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9 Red Flags That Could Get You Audited By the IRS

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Getting audited is not common. In fact, the IRS only audited 1 in 160 individual tax returns in 2018. A decade ago, there was an audit rate of 1 in 90.  Every year, the number of taxpayers audited has been slowly dropping

Cuts at the IRS have resulted in fewer staff members, and, as a result, fewer audits.

The more money you make, the higher the likelihood of being audited. If you’re making north of a $1 million per year, there is a 1 in 25 chance of you being audited.

There’s only a .5 – .6 % chance that you will join the ranks of the audited. The odds are low, but you don’t want to fib or flub your tax return and risk an expensive and time-consuming audit process.  That percentage still puts about 1 million taxpayers on the hook each year. Here are 8 ways you could become one of them.

Claiming Home Office Deductions   

In order to claim home office deductions, you need to ensure that the area you’re dedicating is only used for business.

Claiming a home office deduction means you can prorate some of your household expenses like:

  • Utility bills

  • Homeowner’s association fees

  • And more

This is done on a fractional basis,  based on the percentage of your home that the home office space takes up.

It is also an area that is often abused, which is why claiming home office deductions can be risky business.

Giving a Lot to Charity  

If you’re giving too much to charity, then the IRS will question the validity of your donations. They know how much those who make the same amount you do and giving too much will often signal that something fishy is at play.

Be sure to keep all receipts and records for your charitable donations. It’s recommended to write checks for charitable donations, which are much harder to falsify than other forms of donation.

Using Digital Currencies 

This one is a little newer. The government is looking for those that aren’t reporting income from cryptocurrencies.

Sure, it’s not the US dollar, but the government still wants to know what you’re making from it. Failure to report crypto income could result in worse than an audit, it could lead to a large fine ($250,000) or prison time.

Not Reporting Taxable Income  

This one is simple. Be sure to provide the IRS with every 1099 and W-2 from every job you’ve had this year.

Just because you don’t send one in, doesn’t mean that the IRS doesn’t know about them. A copy of all your tax forms are sent to the IRS, so you can’t just pretend certain jobs didn’t exist.

They’re looking for those participating in businesses that operate in large amounts of cash and those working in the gig economy.

Deducting Entertainment, Meal, and Travel Costs  

You can’t claim entertainment costs on your taxes anymore, so don’t try. You can still deduct travel and meal costs, but you need to be very clear with your records in order to stay in the clear with the IRS. We recommend recording:

  • Amount spent

  • Location

  • A list of those that attended

  • The business purpose of the meeting

Keep receipts for any meal or travel costs that are over $75.

Claiming Losses   

Claiming losses of any kind on your tax ups the chances that you’ll get audited.

Some types of losses include:

  • A business that reports losses for 3 years – this makes the IRS view your business as a hobby

  • Rental losses – Find a tenant that stays and pays

  • Stock market losses

Claiming these types of losses and others could be a red flag that gets your business audited.

Filing a Form 5213  

This form basically tells the IRS to not audit you for the first 5 years of your businesses’ life. It can help you transition from a hobby to a business, but once the 5 year period is up, you’re now under the microscope.

Be aware of this if you have already filed this form or are considering it.

Having Bank Accounts in Other Countries 

It’s not a crime to have bank accounts in other countries, but it is a common tactic for those attempting to hide income from the IRS.

Don’t do it.

If you have foreign bank accounts, be sure to report any that combined have an excess of $10,000+ anytime in the prior year. You can do this electronically or with an IRS Form 8938 if you have an account with far more than $10,000 in them.

Falsifying Tax Form or Making Errors  

If you file your taxes with a preparer that the IRS knows has falsified taxes, you might be on the hook instead of the CPA you hired.

Additionally, basic math errors are another type of issue that could draw the attention of an IRS agent. Use a tax preparing software or a trust tax preparer to negate any of those sorts of issues.

Your chances of being audited are low. But why take the risk? Some of the red flags on this list are unavoidable if you’re filing your taxes properly. Others are completely avoidable.

To cover yourself, hire a tax professional that will not only ensure that your taxes are done properly, but also will represent you if you are one of the million taxpayers that are audited each year.

4 Ways to Pay Less Taxes on Your Investments

If you’re considering jumping into investing (or have already started), you need to know the tactics to avoid paying massive amounts of taxes on them. We’ve compiled a list of tax tips for investors. Check them out.

by Austin Distel

Hold investments for longer than a year

Whenever you make money off your investments (aka capital gains) you are taxed on that income. However, the length of time you held the investment dictates the rate you’ll be taxed at.

