Don't Stress Over The IRS

Postpone Taxes with a Like-Kind Exchange

Mon, 20 Dec 2021 17:11:05 GMT

The real estate boom creates opportunity

The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain.

The Like-kind Exchange Rule

A like-kind exchange involves swapping assets that are similar in nature. Since the passage of the Tax Cuts and Jobs Act in December 2017, like-kind exchanges are now generally limited to exchanges of property. Typically, an equal swap of property is rare. Some amount of cash or debt must change hands between two parties to complete an exchange. Cash or other dissimilar property received in an exchange may be taxable.

Real Estate Exchanges

By using a like-kind exchange you can effectively leverage money you would need to pay for capital gains taxes and depreciation recapture tax into the next property. And with a real estate exchange, it is unusual to find two parties whose properties are suitable to each other. This isn’t a problem because the rules allow for three-party exchanges. Three-party exchanges require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property. Then he forwards the money to your closing agent to complete the exchange.

Not For The Faint of Heart

The like-kind exchange rules are very strict. For this reason, it is always best to hire an expert to advise you prior to exploring this tax saving technique. But when done properly, exchanges let you trade up in value without owing tax on a sale. Even better, there’s no limit on the number of times you can exchange a piece of property.

Visit our Tax Planning page for more information.

Plan Your 2022 Retirement Contributions

Tue, 14 Dec 2021 15:58:15 GMT

As part of your planning for next year, now is the time to review funding your retirement accounts In 2022. With the cost of living calculations and increases in inflation, higher phaseout limits 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:

How To Use

Identify the the type(s) of retirement savings plans that you currently use.
Note the annual savings limits of the plan for next year and adjust your savings to take full advantage of the annual contributions. Remember, a missed year is a missed opportunity that does not come back.
If you are 50 years or older, add the catch-up amount to your potential savings total.
Take note of the income limits within each plan type.
For traditional IRA’s, if your income is below the noted threshold, your taxable income is reduced by your contributions. The deductibility of your contributions is also limited if your spouse has access to a plan.
In the case of Roth IRAs, the income limits restrict who can participate in the plan.

Other Ideas

If you have not already done so, also consider:

Setting up new accounts for a spouse or dependent(s)
Using this time as a chance to review the status of your retirement plan including beneficiaries
Reviewing contributions to other tax-advantaged plans like Flexible Spending Accounts (health care and dependent care) and prepaid medical savings plans like Health Savings Accounts.

15 Year-End Tax Tips

Mon, 06 Dec 2021 20:10:27 GMT

It's that time again!

The final chance to reduce your annual tax bill is here. Spend a few minutes considering the following ideas:

1. Make last minute charitable donations.

2. Review and maximize use of the $15,000 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 ($2,200 of unearned income taxed at your child’s lower tax rate).

6. Make last minute contributions to your retirement account to take advantage of the annual contribution limits.

7. Identify any potential tax forms required for household employees.

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

9. Review retirement accounts. Make any required minimum distributions.

10. Review medical and dependent care funding accounts to ensure you do not lose contributions that do not rollover 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.

Tips to Maximize the Value of a Car Donation

Tue, 30 Nov 2021 16:35:05 GMT

At the end of the year you will be inundated with commercials to donate a vehicle to charity. While it is one of the biggest contributions a taxpayer can make, if not done carefully, the tax deduction of a donated vehicle could be a lot lower than you think.

The Rule

When you donate a vehicle, the value of your donation is either the fair market value of your vehicle when you donate it OR the value received by the charitable organization for your donation. Unfortunately, you do not choose the value of the donated vehicle.

If the organization uses the vehicle , or is in the business of using your vehicle to train others, you can deduct the fair market value of the vehicle.
If the charitable group simply resells your donated vehicle , your donation is limited to what the organization receives for your vehicle and NOT the usually much higher fair market value of the item.

What you should do

Select the organization wisely. Select an organization that will either use the vehicle themselves or will use it to train others. Examples of qualified organizations include groups that help single mothers obtain transportation to and from work or use the vehicles to deliver meals to seniors. Other organizations teach auto repair and body shop work to the unemployed. The cars then are given to other non-profits or needy folks. From the IRS perspective, a qualifying charitable use either;

makes significant intervening use of the vehicle or,
makes significant improvement to the vehicle that increases its value or,
donates the vehicle (or sells it at a below market rate) to a needy person that helps further the cause of the organization.

