poor mental or physical health when the return(s) in question was signed. In addition, the IRS will consider whether the applicant would experience economic hardship without relief from a significant tax debt.
Generally, an applicant must request innocent spouse relief no later than two years after the date the IRS first attempted to collect the tax. But other forms of relief may still be available thereafter. Please contact our firm for more information.
The Achieving a Better Life Experience (ABLE) Act of 2014 created a tax-advantaged savings account for people who have a qualifying disability (or are blind) before age 26. Modeled after the well-known Section 529 college savings plan, ABLE accounts offer many benefits. But it’s important to understand their limitations.
Tax and funding benefits
Like Section 529 plans, state-sponsored ABLE accounts allow parents and other family and friends to make substantial cash contributions. Contributions aren’t tax deductible, but accounts can grow tax-free, and earnings may be withdrawn free of federal income tax if they’re used to pay qualified expenses. ABLE accounts can be established under any state ABLE program, regardless of where you or the disabled account beneficiary live.
In the case of a Section 529 plan, qualified expenses include college tuition, room and board, and certain other higher education expenses. For ABLE accounts, “qualified disability expenses” include a broad range of costs, such as health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management, legal expenses, and funeral and burial expenses.
An ABLE account generally won’t jeopardize the beneficiary’s eligibility for means-tested government benefits, such as Medicaid or Supplemental Security Income (SSI). To qualify for these benefits, a person’s resources must be limited to no more than $2,000 in “countable assets.”
Assets in an ABLE account aren’t counted, with two exceptions: 1) Distributions used for housing expenses count, and 2) if the account balance exceeds $100,000, the beneficiary’s eligibility for SSI is suspended so long as the excess amount remains in the account.
ABLE accounts offer some attractive benefits, but they’re far less generous than those offered by Sec. 529 plans. Maximum contributions to 529 plans vary from state to state, but they often reach as high as $350,000 or more. The same maximum contribution limits generally apply to ABLE accounts, but practically speaking they’re limited to $100,000, given the impact on SSI benefits.
Like a 529 plan, an ABLE account allows investment changes only twice a year. But ABLE accounts also impose an annual limit on contributions equal to the annual gift tax exclusion (currently $14,000). There’s no annual limit on contributions to Sec. 529 plans.
ABLE accounts have other limitations and disadvantages as well. Unlike a Sec. 529 plan, an ABLE account doesn’t allow the person who sets up the account to be the owner. Rather, the account’s beneficiary is the owner.
However, a person with signature authority — such as a parent, legal guardian or power of attorney holder — can manage the account if the beneficiary is a minor or otherwise unable to manage the account. Nevertheless, contributions are irrevocable and the account’s funders may not make withdrawals. The beneficiary can be changed to another disabled individual who’s a family member of the designated beneficiary.
Finally, be aware that, when an ABLE account beneficiary dies, the state may claim reimbursement of its net Medicaid expenditures from any remaining balance.
If you have a child or relative with a disability in existence before age 26, it’s worth exploring the feasibility of an ABLE account. Please contact our firm for more details.
Like many people, you probably feel a great sense of relief wash over you after your tax return is completed and filed. Unfortunately, even professionally prepared and accurate returns may sometimes be subject to an IRS audit.
The good news? Chances are slim that it will actually happen. Only a small percentage of returns go through the full audit process. Still, you’re better off informed than taken completely by surprise should your number come up.
A variety of red flags can trigger an audit. Your return may be selected because the IRS received information from a third party — say, the W-2 submitted by your employer — that differs from the information reported on your return. This is often the employer’s mistake or occurs following a merger or acquisition.
In addition, the IRS scores all returns through its Discriminant Inventory Function System (DIF). A higher DIF score may increase your audit chances. While the formula for determining a DIF score is a well-guarded IRS secret, it’s generally understood that certain things may increase the likelihood of an audit, such as:
Bear in mind, though, that no single item will cause an audit. And, as mentioned, a relatively low percentage of returns are examined. This is particularly true as the IRS grapples with its own budget issues.
Finally, some returns are randomly chosen as part of the IRS’s National Research Program. Through this program, the agency studies returns to improve and update its audit selection techniques.
If you receive an audit notice, the first rule is: Don’t panic! Most are correspondence audits completed via mail. The IRS may ask for documentation on, for instance, your income or your purchase or sale of a piece of real estate.
Read the notice through carefully. The pages should indicate the items to be examined, as well as a deadline for responding. A timely response is important because it conveys that you’re organized and, thus, less likely to overlook important details. It also indicates that you didn’t need to spend extra time pulling together a story.
Your response (and ours)
Should an IRS notice appear in your mail, please contact our office. We can fully explain what the agency is looking for and help you prepare your response. If the IRS requests an in-person interview regarding the audit, we can accompany you — or even appear in your place if you provide authorization.
For many years, business owners had to ask themselves one question when it came to facing taxation in another state: Do we have “nexus”? This term indicates a business presence in a given state that’s substantial enough to trigger the state’s tax rules and obligations.
Well, the question still stands. And if you’re considering operating your business in multiple states, or are already doing so, it’s worth reviewing the concept of nexus and its tax impact on your company.
Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include:
Then again, one generally can’t say that nexus has a “hair trigger”. A minimal amount of business activity in a given state probably won’t create tax liability there.
For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have nexus.
As with many tax issues, the totality of facts and circumstances will determine whether you have nexus in a state. So it’s important to make assumptions either way. The tax impact could be significant, and its specifics will vary widely depending on just how the state in question approaches taxation.
For starters, strongly consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you. The results of a nexus study may not necessarily be negative. You may find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state by, say, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.
Taxation and profitability
“The grass is always greener on the other side of the fence”, so the saying goes. If profitability beckons in another state, please contact our firm for help projecting how setting up shop there might affect your tax liability.
Sidebar: Service companies, beware of market-based sourcing
Nexus has been and remains the primary focus of companies considering whether and how they’d be taxed across state lines. (See main article.) But, recently, many states have established “market-based sourcing” for determining the tax liability of service companies that operate within their borders.
Under this approach, if the benefits of a service occur and will be used in another state, that state will tax the revenue gained from said service. “Service revenue” generally is defined as revenue from intangible assets — not the sales of tangible personal property.
Thus, in market-based sourcing states, the destination state of a service is the relevant taxation factor rather than the state in which the income-producing activity is performed (also known as the “cost of performance” method).
Individuals may want to donate artwork so it can be enjoyed by a wider audience or available for scholarly study or simply to make room for new artwork in their home. Here are four tips for donating artwork with an eye toward tax savings:
1. Get an appraisal. Donations of artwork valued at over $5,000 require a “qualified appraisal” by a “qualified appraiser”. IRS rules detail the requirements. In addition, auditors are required to refer all gifts of art valued at $20,000 or more to the agency’s Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.
2. Donate to a public charity. Donations to a qualified public charity (such as a museum or university) potentially entitle you to deduct the artwork’s full fair market value. If you donate to a private foundation, your deduction will be limited to your cost. The total amount of charitable donations you may deduct in a given year is limited to a percentage of your adjusted gross income (50% for public charities, 30% for private foundations) with the excess carried forward for up to five years.
3. Beware the related-use rule. To qualify for a full fair-market-value deduction, the charity’s use of the artwork must be related to its tax-exempt purpose. Even if the related-use rule is satisfied initially, you may lose some or all of your deductions if the artwork is worth more than $5,000 and the charity sells or otherwise disposes of it within three years of receipt. If that happens, you may be able to preserve your tax benefits via a certification process. (For further details, please contact us.)
4. Consider a fractional donation. Donating a fractional interest allows you to save tax dollars without completely giving up the artwork. Say you donate a 25% interest in your art collection to a museum for it to display for three months annually. You could then deduct 25% of the collection’s fair market value and continue displaying the art in your home or business for most of the year.
The rules for fractional donations, and charitable contributions of artwork in general, can be tricky. Plus, tax law changes affecting deductions may occur in the coming year. Contact our firm for help.
Today’s technology makes self-employment easier than ever. But if you work for yourself, you’ll face some distinctive challenges when it comes to your taxes. Here are some important steps to take:
Learn your liability. Self-employed individuals are liable for self-employment tax, which means they must pay both the employee and employer portions of FICA taxes. The good news is that you may deduct the employer portion of these taxes. Plus, you might be able to make significantly larger retirement contributions than you would as an employee.
However, you’ll likely be required to make quarterly estimated tax payments, because income taxes aren’t withheld from your self-employment income as they are from wages. If you fail to fully make these payments, you could face an unexpectedly high tax bill and underpayment penalties.
Distinguish what’s deductible. Under IRS rules, deductible business expenses for the self-employed must be “ordinary” and “necessary.” Basically, these are costs that are commonly incurred by businesses similar to yours and readily justifiable as needed to run your operations.
The tax agency stipulates, “An expense does not have to be indispensable to be considered necessary.” But pushing this grey area too far can trigger an audit. Common examples of deductible business expenses for the self-employed include licenses, accounting fees, equipment, supplies, legal expenses and business-related software.
Don’t forget your home office! You may deduct many direct expenses (such as business-only phone and data lines, as well as office supplies) and indirect expenses (such as real estate taxes and maintenance) associated with your home office. The tax break for indirect expenses is based on just how much of your home is used for business purposes, which you can generally determine by either measuring the square footage of your workspace as a percentage of the home’s total area or using a fraction based on the number of rooms.
The IRS typically looks at two questions to determine whether a taxpayer qualifies for the home office deduction:
1. Is the specific area of the home that’s used for business purposes used only for business purposes, not personal ones?
2. Is the space used regularly and continuously for business?
If you can answer in the affirmative to these questions, you’ll likely qualify. But please contact our firm for specific assistance with the home office deduction or any other aspect of filing your taxes as a self-employed individual.
As tax-filing season gets into full swing, there are many details to remember. One subject to keep in mind — especially if you’ve seen your income rise recently — is whether you’ll be able to reap the full value of tax breaks that you’ve claimed previously.
What could change? If your adjusted gross income (AGI) exceeds the applicable threshold, your personal exemptions will begin to be phased out and your itemized deductions reduced. For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (joint filer) and $155,650 (married filing separately). These are up from the 2015 thresholds, which were $258,250 (single), $284,050 (head of household), $309,900 (joint filer) and $154,950 (married filing separately).
The personal exemption phaseout reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s AGI exceeds the applicable threshold (2% for each $1,250 for married taxpayers filing separately). Meanwhile, the itemized deduction limitation reduces otherwise allowable deductions by 3% of the amount by which a taxpayer’s AGI exceeds the applicable threshold (not to exceed 80% of otherwise allowable deductions). It doesn’t apply, however, to deductions for medical expenses, investment interest, or casualty, theft or wagering losses.
If your AGI is close to the threshold, AGI-reduction strategies (such as making retirement plan and Health Savings Account contributions) may allow you to stay under it. If that’s not possible, consider the reduced tax benefit of the affected deductions before implementing strategies to accelerate or defer deductible expenses. Please contact our firm for specific strategies tailored to your situation.
If you're planning to make significant charitable donations in the coming year, consider a donor-advised fund (DAF). These accounts allow you to take a charitable income tax deduction immediately, while deferring decisions about how much to give — and to whom — until the time is right.
A DAF is a tax-advantaged investment account administered by a not-for-profit "sponsoring organization", such as a community foundation or the charitable arm of a financial services firm. Contributions are treated as gifts to a Section 501(c)(3) public charity, which are deductible up to 50% of adjusted gross income (AGI) for cash contributions and up to 30% of AGI for contributions of appreciated property (such as stock). Unused deductions may be carried forward for up to five years, and funds grow tax-free until distributed.
