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Tax Tip of the Week | No. 431 | Miscellaneous Tax Facts November 1, 2017

Posted by bradstreetblogger in : General, Tax Preparation, Tax Tip, Taxes , add a comment

Tax Tip of the Week | Nov 1, 2017 | No. 431 | Miscellaneous Tax Facts

1.    The easiest IRS tax form, Form 1040 needs more than 100 pages of explanation. When the IRS first introduced Form 1040, it had only 4 pages including the instructions.

2.    Close to one-half of American homes pay zero federal income tax.

3.    The top 1% of Americans pay 43% of all federal tax collected.

4.    Today’s richest Americans pay 39.6% on each $1.00 earned. That may seem high. However, in 1945 the top rate peaked at 94%. Amazingly, in 1913, the tax rate was 1%.

5.    The Internal Revenue Code is more than 10 million words long. It has grown an average of 144,500 words per year since 1955.

6.    The typical American receives about $3,000 for their IRS refund.

7.    The average effective income tax rate is 13.5%. That is most likely much lower than your top tax bracket.

8.    The sale of your home may be the most generous and unused tax exemption. Generally, if you have lived in your home for two out of the last five years and you are married, you may exclude up to $500,000 of your gain, $250,000 if single.

9.    The IRS is the world’s largest financial institution.

10.   In 2014, 35% of calls made to the IRS went unanswered.

11.   The original deadline for paying income taxes was March 1st.

12.   In 2014, for every $100 collected by the IRS, it spent $0.38.

13.   The IRS is active on social media using their accounts to educate the public.

14.   Around 15% of U.S. taxpayers are delinquent on their taxes.

Credit to The Motley Fool and FactRetriever.com

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

…until next week.

Tax Tip of the Week | No. 426 | Birth Dates You Need to Know September 27, 2017

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Tax Tip of the Week | Sept 27, 2017 | No. 426 | Birth Dates You Need to Know

Many of the tax rules for individual taxpayers depend on age.  Attaining a birthday may entitle an individual to a special tax break or end entitlement to another. It should be noted that some apply on the date of the birthday, some rules apply when the birthday is achieved at the end of the year, and some apply with respect to a half-year birthday. Following are some of the major birthdays you need to know:

1 day:  If a child is born on December 31, the child is considered a dependent of his or her parents for the entire year.

If you are legally married on December 31, you are considered married for the entire year.  Likewise, if you are divorced on December 31, you are considered single for the entire year.

Age 13:  The dependent care credit (Daycare credit) can be claimed until the child reaches his or her 13th birthday.

Age 17:  A tax credit up to $1,000 can be claimed for a child under age 17.  You lose the credit the year the child turns 17—the credit is not prorated.

Ages 19 and 24:   A child is considered a “qualified child” and can be claimed as a dependent on the parent’s return until the child turns 19, or turns 24 if he or she is a full-time college student.

However, a parent can still claim a dependency exemption for a child as a “qualified relative” after age 19 or 24 if certain conditions are met.  For example, if a parent supports a child who is 32 years old and lives in the parent’s home and earns less than $4,050 (in 2017), then the parent can claim the dependency exemption.  Certain other factors must also be considered.

If a child has unearned income (investment income) the “Kiddie Tax” rules also apply under ages 19 or 24.

Age 26:  Under the Affordable Care Act, a child can remain on his or her parent’s health insurance policy until the age of 26.  This is true even if the child cannot be claimed as a dependent or even lives with the parent.

Age 50:  When you turn 50 you can make “catch-up” contributions to qualified retirement plans such as 401(k)s, SIMPLE IRAs and Traditional and Roth IRAs.  For 2017, the additional contributions are $6,000 for 401(k)s, $3,000 for SIMPLE IRAs and $1,000 for IRAs.

Age 55:  The 10% early distribution penalty on distributions from qualified retirement plans and IRAs prior to age 59.5 do not apply if the distributions are made because of a separation of service from the employer.

You can also make a $1,000 additional “catch-up” contribution to an HSA account once you reach age 55.

Age 59.5:  The 10% early distribution penalty on withdrawals from qualified retirement plans and IRAs do not apply after attaining age 59.5.

Age 65:  Taxpayers who use the standard deduction vs. itemized deductions can claim additional deductions the year they turn 65.  For 2017, the additional standard deduction is $1,550 for single filers and $1,250 for each spouse at age 65 on joint returns.

Age 65 is also the age when distributions from HSAs can be taken without penalty for non-medical expenses.  However, such non-medical distributions are still subject to income tax.

