jump to navigation

Tax Tip of the Week | No. 361 | Don’t Ignore That IRS Notice June 29, 2016

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

Tax Tip of the Week | June 29, 2016 | No. 361 | Don’t Ignore That IRS Notice

According to a 2016 report from the Treasury Inspector General for Tax Administration, the IRS mailed more than 188 million notices and letters to taxpayers during 2014. There’s no reason to believe the number of notices will be any less this year. If you’re one of those taxpayers on the IRS mailing list, here’s what to do.

Scan the heading. The first line, generally printed in bold type and centered beneath your name and address, will tell you why the IRS is contacting you. Questions about missing information, additional taxes owed, or payments due mean you’ll want to take prompt action to avoid more notices or assessments of interest and penalties.

Review the discrepancy. You’ll find the tax form and the year to which the notice applies printed in the upper right corner. Pull out your copy of the corresponding tax return, along with the supporting documents, and compare what you filed with what the IRS is questioning.

Prepare your explanation. Are the proposed changes correct? Did the IRS misapply a payment? Whatever the issue, there’s usually no need to file an amended return. However, the IRS typically wants a response, by either phone or mail, in order to clear the notice from your account.

Do not delay. Ignoring IRS correspondence will not make it go away. Reply to the IRS in a timely manner even if you don’t have all the information being requested.

Please contact us as soon as you receive a notice from the IRS or state or local taxing authority. We’re here to set your mind at ease by helping you resolve the matter as quickly as possible.  Many times, we can make the problem “go away” with a properly written response.

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. 360 | It’s Not Personal, It’s Your Business June 22, 2016

Posted by bradstreetblogger in : Business consulting, Business Consulting, General, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week | June 22, 2016 | No. 360 | It’s Not Personal, It’s Your Business

You may think of your business as an extension of yourself, especially if you’re a sole proprietor or the only shareholder. But keeping the two of you separate — particularly in the area of finances — is a tax-smart move. One reason: In addition to making sure the expenses you pay are ordinary and necessary, you need adequate records to support them so you can claim a deduction on your business return. Intermingling personal and business finances may lead to disallowed deductions.

Here are three ways to separate your personal and business life:

Set up a bookkeeping system. In general, federal income tax law does not specify a particular type of recordkeeping system. Your accounting records can be as simple as a logbook with pockets to store receipts. The main requirement is to track your expenses in a manner that provides a complete and accurate account of your business activities.

Open a business bank account. Having a separate bank account can help put to rest the question of whether you are running a business or indulging in a hobby. Why? To open a business account, financial institutions usually require employer identification numbers, business licenses, certificates of incorporation, and other legal documents that signify genuine business activity.

Take a salary.  (Not an option if you are a sole proprietor) Besides providing a clear separation between your personal and business expenses, paying yourself a reasonable wage helps you maintain a budget. Establishing a distinction is especially important for corporations. In some cases, amounts you withdraw from your corporation for your personal benefit can be considered dividends instead of a deductible expense.

If you need help establishing or organizing your business records, please do not hesitate to contact our office.

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. 359 | 6 Quick Tax Tips for Students Starting a Summer Job June 15, 2016

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

Tax Tip of the Week | June 15, 2016 | No. 359 | 6 Quick Tax Tips for Students Starting a Summer Job

Summer jobs are an excellent opportunity to learn responsibility in the areas of work ethic, time management, and financial responsibility.

According to the Bureau of Labor Statistics, 20.3 million youth were employed in the summer of 2015. This is a significant increase from only 2.1 million employed during the school year. If your child is a student and one of the millions joining the work force this summer, kudos to them! Along with establishing a good work ethic and building time and financial management skills, a summer job also means learning about the obligatory duty of paying taxes.

To help navigate the tax process, we have put together a list of six tax tips to be aware of when a child prepares for a summer job. We hope these tips will help you and your child plan ahead and know what to expect as they begin their summer job.

1. Understand the Rules for Claiming Dependents

You may be wondering, since your child has a summer job, if you will still be able to claim him or her as a dependent on your own return. The answer is, “Yes.” A child under the age of 19 (or under the age of 24 and a full-time student) can make any amount of income and still be claimed as a dependent as long as you are still providing more than half their support.

2. Filling Out Form W-4: Determine How Much To Withhold

Before your child begins a summer job, he or she will be required to fill out a federal and state Form W-4 to instruct the employer how much to withhold for federal and state income taxes. To determine how much, if any, should be withheld, it is important to note the thresholds of when your child will need to file an income tax return. Estimate how much they will earn this summer based on their wages and expected hours to be worked. Regardless of amounts withheld for income taxes, Social Security and Medicare tax will be withheld at the regular 6.2 and 1.45 percent rate and is never available for refund.