Although contributions are irrevocable, you're allowed to give the account a name and recommend how the funds will be invested (among the options offered by the DAF) and distributed to charities over time. You can even name a successor advisor, or prepare written instructions, to recommend investments and charitable gifts after your death.
Technically, a DAF isn't bound to follow your recommendations. But in practice, DAFs almost always respect donors' wishes. Generally, the only time a fund will refuse a donor's request is if the intended recipient isn't a qualified charity.
As mentioned, DAF owners can immediately deduct contributions but make gifts to charities later. Consider this scenario: Rhonda typically earns around $150,000 in AGI each year. In 2017, however, she sells her business, lifting her income to $5 million for the year.
Rhonda decides to donate $500,000 to charity, but she wants to take some time to investigate charities and spend her charitable dollars wisely. By placing $500,000 in a DAF this year, she can deduct the full amount immediately and decide how to distribute the funds in the coming years. If she waits until next year to make charitable donations, her deduction will be limited to $75,000 per year (50% of her AGI).
Even if you have a particular charity in mind, spreading your donations over several years can be a good strategy. It gives you time to evaluate whether the charity is using the funds responsibly before you make additional gifts. A DAF allows you to adopt this strategy without losing the ability to deduct the full amount in the year when it will do you the most good.
Another key advantage is capital gains avoidance. An effective charitable-giving strategy is to donate appreciated assets — such as securities or real estate. You're entitled to deduct the property's fair market value, and you can avoid the capital gains taxes you would have owed had you sold the property.
But not all charities are equipped to accept and manage this type of donation. Many DAFs, however, have the resources to accept contributions of appreciated assets, liquidate them and then reinvest the proceeds.
Requirements and fees
A DAF can also help you streamline your estate plan and donate to a charity anonymously. Requirements and fees vary from fund to fund, however. Please contact our firm for help finding one that meets your needs.
If your company owns real property, or you do so individually, you may not always be able to dispose of it as quickly as you'd like. One avenue for perhaps finding a buyer a little sooner is an installment sale.
Benefits and risks
An installment sale occurs when you transfer property in exchange for a promissory note and receive at least one payment after the tax year of the sale. Doing so allows you to receive interest on the full amount of the promissory note, often at a higher rate than you could earn from other investments, while deferring taxes and improving cash flow.
But there may be some disadvantages for sellers. For instance, the buyer may not make all payments and you may have to deal with foreclosure.
You generally must report an installment sale on your tax return under the "installment method." Each installment payment typically consists of interest income, return of your adjusted basis in the property and gain on the sale. For every taxable year in which you receive an installment payment, you must report as income the interest and gain components.
Calculating taxable gain involves multiplying the amount of payments, excluding interest, received in the taxable year by the gross profit ratio for the sale. The gross profit ratio is equal to the gross profit (the selling price less your adjusted basis) divided by the total contract price (the selling price less any qualifying indebtedness — mortgages, debts and other liabilities assumed or taken by the buyer — that doesn't exceed your basis).
The selling price includes the money and the fair market value of any other property you received for the sale of the property, selling expenses paid by the buyer and existing debt encumbering the property (regardless of whether the buyer assumes personal liability for it).
You may be considered to have received a taxable payment even if the buyer doesn't pay you directly. If the buyer assumes or pays any of your debts or expenses, it could be deemed a payment in the year of the sale. In many cases, though, the buyer's assumption of your debt is treated as a recovery of your basis, rather than a payment.
The rules of installment sales are complex. Please contact us to discuss this strategy further.
Where did the time go? The year is quickly drawing to a close, but there’s still time to take steps to reduce your 2016 tax liability. Here are seven last-minute tax-saving tips to consider — you just must act by December 31:
1. Pay your 2016 property tax bill that’s due in early 2017.
2. Pay your fourth quarter state income tax estimated payment that’s due in January 2017.
3. Incur deductible medical expenses (if your deductible medical expenses for the year already exceed the applicable floor).
4. Pay tuition for academic periods that will begin in January, February or March of 2017 (if it will make you eligible for a tax deduction or credit).
5. Donate to your favorite charities.
6. Sell investments at a loss to offset capital gains you’ve recognized this year.
7. Ask your employer if your bonus can be deferred until January.
Keep in mind, however, that in certain situations these strategies might not make sense. For example, if you’ll be subject to the alternative minimum tax this year or be in a higher tax bracket next year, taking some of these steps could have undesirable results.
To make absolutely sure which of these tips are right for you, and learn whether there are other beneficial last-minute moves you might make, please contact our firm. We can help you maximize your tax savings for 2016.
Are you in your 50s or 60s and thinking more about retirement? If so, and you’re still not completely comfortable with the size of your nest egg, don’t forget about “catch-up” contributions. These are additional amounts beyond the regular annual limits that workers age 50 or older can contribute to certain retirement accounts.
Catch-up contributions give you the chance to take maximum advantage of the potential for tax-deferred or, in the case of Roth accounts, tax-free growth.
Under 2016 401(k) limits, if you’re age 50 or older, after you’ve reached the $18,000 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,000. If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, your regular contribution maxes out at $12,500 in 2016. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year.
But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do.
Another way to save more after age 50 is through a traditional IRA or a Roth IRA. With either plan, those 50 or older generally can contribute another $1,000 above the $5,500 limit for 2016. Plus, you can make 2016 IRA contributions as late as April 18, 2017.
The benefits of making the additional contribution differ depending on which account you’re considering. With a traditional IRA, contributions may be tax deductible, providing you with immediate tax savings. (The deductibility phases out at higher income levels if you or your spouse is covered by an employer retirement plan.)
Roth contributions are made with after-tax dollars, but qualified withdrawals are tax-free. By contributing to a Roth IRA and taking the tax hit up front, you won’t lose any of the income to taxes at withdrawal, provided you’re at least 59½ and have held a Roth IRA at least five years. However, be aware that the ability to contribute to a Roth IRA is phased out based on income level.
Another option if you’d like to enjoy tax-free withdrawals is to convert some or all of your traditional IRA to a Roth IRA — but you’ll also take an up-front tax hit.
If you’re self-employed, retirement plans such as an individual 401(k) — or solo 401(k) — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. You can defer 100% of your self-employment income or compensation, up to the regular yearly deferral limit of $18,000, plus a $6,000 catch-up contribution in 2016. But that’s just the employee salary deferral portion of the contribution.
You can also make an “employer” contribution of up to 20% of self-employment income or 25% of compensation. The total combined employee-employer contribution is limited to $53,000, plus the $6,000 catch-up contribution.
The year’s almost over, but you still have time to squirrel away a few extra dollar.
When many people think about charitable giving, they picture writing a check or dropping off a cardboard box of nonperishable food items at a designated location. But giving to charity can take many different forms. One that you may not be aware of is a gift of appreciated stock. Yes, donating part of your portfolio is not only possible, but it also can be a great way to boost the tax benefits of your charitable giving.
No pain from gains
Many charitable organizations are more than happy to receive appreciated stock as a gift. It’s not unusual for these entities to maintain stock portfolios, and they’re also free to sell donated stock.
As a donor, contributing appreciated stock can entitle you to a tax deduction equal to the securities’ fair market value — just as if you had sold the stock and contributed the cash. But neither you nor the charity receiving the stock will owe capital gains tax on the appreciation. So you not only get the deduction, but also avoid a capital gains hit.
The key word here is “appreciated”. The strategy doesn’t work with stock that’s declined in value. If you have securities that have taken a loss, you’ll be better off selling the stock and donating the proceeds. This way, you can take two deductions (up to applicable limits): one for the capital loss and one for the charitable donation.
Inevitably, there are restrictions on deductions for donating appreciated stock. Annually you may deduct appreciated stock contributions to public charities only up to 30% of your adjusted gross income (AGI). For donations to nonoperating private foundations, the limit is 20% of AGI. Any excess can be carried forward up to five years.
So, for example, if you contribute $50,000 of appreciated stock to a public charity and have an AGI of $100,000, you can deduct just $30,000 this year. You can carry forward the unused $20,000 to next year. Whatever amount (if any) you can’t use next year can be carried forward until used up or you hit the five-year mark, whichever occurs first.
Moreover, you must have owned the security for at least one year to deduct the fair market value. Otherwise, the deduction is limited to your tax basis (generally what you paid for the stock). Also, the charity must be a 501(c)(3) organization.
Last, these rules apply only to appreciated stock. If you donate a different form of appreciated property, such as artwork or jewelry, different requirements apply.
A donation of appreciated stock may not be the simplest way to give to charity. But, for the savvy investor looking to make a positive difference and manage capital gains tax liability, it can be a powerful strategy. Please contact our firm for help deciding whether it’s right for you and, if so, how to properly execute the donation.
As the year winds down, many people begin to wonder whether they should put off until next year purchases they were considering for this year. One interesting wrinkle to consider from a tax perspective is the sales tax deduction.
Making the choice
This tax break allows taxpayers to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. It was permanently extended by the Protecting Americans from Tax Hikes Act of 2015.
The deduction is obviously valuable to those who reside in states with no or low income tax. But it can also substantially benefit taxpayers in other states who buy a major item, such as a car or boat.
Considering the break
Because the break is now permanent, there’s no urgency to make a large purchase this year to take advantage of it. Nonetheless, the tax impact of the deduction is worth considering.
For example, let’s say you buy a new car in 2016, your state and local income tax liability for the year is $3,000, and the sales tax on the car is also $3,000. This may sound like a wash, but bear in mind that, if you elect to deduct sales tax, you can deduct all of the sales tax you’ve paid during the year — not just the tax on the car purchase.
Picking an approach
To claim the deduction, you need not keep receipts and track all of the sales tax you’ve paid this year. You can simply use an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale, plus the tax you actually pay on certain major purchases.
Then again, if you retain documentation for your purchases, you might enjoy a larger deduction. The “actual receipt” approach could result in a sizable deduction if you’ve made a number of notable purchases in the past year that don’t qualify to be added on to the sales tax calculator amount. Examples include furnishing a new home, investing in high-value electronics or software, or purchasing expensive jewelry (such as engagement and wedding rings).
Saving while buying
The sales tax deduction offers an opportunity to save tax dollars while buying the items you want or need. Let us help you determine whether it’s right for you.
Appraisals can inspire anxiety for many business owners. And it’s understandable why. You’re obviously not short on things to do, and valuations cost time and money. Nonetheless, there are some legitimate reasons to obtain an appraisal regularly or, at the very least, to familiarize yourself with the process so you’re ready when the time comes.
Perhaps the most common purpose of a valuation is a prospective ownership transfer. Yet strategic investments (such as a new product or service line) can also greatly benefit from an accurate appraisal. As growth opportunities arise, business owners have only limited resources to pursue chosen strategies. A valuation can help plot the most likely route to success.
But hold on — you might say, why not simply rely on our tried-and-true projected financial statements for strategic planning? One reason is that projections ignore the time value of money because, by definition, they describe what’s going to happen given a set of circumstances. Thus, it can be difficult to compare detailed projections against other investments under consideration.
Valuators, however, can convert your financial statement projections into cash flow projections and then incorporate the time value of money into your decision making. For instance, in a net present value (NPV) analysis, an appraiser projects each alternative investment’s expected cash flows. Then he or she discounts each period’s projected cash flow to its present value, using a discount rate proportionate to its risk.
If the sum of these present values — the NPV — is greater than zero, the investment is likely worthwhile. When comparing alternatives, a higher NPV is generally better.
