Simplified Tax Guide for the Self-Employed

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Venturing into a new business can be exciting and fun, but there are certain obligations that you have to fulfill before officially starting this new chapter in your life. Whether it’s a car finance, a car wash, or a new boutique, there are certain steps that you have to follow, especially when it comes to taxes and the government. It can definitely get confusing at times, which is why we are here to guide you through your journey.

Sole Proprietor (Sole Trader)

Every business owner needs to understand that the amount of tax that they pay depends on the business’ structure. As a self-employed individual/business owner, you have to understand that you are liable for your own tax debts. You have no accountant to take care of it, unless of course you decide to hire one, which would only add to your expenses. Note that there won’t be any division between your personal and business expenses, unless you make one, for example, by maintaining a separate bank account for each. This may also help with liability protection however, not being a lawyer this is a general observation and not actually legal advice. If you have the time and you are willing to exert the effort, then you can track and claim a range of deductions and expenses for your business on your personal tax return.

Goods and Services Tax

If you are earning more than $75,000 a year, then you have to be prepared for the Goods and Services Tax or GST. Both companies and sole traders are required to pay the GST, so you should always make sure to have some cash in hand. This does not apply to US based companies at this time, although it has been proposed for future legislation.

Reduce Your Tax Payments

Luckily for sole proprietors, there are certain ways to reduce their tax payments. You can claim a deduction for most of your business expenses, as long as it is strongly and directly related to the generation of revenue by your company. Also, if you are a sole proprietor, then you are entitled to offset business losses carried forward against other income. Please note though that you would not be able to choose which year you can claim your deduction. It would be wise to calculate your own profit and loan too, so you know when to file for a claim and how much you will be receiving. There are specific rules for doing so – you can see these here on the IRS website.

Reportings and Requirements

As a sole proprietor, you will most likely encounter the Business Activity Statement or BAS (outside the US). This needs to be submitted every quarter and must include details on how much money you have made, if you owe any goods and services tax and how much of it you owe, how much the taxation office owes you (if applicable), pay-as-you-go installments (if applicable), as well as other tax obligations your business might have. If you are inside the US you most likely should be making quarterly estimated payments on your income since there is no withholding. You may also have to report sales and use tax which is different for each state. <See: State of MN Sales & Use Tax>

Your FEIN, ITR, and State Filings

When starting your business, you need to file with the state you are operating in for a Tax ID. Go to your state’s Secretary of State page for more details. You also need to file with the Federal Government as well to obtain a FEIN or Federal Employer Identification number. If you are not in the US you must to lodge your income tax return with the taxation office before you even start running your business. To be able to do this, you must use your TFN or individual tax file number.

Pre-Paying Your Tax

You can always opt to pre-pay your business’ tax during its first year. If you cannot pay in full, then paying voluntary installments would be the best choice for you. This way, you would not have to worry about paying hefty amounts of taxes for the next few months.

Reporting Online

Almost everything can be done online today, including business reporting. This is extremely convenient especially to busy business owners, as with just a few clicks, your work will be done. Most state websites are user friendly and will have contact information if you get stuck. Likewise the Federal filings are generally set-up to do it yourself without the aid of a real person. Internationally, reporting your income tax return including your claim expense, superannuation deductions, your BAS, and your business and personal income can all be done online. Tracking your GST and preparing your BAS for lodgment can also be done online.

Starting your own business can be a lot of work, and it can get exhausting at times. However, once you get the hang of it and you start seeing results, you will realize that all of your hard word was well worth it!

How to Reduce Your Investment Taxes in 2018

How to Reduce Your Investment Taxes in 2018

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According to U.S. News, the new tax plan proposed by President Donald Trump may remove the net investment income surtax, which is currently at 3.8 percent. If the surtax is eliminated, the top federal tax rate for long-term capital gains will be reduced to 20 percent for high-income earners. While the proposed tax code may provide some relief, it may not be passed. If you feel that you paid more than you should in investment taxes this year, it is not too early to start planning for your 2018 tax bill.

Harvest Investment Losses

Harvesting investment losses is something that is normally done at the end of the year, but it can be beneficial to do it at other times as well. Robert Waskiewicz from the Wescott Financial Advisory Group said that a good example of harvesting losses is selling a mutual fund that is losing money before the payment of dividends or capital gains. It is essential that you harvest investment losses in a strategic manner. If you trade frequently to lock in gains and losses, you may experience tax inefficiencies, which can in turn lead to reduced net investment return. Long-term investing should be the strategy used for taxable accounts, because it is intrinsically more tax-efficient.

Before you start to harvest investment losses, you need to calculate the amount of tax offset you can get from the sale of a certain asset. Also, take a look at the track record of the investment. Regardless of whether it is an equity or bond, you should get rid of it if it has not been performing as well as expected. If you think that the investment has a good chance of rebounding in the future, selling half of your shares is an option you may want to consider.

Locate Your Assets in the Right Places

You may have holdings that you trim back as they approach the top limit of their trading range and get back in as they fall back to their normal bottom. In order to minimize the tax friction that comes with this approach, you should locate such holdings in tax-deferred accounts. If you belong to a high tax bracket, it is a good idea to utilize municipal bonds and other investments that are not subject to federal or state income tax. Another strategy for reducing investment taxes is investing in a life insurance policy and using it as a Roth IRA alternative. If you are an angel investor, you may be eligible for federal and state tax breaks if you invest in a startup. According to investor Jason Sugarman, those who wish to remain profitable for a long time should invest in tech-oriented startups, because these startups have a better chance of surviving in the future.

Investment taxes can take a significant chunk out of your profits, but you can keep them at a minimum by following the above-mentioned strategies.

If you are Retired or retiring soon, check out these tax tips to save money now!

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Ahhh, you've finally made it to retirement. It's time to relax. While sipping your morning coffee read through the below tax tips. They could save you thousands on your next tax return. 

1. Withdrawals are Coming - Get Ready

Now that you are retired most of your monthly living expenses will be coming from your savings and retirement accounts, especially if you haven't started taking social security yet. Get ready to pay taxes any of these distributions coming out of pre-tax accounts like IRAs and 401(k)s. The same goes for your taxable brokerage with the benefit of only paying capital gains taxes (rather than ordinary income) on any investments that have appreciated and you've held for over a year. This might also a great time to consider converting some of your pre-tax savings to after tax using a Roth conversion. You income most likely is a lot lower than when you were working so utilize your lowest tax brackets to get your money out now.

2. Got a Pension - Avoid the Payout Trap

If you are one of the lucky few to still have a pension by the time you retire make sure you are smart about taking a lump sum payout. The reason is because the pension company will withhold 20% of a lump sum payment (as required by the IRS). This is true even if you plan to roll the money into your IRA, which is a tax-free transaction. Not only is it a pain to have to wait until you file your taxes to get your withholding back, but because you are not rolling over a 100% of the pension, the IRS will consider this a considered a taxable distribution - triggering an immediate tax bill as well as a potential penalty. 

