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Amended Tax Returns November 25, 2020

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Deadlines, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip , add a comment

Filing an amended tax return is far from uncommon. In 2018, 3,500,000 were filed with the IRS. Amended tax returns are often needed for a large number of wide-ranging reasons. Some of the more common ones include receiving a late Form 1099 or a late Schedule K-1 or any other relevant information after your tax return was filed. Or, the cause for amending may be as simple as a math error which was not discovered until a later date. Keep in mind, that filing an amended return with the IRS often prompts filing amended returns for other tax entities such as your state, city and school district. For the most part today, these tax entities are linked. So, if an amended return is filed with the IRS – the other tax entities are notified of that change. So, they are now expecting an amended return as well. Not filing it with them usually prompts some nasty correspondence. Refunds created from filing amended returns are often a pleasant surprise; not so much fun if they cause a tax balance due. Many tax entities limit the time for which a refund claim may be filed. The IRS says the amended return for a refund must generally be filed within three years after the date the original return was filed or within two years after the date the tax was paid whichever is later. 

An article, If You Want to File an Amended Tax Return, authored by Tom Herman as published in the WSJ on September 14, 2020 follows.


                                     -Mark Bradstreet


Much to their chagrin, millions of taxpayers each year discover significant errors, omissions and other miscues on returns they already have filed.

Mastering all the details of knowing how to handle problems such as these can be surprisingly tricky. But the Internal Revenue Service recently took an important step toward making the process of filing an amended federal income-tax return easier.

Until recently, taxpayers who wanted to amend their federal income-tax return had to file Form 1040-X the old-fashioned paper way—even if they had filed their original return electronically. Then, in August, the IRS reversed course and said taxpayers generally can file amended returns electronically for last year with tax-preparation software.

“This is a significant and a very welcome development,” says Stephen W. DeFilippis, owner of DeFilippis Financial Group, a wealth-management and tax firm in Wheaton, Ill., and an enrolled agent (a tax specialist authorized to represent taxpayers at all levels of the IRS). This will make the amending process “easier for everyone: taxpayers, practitioners and the IRS,” he says.

“E-filed returns are generally processed faster, more efficiently and contain fewer errors than paper-filed returns,” says Alison Flores, principal tax research analyst at the Tax Institute at H&R Block Inc. “Similar results are likely to extend to Form 1040-X.” She says H&R Block has already begun e-filing amended returns for customers.

The IRS received nearly 3.5 million amended income-tax returns in 2018.

The e-filing option is also a timely change. Because of the coronavirus pandemic and other issues, IRS workers have been struggling to open and process unusually large mountains of mail. But it remains to be seen how much this new e-filing option will affect how long it takes for the IRS to respond to amended returns. The waiting time can vary significantly based on the facts, circumstances and complexity of each taxpayer’s situation.

As with so many tax issues, there are important exceptions and other fine print to consider for amended returns, filed electronically or on paper. If you’re planning to make amends, here are a few points to consider:

Limited scope
At this stage, the e-filing option for amended returns applies only for Forms 1040 and 1040-SR for the 2019 tax year. “Additional improvements are planned for the future,” the IRS said. Also, only taxpayers who e-filed their original Form 1040 or 1040-SR for 2019 can e-file an amended return, notes Ms. Flores of H&R Block.

Taxpayers who want to amend returns for more than one tax year must file for each year separately, says Eric Smith, an IRS spokesman. “So, for example, if you are amending multiple years and one of them is 2019, we urge you to e-file for 2019 and then send separate 1040-X forms” in separate envelopes for each of the other years, he says. “However, you decide to send it, it’s a good idea to keep any receipt or other evidence you do have that it was sent, whether it’s through one of the mailing or shipping options offered by the U.S. Postal Service or one of the authorized private delivery services,” he adds. “Also, be sure to keep a copy of your return.”

For refunds claimed in amended returns filed electronically, as with the paper 1040-X form, “we don’t currently offer direct deposit, but that’s one of the further enhancements we hope to make in the future,” Mr. Smith says.

Time limits
Generally, to claim a refund, you must file Form 1040-X “within three years after the date you filed your original return or within two years after the date you paid the tax, whichever is later,” regardless of how you file, the IRS says. “Returns filed before the due date (without regard to extensions) are considered filed on the due date, and withholding is deemed to be tax paid on the due date.”

But there are special rules for “refund claims relating to net operating losses, foreign tax credits, bad debts, and other issues.” For example, the IRS says a Form 1040-X based on a “bad debt or worthless security” generally must be filed “within seven years after the due date of the return for the tax year in which the debt or security became worthless.”

Common flubs
Among the classic reasons for amending: You forgot to include taxable income. You didn’t realize you were eligible for various credits, deductions or other valuable breaks. You claimed breaks you now realize you weren’t entitled to take. You need to correct your tax-filing status, or perhaps you received new information from a partnership or a financial institution that differs significantly from what you originally were told.

Another possible reason is that you were affected by a natural disaster in a place later designated as a federally declared disaster area. In such cases, victims have the option of claiming unreimbursed casualty losses for the year in which the disaster occurred—or on the previous year’s return (which typically would mean amending the return for that year).

For example, those who suffered losses from Hurricane Laura or California wildfires this year could deduct those losses on their returns for 2020 or 2019, whichever works out better. The Federal Emergency Management Agency provides a list of disaster declarations.

Some people also may benefit from several tax laws enacted near the end of 2019 that could affect their returns for prior tax years.

Other considerations
Some errors don’t require an amended return. The IRS says it may correct math or clerical errors on a return and even accept returns filed “without certain required forms or schedules.”

There are other circumstances when you shouldn’t file Form 1040-X. For example, the IRS says you shouldn’t amend to ask for “a refund of penalties and interest that you have already paid.” Instead, file Form 843.

In certain other cases, such as where criminal issues might be involved, consider consulting a skilled tax pro.

Lastly, if you amend your federal return, check to see whether you also may need to amend state tax returns and how to do so.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Year End Tax Planning November 4, 2020

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip , add a comment

This year has been unlike any other in recent memory. Front and center, the COVID-19 pandemic has touched virtually every aspect of daily living and business activity in 2020. In addition to other financial consequences, the resulting fallout is likely to have a significant impact on year-end tax planning for both individuals and small businesses.

Furthermore, the national elections will affect tax issues for the rest of the year and well beyond.  

In response to the pandemic, Congress authorized economic stimulus payments and favorable business loans as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act also features key changes relating to income and payroll taxes. This new law follows close on the heels of the massive Tax Cuts and Jobs Act (TCJA) of 2017. The TCJA revised whole sections of the tax code and includes notable provisions for both individuals and businesses.

This is the time to paint your overall tax picture for 2020. By developing a year-end plan, you can maximize the tax breaks currently on the books and avoid potential pitfalls. 

For your convenience, this 2020 Year-End Tax Tip of the Week is divided into three sections:

* Individual Tax Planning

* Business Tax Planning

* Financial Tax Planning

Be aware that the concepts discussed in this letter are intended to provide only a general overview of year-end tax planning. It is recommended that you review your personal situation with a tax professional.

                                       – Mark Bradstreet 

INDIVIDUAL TAX PLANNING

Charitable Donations
Generally, itemizers can deduct amounts donated to qualified charitable organizations, as long as substantiation requirements are met. Be aware that the TCJA increased the annual deduction limit on monetary contributions from 50% of adjusted gross income (AGI) to 60% for 2018 through 2025. Even better, the CARES Act raises the threshold to 100% for 2020.

In addition, the CARES Act authorizes an above-the-line deduction of up to $300 for monetary contributions made by a non-itemizer in 2020 ($600 for a married couple). 