These taxes, called capital gains taxes, change at the year mark. If you hold your investments for a year or less, you’ll be taxed at the short term capital gains rate, which is the same rate as income tax.

But if you hold your investments for a year and a day, you’ll get taxed at a more manageable long-term capital gains rate.

This rate can get as high as 20% for big earners, but it’s more likely you’ll pay somewhere between 0 and 15%.

Buy Municipal Bonds  

Buying bonds means you get to collect interest on those bonds, which is a great source of passive income if you buy enough.

But unless you buy municipal bonds, the IRS is entitled to a share of that interest. When you buy either city, state, or county bonds, you are exempt from paying federal income tax on those bonds. If you buy municipal bonds in your home state, you’ll be exempt from state and local taxes as well.

One thing to note is that if you sell your municipal bonds for a profit, you’ll have to pay taxes on the gain.

Sell Losing Investments   

If you’re losing money on a particular investment, you might want to consider selling it off.  Investment losses offset capital gains, so if you make $2,000 and lose the same amount, you won’t have to pay on the amount you’ve lost.

In addition, if your investment losses exceed your gains, you can use them to offset up to $3,000 in taxable income.

Put Your Money in Tax Sheltered Accounts  

Putting your investment money into tax-sheltered accounts is a great way to defer paying taxes on various investments.

Accounts like 401(k)s, 403(b)s, and certain IRA plans aren’t tax-free, but you won’t have to worry about paying taxes until you start making withdrawals. By the time you do that (barring some emergency), you’ll likely be in a lower tax bracket anyway.

 

Have more questions about investments and taxes? Shoot us an email or give us a call.

Are you withholding enough from your taxes?

witholdings

In a prior article, we talk about how moonlighters (those with 1099s and a W2 job) might need to withhold more taxes from their W2 role to avoid owing for the 2019 year.

They aren’t the only ones. Retirees, those with dependents, and a handful of others will need to take a look at how much they’re withholding and adjust accordingly.

Basically, if you were surprised at how low your refund was this year, you might need to adjust your withholding amount. That means if your refund was low or you owed (and never did before) you need to prioritize your withholding amount.

The time to adjust is now, right after the April 15 tax preparation deadline. The longer you wait, the more likely it is that you’ll owe or get a low tax refund amount. This can mostly be done with the IRS withholding calculator, but you’ll likely need to talk to an accountant for proper withholding.

This is for two reasons:

  • State and local taxes aren’t calculated.
  • Without a full understanding of taxes, taxpayers may not fill out the calculator correctly.

Reach out to a tax professional. They’ll help you navigate the muddy waters that were caused by the latest tax bill change.

Additionally, the IRS is cooking up a new W4 form – the form you fill out at the beginning of conventional employment (where you’d receive a W2) or to adjust your withholding amount. It will be ready for the 2020 tax season and won’t affect this year’s taxes.

If you ended up owing in this year or had a small tax refund, reach out to us. We can help ensure you’re withholding enough.

IRS Says No Decision Yet On 2018 Filing Season Dates

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

by Mike Godfrey, Tax-News.com, Washington

No date has yet been set for the filing of individual tax returns in 2018, despite rumors to the contrary, according to the Internal Revenue Service (IRS).

In a statement on November 3, 2017, the agency confirmed that it is currently updating its programming and processing systems for the coming tax year, as well as continuing to monitor legislative changes that could affect the 2018 tax filing season.

These include the possible renewal of 36 “extender” tax provisions that expired at the end of 2016, which cover renewable energy tax incentives, a couple of homeowner provisions, and a variety of miscellaneous minor provisions including tax credits for electric vehicles, special expensing allowances for media productions, and employment tax credits for Native Americans.

“The IRS anticipates it will not be at a point to announce a filing season start date until later in the calendar year,” it said in a statement. “Speculation on the internet that the IRS will begin accepting tax returns on January 22 or after the Martin Luther King Jr Day holiday in January is inaccurate and misleading; no such date has been set.”

Taxpayers are invited to provide comments on the new IRS.gov Test Homepage – Let Your Voice Be Heard

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Taxpayer Advocate

IRSwebsiteTesting

The IRS is a few months away from launching new look and feel to the IRS’s website (IRS.gov) and you have an opportunity to review the new Homepage about its look, content, and how easily you can find content to answer your tax questions.