Age 70.5:  The year you turn age 70.5 is when you must start taking Required Minimum Distributions (RMDs) from qualified retirement plans and IRAs.  (A full discussion of RMD rules goes beyond the scope of this Tax Tip)

Please Note:  This is a very simplified discussion of age-based tax rules and should not be relied upon without consulting with our office.

Happy Birthday!

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 420 | Where Ohio Ranks for Taxes August 16, 2017

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Tax Tip of the Week | Aug 16, 2017 | No. 420 | Where Ohio Ranks for Taxes

The following is a summary of a report recently issued by the Buckeye Institute:

About a dime out of every dollar Ohioans earn, on average, is taken by local and state taxes.

How does that compare to other states? 

The Buckeye Institute in Columbus and the Tax Foundation in Washington, D.C., partnered to produce a report that attempts to answer that question and provides other interesting facts and tidbits.

The Tax Foundation is a think tank that does research and analysis of tax policies. The foundation describes itself as independent, but often advocates conservative policies.

The Buckeye Institute is a conservative-leaning think tank that advocates for “free-market public policy in the states.”

But what’s good from one political viewpoint might be bad from another.

For example, the Buckeye Institute said in releasing the report that “Ohio’s growing tax burden has resulted in slower economic growth for the state over the past several decades.”

Combined taxes; Ohio ranks 19th highest

Adding up state and local taxes, Ohio ranks 19th highest in the country. Ohioans pay nearly a dime in taxes out of every $1 earned.

Ohio’s rate of 9.8 percent for state and local taxes on average is close to the rates in the neighboring states – Michigan (9.4 percent), Indiana (9.5 percent), Kentucky (9.5 percent), West Virginia (9.8 percent) and Pennsylvania (10.2 percent).

Credit given for city income taxes paid where people work

Most Ohio cities and villages don’t impose their income taxes on residents who pay equal or more income taxes to the city where they work, instead granting the residents a 100 percent “credit.”

For example, the city of Centerville has a 2.25 percent income tax, but collects nothing from residents who work in Oakwood and pay Oakwood’s 2.5 percent income tax.

But some cities in the area such as Xenia and Springboro, give only partial credit. So, workers end up paying income taxes to the communities where they work and taxes to the communities where they live.

Ohio’s sales tax is nearly double original rate

Ohio’s sales tax was established in 1935 and went unchanged at 3 percent for 32 years, then increased to 4 percent in 1967. The rate most recently increased in 2013, to 5.75 percent.

Each county also tacks on additional sales taxes. Once the county and state taxes are combined, rates range from 6.75 percent from Greene and Warren counties, to 7.25 percent from Montgomery County, to a high of 8 percent in Cuyahoga County.

Ohio and U.S. local and state revenue sources

The sources of Ohio and local tax revenue is similar to the national trends. The biggest chunk is from sales taxes. In Ohio, 36 percent of the money is raised through sales taxes. That compares to a national average of 35 percent.

Ohio collects a little more through income taxes than most places – 27 percent versus the U.S. average of 23 percent. And Ohio collects a little less from property taxes – 29 percent versus 31 percent nationally.

Average property tax rates by county

The study rated Ohio ninth highest in the country with property taxes amounting to 1.57 percent of the home values on average. The highest property tax rates are in the state’s two largest counties – 2.13 percent in Cuyahoga County and 2.04 percent in Franklin County.

Sales taxes by state

Combining state and county sales taxes, the average rate in Ohio is 7.14 percent.

The 7.14 percent average rate ranks Ohio near the middle nationally, 19th among the 50 states and the District of Columbia.

Two of the states that impose no state income taxes have some of the highest sales tax rates – Washington at 8.92 percent and Texas at 8.19 percent.

A handful of states have no sales tax – Alaska, Delaware, New Hampshire, Montana and Oregon.

State, local tax collections in Ohio above national average

State and local tax collections per capita in Ohio have been above the national average since the mid-1980s, though the gap has closed in recent years.

Ohio and local governments collected $1,138 per capita in 2014, up from an inflation-adjusted total of $210 in 1974.

Ranking Ohio’s business taxes

The Tax Foundation and the Buckeye Institute created a ranking for various types of taxes on businesses and concluded that Ohio ranks low for unemployment insurance taxes (fourth lowest) and property taxes (11th), but high for individual income taxes (47th) and corporate taxes (45th).

Note: included for corporate taxes was Ohio’s commercial activities tax.

Other findings

The Tax Foundation and the Buckeye Institute included in its report a profile of Ohio on a variety of other topics. Some highlights are below.