YEAR-END MOVE: In most cases, you should try to “bunch” charitable donations in the year they will do you the most tax good. For instance, if you will be itemizing in 2020, boost your gift giving at the end of the year. Conversely, if you expect to claim the standard deduction this year, you may decide to postpone contributions to 2021.

For donations of appreciated property that you have owned longer than one year, you can generally deduct an amount equal to the property’s fair market value (FMV). Otherwise, the deduction is typically limited to your initial cost. Also, other special rules may apply to gifts of property. Notably, the annual deduction for property donations generally cannot exceed 30% of AGI.

Note: If you donate to a charity by credit card in December—for example, you make an online contribution—you can still write off the donation on your 2020 return, even if you do not actually pay the credit card charge until January.

Family Income-Splitting
The time-tested technique of family income-splitting still works. Currently, the top ordinary income tax rate is 37%, while the rate for taxpayers in the lowest income tax bracket is only 10%. Thus, the tax rate differential between you and a low-taxed family member, such as a child or grandchild, could be as much as 27%—not even counting the 3.8% net investment income tax (more on this later).

YEAR-END MOVE: Shift income-producing property, such as securities, to family members in low tax brackets through direct gifts or trusts. This will lower the overall family tax bill. But remember that you are giving up control over those assets. In other words, you no longer have any legal claim to the property.

Also, be aware of potential complications caused by the “kiddie tax.” Generally, unearned income above $2,200 received in 2020 by a child younger than age 19, or a child who is a full-time student younger than age 24, is taxed at the top marginal tax rate of the child’s parents. (Recent legislation reverses a TCJA change on the tax treatment.) The kiddie tax could affect family income-splitting strategies at the end of the year

Note: If there is a danger that the kiddie tax could be triggered in 2020, some of the same income deferral strategies that are available to adults may be used for dependent children. For example, you may arrange for a child to postpone a large capital gain from a securities sale to 2021 or realize a capital loss at year-end to offset previous capital gains (see page 8). 

Higher Education Expenses
The tax law provides tax breaks to parents of children in college, subject to certain limits. This often includes a choice between one of two higher education credits and a tuition-and-fees deduction.

YEAR-END MOVE: When appropriate, pay qualified expenses for next semester by the end of this year. Generally, the costs will be eligible for a credit or deduction in 2020, even if the semester does not begin until 2021.

Typically, you can claim either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC). The maximum AOTC of $2,500 is available for qualified expenses of each student, while the maximum $2,000 LLC is claimed on a per-family basis. Thus, the AOTC is usually preferable. Both credits are phased out based on modified adjusted gross income (MAGI).

Alternatively, you may claim the tuition-and-fees deduction, which is either $4,000 or $2,000 before it is phased out based on MAGI, as shown below

Filing StatusMAGI Tuition-and-Fees
Deduction
SingleUp to $65,000$4,000
Single$65,001 – $80,000$2,000
Married filing jointlyUp to $130,000$4,000
Married filing jointly$130,001 – $160,000$2,000

Note: The tuition-and-fees deduction, which has expired and been revived several times, is scheduled to end after 2020, but could be reinstated again by Congress.

Medical and Dental Expenses
Previously, taxpayers could only deduct unreimbursed medical and dental expenses above 10% of their AGI. But the TCJA temporarily lowered the threshold to 7.5% of AGI for 2017 and 2018. Subsequent legislation extended this tax break through 2020.

YEAR-END MOVE: When it is possible, accelerate non-emergency expenses into this year to benefit from the lower threshold. For instance, if you expect to itemize deductions and have already surpassed the 7.5%-of-AGI threshold this year, or you expect to clear it soon, accelerate elective expenses into 2020. Of course, the 7.5%-of-AGI threshold may be extended again, but you should maximize the tax deduction when you can.  

To qualify for a deduction, the expense must be for the diagnosis, cure, mitigation, treatment or prevention of disease or payments for treatments affecting any structure or function of the body. But any costs for your general health or well-being are nondeductible.

Note: Don’t forget to count unreimbursed medical and dental expenses you have paid for your immediate family members, as well as other tax dependents such as an elderly parent or in-law. These extra expenses can push you over the 7.5%-of-AGI mark for the year or boost an existing deduction.

Estimated Tax Payments
The IRS requires you to pay federal income tax through any combination of quarterly installments and tax withholding. Otherwise, it may impose an “estimated tax” penalty.

YEAR-END MOVE: No estimated tax penalty is assessed if you meet one of these three “safe harbor” exceptions under the tax law.

1. Your annual payments equal at least 90% of your current liability;

2. Your annual payments equal at least 100% of the prior year’s tax liability (110% if your AGI for the prior year exceeded $150,000); or

3. You make installment payments under an “annualized income” method. This option may be available to taxpayers who receive most of their income during the holiday season.

Note: If you have received unemployment benefits in 2020—for example, if you lost your job due to the COVID-19 pandemic—remember that those benefits are subject to income tax. Factor this into your estimated tax calculations for the year.

Miscellaneous
* Watch out for the alternative minimum tax (AMT). The AMT applies if a separate complex calculation involving “tax preference items” and certain adjustments exceeds your regular tax liability. Have an assessment of your AMT liability made to determine your year-end approach. 

   * Make home improvements that qualify for mortgage interest deductions as acquisition debt. This includes loans made to substantially improve your principal residence or one other home. Note that the TCJA suspended deductions for home equity debt for 2018 through 2025.

   * With a Section 529 plan, you can set up an account for a child’s college education that can grow without any current tax erosion. Distributions used to pay for qualified expenses are exempt from tax. Beginning in 2018, the TCJA expanded the use of 529 plans for tuition payments of up to $10,000 a year for a child’s kindergarten, elementary or secondary school education.

   * Consider the tax impact of a divorce or separation. The TCJA repealed the deduction for alimony expenses for payers and the corresponding inclusion in income for recipients, for divorce and separation agreements executed after 2018. Note that deductions may still be available for pre-2019 agreements that are modified after 2018.

   * Meet student loan obligations. Under the CARES Act, payment on many student loans was suspended tax-free until September 30 and then through December 31 by an executive order. Barring any further developments, you must resume required payments in 2021. 

   * If you own property that was damaged in a federal disaster area in 2020, you may qualify for quick casualty loss relief by filing an amended 2019 return. The TCJA suspended the deduction for casualty losses for 2018 through 2025, but retained a current deduction for disaster-area losses.

BUSINESS TAX PLANNING

Depreciation-Related Deductions
Under current law, a business may benefit from a combination of three depreciation-based tax breaks: (1) The Section 179 deduction, (2) “bonus” depreciation and (3) regular depreciation.

YEAR-END MOVE: Place qualified property in service before the end of the year. Typically, a small business can write off most, if not all, of the cost in 2020 as shown below.

1. Section 179 deductions: This tax code section allows you to “expense” (i.e., currently deduct) the cost of qualified property placed in service anytime during the year. The maximum annual deduction is phased out on a dollar-for-dollar basis above a specified threshold.

The maximum Section 179 allowance has been gradually raised over the last decade since it was doubled to $500,000 in 2010. As shown below, the TCJA increased the amount again in 2018.

Tax yearDeduction limitPhase-out threshold
2010–2015$500,000$2 million
2016$500,000$2.01 million
2017$510,000$2.03 million
2018$1 million$2.50 million
2019$1.02 million$2.55 million
2020$1.04 million$2.59 million

However, be aware that the Section 179 deduction cannot exceed the taxable income from all your business activities this year. This could limit your deduction for 2020.

2. Bonus depreciation: The TCJA doubled the 50% first-year bonus depreciation deduction to 100% for property placed in service after September 27, 2017 and expanded the definition of qualified property to include used, not just new, property. However, the TCJA gradually phases out bonus depreciation after 2022.