The right way to do this is to make sure you are doing a direct rollover to your IRA. You can't ever "touch" the money in a direct rollover so you'll need to ask your pension company to make the check out to the custodian where your IRA is held. Then no withholding is required and you avoid the payout trap. You should do this even if you intend to use some of the money right away. That way you will have the final say on whether or not you withhold any money for taxes.

3. Use your RMD as a Tax Shelter

If you are required to start taking distributions from your IRA (Required Minimum Distribution) you may want to delay it until absolutely necessary. Assuming you don't need the RMD to fund your immediate living expenses, you can wait until some time in December to actually pull the money and then withhold all the money that you need to pay your taxes when you file your tax return. Not just enough to cover the RMD but also all of your other taxable income. By doing this you are effectively getting a loan from the IRS every year. I'll explain.

The reason why this is beneficial is because typically as you earn money you are required to pay your taxes on those earnings. For example if you realized a large gain in the beginning year then you are supposed to pay an estimated tax soon after that gain occurs. If you don't you will be hit with interest and penalties for paying late. However, IRA distributions are considered paid throughout the year, even if they are made in one lump sum at the very end of the year. Therefore, if your RMD is large enough to cover all your anticipated taxes, you can keep your cash in your possession the entire year before have to pay it out to the IRS. 

4. Don't forget about the Spousal IRA

Just because you retired doesn't mean you have to stop saving in a tax efficient manner. If you are married and one of you is still employed, the non-working spouse can still contribute to an IRA. Assuming that person is over the age 55 they can contribute up to $6,500 a year to their IRA account. These spousal contributions can be done all the way up to age 70 1/2. This is a great strategy if the lower income earner retires first since you are more likely to be able to live off of the higher income earners salary. Also if you prefer to use a Roth IRA, there is no age limit. 

5. Medicare and other Medical Deductions

Many times pre-retirees transition to retirement by starting their own consulting business (or any business for that matter). Well, once you do this you can deduct your Medicare Part B and Part D, and supplemental insurance (like Medigap) premiums (or the cost of Medicare Advantage). This deduction can be taken regardless of whether you itemize or not. The reason this is such a great strategy is because if you try to deduct these premiums by itemizing your total medical expenses need to be over 10% of your AGI, which can be a large hurdle to get over. Note that until 2017, taxpayers age 65 or older only have to meet a less stringent 7.5% of AGI rule. If you are married just one spouse needs to meet this age requirement.

You cannot use this strategy if you are able to obtain insurance through an employer-subsidized health care plan, for example, retiree medical coverage. This is true for both you and your spouse's healthcare. This is true even if you don't actually use the coverage as long as it is available to you or your spouse. 

This is just the tip of the iceberg. There are many other things retirees and pre-retirees should be doing to not only optimize their tax situation but also to plan so they don't have to worry about outliving their assets and enjoy their retirement years.

Schedule a meeting today to see how you can get more confidence around retirement and taxes.

Best Investment Strategies that CUT your Tax Bill

Investments and Taxes are a lot like Pineapples, don't you think?

Investments and Taxes are a lot like Pineapples, don't you think?

As you may or may not know PJF Tax has a sister company Phillip James Financial, a wealth management company. Because of this our tax clients enjoy the benefits of expert investment advice along with quality tax advice. These two disciplines often cross paths. With that in mind our blog post this we is about the best investment strategies that can cut your tax bill. 

A mistake that most investors make is not considering how taxes effect their overall return. This includes local, state, and federal taxes and they can take a large chunk out of your investments earnings. It's very important that you have a strategy to minimize the impact of these taxes otherwise most of it will end up in the hands of the IRS, which nobody wants.

Utilize Tax Efficient Investments

The more tax efficient an investment is the higher your "After-Tax" rate or return, which is really the most important return number to look at. Think about it. If you have an investment that provides a 10% rate of return but is taxed at 50% your after tax return is only 5%. Compare that to an investment that earns 8% but is only taxes at 15%. In this case your after-tax rate of return is 6.8%. Much better than the 10% even though it didn't seem that way at first. 

There is really spectrum of tax-efficient when it comes to investments. I.e. Investment aren't just tax-efficient or tax-inefficient, they are relatively efficient. Investment A is more efficient than investment B. Get it?

Generally, investments that derive most of their return from appreciation are more tax efficient. This is because capital gains tax rates are lower than ordinary income tax rates. Keep in mind this is only the case if the investments are held long-term, meaning more than 1 year. If a capital gain is realized before one year they are taxed at ordinary income tax rates anyways. Keep this in mind when buying and selling out of your investments.

Another very tax efficient investment is municipal bonds. These bonds are more efficient because, in general, the interest earned on them is tax free at a federal level and also tax free at a state level if you happen to live in the state where the bonds were issued. Note you can buy individual municipal bonds but most investors buy them through a mutual fund or ETF (exchange traded fund). There are some state-specific muni bonds funds but they are harder to find and can be more expensive. Therefore, you might be better off buying a general muni bond fund, foregoing the state tax savings, and just taking the federal tax-free income.

Use Tax-Advantage Accounts

Just like some investments are more tax-efficient, different account types can also be more tax efficient. There are three types of tax advantage accounts, taxable, tax-deferred, and tax-free. 

Individual and Joint brokerage accounts are taxable. This is the simplest account type that you can open. There are no tax benefits which means if you sell an appreciated security you have to pay tax on the gain in that year. As well, if you earn interest or dividends you have to pay tax on that income in that year.  Usually these accounts are used after you have reached the maximum contribution for all the tax-advantaged accounts you have available to you. 

Tax-Deferred accounts are accounts that accounts allow your money to grow tax free until the money is withdrawn from the account. Examples of these type of accounts are 401(k)s, Traditional IRAs, 529 College Savings Plans and Health Savings Accounts (HSAs). Many times you will receive a tax deduction for your contributions or if the contributiosn were made through your employer through salary deferral you won't have to include that income on your tax return. 

Tax-Free accounts are Roth IRAs and Roth 401(k)s. These accounts don't provide you any immediate tax benefits but the investments grow tax-free and when they are withdrawn from the account they are not taxed.  

It is generally a good idea to hold your more tax-inefficient investments in your tax advantaged accounts (tax-deferred and tax-free). Then you tax-efficient investments can be held in your taxable accounts. This will help minimize the taxes you have to pay on your investments. 

Consider you Holding Period

As I briefly mentioned before, you should hold onto your investments for at least one year. Any gains you realize on your investments held more than a year are taxed at the beneficial long-term capital gains rates. The highest long-term capital gains rate is 20% but most people will only pay 15%. If you don't hold your investments for more than a year they are taxed at your ordinary income tax rate which could be as high as 39.5%.  So, keep this in mind if you have an investment with a large gain. It might make sense to hold on for a little longer.

