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Taxes Need Year Round Attention

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tax planningGiving your taxes your full attention just once a year isn’t the best business or individual strategy.

Experts suggest that a year-round approach is better for your finances, unless of course you like paying more in taxes than you must!

Numerous tax experts agree that addressing your tax liability effectively requires planning throughout the year. Those business owners who reap the most benefits consider their taxes year-round, rather than waiting to focus on tax payments just a few weeks before the filing date.

With proper tax planning as part of your wealth strategy, you and your CPA will devise a plan to help you not only make money, but keep it as well. The IRS code is partially written on how to file and pay taxes, yet the majority is written on how to legally reduce taxes. This allows you to make better investment decisions.

A typical small business qualifies for roughly a dozen tax deductions. For example, you may be able to claim deductions on the following:

  • Cars operated for business purposes
  • Business-related travel and entertainment expenses
  • Purchases of office supplies, furniture, equipment, and software programs
  • Telephone expenses
  • Contributions toward insurance policies, retirement plans, and pension funds
  • Home office
  • Hiring children
  • Cost segregation

It’s surprising how many small businesses never take advantage of these (and other non-listed) deductions, mainly because they suffer from the “tax-planning-happens-but-once-a-year” syndrome. To fully benefit from these deductions, it’s important to maintain your expense records throughout the year.

It’s also important to meet with your CPA on a regular basis to discuss planning and set up proper strategies for your situation. There are advanced tax strategies that can be uncovered when you and your accountant can sit down and review all details.

Your goal should be to reduce your tax liabilities by retaining records of your purchases and determining the proportion of business costs in combined expenses. By monitoring your expenses closely all year, you can analyze each expense for its tax impact as it’s made. Additionally, smart business owners should contemplate three key steps to tax planning:

1. Invest in the most effective tax and accounting record tools for your business. Whether it’s spending a few dollars on journals or tax books with a set of refill sheets to do manual tracking (or utilize excel) or investing in the latest online software applications, you will benefit from more rigorous and accurate recordkeeping.

Sure, the initial investment could be significant, but regular monitoring should facilitate tracking expenses and making advance payments, which will save you money in the long run. This tips goes for both individuals tracking their personal finances and businesses needing an accounting software and remember businesses can deduct these expenses as they are necessary.

2. Determine when you need professional tax tips and planning advice. At times you will be able to justify paying for professional tax services, particularly if you need advice on unclear requirements in tax laws that could be in your favor.

To prevent unnecessary complications and aggravations, you must avoid violating tax laws that may be applicable to your small business. If you are unsure of these laws, using the tools at your disposal, such as current software and online recordkeeping, and complementing those capabilities with professional advice when needed, can help you keep your taxes under control.

You will know when you need help. Our CPA’s and tax preparers are trained to also know when you may require additional planning. When going through your tax information for preparation it’s not a bad idea to ask questions to understand where opportunities lie to save in taxes.

3. Establish year-round tax planning goals. A good tax-planning strategy will help you accomplish some of these goals:

  • Reduce the amount of taxable income
  • Claim any available tax credits
  • Lower your tax rate
  • Control the time when taxes must be paid
  • Avoid the most common tax-planning mistakes

Plus, a year-end review at the end of your fiscal year or “busy season” can be most effective if you’ve maintained clear records and an understanding of your financial position throughout the year.

When you meet with BGMF CPAs we may recommend monthly, quarterly or annual tax planning sessions to ensure you are taking advantage of every tax saving opportunity available. We set this based on your unique situation and whether you or your business needs planning more often rather than once per year.  Waiting until tax filing season may be too late to take advantage of the various tax savings strategies.

Click here to schedule a consultation to learn the best ways to evaluate the impact of taxes throughout the year.

Tax Planning for College

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college tax planningIt is never too early to prepare and go through the process of tax planning for college.

It’s no secret that a college education is expensive. Average annual charges for tuition, fees, and room and board at four-year public colleges and universities stood at $20,770 for in-state students and $36,420 for out-of-state students (this was averages for the 2017-2018 school year.)