3. Regular depreciation: Finally, if there is any remaining acquisition cost, the balance may be deducted over time under the Modified Accelerated Cost Recovery System (MACRS).

Note: The CARES Act fixes a glitch in the TCJA relating to “qualified improvement property” (QIP). Under the new law, QIP is eligible for bonus depreciation, retroactive to 2018. Therefore, your business may choose to file an amended return for the appropriate tax year.

Payroll Tax Deferral
Normally, employers must deposit payroll taxes with the IRS under a schedule based on the size of the prior period payroll taxes. Most small businesses are on a monthly schedule.  

YEAR-END MOVE: Take advantage of a payroll tax deferral break. Under the CARES Act, an employer can defer payment of the 6.2% Social Security tax portion of payroll taxes for the period spanning March 27, 2020, through December 31, 2020.

Half of the deferred amount is due at the end of 2021. The employer must pay the other half by the end of 2022. If you choose this approach, make sure you will have the funds needed to meet your company’s obligations in the future. 

Note: Don’t confuse the payroll tax deferral with the “payroll tax holiday” for employees created by an executive order in August. The payroll tax deferral discussed above refers to a separate provision in the CARES Act applying to employers.

Business Interest
Prior to 2018, business interest was fully deductible. But the TCJA generally limited the deduction for business interest to 30% of adjusted taxable income (ATI). Now the CARES Act raises the deduction to 50% of ATI, but only for 2019 and 2020.

YEAR-END MOVE: Determine if you qualify for a special exception. The 50%-of-ATI limit does not apply to a business with average gross receipts of $25 million (indexed for inflation) or less for the three prior years. The threshold for 2020 is $26 million.

For these purposes, ATI is defined as your business income without regard to any income, deduction, gain or loss not properly allocable to a business; business interest income and expense; net operating losses (NOLs); the 20% qualified business income (QBI) deduction; and, for tax years beginning before 2022, depreciation, amortization or depletion.

Note: If the business interest limit applies, you can carry forward the excess indefinitely until it is exhausted.

Employee Retention Credit
Many small businesses have been unable to continue regular operations during the COVID-19 pandemic. Frequently, they are facing difficult decisions concerning employment of workers.

YEAR-END MOVE: Consider keeping employees, if you can, through the end of 2020. The CARES Act authorizes an employee retention credit (ERC) to offset some of the cost.

The ERC equals 50% of the qualified wages an employer pays to employees after March 12, 2020 and before January 1, 2021. For these purposes, “qualified wages” are limited to the first $10,000 of wages paid to each worker during this time period.

Your business qualifies for the credit if it fully or partially suspended operation during any calendar quarter in 2020 due to government orders relating to the COVID-19 outbreak or if it experienced a significant decline in gross receipts (i.e., gross receipts equal to less than 50% of the gross receipts for the same calendar quarter in 2019).

Note: The Families First Coronavirus Response Act (FFCRA), which followed soon after the CARES Act, also provides a tax credit to certain small businesses that have provided emergency paid leave due to the COVID-19 pandemic. The FFCRA provision initially offsets the Social Security tax component of payroll tax. Any excess credit is refundable.

Bad Debt Deduction
During this turbulent year, many small businesses are struggling to stay afloat, resulting in large numbers of outstanding receivables and collectibles.

YEAR-END MOVE: Increase your collection activities now. For instance, you may issue a series of dunning letters to debtors asking for payment. Then, if you are still unable to collect the unpaid amount, you can generally write off the debt as a business bad debt in 2020 (if on the accrual basis).

Generally, business bad debts are claimed in the year they become worthless. To qualify as a business bad debt, a loan or advance must have been created or acquired in connection with your business operation and result in a loss to the business entity if it cannot be repaid.

Note: Keep detailed records of all your collection activities—including letters, telephone calls, e-mails and efforts of collection agencies—in your files. This documentation can help support your position claiming worthlessness of the debt if the IRS ever challenges the bad debt deduction.

Miscellaneous
   * Maximize the QBI deduction that is available for pass-through entities and self-employed individuals. Be aware you must observe special rules if you’re in a “specified service trade or business” (SSTB).

   * If you buy a heavy-duty SUV or van for business, you may claim a first-year Section 179 deduction of up to $25,000. The “luxury car” limits do not apply to certain heavy-duty vehicles.

   * If you pay year-end bonuses to employees in 2020, the bonuses are generally deductible by your company and taxable to the employees in 2020. A calendar-year company operating on the accrual basis may be able to deduct bonuses paid as late as March 15, 2021, on its 2020 return.

   * Generally, repairs are currently deductible, while capital improvements must be depreciated over time. Therefore, make minor repairs before 2021 to increase your 2020 deduction.

   * Switch to cash accounting. Under a TCJA provision, a C corporation may use this simplified method if average gross receipts for last year were less than $26 million (up from $5 million).

   * Hire disadvantaged workers eligible for the Work Opportunity Tax Credit (WOTC). The WOTC, which is generally a maximum of $2,400 per worker, is scheduled to expire after 2020.

   * Get a new business up-and-running to qualify for a maximum first-year deduction of $5,000 in start-up costs. Any remainder is amortized over 180 months.

   * An employer can claim a refundable credit for certain family and medical leaves provided to employees. The credit is currently scheduled to expire after 2020.

   * Investigate Paycheck Protection Program (PPP) forgiveness. Under the CARES Act, PPP loans may be fully or partially forgiven without tax being imposed. Despite recent guidance, this remains a complex procedure, so consult with your professional tax advisor about the details.

FINANCIAL TAX PLANNING

Capital Gains and Losses
Frequently, investors time sales of assets like securities at year-end to produce optimal tax results. For starters, capital gains and losses offset each other. If you show an excess loss for the year, it offsets up to $3,000 of ordinary income before being carried over to the next year. Long-term capital gains from sales of securities owned longer than one year are taxed at a maximum rate of 15% or 20% for certain high-income investors. Conversely, short-term capital gains are taxed at ordinary income rates reaching up to 37% in 2020.

YEAR-END MOVE: Review your investment portfolio. Depending on your situation, you may harvest capital losses to offset gains realized earlier in the year or cherry-pick capital gains that will be partially or wholly absorbed by prior losses.

Be aware of even more favorable tax treatment for certain long-term capital gains. Notably, a 0% rate applies to taxpayers below certain income levels, such as a young child. Furthermore, some taxpayers who ultimately pay ordinary income tax at higher rates due to their investments may qualify for the 0% tax rate on a portion of their long-term capital gains.

However, watch out for the “wash sale rule.” If you sell securities at a loss and reacquire substantially identical securities within 30 days of the sale, the tax loss is disallowed. A simple way to avoid this harsh result is to wait at least 31 days to reacquire substantially identical securities.

Note: The 0%/15%/20% rate structure for long-term capital gains also applies to qualified dividends you have received in 2020. These are dividends paid by U.S. companies or qualified foreign companies.

Net Investment Income Tax
In addition to capital gains tax, a special 3.8% tax applies to the lesser of your “net investment income” (NII) or the amount by which your modified adjusted gross income (MAGI) for the year exceeds $200,000 for single filers or $250,000 for joint filers. (These thresholds are not indexed for inflation.) The definition of NII includes interest, dividends, capital gains and income from passive activities, but not Social Security benefits, tax-exempt interest and distributions from qualified retirement plans and IRAs.

YEAR-END MOVE: Assess the amount of your NII and your MAGI at the end of the year. When it is possible, reduce your NII tax liability in 2020 or avoid it altogether.