Special Caution: Be aware of national advertisers like KARZ4KIDS..they almost always limit your donation amount by what they can resell your car for...often below the fair market value. And before donating, know how, and be pleased with how, the funds are to be used.

Research the fair market value. Prior to donating your vehicle go to a reputable source and estimate the value of your vehicle. Online resources like Edmunds.com and kbb.com (Kelley Blue Book) are two reliable sites to do this. Also make a copy of your title and take pictures of your car prior to donating it to the charity to help support your fair market value claim.

Obtain the proper tax form. When donating your vehicle make sure the organization gives you a proper Form 1098-C at the time you provide your vehicle. Double check the value assigned to your donation form to ensure it meets or exceeds the estimated fair market value of your donation. Remember, if your valuation exceeds $5,000 you will need an approved appraisal.

Sell the vehicle and donate the cash. If you cannot find a charitable organization that will allow you to maximize your fair market value deduction, consider selling the vehicle and then donating the proceeds. There is a potential problem with this approach, however. Take care that you do not create an unplanned taxable capital gain with the transaction.

Note: These rules apply to other vehicle donations as well. This includes motorcycles, trucks, vans, buses, RV's and other transportation vehicles.

2022 Health Savings Account Limits

Mon, 22 Nov 2021 20:31:45 GMT

New contribution limits are on the horizon

The savings limits for the ever-popular health savings accounts (HSA) are set for 2022. The new limits are outlined here with current year amounts noted for comparison. So plan now for your contributions.

What is an HSA?

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

The Limits

Note: An HDHP plan has minimum deductible requirements that are typically higher than traditional health insurance plans. To qualify for an HSA, your coverage must have out-of-pocket payment limits in line with the maximums noted above.

The key is to maximize funds to pay for your medical, dental, and vision care expenses with pre-tax money. By building your account now, you could have a next egg for unforeseen future expenses.

Roll it Before You Pull it

Mon, 15 Nov 2021 17:39:02 GMT

Tips to avoid IRS penalties on 401(k) retirement plan distributions

While each retirement plan has similar early withdrawal penalty exemptions, they are not all alike. Knowing these subtle differences within 401(k) plans can help you avoid a 10 percent tax penalty if you take money out of the plan prior to reaching age 561-584-3777. This is true because a basic rollover of funds into a Traditional IRA is a readily available option to avoid the penalty. You should consider rolling over your 401(k) into an IRA prior to early distribution when:

Using Retirement Funds for Qualified Higher Education Expenses.

Want to use retirement funds to pay for college? Pull the funds out of an IRA and not another retirement account type or you could be subject to an additional 10 percent early withdrawal penalty. After rolling the funds into an IRA, the funds can be used penalty-free as long as they are for qualified educational expenses at a qualified school.

Using Retirement Funds to Buy, Build, or Rebuild a First Home.

You may use up to $10,000 of your IRA per person to purchase a first home and avoid paying the 10 percent early withdrawal penalty. If these same funds are pulled out of a 401(k) plan you could be subject to an additional federal tax of up to $1,000. So roll the funds to a Traditional IRA first, and save the tax.

Using Retirement Funds to Pay for Medical Insurance.

There is also a provision for an unemployed individual to use IRA funds to pay for medical insurance. This provision does not exist in 401(k)s, so to avoid the early withdrawal penalties, roll the money from your 401(k) into an IRA prior to using the funds to pay for your insurance premiums.

Remember, by rolling the funds prior to pulling the funds for pre-retirement distribution you are avoiding the early withdrawal penalties, but you must still pay the applicable income tax.

Bonus Retirement Plan Tips

Two other quirks in the retirement tax code to be aware of:

Early Distributions From a SIMPLE IRA Could Trigger a 25 Percent Penalty. The early distribution penalty of 10 percent increases to 25 percent for those in SIMPLE IRAs, if the withdrawal occurs during a two-year time period starting from your initial enrollment date in the SIMPLE plan. You may not roll your funds into another retirement plan type during this two year period to try to avoid the increased early withdrawal penalty.
Minimum Distributions are Required From ROTH 401(k)s but Not ROTH IRAs. In an unusual quirk in the tax code, if you have a ROTH 401(k) you are required to make minimum required distributions from this account like other 401(k)s and IRAs when you reach age 72. If, however, you roll the ROTH 401(k) funds into a ROTH IRA you are no longer subject to the minimum distribution rule requirements.