Average charges were $46,950 at four-year private colleges and universities.1 Based on historical trends, these costs are likely to increase in the future.

Parents who are intimidated by these figures should realize that the expenses at most colleges and universities are generally less than the quoted prices. There are scholarships, grants, and work-study programs available that can soften the financial impact of a college education.

Parents should take the time to look into the various tax benefits that can help reduce the costs of sending a child to college. Getting an early start on tax planning for college expenses can help reduce some of the anxiety surrounding the whole issue of trying to figure out how to pay for college. Here are some areas worth further investigation.

Savings Programs

Parents have several education savings opportunities that come with built-in tax benefits. Section 529 plans have grown in popularity over the years, but Coverdell education savings accounts also offer valuable tax benefits.

Section 529 Savings Plans

Section 529 college savings plans* are specifically designed for educational saving. You can invest a little at a time or contribute a larger lump sum, whatever approach works best for you. You choose how you want your contributions invested; your plan investments are then professionally managed. These plans offer several features that parents may find appealing:

  • Investment earnings accumulate tax deferred and won’t be subject to federal income taxes when withdrawn for your child’s qualifying educational expenses. (Excess withdrawals are subject to tax and a potential 10% penalty.)
  • Some states offer their residents tax incentives for investing in an in-state plan. For example, Ohio gives up to a $4,000 deduction for each child’s 529 plan contributed to during the year.
  • As a parent, you retain control of the money in the account even after the child turns 18.
  • If your child does not attend college or deplete the fund, you can change the account beneficiary to another qualifying family member without losing tax benefits.

Coverdell Education Savings Accounts

Annual contributions to these accounts are limited to $2,000 per child. This maximum phases out (is gradually reduced to zero) for taxpayers with modified adjusted gross income (AGI) between $95,000 and $110,000 (between $190,000 and $220,000 for joint filers).

Your contributions accumulate tax deferred at the federal level and earnings are tax-free when used for qualified educational expenses such as tuition, room and board, and books. If you make withdrawals from the account for non-educational expenses, the earnings portion of the withdrawal may be subject to federal income tax and an additional 10% penalty.

IRAs

Another college planning option may be to discuss if opening a Roth IRA would make the most sense. Roth IRA contributions are post tax and offers special withdrawal rules for higher education.

Similar to other college savings plans, the earnings will grow tax-free and with a Roth you will have more flexibility on how the money is utilized (for example, if your child doesn’t need the money for college you can continue to invest in the Roth for the future).

Roth IRAs do not get tax benefits similar to other college savings plans and you will want to understand how financial aid views a Roth IRA for planning purposes.  Roth IRA contributions have income limitations as well that you should know.

It’s best to sit down with your advisors to determine which vehicle makes the most sense for your situation.

Scholarships

Young adults who demonstrate high academic promise or who possess certain desirable skills may receive scholarships that can defray a percentage of the cost of attending college. Scholarships are generally exempt from income tax if the scholarship is not compensation for services and is used for tuition, fees, books, supplies, and similar items (and not for room and board).

Tuition Tax Credits

A tax credit gives you a dollar-for-dollar reduction against the taxes you owe the IRS. The following two education tax credits can help eligible parents alleviate the costs of educating a child.

American Opportunity Tax Credit (AOTC)

This credit is worth up to $2,500 per year for each eligible student in your family. It’s for the payment of tuition, required enrollment fees, and course materials for the first four years of post-secondary education. The credit is allowed for 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000. Were the credit to exceed the amount of tax you owe, you may be eligible for a refund of up to 40% of the credit. The available credit is phased out for single taxpayers with modified AGI between $80,000 and $90,000, and for married couples with modified AGI between $160,000 and $180,000.

Lifetime Learning Credit (LLC)

This credit can be as much as $2,000 a year (per tax return) for the payment of tuition and required enrollment fees at an eligible educational institution. It is calculated as 20% of the first $10,000 of expenses. You cannot claim the credit for a student if you are claiming the AOTC for the student that year. Unlike the AOTC, qualified expenses for the LLC do not include academic supplies and no portion of the credit is refundable. The LLC is phased out (in 2018) for single taxpayers with modified AGI between $57,000 and $67,000, and for married couples with modified AGI between $114,000 and $134,000.