For example, you might add municipal bonds (“munis”) to your portfolio. Interest income generated by munis does not count as NII, nor is it included in the calculation of MAGI. Similarly, if you turn a passive activity into an active business, the resulting income may be exempt from the NII tax. These rules are complex, so obtain professional assistance.

Note: When you add the NII tax to your regular tax plus any applicable state income tax, the overall tax rate may approach or even exceed 50%. Factor this into your investment decisions.

Required Minimum Distributions
As a general rule, you must receive “required minimum distributions” (RMDs) from qualified retirement plans and IRAs after reaching age 72 (70½ for taxpayers affected prior to 2020). The amount of the RMD is based on IRS life expectancy tables and your account balance at the end of last year. If you do not meet this obligation, you owe a tax penalty equal to 50% of the required amount (less any amount you have received) on top of your regular tax liability.

YEAR-END MOVE: Take RMDs in 2020 if you need the cash. Otherwise, you can skip them this year, thanks to a suspension of the usual rules by the CARES Act. There is no requirement to demonstrate any hardship relating to the pandemic.  

However, if you already received an RMD this year and did not return the money to a qualified plan or IRA by August 31, the distribution is generally taxable in 2020.

Typically, retirees wait until late in the year to arrange RMDs. If you still intend to take any of your RMDs in 2020, make sure you complete the arrangements in time to have this accommodated by the financial institution.  

Note: RMDs are not treated as NII for purposes of the 3.8% tax. Nevertheless, an RMD may still increase your MAGI used in the NII tax calculation.

IRA Rollovers
If you receive a distribution from a qualified retirement plan or IRA, it is generally subject to tax unless you roll it over into another qualified plan or IRA within 60 days. In addition, you may owe a 10% tax penalty on taxable distributions received before age 59½. However, some taxpayers may have more leeway to avoid tax liability in 2020 under a special CARES Act provision.

YEAR-END MOVE: Take your time redepositing the funds if it qualifies as a COVID-19 related distribution. The CARES Act gives you three years, instead of the usual 60 days, to redeposit up to $100,000 of funds in a plan or IRA without owing any tax.

To qualify for this tax break, you (or your spouse, if you are married) must have been diagnosed with COVID-19 or experienced adverse financial consequences due to the virus (e.g., being laid off, having work hours reduced or being quarantined or furloughed). If you do not replace the funds, the resulting tax is spread evenly over three years.

Note: This may be a good time to consider a conversion of a traditional IRA to a Roth IRA. With a Roth, future payouts are generally exempt from tax, but you must pay current tax on the converted amount. Have a tax professional help you determine if this makes sense for your situation.

Estate and Gift Taxes
Since the turn of the century, Congress has gradually increased the federal estate tax exemption, while eventually establishing a top estate tax rate of 40%. At one point, the estate tax was repealed—but only for 2010—while the unified estate and gift tax exclusion was severed and then subsequently reunified.

Finally, the TCJA doubled the exemption from $5 million to $10 million for 2018 through 2025, inflation-indexed to $11.58 million in 2020. The following table shows the progression of the estate tax exemption and top estate tax rate during the last decade.


Tax year
 
Estate tax exemption

Top estate tax rate
2011$5 million35%
2012$5.12 million35%
2013$5.25 million40%
2014$5.34 million40%
2015$5.43 million40%
2016$5.45 million40%
2017$5.49 million40%
2018$11.18 million40%
2019$11.40 million40%
2020$11.58 million40%

YEAR-END MOVE: Update your estate plan to reflect current law. For instance, you may revise wills and trusts to accommodate the rule allowing portability of the estate tax exemption.

Under the “portability provision” for a married couple, the unused portion of the estate tax exemption of the first spouse to die may be carried over to the estate of the surviving spouse. This tax break is now permanent, so incorporate it into your estate planning decisions.

Note: With the gift tax exclusion, you can give each recipient, like a young family member, up to $15,000 in 2020 without paying any federal gift tax. This exclusion is effectively doubled to $30,000 for joint gifts made by a married couple. These gifts reduce the size of your taxable estate.

Miscellaneous
   * Contribute up to $19,500 to a 401(k) in 2020 ($26,000 if you are age 50 or older). If you clear the 2020 Social Security wage base of $137,700 and promptly allocate the payroll tax savings to a 401(k), you can increase your deferral without any further reduction in your take-home pay.

   * Sell real estate on an installment basis. For payments over two years or more, you can defer tax on a portion of the sales price. Also, this may effectively reduce your overall tax liability.   

   * Invest in passive income generators (PIGs). Generally, you can only use losses from passive activities (e.g., most real estate investments) to offset income from other passive activities, with limited exceptions. With a PIG, you can absorb more of your passive activity losses.

   * From a tax perspective, it is often beneficial to sell mutual fund shares before the fund declares dividends (the ex-dividend date) and buy shares after the date the fund declares dividends.

   * Consider a qualified charitable distribution (QCD). If you are age 70½ or older, you can transfer up to $100,000 of IRA funds directly to a charity. Although the contribution is not deductible, the QCD is exempt from tax. This may benefit your overall tax picture.

CONCLUSION
This year-end tax-planning letter is based on the prevailing federal tax laws, rules and regulations. Of course, it is subject to change, especially if additional tax legislation is enacted by Congress before the end of the year.

Finally, remember that this letter is intended to serve only as a general guideline. Your personal circumstances will likely require careful examination. We would be glad to schedule a meeting with you to assist with all your tax-planning needs.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Income Tax Breaks for your Home October 28, 2020

Posted by bradstreetblogger in : Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Rules, Tax Tip , add a comment

It is a good time to chat about some tax breaks associated with a personal residence since the real estate market remains hot for a variety of reasons.  According to companies like SoFi, some people are motivated by the historic low mortgage rates either to buy a home or to refi an existing mortgage.  Others, having spent a lot of time working from home because of the pandemic, wish to enlarge and/or remodel their home.  Some people are also buying a second home.  Interestingly, mortgage interest paid for boats and motor homes may be deductible provided they have a toilet, and cooking and sleeping arrangements.  Of course, this interest must still meet the other deduction requirements.  As a side note, mortgage interest may not be deducted on more than two homes.

Mortgage interest is deducted as an itemized deduction.  Itemized deductions also include medical expenses, state and local taxes and charitable contributions – each subject to their own limitations.  It does not make sense to use your itemized deductions if your standard deduction is larger.  If you are unable to itemize or go “long form”, your mortgage interest may not be of any value on your tax return.  As for most tax deductions, limitations do exist on the size of the home loan and the use of the loan proceeds as to what may be deducted for the mortgage interest.

Business owners may deduct expenses associated with the regular and exclusive business use of their home.  Such expenses are deducted typically more favorably as a business deduction than as an itemized deduction.  These expenses may include improvements made to your home.

The deduction for working from home as an employee was unfortunately eliminated in 2017.  But you may have a win-win situation if your company reimburses you for your home expenses.  The reimbursement is not taxable income to you but is deductible to the company. 

Various ideas written above were taken from the August 8, 2020 WSJ article written by Laura Saunders titled “Home Is Where The Tax Breaks Are.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Understanding AGI and How to Calculate it October 21, 2020

Posted by bradstreetblogger in : Business consulting, Deductions, General, tax changes, Tax Planning Tips, Tax Rules, Tax Tip, Taxes , add a comment

What’s adjusted gross income? Here’s what to know about this important income tax calculation.

WHEN IT COMES TO filing income taxes, it’s essential to understand your adjusted gross income, or AGI, and its relationship to certain tax benefits.
“The reason it matters is because a lot of deductions, tax credits, whether or not you can contribute to certain retirement accounts depends on your AGI,” says Michele Cagan, certified public accountant and author of “Debt 101.” “A lot hangs on it.”