Visit our Tax Planning page for more information.

Is it really the IRS?

Mon, 08 Nov 2021 19:17:48 GMT

Four tips to ensure your security.

Pretending to be an IRS agent is one of the favorite tactics of scam artists, according to the Better Business Bureau. The con artists impersonate the IRS to either intimidate people into making payments over the phone, or to send misleading emails tricking people into sharing personal information digitally. You can defend yourself against these scammers by knowing these simple rules:

Tip 1: Expect a letter first

In almost every case, the IRS will send you a letter via standard mail if they need to get in touch with you. This will alert you to expect future communication from the agency and instruct you on the best ways to get in touch with them.

What to do: If you get a letter from the IRS that is unexpected or suspicious, it should have a form or notice number searchable on the IRS website, www.irs.gov . If something doesn't look right, you can call the IRS help desk at 561-584-3777 to question it.

Tip 2: Never over email

The IRS will never initiate contact with you using email. A common scammer trick is to send emails to taxpayers using accounts and graphics that imitate the agency's logo. These emails may threaten imprisonment or fines if you don't pay up, or promise an extra refund if you send money to "prepay" your taxes. Often the emails contain links to an official-looking fake website to collect payments. Clicking on them may also trigger the installation of virus programs on your computer.

What to do: Don't respond to any email communications supposedly from the IRS. Don't click on any links. Delete the email or forward it to edwardboes041@gmail.com to help catch the scammers.

Tip 3: Proper phone call etiquette

After notification via the USPS, the real IRS may call to discuss options for handling delinquent taxes or an audit. A real IRS agent or a debt collector won't demand immediate payment without giving you an opportunity to question or appeal the bill. Nor will they threaten lawsuits, arrest or deportation. Their tone should not be hostile or insulting. Finally, if they ask for payment, they should be asking you to make payments only to the United States Treasury.

What to do: If you get a call from the IRS or an IRS debt collector, politely ask for the employee's name, badge number and phone number. They shouldn't hesitate to provide this information. You should then end the call and dial the IRS at 561-584-3777 to confirm the person's identity.

Tip 4: Check in-person visits

Ask the person for their credentials. Every IRS agent is able to produce two forms of credentials: a pocket commission card and a personal identity verification card issued by the Department of Homeland Security, also called an HSPD-12.

What to do: Never provide sensitive information nor confirm information they may have without first independently verifying they are legitimate representatives of the IRS. If you have concerns, call the IRS at 561-584-3777 to confirm the person's identity.

You do not need to navigate this problem on your own. Call immediately for assistance. It is good to have a knowledgeable expert on your side.

A Dozen Tax Planning Triggers

Mon, 01 Nov 2021 18:38:20 GMT

With all the tax law changes over the past few years, here are some things that should trigger you to conduct a full tax planning session to ensure your tax bill is not higher than it needs to be.

You owed tax in 2020. Having a surprising tax bill is never fun. So if you owed taxes last year, project your current year obligation if you have not already done so.
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 su rtaxes plus more.
You are getting married or divorced. The tax penalty for being married is higher than ever. Are you prepared?
You have kids attending college next year. There are a number of tax programs that can help, you may wish to review your options and their impact on your tax return.
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 or LLC companies as these entities are taxed on your personal tax return.
You plan on selling investments. Capital Gains tax rates can now range from 0% to 37% (or even higher with the Net Investment Tax).
There are changes in your employer provided benefits. These changes could impact your taxable income this year.
You buy, sell or go through home foreclosure. There are great tax benefits within your home, but only if you know about them and plan accordingly.
You have major medical expenses. It is harder than ever to itemize deductions, but one way it 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.
You recently lost or changed jobs. Understanding the tax impact of unemployment benefits is crucial.
You have not conducted a tax withholding review. To avoid under withholding penalties, you need to ensure your withholdings are sufficient.
Your e sta te 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 t ax planning appointment .

