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Below you will find various topics and terminology coinciding with the services we provide to our customers.

Any information on our website or on the websites we provide links for, should not be considered tax advice. Before you make any tax or financial decisions, please consult with your professional tax advisor and discuss the matter. Please read our disclaimers page ...

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Liberty Tax Resources

Liberty Tax has excellent content including a solid Blog, knowledge base with tips, calculators, forms, and tools:

Great Business Tax Articles
IRS; State Taxes, and New Employee Forms
Tax Terminology

Well known Professional Journalist Kay Bell authors the website material in "Dontmesswithtaxes".This site is a great place for tax information and the links below will give you a short and concise explanation of any tax term you are interested in. Be sure to sign up for the "Tax Tip" of the day and enjoy Kay's site.

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Individuals

IRA Services
Retirement Savings

This section is dedicated to Retirement Savings including strategies during your "savings" years and and your retirement years.

Approaching Retirement Age

As you approach retirement age, you might consider moving some of your retirement funds out of your employer's plan and into an IRA at a custodian like TD Ameritrade or Fidelity.

You can do a rollover while you're still employed as long as you are over 59½. However, withdrawing money from a past employer’s 401(k) plan may be a little difficult.

Tip: Draw down your taxable accounts first, then tax-deferred accounts (401Ks, IRAs), then tax-exempt (Roth IRAs). This will maximize the time that your tax deferred and tax exempt assets can grow.

Consider other factors:

Where will you live? It's worth considering the state income taxes and property taxes of the state you plan to retire in.

Working in retirement allows you to save and grow investments longer, delay tapping into your retirement funds and provides you with funded healthcare from your employer.


How will you claim Social Security and Pensions? Delay taking Social Security and Pensions as long as possible to maximize your income and survivor benefit. If you plan on working past age 62, you will want to delay Social Security until at least your Full Retirement Age to avoid the Social Security work penalty.

You should only consider using home equity in retirement when it becomes necessary
However as people live longer more people may explore pro-actively using their home equity as part of their draw down strategy. Since it's typically accessed as debt - the cash flow doesn't create income tax obligations.

Retirement Saving Tips

  1. Save as much as possible as early as possible.
    Though it's never too late to start, the sooner you begin saving, the more time your money has to grow. Gains each year build on the prior year's -- that's the power of compounding, and the best way to accumulate wealth.

  2. Set real goals.
    Project your retirement expenses based on your needs. Be honest about how you want to live in retirement and how much it will cost. Then calculate how much you must save to supplement Social Security and other sources of retirement income.

  3. A 401(k) is a great way to save for your retirement.
    Contributing money to a 401(k) gives you an immediate tax deduction, tax-deferred growth on your savings, and -- usually -- a matching contribution from your company.

  4. An IRA will also provide you with a retirement boost.
    Like a 401(k), IRAs offer huge tax breaks. There are two types: a traditional IRA offers tax-deferred growth where you pay taxes on your investment gains only when you withdraw. If you qualify, your contributions may be deductible. A Roth IRA doesn't allow for deductible contributions but offers tax-free growth where you will owe no tax when you make withdrawals, but contributions are not deductible.

  5. Manage your asset allocation.
    How you divide your portfolio between stocks and bonds will have a big impact on your long-term returns.

  6. Stocks are for Long-Term Growth.
    Stocks have the best chance of achieving high returns over long periods. A healthy dose will help ensure that your savings grows faster than inflation, increasing the purchasing power of your nest egg.

  7. Don't allocate too heavily into Bonds, Even in retirement.
    Many retirees stash most of their portfolio in bonds for the income. Unfortunately, over 10 to 15 years, inflation can erode the purchasing power of bonds' interest payments.

  8. Making tax-efficient withdrawals can prolong your nest egg.
    Once you're retired, your assets can last several more years if you draw on money from taxable accounts first and let tax-advantaged accounts compound for as long as possible.

  9. Working part-time in retirement can help you.
    Working keeps you active and will keep you from relying as much on your nest egg.

  10. Get more out of your retirement assets.
    You might consider relocating to an area with lower living expenses or simply downsizing.

Roth IRA Contribution Limit Calculator

Use the button for a Roth IRA Contribution Limit Calculator. provided by Fidelity.

Social Security Disability and Benefits

Who is entitled to Social Security disability benefits?

An individual who is determined by the Social Security Administration to be "disabled" receives an Award Letter, which is a notice of decision that explains how much the disability benefit will be and when payments start. It also tells you when you can expect your condition to be reviewed to see if there has been any improvement.

 

If family members are eligible, they will receive a separate notice and a booklet about things they need to know.

 

Under the Social Security disability insurance program (title II of the Act), there are three basic categories of individuals who can qualify for benefits on the basis of disability: 

  • A disabled insured worker under full retirement age.
  • Individual disabled since childhood (before age 22) who is a dependent of a parent entitled to title II disability or retirement benefits or was a dependent of a deceased insured parent.
  • Disabled widow or widower, age 50-60 if the deceased spouse was insured under Social Security.
  • Been disabled or expected to be disabled for at least 12 months
  • Has filed an application for benefits, and
  • Completed a five-month waiting period; however, the 5-month waiting period does not apply to individuals filing as children of workers. Under SSI, disability payments may begin as early as the first full month after the individual applied or became eligible for SSI. In addition, if you become disabled a second time within five years after your previous disability benefits stopped, there is no waiting period before benefits start.