3 pillars of the process
Many business owners just don’t know what to expect from a valuation. To simplify matters, let’s look at three basic “pillars” of the appraisal process:
1. Purpose. There’s no such thing as a recreational valuation. Each one needs to have a specific purpose. This could be as clear-cut as an impending sale. Or perhaps an owner is divorcing his spouse and needs to determine the value of the business interest that’s includable in the marital estate.
In other cases, an appraisal may be driven by strategic planning. Have I grown the business enough to cash out now? Or how much further could we grow based on our current estimated value? The valuation’s purpose strongly affects how an appraiser will proceed.
2. Standard of value. Generally, business valuations are based on “fair market value” — the price at which property would change hands in a hypothetical transaction involving informed buyers and sellers not under duress to buy or sell. But some assignments call for a different standard of value.
For example, say you’re contemplating selling to a competitor. In this case, you might be best off getting an appraisal for the “strategic value” of your company — that is, the value to a particular investor, including buyer-specific synergies.
3. Basis of value. Private business interests typically are designated as either “controlling” or “minority” (nonmarketable). In other words, do you truly control your company or are you a noncontrolling owner?
Defining the appropriate basis of value isn’t always straightforward. Suppose a business is split equally between two partners. Because each owner has some control, stalemates could impair decision-making. An appraiser will need to definitively establish basis of value when selecting a valuation methodology and applying valuation discounts.
Often, we all find it difficult to be objective about the things we hold close. There are few better examples of this than business owners and their companies. But a valuation can provide you with an unbiased, up-to-date perspective on your business that can help you make better decisions about its future.
The traditional pension may seem like a thing of the past. But many workers are still counting on payouts from one of these “defined benefit” plans in retirement. If you’re among this group, it’s important to start thinking now about how you’ll receive the money from your pension.
Making a choice
Some defined benefit plans give retirees a choice between receiving payouts in the form of a lump sum or an annuity. Taking a lump sum distribution allows you to invest the money as you please. Plus, if you manage and invest the funds wisely, you may be able to achieve better returns than those provided by an annuity.
On the other hand, if you’re concerned about the risks associated with investing your pension benefits (you could lose principal) — or don’t want the responsibility — an annuity offers guaranteed income for life. (Bear in mind that guarantees are subject to the claims-paying ability of the issuing company.)
Choosing yet again
If you choose to receive your pension benefits in the form of an annuity — or if your plan doesn’t offer a lump sum option — your plan likely will require you to choose between a single-life or joint-life annuity. A single-life annuity provides you with monthly benefits for life. The joint-life option (also referred to as “joint and survivor”) provides a smaller monthly benefit, but the payments continue over the joint lifetimes of both you and your spouse.
Deciding between the two annuity options requires some educated guesswork. To determine the option that will provide the greatest overall financial benefit, you’ll need to consider several factors — including your and your spouse’s actuarial life expectancies as well as factors that may affect your actual life expectancies, such as current health conditions and family medical histories.
You might choose the single-life option, for example, if you and your spouse have comparable life expectancies or if you expect to live longer. Under those circumstances, the higher monthly payment will maximize your overall benefits.
But there’s a risk, too: Because the payments will stop at your death, if you die prematurely and your spouse outlives you, the overall financial benefit may be smaller than if you’d chosen the joint-life option. The difference could be substantial if your spouse outlives you by many years.
Your overall financial situation — that is, your expenses and your other assets and income sources — also play a major role. Even if you expect a joint-life annuity to yield the greatest total benefit over time, you may want to consider a single-life annuity if you need additional liquidity in the short term.
Managing this asset
Although increasingly uncommon, these defined benefit plans can be a highly valuable asset. Please contact us for help managing yours appropriately.
When it comes to tax planning, you’ve got to be ready for anything. For example, do you know whether you’re likely to be subject to the alternative minimum tax (AMT) when you file your 2016 return? If not, you need to find out now so that you can consider taking steps before year end to minimize potential liability.
The AMT was established to ensure that high-income individuals pay at least a minimum tax, even if they have many large deductions that significantly reduce their “regular” income tax. If your AMT liability is greater than your regular income tax liability, you must pay the difference as AMT, in addition to the regular tax.
AMT rates begin at 26% and rise to 28% at higher income levels. The maximum rate is lower than the maximum income tax rate of 39.6%, but far fewer deductions are allowed, so the AMT could end up taking a bigger tax bite.
For instance, you can’t deduct state and local income or sales taxes, property taxes, miscellaneous itemized deductions subject to the 2% floor, or home equity loan interest on debt not used for home improvements. You also can’t take personal exemptions for yourself or your dependents, or the standard deduction if you don’t itemize your deductions.
Steps to consider
Fortunately, you may be able to take steps to minimize your AMT liability, including:
Timing capital gains. The AMT exemption (an amount you can deduct in calculating AMT liability) phases out based on income, so realizing capital gains could cause you to lose part or all of the exemption. If it looks like you could be subject to the AMT this year, you might want to delay sales of highly appreciated assets until next year (if you don’t expect to be subject to the AMT then) or use an installment sale to spread the gains (and potential AMT liability) over multiple years.
Timing deductible expenses. Try to time the payment of expenses that are deductible for regular tax purposes but not AMT purposes for years in which you don’t anticipate AMT liability. Otherwise, you’ll gain no tax benefit from those deductions. If you’re on the threshold of AMT liability this year, you might want to consider delaying state tax payments, as long as the late-payment penalty won’t exceed the tax savings from staying under the AMT threshold.
Investing in the “right” bonds. Interest on tax-exempt bonds issued for public activities (for example, schools and roads) is exempt from the AMT. You may want to convert bonds issued for private activities (for example, sports stadiums), which generally don’t enjoy the AMT interest exemption.
Failing to plan for the AMT can lead to unexpected — and undesirable — tax consequences. Please contact us for help assessing your risk and, if necessary, implementing the appropriate strategies for your situation.
Sidebar: Does this sound familiar?
High-income earners are typically most susceptible to the alternative minimum tax. But liability may also be triggered by:
When 529 plans first hit the scene, circa 1996, they were big news. Nowadays, they’re a common part of the college-funding landscape. But don’t forget about them — 529 plans remain a valid means of saving for the rising cost of tuition and more.
Flexibility is king
529 plans are generally sponsored by states, though private institutions can sponsor 529 prepaid tuition plans. Just about anyone can open a 529 plan. And you can name anyone, including a child, grandchild, friend, or even yourself, as the beneficiary.
Investment options for 529 savings plans typically include stock and bond mutual funds, as well as money market funds. Some plans offer age-based portfolios that automatically shift to more conservative investments as the beneficiaries near college age.
Earnings in 529 savings plans typically aren’t subject to federal tax, so long as the funds are used for the beneficiary’s qualified educational expenses. This can include tuition, room and board, books, fees, and computer technology at most accredited two- and four-year colleges and universities, vocational schools, and eligible foreign institutions.
Many states offer full or partial state income tax deductions or other tax incentives to residents making 529 plan contributions, at least if the contributions are made to a plan sponsored by that state.
You’re not limited to participating in your own state’s plan. You may find you’re better off with another state’s plan that offers a wider range of investments or lower fees.
While 529 plans can help save taxes, they have some downsides. Amounts not used for qualified educational expenses may be subject to taxes and penalties. A 529 plan also might reduce a student’s ability to get need-based financial aid, because money in the plan isn’t an “exempt” asset. That said, 529 plan money is generally treated more favorably than, for instance, assets in a custodial account in the student’s name.
Just like other investments, those within 529s can fluctuate with the stock market. And some plans charge enrollment and asset management fees.
Finally, in the case of prepaid tuition plans, there may be some uncertainty as to how the benefits will be applied if the student goes to a different school.
Work with a pro
The tax rules governing 529 savings plans can be complex. So please give us a call. We can help you determine whether a 529 plan is right for you.
With summer headed toward its inevitable close, you may be tempted to splurge on a pricey “last hurrah” trip. Or perhaps you’d like to buy a brand new convertible to feel the warm breeze in your hair. Whatever the temptation may be, if you’ve pondered dipping into your 401(k) account for the money, make sure you’re aware of the consequences before you take out the loan.
Pros and cons
Many 401(k) plans allow participants to borrow as much as 50% of their vested account balances, up to $50,000. These loans are attractive because:
Yet, despite their appeal, 401(k) loans present significant risks. Although you pay the interest to yourself, you lose the benefits of tax-deferred compounding on the money you borrow.
You may have to reduce or eliminate 401(k) contributions during the loan term, either because you can’t afford to contribute or because your plan prohibits contributions while a loan is outstanding. Either way, you lose any future earnings and employer matches you would have enjoyed on those contributions.
Loans, unless used for a personal residence, must be repaid within five years. Generally, the loan terms must include level amortization, which consists of principal and interest, and payments must be made no less frequently than quarterly.
Additionally, if you’re laid off, you’ll have to pay the outstanding balance quickly — typically within 30 to 90 days. Otherwise, the amount you owe will be treated as a distribution subject to income taxes and, if you’re under age 59½, a 10% early withdrawal penalty.
If you need the money for emergency purposes, rather than recreational ones, determine whether your plan offers a hardship withdrawal. Some plans allow these to pay certain expenses related to medical care, college, funerals and home ownership — such as first-time home purchase costs and expenses necessary to avoid eviction or mortgage foreclosure.
Even if your plan allows such withdrawals, you may have to show that you’ve exhausted all other resources. Also, the amounts you withdraw will be subject to income taxes and, except for certain medical expenses or if you’re over age 59½, a 10% early withdrawal penalty.
Like plan loans, hardship withdrawals are costly. In addition to owing taxes and possibly penalties, you lose future tax-deferred earnings on the withdrawn amounts. But, unlike a loan, hardship withdrawals need not be paid back. And you won’t risk any unpleasant tax surprises should you lose your job.
The right move
Generally, you should borrow or take hardship withdrawals from a 401(k) only in emergencies or when no other financing options exist (and your job is secure). For help deciding whether such a loan would be right for you, please call us.
When they’re old enough to understand the concepts, some children start investing in the markets. If you’re helping a child learn the risks and benefits of investments, be sure you learn about the tax impact first.
For the 2016 tax year, if a child’s interest, dividends and other unearned income total more than $2,100, part of that income is taxed based on the parent’s tax rate. This is a critical point because, as joint filers, many married couples’ tax rate is much higher than the rate at which the child would be taxed.
Generally, a child’s $1,050 standard deduction for unearned income eliminates liability on the first half of that $2,100. Then, unearned income between $1,050 and $2,100 is taxed at the child’s lower rate.
But it’s here that potential danger sets in. A child’s unearned income exceeding $2,100 may be taxed at the parent’s higher tax rate if the child is under age 19 or a full-time student age 19–23, but not if the child is over age 17 and has earned income exceeding half of his support. (Other stipulations may apply.)
In many cases, parents take a simplified approach to their child’s investment income. They choose to include their son’s or daughter’s investment income on their own return rather than have him or her file a return of their own.
Basically, if a child’s interest and dividend income (including capital gains distributions) total more than $1,500 and less than $10,500, parents may make this election. But a variety of other requirements apply. For example, the unearned income in question must come from only interest and dividends.
Investing can teach kids about the time value of money, the importance of patience, and the rise and fall of business success. But it can also deliver a harsh lesson to parents who aren’t fully prepared for the tax impact. We can help you determine how your child’s investment activities apply to your specific situation.
One of the great things about setting up a home office is that you can make it as comfy as possible. Assuming you’ve done that, another good idea is getting comfortable with the home office deduction.