Ohio is a cheap place to live, according to the report. In comparison to other states, $100 in Ohio is really worth $112. Just six states were identified as better bargains – Alabama, Arkansas, Kentucky, Mississippi, South Dakota and West Virginia.

On the flip side, $100 is only worth $86.43 of spending power in New York State.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 413 | Learning From Prince’s $250 Million Mistake June 28, 2017

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Tax Tip of the Week | June 28, 2017 | No. 413 | Learning From Prince’s $250 Million Mistake

Finally, over a year after the date of his death, a judge confirmed Prince’s six siblings to be his rightful heirs – after more than 45 people had come forward claiming to be his wife, children, siblings or other relatives.

Last year, the legendary musician passed away, leaving behind not only a legacy of unparalleled music, but also a $250 million fortune – with no will or estate plan to be found. With the long-anticipated announcement that his siblings will inherit his fortune, we’re reminded again of the importance of planning ahead and hiring trusted experts to carry out your wishes.

Whether you have people clamoring after your money or not, it’s important to consider hiring an expert to sort through the, at times, very complicated process of estate planning. There are DIY websites and software packages that may seem attractive (and cheap!), but more often than not, you get what you pay for. More complicated life situations, such as children from a prior marriage, children with special needs, or capital gains from property appreciation, require the hands-on insight of an expert.

It is important to have an unbiased third party look over your documents. Even U.S. Supreme Court Chief Justice Warren E. Burger, who died in 1995, should have relied on estate planning experts to prepare his estate plan – but instead he took it upon himself, and his family paid over $450,000 in taxes because of his errors.

To be better prepared than Prince and Chief Justice Burger, seek out the assistance of an attorney or a CPA to draft a will and do estate planning, respectively. An attorney will help you navigate a will, and a CPA is best positioned to help with more complicated estate planning.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 409 | President Trump’s Tax Plan Summary May 31, 2017

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Tax Tip of the Week | May 31, 2017 | No. 409 | President Trump’s Tax Plan Summary

We now have some information about the proposals included in President Trump’s tax plan. Remember that this plan is not a law and has not yet even been introduced to Congress as a bill, and that a bill must be passed by both the House and the Senate and then signed by the President, so there is no way to know what will be passed (if anything). This is just a summary of the proposals, without comment. The plan released by the President is a one page plan, so most other details are not available beyond this summary.

Business Changes

C corporation tax rates would be reduced from the current highest rate of 35% to a new flat rate of 15%. Pass-through S corporation and LLC income would also be taxed at 15% rate for small and medium sized businesses (which were not defined).

Corporations would no longer be taxed on a worldwide system, but would be taxed on a territorial system, and a one-time repatriation tax would apply on the foreign earnings of US companies.

The proposal does not include a provision allowing expensing of all business assets, as originally proposed.

Individual Changes

The President wants to reduce the current seven different individual tax brackets to three brackets, with rates set at 10 percent, 25 percent, and 35 percent. The President also wants to double the standard deduction to $24,000 for Joint retruns, repeal alternative minimum tax and the estate tax and expand the credit for child and dependent care expenses, while also repealing the dreaded net investment income 3.8% surtax.

With the new standard deduction and changed brackets, individual taxpayers with taxable income less than $25,000 and married taxpayers with taxable income less than $50,000 would owe no Federal income tax.

Most individual itemized deductions would be repealed, but the deduction for mortgage interest and charitable donations would be retained.

Stay tuned….should be an interesting summer and fall!

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 405 | Items to Note on 529 Plans May 3, 2017

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Tax Tip of the Week | May 3, 2017 | No. 405 | Items to Note on 529 Plans

State Limitations

Often people question which state limits to follow when contributing to a 529 plan. Residence of the contributor? Residence of the beneficiary? The answer is…neither. The limits imposed are dependent on which state sponsors the plan. For most, this will be the state in which the contributor resides. Here in Ohio, the state limit is $414,000 to $426,000 contingent on the type of plan selected. Further, Ohio allows up to $2,000 in tax deductions for contributions to a 529 Plan. So, how much should be contributed annually? Contributors generally try to stay within the annual gift-tax reporting exclusion, which is $14,000, or $28,000 for a couple, per beneficiary. 529 Plans do have a special tax advantage that allow front-load contributions. In short, contributors can contribute $70,000, or $140,000 per couple all at once. However, this bars them from contributing to the same beneficiary for the subsequent four years.