Under title XVI, or SSI, there are two basic categories under which a financially needy person can get payments based on disability:

  • An adult age 18 or over who is disabled.
  • Child (under age 18) who is disabled.

For all individuals applying for disability benefits under title II, and for adults applying under title XVI, the definition of disability is the same. The law defines disability as the inability to engage in any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

 

Meeting this definition under Social Security is difficult. Insured means that you have accumulated sufficient credits in the Social Security system.

 

When do Social Security disability benefits begin?

If you are getting disability benefits on your own work record, or if you are a widow or widower getting benefits on a spouse's record, there is a five-month waiting period and your payments will not begin until the sixth full month of disability. The 5-month waiting period does not apply to individuals filing as children of workers. Under SSI, disability payments may begin as early as the first full month after the individual applied or became eligible for SSI.

 

If the sixth month has passed, your first payment may include some back benefits. Your check should arrive on the third day of every month. If the third falls on a Saturday, Sunday, or legal holiday, then you will receive your check on the last banking day before that day. The check you receive is the benefit for the previous month.

 

Example: A check you receive dated July 3 is for June. Your benefit can either be mailed to you or be deposited directly into your bank account.

 

Are Social Security disability benefits taxable?

Some people who get Social Security have to pay taxes on their benefits. The rules are the same regardless as to whether Social Security benefits are received due to retirement or disability. If you file a federal tax return as an "individual" and your combined income is more than $25,000, you have to pay taxes. Combined income is defined as your adjusted gross income + Nontaxable interest + ½ of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you are married and file a separate return, you will probably pay taxes on your benefits. Social Security has no authority to withhold state or local taxes from your benefit. Many states and local authorities do not tax Social Security benefits. However, you should contact your state or local taxing authority for more information.

 

How long do Social Security disability payments continue?

Your disability benefits generally continue for as long as your impairment has not medically improved and you cannot work. They will not necessarily continue indefinitely, however.

 

Because of advances in medical science and rehabilitation techniques, an increasing number of people with disabilities recover from serious accidents and illnesses. Also, many individuals, through determination and effort, overcome serious conditions and return to work in spite of them.

 

What happens to Social Security disability benefits when I reach retirement age?

If you are still getting disability benefits when you reach retirement age, your benefits will be automatically changed to retirement benefits, generally in the same amount. You will then receive a new booklet explaining your rights and responsibilities as a retired person.

 

If you are a disabled widow or widower, your benefits will be changed to regular widow or widower benefits (at the same rate) at 60, and you will receive a new instruction booklet that explains the rights and responsibilities for people who get survivors benefits.

 

What happens if Social Security turns down my claim for disability benefits?

If you disagree with SSA's decision, you can appeal it. You have 60 days to file a written appeal (either by mail or in person) with any Social Security office. Generally, there are four levels to the appeals process. They are: 

  • Reconsideration. Your claim is reviewed by someone who did not take part in the first decision.
  •  Hearing before an Administrative Law Judge. You can appear before a judge to present your case.
  •  Review by Appeals Council. If the Appeals Council decides your case should be reviewed, it will either decide your case or return it to the administrative law judge for further review.
  •  Federal District Court. If the Appeals Council decides not to review your case or if you disagree with its decision, you may file a civil lawsuit in a Federal District Court and continue your appeal all the way to the US Supreme Court if necessary.

If you disagree with the decision at one level, you have 60 days to appeal to the next level until you are satisfied with the decision or have completed the last level of appeal.

 

You have two special appeal rights when a decision is made that you are no longer disabled. They are:

  • Disability Hearing. As part of the reconsideration process, this hearing allows you to meet face-to-face with the person who is reconsidering your case to explain why you feel you are still disabled. You can submit new evidence or information and can bring someone who knows about your disability. This special hearing does not replace your right to also have a formal hearing before an administrative law judge (the second appeal step) if your reconsideration is denied.
  • Continuation of Benefits. While you are appealing your case, you can have your disability benefits and Medicare coverage (if you have it) continue until an administrative law judge makes his or her decision. However, you must request the continuation of your benefits during the first 10 days of the 60 days mentioned earlier. If your appeal is not successful, you may have to repay the benefits.


Will I receive Social Security when I retire?

Retirement benefit calculations are based on your average earnings during a lifetime of work under the Social Security system. For most current and future retirees, The Social Security Administration (SSA) averages your 35 highest years of earnings. Years in which you have low earnings or no earnings may be counted to bring the total years of earnings up to 35.

 

You can collect early retirement benefits at age 62, but you currently can't get full benefits until 65 for persons born in 1937 or earlier. For persons born 1938 and later, the full retirement age increases gradually until it reaches 67 for those born in years 1960 and later. Then you can collect additional benefits for every year you delay your retirement until age 70. After you begin to collect Social Security benefits, you will continue to receive them for life.

 

How can I find out what Social Security will pay me when I retire?

You can create "my Social Security account" with SSA and view your Social Security Statement online at any time.

 

Can I count on Social Security being around when I retire?

With retirement on the horizon for many baby boomers, it's very likely that Social Security will be in your future. However, the Social Security trust fund is being threatened and some type of reform is needed.