To qualify for the deduction, you generally must maintain a specific area in your home that you use regularly and exclusively in connection with your business. What’s more, you must use the area as your principal place of business or, if you also conduct business elsewhere, use the area to regularly conduct business, such as meeting clients and handling management and administrative functions. If you’re an employee, your use of the home office must be for your employer’s benefit.
The only option to calculate this tax break used to be the actual expense method. With this method, you deduct a percentage (proportionate to the percentage of square footage used for the home office) of indirect home office expenses, including mortgage interest, property taxes, association fees, insurance premiums, utilities (if you don’t have a separate hookup), security system costs and depreciation (generally over a 39-year period). In addition, you deduct direct expenses, including business-only phone and fax lines, utilities (if you have a separate hookup), office supplies, painting and repairs, and depreciation on office furniture.
But now there’s an easier way to claim the deduction. Under the simplified method, you multiply the square footage of your home office (up to a maximum of 300 square feet) by a fixed rate of $5 per square foot. You can claim up to $1,500 per year using this method. Of course, if your deduction will be larger using the actual expense method, that will save you more tax. Questions? Please give us a call.
Many families hire people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. If you employ a domestic worker, make sure you know the tax rules.
Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.
Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.
Social Security and Medicare taxes
If a household worker’s cash wages exceed the domestic employee coverage threshold of $2,000 in 2016, you must pay Social Security and Medicare taxes — 15.3% of wages, which you can either pay entirely or split with the worker. (If you and the worker share the expense, you must withhold his or her share.) But don’t count wages you pay to:
The domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax ($118,500 for 2016, adjusted annually for inflation).
Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to household employees. You can also exclude reimbursements to employees for certain parking or commuting costs. One way to provide a valuable benefit to household workers while minimizing employment taxes is to provide them with health insurance.
Unemployment and federal income taxes
If you pay total cash wages to household employees of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.
The tax is 6% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.
You don’t have to withhold federal income tax or, usually, state income tax unless the worker requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except for meals you provide employees for your convenience, lodging you provide in your home for your convenience and as a condition of employment, and certain reimbursed commuting and parking costs (including transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace).
As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 (for withholding) and I-9 (which documents that he or she is eligible to work in the United States).
After year end, you must file Form W-2 for each household employee to whom you paid more than $2,000 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements. In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.
Having a household employee can make family life easier. Unfortunately, it can also make your tax return a bit more complicated. Let us help you with the details.
With tax time long over and midyear officially here, it’s a great time to organize your financial records. And the key word here is indeed “organize.” Throwing all your important documents into a drawer won’t help much when an emergency occurs and you (or a family member) need to find a certain piece of paper.
Make a list
Of course, emergencies aren’t the only reason to organize your records. For example, you may need to be able to access relevant personal records if you’re ever audited or a victim of theft. Or your home could be damaged in a storm or fire. Or you may need proof to cash in investments or claim insurance benefits.
To get started, make a list of important records. These include items related to:
Grouping the items into broad categories such as these will make them easier to file and find later.
Establish your approach
With your list in hand, it’s time to start organizing and storing your records. Here are some tips for streamlining the process:
Create a central filing system. The ideal storage medium for personal documents is a fire-, water- and impact-resistant security cabinet or safe. Create a master list of the cabinet contents and provide a copy of the key to your executor or a trusted family member.
Designate a second storage location. Maintain a duplicate set of the records in another location, such as a bank safety deposit box, and provide access to a trusted individual (preferably not the same individual with access to the original documents). Consider keeping originals of your important legal documents, such as your will, with your attorney.
Back up records electronically. It also makes sense to store copies of records electronically. Simply scan your documents and save them to a trustworthy external storage device. If opting for a cloud-based backup system, choose your provider carefully to ensure its security measures are as stringent as possible.
Follow the ritual
Make organizing your records an annual ritual and not just a one-time event. Need assistance? We can help you identify the specific documents pertinent to your situation and organize them appropriately.
Sidebar: Create an emergency checklist to cope with calamity
Having an emergency checklist of important personal records handy is essential in the event you must evacuate your home. In a crisis, you’ll likely be able to take only what you can easily carry with you. That means storing the bare essentials in a portable container. Include these items:
Also set up an “In Case of Emergency” (ICE) directory in your cell phone. In your phone directory, simply type in “ICE” before each contact (ICE-1 Jane Smith, ICE-2 Dr. John Smith, etc.). Also consider storing and carrying electronic copies of key personal records on a USB flash drive.
The coming and going of Memorial Day marks the beginning of summer in the minds of many Americans. Although the kids might still be in school for another week or two, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax break?
Day camp is a qualified expense under the child and dependent care credit. This tax break is worth 20% of qualifying expenses, subject to a cap — and could be worth even more if your adjusted gross income is less than $43,000. For 2016, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.
Be aware, however, that overnight camp costs don’t qualify for the credit, nor do expenses related to summer school tutoring. In addition, certain types of child care are ineligible. These include care provided by a spouse and care provided by a child who’s under age 19 at the end of the year.
A variety of additional rules may apply. For example, eligible costs for care must be work-related. In other words, parents need to pay for the care so that they can work (or look for work). If you think you might qualify for the child and dependent care credit, please contact us. We can help you determine whether you’re eligible and then properly claim this potentially valuable tax break.
Preserving and managing family wealth requires addressing a number of major issues. These include saving for your children’s education and funding your own retirement. Juggling these competing demands is no trick. Rather, it requires a carefully devised and maintained family wealth management plan.
Start with the basics
First, a good estate plan can help ensure that, in the event of your death, your children will be taken care of and, if your estate is large, that they won’t lose a substantial portion of their inheritances to estate taxes. It can also guarantee that your assets will be passed along to your heirs according to your wishes.
Second, life insurance is essential. The right coverage can provide the liquidity needed to repay debts, support your children and others who depend on you financially, and pay estate taxes.
Prepare for the challenge
Most families face two long-term wealth management challenges: funding retirement and paying for college education. While both issues can be daunting, don’t sacrifice saving for your own retirement to finance your child’s education. Scholarships, grants, loans and work-study may help pay for college — but only you can fund your retirement.
Uncle Sam has provided several education incentives that are worth checking out, including tax credits and deductions for qualifying expenses and tax-advantaged savings opportunities such as 529 plans and Education Savings Accounts (ESAs). Because of income limits and phaseouts, many higher-income families won’t benefit from some of these tax breaks. But, your children (or your parents, in the case of contributing to an ESA) may be able to take advantage of them.
Give assets wisely
Giving money, investments or other assets to your children or other family members can save future income tax and be a sound estate planning strategy as well. You can currently give up to $14,000 per year per individual ($28,000 if married) without incurring gift tax or using your lifetime gift tax exemption. Depending on the number of children and grandchildren you have, and how many years you continue this gifting program, it can really add up.
By gifting assets that produce income or that you expect to appreciate, you not only remove assets from your taxable estate, but also shift income and future appreciation to people who may be in lower tax brackets.
Also consider using trusts to facilitate your gifting plan. The benefit of trusts is that they can ensure funds are used in the manner you intended and can protect the assets from your loved ones’ creditors.
Overcome the complexities
Creating a comprehensive plan for family wealth management and following through with it may not be simple — but you owe it to yourself and your family. We can help you overcome the complexities and manage your tax burden.
Sidebar: Charitable giving’s place in family wealth management
Do charitable gifts have a place in family wealth management? Absolutely. Properly made gifts can avoid gift and estate taxes, while possibly qualifying for an income tax deduction. Consider a charitable trust that allows you to give income-producing assets to charity, but keep the income for life — or for the charity to receive the earnings and the assets to later pass to your heirs. These are just two examples; there are more ways to use trusts to accomplish your charitable goals.
Like many taxpayers, you probably feel a sense of relief after filing your tax return. But that feeling can change if, soon after, you realize you’ve overlooked a key detail or received additional information that should have been considered. In such instances, you may want (or need) to amend your return.
Typically, an amended return — Form 1040X, to be exact — must be filed within three years from the date you filed the original tax return or within two years of the date the applicable tax was paid (whichever is later). Your choice of timing should depend on whether you expect a refund or a bill.
If claiming an additional refund, you should typically wait until you’ve received your original refund. Then cash or deposit the first refund check while waiting for the second. If you owe additional dollars, file the amended return and pay the tax immediately to minimize interest and penalties.
Bear in mind that, as of this writing, the IRS doesn’t offer amended returns via e-file. You can, however, track your amended return electronically. The IRS now offers an automated status-tracking tool called “Where’s My Amended Return?” at https://www.irs.gov/Filing/Individuals/Amended-Returns-(Form-1040-X)/Wheres-My-Amended-Return-1.
If you think an amended return is needed or warranted, please give us a call. We will be glad to help.
Many people want to do something, however small, to contribute to a healthier environment. There are many ways to do so and, for some of them, you can even save a few tax dollars for your efforts.
Indeed, with the passage of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) late last year, a couple of specific ways to go green and claim a tax break have been made permanent or extended. Let’s take a closer look at each.
Not driving for dollars
Air pollution is a problem in many areas of the country. Among the biggest contributors are vehicle emissions. So it follows that cutting down on the number of vehicles on the road can, in turn, diminish air pollution.
To help accomplish this, many people choose to commute to work via van pools or using public transportation. And, helpfully, the PATH Act is doing its part as well. The law made permanent the requirement that limits on the amounts that can be excluded from an employee’s wages for income and payroll tax purposes be the same for both parking benefits and van pooling / mass transit benefits.
Before the PATH Act’s parity provision, the monthly limit for 2015 was only $130 for van pooling / mass transit benefits. But, because of the new law, the 2015 monthly limit for these benefits was boosted to the $250 parking benefit limit and the 2016 limit is $255.
Sprucing up the homestead
Energy consumption can also have a negative impact on the environment and use up limited natural resources. Many homeowners want to reduce their energy consumption for environmental reasons or simply to cut their utility bills.
The PATH Act lends a helping hand here, too, by extending through 2016 the credit for purchases of residential energy property. This includes items such as:
The provision allows a credit of 10% of eligible costs for energy-efficient insulation, windows and doors. A credit is also available for 100% of eligible costs for energy-efficient heating and cooling equipment and water heaters, up to a lifetime limit of $500 (with no more than $200 from windows and skylights).
Doing it all
Going green and saving some green on your tax bill? Yes, you can do both. Van pooling or taking public transportation and improving your home’s energy efficiency are two prime examples. Please contact us for more information about how to claim these tax breaks or identify other ways to save this year.
Restructuring debt has become a common approach to personal financial management. But many people fail to realize that there’s often a tax impact to debt relief. And if you don’t anticipate it, a winning tax return may turn into a losing one.
Less debt, more income
Income tax applies to all forms of income — including what’s referred to as “cancellation-of-debt” (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.
Debt forgiveness isn’t the only way to generate a tax liability, though. You can have COD income if a creditor reduces the interest rate or gives you more time to pay. Calculating the amount of income can be complex but, essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit.
You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure. Here, the tax consequences depend on which of the following two categories the mortgage falls into:
1. Nonrecourse. Here the lender’s sole remedy in the event of default is to take possession of the home. In other words, you’re not personally liable if the foreclosure proceeds are less than your outstanding loan balance. Foreclosure on a nonrecourse mortgage doesn’t produce COD income.
2. Recourse. This type of foreclosure can trigger COD tax liability if the lender forgives the portion of the loan that’s not satisfied. In a short sale, the lender permits you to sell the property for less than the amount you owe and accepts the sale proceeds in satisfaction of your mortgage. A deed in lieu of foreclosure means you convey the property to the lender in satisfaction of your debt. In either case, if the lender agrees to cancel the excess debt, the transaction is treated like a foreclosure for tax purposes — that is, a recourse mortgage may generate COD income.
