An Earnings Report Review is For Everyone!

It is now easier than ever to check your report           05/02/2025

Most of us go through life without being concerned with, or ever checking on, our Social Security records. We assume the money deducted each payday and an equal amount paid in by our employer is applied properly to this valuable retirement benefit.

Ignoring is problematic

The Social Security Administration (SSA) is being inundated with fraudulent W-2s and 1099s and doesn't have the ability to catch them all. This is creating a high degree of reporting errors, even when a tax return is not filed by identity thieves! In addition, the SSA and your employer occasionally have their own errors. Unfortunately, the only way these problems are caught is if YOU catch them. Waiting until retirement may be too late to correct an error made 10 or 20 years back. Common problems created by these errors and their impact are:

Incorrect amounts. If the SSA does not receive a W-2 wage statement from an employer, you will not see credit for these earnings. Since your Social Security retirement check amount averages your lifetime earnings, if you have earnings that are missing, your retirement check will be permanently lower!

Missing the correct length of time. In addition to receiving credit for earnings, you also need to work 40 quarters or 10 years to be fully eligible for retirement benefits. These missing earnings reports reduce your number of working quarters. Mess up here and you may not qualify for benefits at all!

The three-year correction time limit. Per the SSA, an earnings record can be corrected at any time up to three years, three months, and 15 days after the year in which the wages were paid or the self-employment income was derived. While there are exceptions for fraud and obvious clerical errors, why risk the hassle by not finding errors and fixing them when they happen?

Action to take

Thankfully, it is now easier to confirm the accuracy of your account by going to www.ssa.gov and using the SSA's online tool that allows you to review your historic earnings statements.

To use the tool, you will need to go through a signup process that includes many safety measures to ensure your identity is protected. This is usually done using a tool called ID.me and will require a valid ID and a way to take a photo of yourself and your ID.

Once you log in, review your statement for any errors. If you see an error, takes steps to immediately correct it. You can do this by contacting the SSA:

Telephone:

1.800.772.1213

By mail:

Social Security Administration Office of Earnings Operations

PO Box 33026

Baltimore, MD 21290-3026

Since you may have just completed last year's tax filing, now is a great time to get in the habit of reviewing your Social Security records. It is your future.

Please note: These age triggers outline some of the major tax events that relate to your age. In most cases the impacted year is the year you turn the age on this chart. Example: If your qualified dependent turns 17 any time during the year, they no longer qualify for the Child Tax Credit. This chart is not meant to be all-inclusive and there are exceptions to some of these age qualifications. Use this information to know when to ask for help.

Action step: When you or anyone in your family approaches any of the ages in this chart, it's a sure sign you need to spend some time understanding the tax implications of the age event. Call if this impacts you!

A Guide to Tax Record Retention

04/18/2025

Before you close this year's tax file there is still some work to do. If the IRS or state revenue department selects your return for review, you will need to be prepared. Here is what you need to do now:

Keep a copy of your Form 1040 indefinitely. Do not toss or destroy any of your 1040s. You may need them to correct historic Social Security earnings statements or to prove that you filed a tax return.

Supporting documents need to be retained for three years. Records to support your tax return (i.e., W-2s, 1099s, K-1s, receipts, canceled checks, bank statements and mileage logs) should be kept for a minimum of three years from the later of the tax filing due date, the date you filed your taxes, or the date you paid your tax in full. This approach ensures that your records are available for a potential IRS audit.

Property and investment records need to be held longer. To prove your cost basis and taxable gain or loss, all records relating to property that you own (your home, rental properties, stocks, bonds and other investments) need to be kept for at least three years after its sold or disposed.

Be mindful of other record retention requirements. The three-year period is the federal guidance for standard returns. There are other factors that should be considered, including:

State record retention requirements (often six months to one year longer)

Requirements for insurance, banking, or estate management

Additional federal requirements for tax returns including unreported income (six years), worthless securities (seven years) or bad debt (seven years)

No audit time limit for fraudulent returns

A specific filing system is not required, but organization is key. The ability to easily find your documents in the event of an audit will make the process much simpler. Here are some tips:

File records by year rather than income or deduction type.

Within the file, order your records to match the flow of the Form 1040.

Consider scanning your files to create a digital file as a backup.

Create 2025 files now to save documents for the current year.

Shred old documents; don't just throw them away.

If you are unsure whether to retain or shred something, keep it unless you know the document can be replaced.

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

Now is the time to pay your taxes AND make your estimated tax payment.              04/11/2025

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

First quarter due date: Tuesday, April 15, 2025

The estimated tax payment rule

You are required to withhold or prepay throughout the 2025 tax year at least 90 percent of your 2024 total tax bill, or 100 percent of your 2025 federal tax bill.* A quick look at your 2024 tax return and a projection of your 2025 tax obligation can help determine if a quarterly payment might be necessary in addition to what is being withheld from any paychecks.

Things to consider

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

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

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

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

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

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

If your income is more than $150,000 ($75,000 if married filing separate), you must pay 110 percent of your 2024 tax obligation to avoid an underpayment penalty on your 2025 tax return.

Tax Bill Payment Options Expand Digitally

Understand the options and costs               04/04/2025

As the payment alternatives continue to evolve in the economy, so too are the payment options available to you to pay your tax bill. Here is what's available to you this tax filing season along with each option's related costs.

Various payment methods to pay taxes

1. Electronic funds withdrawal. This comes out of the checking or savings account noted on your 1040 tax return. There is no charge for this service.

