Taxes

Should you itemize this tax season? Some important things to keep in mind for 2020.

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Should you itemize this tax season? That is a common question for many taxpayers this season. Are you holding off seeing an accountant because you aren’t sure whether or not you will need to itemize?

I’m sorry to tell you, the only way you’ll truly know whether or not you should itemize is to ask a tax professional. But since (good) accountants charge by the hour, you might want to prepare the proper documentation before you step foot into an accountant’s office.

That’s understandable. We’ll help you navigate the big questions of deductions and whether or not you should itemize your tax return for the 2019 tax season. Then we’ll instruct you as to what types of documentation you’ll need to collect if you do decide to itemize.

Should you take the standard deduction? 

For the 2019 tax season, the standard deduction is up to $12,200 for a single person. This means most taxpayers are going to take the standard deduction.

Here is a chart breaking down both the standard deduction for the 2019 tax season (the taxes you’re currently prepping) and the 2020 tax season (next year’s tax return).

Status

2019

2020

Married Filing Jointly

$24,400

$24,800

Head of Household

$18,350

$18,650

Single

$12,200

$12,400

Married Filing Separately

$12,200

$12,400

If you’re wondering what makes this number change year to year, you can blame tax changes (the 2018 Tax Cuts & Jobs Act bumped the standard single person deduction from $6,000 to $12,000) and inflation.  Congress adjusts the amount of the standard deduction to accommodate inflation.

The big boost in the standard deduction means that anywhere between 85 and 95% of taxpayers won’t need to itemize. We’ll help you determine if you’re part of that approximately 13% that the IRS estimates will itemize for the 2019 tax season.

How do you know if you should itemize? 

You’ll have to add it up.

Check your filing status (and the filing status of a spouse or any dependents). Find out what the standard deduction is for your status. Then add up all your expenses and see if you come in under, close to, or over the standard deduction.

A good accountant would help you maximize what you can write off, but you can get a gist of what you’ll need if you prepare ahead of time.

Start by finding out if you can itemize these 4 major deductions:

  • Charitable contributions

  • Medical Expenses

  • Mortgage interest

  • State and local taxes (think property and sales tax)

Medical expenses and mortgage interest alone might be high enough to put you over the threshold.  If you haven’t made it over the approximate $12k yet, continue by assessing how much you can deduct from these expenses:

  • Casualty, disaster and theft losses

  • Business expenses

  • Tax preparation fees

  • Investment interest

  • Mileage on a vehicle

  • Home office deductions

This covers a lot of areas where you might commonly receive a deduction.  The business deduction point will be a particularly tricky one if you aren’t strict about your record-keeping.

Remember, you don’ t need to get an exact count, you just need to get a rough idea of what you’ll need. That way you spend less time in the accountant’s office and more time doing what you do best.

Who might want to itemize? 

If you aren’t into adding up all the numbers, here are some categories of person who might want to itemize:

  • You run your own business – You have to spend money to make money, which means you’re making less money than it looks like on paper.

  • You have a high-interest rate on your mortgage.

  • You had a lot of medical expenses in the past year.

  • You pay for your own healthcare out of pocket.

If you’re even questioning whether or not you meet the threshold to itemize, its time to schedule a meeting with an accountant. This post helped you determine whether or not your tax situation might warrant itemizing deductions, now talk to your local tax advisor to find out for certain.

 

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.

Important Dates In Post-Revolution American Tax History

The Revolutionary War was sparked in part by the British imposing taxes on the American colonists without their permission or consent.

Once the colonists had freed themselves from British rule, it was time to establish a government that could pay the debts it had incurred during the conflict.

Photo by Patrick Fore on Unsplash

Photo by Patrick Fore on Unsplash

1777 – Articles of Confederation

This was the first constitution of the newly formed United State. It favored decentralization of power, which means that Congress was not given the power to tax.

1781  – Report on Public Credit

Robert Morris, Superintendent of finance, wanted the federal government to own the debt it incurred then issue interest-bearing debt certificates while imposing tariffs and internal taxes.

His proposal was shut down by numerous states over the next few years.

1787 – Ratification of the Constitution

The ratification of the Constitution shifted the focus of power to the federal government and away from individual states.