Employee Tax-Free Income

Fri, 22 Oct 2021 19:06:59 GMT

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

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

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

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

Commuting expenses. You can generally exclude the value of transportation benefits you receive up to the following limits.

$270 per month for combined commuter highway vehicle transportation and transit passes.
$270 per month for qualified parking.
For a calendar year, $20 multiplied by the number of months for qualified bicycle commuting expense reimbursement.

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

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

Small gifts. The IRS calls these "de minimis" benefits. Small-valued benefits are not included in income and could include things like the use of the company copy machine, occasional meals, small gifts, and tickets to a sporting event.

Inflation Spikes Social Security Checks for 2022

Fri, 15 Oct 2021 15:02:07 GMT

The Social Security Administration announced a whopping 5.9 percent boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2022. The increase is based on the rise in the Consumer Price Index over the past 12 months ending in September 2021. For those contributing to Social Security through wages, the potential maximum income subject to Social Security tax increases 2.9 percent this year, to $147,000. Here's a recap of the key dollar amounts:

2022 Social Security Benefits - Key Information

What it means for you

Up to $147,000 in wages will be subject to Social Security taxes, an increase of $4,200 from 2021. This amounts to $9,561-584-3777 in maximum annual employee Social Security payments. Any excess amounts paid due to having multiple employers can be returned to you via a credit on your tax return.

For all retired workers receiving Social Security retirement benefits, the estimated average monthly benefit will be $1,657 per month in 2022, an average increase of $92 per month.

SSI is the standard payment for people in need. To qualify for this payment, you must have little income and few resources ($2,000 if single, $3,000 if married).

SSI is the standard payment for people in need. To qualify for this payment, you must have little income and few resources ($2,000 if single, $3,000 if married).

Social Security & Medicare Rates

The Social Security and Medicare tax rates do not change from 2021 to 2022.

Note: The above tax rates are a combination of 6.20 percent Social Security and 1.45 percent for Medicare. There is also a 0.9 percent Medicare wages surtax for single taxpayers with wages above $200,000 ($250,000 for joint filers) that is not reflected in these figures. Please note that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.

Five Tax-Loss Harvesting Tips

Fri, 08 Oct 2021 19:21:10 GMT

Though the markets have been up strongly this year, your investment portfolio could have a few lemons in it. Using the tax strategy of tax-loss harvesting, you may be able to turn those lemons into lemonade. Here are five tips:

Tip #1: Separate short-term and long-term

Your investments are divided into short-term and long-term buckets. Short-term investments are those you've held a year or less, and their gains are taxed as ordinary income. Long-term investments are those you've held more than a year, and their gains are taxed at generally, lower capital gains tax rates. A goal in tax-loss harvesting is to use losses to reduce short-term gains.

Example: By selling stock in Alpha Inc., Sly Stocksale made a $10,000 profit. Sly only owned Alpha Inc. for six months, so his gain will be taxed at his ordinary income tax rate of 35 percent (versus 20 percent had he owned the stock more than a year). Sly looks into his portfolio and decides to sell another stock for a $10,000 loss, which he can apply against his Alpha Inc. short-term gain.

Tip #2: Follow netting rules

When tax-loss harvesting, use IRS netting rules on the realized gains and losses in your portfolio. Short-term losses must first offset short-term gains, while long-term losses offset long-term gains. Only after you net out each category can you use excess losses to offset other gains. Use this knowledge to your advantage to reduce your taxable income when selling investments.

Tip #4: Beware of wash sales

The IRS prohibits use of tax-loss harvesting if you buy a "substantially similar" asset within 30 days before or after selling it. Plan your sales and purchases to avoid this problem.

Tip #5: Consider administrative costs

Tax-loss harvesting comes with costs in both transaction fees and time spent. Reduce the hassle by conducting tax-loss harvesting once a year as part of your annual tax-planning strategy.

Remember, you can turn an investment loss into a tax advantage, but only if you know the rules.

File That Tax Return!

Fri, 01 Oct 2021 19:21:41 GMT

October extension deadline fast approaching!

Friday, October 15 marks the extension deadline for filing your 2020 Form 1040 Tax return. Given all the recent tax legislation, numerous stimulus checks and COVID-related tax changes, there are more open tax return filings than ever!