2. Send in a check. Use an IRS voucher for this. Write your check out to the U.S. Treasury and send it via certified mail.

3. Pay with a credit card. The IRS provides two vendors (called merchant banks) for this service: Pay1040 and ACI Payments. There is an interchange rate charged to you ranging from 1.75% to 1.85% with a minimum fee of $2.50.

4. Pay with a debit card. Again, there are various services that provide this with a fee of $2.10 to $2.15.

5. Pay by digital wallet or cash. This usually involves a $1.50 fee

6. Drop off cash payment, including to one of 60,000 locations. Yes, you can still bring in your tax payment to designated locations and pay in cash. If this is the option you take, you will need an appointment. Details can be found here.

Available payment suppliers

Debit/Credit: Visa, Mastercard, Discover, American Express, Star, Pulse, NCYE, ACCEL, AFFN, Cirrus, Interlink, Jeanie, Shazam, Maestro

Digital Wallet: Click to Pay, PayPal, Venmo

Cash: Vanilla Direct

Those Pesky Delays

Here are some of the common causes                03/28/2025

Wondering why your tax return is not finished? The delay can often come from one or two items that were overlooked and are needed to complete your tax return. Here are some of the most common:

Missing statements. This includes all W-2s and 1099s, including any related to gambling winnings, income, interest, and mutual funds.

Details on basis. If you sell stock, a house or other property, you need to provide the date you purchased the item, along with the cost and condition of the item when purchased. You also need to ensure that all the costs are included. In the case of stock sales, this includes items like broker fees and surrender charges. And if you are reinvesting dividends, the cost of all those repurchases are also part of your basis in the stock!

Dependent conflict. You claim a dependent on your tax return, but your child claimed themselves as a dependent or an ex-spouse has already filed a tax return with the same dependent's Social Security number.

Mismatched names. You recently got married, but did not change your name with the Social Security Administration.

Digital asset details. Just like details required when you sell other property, you will need to provide the details on ALL transactions related to digital currency and other digital assets. Also remember to acknowledge whether you own any digital assets. This simple omission can hold up filing your tax return.

Missing documentation for deductions. Common among these are: charitable contribution statements, medical expense documents, childcare forms, property tax forms, home sales records, pension statements, and retirement forms.

Waiting for your review. You need to sign your tax return and/or return a signed Form 8879 saying your return is ready to file electronically.

Receiving documentation late. The closer to the April filing deadline your documents are received, the greater the potential back log of tax return processing you'll encounter. When it comes to tax return processing (and receiving a refund), the early bird not only gets the worm, it also gets the worm faster!

If you're requested to provide a missing item, the sooner you can provide the information the better. It always takes a bit more time to review your return after setting it aside for a missing document or piece of information.

Common Overlooked Taxable Events

03/21/2025

Here are seven tax topics that seem innocent but can cause problems if not handled correctly.

1. Gambling winnings. If you receive a tax form at a casino for your winnings, that information is sent to the tax authorities. Since the form typically only contains the amount you won, save copies and records of any gambling losses.

2. Maturing CDs. Be careful with maturing CD’s in a retirement account that are rolled over into new CDs. Normally it is straight forward and the interest is reported on a 1099-INT. However, with increasing interest rates, many are once again using CD's in retirement accounts. So pay attention as your financial institution may provide you with tax forms showing the maturing CD as a distribution, but not report it as a rollover. You will need to account for this on your tax return. In this case, there is not a taxable event, but the IRS may think there is!

3. Retirement distributions. Make note of any distributions from your retirement accounts and note the type of account. You should receive Form 1099s for the distributions. Depending on your age and the type of retirement account, a number of tax surprises could occur if not properly recorded. This includes early withdrawal penalties, potential required minimum distribution penalties, and income tax on the withdrawals.

4. Gifts over $18,000. If you provide gifts in excess of $18,000 ($36,000 for a couple) to any one person during the year, you must fill out a gift tax return.

5. Contemporaneous documentation. The time to put together proper documentation to support your deductions is when the activity takes place. For example, if you misplace a receipt for a charitable donation, you can go back to the organization and ask for a copy of the old receipt, but a new receipt to replace the one you lost is not valid documentation. Common areas where this is important are with charitable contributions, mileage logs, and other itemized deductions.

6. Unemployment income. Unless specifically excluded by the federal government, unemployment income is taxable. Many taxpayers become surprised by an unwanted tax bill if federal withholdings are not taken out of these payments.

7. Digital assets. If you have any transactions during the year using digital assets (cryptocurrency), you have a taxable event. This is because digital assets are seen as property in the eyes of the IRS. This means long and short term capital gains come into play. And if you use digital assets to purchase other capital goods, then you have two potential taxable transactions!

ALERT: Small Business Beneficial Ownership Reporting Update

03/14/2025

The requirement to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) is now not to be actively enforced or fined per recent announcements from the US Treasury and FinCEN.

Background

The Corporate Transparency Act requires most small businesses to file a report on FinCEN.gov to report their owners with confirmed identification or face substantial fines and penalties. There are approximately 20 exceptions to this rule, but basically if you filed business organizational documents with a state entity you probably need to file the form.

Almost as soon as the law was enacted, it began facing numerous legal challenges. The filing deadline was delayed, then re-enacted, then delayed again. Those supporting the rule believe the filings will help law enforcement more readily identify fake companies and bad players. Those against the requirement consider it government overreach and believe the information can be found elsewhere.

Current Situation

Both FinCEN and the Treasury Department say they will no longer enforce the law, nor impose penalties for any firm that does not meet the current March 21st filing deadline. Does this mean the law is dead? Not technically, as the law is not rescinded. It is just not being enforced.

