Attention last minute savers! There’s still time to reduce your tax burden for 2016.
Have you funded a traditional IRA, Roth IRA, or SEP this year? The deadline for contributions to IRAs is April 18, 2017 — this year’s filing deadline. For self-employed taxpayers, contributions to a SEP may be postponed until October 16, 2017 if a tax return extension has been filed.
Increasing your 401(k) contribution so that you are putting in the maximum amount of money allowed is a smart way to lower taxes. If you can’t afford the maximum contribution, $18,000 for 2016, $24,000 if you are age 50 or over, you should still contribute the full amount that will be matched by employer contributions – no reason to leave money on the table!
If you are currently enrolled in an employer sponsored retirement plan, your contribution to a traditional IRA will not be tax deductible, but you will be able to take advantage of tax-deferred interest compounding. The cap for contributions to a traditional or Roth IRA in 2016 is $5,500 for taxpayers under 50 and $6,500 for those over 50.
If you have reason to believe you’ll be in the same or a lower tax bracket next year, it may make sense to defer income by taking capital gains in 2017 instead of in 2016. If you are self-employed or freelancing and can push revenue into a lower earning year, it may be wise to do so. Winding up in a higher tax bracket can result in a big surprise in your tax bill. Your forecast for personal income this year vs. next year is an important issue to discuss with your tax professional.
Charitable deductions are another great way to lower your taxes before year’s end. Just make sure that the charity to which you are donating is recognized by the IRS as being tax-exempt, and that you document and photograph all items donated.
“Loss harvesting” is the practice of selling stocks and mutual funds with the goal of realizing losses. Those losses can offset taxable gains you have realized during the year, dollar for dollar. This is another good conversation to have with your enrolled agent.
To make sure you’re taking advantage of all available tax savings, tax credits and deductions for 2016, be sure to bring the right documents to your tax professional. Along with any Forms W-2 from your employer, bring Forms 1099 declaring misc. income, mortgage interest information, and K-1 forms showing income from a partnership, small business or trust. Bring documentation of any student loans you may be paying off, and money spent on child care.
Some other things to consider: if you collected unemployment benefits at any time during the year, that money is generally taxable and you will need to bring a form 1099-G. For state filing, you’ll want to remember to include any personal property tax paid – for example, on your automobile. Did you collect Social Security, rent a property, receive self-employment income or pay alimony? Cancelled checks and receipts can help to document expenses you wish to claim, such as those related to a home office. Job search expenses, moving expenses and college expenses may all be deductible under certain circumstances. Medical expenses might be deductible, but the bar is high.
As with everywhere else in life, often what the large print giveth the small print taketh away. For instance, IRA contributions — both traditional and Roth — have some tricky limitations (and some workarounds, too). Enrolled agents (“EAs”), America’s tax experts, are well placed to help you navigate. Please feel free to call my office at xxx-xxx-xxxx to schedule an appointment.
About Enrolled Agents
To earn the EA license from the US Department of Treasury, candidates must pass a background check and a stringent three-part exam on tax administered by the IRS. To maintain the license, they must complete annual continuing education that is reported to the IRS. Members of the National Association of Enrolled Agents (NAEA) are obligated to complete additional continuing education and adhere to a code of ethics and rules of professional conduct.
Although the IRS reports a 400 percent surge in phishing and malware incidents during the 2016 tax season, there are simple steps you can take to help protect yourself.
Here are nine hints that can help:
You can save money and trouble if you follow professional advice and your own good sense when taking care of taxes.
It sometimes makes sense to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.
Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.
Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.
It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement accounts (IRAs) still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. The 2016 contribution limits are $18,000 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those 50 years of age and older).
It has become very popular in recent years to convert a traditional IRA into a Roth IRA. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). If you converted your account this year, reexamine the rollover. If the value went down, you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax.
If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.