Student Loan Interest Deduction

A tax deduction lowers your tax liability by reducing the amount of income on which you pay tax. You can deduct interest on qualified loans you take out to pay for your child’s post-secondary education. The maximum deduction is $2,500 per year, but it phases out for taxpayers who are married filing jointly with AGI between $135,000 and $165,000 (between $65,000 and $80,000 for single filers). The deduction is available even if you don’t itemize deductions on your return.

*Certain 529 plan benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used. Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer’s official statement contains more information about municipal fund securities, and you should read it carefully before investing.

College Funds Held in Each Account

529 Plans 30%
General Savings Accounts 22%
Investment Accounts 14%
Checking Accounts 8%
Prepaid State Plan 8%
Certificate of Deposit 5%
Other 13%

Don’t put this off until it’s too late. Set up a time to talk with one of our advisors to get started on the right path for tax planning and college.

Source/Disclaimer:

1 Trends in College Pricing 2017, The College Board, 2017

Tax Planning for Divorce

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Divorce Tax PlanningAre you going through a major life change such as divorce? Tax planning for divorce is a crucial step in ensuring you don’t cost yourself more money during and after the process.

The good news is you don’t have to deal with this and everything else going on alone. Our team is here to assist you during and after the process.

If you are getting a divorce, taxes are probably not highest on your list of concerns. Still, you should consider a number of tax-related issues.

Property Settlements

Dividing property in connection with a divorce generally has no immediate consequences for either spouse. However, if the spouse who receives property in the divorce settlement later sells it, there may be a gain to report for tax purposes. So, potential taxes should be a consideration in deciding which spouse will receive which property.

Note that a spouse who receives property in a divorce figures any gain on a subsequent sale of the property using the transferring spouse’s basis (e.g., cost), not the property’s value when it was received.

For example: Michelle receives 10 acres of unimproved land in her divorce settlement. Her ex-husband bought the land for $25,000. It’s now worth $100,000. If Michelle sells the land for $100,000, she will have to report a taxable gain of $75,000 (the difference between the $100,000 selling price and the $25,000 cost basis).

Personal Residence

If a divorcing couple sells their home while they are still married, they are entitled to exclude up to $500,000 of gain from their taxable income if otherwise eligible for the exclusion. If the ownership of the home is simply transferred to one spouse as part of the divorce settlement, there is no taxable gain or loss at the time of transfer. However, should that spouse later sell the house while he or she is unmarried, only a $250,000 exclusion would be available.

Retirement Benefits

A divorce settlement often determines how retirement plan benefits will be divided. However, an employer may distribute retirement plan benefits to a former spouse only after receiving a court-issued document that meets the requirements for a qualified domestic relations order (QDRO). The benefits are taxable to the former spouse who receives them pursuant to a QDRO.

Dependency Exemptions

The Tax Cuts and Jobs Act of 2017 suspended the deduction for dependency exemptions for 2018 through 2025. But after 2025, the deduction will apply (unless additional changes are made). While the spouse who has legal custody of a child is generally entitled to claim the dependency exemption, this tax advantage is negotiable and can change from year to year. The custodial spouse can waive his or her right to the exemption, allowing the noncustodial spouse to claim it.

Other Tax Benefits

Having a child or relative qualify as a dependent may impact other tax benefits. For example, there is a potential child tax credit of up to $2,000 annually for each qualifying dependent child under age 17 and $500 for each qualifying relative over 17 (i.e. your children in college).

Alimony vs. Child Support

Payments that qualify as alimony under the tax law are deductible by the paying spouse and are considered taxable income to the recipient spouse. Child support payments, on the other hand, are not deductible by the paying spouse and are not included in the recipient spouse’s income. The IRS characterizes payments that are linked to an event or date relating to a child — such as high school graduation or a 21st birthday — as child support rather than alimony.

