Can the IRS help you recover from Mother Nature?

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Mother Nature created a life changing financial effect upon many American financial lives.

  • Since 6/11/16, there have been 6 Major Disaster Declarations in 6 different states: Texas, Oklahoma, West Virginia, Montana, Wisconsin, and Louisiana
  • During the same period of time, there have been numerous Fire Management Assistance Declarations in multiple states, mostly in California and most recently in Washington

If I could, I would, restore your homes to their original condition- with a wave of a Faerie wand or a twitch of a nose. Unfortunately, I cannot do that.

What I can do is to use my commercial property & casualty experience and my tax knowledge, to create this blog and hopefully provide you information you can use, to help you recover from a financial loss.

Damage caused by Mother Nature = Casualty Loss:

A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. It does not include normal wear and tear or progressive deterioration (termite damage).

  • For those that had a property loss due to fire, an insurance policy may have helped you recover some of your financial loss
  • For those that had a property loss due to a flood, financial help from an insurance company may not be  available; FEMA or others might help

 

In addition to insurance or FEMA assistance, the IRS tax rules may provide you some tax relief:

  1. Allow you to deduct a portion of your unreimbursed loss on your individual tax return
  2. Allow you to use a Net Operating Loss to change past tax returns or to use that loss on a future tax return

 

Perspective:

  • Casualty Losses are required to be reported on Schedule A as an Itemized Deduction
  • For practical purposes, Itemized Deductions need to be greater than the Standard Deduction to provide you a tax financial benefit
  • Is your loss more than the amounts shown below?

 

2016 Standard Deductions:

  • $6,300 for Single and for Married Filing Separate (same as 2015)
  • $12,600 Married Filing Joint (same as 2015)
  • $9,300 Head of Household (was $9,250 for 2015

 

Planning Tip: “Details create the big picture “ – Samuel I. Weill

  • The IRS requires documentation for tax deductions; start to gather and prepare now
  • The only way to see what will work for you is to gather, evaluate and decide
  • If you have questions, reach out and ask, including from me

 

Individual Tax Deduction Rules:

  • Generally, you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return
  • You may not deduct casualty and theft losses covered by insurance, unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement

 

If your property is personal-use property or is not completely destroyed, the amount of your casualty loss is the lesser of:

  • The adjusted basis of your property, or
  • The decrease in fair market value of your property as a result of the casualty

 

If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis.

 

Tip: Adjusted Basis =

  • The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation
  • For property you buy, your basis is, generally, the cost to you
  • For property you acquire in some other way, such as inheriting it or getting it as a gift, you must figure your basis in another way- see Pub 551

 

Claiming the Loss:

  • Individuals are required to claim their casualty and theft losses as an Itemized Deduction Form 1040, Schedule A
  • For property held by you for personal use, you must subtract $100 from each casualty or theft event that occurred during the year after you have subtracted any salvage value and any insurance or other reimbursement
  • Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year
  • Consider using your 2015 Adjusted Gross Income (AGI) as a benchmark – (the last line, on the 1st page, of your 1040 tax return)
  • Report casualty and theft losses on Form 4684, Casualties and Thefts
  • Use Section A for personal-use property and Section B for business or income-producing property
  • If personal-use property was damaged, destroyed or stolen, you may wish to refer to Pub 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)
  • For losses involving business-use property, refer to Pub 584-B, Business Casualty, Disaster, and Theft Loss Workbook
  • These workbooks are helpful in claiming the losses on Form 4684; keep them with your tax records

 

When to Deduct:

  • Casualty losses are generally deductible in the year the casualty occurred
  • However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to treat the casualty loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year
  • Claiming a disaster loss on the prior year’s return may result in a lower tax for that year, often producing a refund – Do the Math

 

When Your Loss Deduction Exceeds Your Income

  • If your loss deduction is more than your income, you may have a Net Operating Loss (NOL)
  • You do not have to be in business to have an NOL from a casualty
  • For more information, refer to Pub 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts

 

Net Operating Loss (NOL)– Individuals:

  • Net Operating Losses occur when you have more tax deductions than you have taxable income
  • You may have a NOL if you have a negative number on the line for taxable income before you deduct your personal exemptions- Form 1040, Line 41
  • This can occur in you have a large casualty loss, such as a flood or a fire, and are not reimbursed for the loss from insurance or other possible sources

 

If you have a NOL:

  • Decide whether to carry the NOL back to a past year or to waive the Carry Back period and instead carry the NOL forward to a future year
  • NOL year= This is the year in which the NOL occurred
  • Generally, if you have an NOL for a tax year ending in 2015, you must carry back the entire amount of the NOL to the 2 tax years before the NOL year (the Carry Back period), and
  • Then Carry Forward any remaining NOL for up to 20 years after the NOL year (the Carry Forward period)
  • You can, however, choose not to Carry Back an NOL and only Carry it Forward
  • See IRS Publication 536

 

I realize this is a lot of information to take in at one time. Keep it as a guide, and take one step at a time. The following action steps will help you get started.