What to do now

If you have not filed your BOI form at www.fincen.gov, you will not be penalized or forced to do so at this time.

If you wish to file your report, the site is still available and your report may be filed.

Since the law is still in place, the requirements, penalties and fines may be reinstated. The likelihood of this happening during the current administration is remote at best.

FinCEN will still be modifying requirements to try and identify questionable businesses, so there may be announcements in the future.

If you are interested, here is a link to the announcement from the Treasury Department.

Understanding the Tax Gap

Voluntary tax compliance is measured      03/07/2025

While more and more legislation is introduced that penalizes all of us for doing things wrong on our tax returns, please remember that at its origin, tax collection in the U.S. is a voluntary. In other words, the tax code is defined, we are given due dates, and the government asks us to voluntarily comply.

When you don’t, there are late filing penalties, underpayment penalties, fines, fees, interest and other imposed compliance incentives including audits. To help guide Congress and the Treasury department, there are ongoing studies conducted to try to calculate the trends in non-compliance.

The Tax Gap

The result of this research is an estimate known as the Tax Gap. As you can imagine, calculating this Tax Gap is made very complicated due to the complex nature of the tax code. Here is the IRS’s most recent Tax Gap projection.

The Impact of IRS Layoffs

02/28/2025

During the recent chaos of Federal employment moves over the past couple of weeks, two actions will impact how filing your tax return this year could go and how to prepare accordingly.

Voluntary termination

After being offered voluntary termination, approximately 75,000 employees across all departments of the federal government took up the executive branch’s offer. What isn't known at this time is what areas of government services will be impacted.

6,500 terminations at the IRS

As part of the executive branch’s trimming of the government, all newly-hired IRS employees were terminated. This includes about 6,500 new hires (approximately 6% of all IRS employees) as part of the IRS's recent workforce expansion. For those that follow the news, this trimming appears to be politically motivated as the recent expansion of their workforce was a fairly partisan affair.

What it means for you this tax season

The remaining staff are unsettled. There will be greater workload, sadness, and uncertainty about job security for the remaining staff at the IRS. This means getting your questions answered may be more difficult.

IMPACT: If you need a question answered by the IRS, be prepared to wait longer. You may also find it more difficult to get a qualified answer. Should you speak with an IRS representative, try to show some compassion for their situation.

Open questions may take longer to close. As you may recall, during the pandemic the IRS suspended the mailing of notices to taxpayers. When the backlog of notices was turned back on, many taxpayers found themselves facing potential liens because prior notices were never sent. Until the mailing of notices were turned back on, many these taxpayers were unaware of any problems with their tax records. This backlog still exists and will get worse.

IMPACT: You'll probably have a hard time getting someone on the phone who can help with your particular problem. And responses to your mailed replies to IRS notices is taking a very long time. So be prepared to respond multiple times concerning the same issue. Consider sending all correspondence to the IRS using certified mail so there is evidence should you need to prove the timeliness of YOUR replies.

Don’t expect audit rates to go down. Audit rates are already extremely low, with a significant portion of the audit activity now being identified automatically through computer generated correspondence audits. The irony here is that given the progressive nature of the individual tax system, the majority of tax is paid by a minority of taxpayers. Audits will still naturally follow the potential for a return-on-investment for the time spent auditing a particular tax return.

IMPACT: Double check your 2024 tax return documents for missing items. This is especially true for all 1099s! And double check that they are correct. If you report an incorrect dollar amount, you can almost guarantee you will see a notice from the IRS. And be prepared to defend your deductions with proper documentation.

It's unfortunate that the idea of voluntary compliance to help fund our government is so chaotic and more political than ever. The best approach is to comply with the tax rules and adjust according to the situation. And this is where our service can help.

The New Problem with IRS Identity Theft

PLUS: Small Business FinCEN Update!                    02/21/2025

In its most recent annual report to Congress, the Taxpayer Advocacy Service outlines troublesome trends it sees in the processing and administration of tax returns and taxpayer support. By law, the National Taxpayer Advocate’s report must identify the 10 most serious problems taxpayers face in their dealings with the IRS and make administrative and legislative recommendations to address those problems. One of the most critical issues identified in their recent report:

Continuing delays in resolving identity theft cases

Per the report, “For cases closed by the IRS’s Identity Theft Victim Assistance (IDTVA) unit in Fiscal Year 2024, the average time it took the IRS to resolve identity theft cases and issue refunds to the affected victims was almost two years.”

Talk about frustrating! It currently takes up to two years to get a victim’s tax records corrected and receive a refund when you have already been made a victim by the ID thief!

While the Taxpayer Advocacy Service is recommending changes, it will take some time to implement by the IRS. So, what do you do in the meantime? Here are some tips:

File early. If you have any reason to believe your identity is compromised, file your tax return as early as possible. For example, if you received notices during the year from any businesses that their records may be compromised and exposed some of your personal information, this is a signal that you may be at risk.

Check your credit reports. Remember, each year the three major credit agencies are required to provide copies of your credit report free of charge. The beginning of the year is a great time to check. If you see anything fishy, file your tax return immediately. These reports can be ordered at: AnnualCreditReport.com

Consider the IRS Identity Protection PIN program. While not for everyone, if you are worried about IRS Identity theft, sign up to receive a unique id or PIN to be used when filing your federal tax return. While it can be a hassle, it will help avoid anyone else filing using your identification. In the meantime, there is hope that the Taxpayer Advocacy report will motivate the IRS or someone in Congress to take action to help victims receive more timely resolution to their problem. 