You can do this through June 30, 2017 by accessing IRS.gov, navigating to Hot Topics and selecting Help us improve our home page! to provide an assessment of your experience or by entering the feedback tool directly. Testing takes less than nine minutes and your comments are confidential, anonymous and valuable to validate whether the enhancements will meet your needs.

This is a site to help you with your tax questions – please take the time to tell the IRS if it works for you!

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

 

IRS Seeks Taxpayer Input For 2017-18 Priority Guidance Plan

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Tax-News

IRS Tax Feedback

The Internal Revenue Service (IRS) and the Treasury are seeking feedback on what guidance should be prioritized to clarify parts of the tax code and explain policies.

The 2017-18 Priority Guidance Plan is intended to “identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance.”

The IRS said that this year’s consultation is particularly important in light of the recent Executive Order no. 13771, on “Reducing Regulation and Controlling Regulatory Costs.” This order requires federal agencies to repeal two existing regulations for every new regulation, whilst reducing the cost of regulations. As well as asking for feedback on areas where guidance and clarification is required, the agency is hoping to hear from taxpayers as to how to reduce taxpayer compliance burdens while complying with that Order.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

 

Tax bill too big to pay all at once? Sign up for an IRS payment plan

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

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Do you owe the IRS money this year? You have several options for paying your tax online. But if you can’t pay it all at once, the IRS gives you payment plan choices.

Note, however, that your first step must be to file your tax return on time. Failure to do so can result in stiff penalties.

Paying with plastic

Some taxpayers find the easiest way to pay is with a credit card. The IRS has awarded contracts to three companies to accept payments by plastic: Official Payments, Link2Gov and WorldPay. They take American Express, Discover, MasterCard, Visa or a variety of debit cards.

Each company has its own fee schedule that will add to your bill.

IRS

If you do pay a fee, make a note of it for next year’s filing. The IRS has ruled that this amount is deductible as a miscellaneous itemized expense.

Keep in mind that if you don’t pay off your credit card in full, you’ll start racking up interest charges on your account. In some cases, though, your credit card interest charges might fall below IRS penalties and interest you’d owe if you don’t pay on time.

A low-interest credit card may be a good option in this scenario.

Installment plans

If your tax bill is too large for a credit card, the IRS will take monthly payments.

Approval is not automatic unless:

  • You owe less than $10,000.
  • You have paid taxes in a timely way during the past five years without entering into an installment agreement.
  • You can pay the full amount within three years.

To get the program going, you can attach Form 9465, Installment Agreement Request, to the front of your tax return. Or, you can request an installment agreement online at the IRS website if the total amount you owe is not more than $50,000.

Taxpayers who seek an installment plan must provide detailed financial information, including data on equity assets, that the IRS will verify.

Keep in mind that paying over time, even to Uncle Sam, will cost you more.

  • Expect to pay a one-time user fee of $225, up from $120 last year.
  • The fee drops to $107 for direct-debit agreements.
  • Some lower-income taxpayers could pay a reduced fee of $43.
  • Applying online is your best bet: You pay a $149 one-time fee, or only $31 if you agree to a direct-debit plan.

You’ll be billed for any fee when the agency sends you a notice detailing your payment terms. Plus, penalties and interest continue to accrue to your unpaid tax bill. The IRS may also file a federal tax lien against you, which will be released when you pay off your installment loan.

Another way to deal with a large tax bill is with a home equity loan. That way you won’t have to pay IRS penalties and fees.

Offer in compromise

What if you can’t pay off your tax bill, in whole or part, in three years or five years or even longer? Then it might be time to negotiate.

The IRS might be willing to accept a lump-sum payment offer of less than your total tax bill if it is realistic. In these cases, the agency hopes to get some taxpayer money sooner than it would after years of costly collection efforts.

The IRS will review your financial situation and future income potential to determine whether your offer is appropriate. Be warned, however: This program was designed only for extreme cases, and few filers will qualify for the program. If you believe your situation does indeed meet the requirements, you need to file two forms: Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement.

To find out whether you qualify for an offer in compromise before filling out the paperwork, use the IRS’ online pre-qualifier tool. The questionnaire format will let you know if you’re eligible, as well as help determine an acceptable preliminary offer amount.

Options for offers in compromise include:

  • Lump sum cash offer — This must be paid in five or fewer installments within five months after the offer is accepted. You must include 20 percent of the offer amount plus a $186 application fee.
  • Periodic payment offer — This is paid in six or more monthly installments within 24 months after the offer is accepted. You must produce the first proposed installment payment plus $186.