 

Action Steps:

  • Inventory your loss by property type- real property (real estate); personal property; automobiles; business property
  • If you own real estate, determine your cost basis
  • If you need to replace IRS information, use their “Get Transcript” tools, for wage/income information and to obtain previous tax returns
  • State tax rules are different; research yours when you can, to see if tax benefits are available there
  • When you can:
  1. Quantify the value of items lost
  2. Quantify the money received to replace part of your loss
  3. Find your initial IRS loss number: Value of items lost – money received = unreimbursed loss
  4. Use the Unreimbursed loss number to see if the IRS rules, included above, can help you recover, at least some, financially
  5. If you have questions, feel free to contact me via e-mail or by phone; if you use e-mail, please do not send attachments or any personal financial information- that information should always be protected. General questions and specific numbers are safe.

 

“In times of turbulence and change, it is more true, than ever, that knowledge is power ” – John F Kennedy

“Tax Filing is mandatory; Tax Planning is optional; Tax Planning & Acting can help you keep more $$ in your pocket rather than Theirs (The IRS)” – Deb Fox

It’s impossible said Pride; It’s risky said experience; It’s pointless said reason; Give it a try whispered heart” – anonymous

 

Thanks for reading,

Deb

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

Does the IRS think you have a Business?

2013 Tax

Many taxpayers started a business and thought, or were told, “Don’t worry about the expense, it’s a write off on your tax return”.

The truth is that this may or may not be true.

Tax is not a cookie-cutter industry and as you can probably guess, the IRS did not make a “One Size Fits All” tax rule for write-offs.

If your intent is to enjoy your hobby and perhaps make some incidental income, this blog may not be of interest to you.

If your intent is to make money through a legitimate business, as defined by the IRS – this is for you

  • My purpose is to provide you “heads up” and “eyes open” to help ensure your business and financial success
  • This blog is provided to help educate you on how to organize, manage and conduct your business to improve your chances with the IRS in the event that your “activity” is audited ***

 

IRS Hobby VS Business Rules:

  • An “Activity” is either a hobby or a business
  • The IRS uses facts to decide if an activity is a (hobby) or a business
  • Neither the Code nor the Regulations provide an absolute definition
  • It is difficult for a taxpayer to win a hobby-loss case at the Tax Court level
  • If your tax return pays tax as a business and the IRS finds that it is a hobby, your tax return can be corrected and your tax liability could go up; i.e. you might owe the IRS money ***
  • The financial adjustment may be significant. In addition to the loss of the deductions, you, may face a §6662 understatement penalty for the tax years in question ***

 

Hobby Rules:

  • An activity is presumed to be a Hobby if a profit is not earned in at least 3 taxable years of a consecutive 5-year period
  • A taxpayer can overcome the presumption if he/she can show the activity was operated with a For-Profit motive
  • Under IRC §183, a taxpayer’s deduction for Hobby losses is limited to the income produced
  • You must itemize deductions to claim hobby expenses on your tax return
  • Hobby expenses, along with other miscellaneous expenses you itemize on Schedule A, must come to more than 2% of your adjusted gross income before you can deduct them
  • Hobby Expenses can bring your Hobby Gross Income, to zero
  • Income is reported on your IRS Form 1040, Line 21, Other Income
  • I understand that this can be confusing, so I will rephrase differently, to help bring clarity:
  • Hobby Income needs to be reported
  • Hobby Expense deductions have 3 limitations:
  1. Total Itemized Deductions have to be greater than your Standard Deduction
  2. Hobby expense deductions are limited to the hobby income produced, and then
  3. Then those expenses must be reduced by 2% of your Adjusted Gross Income (AGI)

 

Business Rules:

  • A Business has a For-Profit motive
  • A simple, general rule is that if the business makes a profit in 3 of 5 years there will be a presumption of profit
  • IRC § 183(d) is a safe harbor for the taxpayer
  • If the business is For-Profit, no limit on deductions is imposed and the taxpayer may be able to use losses to offset (reduce) other taxable income
  • If an activity has not produced profits in three of the past five years, the taxpayer may still argue that the business has a profit motive by relying on Reg. §1.183-2, which provides for a nine-factor test
  • More weight is given by the courts to the objective facts (rather than to the taxpayer’s statement intent) Dreicer v. Comr., 78 T.C. 642 (1982)
  • Judicial decisions suggest that no one factor is controlling
  • Court decisions often seem to consistently rely on the first factor as the most important

 

The prevailing regulations list nine critical factors for determining whether an activity constitutes a Hobby or a Business. They are:

  1. The manner in which the taxpayer carries on the activity
  2. The expertise of the taxpayer or his or her advisers
  3. The time and effort expended by the taxpayer in carrying on the activity
  4. The expectation that assets used in the activity may appreciate in value
  5. The success of the taxpayer in carrying on other similar or dissimilar activities
  6. The taxpayer’s history of income or losses with respect to the activity
  7. The amount of occasional profits, if any, which are earned by the taxpayer
  8. The financial status of the taxpayer
  9. Any elements of personal pleasure or recreation

 

Business Tax Reporting:

  • A Sole Proprietor or Qualified Joint Venture will file a federal return on Form 1040 and Schedule C- Profit or Loss from Business
  • If you have another Schedule C business activity; a separate Schedule C is required for each business; the same is true for your business records
  • Check to see what tax reporting is required by your state tax board and local municipality
  • The IRS expects you to pay tax as the money is earned
  • If you operate on a calendar year, due dates are 4/15, 6/15, 9/15, and 1/15 for the previous year
  • Quarterly estimated tax payments should be paid if you expect to owe more than $1,000 in federal taxes on an annual basis
  • Use 1040ES for Individual Estimated Payments
  • Reconcile payments on your annual Year End tax return
  • Self-Employment tax of 15.30% is required on all Annual Net Earnings of more than $400

 

Building the Foundation for a For-Profit Business Intent

Tips for Success:

  • Conduct your business, like a business, consistently
  • Consistency includes Quarterly tax reporting and payments – as required
  • Quarterly reporting requires that your accounting records be current – so you know if you have a profit or a loss
  • Taxpayers bear the burden of proving that they engaged in the activity with an actual and honest objective of realizing a profit
  • Keep detailed financial records
  • Credit Card and Bank statements and cancelled checks are not enough- the IRS needs to see the detail of what you bought
  • Receipts are your Audit Protection – the IRS has Strict Substantiation Requirements
  • The Cohen Rule,” states that you can use “other credible evidence,” or rely on IRS Publication 463 which states that you don’t need to keep receipts for expenses under $75 – it is safer to save all receipts and to follow a consistent business practice
  • Don’t use Cash: it is hard to track, easy to spend and nearly impossible to reconcile with receipts
  • Establish separate checking and credit accounts for your business – don’t co-mingle business & personal funds
  • Keep a Time/Activity Log- Outlook or Google calendar may be requested during an audit
  • If you have had business losses and made changes in the attempt to improve profitability, keep a list of changes made and the date the change was made
  • Establish a level of expertise by attending seminars, networking, and joining professional organizations related to the activity
  • Anticipate that you could be audited ***
  • Pursue your passion, enjoy the journey, and ask questions as you learn along the way

 

If you want to learn more about IRS tax rules, contact for me for a $75.00 Special: includes a 45 minute Q&A phone session plus a free “cheat sheet” for your personal use. The “cheat sheet” includes accounting/tax tips about what is a deductible expense, etc. Offer is valid until 9/5/16.

 

“Success is nothing more than a few simple disciplines practiced every day” – Jim Rohn

“To open a shop is easy; to keep it open is an art” –Chinese Proverb

 

Thanks for reading,

Deb

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

Is Your Tax Situation Causing You Pain?

 

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Perhaps, a little humor can help the “medicine go down”

Is a Tax problem (and pain) keeping you up at night? If so, I hope to provide you some relief to feel better by:

  • Helping you Identify your status & gain perspective
  • Provide education – process, proposed solutions, and
  • Suggest do’s and don’t to remedy your situation, or
  • Identify those that can legally help you and with what

Pain Scale:

0 – I hope it stays this way – always

Mild Pain – Filed an extension & still not ready to file?