Congress finally made permanent a provision that allow taxpayers 70½ and older to make tax-free charitable distributions from IRAs. Using your IRA distributions for charitable giving could save you more than taking a charitable deduction on a normal gift. That’s because these IRA distributions for charitable giving won’t be included in income at all, lowering your AGI. You’ll see the difference in many AGI-based computations where the below-the-line deduction for charitable giving doesn’t have any effect. Even better, the distribution to charity will still count toward the satisfaction of your minimum required distribution for the year.
Some high-income taxpayers must pay the alternative minimum tax (AMT) because the AMT removes key deductions. The silver lining is that the top AMT tax rate is only 28 percent. So you can “zero out” the AMT by accelerating income into the AMT year until the tax you calculate for regular tax and AMT are the same. Although you will have paid tax sooner, you will have paid at an effective tax rate less than the top regular tax rate of 39.6 percent. But be careful, this can backfire if you are in the AMT phase-out range or the additional income affects other tax benefits.
You can give up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. You and your spouse can use your exemptions together to give up to $28,000 per beneficiary.
Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. An appreciating market and historically low rates create the perfect atmosphere for estate planning. The past several years presented a historically favorable time, and the low rates won’t last forever
Not sure what to do? Give our office a call!! 663-8686
WASHINGTON, DC (January 12, 2016) How do you know if someone has filed a tax return using your Social Security number? And what do you do then?
This is happening more and more—the latest General Accounting Office (GAO) report says that IRS paid out over $5.8 billion in fraudulent returns in 2013. IRS does have security measures in place to verify the accuracy of tax returns and the validity of Social Security numbers submitted, but that hasn’t stopped the bad guys from filing returns using other people’s identities—early and often!
“Filing your return early is actually a great way to thwart these fraudsters,” said Kerry Freeman, EA, of Freeman Income Tax Services in Anthem, AZ. “By filing later, you give the bad guys more time to file a false return in your name.”
If you receive a notice from the IRS that leads you to believe someone may have used your Social Security number fraudulently, or if your electronic filing is rejected, Freeman advises that you notify the IRS immediately by calling the IRS’ Identity Protection Specialized Unit (IPSU) at 800.908.4490. For the IRS to mark your account to identify any questionable activity, you must complete Form 14039, Identify Theft Affidavit. Mail or fax the form (one or the other, doing both will result in a delay) to the address or fax number listed on the form
The IRS is well aware of the uptick in fraudulent filings and is making efforts to prevent it, such as monitoring Internet “IP” addresses where multiple returns are filed and keeping track of the time it takes to fill out each return online. Scammers prepare returns in rapid succession, unlike most taxpayers, who typically put in time to make sure the information on their return is correct.
Freeman also noted that the IRS is providing increased protection with a personal pin number for taxpayers, known as an “IP PIN”—an identity protection pin.
“An IP PIN is a six-digit number the IRS will assign you if you think you’ve been the victim of identity theft that helps prevent the misuse of your Social Security number on fraudulent federal income tax returns. IRS is not giving out IP Pins to everyone, but if you think you’ve been a victim of identity theft you’ll need one.”
Many people feel safer having a licensed professional, such as an enrolled agent, prepare their returns. Enrolled agents (also known as “EAs”) receive their licenses from the IRS and are required to undergo a background check. They abide by a code of ethics and earn annual continuing education. You can find an enrolled agent in good standing on the directory of the National Association of Enrolled Agents (NAEA): eatax.org.
Overview of the Provisions
PERMANENT PROVISIONS
The bill makes over 20 tax relief provisions permanent, including provisions from 11 different bills marked up by the Ways and Means Committee in 2015.
FIVE-YEAR PROVISIONS
TWO-YEAR PROVISIONS
EXCISE TAXES
PROGRAM INTEGRITY
MISCELLANEOUS PROVISIONS
Family Tax Relief
Real Estate Investment Trusts
Additional Provisions
Revenue Provisions
TAX ADMINISTRATION
Internal Revenue Service Reforms
United States Tax Court
The only thing worse than owing a tax bill: owing even more when the IRS tacks on penalty charges.