Keep in mind that COD income is taxable as ordinary income, even if the debt is related to long-term capital gains property. And, in some cases, foreclosure can trigger both COD income and a capital gain or loss (depending on your tax basis in the property and the property’s market value).
Exceptions vs. exclusions
Several types of canceled debt are considered nontaxable “exceptions” — for example, debt cancellation that’s considered a gift (such as forgiveness of a family loan). Certain student loans are also considered exceptions — as long as they’re canceled in exchange for the recipient’s commitment to public service.
Other types of canceled debt qualify as “exclusions.” For instance, homeowners can exclude up to $2 million in COD income in connection with qualified principal residence indebtedness. A recent tax law change extended this exclusion through 2016, modifying it to apply to mortgage forgiveness that occurs in 2017 as long as it’s granted pursuant to a written agreement entered into in 2016. Other exclusions include certain canceled debts relating to bankruptcy and insolvency.
The rules applying to COD income are complex. So if you’re planning to restructure your debt this year, let us help you manage the tax impact.
Like many taxpayers, you may have been expecting to encounter a few roadblocks while traversing your preferred tax-saving avenues. If so, tax extenders legislation signed into law this past December may make your journey a little easier. Let’s walk through a few highlights of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act).
Of interest to individuals
If you’re a homeowner, the PATH Act allows you to treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through 2016. However, this deduction is phased out for higher income taxpayers. The law likewise extends through 2016 the exclusion from gross income for mortgage loan forgiveness.
Those living in a state with low or no income taxes (or who make large purchases, such as a car or boat) will be pleased that the itemized deduction for state and local sales taxes, instead of state and local income taxes, is now permanent. Your deduction can be determined easily by using an IRS calculator and adding the tax you actually paid on certain major purchases.
Investors should note that the PATH Act makes permanent the exclusion of 100% of the gain on the sale of qualified small business stock acquired and held for more than five years (if acquired after September 27, 2010). The law also permanently extends the rule that eliminates qualified small business stock gain as a preference item for alternative minimum tax (AMT) purposes.
Breaks for businesses
The PATH Act gives business owners much to think about as well. First, there’s the enhanced Section 179 expensing election. Now permanent (and indexed for inflation beginning in 2016) is the ability for companies to immediately deduct, rather than depreciate, up to $500,000 in qualified new or used assets. The deduction phases out, dollar for dollar, to the extent qualified asset purchases for the year exceeded $2 million.
The 50% bonus depreciation break is also back, albeit temporarily. It’s generally available for new (not used) tangible assets with a recovery period of 20 years or less, and certain other assets. The 50% amount will drop to 40% for 2018 and 30% for 2019, however.
In addition, the PATH Act addresses two important tax credits. First, the research credit has been permanently extended, with some specialized provisions for smaller businesses and start-ups. Second, the Work Opportunity credit for employers that hire members of a “target group” has been extended through 2019.
Does your company provide transit benefits? If so, note that the law makes permanent equal limits for the amounts that can be excluded from an employee’s wages for income and payroll tax purposes for parking fringe benefits and van-pooling / mass transit benefits.
Much, much more
Whether you’re filing as an individual or on behalf of a business, the PATH Act could have a substantial effect on your 2015 tax return. We’ve covered only a few of its many provisions here. Please contact us to discuss these and other provisions that may affect your situation.
Sidebar: Good news for generous IRA owners
The recent tax extenders law makes permanent the provision allowing taxpayers age 70½ or older to make direct contributions from their IRA to qualified charities up to $100,000 per tax year. The transfer can count toward the IRA owner’s required minimum distribution. Many rules apply so, if you’re interested, let us help with this charitable giving opportunity.
There are virtually countless charitable organizations to which you might donate. You may choose to give cash or to contribute noncash items such as books, sporting goods, or computers or other tech gear. In either case, once you do the good deed, you owe it to yourself to properly claim a tax deduction.
No matter what you donate, you’ll need documentation. And precisely what you’ll need depends on the type and value of your donation. Here are five things to know:
1. Cash contributions of less than $250 are the easiest to substantiate. A canceled check or credit card statement is sufficient. Alternatively, you can obtain a receipt from the recipient organization showing its name, as well as the date, place and amount of the contribution. Bear in mind that unsubstantiated contributions aren’t deductible anymore. So you must have a receipt or bank record.
2. Noncash donations of less than $250 require a bit more. You’ll need a receipt from the charity. Plus, you typically must estimate a reasonable value for the donated item(s). Organizations that regularly accept noncash donations typically will provide you a form for doing so. Keep in mind that, for donations of clothing and household items to be deductible, the items generally must be in at least good condition.
3. Bigger cash donations mean more paperwork. If you donate $250 or more in cash, a canceled check or credit card statement won’t be sufficient. You’ll need a contemporaneous written acknowledgment from the recipient organization that meets IRS guidelines.
Among other things, a contemporaneous written acknowledgment must be received on or before the earlier of the date you file your return for the year in which you made the donation or the due date (including an extension) for filing the return. In addition, it must include a disclosure of whether the charity provided anything in exchange. If it did, the organization must provide a description and good-faith estimate of the exchanged item or service. You can deduct only the difference between the amount donated and the value of the item or service.
4. Noncash donations valued at $250 or more and up to $5,000 require still more. You must get a contemporaneous written acknowledgment plus written evidence that supports the item’s acquisition date, cost and fair market value. The written acknowledgment also must include a description of the item.
5. Noncash donations valued at more than $5,000 are the most complicated. Generally, both a contemporaneous written acknowledgment and a qualified appraisal are required — unless the donation is publicly traded securities. In some cases additional requirements might apply, so be sure to contact us if you’ve made or are planning to make a substantial noncash donation. We can verify the documentation of any type of donation, but contributions of this size are particularly important to document properly.
If you’ve looked into retirement planning, you’ve probably heard about the Roth IRA. Maybe in the past you decided against one of these arrangements, or perhaps you just decided to sleep on it. Whatever the case may be, now’s a good time to reacquaint yourself with the Roth IRA and its potential benefits, because you have until April 18, 2016, to make a 2015 Roth IRA contribution.
With a Roth IRA, you give up the deductibility of contributions for the freedom to make tax-free qualified withdrawals. This differs from a traditional IRA, where contributions may be deductible and earnings grow on a tax-deferred basis, but withdrawals (less any prorated nondeductible contributions) are subject to ordinary income taxes — plus a 10% penalty if you’re under age 59½ at the time of the distribution.
With a Roth IRA, you can withdraw your contributions tax-free and penalty-free anytime. Withdrawals of account earnings (considered made only after all your contributions are withdrawn) are tax-free if you make them after you’ve had the Roth IRA for five years and you’re age 59½ or older. Earnings withdrawn before this time are subject to ordinary income taxes, as well as a 10% penalty (with certain exceptions) if withdrawn before you are age 59½.
On the plus side, you can leave funds in your Roth IRA as long as you want. This differs from the required minimum distributions starting after age 70½ for traditional IRAs.
For 2016, the annual Roth IRA contribution limit is $5,500 ($6,500 for taxpayers age 50 or older), reduced by any contributions made to traditional IRAs. Your modified adjusted gross income (MAGI) may also affect your ability to contribute, however.
In 2016, the contribution limit phases out for married couples filing jointly with MAGIs between $184,000 and $194,000. The 2016 phaseout range for single and head-of-household filers is $117,000 to $132,000.
Regardless of MAGI, anyone may convert a traditional IRA into a Roth to turn future tax-deferred potential growth into tax-free potential growth. From an income tax perspective, whether a conversion makes sense depends on whether you’re better off paying tax now or later.
When you do a Roth conversion, you have to pay taxes on the amount you convert. So if you expect your tax rate to be higher in retirement than it is now, converting to a Roth may be advantageous — provided you can afford to pay the tax using funds from outside an IRA. If you expect your tax rate to be lower in retirement, however, it may make more sense to leave your savings in a traditional IRA or employer-sponsored plan.
Roth IRAs have become a fundamental part of retirement planning. Even if you’re not ready for one just yet, be sure to keep the idea of opening one on your radar.
Some married couples assume they have to file their tax returns jointly. Others may know they have a choice but not want to rock the boat by filing separately. The truth is that there’s no harm in at least considering your options every year.
Granted, married taxpayers who file jointly can take advantage of certain credits not available to separate filers. They’re also more likely to be able to make deductible IRA contributions and less likely to be subject to the alternative minimum tax.
But there are circumstances under which filing separately may be a good idea. For example, filing separately can save tax when one spouse’s income is much higher than the others, and the spouse with lower income has miscellaneous itemized deductions exceeding 2% of his or her adjusted gross income (AGI) or medical expenses exceeding 10% of his or her AGI — but jointly the couple’s expenses wouldn’t exceed the applicable floor for their joint AGI. However, in community property states, income and expenses generally must be split equally unless they’re attributable to separate funds.
Many factors play into the joint vs. separate filing decision. If you’re interested in learning more, please give us a call.
Tax-related fraud isn’t a new crime, but tax preparation software, e-filing and increased availability of personal data have made tax-related identity theft increasingly easy to perpetrate. The IRS is taking steps to reduce such fraud, but taxpayers must play their part, too.
How they do it
Criminals perpetrate tax identity theft by using stolen Social Security numbers and other personal information to file tax returns in their victims’ names. Naturally, the fake returns claim that the filer is owed a refund — and the bigger, the better.
To ensure they’re a step ahead of taxpayers filing legitimate returns and employers submitting W-2 and 1099 forms, the thieves file early in the tax season. They usually request that refunds be made to debit cards, which are hard for the IRS to trace once they’re distributed.
IRS takes action
The increasing rate of tax-related fraud — not to mention the well-publicized 2015 IRS data breach — has spurred government agencies and private sector businesses to act. This past June, a coalition made up of the IRS, state tax administrators, tax preparation services and payroll and tax product processors announced a new program with five initiatives:
1. Taxpayer identification. Coalition members will review transmission data such as Internet Protocol numbers.
2. Fraud identification. Members will share fraud leads and aggregated tax return information.
3. Information assessment. The Refund Fraud Information Sharing and Assessment Center will help public and private sector members share information.
4. Cybersecurity framework. Members will be required to adopt the National Institute of Standards and Technology cybersecurity framework.
5. Taxpayer awareness and communication. Members will increase efforts to inform the public about identity theft and protecting personal data.
Your role in preventing fraud
But the IRS and tax preparation professionals can’t fight fraud without your help. Be sure to keep your Social Security card secure, and if businesses (including financial institutions and medical providers) request your Social Security number, ensure they need it for a legitimate purpose and have taken precautions to keep your data safe. Also regularly review your credit report. You can obtain free copies from all three credit bureaus once a year.
If you’ve accumulated many bank, investment and other financial accounts over the years, you might consider consolidating some of them. Having multiple accounts requires you to spend more time tracking and reconciling financial activities and can make it harder to keep a handle on how much you have and whether your money is being invested advantageously.
Start by identifying the accounts that offer you the best combination of excellent customer service, convenience, lower fees and higher returns. Hold on to these and consider closing the rest, keeping in mind the bank account amounts you’ll be consolidating. The Federal Deposit Insurance Corporation generally insures $250,000 per depositor, per insured bank. So if consolidation means that your balance might exceed that amount, it’s better to keep multiple accounts. You should also keep accounts with different beneficiaries separate.
When closing accounts, make sure you stop automatic payments or deposits and destroy checks and cards associated with them. To prevent any future disputes, obtain letters from the financial institutions stating that your accounts have been closed. Closing an account generally takes several weeks.