1-2 – Mild Pain – Can be Ignored?

Moderate Pain – Audit – Find your Records?

3 or 4: Interferes with Tasks

5 or 6: Interferes with Concentration

Severe Pain – Assets seized? Wage Garnishment?

7 or 8: Interferes with Basic Needs

9 or 10: Bed Rest Required

Regardless of your situation, know that you are not alone and help is available.

Tips for those with a Mild diagnosis

  • You have until 10/17/16 to file your 2015 return
  • Now is the time to request help if you want it
  • Reminder to stay current with your estimated tax payments for 2016

Tips for those with a Moderate/Severe diagnosis

Remind yourself that being afraid of things going wrong isn’t the way to make things go right.

Fear is interest paid on a debt you may not owe” – anonymous

Take a breath and let’s dig deeper.

There are 3 types of IRS Audits (verified compliance)

  • Correspondence Exam– not Face to Face
  • Office – Local IRS office – Desk Audit
  • Field – Your office or home or your Accountants office

Audit Scope/Complexity varies from low to high risk

  • In a Correspondence Audit, the IRS, generally, will not expand the scope
  • If you request a transfer to an Office Audit, because of complexity or large amount of documents, the Revenue Agent has the authority to Expand the Scope- IRS internal approval required
  • Field Audit scope can be expanded without approval 

An Audit LifecycleSimplified

  • Inquiry
  • Provide info
  • Wait
  • Proposed Changes
  • Wait
  • Provide Additional info
  • Finalize

Timeframe to Resolve (perspective)

  • Correspondence Exam – 3 to 6 months
  • Office Exam – can take over a year

 

What you need to know:

  • A discrepancy is not an audit; i.e. Form CP 2000, but should be treated like an audit
  • For Audits, the Burden of Proof, falls upon the Taxpayer- show why you are entitled to deduction
  • The IRS may give you a Proposed Tax Bill if you don’t substantiate your position
  • Your Tax Adviser can help you by being the Auditor before the Audit; examples:
  1. Can help you identify Audit Risks – problem areas on your return and/or overlooked deductions & credits
  2. Poor Books & Records & the need to recreate

 

Dos and Don’ts

Do:

  • If you handle your own IRS correspondence, Be Clear, Concise, and To The Point
  • Do provide credible evidence
  • Be timely in your response and provide the requested information – Be organized and help them do their job
  • Do know the Limits on Representation:
  1. CPA, EA, & Attorney can help through the Appeals process
  2. Attorney only for Tax Court

 

Don’t:

  • Do not include needless facts- the auditor could miss your main point if you ramble
  • Do not send/bring a big box of loose unorganized paper- this sets your audit off on the wrong foot
  • Don’t ignore their letters

Action Steps:

  • Read what the IRS is looking for
  • Gather documents, organize, & summarize
  • Recreate unavailable documents
  • Decide, am I going to do this alone or get help

 

Process:

Audit Determination:

  • No change
  • Agree with changes – make payment arrangements
  • Disagree with changes – Appeals Mediation or Appeal

Collection:

  • Generally, the IRS will send you a written notice requesting that you pay a specific amount
  • If not paid and you do not contact them, the IRS could force you to pay by taking future refunds, placing liens on your property, seizing assets, & garnishing your wages

Installment Agreement:

  • Signed agreement to pay down the debt over a period of time
  • Can prevent Wage Garnishment IF payments are made on time

Offer in Compromise:

  • An agreement to settle the debt for less than the amount owed
  • You must qualify by meeting compliance and eligibility requirements. Requirements are strict and the IRS only accepts this under limited conditions

Appeals Mediation:

  • Alternative Dispute Resolution
  • Helps to develop resolution strategies
  • Appeals mediator has no power to render a decision or to force either party to accept a settlement.

Appeal:

Appeals is the place for you if ALL of the following apply:

  • You received a letter from the IRS explaining your right to appeal the IRS’s decision.
  • You do not agree with the IRS’s decision.
  • You are not signing an agreement form sent to you.

 

Closing Comments:

  • This blog is intended to provide you some insight and helpful solutions. It is not exhaustive of all possibilities
  • 1st Time Abatement Penalty and relief from other penalties were not discussed in this blog

 

If you have questions, feel free to call me at 619-549-2717.