How to Pass on the Wealth

Individuals who want to transfer wealth to heirs tax-free, and minimize estate taxes, should take advantage of tax strategies like gifting and direct payments to educational institutions; however, low-interest rates and a volatile stock market are creating additional opportunities. Here are some strategies:

 

  • Gifting: The annual gift tax exclusion provides a simple, effective way of cutting estate taxes and shifting income to heirs. For example, in 2020, you can make annual gifts of up to $15,000 ($30,000 for a married couple) to as many donees as you desire. The $15,000 is excluded from the federal gift tax so that you will not incur a gift tax liability. Furthermore, each $15,000 you give away during your lifetime reduces your estate for federal estate tax purposes. Any amounts above this limit will reduce an individual's federal lifetime exemption and require filing a gift tax return.
  • Direct Payments: Direct payments for medical or educational purposes indirectly shift income to heirs; however, it only works if the payments are made directly to the qualifying educational institution or medical provider. This strategy allows you to give more than the annual gifting limit of $15,000 per donee. For example, as a grandparent, you can pay tuition directly to your grandchild's boarding school, college, or university. Non-tuition expenses like room and board, books, and supplies, are not covered. The same holds for direct payments to a hospital or medical provider. Medical expenses reimbursed by insurance are not included.
  • Loans to Family Members: This strategy works by loaning cash to family members at low-interest rates, which is then invested to reap profits down the road. With mid and long-term applicable federal rates (AFR) rates for June 2020, as low as 0.43 and 1.01 percent, respectively, heirs can lock in these rates for many years - three to nine years (mid-term) and nine to more than 20 years (long-term).
  • Grantor Retained Annuity Trust (GRAT): Another relatively low-risk strategy is the grantor retained annuity trust (GRAT), where the donor transfers assets to an irrevocable trust and receives an annuity payment back from the trust each year. This strategy enables heirs to profit from their investments long-term - if returns are higher than the IRS interest rate. In June 2020, the interest rate used to value particular charitable interests in trusts such as the GRAT is 0.60 percent.
  • Roth IRA Conversions: Contributions to a traditional IRA are made pre-tax, which means distributions are considered taxable income; however, with a Roth IRA, the tax is paid upfront, and distributions are entirely exempt from income tax. It is this feature that makes converting a traditional IRA to Roth IRA and rolling it over to an heir an attractive option, especially during a financial crisis. The conversion is treated as a rollover, and typically would be accomplished via a trustee to trustee transfer where the trustee of the traditional IRA is directed to transfer an amount from the traditional IRA to the trustee of the Roth IRA. The account owner pays income tax on the amount rolled over in the year the account is converted, which allows the account to accumulate assets tax-free, and future distributions are tax-free.

Individuals

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Educator Expense

The deduction for educator expenses is up to $250 for 2018 and 2019. The tuition and fees deduction expired at the end of 2017.

Filing an Extension

If you can't meet the April 15 deadline to file your tax return, you can get an automatic six-month extension of time to file from the IRS. The extension will give you extra time to get the paperwork into the IRS, but it does not extend the time you have to pay any tax due. You will owe interest on any amounts not paid by the April deadline, plus a late payment penalty if you have paid less than 90 percent of your total tax by that date.

You must make an accurate estimate of any tax due when you request an extension. You may also send a payment for the expected balance due, but this is not required to obtain the extension.

To get the automatic extension, file Form 4868, Application for Extension of Time to File U.S. Individual Income Tax Return, with the IRS by the April 15 deadline, or make an extension-related electronic payment. You can file your extension request by computer or mail the paper Form 4868 to the IRS.

The system will give you a confirmation number to verify that the extension request has been accepted. Put this confirmation number on your copy of Form 4868 and keep it for your records. Do not send the form to the IRS.  As this is the area of our expertise, please contact us for more detailed information on how to file an extension properly!

Ten Ways to Avoid Problems at Tax Time

Looking for ways to avoid the last-minute rush for doing your taxes? The IRS offers these tips:

 

Don't Procrastinate. Resist the temptation to put off your taxes until the last minute. Your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.

Organize Your Tax Records. Tax preparation time can be significantly reduced if you develop a system for organizing your records and receipts. Start with the income, deduction or tax credit items that were on last year's return.

Visit the IRS Online. Millions of taxpayers visited the IRS Web site last year, downloading nearly 600 million forms, publications and a variety of topic-oriented tax information. Anyone with Internet access can find tax law information and answers to frequently asked tax questions.

Take Advantage of Free Assistance. The IRS offers about 150 tax topics through its website atTax Topics. It also offers federal tax forms and publications at 1-800-TAX-FORM (1-800-829-3676). Some libraries, post offices, and banks carry the most widely requested forms and instructions. Libraries may also have reference sets of IRS publications. The IRS also staffs a tax Help Line for Individuals at 1-800-829-1040. Help for small businesses, corporations, partnerships and trusts which need information or assistance preparing business returns is available at 1-800-829-4933. Both lines are staffed on weekdays from 7 a.m. to 7 p.m. your local time (Alaska & Hawaii follow Pacific Time). Hearing-impaired individuals with access to TTY/TDD equipment may call 1-800-829-4059 to ask questions or to order forms and publications.

Use IRS Taxpayer Assistance Centers and Vounteer Programs. Free tax help is available at IRS offices nationwide. Also, check your newspaper or local IRS office to find locations for Volunteer Income Tax Assistance or Tax Counseling for the Elderly sites. To obtain the location, dates, and hours of the VITA or TCE volunteer site closest to you, call the IRS toll-free Tax Help Line for Individuals at 1-800-829-1040 or on the IRS website.

Have your accountant Double-Check Your Math and Data Entries. Review your return for possible math errors and make sure you have provided the names and correct (and legibly written) Social Security or other identification numbers for yourself, your spouse and your dependents.

