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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.