“They always say time changes things, but you actually have to change them yourself “ – Andy Warhol

 

Thanks for reading,

Deb

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

5 Ways a CPA can help Small Business

 

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Small Business Owners, particularly in the early stages, are doing it all.

Sometimes it can feel like an up hill battle. There is so much to do, and learn, and not enough time to do it. Financial resources can be scarce and stretched thin.

Sometimes spending a little can help you a lot. The value is apparent.

What We Do:

CPA’s do much more than crunch numbers and report on facts that have already happened in your financial statements.

CPA’s provide advice. We educate our clients and help them improve their financial business results.

Our value can often be quantified, measured, seen and/or felt by business owners.

CPA’s provide a wide variety of services.

I enjoy helping small business owners with income tax and with all the detail that includes. I understand almost no one likes tax; however, we all like to save money. For me, using IRS rules to help others is fun.

How We Help:

1.  A CPA  can help prevent “Blind Spots”:

What you don’t know can hurt you. I’m not telling you this to scare you. Rather, to educate you and provide an objective example.

Many new Small Business Owners do not know that the IRS expects them to pay tax as the money is earned and that quarterly reporting and payments are required if you expect to owe more than $1,000 annual tax to the IRS.

This means that you need to keep your accounting records current so you can determine if you need to begin quarterly reporting and payments. 

2.  A CPA can help with your Budget:

  • Self-Employment tax of 15.30% is required on all Annual Net Earnings of more than $400
  • The 2015 SE tax rate on Net Earnings is 15.3: (12.4% social security tax and 2.9% Medicare tax)
  • Do you include this expense in your budget so you have cash when it is time to pay the IRS?

 

3.  A CPA can help you make Decisions:

  • Data (information) can be used to help you make cost effective decisions
  • Review Forecasted to Actual Financial results – what happened?
  • Help a business owner interpret the financial statements and offer suggestions to improve profitability, cash flow, and efficiency

 

4.  A CPA can help you Minimize your Income Tax:

  • Do you know what you can legally deduct on your tax return?
  • Do you know how to use strategy to reduce your business tax bill?
  • Tax Planning includes education, evaluation, and action

 

5.  CPA can help you improve Profitability:

  • When I told an architect that they were required to pay Self-Employment tax, they were shocked. They told me, I have to raise my prices immediately. I am not making any money.
  • We can help you determine if your pricing is profitable or if you are working for free or for not as much money as you thought you were making
  • You don’t want to wait until year-end to find out
  • As we all know, time is money and the faster we can earn it and build a financial cushion, the more comfortable we feel

 

You have 3 choices:

  1. Do it yourself – inexpensive, but can be costly
  2. Do it for me – expensive & might be seen as a luxury until the cash starts coming in – consistently
  3. Do Some of it for me: a cost effective bridge to obtain education and help on a “as needed” basis

 

Thanks for reading,

Deb

Call me about an Accounting & Tax Tip Cheatsheet  619-549-2717

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

 

Financial Fitness: Improving your Tax Story

2013 Tax

Our tax returns tell a story.

A Tax Return is the Story of your recent Past; it is your 2015 financial story.

The story tells the reader lots of information about you:

  • Marital Status (tax rate) Single; Head of Household; Married filing Separate; Married filing Joint; Widowed
  • How you earn your money – employee, self-employed, real-estate investments/rents; royalties
  • How you support yourself if you are not working – unemployment, retired, pension, social security, Required Minimum Distributions
  • How you spent your money: mortgage interest; children; student loans; medical bills; charitable donations
  • Did you have a good year with gambling winnings? Capital Gains?
  • Did you have financially devastating year, as many unfortunately did this year, because of so many natural U.S. catastrophes in 2015?

 

Income Tax Planning is one of the best ways to build your financial wealth.

2015:

Yes, 2015 is over and there is limited opportunity to improve that tax bill. However, depending on your circumstances, there might still be a way to reduce the amount you pay.

  • Contribute to your IRA before 4/18/16
  • If you are married, can you start and fund a Spousal IRA?
  • For 2015 and 2016, your total contributions to all of your traditional and Roth IRAs cannot be more than:

$5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit

Your Traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.

 

Be Careful of Excess IRA Contributions:

If you exceed the 2015 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). Otherwise, you must pay a 6% tax each year on the excess amounts left in your account

Note that Employer contributions made under a SEP (Simplified Employee Pension) plan do not affect the amount you can contribute to an IRA on your own behalf.  You can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA.