The IRS has many ways to collect extra money. There are tax penalties for:
Most taxpayers, however, tend to encounter basic tax penalties for these 3 offenses:
Nonfiling penalty
If you don’t file a Form 1040 or an extension to file using Form 4868 by April 15, the penalty for not filing starts accruing the very next day.
The assessment is 5% per month of any tax balance due. The full monthly charge for failing to file applies for any part of a month you’re late in sending in your tax return. So if you file on May 1, you still are assessed the monthly 5% penalty for that month.
Many taxpayers, says enrolled agent Alan Pinck, fall into the ostrich routine, especially if they owe and can’t afford to pay the due tax. They just ignore filing.
That’s not a good idea for many reasons.
First, says Pinck, “you’re just prolonging the inevitable.” Even if you get an extension until Oct. 15 to submit your Form 1040, you’ll have to make that October deadline or the nonfiling penalty will begin.
Plus, the IRS considers not filing at all the more serious offense. “It’s way worse than if you didn’t pay,” says Stephen DeFilippis, an enrolled agent in Wheaton, Illinois.
There is one bit of good news about the nonfiling penalty: It maxes out at 25% of your unpaid taxes.
Still, 25% is a hefty fee to pay just because you didn’t fill out the form on time.
Nonpayment penalty
As for those unpaid taxes, they have their own penalty.
Even if you file a return or an extension by April 15 but don’t pay what you owe in April, you’ll face the nonpayment penalty. The penalty is 0.5% of your due tax.
Again, this penalty is assessed for every month, or any part of a month, that your tax bill is outstanding. And like the nonfiling penalty, the nonpayment penalty can grow until it reaches 25% of your unpaid tax bill.
What if you don’t owe any or very much tax? Tax law still requires you to file.
If you are due a refund, filing is the only way to get that money.
And if you owe only a small amount but wait more than 60 days to file a tax return, the minimum failure-to-file penalty is the smaller of $135 or 100% of the unpaid tax.
Percentage break for both penalties
If you did not file on time and did not pay any tax you owed, you are subject to both penalties. However, the IRS actually gives you a bit of a break in these cases.
The combined penalty for failure to file and failure to pay is 5%, the total of the 4.5% late filing charge and 0.5% for the late payment for each month or part of a month that your return is late, up to 25%.
But don’t push it. If, after 5 months, you still have not filed or paid, the failure-to-file penalty will max out, but the 0.5% failure-to-pay penalty continues until the tax is paid — up to 25%.
That means your total penalty for failure to file and pay can be as much as 47.5% — a 22.5% late filing tax penalty and another 25% in late payment charges.
Underpayment penalty
U.S. taxes are collected on a pay-as-you-earn system. If you don’t meet that requirement, you’ll be hit with a tax underpayment penalty.
Most of us comply, thanks to income tax withholding from our paychecks. But if you’re an independent contractor, either full time or as a side job to your salaried employment, you are responsible for covering the tax due on those earnings through estimated tax payments.
The same timely tax-paying applies to other income, such as prize winnings, investment earnings and even stock options, an income source Pinck sees often at his San Jose, California-based firm A. Pinck and Associates.
Sometimes, people who receive these various types of untaxed income pay what they owe the IRS in 1 lump sum when they file their taxes. That won’t cut it.
The IRS wants its portion of your earnings when you get the money. Fail to do that and you could owe an underpayment penalty, even if you ultimately paid the full tax due.
Avoiding the underpayment penalty
There are a few ways to get around the tax underpayment penalty.
First, you can meet 1 of 2 estimated tax-filing safe harbors. Pay estimated taxes that are the lesser of 100% of your prior year’s tax liability or 90% of your current year’s tax liability. Most taxpayers, says DeFilippis, opt for the prior year safe harbor. “100% is a fixed target; 90% is a moving target,” he says.