FIN-2025-CTA1 February 18, 2025 FinCEN Extends Beneficial Ownership Information Reporting Deadline by 30 Days; Announces Intention to Revise Reporting Rule The on then off then on again requirement for small businesses to report their beneficial owners to the federal government is now on again with a new reporting deadline of March 21, 2025. This represents a "stay" of a judge's order to eliminate the requirement. In other words, the filing requirement may be removed, but until it is, most small businesses need to still file the report.

Should you file the report for your business?

Per the notice:

Notably, in keeping with Treasury’s commitment to reducing regulatory burden on businesses, during this 30-day period FinCEN will assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks. FinCEN also intends to initiate a process this year to revise the BOI reporting rule to reduce burden for lower-risk entities, including many U.S. small businesses.

The current ruling says yes...but it probably will change if you can read into this notice. Here is a link to the announcement: FinCEN Announcment

Does Your Mileage Log Travel the Distance?

02/14/2025

The tax code allows deductions for qualified miles driven for business, medical, moving and charitable purposes. But to claim this deduction you must keep adequate records of actual miles driven. During an audit, this is an often disallowed deduction, despite the fact that you actually drove the distance claimed. How can you make sure this doesn't happen to you? Here are some tips.

1. Keep a log. The tax code is clear on this point. You may not estimate your miles driven. You must support your claimed deduction, ideally with a detailed mileage log.

2. Create good habits. Your odometer reading and miles driven should be noted as soon as possible after the event. Keep a log book in your car and note the miles driven each day. Logs created after-the-fact with estimated miles driven could be disallowed during an audit.

3. Make thorough entries. Note the odometer readings, date, miles driven, the to/from locations, and the qualified purpose for the trip.

4. Don't lose out on the extras. The deduction for miles driven is meant to provide a deduction for fuel, depreciation, and repairs. You can also deduct out-of-pocket expenses for tolls, parking and other transportation fees. Keep a running total of these fees in the back of your mileage log.

5. Keep separate logs for each deduction. Remember you may deduct mileage for business, charitable purposes, qualified moving and medical miles. It is best to keep track of each in a separate mileage log.

6. Alternative business transportation deduction. When it comes to deducting business transportation expenses, remember the miles driven method is not the only one available to you. You may also deduct your actual expenses, but how and when you make this determination is important. In the initial year of placing your vehicle into service for your business, it is best to keep track and record all your actual auto expenses. An analysis can then be conducted to see which method is best for you to maximize your deduction.

Review and Correct Your 1099s NOW!

What to do to fix this thorny problem          02/07/2025

It's sometime in February and you realize the Form 1099 you received is in error. In fact, it overstates your income by several thousand dollars. What should you do?

Gather your facts. Put yourself in the shoes of the vendor, bank or investment company representative. Gather evidence they will need to support your claim to correct the tax form. This includes receipts, e-mails, and statements. Have your account number handy as well.

Contact the vendor. Contact the vendor as soon as you discover the error and ask them to re-issue the statement or provide you with a corrected form. Start with a phone call, then put your evidence in writing and send it to them via certified mail. Give the vendor a reasonable, yet concrete, time frame to correct the error. You do not want to wonder when a correction is coming, so keep control of the timing for a correction if at all possible.

Written confirmation. If the vendor agrees with your change, ask for a letter from them that outlines the correction. File this letter with your tax return to help you defend against a potential audit.

Tell the IRS. After a reasonable attempt to correct the error with no progress, contact the IRS to inform them of the failure to correct your information.

File an extension? If you believe a correction is on the way, you may wish to file a tax extension. Remember, you will still need to pay any tax owed by the original due date. If you do not have assurance of a correction, file your tax return with correct information and provide documentation that outlines the reporting error.

Contractor versus Employee

Knowing the difference is very important          01/31/2025

As informational tax forms start flowing in, you are reminded to review the forms and determine the correctness of the form. One of the keys is whether your employer (or contractor) sends you the correct form. Getting it wrong could cost you plenty in the way of Social Security, Medicare taxes, and other employment-related taxes. Here is what you need to know.

The basics

As a contractor. If you are the worker and you are not considered an employee you must:

Pay self-employment taxes (Social Security and Medicare-related taxes)
Make estimated federal and state tax payments
Handle your own benefits, insurance, and bookkeeping

As an employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to:

Payment and penalties related to Social Security and Medicare taxes
Payment of possible overtime including penalties for a contractor reclassified as an employee
Legal obligation to pay for benefits

Determining the answer: Things to consider

Usually in determining whether you are an independent contractor or an employee, state and federal authorities look at the business relationship between the employer and you, the worker. The IRS focuses on the degree of control exercised by the business over the work done, and they will assess your level of independence. Here are some tips.

The more the employer has the right to control your work, when the work is done, how the work is done, and where the work is done, the more likely you are an employee.

The more the financial relationship is controlled by the employer, the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a business-like manner.

The more business-like the arrangement, the more likely you have an independent contractor relationship.

Don't forget your obligations

With so many workers now in the contractor ranks, it is important to stay on top of your tax filing obligations. With 15.3% of your income due for Social Security and Medicare taxes, forgetting to pay this can quickly become a financial nightmare.

While there are no hard set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged by the IRS. But beware, states are trying to constantly move contractors into the ranks of employees, all of which can cause havoc as companies and workers try to understand the changes these initiatives create.

IRS Proactively Issues One Million Rebate Payments!