2016:

Our Financial Life is not stagnant. Like the ocean or a river, it changes all the time – it is a continuous evolving, moving, financial puzzle. New life stages & events provide us an opportunity to make new financial decisions & implement a revised plan.

The key to changing your Tax Story requires you to take action, now, in the present, and in the future.

Here are some tips to help you strengthen your Financial Fitness in this New Year:

  1. If you are an employee, review your withholding allowance on Form W-4. Is it accurate for what you anticipate in 2016? If not adjust, as soon as possible. The earlier you do this during the year, the more accurate your withholding will be.
  1. If you are Self-Employed, even part-time, do you know if you are required to make estimated quarterly payments to the IRS?  Avoid penalties & interest by ensuring that you make the required payments if they apply. Independent Contractors, Freelance workers, those that conduct Internet based sales (Etsy, eBay, Airbnb) and even Uber Drivers should review the information on the IRS website.

The IRS expects you to pay tax as the money is earned. If you operate on a calendar year, due dates are 4/15, 6/15, 9/15, and 1/15 for the previous year.

  1. If you have a High Deductible Health Insurance Plan, consider setting up a Health Savings Account (HSA). This is a tax- advantaged account to help pay for your medical expenses.

It is also an “Above the Line” deduction on your 1040 Individual tax return, which means you can use it to reduce your income, even if you do not itemize. Lower income, generally indicates, lower taxes.

  1. If you gamble, including playing the lottery, save all of your 2016 “expense” receipts. Why? If you win big, you can reduce the amount you won by the amount that you lost and only pay tax on the difference.

Gambling income includes but is not limited to winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips.

To deduct your losses, you must be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses

  1. Defer at least some of your income through a 401K match or similar program to reduce your taxable income for the year & to build savings for the future.
  1. If you itemize or might be able to itemize, record all of the miles you drive, by category: Charity ($0.14); Medical/Moving ($0.19) and Business ($0.54).

It can all add up, faster than you might think and may also make the difference between claiming the standard deduction and being able to itemize. The more you can legally write off, the lower your tax bill.

You can keep a paper calendar in your car & record what, where, why, & how many miles for each trip or use a Smart Phone App to help you.

Whatever you do, ensure you keep good records. If you are audited & can’t prove the deduction, the deduction can be denied and you could owe a penalty and interest for the underpayment.

  1. If you have a business and operate on a cash basis, it is imperative that you keep great records for both cash coming in & cash going out. This recent article highlights the reason why you need to do this: http://smallbiztrends.com/2015/12/recent-irs-case-highlights-need-sophisticated-small-business-management.html

 

  1. Think like a Tax Professional: Know your “Income” Types & their Tax Rates:

Taxable “Income”:

  • Ordinary Income is income earned from providing services or the sales of goods
  • Capital gains are usually associated with the sale or exchange of property characterized as capital assets
  • Short Term Capital Gains are taxed at your Ordinary Income tax rate (10 % to 39.6%)
  • Long Term Capital-Gains tax rates vary by your income tax bracket and the type asset sold
  • Generally, if you’re in the 10% or 15% tax bracket, you’ll pay 0% on those gains. Most other taxpayers pay 15%; however, the rate can also be 20, 25, or 28% for certain asset classes and/or income levels.

Tax Deferred Investment Income includes:

Withdrawals from Traditional IRAs and your 401K, which are, taxed as ordinary income (10% to 39.6%)

Tax Free Investment Income: Roth IRA

  • Tax Free Income as long as the account has been open for at least 5 years
  • Provides flexibility in the timing of future income – you decide
  • Required Minimum Distributions do not apply to Roth accounts as are required by Traditional IRA plans
  • Roth IRA distributions are not considered as income when determining how your Social Security payments are taxed. Qualified Roth distributions are not included in either net investment income or in the modified adjusted gross income calculation for assessing the 3.8% net investment income tax

 

  1. Manage your Tax Bracket:
  • Try to keep your Ordinary Income in the lower tax brackets
  • “Fill up” each bracket, where possible
  • Be aware of tax consequences before making decisions that push you into the next highest rate bracket; i.e. can you defer a bonus or sale to new year if it means you will be taxed 10% less?
  • If you itemize, group deductions where possible; i.e. elective medical or dental procedures; charitable contributions to reduce your taxable income – Plan

 

  1. Your income tax bill is perhaps the biggest bill you will pay over your lifetime. Learn, Plan, Act to reduce and keep more of your money in your pocket, not Theirs (The IRS).