This gave the federal legislature the power to impose tariffs and coin money, along with the flexibility to collect excises and levy taxes directly on individual citizens.

1789 – Tariff of 1789

This tax bill included the original 5% duty on imports, as well as a list of special items that would be taxed at specific amounts.

1790 – Report on Public Credit

This new tax plan worked on two basic principles:

  • Redemption – Congress would redeem at face value all the securities issued by the Confederation government. These old notes would be exchanged for new government securities with interest of about 4%. This plan aimed to intertwine the wealthy Americans who had financed the initial government with the new government.

  • Assumption – The national government would take on outstanding war debts of the states. This would concentrate the nation wealth into the hands of the wealthy merchant class so they would be able to invest in the nation’s economy and other critical innovations.

1791 – Whiskey Excise Tax

This was a tax specifically for spirit distillers and imposed a 7 cents to 18 cent per gallon tax. This was not a popular tax, as spirits were often used as a form of currency out west.

1794 – Uprising Quelled

North Carolina and Western Pennsylvania were in a state of civil unrest after being cited by the federal government for dodging taxes.

The federal government forced the states to send militia to occupy these territories and take down any organized resistance.

President Madison appealed to Congress for a Declaration of War against Britain as the tension between the two countries reached a head.

There was a lot of conflict over fundraising for the war, but Congress eventually settled on doubling the tariff schedule.

 

6 Tax Deductions That Went Extinct in 2018

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The Tax Cuts and Jobs Act of 2017 was called one of the largest tax overhauls in 30 years. It went into effect at the beginning of 2018, which means taxpayers are starting to feel the impact now. Some households will benefit from it, others will not. Here are some deductions that have been eliminated or reduced.

Moving Expenses
Unless you or a spouse is in the military and is currently on active duty, you won’t be able to take any deductions for moving. In the past, those who moved for a job and paid the moving cost could deduct most of their expenses.

Personal Deductions
Deductions for personal exemptions, which can be worth $4,050 for each exemption, were eliminated and replaced with a larger standard deduction and an expanded child tax credit.

Paying Alimony
If you’re paying alimony on a divorce finalized before December 31, 2019, then you can deduct those payments one last time.

Unreimbursed Job Expenses
This fell into the category of miscellaneous itemized deductions, an area that has been greatly reduced by the latest tax laws. It means that anything an employee pays for while on the job and doesn’t get reimbursed for, is not deductible.

State and Local Taxes
You used to be able to fully deduct any amount of state or local taxes. Now that cap is set at $10,000 meaning those with high state income and property taxes will get much less back.

Tax Preparation Fees
Tax preparation fee deductions were eliminated as part of the miscellaneous fees. This is will occur from 2018-2025. That means you cannot deduct payments to accountant, tax prep firms, or tax preparation software.

The Business & Tax Benefits of Westchester County

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Thinking of starting a business?

Westchester County is the perfect place to start a business. There are lots of countywide programs to get your business off the ground and geographical benefits from being in Westchester County.

Proximity to NYC

Depending on where you are in Westchester County, you’ll be close to the bustling economic center of New York City without having to deal with commuting to the city.

You’ll also be located close to Connecticut and parts of upstate New York.

That means you’ll be within drivable range for all of these areas.

Get Ahead With Westchester’s IDA Program Benefits

Westchester County Industrial Development Agency (IDA) can help you grow or start your business.

Use the benefits from this program to:

  • Build or renovate office parks or buildings
  • Develop mixed-use projects including hotels, marketers, medical office space, etc.
  • Support extensive multi-family and multi-use residential

This past January, the agency funded $391 million worth of residential projects in 2019. They’ve helped get hundreds of businesses off the ground and have given them a variety of benefits. For more details, check out IDA’s website.

Tax Exemptions

The IDA agency can also provide exemptions for use and sales tax in the following areas:

  • Construction
  • Furnishings
  • Business equipment
  • Related capital improvements

Check out the policy here.

Westchester County wants businesses to move in, so find out what both the county and the town/city you’re in offers in the way of incentives.

Image: Fred Murphy/C.C 2.0

When an Elderly Parent Might Qualify as Your Dependent

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!