Have Your Refund Deposited Directly to Your Bank Account. Another way to speed up your refund and reduce the chance of theft is to have the amount deposited directly to your bank account. Check the tax instructions for details on entering the routing and account numbers on your tax return. Make sure the numbers you enter are correct. Wrong numbers can cause your refund to be misdirected or delayed.

Don't Panic if You Can't Pay. If you can't immediately pay the taxes you owe, consider some stress-reducing alternatives. You can apply for an IRS installment agreement, suggesting your own monthly payment amount and due date, and getting a reduced late payment penalty rate. You also have various options for charging your balance on a credit card, either as part of an electronic return or directly through a processing agent, either by phone or online. Electronic filers with a balance due can file early and authorize the government's financial agent to take the money directly from their checking or savings account on the April 15 due date, with no fee. Note that if you file your tax return or a request for a filing extension on time, even if you can't pay, you avoid potential late filing penalties.

Have Your Accountant Request an Extension of Time to File — But Pay on Time. If the clock runs out, you can get an automatic six-month extension of time to file, to October 15. An extension of time to file does not give you an extension of time to pay, however. You can e-file a Form 4868, Application for Automatic Extension of Time to File, that is included in most tax preparation software, or send a paper Form 4868 to the IRS to request the extension. You will need the adjusted gross income and total tax amounts from last year's return if you request the extension by electronic filing. You may also get an extension by charging your expected balance on a credit card at Official Payments Corporation or Link2Gov Corporation. There is no IRS fee for credit card payments, but the processors charge a convenience fee.

Foreign Income

With more and more United States citizens earning money from foreign sources, the IRS reminds people that they must report all such income on their tax return, unless it is exempt under federal law. U.S. citizens are taxed on their worldwide income.

This applies whether a person lives inside or outside the United States. The foreign income rule also applies regardless of whether or not the person receives a Form W-2, Wage and Tax Statement, or a Form 1099 (information return).

Foreign source income includes earned income, such as wages and tips, and unearned income, such as interest, dividends, capital gains, pensions, rents and royalties.

An important point to remember is that citizens living outside the U.S. may be able to exclude up to $102,100 for 2017 and $104,100 for 2018, of their foreign source income if they meet certain requirements. However, the exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S. Please contact us if you feel you may have earned foreign income to learn more!

Capital Gains and Losses

When you sell capital assets like stocks and bonds, rental property, your home, precious metals, etc. etc., the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss. Below, you will find  ten facts on how gains and losses can affect your federal income tax return.

  1. Capital Assets. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset including property such as your home or car, as well as investment property, such as stocks and bonds.
  2. Gains and Losses. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset. You must report all capital gains on your tax return.
  3. Net Investment Income Tax. You may be subject to the Net Investment Income Tax (NIIT) on your capital gains if your income is above certain amounts. The rate of this tax is 3.8 percent. For additional information about the NIIT, please call the office.
  4. Deductible Losses. You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.
  5. Limit on Losses. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return to reduce other income, such as wages. This loss is limited to $3,000 per year or $1,500 if you are married and file a separate return.
  6. Carryover Losses. If your total net capital loss is more than the limit you can deduct, you can carry it over to next year's tax return.
  7. Long and Short Term. Capital gains and losses are treated as either long-term or short-term, depending on how long you held the property. If you hold the property for more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
  8. Net Capital Gain. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.
  9. Tax Rate. The tax rates that apply to net capital gain depend on your income but are generally lower than the tax rates that apply to other income. The maximum tax rate on a net capital gain is 20 percent. However, for most taxpayers, a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gain such as unrecaptured Sec. 1250 gains (25 percent) and collectibles (28 percent).
  10. Forms to File. You often will need to file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses, with your tax return.
Selling Your Home

If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years.

To be eligible for this exclusion, your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale. You also must not have excluded gain on another home sold during the two years before the current sale.

If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount.

To exclude gain, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use. Longer breaks, such as a one-year sabbatical, do not.

If you do not meet the ownership and use tests, you may be allowed to exclude a reduced maximum amount of the gain realized on the sale of your home if you sold your home due to health, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disaster resulting in a casualty to your home, or an involuntary conversion of your home.  Send us a message for more!

Gift Giving

If you gave any one-person gifts valued at more than $15,000 (Spouses can elect to give up to $30,000 to one person.), it is necessary to report the total gift to the Internal Revenue Service. You may even have to pay tax on the gift.

  

The person who received your gift does not have to report the gift to the IRS or pay either gift or income tax on its value.

  

You make a gift when you give property, including money, or the use of or income from property, without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

  

There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:

  

Tuition or medical expenses that you pay directly to an educational or medical institution for someone's benefit

Gifts to your spouse

Gifts to a political organization for its use

Gifts to charities

If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift. Please contact us for more!

Deductible Taxes

Did you know that you may be able to deduct certain taxes on your federal income tax return? The IRS says you can if you file Form 1040 and itemize deductions on Schedule A. Deductions decrease the amount of income subject to taxation. There are four types of deductible non-business taxes:

State and local income taxes, or general sales taxes;

Real estate taxes;

Personal property taxes; and

Foreign income taxes.

You can deduct estimated taxes paid to state or local governments and prior year's state or local income tax if they were paid during the tax year. If deducting sales taxes instead, you may deduct actual expenses or use optional tables provided by the IRS to determine your deduction amount, relieving you of the need to save receipts. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate. The Tax Cuts and Jobs Act (TCJA) limit the total amount of the above state and local taxes an individual can deduct in a calendar year to $10,000.

Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for income or sales tax.

Deductible real estate taxes are usually any state, local, or foreign taxes on real property. If a portion of your monthly mortgage payment goes into an escrow account and your lender periodically pays your real estate taxes to local governments out of this account, you can deduct only the amount paid during the year to the taxing authorities. Your lender will normally send you a Form 1098, Mortgage Interest Statement, at the end of the tax year with this information.

To claim a deduction for personal property tax you paid, the tax must be based on value alone and imposed on a yearly basis. For example, the annual fee for the registration of your car would be a deductible tax, but only the portion of the fee that was based on the car's value.
Credit for the Elderly or Disabled

You may be able to take the Credit for the Elderly or the Disabled if you were age 65 or older at the end of last year, or if you are retired on permanent and total disability, according to the IRS. Like any other tax credit, it's a dollar-for-dollar reduction of your tax bill. The maximum amount of this credit is constantly changing.

You can take the credit for the elderly or the disabled if:

  • You are a qualified individual,
  • Your nontaxable income from Social Security or other nontaxable pension is less than $3,750 to $7,500 (also depending on your filing status).

Generally, you are a qualified individual for this credit if you are a U.S. citizen or resident at the end of the tax year and you are age 65 or older, or you are under 65, retired on permanent and total disability, received taxable disability income, and did not reach mandatory retirement age before the beginning of the tax year.

If you are under age 65, you can qualify for the credit only if you are retired on permanent and total disability. This means that:

  • You were permanently and totally disabled when you retired, and
  • You retired on disability before the end of the tax year.

Even if you do not retire formally, you are considered retired on disability when you have stopped working because of your disability. If you feel you might be eligible for this credit, please contact us for assistance.

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Tax Tip on mutual Funds

'It is wise to stay away from purchasing mutual funds in non-qualified accounts in late October, November and December. It's important you know the timing of capital gain distributions as mutual funds tend to announce distributions towards the end of the year. Capital gains distributions are taxable and we have seen clients buying funds in late December and getting capital gains distributions as much as $7,000. We advise you to hold off on investing in new funds or use an ETF until the distribution has been completed.

Deducting a Qualifying Home Office

If you are an employee of your own one-man corporation, whether a regular "C" corporation or a "sub-chapter S" corporation, you have three choices for handling the costs of a qualifying home office:

 

The best way  to get money out of your closely-held corporation tax-free is being reimbursed under an accountable plan The corporation can deduct the amount of the reimbursement and you do not have to report the payment as income.

 

This option is better than having the corporation pay you rent for the home office. While your corporation can deduct the rent paid to you, you must report the rent as income on Schedule E. In addition, you can only deduct the pro-rated share of real estate taxes, mortgage interest and casualty losses against the rental income on Schedule E, expenses that are otherwise deductible in full on Schedule A. You cannot deduct the proportionate share of any other expenses "with respect to the use of the home". While this generally includes insurance, repair and maintenance,, depreciation, and certain other indirect expenses, it does not include expenses which are not used with the dwelling", such as the cost of electricity used to power office lights and equipment.

 

To qualify as a home office, the space (it does not have to be an entire room) must be used regularly (on a continuous, ongoing or recurring basis) and exclusively (there can be no personal use) for your trade or business, and it must be your principal place of business or a place where you physically meet with patients, clients or customers on a regular basis. The space will be considered your principal place of business if it is used for performing administrative or management activities, such as billing, bookkeeping, ordering supplies, setting up appointments and writing reports, and there is no other fixed location where you regularly perform these activities.

 

As an employee, the home office must be for the convenience of your employer. This means the home office is required as a condition of employment, it is necessary for the business to function or it is necessary for you to properly perform your duties as an employee. If you do not have any other place of business, such as a rented office or storefront, your home office should qualify.

 

For an expense reimbursement plan to be considered "accountable", the expenses that are reimbursed must be for actual job-related expenses and you, as the employee, must substantiate the expenses by providing your employer with receipts or other documentation.

 

You should use a mobile app like Zoho Expense for your corporation. You should do this whether or not you have a home office. You can use the app for business mileage and other out-of-pocket business expenses, such as postage, office supplies, parking and tolls, meals and entertainment, etc. You won't need to keep  receipts with app since it captures the image as well as the information so you don't need to key anything in.

 

In calculating the "business use percentage" of your home office, divide the square footage of the office area by the total square footage of the home. List each item of expense paid during the month, such as real estate taxes, homeowner's insurance, oil heat, gas and electric, water and sewer, alarm or security service, garbage disposal, general repairs and maintenance, and mortgage interest (taken from the monthly mortgage billing statement or a loan amortization statement you can create online). Multiply the total of these expenses by the business use percentage to determine the amount to be reimbursed.

 

With the Zoho expense app, you can submit the expense report and pay yourself for it.


Fyi: You must reduce the amount of your itemized deduction for real estate taxes and mortgage interest by the amount of reimbursement you receive from your corporation during the year


Deducting, or being reimbursed for, a home office today will no longer turn around and bite you when you sell your personal residence, as had been the case in the past. If the home office is within the same "dwelling unit" as the residential portion of your home, you are treated as using the entire home as a principal residence.

 

If the office space was 10% of the total area of your home, you DO NOT have to pay income tax on 10% of the gain from the sale. You will be able to exclude the entire gain, up to the $250,000 or $500,000 limits, if you qualify, less any "post-May 6, 1997" depreciation. You must report any depreciation you deducted on the home office after May 6, 1997 as "unrecaptured Section 1250 gain", which will be taxed at the capital gains rates up to a maximum of 25%. 