Yes,  to be in compliance, we need to file & pay.  The IRS rules are there for us to use. It is our responsibility and our choice to use them or not. The IRS is not going to tell you, you could have paid less, if you had just (xxx). There are a lot of possible ways to “fill in the blank”. Each Tax Story is unique.

As a CPA – Tax Advisor, I love learning the rules and then sharing information to help other people reduce their tax bills. It is my way to help empower other people and hopefully, make a small difference in their quality of life. Nobody likes paying taxes; almost all of us like to save money.

Have fun leaning, planning, and saving.

Cheers to a happier, healthier, & wealthier 2016!

Thanks for reading,

Deb

 

 

Deborah Ann Fox, CPA is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointments. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com

“Money on the Table”- 2015 Year-End Tax Saving Strategies

Leaving “Money on the Table” is an idiom, which means not getting as much money as you could.

You can do this in a lot of different ways such as salary negotiations, selling low when you bought high, or by not using the IRS tax rules and planning opportunities and then leave your hard earned money “on the table”.

The IRS, literally, spells “theirs”. The money is theirs if you just wait until the tax- filing season comes, complete & submit your 1040 tax form and then pay the amount owed or get a refund.

As a CPA – Tax Advisor, I love learning the rules and then sharing information to help other people reduce their tax bills. It is my way to help empower other people and hopefully, make a small difference in their quality of life. Nobody likes paying taxes; almost all of us like to save money.

Yes, we need to pay our share, but we don’t need to pay more than we need to. The IRS also does not want us to pay more than we should. The rules are in place to help us pay less. It is our responsibility and our choice to use them or not. The IRS is not going to tell you, you could have paid less, if you had just (xxx). There are a lot of possible ways to “fill in the blank”. Each tax story is unique.

As an advocate for “not leaving money on the table”, I offer you some practical, actionable, steps to take now to see if you can reduce your 2015 tax bill, now, before it is too late.

Step One: Estimate your 2015 Income & IRS Withholding

If you want to want to make sure your money is more in “your pocket” than theirs:
• Determine how much you have earned this year
• Determine what you have paid toward your 2015 tax bill
• Then increase each of these amounts to estimate the year-end amounts

Step Two: Compare this year to last year:

Now that you have a glimpse of your 2015 tax situation, compare those numbers to those on your 2014 tax return. A filed return can be used as a sort of “road map” to see if there are options to reduce your tax bill now or in the future.

For example, did you get a refund last year? If so, consider this:

Last year, Kiplinger’s had a great article titled, “Safeguard your Refund by shrinking it”. The article includes the following:
• More than 75% of Americans get an IRS tax refund each year which is the equivalent of giving the IRS an interest free loan
• Identity Theft is on the rise and thieves file fraudulent returns to collect refunds. Avoid this risk by limiting the amount of refund you receive
• Use on –line tax calculators to see if your estimated tax withholding is correct; the IRS and Kiplinger’s both provide these tools
• File a revised W-4 with your employer this year to change your tax withholdings; remember the goal is to break even

Step Three: Review 2015 & determine actionable steps

Shift “Income” to this year or to next year?

Consider if you can shift your income to decrease the amount of tax owed.

If you think your income will decrease next year and your tax rate would be lower, can you:
1. Defer a year-end bonus to January 2016?
2. Postpone a sale that will trigger a gain to next year?
3. Delay exercising stock options?

Alternatively, it may make sense to move income to this year:
1. Covert a traditional IRA into a Roth IRA and recognize the conversion income this year?
2. Take IRA distributions this year?

Shift Payments?
If you itemize, would you benefit if you changed the timing of some of your payments?
If you expect your income to decrease next year, then you might want to move some payments/deductions to the current year to offset your higher income this year. Can you:
• Prepay property taxes?
• Make your January mortgage payment this year?
• If you owe state income taxes, consider making up any shortfall rather than waiting until your return is due
• Consider the timing of medical expenses so you can benefit from the deduction?
• Sell some or all of your loss stocks?
• If you qualify for a health savings account, consider setting one up and making the maximum contribution allowable

Defer Deductions to 2016
If you expect tax rates to increase next year, or if you anticipate a substantial increase in taxable income, you may want to explore waiting to take deductions until 2016:
• Postpone year-end charitable contributions, property tax payments, and medical & dental expense payments, to the extent you might get a deduction for such payments
• Postpone the sale of any loss-generating property

Step Four: Can you do anything else?
For those that would like to take it a step further, consider if there is anything you can do to increase your “Above the Line Deductions”.