Tax-Loss Harvesting

When the markets are volatile you might be able to harvest losses from your portfolio and use them to offset some gains for any given tax year. This is a strategy known as tax-loss harvesting. Here is an example of how this works. Let's say tomorrow you buy $50,000 of Mutual Fund ABC. Then over the course of a month the markets are down 10%. You have a $5,000 unrealized loss on your investment. From a tax perspective this doesn't do you any good. So you "Harvest" the loss by selling funds ABC and then purchase another fund, say XYZ at the same time. This accomplishes two things. 1) You now realized the loss which can be used on your tax return to offset any gains and 2) You maintained your exposure to the market so when it goes back up you get the benefit.

(See Tax Loss Harvesting Made Easy on the Phillip James Financial Blog)

You can also use up to $3,000 per year in losses to offset ordinary income (not just to offset gains). You can also carry forward any losses that you don't use in any given year to use in future tax years. You should also note that you cannot buy the same investment that you just sold within 30 days otherwise you violate something called the "wash sale" rule and won't be able to use those losses. 

Mutual Fund Turnover Ratios

Every mutual fund (and ETF) has a fund manager that buys and sells stocks and bonds for the fund. How often they buy or sell those funds is called the turnover ratio. A high turnover ratio means that the manager trades often. For example a 100% turnover ratio means that the portfolio will be completely different at the end of the year when compared to the beginning. I see a lot of problems with this but from a tax perspective it's going to increase your tax bill because of eh capital gains that the fund generates.

This is why we are big proponents of index funds. They are designed to track an index an index and since indexes don't change very often they have low turnover. Not to mention that most index funds beat their actively managed counterparts. It's a win/win!

Don't Sell Appreciated Securities Donate Them

When you have investments that are highly appreciated you should consider donating them to your favorite charity. This is a better idea than just donating cash because now no one has to pay the tax on the capital gains. The charity still gets the full value of the securities in the donation. This is a no-brainer than most people don't think about when writing their annual donation check. Just ask the charity you want to make a donation what their process is for handling donated securities. 

Investing is not about what you make it's about what you keep (or keep away from the IRS)! Use these strategies I laid out to trim your tax bill and keep more of your money for yourself. If you're financial advisor isn't making these suggestions maybe it's because they are not a tax professional. This is why we offer both services to our clients both Tax Preparation and planning along with Financial Planning and investments. If you want to have everything handled in one place reach out for a meeting!

WHICH TAX FORM SHOULD I REALLY USE? 1040, 1040A, 1040EZ

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There are three main forms that US citazens can use to file their annual income tax return. They are the Form 1040EZForm 1040A and Form 1040. Below is a description of each along with all the links that you will need to file your taxes.

1. Form 1040EZ is the easiest and simplest form the IRS will let you use to file your taxes. 

You need to meet the following conditions in order to use this form:

  • Your filing status is single or married filing jointly

  • You claim no dependents
  • You, and your spouse if filing a joint return, were under age 65 at the end of the year
  • Your only income sources are wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500
  • Your taxable income is less than $100,000
  • Your earned tips, if any, are included in boxes 5 and 7 of your Form W-2
  • You do not owe any household employment taxes on wages you paid to a household employee
  • You are not a debtor in a Chapter 11 bankruptcy case filed after October 16, 2005
  • You do not claim any adjustments to income
  • You do not claim any credits other than the earned income credit
  • Advance payments of the premium tax credit were not made for you, your spouse, or any individual you enrolled in coverage for whom no one else is claiming the personal exemption
  • You are not itemizing deductions and claim any adjustments to income tax credits (other than the earned income credit)

If you meet these conditions then file your taxes using the 1040EZ form. It’s the easiest way to do it. Here are links to the forms. Here is the link to the 1040EZ instructions.

2. Form 1040A is the next simplest form allowed by the IRS.

So if you don’t qualify to use the 1040EZ you should check to see if you can use this form instead. The criteria for eligibility for 1040A is listed below.

  • Your income is only from wages, salaries, tips, taxable scholarships and fellowship grants, interest, ordinary dividends, capital gain distributions, pensions, annuities, IRAs, unemployment compensation, taxable Social Security or railroad retirement benefits, and Alaska Permanent Fund dividends
  • Your taxable income is less than $100,000
  • You do not itemize deductions
  • You did not have an alternative minimum tax adjustment on stock you acquired from the exercise of an incentive stock option
  • Your only adjustments to income are the IRA deduction, the student loan interest deduction, the educator expenses deduction, the tuition and fees deduction, and
  • The only credits you are claiming are the credit for child and dependent care expenses, the earned income credit, the credit for the elderly or the disabled, education credits, the child tax credit, the additional child tax credit, the net premium tax credit, or the retirement savings contribution credit

Here’s the link to the 1040A instructions - Form 1040A Instructions

3. 1040 is the most complicated tax form and is used by taxpayers who are unable to file using a 1040EZ or 1040A.

Here is the criteria for using this form.

  • Your taxable income is $100,000 or more
  • You have certain types of income such as unreported tips; dividends on insurance policies that exceed the total of all net premiums you paid for the contract; self-employment earnings; or income received as a partner, a shareholder in an S corporation, or a beneficiary of an estate or trust
  • You itemize deductions or claim certain tax credits or adjustments to income, or
  • You owe household employment taxes
     

Here is the link for the form 1040 instructions - Form 1040 Instructions.

The IRS provides a handy online tool for determining which form you should use when filing your taxes. You can try it out here What is the simplest form to use to file my taxes? 

Below is a list of the many of other often used forms. You can use these resources when preparing your own return.


Form 1040, Schedule A - Itemized Deductions

Form 1040A or 1040, Schedule B - Interest and Ordinary Dividends

Form 1040, Schedule C - Profit or Loss From Business (Sole Proprietorship)

Form 1040, Schedule C-EZ - Net Profit From Business

Form 1040, Schedule D - Capital Gains and Losses

Form 1040, Schedule E - Supplemental Income and Loss

Form 1040A or 1040, Schedule EIC - Earned Income Credit

Form 1040A or 1040, Schedule 8812 - Child Tax Credit

Form 1040A or 1040, Schedule R - Credit for the Elderly or the Disabled

Form 2441 - Child and Dependent Care Expenses

Form 8863 - Education Credits (American Opportunity and Lifetime Learning Credits)

Form 8888 - Allocation of Refund (Including Savings Bond Purchases)

Form 8949 - Sales and Other Dispositions of Capital Assets

If you need help determing which form you need to use feel free to reach out to PJF Tax or just let us handle it for you this tax season.

HELP AMENDING YOUR TAX RETURN - 8 TIPS TO MAKE THE FIX QUICK

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You’ve filed your taxes, received your refund (or made your payment), and breathe a sigh of relief knowing that you won’t have to deal with taxes for another year….and then you receive a 1099, W2 or other tax document in the mail!  Great! Time to panic – your taxes are wrong, you already filed, what you do now!