The $186 fee is waived for qualifying low-income taxpayers.

The IRS has created a special website with “what if” scenarios regarding tax and payment issues for taxpayers who are having a hard time making their payments.

Regardless of which payment plan method you choose, make your decision now. Delay will only compound your financial and tax problems since penalties and interest charges will continue to accrue. By sending in any amount when you file your return, at least you’ll ultimately reduce your interest and penalty charges.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Beware the costly, complicated AMT, or alternative minimum tax

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

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The alternative minimum tax, or AMT, is widely unpopular and has been a perennial punching bag whenever tax reform is discussed. President Donald Trump has vowed to kill the AMT, which cost him $31 million on his 2005 tax return.

This parallel tax calculation method has been around since 1969 to ensure that wealthy taxpayers didn’t use loopholes to escape paying their fair share of taxes. The original target was 155 filers with the then-exorbitant income of $200,000 who avoided paying any federal taxes.

For many decades the AMT wasn’t indexed for inflation, so more and more middle-income taxpayers were subject to the tax. A 2013 law fixed that, so the AMT is now adjusted each year to reflect inflation.

What exactly is the alternative minimum tax?

The alternative minimum tax, commonly referred to as the AMT, has its own set of rates (26 percent and 28 percent) and requires a separate computation that could substantially boost your tax bill.

Basically, it’s the difference between your regular tax bill, figured using ordinary income tax rates, and your AMT bill, figured by filling out more IRS paperwork. When there’s a difference, you must pay that amount, the AMT, in addition to your regular tax.

Common tax breaks disallowed

The AMT rejects or reduces many common tax breaks used every year by individual taxpayers to lower their IRS bills.

For example, under the AMT:

  • You cannot deduct state and local taxes.
  • If you are 65 or older, have lots of itemized medical deductions and fall into the AMT, you’ll lose some of those write-offs.
  • Miscellaneous itemized deductions, which must exceed 2 percent of your adjusted gross income under the regular tax system, are disallowed under the AMT.
  • Personal exemptions may be disqualified.
  • While mortgage interest on your main and second home is still AMT-deductible, home equity loan interest is restricted. It can’t be deducted unless the money is used solely to pay for home improvements.
  • Real estate property taxes also are disallowed as deductions under the AMT.
  • Some tax credits that reduce your regular tax liability do not reduce what you owe under the AMT. Once you add back these disallowed credits and run the numbers, you might be subject to a bigger IRS bill if your taxable income exceeds the annual AMT exemption amount for your filing status.

herman blog

Many of the tax breaks not allowed under the AMT system do affect predominantly wealthy individuals or businesses with complicated tax circumstances. These include:

  • Incentive stock options.
  • Intangible drilling costs.
  • Tax-exempt interest from certain private activity bonds.
  • Depletion and accelerated depreciation on certain leased personal or real property.

Considering making a real estate investment?

Do more to pay more

To help sort through the AMT mess, some taxpayers turn to computer software packages, most of which include AMT computation, or hire professional help.

For the past couple of years, the IRS has provided some free AMT calculation assistance. AMT Assistant is an online tool that helps taxpayers determine whether they owe the tax. You just answer a few questions about entries on your draft 1040 and the system does the rest. Based on your entries, the calculator will tell you that either you do not owe the AMT or that you must go further by filling out Form 6251 to find out how much you owe.

But the IRS plans to retire the tool after the close of this filing season. Fewer people need it since it’s easy to figure out whether you owe the tax by using tax preparation software, including through the IRS’ Free File, which automatically calculates any tax owed.

If you find you must pay the AMT, the extra money you owe is never welcome. But dealing with it now is better than the alternative: letting the IRS discover that you should have paid it. Then you’ll owe interest and penalties, too.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Tax lesson for teachers: Educator expenses can be written off

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

tax deductions for teachers

Teachers on average spend $530 of their own money during the school year to pay for supplies, snacks for students and other classroom items.

Teachers and other educators can get a tax deduction of up to $250 for some of those costs as well as continuing education expenses.

Even better, they don’t have to itemize to get the tax break. Educator expenses are one of the so-called above-the-line deductions claimed directly on a Form 1040 or via tax software.

Educator expenses deduction enhanced

Congress made the tax break for educators a permanent part of the tax code in 2015.

Lawmakers also indexed the $250 maximum deduction amount for inflation. It didn’t change for the 2016 tax year, because of low inflation, but it could increase in future years.

What items are deductible?