In fact, recently, Americans’ eligibility for COVID-19 stimulus checks was tied to adjusted gross income reported in 2018 or 2019. The final amount taxpayers receive will depend on their 2020 AGI.

Ready to understand this essential tax concept? Here’s what to know about AGI, how it’s calculated and strategies to reduce your adjusted gross income.

What Is Adjusted Gross Income, or AGI?

AGI is a calculation of income for tax purposes that measures taxable earnings while subtracting certain tax deductions. For 2020 income taxes, it’s marked on line 11 of your Form 1040, according to IRS draft forms.

“Basically it’s all of your income minus certain adjustments that are found on Schedule 1,” says Eva Rosenberg, a Los Angeles-based enrolled agent and founder of TaxMama.com.

Why Is AGI Important?

Your adjusted gross income is an important tax calculation because eligibility for many tax deductions, tax credits and other tax breaks are tied to it, Cagan says. “It can lock you out of tax benefits if your AGI is too high,” she says.

For example, your AGI impacts limitations on these itemized deductions:

It will also determine your eligibility for and amount received in certain tax credits, including the earned income credit and retirement savings contribution credit.

Recently, the stimulus checks designed to combat the coronavirus’ economic repercussions was tied to AGI. The full $1,200 per taxpayer is available to single filers earning less than $75,000 in adjusted gross income and married filers earning less than $150,000 in 2020. Reduced amounts are available to taxpayers earning an adjusted gross income of less than $99,000 if single or $198,000 if married filing jointly.

How Do I Calculate AGI?

AGI is calculated this way:

All income
– exclusions from income
= gross income
– deductions for AGI
= adjusted gross income

On a practical note, most tax software programs will take you through the steps to calculate adjusted gross income within their interfaces. A tax professional can also help you calculate this number.

Here are the elements of the calculation in more detail.

All income. To determine this, collect income statements from all sources, including businesses, unemployment compensation, insurance, wages, investments, gifts and other sources.

Exclusions from income. Certain types of income are excluded from gross income for the purposes of calculating adjusted gross income. Depending on the circumstances, those could include these sources of income:

If you’re not sure whether an income source is excluded, consult with a tax professional.

Deductions for AGI. To calculate adjusted gross income, you’ll be able to subtract certain above-the-line deductions from gross income. Those deductions include:

Additionally, taxpayers who don’t itemize may deduct $300 in cash donations to charity. This is due to the coronavirus stimulus bill and new for 2020 taxes.

Keep in mind that some of these deductions are capped at a certain level. Subtracting them will yield your AGI. It’s simple math, although identifying the appropriate income sources and deductions may be less simple.

How Do I Reduce AGI?

A key tax-planning strategy is to reduce adjusted gross income to make the taxpayer eligible for more generous tax benefits. Most of those strategies are best enacted before Dec. 31, Rosenberg says. “If you’re looking at AGI, and it’s starting to make you ineligible for some things, it’s important to do the planning before the end of the year,” she says.

For example, you may want to generate investment losses by selling off stocks or securities at a loss to reduce your AGI, she says. Or you could consider making a contribution to your IRA or self-employed retirement plan. Contribute to your health savings account if you’re eligible or consider taking the deduction for tuition and fees interest.

“Every little bit makes a difference when you’re trying to reduce AGI,” Cagan says.

What’s the Difference Between AGI and Modified Adjusted Gross Income, or MAGI?

Don’t confuse AGI with modified AGI. To calculate your eligibility for certain tax benefits, such as the deduction associated with contributions to an IRA, modified adjusted gross income may be used.

Rosenberg says that different credits and deductions require different calculations for modified AGI. “Sometimes modified adjusted gross income might not include certain deductions,” she says. “Sometimes it may include nontaxable income, so there are different elements.”

Take note of whether a tax benefit you’re eyeing is tied to AGI or MAGI. If it’s tied to MAGI, you may have to do some extra math to determine your eligibility. It is entirely possible, however, that depending your financial situation, your AGI and MAGI will be the same since some of these deductions and forms of income are uncommon.

Credit given to US News & World Report published on Sept 17, 2020 by Susannah Snider

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

5 New Rules for Charitable Giving October 14, 2020

Posted by bradstreetblogger in : Charitable Giving, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Rules, Tax Tip, Taxes, Taxes , add a comment

New tax laws and strategies can help you maximize tax breaks for yourself and benefits for the charity.

THERE ARE SO MANY reasons to make charitable gifts this year – whether it’s to support nonprofits that help people and communities with challenges from the coronavirus pandemic, or to provide assistance after disasters such as the Beirut explosion or an active hurricane season.

Even though a lot of people are struggling financially right now, many people whose finances have stabilized want to do whatever they can to help out. And they’re not waiting until the end of the year to make their gifts. “A lot of things are driving people to be generous, and our numbers prove it,” says Kim Laughton, president of Schwab Charitable, which runs Schwab’s donor-advised funds. From January through June 2020, its donors recommended over $1.7 billion in 330,000 grants, almost a 50% increase in the dollars granted and the number of grants compared to the same period in 2019. “There’s great need out there, and people are stepping up.”

“Philanthropy and giving is on everyone’s mind,” says Dien Yuen, who holds the Blunt-Nickel Professorship in Philanthropy at the American College of Financial Services. Some nonprofits need help now just to stay afloat. “The donors who are quite active are making gifts now and not waiting until later in the year, because the nonprofit might not be there later on.”

New tax laws and strategies can help you maximize tax breaks for yourself and the benefits for the charity. Here’s what you need to know:

New $300 Charitable Deduction for Non-Itemizers

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, created several incentives for people to help charities right away, including a charitable deduction of up to $300 in 2020, even if you don’t itemize. Otherwise, you generally need to itemize to take the charitable deduction, which fewer people do since the standard deduction doubled a few years ago – now at $12,400 for single filers and $24,800 for married couples filing jointly in 2020.

“As a result of the Tax Cuts and Jobs Act of 2017, most taxpayers utilize the significantly higher standard deduction instead of itemizing deductions for mortgage interest, state taxes paid and charitable contributions,” says Mark Alaimo, a certified public accountant and certified financial planner in Lawrence, Massachusetts. “This special CARES Act provision now gives a tax incentive to all taxpayers to give at least $300 to charity during 2020.” To qualify, the gift must be made in cash and go directly to the charity, rather than to a donor-advised fund or private foundation.

“I think that the additional $300 provision in the CARES Act is really great, especially for the younger generation who may be just starting to work and may not be paying substantial mortgage interest,” says Kelsey Clair, tax strategist for Baird’s Private Wealth Management Group. “It allows them to give even in a small way and reap the tax benefit for it.”

The CARES Act also helps people who are in a financial position to make very large gifts. In 2020, you can deduct cash gifts of up to 100% of your adjusted gross income, rather than the usual 60% limit. To qualify for this higher limit, the gifts must go directly to the charities, rather than to a donor-advised fund or private foundation. This can help wealthy people reduce their taxable income significantly in 2020, and it may also help retirees who have money to give but bump up against the income limits for the deduction. “I see it in the older generation who have a lot of cash but don’t have a lot of income coming in and are trying to help out the community in any way they can,” says Clair.

Bunching Contributions and Donor-Advised Funds

Bunching contributions is a strategy that became popular after the standard deduction was increased. Instead of making smaller charitable contributions spread over several years, you can make larger contributions in one year so you can itemize your deductions (and claim the charitable deduction) that year, then take the standard deduction in the other years. “Rather than making a steady stream of charitable contributions from year to year, it may be beneficial instead to use a bunching strategy – give more and itemize in one year, and claim the standard deduction in other years,” says Clair.