If you have not filed a tax return and don't think you need to file one, please reconsider. Billions of refunds go unclaimed each year by taxpayers that really should file a tax return.

Here's a quick checklist of situations when filing a tax return might make sense even if you don't have to:

You are due a refund. Without filing, the government could end up keeping these funds. So double check your stimulus check payments. Did you get them? Were they for the full amount? Preparing a tax return, even if not filed, is a good exercise to ensure you received the full benefit.
You paid tax on unemployment benefits. With the federal government making up to $10,200 of these benefits tax-free, you may be due a nice refund.
You had taxes withheld from your paychecks, but end up owing no tax for the year.
You are eligible for Health Insurance Premium Credits. Be aware of this possible benefit if you use the market exchange to purchase your health care insurance.
You are eligible for a refundable credit. This is true with the popular Earned Income Tax Credit, the Additional Child Tax Credit, and a portion of the American Opportunity Tax Credit.
Your state requires a federally filed tax return.
You want the filed tax return for your records.
You wish to start your audit time clock.
Remember the audit time-frame never starts if you do not file your tax return.

Many taxpayers have trouble gathering accurate and complete information necessary to file their tax return. When they cannot get all the necessary information, they get stuck. Should this be your situation, please ask for help. Even a reasonably close tax filing that is later amended when more information becomes available is sometimes a better alternative than not filing at all.

How to Reduce Your Property Taxes

Fri, 24 Sep 2021 19:22:19 GMT

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

What is happening

Property taxes typically lag the market. In bad times, the value of your home goes down, but the property tax is slow to show this reduction. In good times, property taxes go up when you buy your new home, but these higher prices quickly impact those that do not plan to move.

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

What you can do

If you dread the annual letter informing you that your property tax is going to go up again what can you do? Your best bet is usually to approach the assessor and ask for a property revaluation. Here are some ideas to successfully reduce your home's appraised value.

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

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

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

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

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

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

Those Pesky Records!

Fri, 17 Sep 2021 20:00:48 GMT

What do I need to keep?

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.

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 (i.e. home mortgage, home closing documents, documentation for stock and investment transactions, major asset purchase and sale 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 collectables.

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.

Others may want your documentation. You may need records for non-tax related purposes. Copies of divorce decrees, records of insurance, and home sale 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 over 25% of the tax obligation require record retention of 6 years. If fraud is determined, the record holding period is indefinite.

Reminder: Third Quarter Estimated Taxes Due

Fri, 10 Sep 2021 20:38:54 GMT

Make your estimated tax payment now

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: Wednesday, September 15th, 2021

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

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 need to account for FICA taxes. Remember to account for your Social Security and Medicare taxes as well. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter when you pay your estimated taxes.

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

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

Avoid Tax Traps with Loans to Friends and Family

Fri, 03 Sep 2021 20:39:29 GMT

Lending to friends and relatives can be tricky, and not only because of the stress it can place on your relationships. There are tax issues involved as well. If you have to lend money to someone close to you, here are some tips to do it right in the eyes of the tax code.

Charge interest

Yes, you should charge interest, even to friends and family. If you don’t charge a minimum rate, the IRS will imply interest in the loan and tax you for the interest income they assume you should be getting. This can occur even if you’re not actually getting a dime.

Charge enough interest

Not only should you charge interest, the amount must be reasonable in the eyes of the IRS. If it's not, the IRS will imply interest at their minimum applicable federal rates (AFRs). To stay on the safe side, always charge the interest rate at or above these AFRs , av ailable on the IRS website. The good news is these interest rates are low and almost always below the prime interest rate.

Know the exceptions

If you don’t want to charge interest, you don’t have to IF:

The money is a gift. In 2021, you and your spouse can each give up to $15,000 to an individual each year.

OR:

The loan is less than $10,000 and is not used to purchase income-producing property.

If you don’t charge interest and the loan is used to purchase income-producing property such as capital equipment or to acquire a business, special tax rules apply. In this case it’s good to ask for assistance.