Amend your return. It might sound like a pain but it’s really not that hard. And it’s much easier than might think. Below are 8 tips to help you quickly and easily amend your tax return.

  1. 1040X - The first think you need is the right tax form. It’s called a 1040X and located here on the IRS website. Remember this form cannot be e-filed, I anticipate this in the future but for now be prepared to us mail (We use certified mail so you can track it and prove the IRS received it).
  2. Filling out the Form - Ok you’ve sharpened your pencil and have your 1040X. Now just fill out the form. In column A you input the information from your original return. Column B is where your changes are made. And Column C is where the correct amount is listed. It’s really that easy. Especially if you are using tax software as they generally fill out the columns for you. Don’t forget to write a simple explanation of your changes at the bottom of the form.  Then just sign, date, and send it in. Also, if you are amending your Federal Return you probably need to amend your state return as well. Minnesota’s form M1X is found here.
  3. Why Amend your Return – Ok slow down there, before you fill out the form let’s make sure you have to do the additional work. You should amend your return if you are changing your filing status, dependents, total income, deductions, and credits. (so just about everything).  But the IRS will catch and correct most math errors and missing forms when processing your original return. No need to amend just for this.
  4. Other Schedules and Forms – If your amendment affects a certain schedule like Schedule E or C then you should include these forms with your 1040X.
  5. Additional Refund – If you are filing to claim an additional refund wait until you receive your original refund before filing your 1040X. You can cash the first check while waiting for your additional refund check.
  6. Additional Payment – If you owe additional tax as a result of the amendment you should file the 1040X as soon as possible and send payment. This will limit any additional interest and penalties.
  7. Time Limits – You can claim a refund within three years from the date you filed your original return. Or within two years from the date you paid the tax, whichever is later.
  8. Procession Time – The “normal” processing time for an amended return is 8-12 weeks. So be patient. You can always check the status of your amended refund here.

PJF Tax can help you amend your tax return and will even receive past returns for mistakes. Just reach out for a meeting or a quote!

OOPS! COMMON ERRORS WHEN PREPARING A TAX RETURN

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It’s a good feeling when you complete your tax return. Now the last thing to do is hit the submit button and send it off to the IRS….not so fast! Check out these common errors first to avoid frustration and wasted time down the road.

E-file your return – Ok so this isn’t really an error but a way to avoid errors. E-filed returns are processed through the IRS e-file system which often detects common errors before it gets sent to the IRS. I’m always impressed when I see people bringing in their hand filled out tax returns but they are rarely free from errors. Time to switch to e-file and avoid simple mistakes.

Check the Easy Inputs – It sounds simple but double check your social security number, name, current address, and zip code. These all could affect your tax return and more importantly your refund. Many times people move but fail to update their tax return because the data is pulled forward from a prior year return. Note, Social Security Numbers should be listed exactly as they appear on your social security card. Save yourself the hassle and check the easy stuff.

Filing Status – Make sure you check your filing status. Married Filing Jointly and Single are easy but are you sure you don’t meet the criteria for head of household? It’s worth checking to make sure because it could save you some money. Check this link to make sure you’re filing the right tax status. What is my Filing Status?

Exemptions – Did you take all of your exemptions? There are personal, spousal, and dependency exemptions. Make sure you take all the ones you are eligible for. Review these two pages to see if you qualify. Personal/Spousal Exemptions and Dependency Exemptions.

Paper Filing – If you insist on doing things the old fashioned way make sure you list all income, credits and deductions on the correct lines and use the appropriate schedules. Don’t forget to put brackets around your negative amounts. And double check your math!

Standard Deduction isn’t so standard – If you are taking the standard deduction and are over the age of 65 did you find the correct “standard deduction” using the chart included in the 1040 instructions. Look here to make sure - How Much Is My Standard Deduction? 

Taxes Owed – Did you figure your tax liability correctly? Use this tax table to make sure. Don’t forget to us the correct column based on your filing status. Tax Tables

John Hancock – Did you sign the return? If filing a joint return, did your spouse sign and date the return?

Attachments – Did you attached all of the correct forms to your tax return? You should include a W-2 from each of your employers (copy B) and 1099-R’s? This is only necessary for paper filers. Just another reason to e-file.

Payments – If you we tax did you include a check or money order with your tax return? Is the check made payable to the “United States Treasury” and does it include your name, address, social security number, phone number, tax form, and tax year? For Minnesota tax make sure the check is made out to Minnesota Revenue and includes the same information as your federal payment. If using a payment voucher make sure you include the voucher with the payment. If using direct debit/credit check and double check your account number and routing numbers. This is an easy one to mess up and can really delay your refund.

Copies – Did you make a copy of your tax return with all the supporting schedules? If you use PJF Tax we keep a copy of your return on file for you free of charge!

It’s very important that you review your entire return even if you had someone prepare it for you. No one knows your tax situation better than you so make sure you are reviewing your tax professional’s work – ask questions if you don’t understand something. Many of these common errors can delay the processing of your return.

Reach out to us at PJF Tax if you need any help preparing or reviewing your tax return. We can also review your previous year’s returns for errors and amend if necessary.

WHERE THE H*LL IS MY REFUND?

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It’s frustrating, I know. You want your money back from the IRS. After all the IRS demands their money on one specific date each year and if you don’t pay they charge you penalties and interest. If only you could do the same. Instead you have to sit back (try to relax) and wait. The good news is there are some easy ways to check on the status of your refund.

First go to Where’s My Refund?  This IRS web page has the most up to date information available about your refund. You can use it to get your personalized refund status. It’s updated once a day so no need to waste your time checking every hour. You should wait 24 hours after your or your tax preparer receives confirmation that your return was accepted by the IRS. If you paper filed, sorry, but you have to wait at least 4 weeks for your info to show up. Make sure to have your tax return information ready because you’ll need to input your social security number, filing status, and the exact whole dollar of your current year’s refund.

If you really want to talk to an agent (I wouldn’t recommend this) you can call the refund hotline. The number is 1-800-829-1954. Again make sure you have your tax return information. Unless your Where’s My Refund tool tells you to call I wouldn’t as the agent probably won’t be able to give you any more info than what’s online.

If you filed an amended return there is a separate link. Where’s My Amended Return? Just follow the instructions and input the required information from your tax return.

Both of these tools will provide you will the progress of your tax return. These are:

  1. Return Received
  2. Refund Approved
  3. Refund Sent

Refund for e-filed returns generally process within 21 days of the acceptance date. Refunds from mailed returns take anywhere from 6-8 weeks to process from the date the IRS receives the return. Refunds for amended returns can take up to 16 weeks to process. These are just general rules so don’t worry if the 21 days are up and you haven’t received your return. Use the tool listed above to check the status. Sometimes the IRS gets bogged down during busy times of the year.