Transferability

Beneficiaries can be changed with no tax consequences, but a change in beneficiary designation may not always be necessary. A strategy formulated by some is to transfer funds between beneficiaries in the earlier years of college to prevent reduction of potential FAFSA benefits. It should be noted that 529 Plan funds are not included in the calculation of FAFSA benefits. It is not until the funds are withdrawn for education purposes that they are included in the FAFSA benefit calculation.

Penalties

Penalties…a word no one likes to hear. Fortunately, this segment of the article focuses on when a penalty for withdrawal of unused 529 funds is waived. If these funds are withdrawn because college expenses were paid via scholarships, GI Bills, etc., then the penalty is waived. Earnings in the account are still subject to tax, but the contributions can be withdrawn tax and penalty free.

To further discuss the benefits of a 529 Plan, contact us today in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 399 | Five Things to Know About Substantiating Donations March 22, 2017

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Tax Tip of the Week | March 22, 2017 | No. 399 | Five Things to Know About Substantiating Donations

There are virtually countless charitable organizations to which you might donate. You may choose to give cash or to contribute noncash items such as books, sporting goods, or computers or other tech gear. In either case, once you do the good deed, you owe it to yourself to properly claim a tax deduction.

No matter what you donate, you’ll need documentation. And precisely what you’ll need depends on the type and value of your donation. Here are five things to know:

1. Cash contributions of less than $250 are the easiest to substantiate. A canceled check or credit card statement is sufficient. Alternatively, you can obtain a receipt from the recipient organization showing its name, as well as the date, place and amount of the contribution. Bear in mind that unsubstantiated contributions aren’t deductible anymore. So you must have a receipt or bank record.

2. Noncash donations of less than $250 require a bit more. You’ll need a receipt from the charity. Plus, you typically must estimate a reasonable value for the donated item(s). Organizations that regularly accept noncash donations typically will provide you a form for doing so. Keep in mind that, for donations of clothing and household items to be deductible, the items generally must be in at least good condition.

3. Bigger cash donations mean more paperwork. If you donate $250 or more in cash, a cancelled check or credit card statement won’t be sufficient. You’ll need a contemporaneous written acknowledgment from the recipient organization that meets IRS guidelines.

Special Note About Cash Donations to Churches, Synagogues, etc.:  We continue to see some religious groups simply issue a statement to parishioners showing the annual amount of contributions given.  There have been many court cases showing some very specific language must be included on the receipt for the donation to be classified as a deductible donation if audited.  The statement must include some language like the following: “You did not receive any goods or services in connection with these contributions other than intangible religious benefits.”

Among other things, a contemporaneous written acknowledgment must be received on or before the earlier of the date you file your return for the year in which you made the donation or the due date (including an extension) for filing the return. In addition, it must include a disclosure of whether the charity provided anything in exchange. If it did, the organization must provide a description and good-faith estimate of the exchanged items or service. You can deduct only the difference between the amount donated and the value of the item or service.

4. Noncash donations valued at $250 or more and up to $5,000 require still more. You must get a contemporaneous written acknowledgment plus written evidence that supports the item’s acquisition date, cost and fair market value. The written acknowledgement also must include a description of the item.

5. Noncash donations valued at more than $5,000 are the most complicated. Generally, both a contemporaneous written acknowledgement and a qualified appraisal are required—unless the donation is publicly traded securities. In some cases additional requirements might apply, so be sure to contact us if you’ve made or are planning to make a substantial noncash donation. We can verify the documentation of any type of donation, but contributions of this size are particularly important to document properly.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 396 | Internet Sales Tax March 1, 2017

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Tax Tip of the Week | March 1, 2017 | No. 396 | Internet Sales Tax

Internet Sales Tax Clash Turned Away by U.S. Supreme Court

The U.S. Supreme Court let stand a Colorado law that imposes reporting requirements on internet retailers in an effort to get customers to pay the sales taxes they owe.

The justices recently turned away an appeal by a retail-industry trade group that challenged the measure as violating the U.S. Constitution.

The case raised questions about a 1992 Supreme Court ruling that bars states from requiring merchants to collect taxes unless they have a physical presence in the state. States lose $23 billion every year in uncollected sales taxes from web and catalog purchases, according to a 2012 estimate by the National Conference of State Legislatures, the most recent figures available.

Although consumers are supposed to pay the taxes themselves, few do unless the seller collects the money.

The Colorado law requires internet retailers to turn over customers’ names, addresses and purchase amounts to tax authorities. Merchants also must notify consumers of their obligation to pay taxes and provide a purchase summary to people who spend more than $500 in a year.

The Direct Marketing Association contended unsuccessfully that the law violates the Constitution’s commerce clause because it applies solely to out-of-state companies.