 

You are married and you sell your personal residence, which you owned and lived in for the past 4 years and in which you had a qualified home office that was 15% of the total area, for a net gain of $300,000. During the 4 years you lived in the home you were able to deduct $5,000 in depreciation on the home office portion. You can exclude $295,000 of the gain, and will pay tax on only $5,000.

 

If you were not able to deduct depreciation on your home office, or were not reimbursed by your corporation for depreciation, there is no income to report and 100% of the gain, up to the limits, will be tax-free.

Charitable Donation Tips

Although fewer people will be taking charitable gift donations on their taxes, some individuals still look for every deduction they can get.

 

What you need to know:

“Real” charities:

All good causes are not charities. The IRS wants you to pick a charity with a 501c(3) designation.

Holding periods: When considering gifts where you are expecting a big deduction, the IRS wants the donor to have owned the item for at least a year.

Written confirmation: Gifts of $ 250.00 or more to a charity must be acknowledged by the charity in writing. If you attend a gala, they usually indicate how much of the ticket price is considered a contribution. You can only deduct the contribution amount.

Fair market value: Most charities need money, not things. They will accept your items but will most likely sell them. The value of your gift is usually the amount at which they can sell it, or what is called “market value”.

$ 500, $ 5,000 or $ 500,000 gifts: Charitable deductions totaling $500 or more requires the filling out of IRS form 8283. Donations of property of $5,000 or more require a qualified appraisal. Bigger gifts, like a $500,000 real estate donation, require the appraisal to be attached.

Donation of Used Clothing: You should deliver it directly to the charity, hand it over to a person behind the counter, and get your signed or stamped receipt and make sure they dated it. Attach the receipt to an itemized list of items with a market value. Organizations like Goodwill may have a printed value guide.

Used Furniture: Process is similar to used clothing. Make sure the donated furniture is in good, usable condition. Organizations like the Salvation Army provide valuation sheets with ranges.

Used Vehicles: This is another fair market value deduction. Use the KBB website to appraise your vehicle. Using the “retail price” is the market value.

Jewelry: The organization that sells it is getting the fair market value. That’s your deduction.

Antiques: The charity might accept it, but it’s probably going to be sold to generate cash. Know the difference between monetary value, and sentimental value.

Artwork: This gets complicated. Artists can’t donate their own work for more than the cost of materials and if you donate a painting to a museum for their display, you can deduct it at market value. If the museum intends to sell it, you can only deduct your original cost basis.

Real Estate: This is similar to securities. Get the fair market value for your deduction with a documented appraisal.

Rules for the rich:

Personal Foundations: If you are giving to your own personal charity, your asset donation value is the lower of the cost or fair market value.

Ceilings on Deductions: Under the new tax laws, you can donate up to 60 percent of it to a public charity.

Income Tax Filing Problems

Frequently Asked Questions

  • If I missed filing a return, what should I do? Get the return filed as soon as possible. Failure to file will lead to additional penalties, and ultimately the IRS will file for you by estimate, and their estimate is always high and fails to take into account important deductions. Moreover, the IRS will not accept your offer in compromise or allow to an installment agreement unless you are current on returns, whether you have paid all your taxes or not.
  • What do I do if I can’t afford to pay the IRS what I owe? There are many options, and you have rights. The IRS has numerous programs to pay off your taxes or even reduce them if you qualify. For example, you may qualify for an Installment Agreement, or it may make sense to submit an Offer in Compromise to reduce your liability. Reduction of penalties may be available. The worst thing you can do put your head in the sand. Penalties and interest will continue to accrue.
  • What is the difference between an IRS levy and lien? A lien is like a mortgage or judgment. It is filed in your county and automatically gives the IRS a security interest in your property, if you try to sell it, or if the IRS forces a sale. A levy means the IRS is in the process of actually taking your property, bank accounts or wages (garnishment) to pay your back taxes.
  • What happens to my credit score if I owe money to the IRS? Even if you negotiate an Installment plan will appear in your credit history including the amount owed and the size of your monthly payments. The debt will be considered as part of your overall debt and would affect your FICO score. If you don't work out a payment plan or pay in full, nonpayment may cause the IRS to file a Notice of Federal Tax Lien, which will stay on your credit report for at least seven years and therefore affect your credit score.
  • What can I do if the IRS has issued a levy against my property?
  • In this case, you should get professional help. If we can arrange a resolution with the IRS (even a long-term installment agreement) the IRS will stop its collection efforts as long as you stick to the agreement. We can also use other strategies to hold off the IRS, such as an Offer in Compromise, which will usually stop collection activity while the IRS considers your request.
  • Will the IRS garnish my wages without giving me notice first? No. The IRS is required to provide you with written Notice of Intent to Levy Wages. Do not ignore this letter. Come see me immediately to stop this process.
  • How much of my wages can the IRS garnish? It depends on your tax situation, such as number of exemptions, filing status, etc. But the IRS can take a lot and leave you broke. 
  • Am I liable for money my spouse owes the IRS that he/she incurred before we were married? Am I liable for IRS debts due to my spouse lying to the IRS? You are not liable for your spouse’s taxes incurred before marriage. However, during collection activity, the IRS may not distinguish between your property and your spouse’s property. In that case, we can seek Innocent Spouse Relief to get your property or money back. If you are married, the general rule is that if you file a joint return, you are both liable for the tax. However, if you were duped by your spouse, or former spouse, you may be entitled to Innocent Spouse Relief. This will require a full and complete explanation of the situation to the IRS, and an IRS investigation, including contact with your former spouse if he or she can be found.
  • How long does the IRS have to collect back taxes from me? The generally rule is that the IRS has 10 years from the date the tax assessed. This is called the statute of limitations. The date of assessment is tricky. If you filed on time, it is 10 years from the date the return was due. If you filed late, the time limit will not begin until you file, which means that unless your file, the IRS can pursue forever. There are also actions that can stop the limitations period from running, such as how long the IRS has to review an Offer in Compromise.
  • How do I prepare for an IRS audit? Get assistance. Gather your records. Sometimes an audit only looks at a particular issue, so do not discuss or provide information on other issues with the IRS. If it is a full-blown audit, your records will be very important. Audits are tough, but with good documentation and representation, you can come out alright, even with the IRS owing you money. You will also have right to appeal the results.
Tax Credits for Higher Education