Note that the tax treatment of alimony will be different for taxpayers who divorced after 2018. Under the Tax Cuts and Jobs Act of 2017, no deduction is available for alimony payments made under post-2018 divorce or separation agreements and recipients are not required to include the payments in income.

These are just some of the tax planning issues that could be important in a divorce situation. Be sure to consult our expert divorce tax planning advisors to discuss how these general rules pertaining to your personal situation.

What to Do When You Get an Audit Notification

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IRS Audit HelpYou’ve opened the mail and your heart sinks. You or your business just received an audit notification from the IRS.

BGMF CPAs deals with these letters due to a variety of reasons from a letter that indicates something was not reported on the tax return to a full-fledged, IRS agent in your office audit to review all records.

Keep reading to learn how to keep your cool and prepare for what happens next (and how we can assist you).

You may be surprised to learn that not every audit notification you receive will be legitimate. So, first, make sure you received an official audit notification. The Internal Revenue Service (IRS) will notify you either by letter or by a phone call followed by a letter. If you receive a call without the letter, please consider this potentially fraudulent.

The IRS does not notify taxpayers about audits through email or phone call only, so again if you do get an email or phone call saying you’ve been selected for an audit, it’s probably fraudulent. There continues to be new scams threatening taxpayers surrounding audits and other IRS matters. Do not respond or hang up and contact your CPA before providing any information.

If you’ve determined that you’re definitely getting audited, your next step is to learn what’s involved.

What Exactly Is an Audit?

According to the IRS, an audit is “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is substantially correct.”

That’s it. It’s an audit — not an arrest and not a trial — so don’t panic. Contrary to popular belief, an audit doesn’t automatically mean you made a mistake. Yes, an inconsistency can trigger an audit if there’s a discrepancy between what’s on a tax form and what you actually reported.

But the IRS may choose to audit a taxpayer based on random selection or a statistical formula. Also, an audit may be less intrusive than you feared. For example, it may be entirely through the mail, although in some cases, it may be at an office or the taxpayer’s home or place of business (or our firm’s office). And not all audits result in your owing money. In fact, your audit may lead to no changes at all.

Both businesses and individuals may be audited (even sole proprietorships), and there may be some differences in how they are handled. One thing that virtually all audits have in common, however, is access to records. The IRS is going to want to check some of your records, and maybe a lot of them. Did you deduct business expenses? Make some substantial charitable contributions? You’ll need to show the IRS some receipts. The good news is that in many cases the IRS accepts electronic records.

What Happens Next?

There is no typical length of time for an IRS audit, but if you have your records handy and cooperate fully and quickly, you increase your chances that it will be as brief and painless as possible. Ultimately, the IRS may determine that you owe more money. At this point, you can pay it or you can appeal. The audit doesn’t have to be the end of the road. There is a substantial appeal process and a long and expensive court trial may not even be necessary.

The important thing to remember is that you don’t have to go it alone! Our CPA firm can work with you throughout the audit process, including any appeals. The key factor is to call us as soon as you receive the notification about your audit. We’re ready to work through the details and help you gather any records you may need.

Time to Check Your Withholding

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check tax withholdingIn light of the tax law changes made by the Tax Cuts and Jobs Act of 2017, it may be an appropriate time for taxpayers to review their withholding.

Changes to the tax rates and brackets, the removal of personal exemptions and certain other deductions, the new limit on the deduction for state and local taxes, and various other modifications may have a significant impact on personal income tax liabilities.

BGMF CPAs offers tax planning services to clients to properly strategize and save in taxes.  Like many taxpayers found out during tax filing season, their withholding was lower than expected, resulting in lower refunds or a tax bill. At a minimum we recommend reviewing your withholding to ensure you’re not surprised next tax filing season.

The IRS offers workers the opportunity to perform a quick “paycheck checkup” to make sure they have the right amount of tax withheld from their paychecks. The IRS Withholding Calculator can be found at http://irs.gov/individuals/irs-withholding-calculator.