Besides teachers, counselors, principals and aides can take the deduction if, for the tax year, they were employed at a state-approved public or private school system from kindergarten through grade 12, and worked at least 900 hours during the school year.

Educators can write off unreimbursed costs for:

  • Books
  • Supplies
  • Computer and other equipment (including software and services)
  • Supplementary materials used in the classroom
  • Professional development programs

The IRS also applies its “ordinary and necessary” rule here. An item purchased for your classroom must be considered ordinary:  something that is common and accepted in the education profession.

It also must be necessary: defined as helpful and appropriate, though maybe not required.

So buying a recording of “Death of a Salesman” to help drive home Arthur Miller’s points to your students would likely meet tax muster. But purchasing a new HD television, instead of watching on your school’s working-but-old set, may raise some IRS eyebrows.

Couples who share education careers could get a double break if they file jointly. However, each spouse is limited to $250 of qualified expenses.

What about home schooling? Sorry, but the tax law specifically states that costs for this type of instruction don’t count toward the educator expenses deduction.

Circumstances could limit expenses

In addition to the eligibility requirements on expenses, the IRS has set some other restrictions on what’s deductible.

The tax agency says when an educator uses any tax-favored funds to pay for his or her own schooling, those amounts must be subtracted from the total the teacher claims under the educator expenses deduction.

Take for example Joe Jones, a high school English teacher who is working toward his master’s degree in literature during school breaks. He cashed in savings bonds to pay his tuition and excluded the bonds’ $150 interest from tax. He also spent $200 for books on Shakespeare to distribute to his 11th-grade students. He must subtract the $150 in tax-free interest from the $200 for the books, leaving him only $50 to claim under the educator expenses deduction.

The same rule applies to nontaxable earnings a teacher gets from qualified state tuition programs or tax-free withdrawals from a Coverdell education savings account.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

7 Milestones In Life That Trigger Taxes: Birth, Marriage, Work, Homeownership and More

 

 

 

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

taxes

You were blissfully unaware of it, but taxes became a part of your life on the day you were born.

From that beginning as a spanking-new tax break for Mom and Dad, taxes have had an important role in all your major life events, from getting a job, saying “I do,” buying and selling homes, having kids of your own and even retiring.

In some cases, the involvement of the IRS is not such a good thing.

But in many ways, the tax code can be your best friend. You just need to know how it applies to your personal circumstances so you can take advantage of it. Read on to learn more about tax breaks for life’s big events.

Getting Your First Job

Uncle Sam gets a portion of your paycheck via payroll taxes. You do, however, have a bit of a say in how much comes out of your pay by adjusting your withholding.

If you have too much withheld, you’ll get a refund when you file. That’s not necessarily bad, but wouldn’t you rather have your own money year-round instead of giving the IRS an interest-free loan?

On the other hand, if you don’t have enough taken out, you could face a major tax bill, and possible underwithholding penalties, at filing time. Ask your boss for a new Form W-4 so you can run the numbers and adjust your withholding. You can change your withholding amount as often as you need to get your tax amount just right.

Your job likely offers several tax breaks. If your employer provides health care coverage, your medical insurance is a tax-free benefit to you. You’ll find out how much that’s worth on your W-2 earnings statement.

A flexible spending account, or FSA, also might be part of your job benefits. Here you can save pretax dollars to pay for medical care not covered by insurance.

You also want to take advantage of your workplace’s tax-deferred 401(k) retirement plan.

And if you move to take a job, even your first one, you can write off many of your relocation costs.

Getting Married

Uncle Sam probably wasn’t a guest at your wedding, but he becomes a big part of your life when you are a married taxpayer.

Most couples filed jointly because it generally produces the best tax result.

If both partners work, coordination of employer fringe benefits after marriage is key, says Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting.

Reassess your individual retirement accounts. Your new combined income could affect your retirement contributions. Income limits apply to tax-free Roth accounts and also to how much of a traditional IRA contribution you can deduct if you or your spouse put money into a workplace retirement plan.

Marriage also is one of the changes in family circumstances that allows you to revisit your tax-favored FSA. Newlyweds also should reevaluate how much each has withheld from their paychecks.

And what about your once-in-a-lifetime honeymoon? The tax code’s annual gift exclusion amount for 2017 is $14,000, the same as it was for 2016. It’s usually adjusted annually for inflation.

That means both a well-to-do mom and dad could give each newlywed $28,000 or a combined total of $56,000 to the wedded couple. That definitely would pay for an extravagant post-ceremony getaway.