Even though this can help you tax-wise, you might not want to give all of the money to the charities at one time and then neglect them over the next few years. But bunching can work well if you have a donor-advised fund. These funds are offered by brokerage firms, banks and community foundations, and you can take the charitable deduction in the year you give the money to the donor-advised fund, but then you have an unlimited amount of time to decide which charities to support. You can usually open a donor-advised fund with an initial contribution of $5,000 to $10,000 (it’s $5,000 at Schwab and Fidelity, $10,000 at T. Rowe Price, and $25,000 at Vanguard). You can make grants to charities of $50 or $100 up to thousands of dollars or more, and you can invest the money in a handful of mutual funds or investing pools until you make the grants. “It can be a great way to go ahead and make the contribution, without having to decide where that money goes right away,” says Clair.

Another benefit of the donor-advised fund is simplicity – you get one receipt for your tax records when you make the contribution and don’t have to wait for a variety of paperwork from each of the charities. “Donor-advised funds really help with the administrative side of things,” says Elliot Dole, a certified financial planner with Buckingham Strategic Wealth in St. Louis. “Itemizing charitable gifts is a hot button audit area. But with a donor-advised fund, it’s clear that you met the requirements.”

A Double Tax Break From Giving Appreciated Stock

Many people just write a check to the charity, but you may get a bigger tax benefit if you give appreciated stock. If you owned the stock for more than a year, you can deduct the value of the stock on the date you give it to the charity if you itemize. And even if you don’t itemize, you can avoid having to pay long-term capital gains taxes on your profits, which could have cost up to 20% if you sold the stock first. (Giving appreciated stock doesn’t qualify for the special $300 charitable deduction for non-itemizers for 2020; that only applies to cash.)

Most charities can accept appreciated stock, but the process can be easier if you have a donor-advised fund. “Given how volatile the stock market can be, many advisors recommend utilizing donor-advised funds due to the ease and speed that one can make a contribution,” says Alaimo. “This makes it easier to opportunistically gift highly appreciated securities, while regulating which charity receives how much of the donation, and when they receive it.”

It’s even easier if your brokerage account and donor-advised fund are with the same company. “When you log into your Schwab accounts, it shows your investment accounts, your bank accounts and your charitable account,” says Laughton. You can sort your investments by most highly appreciated or highly concentrated and see if you’re overweighted in one area. “We encourage people to rebalance their portfolios regularly, and when they see they’re overconcentrated, instead of selling those shares, they can just move them over to their charitable account,” says Laughton.

With so much stock market volatility this year, you may want to donate the stock when it reaches a target price, rather than giving at a certain time of year.

The donor-advised fund can also accept a variety of contributions – whether you write a check or you give appreciated stock, privately held stock, real estate, limited partnerships or even a horse farm. “It always makes sense for people who have highly appreciated non-cash assets to at least explore whether they could make good charitable gifts,” says Laughton. “Donor-advised funds can make that simple and easy.”

If you have investments that have lost value, however, it’s better to sell them first – and take a Charitable loss – and then give the cash to charity. “I’ve seen multiple times where people made mistakes of donating stocks that were in a loss,” says Clair. “It’s better to sell that and claim the loss on your return and donate the cash.” When you sell the losing stock, you can use the loss to offset your capital gains and can use up to $3,000 in losses to reduce your ordinary income, which you couldn’t do if you gave the stock directly to the charity.

Make a Tax-Free Transfer From Your IRA

People who are age 70½ and older can give up to $100,000 per year tax-free from their IRA to charity, a procedure called a qualified charitable distribution or QCD. The gift counts as their required minimum distribution but isn’t included in their adjusted gross income. (Even though the SECURE Act, another recent tax law, increased the age to start taking RMDs from 70½ to 72, you can still make a qualified charitable distribution any time after you turn age 70½.)

This is usually a great strategy for people who have to take RMDs and would like to give money to charity – they can help the charity and not have to pay taxes on the money they have to withdraw from their IRA. But because of the CARES Act, people are not required to take RMDs in 2020. However, you may still be able to benefit from making a QCD this year. “Some people who have been doing the QCD have been supporting a couple of charities every year, and they’re not going to stop, especially during this time of need,” says Yuen. The tax-free transfer takes money out of your IRA, which can help reduce future RMDs. “It’s great planning,” she says.

To keep the money out of your AGI, it must be transferred directly from your IRA to the charity – you can’t withdraw it first. Ask your IRA administrator about the procedure, and let the charity know the money is coming. You have to give this money directly to a charity; it can’t go to a donor-advised fund.

Make an Extra Effort to Research Charities This Year

Scam artists have been out in full force to take advantage of the coronavirus pandemic. It’s even more important now to check out charities before you give money, especially if they contact you first. You can look up charities at sites such as Charity Navigator and the Better Business Bureau’s Wise Giving Alliance. Local community foundations are also a great resource for aid focused on your community – see the Community Foundation Locator for links. If you have a donor-advised fund, you may have access to additional research tools, such as GuideStar.

Schwab Charitable can help its donors vet the charities and also provides lists of selected charities that focus on timely issues, such as COVID-19 relief and social justice. “We’re trying to develop short lists to help people narrow the charities down to ones we know are valid and doing good work,” says Laughton.

Credit given to US News & World Report published Aug 21, 2020 by Kimberly Lankford.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

Who Will Pay Your Estate Taxes? October 7, 2020

Posted by bradstreetblogger in : Deductions, Depreciation options, General, Retirement, tax changes, Tax Planning Tips, Tax Rules, Tax Tip , add a comment

To a large degree, paying federal estate taxes is voluntary since many estate planning tools are available to eliminate or at least reduce this tax.  Having said that, once your estate reaches over a certain size and you are not married (if you are married you may have an unlimited marital estate deduction for assets transferred to a spouse) – the available estate tax reducing tools may not be adequate to reduce the federal estate tax to zero. Regardless, your lifetime federal estate exclusion for 2020 is $11,580,000. If your taxable estate is less than the lifetime exclusion amount – no federal estate tax is normally due. For most people the current lifetime exclusion of $11,580,000 seems more than enough. But, as recent as 1997, the lifetime exclusion was only $600,000. Who knows how this might change with the possibility of a new incoming administration. The current top federal estate tax rate is 40%. At that rate, if you expect to have a taxable estate, spending some money now for estate planning may reap some huge benefits for your heirs. 

Too often people tend to focus only on their federal estate tax planning and overlook the possibility of a State death or inheritance tax. Currently, about 1/3 of the states have some sort of death or inheritance tax. The State of Ohio ended its death/inheritance tax for any deaths occurring after January 1, 2013.

Side note: Gifts are one of many effective tools for reducing one’s taxable estate.  In 2020, a gift of up to $15,000 may be made to an individual without having to report the gift or reduce your lifetime exclusion.

                                                                                                  -Mark Bradstreet

If you have a taxable estate, consider yourself fortunate. I often tell clients, “paying estate taxes is a good problem to have.” It is better than the alternative – dying with few or no assets. But sometimes little thought is given to who will pay these estate taxes.

An estate tax is a one-time tax that is due nine months from the date of a person’s death. It is not an income tax, although it is easily confused with yearly income taxes that estates, trusts and individuals have to pay. Republicans call it the “death tax.” Democrats and the Internal Revenue Code refer to it as the estate tax. Whatever you call it, it is the same thing – a tax on a person’s assets valued as of the date of death. 

Many estates are exempt from the estate tax. If the value of your assets (and prior taxable gifts) do not reach the filing threshold, an estate tax return may not be due. The federal amount you are allowed to leave in 2020 without paying an estate tax is $11,580, 000. That amount is scheduled to increase for inflation every year until 2026 when it drops to $5,000,000 adjusted for inflation. It also may drop sooner depending on what happens with the November elections. 