Colorado officials urged the Supreme Court not to hear the case. The state told the justices that, if they wanted to intervene, they should also consider overruling the 1992 ruling, which Colorado says no longer makes sense given the growth of internet retailing.

The case is a familiar one to the justices, who ruled on a preliminary question in 2015. In that decision, Justice Anthony Kennedy wrote a separate opinion to say that the court should at some point revisit the 1992 case.

As always, give us a call if you have any questions.  You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 392 | How Are You Going to File? February 1, 2017

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Tax Tip of the Week | February 1, 2017 | No. 392 | How Are You Going to File?

Some tips are worth repeating—-a reminder we offer every year:

If you were legally married on 12/31/16, the IRS considers you married for the entire year of 2016.

You now must decide if you are going to file as Married Filing Jointly (MFJ) or Married Filing Separately (MFS).  Note, however, if you file MFJ it is an irrevocable election—you cannot go back and amend a MFJ return to a MFS return.

The primary reason to file MFS is to pay less tax.  This is particularly beneficial to save on the amount of Ohio taxes paid. Another reason to file separately is to avoid joint liability.  Each spouse who signs a joint return is responsible for the accuracy and tax liability on the return.

Many times, for example, in a second marriage situation we see couples who have a desire to maintain separate financial responsibilities.  While this is understandable, it could lead to paying several thousand dollars in additional taxes.  If you file MFS, you should consider the following:

–   Child care credits, education credits, adoption credits and the earned income credit are not allowed on MFS returns
–    Deductions for student loan interest, tuition and fees, and savings bond interest are not allowed for MFS returns
–    If one spouse itemizes, or takes the standard deduction, the other spouse must do the same.  (That is, one cannot itemize and the other take the standard deduction.)
–    A greater percentage of your Social Security benefits may be taxable
–    Your ability to contribute to traditional or Roth IRA will be greatly limited
–    Capital losses could be limited to a maximum of $1,500
–    Passive losses could be limited

Remember:  If one spouse itemizes their deduction BOTH spouses must itemize.  You cannot let one spouse use Schedule A for itemized deductions and allow the other spouse to take the Standard Deduction when MFS.

Before filing your return you need to look at both MFJ and MFS to see which lowers your tax burden the greatest.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 381 | New W-2 Reporting Requirements November 16, 2016

Posted by bradstreetblogger in : General, tax changes, Tax Deadlines, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week | November 16, 2016 | No. 381 | New W-2 Reporting Requirements

New W-2 and 1099-MISC Filing Deadlines to Have a Significant Impact on Businesses

This change adds an extensive amount of work for filers in January.

Every tax year brings a variety of changes, whether forms are updated or regulations have changed. This year marks a particularly important year for filers, as the deadline for submitting Form W-2 to the SSA and Form 1099-MISC to the IRS has changed significantly.

Beginning in 2017, for the 2016 reporting year, filers must send W-2 and 1099-MISC recipient copies and submit to the SSA/IRSIRS/SSA by January 31, regardless of method (paper or e-file). In many cases, this is months earlier, increasing workload and stress for filers.

To further complicate matters, the new filing deadline, as it relates to Form 1099-MISC, only impacts filers reporting nonemployee compensation payments in box 7. Although the overwhelming majority of 1099-MISC filers will report information in box 7, there is bound to be some confusion.

Historically, filers were required to provide W-2 and 1099-MISC forms to recipients by January 31; however, they were not required to submit the forms to the SSA/IRS until February 28 (paper) or March 31 (e-file).

With three months of work being condensed into 30 days, this change adds an extensive amount of work for filers in January. In addition, Forms 1095-B and 1095-C filing deadlines also fall at the end of January for recipient delivery. This schedule means businesses will face a huge time crunch when planning for wage, income, and ACA reporting for the 2016 year.

In the past, some businesses would file W-2 and 1099-MISC recipient copies first and wait to find out if any changes were needed prior to filing to the SSA/IRS, which lessened the risk for possible corrections. Due to the earlier deadline in 2017, businesses may need to abandon this strategy and consider filing to recipients and the SSA/IRS concurrently.

To further complicate January’s filing deadlines, the IRS recently eliminated the automatic 30-day extension of time to file W-2 forms. Previously, filers could obtain an automatic 30-day extension by submitting Form 8809 to the IRS on or before January 31. Filers could also request an additional 30-day extension, pushing their e-file deadline to the end of May. These automatic extensions will no longer be available when filing W-2 forms for tax year 2016.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.