Just make sure when you look at your previous year’s taxes, you note the correct amount to use as your safe harbor. For example, let’s say your tax liability was $20,000 and you paid $18,000 during the tax year through withholding, tax credits and estimated taxes; then your tax due was $2,000. Your estimated tax safe harbor amount this year is the 20 grand, not the $2,000.
If you have a salaried job, you also can make up for a coming estimated tax shortfall by increasing your withholding there, says DeFilippis. Married couples get an extra option here. If they file jointly, a spouse’s withholding will cover any shortage of estimated taxes due on the husband’s or wife’s untaxed income.
Or you can annualize your income. Here you file Form 2210, breaking down income and deductions by estimated tax period, showing that you paid as you should have for each. “If you got a big chunk at the end of the year, it only counts for the 4th quarter,” says DeFilippis. “Annualizing shows you had the correct amount in the first 3 (quarters) and only needed to pay the higher estimated amount in the last quarter.”
Other penalty options plus interest
If you face a tax penalty for the 1st time, the IRS might be lenient.
“A first-time abatement request can be made, and a lot of time the taxpayer will prevail,” says Pinck. Basically, you show the IRS that you’ve been good for your taxes in the past and promise to be compliant in the future.
Remember, though, even if the IRS grants some penalty relief, you’ll still face interest charges on unpaid taxes.
“Interest is statutory, so it’s usually not abated,” says Pinck. For general nonpayment, nonfiling situations, the current interest rate is 3%. It is adjusted quarterly, and the rate is posted on the IRS website.
A 3% rate doesn’t sound like much, but Pinck points out that it is compounded quarterly, not annually. “It can add up pretty quick,” he says.
So can the tax penalties for not filing, not paying or paying too little throughout the year. To stay out of those costly situations, file your 1040 on time, pay any taxes due with that form and keep track of and pay enough estimated taxes on your other earnings. That will ensure that Uncle Sam doesn’t get any more of your money than he should.
By Kay Bell
Each year the IRS mails millions of notices and letters to taxpayers. If you receive a notice from the IRS, here is what you should do:
If you agree, you don’t need to reply unless a payment is due.
If you don’t agree, it’s important that you respond to the IRS. Write a letter that explains why you don’t agree. Make sure to include information and any documents you want the IRS to consider. Include the bottom tear-off portion of the notice with your letter. Mail your reply to the IRS at the address shown in the lower left part of the notice. Allow at least 30 days for a response from the IRS.
IRS Summertime Tax Tip 2015-05, July 13, 2015
Millions of people enjoy hobbies. They can also be a source of income. Some of these types of hobbies include stamp or coin collecting, craft making and horse breeding. You must report any income you get from a hobby on your tax return. How you report the income is different than how you report income from a business. There are special rules and limits for deductions you can claim for a hobby. Here are five basic tax tips you should know if you get income from your hobby:
IRS Summertime Tax Tip 2015-08, July 20, 2015
Miscellaneous deductions can cut taxes. These may include certain expenses you paid for in your work if you are an employee. You must itemize deductions when you file to claim these costs. So if you usually claim the standard deduction, think about itemizing instead. You might pay less tax if you itemize. Here are some IRS tax tips you should know that may help you reduce your taxes:
Deductions Subject to the Limit. You can deduct most miscellaneous costs only if their sum is more than two percent of your adjusted gross income. These include expenses such as
Deductions Not Subject to the Limit. Some deductions are not subject to the two percent limit. They include:
There are many expenses that you can’t deduct. For example, you can’t deduct personal living or family expenses. You claim allowable miscellaneous deductions on Schedule A, Itemized Deductions. For more about this topic see Publication 529, Miscellaneous Deductions. You can get it on IRS.gov/forms at any time.
IRS Summertime Tax Tip 2015-09, July 22, 2015
IRS Tax Tip 2015-05, January 26, 2015
Nearly everyone can claim an exemption on their tax return. It usually lowers your taxable income. In most cases, that reduces the amount of tax you owe for the year. Here are the top 10 tax facts about exemptions to help you file your tax return.