When you sell a capital asset, the sale results in a capital gain or loss. A capital asset includes most property you own for personal use (such as your home or car) or own as an investment (such as stocks and bonds). Here are some facts that you should know about capital gains and losses:
• Gains and losses. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.
• Net investment income tax (NIIT). You must include all capital gains in your income, and you may be subject to the NIIT. The NIIT applies to certain net investment income of individuals who have income above statutory threshold amounts: $200,000 if you are unmarried, $250,000 if you are a married joint-filer, or $125,000 if you use married filing separate status. The rate of this tax is 3.8%.
• Deductible losses. You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.
• Long- and short-term. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.
• Net capital gain. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain.
• Tax rate. The capital gains tax rate, which applies to long-term capital gains, usually depends on your taxable income. For 2015, the capital gains rate is zero to the extent your taxable income (including long-term capital gains) does not exceed $74,900 for married joint-filing couples ($37,450 for singles). The maximum capital gains rate of 20% applies if your taxable income (including long-term capital gains) is $464,850 or more for married joint-filing couples ($413,200 for singles); otherwise a 15% rate applies. However, a 25% or 28% tax rate can also apply to certain types of long-term capital gains. Short-term capital gains are taxed at ordinary income tax rates.
• Limit on losses. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
• Carryover losses. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year's tax return. You will treat those losses as if they happened in that next year.
Yes, that is too good to be true, but we got your attention. As you are painfully aware, it is extremely difficult to earn much, if any, interest on savings, money market funds, or CDs these days. So, what are we to do? Well, one way to improve the earnings on those idle funds is to pay down debt. Paying off a home loan having an interest rate of 5% with your excess liquid assets is just like earning 5% on those funds. The same goes for car loans and other installment debt. But, the best return will more likely come from paying off credit card debt! We are not suggesting you reduce liquid assets to an unsafe level, but examine the possibility of paying off some of your present debt load with your liquid funds. Paying down $100,000 on a 5% home loan is like making more than $400 per month on those funds.
Your health insurance company may request that you provide the Social Security Numbers (SSNs) for you, your spouse, and your children covered by your policy. This is because the Affordable Care Act requires every provider of minimum essential coverage to report that coverage by filing an information return with the IRS and furnishing a statement to covered individuals. The information is used by the IRS to administer — and by individuals to show compliance with — the health care law.
Health coverage providers will file an information return (Form 1095-B, “Health Coverage”) with the IRS and will furnish statements to you in 2016 to report coverage information from calendar year 2015. The law requires coverage providers to list SSNs on this form. If you don’t provide your SSN and the SSNs of all covered individuals to the sponsor of the coverage, the IRS may not be able to match the Form 1095-B with the individuals to determine that they have complied with the individual shared responsibility provision.
Your health insurance company may mail you a letter that discusses these new rules and requests SSNs for all family members covered under your policy. The IRS has not designated a specific form for your health insurance company to request this information. However, it should be a written request that is mailed to you through the U.S. Postal Service, not emailed to you. If you receive an email request, it could be a phishing attempt by a hacker who is aware of this requirement, so be cautious and take precautions to protect yourself. Don’t respond directly to the email. Instead, call the insurance company at its main number (not any number contained in the email) or go directly to the insurance company’s website (not from the link or to an address contained in the email) to verify the request.
The Form 1095-B will provide information for your income tax return that shows you, your spouse, and individuals you claim as dependents had qualifying health coverage for some or all months during the year. You do not have to attach Form 1095-B to your tax return. However, it is important to keep it with your other important tax documents.
Anyone on your return who does not have minimum essential coverage, and who does not qualify for an exemption, may be liable for the individual shared responsibility payment.
The information received by the IRS will be used to verify information on your individual income tax return. If you refuse to provide this information to your health insurance company, the IRS cannot verify the information you provide on your tax return, and you may receive an inquiry from the IRS. You also may receive a notice from the IRS indicating that you are liable for the individual shared responsibility payment.
Continuing to work while receiving Social Security benefits may cause the benefit to be reduced below the anticipated amount. If you are under the full retirement age (currently 66), an earnings test determines whether your Social Security retirement benefits will be reduced because you earned more from a job or business than an annual exempt amount.
As a general rule, the earnings test is based on income earned during the year as a whole, without regard to the amount you earned each month. However, in the first year, benefits you receive are not reduced for any month in which you earn less than one-twelfth of the annual exempt amount.
For 2015, Social Security beneficiaries under the full benefit retirement age who have earnings in excess of the annual exempt amount are subject to a $1 reduction in benefits for each $2 earned over the exempt amount ($15,720 in 2015) for each year before the year during which they reach the full benefit retirement age. However, in the year beneficiaries reach their full benefit retirement age, earnings above a different annual exempt amount ($41,880 in 2015) are subject to a $1 reduction in benefits for each $3 earned over the exempt amount. Social Security benefits are not affected by earned income beginning with the month the beneficiary reaches full benefit retirement age.
The federal income tax rates for 2015 are the same as last year: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. However, the rate bracket beginning and ending points are increased slightly to account for inflation. For 2015, the maximum 39.6% bracket affects singles with taxable income above $413,200, married joint-filing couples with income above $464,850, heads of households with income above $439,000, and married individuals who file separate returns with income above $232,425. Higher-income individuals can also get hit by the 0.9% additional Medicare tax on wages and self-employment income and the 3.8% net investment income tax (NIIT), which can both result in a higher-than-advertised marginal federal income tax rate for 2015.
What we’ve listed below are a few money-saving ideas to get you started that you may want to put in action before the end of 2015:
• For 2015, the standard deduction is $12,600 for married taxpayers filing joint returns. For single taxpayers, the amount is $6,300. If your total itemized deductions each year are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions, such as charitable contributions and property taxes, in every other year. This allows you to time your itemized deductions so they are high in one year and low in the next. However, the alternative minimum tax (AMT), discussed later in this article, should be considered when using this strategy.
• If you or a family member own traditional IRAs and reached age 70½ this year, consider whether it’s better to take the first required minimum distribution in 2015 or by April 1 of next year.
• If your employer offers a Flexible Spending Account arrangement for your out-of-pocket medical or child care expenses, make sure you’re maximizing the tax benefits during the upcoming enrollment period for 2016.
• If you have a 401(k) plan at work, it’s just about time to tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free money” when you fail to participate with the maximum amount the company will match.
• If it looks like you are going to owe income taxes for 2015, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year.
• Between now and year end, review your securities portfolio for any losers that can be sold before year end to offset gains you have already recognized this year or to get you to the $3,000 ($1,500 married filing separately) net capital loss that’s deductible each year.
• If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year.
• Don’t overlook estate planning. For 2015, the unified federal gift and estate tax exemption is a generous $5.43 million, and the federal estate tax rate is a historically reasonable 40%. Even if you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. Also, you may need to make some changes that have nothing to do with taxes.
• If you are self-employed, consider employing your child. Doing so shifts income (which is not subject to the “kiddie tax”) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings and the ability to contribute to an IRA for the child.
• If you own an interest in a partnership or S corporation that you expect to generate a loss this year, you may want to make a capital contribution (or in the case of an S corporation, loan it additional funds) before year end to ensure you have sufficient basis to claim a full deduction.
Remember that effective tax planning requires considering at least this year and next year. Without a multiyear outlook, you can’t be sure maneuvers intended to save taxes on your 2015 return won’t backfire and cost additional money in the future.
And finally, watch out for the AMT in all of your planning, because what may be a great move for regular tax purposes may create or increase an AMT problem. There’s a good chance you’ll be hit with AMT if you deduct a significant amount of state and local taxes, claim multiple dependents, exercise incentive stock options, or recognize a large capital gain this year.
Again, these are just a few suggestions to get you thinking. If you’d like to know more about them or want to discuss other ideas, please feel free to call us.
Adult children may be able to acquire a more expensive home than they might otherwise afford by using a shared equity financing arrangement, under which parents or other relatives share in the purchase and cost of maintaining a house used by the children as a principal residence. The nonresident owner rents his or her portion of the home to the resident owner and obtains the annual tax benefits of renting real estate if the statutory requirements are satisfied. Since the child does not own 100% of the home, he or she is the relative’s tenant as to the portion of the home not owned and rents that interest from the relative at a fair market rate.
A shared equity financing arrangement is an agreement by which two or more persons acquire qualified home ownership interests in a dwelling unit and the person (or persons) holding one of the interests is entitled to occupy the dwelling as his or her principal residence, and is required to pay rent to the other person(s) owning qualified ownership interests.
Under the vacation home rules, personal use of the home by a child or other relative of the property’s owner is normally attributed to the owner. However, an exception to the general rule exists when the dwelling is rented to a tenant for a fair market rent and serves as the renter’s principal residence. When the tenant owns an interest in the property, this exception to the general rule applies only if the rental qualifies as a shared equity financing arrangement.
Example: Shared equity financing arrangement facilitates child’s home ownership.
Mike and Laura have agreed to help their son, Bob, purchase his first home. The total purchase price is $100,000, consisting of a $20,000 down payment and a mortgage of $80,000. Mike and Laura pay half of the down payment and make half of the mortgage payment pursuant to a shared equity financing agreement with Bob. Bob pays them a fair rental for using 50% of the property, determined when the agreement was entered into.
Under this arrangement, Bob treats the property as his personal residence for tax purposes, deducting his 50% share of the mortgage interest and property taxes. Because his use is not attributed to his parents, Mike and Laura, they treat the property as rental. They must report the rent they receive from Bob, but can deduct their 50% share of the mortgage interest and taxes, the maintenance expenses they pay, and depreciation based on 50% of the property’s depreciable basis. If the property generates a tax loss, it is subject to, and its deductibility is limited by, the passive loss rules.
One drawback to shared equity arrangements is that the nonresident owners will not qualify for the gain exclusion upon the sale of the residence. The result will be a taxable gain for the portion of the gain related to the deemed rental. The gain may also be subject to the 3.8% net investment income tax (NIIT). Parents should consider guaranteeing or cosigning the mortgage, instead of outright joint ownership, if excluding potential future gain is a major consideration.
If it is anticipated that the resident owner will ultimately purchase the equity of the nonresident owner and the rental will generate losses suspended under the passive loss rules, special care must be taken when the lease terms are agreed to, because suspended passive losses normally allowed at disposition are not allowed when the interest is sold to a related party. This problem can be minimized by making a larger down payment that decreases mortgage interest expense, or by charging a rent at the higher end of the reasonable range for the value of the interest being rented to the resident owner.
The net investment income tax, or NIIT, is a 3.8% surtax on investment income collected from higher-income individuals. It first took effect in 2013. After filing your 2014 return, you may have been hit with this extra tax for two years, and you may now be ready to get proactive by taking some steps to stop, or at least slow, the bleeding for this year and beyond.
NIIT Basics. The NIIT can affect higher-income individuals who have investment income. While the NIIT mainly hits folks who consistently have high income, it can also strike anyone who has a big one-time shot of income or gain this year or any other year. For example, if you sell some company stock for a big gain, get a big bonus, or even sell a home for a big profit, you could be a victim. The types of income and gain (net of related deductions) included in the definition of net investment income and, therefore, exposed to the NIIT, include—
• Gains from selling investment assets (such as gains from stocks and securities held in taxable brokerage firm accounts) and capital gain distributions from mutual funds.
• Real estate gains, including the taxable portion of a big gain from selling your principal residence or a taxable gain from selling a vacation home or rental property.
• Dividends, taxable interest, and the taxable portion of annuity payments.