Getting it right is important since you could face an unexpected tax bill or penalty at tax time next year if you have too little tax withheld. Or, if you have too much tax withheld, you may be eligible for a tax refund. Many people see a large tax refund as a plus — but in reality a large tax refund is effectively an interest-free loan of taxpayer money to the IRS. A better approach may be to have less tax withheld up front and receive more in your paycheck. That way, the extra money would be available to save or invest, pay down debt, or spend as you see fit.

The withholding calculator can help you figure out if you need to give your employer a new Form W-4, Employee’s Withholding Allowance Certificate. Your results from the calculator can be used to help you fill out the form and adjust your income tax withholding.  If you prefer not to calculate this yourself we’re glad to help. Please contact us today to start that conversation.

Steps to Take

The key is to plan ahead. Before you access the calculator and start entering data, the IRS suggests that you:

  • Have your most recent pay stubs within reach.
  • Have a copy of your most recent income tax return available. A copy of your completed Form 1040 can assist you in estimating your 2019 income and identifying other items that may affect your tax.

The IRS cautions that the calculator’s results will only be as accurate as the information you enter. If there is a change to your circumstances during the year, you will have to use the calculator again to ensure that your withholding is still correct.

Moreover, the IRS withholding calculator may not work for those with more complex tax situations. Taxpayers who owe self-employment tax, alternative minimum tax, the tax on unearned income of dependents, or certain other taxes, and those with long-term capital gain or qualified dividends should use the instructions in Publication 505, Tax Withholding and Estimated Tax.

If you have questions about your withholding or would like assistance with analyzing your tax situation, consult with your tax advisor.  We’re available all year around to answer your questions.

Tax Deductions When Traveling for Business and Pleasure

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business travel and taxBusiness owners who travel out of town on business sometimes like to extend their trips and take a little time to relax and see the sights. When a trip is partly for business and partly for pleasure, various expenses may still be deductible.

Domestic Travel

A self-employed individual whose trip is primarily for business may deduct the full cost of the travel itself (such as airfare or train fare) even though some of the trip is devoted to personal activities.1 Additionally, various other expenses allocable to business, such as lodging and 50% of meal costs incurred on the business days, are deductible.

There needs to be a legitimate business purpose for each person taking the trip for there to be a write-off.  For example, if your spouse or kids travel with you, the cost of their travel may not be deductible if they are not involved in the business.

In addition, you may have to allocate a portion of the trip when both business and personal activities are intertwined.How do you maximize your deductions when traveling? Easy! Turn more days into business days. Consider getting your spouse and kids involved and find ways to conduct business-related matters.  Ultimately, you’ll have to demonstrate how the activities performed helped your business.

If a trip is primarily for personal reasons, the entire cost of the travel is a nondeductible personal expense. However, expenses incurred while at the destination that are directly related to the taxpayer’s business may be deducted.

For example, if you travel to Disney with your family and set up a couple of lunch meetings with clients in the area, the cost of the meals could be deductible as a business expense. The trip to Disney would be non-deductible.

Foreign Travel

The deductibility rules for combined business/pleasure trips outside of the U.S. are a little more complicated in some respects. Even if the primary purpose of the trip is business, the cost of the travel itself generally has to be allocated, and only the business portion is deductible. However, no allocation has to be made — and the full travel cost is deductible — if:

  • The trip lasts for no more than seven consecutive days (excluding the day of departure but including the day of return); or
  • Personal days total less than 25% of the total days spent on the trip (including both the day of departure and the day of return); or
  • The taxpayer can establish that the opportunity to take a personal vacation was not a major consideration for the trip.
  • For these purposes, business days include days when business is conducted for only part of the day, days spent traveling to and from a business destination, and weekend days or holidays that fall between two business days.

As this brief overview suggests, with smart planning, self-employed business owners can maximize their write-offs for combined business/pleasure travel.

Contact us today to discuss how we can help you maximize your deductions and limit your tax liability with proper planning.

Source/Disclaimer:

1Under The Tax Cuts and Jobs Act of 2017, employees may no longer deduct unreimbursed employee business expenses as a miscellaneous deduction, effective with the 2018 tax year.