3. If No Taxes are Withheld, Set Money Aside to Be Prepared for Tax Time

Your child may have a summer job when the employer does not take your child on as an official employee, but, rather, as an independent contractor for their temporary summer work. In this instance, your child’s paycheck will not include any deductions for Social Security and Medicare tax, nor will there be any withholdings for federal or state income tax. If $600 or more is earned from this employer, your child should receive a 1099-MISC at the end of the year. Most likely the income will be shown as “Non-employee Compensation” in box 7 of the 1099-MISC. This is treated as self-employment income and is subject to self-employment taxes. In this case, your child must file a return if earnings were at least $400. Be aware that because the employer did not withhold and pay any taxes on behalf of your child, taxes will be owed when tax returns are filed the following spring. It will be a good idea for your child to set aside money from each pay check so that he or she can pay the tax when the returns are filed.

4. Know the Tax Implications of Employing your Child

Many of you may be exploring the idea of hiring your child for the summer. Giving your child a summer job may provide an opportunity for tax savings for you as the employer as well as for your child. There are tax benefits of having your child as an employee if your trade or business is a sole proprietorship or partnership in which you and/or your spouse are the sole owners or partners.

Wages paid to your child who is under the age of 18 are not subject to Social Security and Medicare taxes, or Federal Unemployment Tax (FUTA). Wages paid to your child who is 18 years or older, but under 21, are not subject to FUTA. Your child’s wages are a deductible business expense to your company, as long as your child is treated as a regular employee, wages are paid in dollars, and a W-2 is filed.

5. Understand How Taxes Work with an Out-Of-State Summer Job

If you reside in Ohio and your dependent child gets a summer job out-of-state, your child is considered an Ohio resident and will need to file an Ohio return. If the job is in Indiana, Kentucky, Michigan, West Virginia or Pennsylvania, a reciprocity agreement exists with Ohio. This means the out-of-state employer will withhold and pay Ohio taxes and no taxes should be paid to that employer’s state. In most other states, taxes will be withheld and paid to the state of employment. In those cases, an Ohio return and a non-resident return for the state of employment will need to be filed.

6. Understand Roth IRA Eligibility and Benefits

Something else to think about if your child gets a summer job is that he or she will be eligible to start making Roth IRA contributions. While retirement may seem like eons away for your newly working teen, the power of compounding is amazing. In addition, the contributions can be withdrawn tax-free and penalty-free at any age and the earlier they begin contributing, the greater the earnings potential.

As you can see, there is a lot to keep-in-mind as your child begins exploring summer job opportunities since the tax implications can be complex.  Give us a call so there are no surprises come tax season in 2017.

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. 358 | Five Things to Know About Substantiating Donations June 8, 2016

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

Tax Tip of the Week | June 8, 2016 | No. 358 | 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.

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. 357 | 2016 Cost-of-Living Adjustments June 1, 2016

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

Tax Tip of the Week | June 1, 2016 | No. 357 | 2016 Cost-of-Living Adjustments

Keep in mind these cost-of-living increases for various tax exemptions and deductions, taxable income, and contributions limits:
  • Personal exemptions. They jumped from $4,000 to $4,050 in 2016.
  • Income tax brackets. The 2016 income tax brackets rose by 0.4% from 2015. Remember, tax brackets are based on taxable income—not gross income!
  • The lifetime individual gift and estate tax exemption for unified credit has risen by $20,000 to $5.45 million, and there will also be an upward adjustment in 2017.
  • HSAs. For family policies, the annual contribution limit on an HSA connected to a high-deductible plan has increased by $100 this year to $6,750, with the additional $1,000 catch-up contribution allowed for those 55 and older.
  • Roth IRAs. The phase-out range on 2016 Roth IRA contributions has become $117,001-$132,000 for single filers and heads of household, and $184,001-$194,000 for joint filers. These ranges are $1,000 higher than they were in 2015.
  • Standard deduction for head of household. If clients file their federal tax returns using a head of household status, their standard deduction is $50 dollars higher than it was in 2015—it has risen to $9,300!
  • AMT exemption. In 2016, the alternative minimum tax exemption jumped by $300 to $53,900 for single filers and by $500 to $83,800 for joint filers.
However the following income, contribution, and deduction limits DID NOT get a cost-of-living adjustment:
  • Social Security benefits.
  • Social Security tax. $118,500 limit on income subject to Social Security tax.
  • IRA contribution limit. $5,500 for 2016, with an additional $1,000 catch-up contribution allowed for those who turn 50 or older by the end of 2016.
  • IRA AGI deduction phase-out limit. $98,000 for those married filing jointly and $61,000 for single filers and heads of household.
  • Elective deferral limits for 401(k), 403(b), and 457 plans. $18,000 this year, with an extra $6,000 catch-up contribution allowed for those who turn 50 or older by the end of 2016.
  • The 401(a) defined contribution plan contribution limit. $53,000 for 2016.
  • Retirement plan contribution limits. $53,000 for SEP plans and $12,500 for SIMPLE plans this year. SIMPLE plan catch-up contribution limit remains at $3,000.
  • SEP minimum and maximum compensation limits. $600 for the minimum and $265,000 for the maximum.
  • The Employee Stock Ownership Plan (ESOP) maximum balance. $1,070,000.
  • The amount for lengthening of a 5-year ESOP period. $210,000.
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.