What you need to know          01/24/2025

In late December, the IRS announced plans to issue automatic payments to eligible people who did not claim the Recovery Rebate Credit on their 2021 tax returns. The payments should be received in late January. No action is needed for eligible taxpayers to receive the credit with a maximum payment of $1,400.

Background

As part of various COVID-19 relief programs, the federal government issued Economic Impact Payments and a Recovery Rebate Credit. The latter was to be awarded on 2021 income tax returns. Upon reviewing internal data, the IRS determined that approximately one million taxpayers overlooked claiming this refundable credit. The IRS would not typically take proactive actions to pay out this money...instead the agency would normally remind taxpayers to claim any and all refunds before the statute of limitations runs out, which in this case is April 15, 2025. But in a surprise to many, the IRS is deciding to be proactive in this case.

What you need to know

No action is required on your part. If you or a family member is eligible for the credit, the IRS will automatically deposit the money in the direct deposit account noted on your 2023 tax return. If no bank account is noted, you will receive a paper check. Things to note:

Should you receive a payment, it is legitimate. There should also be a letter from the IRS explaining the payment.

Most taxpayers already received this credit. So no need to call wondering if you are going to get a payment. While $2.4 billion in payments going out is no small number, it only represents a small percentage of total payments to all taxpayers.

Double check 2021 non-filers. If you know of someone who did not file a 2021 tax return, it may be worth looking at doing so before April 15, 2025 or the ability to claim this credit goes away.

2025 Mileage Rates are Here!

New mileage rates announced by the IRS          01/17/2025

   Your Weekly Tax Tip from Logo Facebook Twitter LinkedIn Google Business Yelp RSS Feed www.affinityaccountingtax.com Phone: 505-800-5690 2025 Mileage Rates are Here! New mileage rates announced by the IRS Tip Image Tip Category: What's New Mileage rates for travel are now set for 2025. The standard business mileage rate increases by 3 cents to 70.0 cents per mile. The medical and moving mileage rates stay at 21 cents per mile. Charitable mileage rates remain unchanged at 14 cents per mile.

2025 New Mileage Rates

To note

These rates apply to gas, electric, hybrid-electric and diesel-powered vehicles.

You cannot claim mileage as an itemized deduction as en employee if you aren't reimbursed for travel expenses.

Claiming a mileage deduction for moving expenses is not allowed unless you are an active member of the Armed Forces and are ordered to move to a new permanent duty station.

Remember to properly document your mileage to receive full credit for your miles driven.

Tax Season is Scam Season

PLUS: Small Business Judicial ALERT Update             01/03/2025

As a reminder, tax season is also tax scam season for savvy criminals. As you prepare to file your tax return, here are some things to know to reduce your risk of having your valuable personal information stolen. These tips are provided by the IRS and other experts.

Scam sources are typically over the phone, email and even in person!
The IRS DOES NOT initiate contact by email or request personal or financial information in this format.
The IRS typically initiates contact via mail.
On rare occasion the IRS will call. When this happens, get the IRS agent’s name and badge number. Then hang up and call the IRS independently (not the phone number they give you). Better still, call your tax professional!
Email phishing. If you receive a suspicious email DO NOT OPEN IT or any links. Do not reply or open attachments. Report it to phishing@irs.gov.
Phone scams. Do not give personal information to unsolicited phone calls from the IRS. Even if it looks legitimate. Scammers are getting good at spoofing legitimate phone numbers on your caller id. Report the caller ID and call back number to the IRS using phishing@irs.gov. Put IRS phone scam in the subject line.
Payment. Only pay the US Treasury directly. DO NOT pay anyone else, even if they threaten you. No one is allowed to collect money directly from you.

Finally, the IRS and Federal Trade Commission have tons of material regarding these thieves and their techniques. Become familiar with them and reach out for help, as a tax professional may be able to help read through the scam. 

FinCEN BOI reporting requirement on hold once again

Required filing of beneficial owner information (BOI) on FinCEN.gov continues its roller coaster judicial journey. On December 26th, the requirement to file is (for now) officially on hold once again pending further judicial review. Last week the injunction to halt the filing requirement was overturned leaving your business until January 13, 2025 to file your report. Now that ruling is suspended. Go to FinCEN.gov to learn more.

Leveraging Kiddie Tax Rules

PLUS: Small Business Judicial ALERT              12/27/2024

The beginning of each year is a great time to start next year's tax planning. One area to help reduce your tax obligation, that benefits from an early in the year start, is leveraging your kids to the fullest using the kiddie tax rules.

Background

The term kiddie tax was introduced by the Tax Reform Act of 1986. The rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child's lower tax rate. In 2025 the law requires a child's unearned income (generally dividends, interest, and capital gains) above $2,700 be taxed at their parent's tax rate.

Applies to

Children under the age of 19
Full-time students under the age of 24 and providing less than half of their own financial support
Children with unearned incomes above $2,700

Who/What it does NOT apply to

Earned income (wages and self-employed income from things like babysitting or paper routes)
Children that are over age 18 and have earnings providing more than half of their support
Children over age 19 that are not full-time students
Gifts received by your child during the year

How it works

The first $1,350 of unearned income is generally tax-free
The next $1,350 of unearned income is taxed at the child's (usually lower) tax rate

The excess over $2,700 is taxed at the parent's rate either on the parent's tax return

Planning thoughts

So while your child's unearned income above $2,700 is a problem, you will still want to leverage the tax advantage up to this amount. Here are some ideas:

Create accounts in your child's name. Establish a Uniform Transfers to Minor Act (UTMA) account at your favorite bank and/or investment institution. This will allow you to manage assets in the name of a minor child. Then gift cash or investments into the account. Gains and interest in the UTMA account will now create unearned income in the name of the child. Be aware of annual gift limits to keep reporting simple (currently $19,000 per individual per year in 2025). Build these accounts to provide up to $2,700 in unearned income each year.