Know the exceptions

If you expect repayment, write out the terms of your loan. There are a variety of basic loan document formats online that you can use. Creating a loan document may seem unnecessarily formal when dealing with a friend or family member, but it’s important for two reasons:

Document your tax code compliance. By documenting the terms and charging a stated interest rate, you can clearly show you are within tax code rules.
Avoid misunderstandings. Creating a written document will make it clear that it is a real loan, not an informal gift. Your friend or relative will know that you expect to be paid back and when you expect repayment.

The $24,000 Tax Time Bomb

Fri, 27 Aug 2021 20:39:45 GMT

A key lesson within EVERY tax surprise

What follows is a true story. A story with a sad ending. But one that has a lesson for everyone. Stick with the story, with a high degree of certainty most tax surprises can be identified with a little help.

The ingredients

Background. Back in the 1970s, U.S. Savings Bonds were a popular savings alternative. Grand parents purchased them for kid’s college. Many used them to build funds for retirement. Even better, you paid ½ the face value and later (usually 20 years) the bonds matured at twice what you paid for them. So a $1,000 investment yielded $2,000 when it reached maturity.

Our ingredients. In our case, this tax bomb had the following ingredients:

Converted old Series E savings bonds with deferred interest;
Series HH savings bonds with annual taxable interest;
Owning uncashed savings bonds that no longer earn interest;
Little help from the bank; and
Confusing information from federal tax authorities about impending tax obligations.

The bomb is set

Joe purchased Series E saving bonds each year in the 1970s. With half down and promise of double value upon maturity, Joe amassed a nice $140,000 retirement fund. After 20 years the bonds matured. Joe did not yet need the money, so he converted them to Series H savings bonds. This effectively deferred the interest income on the old, Series E, bonds since the bonds were not cashed.

With the new Series H savings bonds, Joe paid federal income tax each year on the interest earned. Meanwhile the taxable interest from the series E bonds continued to be deferred.

The result? Joe thought he was paying tax on the interest each year...BUT there was a sleeping tax bill on interest of $70,000 just waiting until Joe cashed in his series H bonds!

The bomb explodes

Joe received word that his series H bonds would no longer pay interest. So he tells his grandson to go to a bank and cash in the bonds. Heck, why have bonds that no longer pay interest? And...it’s no big tax deal because he has been paying tax on his Series H bond interest each year. The grandson has financial power of attorney so he does as his grandfather asks.

Surprise! He receives a notice from the IRS saying he owes them $24,000! This includes plenty of penalties and tax.

Lessons for all of us

Never disregard 1099s or printed details. When the grandson cashed the bonds, if he looked closely on the face of the bonds, he may have noticed the deferred interest. But it would contradict what grandpa had told him. Further, his grandpa probably received a Form 1099 that was disregarded because he believed he was already paying the tax.

Old savings bonds can be confusing. There are many different issues and flavors of savings bonds. When you see any uncashed bonds, conduct the necessary research to understand your potential obligations. This is especially true for bonds past their maturity date.

Ask before you sell. Always understand the tax consequences BEFORE you sell any property. Even the most innocent of transactions can have their own tax time bomb. So call an expert before you buy or sell.

Tax planning matters. While Joe would always owe federal income tax when he cashed the bonds, he could have reduced his effective tax rate by cashing them over time instead of all in one year. In this case, it exposed a lot of income to a much higher tax rate. He could have saved over $10,000 in tax with a little planning!

Because neither the bank nor federal taxing authorities believe it is part of their duty to help you make knowledgeable tax decisions, you are on your own. This one-way street of knowledge makes having an expert on your side more important than ever!

The Marriage Penalty: Alive and Well in the Tax Code

Fri, 20 Aug 2021 20:45:56 GMT

Couples filing jointly still get the short end of the stick

T here are a lot of positive things about getting married, but the IRS' marriage penalty isn't one of them. The marriage penalty occurs when you pay more tax as a married couple than you would as two single filers making the same amount of money. It pops up again and again in the federal tax code. Thankfully, legislation in recent years is shrinking the problem, but it still exists. Here is what you need to know.

Tax Social Security benefits

Probably the worst example of the ongoing marriage penalty is imposed on older couples. Talk about insult! You make it to retirement as a couple and then get your Social Security taxed more quickly. This occurs because two single seniors start getting their Social Security retirement benefits taxed when their income exceeds $25,000. So the married threshold should be $50,000, right? Nope, it is $32,000. When you consider up to 85% of this benefit is taxable, is it a marriage penalty on couples that can least afford it!