Keep in mind that depending on where you live, your state may also have a state estate tax. For example, the exemption amount in Massachusetts is only $1 million. 

If you have a will, it should specify how your estate taxes will be paid. In general, it is your executor’s responsibility to pay your estate taxes. Typically, the will directs your executor to use your probate assets to pay the estate taxes that are due. However, if some of your assets pass outside your will, i.e. by beneficiary designations or joint ownership, there may not be enough assets in your probate estate to pay your estate taxes. This scenario means that the beneficiaries of your will could end up paying a disproportionately greater share of the taxes due. 

To avoid this, you need to pay close attention to the beneficiaries named in your will and the beneficiaries of your non-probate assets such as life insurance policies, IRA’s and 401K’s. If the beneficiaries are not the same, you may stick some people with paying for the estate tax while others receive their assets free and clear of any tax.

Take the example of a woman who died leaving a large “payable on death” account and life insurance policy to her live-in boyfriend. These non-probate assets were paid directly to the boyfriend. They were still included in her taxable estate and taxed for estate tax purposes, but the boyfriend did not have to contribute to the estate taxes. He received the assets free of estate taxes. 

The estate taxes were paid out of the probate estate. The only probate asset was a heavily mortgaged house that was left to nieces and nephews. Because the will stipulated that all estate taxes must be paid from the probate assets, the nieces and nephews were on the hook for the entire estate tax which essentially ate up any monies they were to receive.  

Be sure to discuss payment of estate taxes with your attorney. You do not want to leave some of your beneficiaries to pay the bill while others walk away scot-free.

Credit Given to:  Christine Fletcher published on June 12, 2020 in Forbes.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s Author – Mark Bradstreet, CPA

–until next week.

What Will Filing Taxes Be Like in 2021 – And How Can You Prepare? September 30, 2020

Posted by bradstreetblogger in : Business consulting, COVID, COVID-19, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

Some of the tax return changes listed below provide us with likely insights into the IRS’s future audit and cross matching software programs.  The IRS is always trying to close the so-called “tax gap.”  The tax gap is the amount of income taxes due which are not paid in a timely or voluntary fashion.  One of the studies in recent years indicated that about 16 percent of taxes are never paid.  At the time of this study, that amount represented about 18 percent of annual federal revenues (this study was pre-COVID era).

Let me share my thoughts on the dangers of two of the new changes below as recapped by Morris Armstrong.  The first change is the possibility of deferring the deposit and payment of the employer’s portion of the Social Security taxes.  The second one involves receiving retirement plan distributions and deferring their repayments.  Both are akin to kicking the can down the road which typically sounds like a good idea.  But, keep in mind, there is a day of reckoning.  Failure to later pay either the employer’s portion of the Social Security taxes or your retirement plan distributions will result in interest and penalties and maybe even additional income taxes.  Don’t get me wrong, sometimes kicking the can down the road is the only option one may have.  And, if that is the case, then I would take full advantage of the tax law.

-Mark Bradstreet


“THERE HAVE BEEN CHANGES to the tax code this year, and they will be reflected on the Form 1040 of your tax return.

Each year, if necessary, the IRS releases drafts of the forms so professionals may comment, and line numbers are subject to change. However, the advance notice is always appreciated and can give insights into what next year’s taxes will look like.

Here’s how tax-filing will look different in 2021 – when 2020 income taxes are filed – and what you can do to prepare.

A New Focus on Cryptocurrency
This year, the Department of Treasury is focusing on virtual currencies. The first question asks this: At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?

Over the past several years, the government has focused on cryptocurrencies, issued guidance on its tax treatment and advised certain taxpayers that they may have failed to report transactions properly. Likely, the government must feel that it has in place the infrastructure to trace your transactions.

As you answer this question, remember that you are signing the tax return under penalties of perjury, a conviction of which can carry a five-year prison sentence.

Adjustment to Income Via Charity
A bonus to taxpayers in 2020 is that they may be eligible to reduce their income by up to $300 for charitable contributions, thanks to the coronavirus relief bill.

These contributions must be in the form of cash, check or credit card payments, and you must have the proper documentation. You may not deduct donations of items such as the four bags of clothing that you dropped off at Goodwill this spring.

This “adjustment to income” is nice because it reduces your adjusted gross income, also called AGI, which impacts many other aspects of your financial life. Your Medicare Part B and Medicare Part D premiums and programs at the state level are tethered to AGI. So, having a lower adjusted gross income can reduce those premiums or make you eligible for additional state programs.

Prepare by keeping your receipts and other substantiating documents. Remember, contributions of $250 or more to a charity require a letter of acknowledgment.

Look Out for Changes in Reporting Taxes Paid
In the past, when you reported the amount of federal tax withheld, you reported one number. This would be the paid federal income tax shown on your W-2 and on any 1099 form.

This year, the numbers are being reported on separate lines, and that could mean that someone at the IRS will be focusing on 1099s in the future.

Tax Credit Reconciling the Economic Impact Payments
Line 30 seems to be reserved for something that the government is calling a recovery rebate credit, which refers to the stimulus payments you received. This is where you may receive an additional credit if your 2020 tax return has a smaller AGI than the one that was used to calculate the initial stimulus check or if you have additional dependents.

Prepare by keeping the letter from the IRS telling you how much you received. It is Notice 1444 that you want to have available when you are filing your tax returns.

Payroll Tax Deferment Impacts the Amount You Owe
If you had household employees or are self-employed, which you report on Schedule H and Schedule SE, you may have to pay extra attention to this calculation.

Normally, the calculation is a simple addition of the taxes owed minus any payments and credits, but this year, we have a wrinkle. The coronavirus relief bill allows employers to defer the deposit and payment of the employer’s portion of the Social Security taxes.

The span of March 27 through Dec. 31, 2020 is important because any payroll taxes that were due then may be deferred, with 50% paid by Dec. 31, 2021, and the balance by Dec. 31, 2022. If you are a Schedule C filer, this will apply to you.

Flexibility Around Retirement Plan Distributions for Taxpayers Impacted by COVID-19
The coronavirus relief bill allows for distributions from a retirement account, including an IRA, to be handled differently if the taxpayer was impacted by COVID-19. This does not require contracting the disease but includes having your economic life disrupted by it.

You could be quarantined, furloughed, laid-off or had work hours reduced, been unable to work because you could not find child care– if it is virus related – and qualify for this retirement plan provision.

When the taxpayer self-certifies to these facts, the tax impact is substantial. There will be no 10% penalty if you take a distribution while under the age of 59½, the distribution will be spread over three years, and the taxpayer may repay the amount taken out over three years and avoid taxation.

Prepare by keeping documentation. Since you are self-certifying that you are impacted, you may want to keep any medical records, notices from your employers or notes describing your circumstances.

For most people, these are the main changes that will impact their personal 1040 Form. But keep in mind that Congress is still in session, it is an election year and more changes are possible.”

Credit given to US News & World Report published Sept 1, 2020 by Morris Armstrong.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Good Record-keeping is an Essential Element of Tax Planning September 16, 2020

Posted by bradstreetblogger in : Business consulting, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

I can go on ad nauseum about the importance of good record-keeping. Of course, being an accountant, I may be more than a little biased. I won’t say that good record-keeping is THE most important piece of the business world BUT it is certainly near the top. You simply must have a way to keep score. Without knowing the score, you may be using the wrong playbook. Most businesses have poor records which results in inaccurate financial statements. Making decisions from incorrect data just sets the stage for a disaster. Eventually, most of your day will be wasted answering calls from past due or incorrect payments on your invoices, screwed up orders, improper or missed billings, unable to obtain credit, poor credit history and losing money all the while not knowing you are underwater until it is too late.
                                                -Mark

Now is a good time for people to begin thinking about next year’s tax return. While it may seem early to be preparing for 2021, reviewing your record-keeping now will pay off when it comes time to file again.