Having Children

Congratulations on your new baby. Let Uncle Sam help cover some of your growing family’s costs.

A dependent youngster is an added exemption. Kids also allow parents to claim the child-tax credit as long as the youngster was 16 at the end of the tax year. Large families might be able to get money back from the IRS via the refundable additional child-tax credit.

If your family grew via an adoption, there’s a tax credit to cover some of the many costs of that process.

Working parents can use the child- and dependent-care credit to pay for some of the costs of caring for their kids while they are on the job.

And the tax code also offers several ways to save and pay for higher education costs, including 529 college savings plans, the Coverdell Education Savings Account and the American opportunity and lifetime learning tax credits.

Starting a Business

Once you decide it’s time to break out of the corporate cubicle and start a new business, the tax code can help.

Filing is relatively easy for sole proprietors. They report their income as part of their annual individual tax filing by attaching Schedule C to Form 1040. Schedule C also offers many ways for individual entrepreneurs to write off many of their business expenses.

Among the deductible small-business costs are home office expenses. Business use of a vehicle also is deductible, as are health insurance premiums and contributions to self-employed retirement plans. New businesses also are allowed to deduct thousands in certain startup costs.

If you have kids, putting them to work in your sole proprietorship could be a tax-smart move. Depending on how much you pay them, they might not owe income taxes and you can deduct the salary as a business expense.

But starting a business is not all about tax breaks. Sole proprietors also must pay self-employment taxes. These are the equivalent of the payroll taxes collected from wage-earning employees. As both the employer and employee, a sole proprietor has to pay the boss and worker components of Social Security and Medicare taxes.

And running your own business usually means you must file more tax forms, including estimated tax payments four times a year.

Buying a Home

Your home is probably your biggest investment. Homeownership also provides many tax breaks.

Interest paid on a primary residence mortgage up to $1 million is deductible as an itemized expense. If you take out a home equity loan or line of credit, interest on those loans up to $100,000 also is deductible. Even the interest on a second home is tax-deductible.

Property tax you pay on your main house — and any other residences you own — also is deductible.

The tax benefit of a home is even better when you sell it. Up to $250,000 in sales gain ($500,000 for married joint filers) on your home is tax-free, as long as you owned the property for two years and lived in it for two of the five years before the sale.

Many home improvements, such as structural additions, kitchen modernization and landscaping, can increase the basis in your home. This is essentially your investment in the home. A larger basis means less profit that might be taxable.

And some home upgrades, such as installing solar energy systems, also will get you an immediate tax credit to help offset the high cost of this type of improvement.

Dealing with Divorce

As with marriage, your filing status is determined on the last day of the tax year. If your divorce is final on Dec. 31, then you are considered unmarried for the full year.

One of the stickiest divorce issues is child custody. The parent who has physical custody of the children for most of the year usually gets to claim them as dependents. That means that parent gets the exemption, child-tax credit and child-care tax credit savings.

One spouse typically is granted sole ownership of the family home. This could, however, pose a problem for the solo owner. When the lone ex sells the property, the amount of profit exempt from capital gains is just $250,000 versus the $500,000 that married filing jointly homeowners can exclude. Because of that, some couples sell the house before they divorce and split the tax-free profits.

Similarly, take into account the cash the recipient partner will net after taxes when dividing other marital assets.

And note that alimony has tax implications for both ex-spouses. It is taxable income to the recipient and can be deducted by the paying ex. Child support, however, offers no tax breaks to the paying ex, as it is not deductible. However, to the recipient, it isn’t taxable.

Retiring

Your golden years will be more enjoyable if you take advantage of the many tax breaks afforded by retirement plans.

A traditional IRA contribution could produce a tax deduction when you file your tax return. Remember, though, that you’ll have to pay taxes on this account when you start taking out money in retirement.

With a Roth IRA, you put in already-taxed money, but that means eventual distributions from a Roth are tax-free. The biggest drawback to a Roth is that you can’t open or contribute to a Roth if you make a lot of money. However, regardless of your income, you can convert a traditional IRA to a Roth.

Workplace retirement plans, usually known as 401(k)s or Roth 401(k)s, offer similar retirement saving options, but with a nice bonus. Many employers match some of your plan contributions, which helps your retirement savings grow more quickly.

Social Security benefits generally are tax-free as long as you don’t have a lot of other income.

And if you do have to file a tax return when you’re older, you can claim a larger standard deduction amount simply because you’re age 65 or older.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.