Minnesota Tax Return Refunds

If you are just waiting on your Minnesota state tax return you can also check the status of this. Go to the Minnesota State Tax Website to do this - https://www.mndor.state.mn.us/tp/refund/_/

You’ll need similar information just like the Federal Refund Checker. Using this tool you can check any return filed within the past 12 months. In general you should receive your refund within 90 days of filing a paper return and 15 business days for e-filed returns. Again, this is a general rule so don’t panic if you still haven’t received your refund. I have seen Minnesota state refunds take much longer to process

You can also call our automated tax service line at 651-296-4444 (Metro) or 1-800-657-3676 (Greater Minnesota). If you have not received your refund and:it has been over 15 days since your electronic return was accepted or more than 90 days since you mailed your paper return, AND neither the online system nor the automated line has any information on your return, then you can call our individual income tax help line at 651-296-3781 (Metro) or 1-800-652-9094 (Greater Minnesota), Monday through Thursday, 8:30 a.m. – 5:00 p.m. and Friday, 8:30 a.m. – 4:30 p.m.

YOU CHOSE WISELY - HOW TO CHOOSE A TAX PREPARER

choose-tax-preparer- wisely

Fun fact of the day: Did you know over half of US taxpayers hire a professional tax preparer when it comes time to file their taxes? It’s true (at least according to the IRS). Whether you use a tax preparer or not YOU are responsible for what’s on your tax return no matter who prepares it.

Tax Accountants are trust with our most personal information. Through your discussions and documentation they know about your marriage, your income, expenses, and social security numbers. That’s information your own family might now know. All of this sensitive information means that you need to choose your tax preparer wisely. To do that take a look these essentials

First let me say that most tax preparers do a great job. With that being said each and every year some taxpayers are hurt financially because they used an unscrupulous (or just uneducated) tax preparer.

Here are the tips to keep in mind when looking for a tax preparer:

  • Check to make sure your tax preparer has a PTIN. This is a Preparer Tax Identification Number. Only tax preparers who have a valid 2015 PTIN are authorized by the IRS to prepare and file federal tax returns. But this is only the first thing to look for because just because they have a PTIN does not mean they actually have the skills, education, and training to prepare taxes.
  • Representation Rights – Only CPA’s, attorneys and Enrolled Agents can represent you in front of the IRS. It’s one thing to prepare your return but can your preparer also represent you in the case of an audit or other tax issue. This lead directly into our next thing to look for…
  • Credentials – As I mentioned that main ones are enrolled agents, CPAs (Certified Public Accountants, and attorneys. There is also a new RTRP designation which means the tax preparer had to pass a text from the IRS to show a minimum level of competency. Along with this ask if your preparer keeps up on tax matters with continuing education credits and is part of a professional organization.
  • Fees – It’s ok to ask a preparer for an estimate of the cost. For new clients this will most likely be a range such as $200-$300. The range is because they won’t know your full tax situation until they get into the details of your tax return. Some tax preparers charge by the hour, some by the form, and others a flat fee. Try to avoid tax preparers that charge a % of your refund. This can lead to a conflict of interest. Since your tax preparer will get a bigger fee if you have a bigger refund they will be very aggressive in taking deductions, credits, etc.
  • This one should be obvious but make sure your refund gets deposited into your own account. Taxpayers should never deposit their refund into a preparer’s bank account.
  • Make sure your tax preparer is available after tax season and after you file your taxes. Tax Professionals might go on vacation after a long tax season but they shouldn’t close up for the rest of the year. Issues might come up that you’ll want your tax preparer to help with.
  • Records and Receipts – Ask what your preparer does with all the receipts and other tax information that they use to prepare your tax return. Good preparers keep digital copies of your information so that they can support the preparation of your return. This also provides you will a backup copy in case you lose or destroy your original tax documents.
  • Never Sign a Blank Return – Wait until your return is finalized and you have a chance to review it for accuracy before you sign. Ask if anything isn’t clear to you.
  • Make sure your tax preparer also signs the return and includes their PTIN. This is required by law and only unprofessional tax preparers will not sign a tax return that they prepare.
  • Make sure you get a copy of your tax return. Whether it’s a digital or printed copy you should keep a copy for your own records.

Follow these tips and you should have no problem finding a good tax preparer this tax season. Don’t be afraid to ask these questions of any potential preparer. After all it’s your responsibility to ensure your tax return is accurate. Or better yet ask us! PJF Tax preparers taxes for hundreds of tax clients and is still taking on additional clients for the 2015 tax season. Call or a quote today!

5 Most Itemized Deductions You Need to Take this Tax Season (Save Your Money!)

Today let’s talk about 5 itemized tax deductions that can you big money this tax season. But before we get into that we can quickly go over the difference between itemized versus standard deductions.

itemized-deduction-save-money

Schedule A is the way you itemize your deductions. It’s basically a list of all your itemized deductions for the year. But you only use this form if you are itemizing. You can either itemize or take the standard deduction. The standard deduction is really just that, the standard deduction that the IRS allows you to take each year. The amount depends on your tax status (Single, Married Filing Jointly, Head of Household, etc.) and whether or not you are claimed as a dependent by someone else. You can also get an additional standard deduction if you are blind and/or over the age of 65. You don’t have to track or prove anything. You can take this deduction every year no matter what. Itemized deductions are things like medical costs, long-term care, property taxes, mortgage interest, personal property tax and many others. If you’ve tracked this information throughout the year you can choose whether or not you want to take the standard deduction or the itemized. Basically choose the larger amount as it will give you the biggest tax benefit. You can work it out both ways to see which is best for you. (We do this for you if PJF is preparing your taxes.)

One thing to keep in mind is if you itemize, the alternative minimum tax could kick in if your income is too high. What that means is your deductions are added back to an alternative tax calculation to determine if you need to pay a minimum amount of tax. Basically, you calculate tax two different ways. It’s the IRS’ way of making you pay a minimum amount of tax even if you have a lot of itemized deductions.

So if you are itemizing this year here are the 5 itemized tax deductions to look for to help lower your taxable income.