Accelerating phase-outs

The tax code is filled with various income phaseouts for benefits, credits and deductions. Thankfully most now have the marriage penalty taken out, but it still exists in things like the Adoption Credit and Roth IRA contribution limits. But probably the worse example is that the earned income tax credit (EITC) phase-outs favor single versus married taxpayers. A single mother of thr ee in 2021 can qualify for the EITC with income less than $51,464, while a married couple loses the EITC with combined income over $57,414. This is often one of the driving reasons for not marrying when you have lower income and children are in the home.

Affordable Care Act piles onto the marriage penalty

The Affordable Care Act also penalizes married couples with lower thresholds on its 0.9 percent wage surtax and 3.8 percent investment income tax. The income thresholds for these surtaxes are $200,000 for single filers and $250,000 for married couples filing jointly. As a result, singles who each earn $125,000 to $200,000 can get hit with the extra tax after they marry.

Even Itemizing deductions favors single taxpayers

One of the new provisions in the tax code that limits itemizing deductions is the $10,000 upper limit on taxes, like property taxes and sales taxes, that can be used for itemizing deductions for a single taxpayer. The limit for a married couple? Not $ 20,000. It is the same $10,000! Congress must not think a family may need a bigger place to stay or need to spend more for the extra family members.

The tax rate problem is now better

However, there is some good news on the marriage penalty front. Prior to law changes in 2017, most married couples paid higher tax rates than if they were two single people. This penalty is now eliminated for all but the highest earners. The marriage penalty now comes into play in the 34% tax bracket that begins with combined incomes well over $200,000. Most of us can see the results of this pena lty in the news as celebrities conduct their tax planning and delay or avoid tying the knot.

The most import part of the marriage penalty is awareness of the problem. By knowing the tax pitfalls you can plan around them, and perhaps influence a change for the future.

You Owe Us, Not Them!

Fri, 13 Aug 2021 20:50:58 GMT

State tax authorities clamp down

If you work remotely in another state or are thinking about changing your residence from one state to another, you may be caught in the middle of a major state tax audit. If you keep a home in your original state or you later decide to return, you could have even more tax problems. State tax authorities may argue you never really left, and that you owe them a big tax bill for all the income you earned while away. Here are tips to ensure this does not happen to you.

Understand domicile

Tax residency is usually based on the concept of domicile . You may have many homes, but you can only have one domicile. A domicile is the place you intend to be your permanent home, and where you intend to return after being away. When these cases go to court, they are often decided by determining a person's intentions regarding their domicile.

Consider this hypothetical example:

Illinois resident Steve Seeyoulater moves to an apartment to pursue a lucrative job opportunity in Arizona leaving his wife and children behind in St. Paul, Minnesota to finish the school year. Steve reasoned that since he spent more than 70 percent of his time in Arizona, he could file his state return there and take advantage of its lower tax rate. The state of Minnesota could easily disagree with Steve's assumption, since on the surface Steve may intend for his permanent home to remain where his family is, in Minnesota. In this case, both states will have a claim on Steve's income.

Know the rules before you move

Before moving or working remotely, research the residency rules in your home and destination states. They often vary from state to state. Some states have specific guidelines on the number of days its residents must be in the state. Others are less exact.

Keep good records

If you say you are in a state for a certain period of time, be ready to support your claim. If during an audit your credit card receipts conflict with where you claimed to be at the time, you will have problems.

Demonstrate your intentions

If you're going to file as a resident of a new state but also have a potential tax claim in another state, you have to be able to demonstrate your sincere intent to change your domicile. Here are some things you can do:

Change your driver's license to reflect your new home.
Register to vote in your new state.
Relocate your checking and savings accounts to a local bank.
Use local service providers . Start going to a new, locally based doctor, dentist and church.
Make sure as many things near and dear to your heart are located in the new state. These can include your loved ones, pets or favorite personal items.
Spend the required amount of time in your new home, according to the state's tax laws.

The last thing you want is a call from a state auditor looking for income tax. By being prepared, you can greatly reduce the risk of a surprising tax bill. Reach out if you'd like to discuss your unique situation.