• Income and gains from passive business activities (meaning activities in which you don’t spend a significant amount of time) and gains from selling passive partnership interests and S corporation stock (meaning you don’t spend much time in the partnership or S corporation business activity).
• Rents and royalties.
Are You Exposed? Thankfully, you are only exposed to the NIIT if your Modified Adjusted Gross Income (MAGI) exceeds $200,000 if you are unmarried, $250,000 if you are a married joint-filer, or $125,000 if you use married filing separate status. However, these thresholds are not all that high, so many individuals will be exposed. The amount that is actually hit with the NIIT is the lesser of: (1) net investment income or (2) the amount by which your MAGI exceeds the applicable threshold. MAGI is your “regular” Adjusted Gross Income (AGI) shown on the last line on page 1 of your Form 1040 plus certain excluded foreign-source income net of certain deductions and exclusions (most people are not affected by this add-back).
Planning Considerations. As we just explained, the NIIT hits the lesser of: (1) net investment income or (2) the amount by which MAGI exceeds the applicable threshold. Therefore, planning strategies must be aimed at the proper target to have the desired effect of avoiding or minimizing your exposure to the tax.
• If your net investment income amount is less than your excess MAGI amount, your exposure to the NIIT mainly depends on your net investment income. You should focus first on strategies that reduce net investment income. Of course, some strategies that reduce net investment income will also reduce MAGI. If so, that cannot possibly hurt.
• If your excess MAGI amount is less than your net investment income amount, your exposure to the tax mainly depends on your MAGI. You should focus first on strategies that reduce MAGI. Of course, some strategies that reduce MAGI will also reduce net investment income. If so, that cannot possibly hurt.
Perhaps the most obvious way to reduce exposure to the NIIT is to invest in tax-exempt bonds via direct ownership or a mutual find. There are other ways, too. Contact us to identify strategies that will work in your specific situation.
Since the Supreme Court's 2013 Windsor decision, same-sex couples who are legally married under state or foreign laws are treated as married for federal tax purposes just like any other married couple. The Supreme Court's Obergefell decision (issued in late June) now requires all states to license and recognize marriages between same-sex couples. Specifically, the decision states that same-sex couples can exercise the fundamental right to marry in all states and that there is no lawful basis for a state to refuse to recognize a lawful same-sex marriage performed in another state.
Therefore, same-sex couples who are legally married in any state are now allowed to file joint state income tax returns wherever they reside. They are also entitled to the same inheritance and property rights and rules of intestate succession that apply to other legally married couples. Therefore, same-sex couples should now be able to amend previously filed state income, gift, and inheritance tax returns for open years to reflect married status and claim refunds. Furthermore, these couples likely need to rethink their estate and gift tax plans.
Before the Obergefell decision, members of married same-sex couples who live in states that did not previously recognize same-sex marriages had to file state income, gift, and inheritance tax returns as unmarried individuals. This caused additional complexity and expense in filing state returns.
Other implications of an individual's marital status include spousal privilege in the law of evidence; hospital access; medical decision-making authority; adoption rights; the rights and benefits of survivors; birth and death certificates; professional ethics rules; campaign finance restrictions; workers' compensation benefits; health insurance; and child custody, support, and visitation rights.
Note: The ruling does not apply to individuals in registered domestic partnerships, civil unions, or similar formal relationships recognized under state law, but not denominated as a marriage under the laws of that state. These individuals are considered unmarried for federal and state purposes. However, these state-law “marriage substitutes” might be eliminated now that all states must allow same-sex marriages. Individuals in these relationships can now obtain marriage licenses, get married, and thereby qualify as married individuals for both state and federal tax purposes.
Most of us have more than enough to do. We're on the go from early in the morning until well into the evening — six or seven days a week. Thus, it's no surprise that we may let some important things slide. We know we need to get to them, but it seems like they can just as easily wait until tomorrow, the next day, or whenever.
A U.S. Supreme Court decision reminds us that sometimes "whenever" never gets here and the results can be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named his wife, Liv, as his beneficiary in 1974 shortly after they married. The couple divorced 20 years later. As part of the divorce decree, Liv waived her rights to benefits under William's employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.
When William died, Liv was still listed as his beneficiary. So, the plan paid the $400,000 to Liv. William's estate sued the plan, saying that because of Liv's waiver in the divorce decree, the funds should have been paid to the estate. The Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. William's designation of Liv as his beneficiary was done in the way the plan required; Liv's waiver was not. Thus, the plan rightfully paid $400,000 to Liv.
The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan's beneficiary form), the outcome could have been quite different and much less tragic. However, it still would have taken a lot of effort and expense to get there. This leads us to a couple of important points.
If you want to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, use the plan's official beneficiary form rather than depending on an indirect method, such as a will or divorce decree.
It's important to keep your beneficiary designations up to date. Whether it is because of divorce or some other life-changing event, beneficiary designations made years ago can easily become outdated.
One final thought regarding beneficiary designations: While you're verifying that all of your beneficiary designations are current, make sure you've also designated secondary beneficiaries where appropriate. This is especially important with assets such as IRAs, where naming both a primary and secondary beneficiary can potentially allow payouts from the account to be stretched out over a longer period and maximize the time available for the tax deferral benefits to accrue.
A Health Savings Account (HSA) represents an opportunity for eligible individuals to lower their out-of-pocket health care costs and federal tax bill. Since most of us would like to take advantage of every available tax break, now might be a good time to consider an HSA, if eligible.
An HSA operates somewhat like a Flexible Spending Account (FSA) that employers offer to their eligible employees. An FSA permits eligible employees to defer a portion of their pay, on a pretax basis, which is used later to reimburse out-of-pocket medical expenses. However, unlike an FSA, whatever remains in the HSA at year end can be carried over to the next year and beyond. In addition, there are no income phaseout rules, so HSAs are available to high-earners and low-earners alike.
Naturally, there are a few requirements for obtaining the benefits of an HSA. The most significant requirement is that an HSA is only available to an individual who carries health insurance coverage with a relatively high annual deductible. For 2015, the individual's health insurance coverage must come with at least a $1,300 deductible for single coverage or $2,600 for family coverage. For many self-employed individuals, small business owners, and employees of small and large companies alike, these thresholds won't be a problem. In addition, it's okay if the insurance plan doesn't impose any deductible for preventive care (such as annual checkups). Other requirements for setting up an HSA are that an individual can't be eligible for Medicare benefits or claimed as a dependent on another person's tax return.
Individuals who meet these requirements can make tax-deductible HSA contributions in 2015 of up to $3,350 for single coverage or $6,650 for family coverage. The contribution for a particular tax year can be made as late as April 15 of the following year. The deduction is claimed in arriving at adjusted gross income (the number at the bottom of page 1 on your return). Thus, eligible individuals can benefit whether they itemize or not. Unfortunately, however, the deduction doesn't reduce a self-employed person's self-employment tax bill.
When an employer contributes to an employee's HSA, the contributions are exempt from federal income, Social Security, Medicare, and unemployment taxes.
An account beneficiary who is age 55 or older by the end of the tax year for which the HSA contribution is made may make a larger deductible (or excludible) contribution. Specifically, the annual tax-deductible contribution limit is increased by $1,000.
An HSA can generally be set up at a bank, insurance company, or other institution the IRS deems suitable. The HSA must be established exclusively for the purpose of paying the account beneficiary's qualified medical expenses. These include uninsured medical costs incurred for the account beneficiary, spouse, and dependents. However, for HSA purposes, health insurance premiums don't qualify.
You may be tempted to forget all about your taxes once you've filed your tax return, but that's not a good idea. If you start your tax planning now, you may avoid a tax surprise when you file next year. Also, now is a good time to set up a system so you can keep your tax records safe and easy to find. Here are some tips to give you a leg up on next year's taxes:
Take action when life changes occur. Some life events (such as marriage, divorce, or the birth of a child) can change the amount of tax you pay. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4 (“Employee's Withholding Allowance Certificate”) with your employer. If you make estimated payments, those may need to be changed as well.
Keep records safe. Put your 2014 tax return and supporting records in a safe place. If you ever need your tax return or records, it will be easy for you to get them. You'll need your supporting documents if you are ever audited by the IRS. You may need a copy of your tax return if you apply for a home loan or financial aid.
Stay organized. Make tax time easier. Have your family put tax records in the same place during the year. That way you won't have to search for misplaced records when you file next year.
If you are self-employed, here are a couple of additional tax tips to consider:
Employ your child. Doing so shifts income (which is not subject to the “kiddie tax”) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings; plus, the earnings can enable the child to contribute to an IRA. However, the wages paid must be reasonable given the child's age and work skills. Also, if the child is in college, or is entering soon, having too much earned income can have a detrimental impact on the student's need-based financial aid eligibility.
Avoid the hobby loss rules. A lot of businesses that are just starting out or have hit a bump in the road may wind up showing a loss for the year. The last thing the business owner wants in this situation is for the IRS to come knocking on the door arguing the business's losses aren't deductible because the activity is just a hobby for the owner. If your business is expecting a loss this year, we should talk as soon as possible to make sure you do everything possible to maximize the tax benefit of the loss and minimize its economic impact.
If you go on a business trip within the U.S. and add on some vacation days, you know you can deduct some of your expenses. The question is how much.
First, let’s cover just the pure transportation expenses. Transportation costs to and from the scene of your business activity are 100% deductible as long as the primary reason for the trip is business rather than pleasure. On the other hand, if vacation is the primary reason for your travel, then generally none of your transportation expenses are deductible. Transportation costs include travel to and from your departure airport, the airfare itself, baggage fees and tips, cabs, and so forth. Costs for rail travel or driving your personal car also fit into this category.
The number of days spent on business vs. pleasure is the key factor in determining if the primary reason for domestic travel is business. Your travel days count as business days, as do weekends and holidays if they fall between days devoted to business, and it would be impractical to return home. Standby days (days when your physical presence is required) also count as business days, even if you are not called upon to work on those days. Any other day principally devoted to business activities during normal business hours is also counted as a business day, and so are days when you intended to work, but could not due to reasons beyond your control (local transportation difficulties, power failure, etc.).
You should be able to claim business was the primary reason for a domestic trip whenever the business days exceed the personal days. Be sure to accumulate proof and keep it with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take some notes to show you attended the sessions.
Once at the destination, your out-of-pocket expenses for business days are fully deductible. Out-of-pocket expenses include lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days are nondeductible.
If you're looking for a CPA in Las Vegas, Boehme & Boehme has the answers. A good CPA firm in Las Vegas is hard to find. You can trust that Boehme & Boehme is committed to providing our clients with reliable, professional, personalized services and guidance in a wide range of finanåcial and business needs. We provide high quality tax, accounting, and consulting services to a variety of clients worldwide. Give us a call today (702) 871-9393.
In its efforts to combat identity theft, the IRS is stopping suspicious tax returns that have indications of being identity theft, but contain a real taxpayer’s name and/or Social Security number, and sending out Letter 5071C to request that the taxpayer verify his or her identity.
Letter 5071C is mailed through the U.S. Postal Service to the address on the return. It asks taxpayers to verify their identities in order for the IRS to complete processing of the returns if the taxpayers did file it or reject the returns if the taxpayers did not file it.
It is important to understand that the IRS does not request such information via e-mail; nor will the IRS call you directly to ask this information without first sending you a Letter 5071C. The letter number can be found in the upper corner of the page.
Letter 5071C gives you two options to contact the IRS and confirm whether or not you filed the return: You can (1) use the www.idverify.irs.gov site or (2) call a toll-free number on the letter. However, the IRS says that, because of the high volume on its toll-free numbers, the IRS-sponsored website, www.idverify.irs.gov, is the safest, fastest option for taxpayers with Web access.