It’s not uncommon for adult children to help support their aging parents. If you’re in this position, you might qualify for an adult-dependent exemption to deduct up to $4,050 for each person claimed on your 2017 return.

Basic qualifications

For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled.) Social Security is generally excluded, but payments from dividends, interest and retirement plans are included.

In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with one or more siblings and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption in this situation.

Important factors

Although Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.

Also, if your parent lives with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence. If the parent lives elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contribute to that housing expense counts toward the 50% test.

Easing the burden

An adult-dependent exemption is just one tax break that you may be able to employ on your 2017 tax return to ease the burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.

Ensuring Your Year-End Donations Are Tax-Deductible

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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!

Many people make donations at the end of the year. To be deductible on your 2017 return, a charitable donation must be made by December 31, 2017. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean?

Is it the date you write a check or charge an online gift to your credit card? Or is it the date the charity actually receives the funds? In practice, the delivery date depends in part on what you donate and how you donate it. Here are a few common examples:

Checks. The date you mail it.

Credit cards. The date you make the charge.

Pay-by-phone accounts. The date the financial institution pays the amount.

Stock certificates. The date you mail the properly endorsed stock certificate to the charity.

To be deductible, a donation must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions. The IRS’s online search tool, “Exempt Organizations (EO) Select Check,” can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access it at https://www.irs.gov/charities-non-profits/exempt-organizations-select-check. Information about organizations eligible to receive deductible contributions is updated monthly.

Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making. But act soon — you don’t have much time left to make donations that will reduce your 2017 tax bill.

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.”

US Senate Presents A Different Take On Tax Reform

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

The Senate Finance Committee released its tax reform plan on November 9, presenting a draft bill with marked differences to that agreed by the House Ways and Means Committee on the same day.

The proposal was drafted by Finance Committee Republicans under the leadership of Senate Finance Committee Chairman Orrin Hatch (R-UT), based on the Unified Tax Framework agreed by the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance in September 2017.

While said to adopt a similar “pro-growth approach” to the House Ways and Means proposal, the Senate plan differs in a number of areas.

The Senate bill would preserve the current seven income tax brackets, compared to the reduced four brackets proposed under the House bill. Under the Senate proposal, the zero tax bracket would be expanded, and a slightly lower 38.5 percent tax rate would be introduced for high-income earners (compared with 39.6 percent in the House Bill, in line with current law).

Both the Senate and House bills include a proposal to double the standard deduction, to USD12,000 for individuals and USD24,000 for married couples; to repeal the Alternative Minimum Tax; and eliminate the state and local tax deductions. Where the House bill would repeal the medical expense deduction, the Senate bill would retain it.

The treatment of the Child Tax Credit is also largely similar in both bills, with the Senate proposing to increase the credit from USD1,000 to USD1,650 (compared to USD1,600 in the House Bill). However, the Senate Bill would preserve the existing mortgage interest deduction, which the House Bill proposes to curb from USD1m to USD500,000.

The Senate bill also proposes to preserve the estate tax, which the House Bill would repeal for persons dying after 2024. The Senate bill also proposes to double both the estate and gift tax exemption for individuals, from USD5m to USD10m.

For businesses, the Senate Bill would also cut the corporate tax cut from 35 percent to 20 percent, but would delay implementation until January 2019. The bill proposes a new 17.4 percent deduction for certain pass-through businesses, which are taxed under the personal income tax regime, and enhanced Section 179 expensing. There is an exclusion from the deduction for specified service businesses, except in the case of a taxpayer whose taxable income does not exceed USD150,000, for married individuals filing jointly, or USD75,000 for other individuals.

The Senate Bill would tax multinationals’ offshore holdings under a repatriation tax proposal at lower rates than under the House bill. Cash holdings would be subject to a repatriation tax of five percent, rather than seven percent under the House proposal, and at 10 percent on non-cash holdings, rather than 14 percent as under the House proposal.

Both bills would cap the deduction for net interest expenses at 30 percent of adjusted taxable income, with exclusions for small businesses.

“This is just the start of the legislative process in the Senate. We expect robust committee debate on the policies in this bill, will have an open amendment process, and hope to report legislation by the end of next week,” said Hatch.

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.