The cost for higher education is expensive, and it keeps outpacing inflation. The average annual cost of tuition and fees is around $10,000 for public four-year universities in-state students and around a whopping $36,000 for private four-year universities out of-state students. The good news is the federal government offers 2 nice tax credits may be able to claim:

                

The American Opportunity Credit:

This credit provides the largest benefit if you are eligible for it. The maximum benefit is $2,500. This credit applies only to the first four years of post-secondary education and the student must attend at least half time. Tuition, course materials and fees qualify for this credit and the credit is equal to 100% of the first $2,000 of expenses for the year and 25% of the next $2,000 of expenses.

The phaseout are based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are:

For unmarried individuals: between $80,000 and $90,000

For married filing jointly, individuals: between $160,000 and $180,000

Up to 40 percent of the American Opportunity credit is refundable meaning the credit can reduce your tax liability below zero.

                

The Lifetime Learning Credit:

This credit equals 20% of the first $10,000 of qualified education expenses for up to a $2,000 credit per tax return. There are fewer restrictions to qualify for this credit than for the American Opportunity credit.

The Lifetime Learning credit can be applied to education beyond the first four years, and qualifying students may attend school less than half time. The student doesn’t even need to be part of a degree program. This credit works well for graduate programs and part-time students who take a qualifying course at a local college to improve job skills. The expenses apply to tuition, fees and materials. They do not include books, supplies, equipment, room and board, insurance, student health fees, transportation, or living expenses.

The phaseout are based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are:

For unmarried individuals: between $58,000 and $68,000

For married filing jointly, individuals: between $116,000 and $136,000

The Lifetime Learning credit isn't refundable. It can bring any tax you may owe down to zero.


The American Opportunity credit is often a greater credit, so taxpayers normally claim the Lifetime Learning credit when they're unable to claim the American Opportunity Credit due to enrollment restrictions.

                

Note: You can't claim both the Lifetime Learning credit and the American Opportunity credit for the same student in the same year. You can claim the Lifetime Learning credit for one student and the American Opportunity credit for another.

Tax Topics for Businesses

Virtual Business Tax Services
Self employed
If you are self-employed, you may be eligible to deduct premiums that you pay for medical, dental and qualifying long-term care insurance coverage for yourself, your spouse and your dependents. This health insurance write-off is entered on page 1 of Form 1040, which means you benefit whether or not you itemize your deductions.
Basis Limitations for K-1 Losses

The basis limitation is a limitation on the amount of losses and deductions that a partner of a partnership or a shareholder of a S-Corporation can deduct. The basis limits are the first of three limitations that are applied to Schedule K-1 losses and deductions. After the basis limits are applied, the At-risk limits (Form 6198) are applied. If losses are allowed by the basis and at-risk limits, the passive limits (Form 8582) are applied, if applicable.

 

Per Schedule E (1040), shareholders of S Corporations are required to attach a basis calculation to their tax return each year. There is no form for the basis limitation, but a worksheet, and some instructions have been provided in the partner and shareholder instructions for Schedule K-1.

 

It is important to note that the capital account shown on the Partner's K-1 is not the same as basis. According to the Partner's Instructions for Schedule K-1, the basis schedule represents outside basis while the capital account represents inside basis. These can differ, even when the partnership maintains its books and records on a tax basis. One way this difference can occur is when a partner buys his partnership interest from another partner, since the purchase price becomes the starting point for his outside basis. (For more information on general K-1 issues, please see K-1 Issues for Individual Taxpayers, General)

 

Computation

The starting point for the basis limitation is adjusted basis at the beginning of year. The adjusted basis at the beginning of the year is the ending adjusted basis from last year reduced by loss allowed in the previous year. In the initial year, basis is equal to the adjusted basis of property contributed to the partnership, plus any gain recognized on the contribution of property.

 

The following adjustments are made to arrive at the beginning adjusted basis used in applying the basis limitation:

 

Increases:

Adjusted basis is increased by current income from the activity, additional amounts invested in the activity, and depletion in excess of the oil and gas property basis.

 

Additionally, the adjusted basis of a partner's interest in a partnership includes the partner's share of the partnership's liabilities. This is not the case for shareholders in an S-Corporation. Because the S-Corporation is a corporation, it is a distinct legal entity separate from the shareholder, so the shareholder does not increase his or her basis by their share of liabilities. The shareholder only increases their basis by the loans they make directly to the corporation.