  1. Sales Tax or Income Tax – If you live in a state like Minnesota with income tax you can deduct all of the income that you pay over the year. If you are using a tax software it will usually take this deduction for you. The thing to look for is if your income is low this year (or there is no state sales income tax) you should deduct your sales tax instead. For example, if you purchased a car you might have paid a large chunk of sales tax on that purchase. As long as you have documentation to prove it you can deduct this along with all of the other sales taxes you’ve paid over the year. Consider calculating both income and sales tax to make sure you are taking the largest deduction possible.
  2. Property Taxes – This is all of the taxes that you pay related to your personal or real property. The biggest one could be your primary residence but could also include your vacation property (assuming you don’t rent it out – if you do then the taxes would go on schedule E). This deduction also includes auto and boat registration taxes. Basically any state or local taxes that you paid throughout the year charged on personal property, based on the value of the property and charged on an annual basis
  3. Mortgage Interest Deduction – This is the mortgage interest paid on your primary interest and vacation/second home. However, you only get to deduct the interest on up to $1,000,000 of mortgage debt. I know this seems like but I’ve seen cases where a primary residence and cabin debt get over the $1,000,000 mark pretty quickly. We love our cabins in Minnesota!
  4. Charitable Contributions – This is any donation to non-profits like cash or non-cash items like clothing and household goods. Keep in mind if the value is over $500 you have fill out the additional 283 Form. And if the value is over $5,000 you have to get the item appraised. Do not appraise it yourself the IRS won’t count this.
  5. Miscellaneous Deductions – Some examples of these things could be safe deposit boxes, estate planning fees,  tax preparation fees, unreimbursed employee expenses, investment management fees, casualty losses, and gambling losses (only to the extent you have gambling gains.  Keep in mind most of these deductions are subject to 2% of you AGI meaning the combined amount of these expenses have to be over 2% of your adjusted gross income in order to be deductible at all.

There you go, the five deductions you need to take this year if you’re itemizing. The 6th item that I left off the list is Medical deductions. I left if off because it is harder to meet the threshold. If you are older than age 65 it is subject to 7.5% of your AGI and for everyone else is 10% of your AGI. If you’ve itemized in previous years you should consider taking a look to make sure you took every deduction on this list. If not you can amend a tax return within three years of the date you filed or within two years form the date you paid the tax, whichever is later.

5 MOST ITEMIZED DEDUCTIONS YOU NEED TO TAKE THIS TAX SEASON - SAVE YOU MONEY!

Today let’s talk about 5 itemized tax deductions that can you big money this tax season. But before we get into that we can quickly go over the difference between itemized versus standard deductions.

itemized-tax-deduction-for-tax-season

Schedule A is the way you itemize your deductions. It’s basically a list of all your itemized deductions for the year. But you only use this form if you are itemizing. You can either itemize or take the standard deduction. The standard deduction is really just that, the standard deduction that the IRS allows you to take each year. The amount depends on your tax status (Single, Married Filing Jointly, Head of Household, etc.) and whether or not you are claimed as a dependent by someone else. You can also get an additional standard deduction if you are blind and/or over the age of 65. You don’t have to track or prove anything. You can take this deduction every year no matter what. Itemized deductions are things like medical costs, long-term care, property taxes, mortgage interest, personal property tax and many others. If you’ve tracked this information throughout the year you can choose whether or not you want to take the standard deduction or the itemized. Basically choose the larger amount as it will give you the biggest tax benefit. You can work it out both ways to see which is best for you. (We do this for you if PJF is preparing your taxes.)

One thing to keep in mind is if you itemize, the alternative minimum tax could kick in if your income is too high. What that means is your deductions are added back to an alternative tax calculation to determine if you need to pay a minimum amount of tax. Basically, you calculate tax two different ways. It’s the IRS’ way of making you pay a minimum amount of tax even if you have a lot of itemized deductions.

So if you are itemizing this year here are the 5 itemized tax deductions to look for to help lower your taxable income.

  1. Sales Tax or Income Tax – If you live in a state like Minnesota with income tax you can deduct all of the income that you pay over the year. If you are using a tax software it will usually take this deduction for you. The thing to look for is if your income is low this year (or there is no state sales income tax) you should deduct your sales tax instead. For example, if you purchased a car you might have paid a large chunk of sales tax on that purchase. As long as you have documentation to prove it you can deduct this along with all of the other sales taxes you’ve paid over the year. Consider calculating both income and sales tax to make sure you are taking the largest deduction possible.
  2. Property Taxes – This is all of the taxes that you pay related to your personal or real property. The biggest one could be your primary residence but could also include your vacation property (assuming you don’t rent it out – if you do then the taxes would go on schedule E). This deduction also includes auto and boat registration taxes. Basically any state or local taxes that you paid throughout the year charged on personal property, based on the value of the property and charged on an annual basis
  3. Mortgage Interest Deduction – This is the mortgage interest paid on your primary interest and vacation/second home. However, you only get to deduct the interest on up to $1,000,000 of mortgage debt. I know this seems like but I’ve seen cases where a primary residence and cabin debt get over the $1,000,000 mark pretty quickly. We love our cabins in Minnesota!
  4. Charitable Contributions – This is any donation to non-profits like cash or non-cash items like clothing and household goods. Keep in mind if the value is over $500 you have fill out the additional 283 Form. And if the value is over $5,000 you have to get the item appraised. Do not appraise it yourself the IRS won’t count this.
  5. Miscellaneous Deductions – Some examples of these things could be safe deposit boxes, estate planning fees,  tax preparation fees, unreimbursed employee expenses, investment management fees, casualty losses, and gambling losses (only to the extent you have gambling gains.  Keep in mind most of these deductions are subject to 2% of you AGI meaning the combined amount of these expenses have to be over 2% of your adjusted gross income in order to be deductible at all.

There you go, the five deductions you need to take this year if you’re itemizing. The 6th item that I left off the list is Medical deductions. I left if off because it is harder to meet the threshold. If you are older than age 65 it is subject to 7.5% of your AGI and for everyone else is 10% of your AGI. If you’ve itemized in previous years you should consider taking a look to make sure you took every deduction on this list. If not you can amend a tax return within three years of the date you filed or within two years form the date you paid the tax, whichever is later.

Do I Really Need to Keep My Tax Return For 7 Years?

The IRS Requirements for Record Keeping

We all have heard that we have to keep our tax returns and pay stubs for X number of years. I’ve heard anywhere from 0 to Forever. (I hope your will doesn’t specify who inherits your lifetime accumulation of tax documents.) Well the IRS actually has very explicit rules on this which you need to follow to avoid the stress other issues that come when you receive an IRS letter or notice in the mail. No need to rely on rules of thumb and hearsay. Here is what the IRS says.

Receipts/Cancelled Checks – These items along with other documents supporting an item of income, deduction, or credit that appears on a tax return must be kept for as long as they could become important in the administration of any IRS revenue law. This generally means until the period of limitation expires for that specific tax return. This is 3 years from the date you filed your return. Keep in mind returns filed early (before the tax deadline) are treated as being filed on the due date (usually April 15th). Conclusion: In general 3 years.

keep-your-taxes

Fraudulent or No Returns – There is no period of limitations when you file a fraudulent return or if you didn’t file a return. A fraudulent return is when you knowingly filed incorrectly. Examples would be leaving off income or taking deductions/credits you are not entitled to. The IRS rule is that for income you should have reported is not reported and is more than 25% of your gross income shown on the return the time to assess is 6 years from when the return is filed. Conclusion: Unlimited – File your taxes and don’t try to defraud the IRS.