Maximize your lower tax investment options. Look for gains in your child's investment accounts to maximize the use of your child's kiddie tax threshold each year. You could consider selling stocks to capture your child's investment gains and then buy the stock back later to establish a higher cost basis.

Be careful where you report a child's unearned income. Don't automatically add your child's unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by reducing your tax benefits in other programs like the American Opportunity Credit.

Leverage gift giving. Each year, if your children are not maximizing tax-free investment income consider gifting additional funds to allow for unearned income up to the kiddie tax thresholds. Properly managed, the kiddie tax rules can be used to your advantage. But be careful as your child reaches their legal adult age, this part of the tax code can create an unwelcome surprise if not handled properly.

Small Business ALERT:

Department of Justice FinCEN Judicial order is overturned.

What this means. All firms must register their beneficial owners (BOI) through the FinCEN application as originally dictated by the law. The law was ruled an overreach by a judicial order earlier this month, but in an emergency ruling the Justice Department got the order overturned. The original filing deadline of 12/31/24 is now extended to 1/13/25. If you are a small business and have not registered your owners you will need to ensure you comply. Go to www.FinCEN.gov and review the information.

Maximize the Child & Dependent Care Credit

12/20/2024

 The Child & Dependent Care Credit provides a reduction in taxes to offset the cost of daycare when you are employed. The maximum amount of the credit is $3,000 for one dependent or $6,000 for two or more qualifying persons.

To take advantage of the credit here is what you need to know.

1. Qualified dependent(s). Your dependent must be under the age of 13. A spouse or older dependent who is physically or mentally unable to care for themselves can also qualify.

2. Earned Income. You must have earned income to support the credit.

3. Qualified daycare expenses. You must actually incur the care expense for the qualified dependent.

4. Financial support requirement. You must maintain the home and financial support for the qualified dependent (more than half the cost and more than half the year).

Here are some tips;

Partial expense coverage. The credit only covers a percentage of your qualified care expenses. The amount depends on your income with a high of 35% of qualified expense down to a low of 20% of the daycare expense.

Obtain proper ID. Most daycare organizations will provide you with an expense summary at the end of each tax year. This form will tell you how much you spent in care and will provide you with the proper tax id for their organization. If you have someone else caring for your dependent, make sure you receive their tax information. It will be needed when you file for the credit on your tax return.

Not equal. If you have two or more qualified dependents, the daycare expenses do not have to be equal for each of them. For example, you could use $5,000 for one dependent and $1,000 for the rest of them.

Education expenses. Pre-school, nursery and other educational programs can qualify if levels are lower than kindergarten. Full-day kindergarten fees DO NOT qualify.

Leverage summer. Summer day camps and similar activities can qualify for the credit. So too can hiring a nanny to care for the kids while you are at work and the kids are out of school.

Other details apply. Please ask for help if you wish to review your situation.

Note: If your employer provides daycare reimbursement as a benefit on your W-2, the employer benefit is limited to $5,000 or $2,500 if married filing separate or single. You can still use excess daycare expenses to maximize your credit to the full $3,000/$6,000 amount.

Gone Phishing?

12/13/2024

Each year the IRS publishes the top dozen tax scams it encounters over the prior year. One of them that makes an all too common appearance on their list is the phishing scam. Here is what you need to know.

Phishing requires bait

Phishing is the act of creating a fake e-mail or website that looks like the real thing. This bait is then used to reel you into the scam by asking for private information. This includes your name, address, or phone number. It could also include potentially dangerous ID theft information like your Social Security number, a credit card number or banking information. The bait is often very real looking - just like correspondence from the IRS or the IRS website.

How to avoid the lure

How do you know the phishing is fake? Here are some tips.

The IRS never initiates contact via email. If you get an unsolicited e-mail from the IRS requesting a response, do not reply!

Instead forward the email to phishing@irs.gov. Never click or download. Perhaps even more important, never click on a link or open a file on a suspicious email. This is true even if the email comes from someone you know. Too often phishing comes from someone impersonating someone you know.

Know the website. This includes the appearance, but more importantly the address. The valid address for the IRS is www.irs.gov. For Social Security, the address is www.ssa.gov.

They may already have info about you. Good phishers already have parts of your identity, so just because they know things like your middle name and birth date does not make them legitimate.

Phishing over the phone. Phishing can also take place over the phone. If you receive an unsolicited phone call, get the person’s name and ID, then hang up. Then go to the IRS (or vendor) website, write down their phone number and call them back using this phone number. Most fake calls are ended quickly when taking this approach.

Don’t forget social media. Phishing can also happen via social media and texting. Virtually every digital resource has the potential to be used as a tool for theft.

What do phishers do?

When the phishers have your information, they can file false tax returns requesting refunds, steal bank account information, set up fake credit cards, establish false IDs, plus much more. Remember, if it smells like a phish, it probably is!

Plan Your 2025 Retirement Contributions

12/06/2024

As part of your planning for next year, now is the time to review funding your retirement accounts in 2025. Recent cost of living calculations means much higher contribution limits for next year. Plus the higher income phaseouts for eligibility will make many more taxpayers eligible for fully-deductible contributions. So plan now to take full advantage of this tax benefit. Here are annual contribution limits for the more popular programs:

Tax Shifting Ideas to Reduce Your Bill to Uncle Sam

Is there a taxable income reduction idea you can use?          11/29/2024

Many tax experts talk about shifting your tax burden from one year to the next. While in theory it may make sense, how can you make it work for you in practice?