Before accessing the website, be sure to have your prior-year and current-year tax returns available, including supporting documents, such as Forms W-2 and 1099. You will be asked a series of questions that only the real taxpayer can answer.
Once your identity is verified, you can confirm whether or not you filed the return in question. If you did not file the return, the IRS will take steps at that time to assist you. If you did file the return, it will take approximately six weeks to process it and issue a refund.
You should always be aware of tax scams, efforts to solicit personally identifiable information, and IRS impersonations. However, www.idverify.irs.gov is a secure, IRS-supported site that allows taxpayers to verify their identities quickly and safely. IRS.gov is the official IRS website. Always look for a URL ending with “.gov” — not “.com,” “.org,” “.net,” or other nongovernmental URLs.
A number of charities now ask their donors to consider donating life insurance policies rather than (or in addition to) cash in order to make substantially larger gifts than would otherwise be possible. The advantage to donors is that they can make a sizable gift with relatively little up-front cash (or even no cash, if an existing policy is donated). The fact that a charity may have to wait many years before receiving a payoff from the gift is typically not a problem, because charities normally earmark such gifts for their endowment or long-term building funds.
Of course, good reasons may exist for keeping the policy in force (such as to provide liquidity for a taxable estate or to meet the continuing needs of a surviving spouse or disabled child). Still, for individuals with both excess life insurance and a charitable intent, the donation of a life insurance policy may make sense.
If handled correctly, a life insurance policy donation can net the donor a charitable deduction for the value of the policy. A charitable deduction is also available for any cash contributed in future years to continue paying the premiums on a policy that was not fully paid up at the time it was donated. However, if handled incorrectly, no deduction is allowed. For this reason, we encourage you to contact us if you are considering donating a life insurance policy. We can help ensure that you receive the expected income tax deduction and that the contribution works as planned.
If you have a financial interest in or signature authority over a foreign financial account exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the IRS by filing a Financial Crimes Enforcement Network (FinCEN) Form 114 (“Report of Foreign Bank and Financial Accounts (FBAR)”).
Specifically, for 2014, Form 114 is required to be filed if during the year:
1. You had a financial interest in or signature authority over at least one foreign financial account (which can be anything from a securities, brokerage, mutual fund, savings, demand, checking, deposit, or time deposit account to commodity futures or options, and a whole life insurance or a cash value annuity policy); and
2. The aggregate value of all such foreign financial accounts exceeded $10,000 at any time during 2014.
The FBAR is filed on a separate return basis (that is, joint filings are not allowed). However, a spouse who has only a financial interest in a joint account that is reported on the other spouse’s FBAR does not have to file a separate FBAR.
The 2014 Form 114 must be filed by June 30, 2015, and cannot be extended. Furthermore, it must be filed electronically through http://bsaefiling.fincen.treas.gov/main.html. The penalty for failing to file Form 114 is substantial — up to $10,000 per violation (or the greater of $100,000 or 50% of the balance in an account if the failure is willful).
Please give us a call if you have any questions or would like us to prepare and file Form 114 for you.
If your college-age child is or will be receiving financial aid, congratulations. Now, you’ll probably want to know if the financial aid is taxable. Keep in mind that the economic characteristics of financial aid, rather than how it is titled, will determine its taxability. Strictly speaking, scholarships, fellowships, and grants are usually awards of “free money” that are nontaxable. However, these terms are also sometimes used to describe arrangements involving obligations to provide services, in which case the payments are taxable compensation.
Tax-free awards. Scholarships, fellowships, and grants are awarded based on the student’s financial need or are based on scholastic achievement and merit. Generally, for federal income tax purposes, these awards are nontaxable as long as (1) the recipient is a degree candidate, (2) the award does not exceed the recipient’s “qualified tuition and related expenses” (tuition and enrollment fees, books, supplies, and equipment required for courses, but not room and board or incidental expenses) for the year, (3) the agreement does not expressly designate the funds for other purposes (such as room and board or incidental expenses) or prohibit the use of the funds for qualified education expenses, and (4) the award is not conditioned on the student performing services (teaching, research, or anything else).
Work-study arrangements. If the financial aid is conditioned on the student performing services, the amount that represents payment for such services is taxable income and will be reported on a Form W-2 or Form 1099. This is true even if the work is integrated with the student’s curriculum or if the payment is called a scholarship, fellowship, or grant. Students typically work for the school they’re attending. However, they could work for other employers under the auspices of a work-study program.
Student loans. Naturally, student loan proceeds are not taxable income because the borrowed amounts must be paid back. However, some college education loans are subsidized to allow borrowers to pay reduced interest rates. Fortunately, college loan interest subsidies are nontaxable to the same extent as if they were provided in the form of an outright scholarship, fellowship, or grant. An above-the-line deduction (i.e., available whether or not the borrower itemizes) of up to $2,500 is allowed for interest expense paid by a taxpayer on a loan to fund qualified higher education expenses. The deduction is phased out for taxpayers with adjusted gross income exceeding certain amounts.
What happens when financial aid isn’t free? Fortunately, taxable scholarships, fellowships, grants, and compensation from work-study programs count as earned income. Assuming the student is your dependent, this means that for 2015 he or she can offset this income by his or her standard deduction of the greater of (1) $1,050 or (2) earned income plus $350, up to $6,300. Since taxable scholarships, fellowships, grants, and compensation count as earned income, they increase the student’s standard deduction. If the student isn’t anyone’s dependent for 2015, he or she can offset earned income of up to $10,300 with his or her personal exemption ($4,000) and standard deduction ($6,300). (Dependents are not entitled to a personal exemption.)
Taxable financial aid in excess of what can be offset by the student’s personal exemption (if any) and standard deduction is usually taxed at only 10%. (For 2015, the 10% bracket for single taxpayers applies to taxable income up to $9,225.)
Warning: The “kiddie tax” rules may cause investment income (such as interest, dividend, and capital gains) received by students who are under age 24 to be taxed at the parent’s higher rates instead of at the student’s lower rates. The student’s earned income (including taxable scholarships, fellowships, grants, and compensation) is not subject to the kiddie tax.
Please give us a call if you have questions or want more information.
Besides being the last day to file (or extend) your 2014 personal return and pay any tax that is due, 2015 first quarter estimated tax payments for individuals, trusts, and calendar-year corporations are due today. So are 2014 returns for trusts and calendar-year estates, partnerships, and LLCs, plus any final contribution you plan to make to an IRA or Education Savings Account for 2014. SEP and Keogh contributions are also due today if your return is not being extended.
Second quarter estimated tax payments for individuals, trusts, and calendar-year corporations are due today.
The annual exclusion for gifts remains at $14,000 for 2015. (Married couples can gift up to $28,000 combined.) This limit applies to the total of all gifts, including birthday and holiday gifts, made to the same individual during the year. However, any payment made directly to the medical care provider (for example, doctor, hospital, etc.) or educational organization for tuition is not subject to the gift tax and, therefore, is not included in the $14,000 limit.
So, when paying tuition or large medical bills for parents, grandchildren, or any other person who is not your dependent minor child, be sure to make the payment directly to the organization or service provider. Don’t give the funds to the parent or other individual first and have them pay the school, doctor, or hospital. By doing so, you have made a gift to that person, subject to the $14,000 limit. In summary, make direct payments to schools or medical providers and avoid taxable gifts that could be subject to the gift tax or reduce the payer’s unified credit.
Caution: Direct payments of tuition reduce the student’s eligibility for financial aid on a dollar-for-dollar basis. However, if the gift were made directly to the student, only 20% of the gifted assets would be counted as assets of the student for financial aid purposes. Accordingly, careful analysis of the trade-offs between the gift tax exclusion and impairment of financial aid eligibility should be considered.
The Tax Increase Prevention Act of 2014 (TIPA) was signed into law on December 19, 2014. Thankfully, TIPA retroactively extends most of the federal income tax breaks that would have affected many individuals and businesses through 2014. So, these provisions may have a positive impact on your 2014 returns. Unfortunately, these extended provisions expired again on December 31, 2014. So, unless Congress takes action again, these favorable provisions won’t be available for 2015.
In this article, we will discuss some of the extended provisions impacting individual taxpayers.
Qualified tuition deduction. This write-off, which can be as much as $4,000 for married taxpayers with adjusted gross income up to $130,000 ($65,000 if unmarried) or $2,000 for married taxpayers with adjusted gross income up to $160,000 ($80,000 if unmarried), expired at the end of 2013. TIPA retroactively restored it for 2014.
Tax-free treatment for forgiven principal residence mortgage debt. For federal income tax purposes, a forgiven debt generally counts as taxable Cancellation of Debt (COD) income. However, a temporary exception applied to COD income from canceled mortgage debt that was used to acquire a principal residence. Under the temporary rule, up to $2 million of COD income from principal residence acquisition debt that was canceled in 2007–2013 was treated as a tax-free item. TIPA retroactively extended this break to cover eligible debt cancellations that occurred in 2014.
$500 Energy-efficient Home Improvement Credit. In past years, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. The credit equals 10% of eligible costs for energy-efficient insulation, windows, doors and roof, plus 100% of eligible costs for energy-efficient heating and cooling equipment, subject to a $500 lifetime cap. This break expired at the end of 2013, but TIPA retroactively restored it for 2014.
Mortgage insurance premium deduction. Premiums for qualified mortgage insurance on debt to acquire, construct or improve a first or second residence can potentially be treated as deductible qualified residence interest. The deduction is phased out for higher-income taxpayers. Before TIPA, this break wasn’t available for premiums paid after 2013. TIPA retroactively restored the break for premiums paid in 2014.
Option to deduct state and local sales taxes. In past years, individuals who paid little or no state income taxes had the option of claiming an itemized deduction for state and local general sales taxes. The option expired at the end of 2013, but TIPA retroactively restored it for 2014.
IRA Qualified Charitable Contributions (QCDs). For 2006–2013, IRA owners who had reached age 70½ were allowed to make tax-free charitable contributions of up to $100,000 directly out of their IRAs. These contributions counted as IRA Required Minimum Distributions (RMDs). Thus, charitably inclined seniors could reduce their income tax by arranging for tax-free QCDs to take the place of taxable RMDs. This break expired at the end of 2013, but TIPA retroactively restored it for 2014, so that it was available for qualifying distributions made before 2015.
$250 deduction for K-12 educators. For the last few years, teachers and other eligible personnel at K-12 schools could deduct up to $250 of school-related expenses paid out of their own pockets — whether they itemized or not. This break expired at the end of 2013. TIPA retroactively restored it for 2014.
Unfortunately, as we said at the beginning of this article, none of these favorable provisions will be available for 2015, unless Congress takes further action. This is entirely possible, but far from certain. We’ll keep you posted as the year progresses.
If you are getting a refund this year, here are four good reasons to choose direct deposit:
1. Convenience. With direct deposit, your refund goes directly into your bank account. There's no need to make a trip to the bank to deposit a check.
2. Security. Since your refund goes directly into your account, there’s no risk of your refund check being stolen or lost in the mail.
3. Ease. Choosing direct deposit is easy. You just need to provide us your bank account and routing number and we’ll take care of it.
4. Options. You can split your refund among up to three financial accounts. Checking, savings, and certain retirement, health and education accounts may qualify.
You can have your refund deposited into accounts that are in your own name, your spouse’s name, or both, but not to accounts owned by others. Some banks require both spouses’ names on the account to deposit a tax refund from a joint return. Check with your bank for its direct deposit requirements