Claiming Credits and Refunds  - If you want to claim a credit or refund on your tax return, the period to make the claim is 3 years from the date the original return was filed (or the due date of the return if filed early), or two years from the date the tax was paid, whichever is later. If filing a claim for an overpayment resulting from a bad debt or loss from worthless securities the time to make a claim is 7 years from when the return was due. Conclusion: In general 3 years. 7 if you claim a loss from bad debt or worthless securities.

Health Care Coverage – Starting in tax year 2014 and later you should also keep records related to yours and your family’s health care insurance coverage. This includes records of employer provided coverage, premiums paid, and private coverage documentation. This is to show that you and your family maintained the required minimum essential coverage as now required by Obama Care. If you are exempt from minimum essential coverage you should keep your certificates of exemption that you receive from the marketplace or other documentation to support the claimed exemption on your tax return. This documentation follows the same rules as receipts and cancelled checks so the statute of limitations is 3 years. Conclusion: In general 3 Years.

Small Business Documentation – If you own a business you need to keep all of your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later. Also, there is no method of bookkeeping the IRS requires you to us but however your account for your financial information it must clearly and accurately reflect your gross income and expenses. These records This can get a little complicated so check out this IRS Publication, Employer’s Tax Guide, for more information. Conclusion: In general 4 Years.

That’s it. Those are the IRS rules. You can shred those pay stubs from your first summer job. Once thing to consider is that you may want to keep your records for non-tax purposes. While there is no law your insurance company, banks, or other creditors may want to see this information.

If you have PJF Tax prepare your tax return we keep relevant documents in digital version for the appropriate amount of years. If you want to learn about all the other benefits of using a professional tax preparer.


IRS QUICK TIP: WHAT ARE QUALIFIED TUITION PROGRAMS (QTPs)

Have you heard of a qualified tuition program or often called by IRS insiders a “QTP.” I bet you have! QTPs are better known as 529 plans. If you still haven’t heard of it or aren’t sure how they work then this quick tip is for you.

qualified-tuition-program

A QTP is a program established by a state that allows you to either prepay a beneficiary’s qualified higher education expenses at an eligible educational institution or contribute to an account for paying those expenses. This account can then be invested in mutual funds so that money can grow over time. An eligible institution is generally any college, university, vocational school, or postsecondary educational institution. The contributions to qualified tuition programs cannot be more than the amount necessary to provide for the qualified higher education expenses of the beneficiary. Contributions to a QTP are not deductible however, the earnings can accumulate tax free while in the account. Generally the beneficiary does not have to include the earning from a QTP in income. So no tax is due as long as the money goes to pay qualified education expenses. Note: you can change the beneficiary if the first beneficiary doesn’t use all the money.

For additional information, refer to Chapter 8 of Publication 970, Tax Benefits for Education. You should also check out our article on Coverdell Education Savings Accounts for an alternative to a qualified tuition program. Or reach out if you need some help planning for college. 

 

HOW TO HANDLE ROLLOVER FROM RETIREMENT PLANS

Did you just leave your job? Well don’t leave your money just sitting in your old 401k. Take it with you so it’s organized and continues to be invested, earning you megabucks.

rollover-from-retirement-plan

 So a rollover happens when you want to withdraw your money from your 401k and are moving it to another qualified plan like an IRA or another 401(k). This movement has to happen within 60 days or else there could be dire consequences, like taxes. If you follow the rules the transaction is not taxable even though it is still reportable on your federal tax return. Some distributions, even though they are form a qualified retirement plan, cannot be rolled over. They are as follows:

  1. Nontaxable distribution – This includes your after-tax contributions (like Roth Contributions). In many cases this money needs to be transferred to another like plan, a Roth IRA for example.
  2. Series of Payment Distribution – If your distribution is part of a series of payments made for your life or specified period of time (10 years or more). This is a special type of distributions called a 72-T.
  3. Required Minimum Distribution – Some qualified plans require you take a certain amount of money out at a certain age and cannot be rolled over. You have to pay the tax at some point.
  4. Hardship Distribution – This is obvious. The money goes towards your hardship not rolled over.
  5. Dividends paid on employer securities
  6. Cost of Life Insurance Coverage.

You need to include any amount of your distribution that is not rolled over in income for that year. If your plan pays you an eligible distribution you have exactly sixty days from the date you receive it to roll it over to another eligible plan. If a rollover distribution from an employer sponsored plan like a 401k it is subject to a mandatory 20% withholding, even if you intend to roll it over later. This can be avoided by performing a direct rollover, which means your money goes directly from one institution to another (this includes a rollover to an IRA). If you receive a distribution in the form of a check the best practice is to not deposit it in your personal bank account and instead bring it directly to the finical institution where you are rolling your IRA to.

If you are no age 59 and half or older at the time you receive a distribution any amount not rolled over may be subject to a 10% penalty unless an exception applies. For a list of exceptions, refer to Topic 558. If the distribution is from a SIMPLE IRA you could be subject to a 25% penalty.  

If you need help rolling over your 401(k) or have questions about the process feel free to reach out or schedule a meeting.

How to Handle Rollover from Retirement Plans

rollover-retirement

Did you just leave your job? Well don’t leave your money just sitting in your old 401k. Take it with you so it’s organized and continues to be invested, earning you megabucks.

 So a rollover happens when you want to withdraw your money from your 401k and are moving it to another qualified plan like an IRA or another 401(k). This movement has to happen within 60 days or else there could be dire consequences, like taxes. If you follow the rules the transaction is not taxable even though it is still reportable on your federal tax return. Some distributions, even though they are form a qualified retirement plan, cannot be rolled over. They are as follows:

  1. Nontaxable distribution – This includes your after-tax contributions (like Roth Contributions). In many cases this money needs to be transferred to another like plan, a Roth IRA for example.
  2. Series of Payment Distribution – If your distribution is part of a series of payments made for your life or specified period of time (10 years or more). This is a special type of distributions called a 72-T.
  3. Required Minimum Distribution – Some qualified plans require you take a certain amount of money out at a certain age and cannot be rolled over. You have to pay the tax at some point.
  4. Hardship Distribution – This is obvious. The money goes towards your hardship not rolled over.
  5. Dividends paid on employer securities
  6. Cost of Life Insurance Coverage.

You need to include any amount of your distribution that is not rolled over in income for that year. If your plan pays you an eligible distribution you have exactly sixty days from the date you receive it to roll it over to another eligible plan. If a rollover distribution from an employer sponsored plan like a 401k it is subject to a mandatory 20% withholding, even if you intend to roll it over later. This can be avoided by performing a direct rollover, which means your money goes directly from one institution to another (this includes a rollover to an IRA). If you receive a distribution in the form of a check the best practice is to not deposit it in your personal bank account and instead bring it directly to the finical institution where you are rolling your IRA to.

If you are no age 59 and half or older at the time you receive a distribution any amount not rolled over may be subject to a 10% penalty unless an exception applies. For a list of exceptions, refer to Topic 558. If the distribution is from a SIMPLE IRA you could be subject to a 25% penalty.  