 

Increases to Shareholders' debt basis:

Once losses have reduced a shareholder's stock basis to zero, basis in loans that the shareholder has made to the S-corp is used to allow losses. In future years, any net increases increase debt basis before stock basis. It is important to note "Net Increases" is determined by netting together current year income, losses, prior year losses and distributions. If prior year losses are in excess of current year income, there is no "net increase" and therefore no restoration of debt basis. For more information, please see IRC. 1367(b)(2)(B)).

 

Decreases:

Distributions, decreases in a partner's share of partnership debt, and repayments on loans the shareholder made to the S corporation are all reductions to a partner's or a shareholder's basis.

 

If the current year plus prior year disallowed losses exceed basis, some of the loss is disallowed. Any disallowed loss is carried to the following year return and is treated as incurred in the following tax year.

 

For partners, the allowed loss is allocated pro-rata to each category of loss or deduction (Ordinary, 1231, capital gains/losses, 179 expense, etc.). For shareholders, there are ordering rules. Nondeductible expenses and depletion are allowed in full first, unless the shareholder has filed an election to do otherwise. (Regulation 1.1367-1(f))

 

Distributions in excess of basis

Per Internal Revenue Code Sections 704(a)(2) and 1367(a)(2) basis can never fall below zero. If there has been a distribution in excess of basis, then gain has to be recognized on the distribution. This gain is not reported on schedule K-1. The partner/shareholder reports the gain on their tax return.

 

Per Internal Revenue Code Section 1368, the treatment of a distribution in excess of stock basis depends upon whether or not the S-Corporation has any earnings or profits from when it was a C-Corporation.

 

If there were no earnings and profits, then any amount distributed in excess of stock basis is considered gain from the sale or exchange of property. IRC. 1368(b)(2)). The character of the gain is dependent upon the holding period of the S-Corporation stock.

 

If the S-Corporation had earnings and profits from when it was a C-Corporation, then, per Internal Revenue Code section 1368(c) the following rules apply:

 

A. The portion of the distribution that does not exceed the accumulated adjustments account is treated as a gain from the sale or exchange of property.

 

B. The portion of the distribution remaining after step A above is treated as a dividend to the extent it does not exceed accumulated earnings and profits of the S corporation.

 

C. Any distribution remaining after applying the two steps above is treated as gain from the sale or exchange of property.

 

For partners, Distributions in excess of basis also results in gain. (IRC. 731(a)(1)) Any gain recognized is considered gain from the sale of exchange of the partnership interest. See Internal revenue code section 731 for how to determine the character of the gain.

 

Alternative Rule for computing partnership basis

In circumstances where the general rule for computing a partner's basis cannot be practicably followed, an alternative method of computing basis may be available. This alternative method computes the partner's basis by referencing the partner's share of the adjusted basis of partnership property they would receive upon termination of the partnership. (See Regulation 1.705-1(b) for more details about the alternative rule).

Which business taxes can be deducted?

Unfortunately, businesses have more taxes to pay than individuals pay, but at the same time, businesses can deduct more taxes than individuals can.

            

Before we move into which taxes are deductible, federal income taxes are not deductible.

            

Are state income taxes deductible?

            

C and S Corporations and Partnerships can claim a deduction on their federal return for all state and local income taxes it pays. However, sole proprietors and single member LLC's can only deduct state taxes  if they itemize deductions on Schedule A

            

Can you deduct Payroll Taxes? 

If you have employees, you can deduct the portion of  payroll taxes the business pays for FICA tax.

            

Are self-employment Taxes Deductible? 

Self-employment taxes are not deductible. However, sole proprietors and single member LLC owners can deduct half of the self-employment tax amount on their personal tax return. 

            

The taxes that follow are considered a necessary cost of doing business so you may deduct these taxes your business pays:

City or state gross receipts tax

State unemployment insurance contributions and contributions to state disability funds (depending on the state)

State income tax or state business franchise tax

State, city, or local sales taxes you paid on business purchases

Real estate tax or property tax on real estate owned by your business (see below for more)

State unincorporated business tax

Tangible and intangible property tax

Customs, import, or tariff tax

License tax (for your business license, city license, or other)

Business vehicle registration tax

Gasoline tax, depending on how you claim business mileage costs (actual expenses vs. standard mileage) 

Telephone and cell phone taxes

Taxes on business travel expenses, such as hotel taxes, air travel taxes, meal taxes, entertainment, laundry, etc.

Excise taxes and fuel taxes

Miscellaneous taxes on business-related membership dues, stamps, safe deposit box rental, and others. 

Property taxes are deductible if the tax is based on the assessed value of the real estate and if it is levied for the "general welfare."  If the city where the business is located levies a tax to pay for a benefit like a new sidewalk on your property, you cannot deduct it. Taxes paid on utility bills are deductible.

            

How to Deduct Sales Taxes on Business Purchases

"Sales Tax and More

If a sales tax is included in an item your business purchases, you can deduct the sales tax. You can also deduct state taxes on personal property you purchased for your business such as taxes on an automobile.

            

Foreign income taxes including taxes imposed by United States possessions are deductible. You can choose to take a tax credit for either the foreign or the United States tax on the foreign income. Unlike state income tax, where you deduct the tax if you itemize, you can take this tax as a deduction. However, you cannot claim a deduction or a credit if your foreign income isn't taxable in the United States."

            

Note:

Taxes are only deductible in the year they are paid.

Only  business-related tax payments can be deductible as a business expense.

Tax Blogs

Tax Preparer

Please Note: Before you read any Tax articles, be aware of dated material. 

Tax information can age very quickly with tax law changes.

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