On a Federal Individual 1040 tax form, the basic formula is:
Income minus “Above the Line” deductions = Adjusted Gross Income.

These deductions include paying monies to:
• Establish an IRA for you or your spouse?
• If qualified, set up a Health Savings Account?
• If self-employed, would you benefit from having health insurance or a Qualified Pension Plan?

While this is not an exhaustive list, I hope it gives you enough information to initiate your plan, act this year, and save money on your 2015 next tax bill.

A dollar saved is a dollar you don’t need to earn. Keep marching towards financial freedom. Happy planning!

Deb Fox is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointments. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com

Smart Personal Tax Planning –What to do before Year-End

2013 TaxTaxes take a big bite out of the income we earn. We may pay: federal (IRS) income tax, state income tax, payroll tax (social security/medicare), sales tax, and property tax. Most of these taxes offer limited options to control how much we pay. However, our golden opportunity comes with income tax because there are a ways to reduce our expense. Today, I offer some of these for you to consider:

The Why & The How

If you want to want to make sure your money is more in “your pocket” than in theirs (The IRS), now is the time to act. Estimating your 2014 tax bill keeps you from being surprised next year. More importantly, it provides you the opportunity to perhaps decrease the amount of tax you pay by planning and acting strategically before the end of this year.

To start:

  • Determine how much you have earned this year
  • Determine what you have paid toward your 2014 tax bill
  • Then increase each of these amounts to estimate the year-end amounts

Now that you have a glimpse of your 2014 tax situation, compare those numbers to those on your 2013 tax return. A filed return can be used as a sort of “road map” to see if there are options to reduce your tax bill now or in the future.

For example, did you get a refund last year? If so, consider this:

Kiplinger’s recently had a great article titled, “Safeguard your Refund by shrinking it”. The article includes the following:

  • More than 75% of Americans get an IRS tax refund each year which is the equivalent of giving the IRS an interest free loan
  • Identity Theft is on the rise and thieves file fraudulent returns to collect refunds. Avoid this risk by limiting the amount of refund you receive
  • Use on –line tax calculators to see if your estimated tax withholding is correct; the IRS and Kiplinger’s both provide these
  • File a revised W-4 with your employer this year to change your tax withholdings; remember the goal is to break even

Shift Income?

Then consider if you can shift income to decrease the amount of tax owed:

If you think your income will decrease next year and your tax rate would be lower, can you:

  1. Defer a year-end bonus to January 2015?
  2. Postpone a sale that will trigger a gain to next year?
  3. Delay exercising stock options?

Alternatively, it may make sense to move income to this year:

  1. Covert a traditional IRA into a Roth IRA and recognize the conversion income this year
  2. Take IRA distributions this year?

Shift Payments?

If you itemize, would you benefit if you changed the timing of some of your payments?

If you expect your income to decrease next year, then you might want to move some payments/deductions to the current year to offset your higher income this year. Can you:

  • Prepay property taxes?
  • Make your January mortgage payment this year?
  • If you owe state income taxes, consider making up any shortfall rather than waiting until your return is due
  • Consider the timing of medical expenses so you can benefit from the deduction?
  • Sell some or all of your loss stocks?
  • If you qualify for a health savings account, consider setting one up and making the maximum contribution allowable

Defer Deductions into 2015

If you expect tax rates to increase next year, or if you anticipate a substantial increase in taxable income, you may want to explore waiting to take deductions until 2015:

  • Postpone year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent you might get a deduction for such payments
  • Postpone the sale of any loss-generating property

Can you do anything else?

For those that would like to take it a step further, consider if there is anything you can do to increase your “Above the Line Deductions”.

On a Federal Individual1040 tax form, the basic formula is:

Income minus “Above the Line” deductions = Adjusted Gross Income.

These deductions include paying monies to:

  • Establish an IRA for you or your spouse?
  • If qualified, set up a Health Savings Account?
  • If self-employed, would you benefit from having health insurance or a Qualified Pension Plan?

While this is not an exhaustive list, I hope it gives you enough information to initiate your plan, act this year, and save money on your next tax bill.

A dollar saved is a dollar you don’t need to earn. Keep marching towards financial freedom. Happy planning!

Deb Fox is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointment. More information is available at www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com. Thanks for reading