Here are some suggestions to help taxpayers keep good records:

Credit given to – IRS.gov – click here for original article

This week’s Author – Mark Bradstreet, CPA

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

How to Owe Nothing with Your Federal Tax Return September 9, 2020

Posted by bradstreetblogger in : Depreciation options, General, tax changes, Tax Preparation, Tax Rules, Tax Tip , add a comment

Here’s how to fine-tune your W-4 and avoid writing a fat check next year.

It’s a calming thought: owing nothing on your federal tax return. And you can make it happen if you handle your withholding strategically.

Here’s how:

The W-4 form that you fill out for your employer when you start a new job determines how much income tax will be withheld from your paycheck and, ultimately, how much tax you will either owe or get back as a refund at the end of the year.

What you may not know is that it’s not a one-time thing. You can submit a revised W-4 form to your employer whenever you want. Managing how much your employer withholds through your W-4 form will give you a better shot at owing no taxes come April.

You also should avoid having too much withheld, of course. That would be giving Uncle Sam an interest-free loan all year.

Here’s how to get your tax bill closer to zero before tax time arrives:

KEY TAKEAWAYS
• The W-4 form that you fill out for your employer determines how much tax is withheld from your paycheck throughout the year.
• An online calculator can help you estimate your tax liability for the year and determine whether you’re having too little or too much withheld.
• Once you know that, you can submit a new W-4 to get you closer to owing zero at tax time.

Estimate What You’ll Owe
If you are a salaried employee with a steady job, it’s relatively easy to calculate your tax liability for the year. You can predict what your total income will be.

Millions of Americans don’t fall into the above category. They work freelance, have multiple jobs, work for an hourly rate, or depend on commissions, bonuses, or tips. If you’re one of them, you’ll need to make an educated guess based on your earnings history and how your year has gone so far.

From there, there are several ways to get a good estimate of your tax liability:

Use an Online Check Calculator
There are a number of free income tax calculators online. If you enter your gross pay, your pay frequency, your federal filing status, and other relevant information, the calculator will tell you your federal tax liability per paycheck.

You can multiply that by the number of pay periods in a year to see your total tax liability.

This method is easy, and the result will be reasonably accurate, but it may not be perfect since your actual tax liability may depend on some other variables, such as whether you itemize deductions and which tax credits you claim.

Use a Tax Withholding Estimator
The tax withholding estimator on the Internal Revenue Service website is particularly useful for people with more complex tax situations.

It will ask about factors like your eligibility for child and dependent care tax credits, whether and how much you contribute to a tax-deferred retirement plan or health savings account, and how much federal tax you had withheld from your most recent paycheck.

Based on the answers to your questions, it will tell you your estimated tax obligation for the year, how much you will have paid through withholding by year’s end, and your expected over-payment or underpayment.

Fill Out a Sample Tax Return
Another option is to complete a sample tax return for the year, either by using tax software or by downloading the forms you need from the IRS website and filling them out by hand.

This method should give you the most accurate picture of your annual tax liability.

If you’re using last year’s tax software or IRS forms, make sure there haven’t been significant changes to the rules or the tax rates that would affect your situation.

How To Get The Most Money Back On Your Tax Return

Adjust Your Tax Withholding
Once you know the total amount you will owe in federal taxes, the next step is figuring out how much you need to have withheld per pay period to reach that target but not exceed it by Dec. 31.

Then fill out a new W-4 form accordingly.

You don’t have to wait for your employer’s HR department to hand you a new W-4 form. You can print one yourself from the IRS website.

If Not Enough Is Being Withheld
The W-4 form has a place to indicate the amount of additional tax you’d like to have withheld each pay period.

If you’ve underpaid so far, subtract the amount you’re on track to pay by the end of the year, at your current level of withholding, from the amount you will owe in total. Then divide the result by the number of pay periods that remain in the year.

That will tell you how much extra you want to have withheld from each paycheck.

You could also decrease the number of withholding allowances you claim, but the results won’t be as accurate.

If You’ve Been Overpaying
Unless you’re looking forward to a big refund, try increasing the number of withholding allowances you claim on the W-4.

Deciding on the exact number can be tricky. The best method is to plug different numbers of withholding allowances into a paycheck calculator until it hits the amount closest to the federal tax you want to have withheld for each pay period going forward.

Note that the IRS requires that you have a reasonable basis for the withholding allowances you claim. It doesn’t want you fiddling with its form just to avoid paying taxes until the last minute.

If you don’t have enough tax withheld, you could be subject to underpayment penalties.

Bear in mind that you need to have enough tax withheld throughout the year to avoid underpayment penalties and interest. You can do that by making sure your withholding equals at least 90% of your current year’s tax liability or 100% of your previous year’s tax liability, whichever is smaller.

You’ll also avoid penalties if you owe less than $1,000 on your tax return.

Other Considerations
If it’s so early in the year that you haven’t received any paychecks yet, you can just divide your total tax liability for the year that just ended by the number of paychecks you receive in a year. Then, compare that amount to the amount that’s withheld from your first paycheck of the year once you get it and make any necessary adjustments from there.

If you adjust your W-4 to make up for any underpayment or over-payment partway through the year, you’ll want to fill out a new W-4 in January or your withholding will be off for the new year.

Of course, if your income fluctuates unpredictably, this is all a lot harder. But following the steps above should help you get close to a reasonable number.

And remember: You can redo your W-4 several times during the year if necessary.

Article credit given to – Amy Fontinelle – click here for original article

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

Where’s My Refund? July 29, 2020

Posted by bradstreetblogger in : 2019 Taxes, tax changes, Tax Rules, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

                     

Due to the COVID-19 pandemic, IRS live phone assistance is extremely limited. People are encouraged to first check the Where’s My Refund? tool on the IRS website and the IRS2Go app. Taxpayers can also review the IRS Services Guide (PDF) which links to additional IRS online services.

The IRS issues 9 out of 10 refunds in less than 21 days, and the fastest way to get a refund is to use IRS e-file and direct deposit. Taxpayers should also know they can have their refunds divided into up to three separate accounts.

Please note: Ordering a tax transcript will not speed delivery of tax refunds nor does the posting of a tax transcript to a taxpayer’s account determine the timing of a refund delivery. Calls to request transcripts for this purpose are unnecessary. Transcripts are available online and by mail at Get Transcript.

A few necessary items

To use the “Where’s My Refund” tool, taxpayers will need to enter their Social Security number, tax filing status (single, married, head of household) and exact amount of the tax refund claimed on the return.

Taxpayers who file electronically can check “Where’s My Refund” within 24 hours after they receive their e-file acceptance notification. The tool can tell taxpayers when their tax return has been received, when the refund is approved and the date the refund is to be issued.

Some refunds may take longer

While the IRS continues to process electronic and paper tax returns, issue refunds, and accept payments, there are delays in processing paper tax returns due to limited staffing. If a taxpayer filed a paper tax return, the return will be processed in the order in which it was received. Do not file a second tax return or call the IRS.

Many different factors can affect the timing of a refund. In some cases, a tax return may require additional review. It is also important to consider the time it takes for a financial institution to post the refund to an account or for a refund check to be delivered by mail.

Taxpayers who owe

The IRS encourages taxpayers who owe to do a Paycheck Checkup every year to ensure enough tax is withheld from their pay to avoid an unexpected tax bill.

This week’s article – From IRS.gov – Click Here

– Tammy

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

– until next week.