The concept

Since the tax code is complex in its construction, there are often opportunities to reduce your tax burden by controlling the amount of your taxable income. This is because:

Income tax rates vary from 0% to 37% depending on your income and filing status. Many tax breaks have income limits.
Tax breaks have income phase-out ranges.
Incremental taxes like the alternative minimum tax are triggered by income level.

So if you can shift your income and expenses from one year to the next, you could create a net tax obligation for both years that might be lower than if you did nothing. Here are six great ideas to accomplish this.

Six great tax shifting ideas

Idea 1 - Know the rules. Identify whether you are a good candidate for using shifting as a tax planning strategy. For singles, the income tax rate increases 80% or more on earnings over $47,150. For married couples, that increase occurs with adjusted gross income over $94,300. But other tax benefits are lost at different income levels. Common tax breaks subject to income limits are child tax credits, earned income credits, educational credits, premium health care credits and many educational tax benefits.

Idea 2 - Load up your contributions. If you itemize your deductions, consider loading up your cash and non-cash contributions into the year that lowers more highly-taxed income. For example, you could shift next year’s donations to your church into this year. This bunching of itemized deductions into one year makes even more sense with the higher standard deductions introduced in 2018.

Idea 3 - Leverage the cash basis concept. You can take a deduction when you pay for it. A credit card receipt is good on the date you run the transaction and not when you pay your monthly bill to the credit card company. Knowing this, you could pay a property tax statement or a house payment either a little early or a little late to change whether that deduction occurs in this year or next. Idea

4 - Stop working. There are many cases when this technique is an important tax shifting tool. The most common example applies to those who are under the full retirement age and receiving Social Security benefits. If this applies to you, consider actively managing your part-time work or you could end up paying taxes on some of your Social Security benefits or even losing some of them. Work can also hurt your tax situation when a dependent’s wages put you over the earnings threshold to receive the Health Insurance Premium Tax Credit. It may make sense to stop working or arrange to get your last paycheck delayed into the following year.

Idea 5 - Manage retirement plan distributions. Those over age 59½ can use distributions from pre-tax retirement plans to tightly control their taxable income. Your withdrawal calculation should include evaluating how to maximize the tax efficiency of your income. An analysis may indicate it is better to take out a little more this year to get these retirement earnings taxed at a lower rate than if you waited until next year.

Idea 6 - Manage your stock and investment sales. You have up to $3,000 in investment losses that can offset your higher-taxed ordinary income. Use this to your advantage when deciding whether to take a stock loss this year or next. If done correctly, you can match your stock loss against ordinary income which is taxed at a higher rate.

By shifting your taxable income to the right level, you can often reduce your tax bill. Please call if you wish to have a review of your situation.

Avoid Name Mismatch Audits

11/22/2024

 If you were married, divorced, or changed your name for any reason during the past year, do not forget to file to change your name prior to preparing next year's tax return. The IRS automatically conducts a name match on the first few letters of your last name.

The problem

If the name on your tax return does not match the name on file with the Social Security Administration for your Social Security number, here's what could happen:

Your tax return might be rejected when you try and e-file
The IRS automatically accepts your income as taxable, but then disallows any deductions
You may receive a notice from the IRS with taxes owed and underpayment penalties

Here's what you can do

Prior to filing your tax return, go to www.ssa.gov and download form SS-5. Fill out the form with the name change and file it as soon as possible.

Also notify your employer. Double check the W-2 you receive to ensure the change was made correctly. If the change is made on your W-2, you must make sure it is also changed with the Social Security Administration.

If you are planning a major financial transaction in the near future, you may wish to adjust the timing of the transaction or the timing of your name change to avoid complications.

Don't forget to also change your name on other important documents like auto titles, driver's licenses, property titles, bank accounts, loan agreements, beneficiary documents, and other accounts.

If you are unable to make the name change in a timely manner, use the name on file at the Social Security Administration AND with your employer when filing your taxes to avoid the automatic notification of a name mismatch.

Here is a link to the Social Security Administration's website and Form SS-5 that walks through the name change process. Please be forewarned, this process is not as simple as it was in the past. You now need to provide proof of citizenship and submit documents that show the original and new names. Spend some time going over the name change process and plan accordingly.

Taxable or Not Taxable?

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

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

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

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

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

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

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

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

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

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

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

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

15 Year-End Tax Tips

11/08/2024

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

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

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

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

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

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

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

7. Identify any potential household employees.

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

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

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

11. Consider retirement plan rollover options into Roth IRAs.

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

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

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

15. Begin organizing your tax records.

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

Elections. Elections. Elections.

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

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

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

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

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

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

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

Hike in Social Security Benefits Announced for 2025

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

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

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

Understanding Tax Terms: Contemporaneous Records

10/18/2024

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

Contemporaneous defined

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

Not fair!

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

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

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

What you need to know

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

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

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

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

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

Those Pesky Records!