If you need help rolling over your 401(k) or have questions about the process feel free to reach out or schedule a meeting.

I'VE MOVED - DO I NEED TO TELL THE IRS?

Yes you do. If you recall from our last blog post Tax To-Do List for Recently Married Couples, this is one of the things you should do if you move residences after you get married but it’s a good idea anytime you move. This article will tell you exactly how to do it.

just-moved-IRS

There are 4 different ways to let the IRS know that you’ve moved. It’s doesn’t matter how you do only that you do. You don’t want to miss out on importance IRS correspondence. Also, it’s always a good idea to use mail forwarding from the post office. It’s free and I believe can be set up for the next 6 months. Keep in mind that not all post offices forward government checks so while it will ensure your mail will be forwarded it might not forward your refund check. So be wary.

The easiest way to notify the IRS of a move is When Filing Your Tax Return. If you change your address right before you file your tax return just enter your new address on your return when you file and then magically (or administratively) when your return in processed the IRS will update their records. While this is by far the easiest, if you are not filing your return anytime soon you should update your address using one of the other means.

Another easy way is to simply fill out the IRS’ change of address form - 8822. You also have to fill out a form 8822-B, Change of Address or Responsible Party — Business, for your small business and send them to the address shown on the forms. Any entity with an employer identification number (EIN) must file Form 8822-B to report to the IRS the latest change to its responsible party.

With the new internet spreading like wildfire you can change your address using an Electronic Notification. However, this can only be done if your refund check was returned to the IRS. Use Where's My Refund? to complete your change of address online. You will need your Social Security number, filing status and the amount of your refund.

Finally you can notify the IRS the old-fashioned way, In Writing. To do this you need to write a letter that includes the following information:

  • Full name
  • Old and new addresses
  • Social Security number, individual taxpayer identification number or employer identification number, and
  • Signature

Mail your letter to the same address where you filed your tax return last year.

And finally you can notify the IRS of your address change verbally. This can be done at a local IRS office or on the phone. The IRS just needs to verify your identity and address. You should have the same information listed above ready for the IRS agent when you call. 

Important Note: If you are a joint filer (married filing jointly) you will need to provide the same information and signatures from both spouses. If you are separated, still file a joint return, and you and your spouse have different residences, you both need to notify the IRS of your new addresses.

IRS Quick Tip: Educator Expense Deduction

educator-tax-deduction

Did you know that as an educator you can get an extra tax deduction that the standard non-educator people can’t? Well, you can. Maybe the IRS is just giving you a special thanks for the work do.  Either way you are special in the eyes of the IRS. If you are an eligible educator, you can deduct up to $250 or $500 if married filing jointly for expenses that you incur related to your job as long as they are not reimbursed. The expenses can be anything from books, classroom equipment, school supplies, computer equipment and software, and other materials that you use for your classroom and job. Specifically for courses in health and physical education the expenses can be related to athletics.

The expenses need to be incurred in the tax year that you are filing for. So for your 2015 tax return (due by April of 2016) the expenses have to be incurred this year in 2015. This deduction is claimed on line 23 of the 1040.

Eligible educators include teachers, instructors, counselors, principals, and aids. Also you need to work at least 900 hours a school year that provides secondary or elementary education (as determined by State Law).

These expenses are only deductible to the extent that they exceed the following amounts in the same tax year.

  1. Interest on US Savings Bonds that you excluded from income because you paid higher education expenses.
  2. Distributions from a qualified tuition program that you excluded from income
  3.  Tax Free Withdrawals from your Coverdell Education Savings Account
  4. Any reimbursed expenses not reported in box 1 of your W2.

If you’re an educator and you want to make sure you are taking all the deductions you can give us a call or send an email to info@pjftax.com.

WHEN CAN YOU TAKE A TAX DEDUCTION FOR MEALS AND ENTERTAINMENT?

When you take a client to dinner or to a live entertainment venue, it may seem like you could deduct this from your taxes later. This is a common pratfall and has several rules attached before it can be counted as a deduction at the end of the year. In order for it to count in the first place, both meals and entertainment must be common practice in your industry and necessary to carry out. For example, a freelance programmer likely won't be taking a client to a baseball game, so it may not be deductible come tax time.

Regardless of whether it was a meal or an event, you will only be able to deduct 50% of the total expense at the most and there are exceptions, naturally. There are also two "tests" that the IRS applies when determining whether something you have listed can actually be a deductible or not. The first is called the "Directly Related Test" and the second is called the "Associated Test." If your deduction does not fit either of these two categories, it would be safer not to try to claim it at all.

Directly Related vs. Associated

In order for something to be considered "directly related," you must prove three things:

  1. The purpose of the event was to conduct business first and foremost.
     
  2. During the event, you conducted some sort of business with your client.
     
  3. You had more than just a general expectation that taking your client to the event would help gain income or a business-related benefit in the future.

Fortunately, you don't have to devote more time to business than pleasure during the event, just prove that taking your client to the event was with the intention of conducting business. The IRS also states that the event should be set in what they call a "clear business setting" to be considered Directly-Related. Examples of this include entertainment at an industry-related convention, a price rebate on the sale of your products, such as a restaurant giving a customer the occasional free meal, and almost any event designed to gain publicity.

The IRS does frown upon, and therefore may not acknowledge, certain venues and events. These include nightclubs, theaters, sporting events, cocktail lounges, country clubs, vacation resorts, athletic clubs and, despite what Hollywood might imply, golf clubs. If your meeting takes place at any of these places, there is a high chance it will not be considered "Directly Related," but it could still be considered "Associated."

For a function to be considered "Associated," you need to prove that it was associated with your business's active conduct and that it came directly before or after an important business discussion. The first point goes back to how normal it is in your industry as a whole to have such meetings in the first place, but the second point is a bit trickier. This is determined on a case-by-case basis, but you need to show that you actively participated in the business discussion or transaction. Once again, there are no constraints on time or even that the discussion took place during the meal or entertainment. The IRS's main concern is relevance.

What you Can and Cannot Deduct

The IRS's general definition of "entertainment" is pretty much what you would expect with the addition of everyone's needs, including room, food and transportation. The entertainment category is a bit tricky depending on your particular business, and will likely be outside your business's norm. If you are a gun maker and hold a gun show, this is not entertainment. If you are a gun maker and hold a concert for your employees, however, that's entertainment. One form of entertainment that is always deductible is a holiday party for your staff, so long as it isn't limited to a certain group of people within the company.

Be aware that if you and your business associates take turns paying for expenses for personal reasons, none of you can claim it as a deductible. You also cannot claim club membership fees, expenses for an entertainment facility that you own, such as a yacht, a swimming pool, a vacation resort and so on, or expenses for you, your spouse or your client's spouse. You also cannot deduct something if it is too lavish. For example, you can't claim a luxury limousine when all you needed was a standard rental car.