10/11/2024

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

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

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

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

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

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

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

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

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

Estate Taxes: What EVERYONE Should Know

10/04/2024

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

Q. Who pays estate taxes?

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

Q. What is included in the taxable estate?

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

Q. How are assets valued?

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

Q. How is the estate tax calculated?

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

Q. Can a married couple double the exemption?

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

Q. What is an inheritance tax?

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

Q. What about estate taxes at the state level?

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

Q. How are gifts to others handled?

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

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

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

How to Maximize Deductions for Assisted Living

09/27/2024

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

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

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

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

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

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

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

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

Tax Surprises for the Newly Retired

09/20/2024

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

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

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

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

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

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

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

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

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

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

Tips:

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

Understanding Tax Terms: Head of Household

09/13/2024

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

Three key qualifications

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

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

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

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

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

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

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

Reminder: Third Quarter Estimated Taxes are Due

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

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

Due date: Monday, Sept. 16, 2024

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

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

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

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

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

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

A Dozen Tax Planning Triggers

08/30/2024

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Play the Match Game. Or Else...

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

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

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

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

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

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

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

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

Deductions for Non-Itemizers

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

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

Standard or Itemize?

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

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

What is Available

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

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

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

Understanding Tax Terms: Basis

Covering the bases on basis          08/09/2024

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

What basis is

The IRS describes basis as:

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

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

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

Types of basis

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

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

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

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

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

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

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

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

Social Security: Know the Variables

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

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

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

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

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

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

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

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

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

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

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

PII. Know it. Protect it.

The importance of personally identifiable information            07/26/2024

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

The Concept

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

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

What you need to know

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

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

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

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

Don't Fall for These 5 Audit Myths

07/19/2024

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

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

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

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

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

Myth 3: The IRS can only audit certain items.

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

Myth 4: Only rich people get audited.

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

Myth 5: Going through an audit is a disaster.

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

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

Turning Your Hobby Into a Business

07/12/2024

The business-versus-hobby test

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

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

Understanding Tax Terms: Wash Sales

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

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

Wash sales explained

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

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

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

Why the rule?

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

Some ideas

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

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

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

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

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

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

Five Big Tax Mistakes

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

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

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

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

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

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

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

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

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

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

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

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

Clues You are About to be Scammed

06/21/2024

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

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

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

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

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

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

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

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

An Option to Deduct Summer Activity Expenses

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

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

What is deductible?

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

How it works

To receive the credit you must:

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

have earned income (wages) to support the dependent

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

financially support and maintain a home for the dependent

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

Some summertime tips

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

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

Day camps qualify for the credit.

OVERNIGHT camps and summer school/tutoring do NOT qualify.

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

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

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

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

Reminder: Second Quarter Estimated Taxes Are Due

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

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

Due date: Monday, June 17, 2024

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

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

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

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

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

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

Roth versus Traditional IRA: Which is Better?

05/31/2024

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

Traditional IRA

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

Roth IRA

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

Which is better?

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

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

Roth IRA accounts have more flexible contribution and withdrawal rules.

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

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

Great Tax Reduction Ideas

05/24/2024

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

1. Maximizing HSA contributions

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

2. Student loan interest

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

3. Leveraging your itemized deductions

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

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

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

5. Understand taxability of state refunds

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

6. Taking full advantage of state tax deductions

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

7. Leveraging retirement accounts to their fullest

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

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

Take Advantage before Changes Occur

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

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

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

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

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

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

More will be impacted by the alternative minimum tax

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

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

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

There will be different capital gain tax rules

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

Small businesses may lose their 20% QBI deduction

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

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

Understanding the Home Gain Exclusion

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

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

The tax benefit explained

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

Special situations can cause complications

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

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

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

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

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

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

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

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

Ideas for a Great Refund

05/03/2024

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

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

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

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

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

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

Seeing Inside the Mind of the IRS

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

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

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

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

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

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

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

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

Tax Tips to Aid in Retiring Early

04/19/2024

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

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

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

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

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

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

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

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

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

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

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

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

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

First quarter due date: Monday, April 15, 2024     

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

Things to consider

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

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

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

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

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

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

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

IRS Notices Creating Alarm

Here is what to know          04/05/2024

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

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

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

What is happening

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

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

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

To make matters worse

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

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

What to do

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

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

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

Keep Track of Home Improvements

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

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

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

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

The problem

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

The calculation

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

To keep the tax surprise away

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

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

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

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

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

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

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

Anticipating your Refund

What you should know            03/22/2024

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

Refund Delays: The common culprits

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

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

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

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

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

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

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

Check the status of your expected refund

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

Your Social Security Number
Your filing status
The exact refund amount

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

Audit Proof Your Tax Return

03/15/2024

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

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

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

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

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

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

Homeowner Alert! Review Your Tax Forms

New tax rules are creating confusion             03/08/2024

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

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

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

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

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

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

Your Business Tax Return is DUE!

March 15th is quickly approaching             03/01/2024

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

The penalty

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

Take action

Here are some ideas to help you avoid penalties:

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

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

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

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

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

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

No Check! Where's Your Proof?

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

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

Background

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

Some Tips

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

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

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

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

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

The $500,000 Homeowner Tax Break

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

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

The basics

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

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

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

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

There are some additional quirks to know about, including:

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

When to pay attention

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

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

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

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

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

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

Recordkeeping is key

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

Common Missing Items = DELAYS

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

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

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

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

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

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

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

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

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

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

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

IRS Identity Theft Season Begins Now

01/26/2024

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

Early tax filing season is the worst time

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

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

What you can do?

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

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

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

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

The IRS is becoming better at spotting fakes

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

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

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

File a police report.

Contact the credit bureaus.

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

SMALL BUSINESS ALERT: New Federal Reporting Required

Especially important for new business startups               01/19/2024

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

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

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

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

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

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

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

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

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

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

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

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