Individual Tax Help in Jefferson City and Central MO

A warning to kids who want to file their own tax return:

If you have children younger than 19 years old (or 24 if a full-time student) coordinate the filing of their taxes with yours. How they file is a matter of tax law.

The problem

Your child is away for college. You prepare and try to file your tax return on April 14th after finally receiving all the required documentation. Unfortunately, the e-filed tax return is rejected because your college student filed their own tax return and received a nice refund. Now you have a mess on your hands. You must file an extension, file an amended tax return for your child, return a refund, and paper file your tax return.

A matter of law

The dependency rules and kiddie tax laws are clear and must be followed. If you have a dependent child as determined by the tax code, you will need to conduct the tax calculations to determine what is taxed at your child’s tax rate and what will be taxed at your higher rate. The same is true for which tax return receives exemptions and standard deductions. This requires coordination of your tax filings with that of your dependent children.

Suggestions

Remind your independent-minded kids to hold off filing their tax return until consulting with you.

Claiming oneself as a dependent is not a choice, it is a matter of law. Remind your child there are rules that must be followed before making this tax decision.

Plan for a dependency shift. Sometimes arranging for a shift in dependence from a parent to a student makes financial sense. If you think this might be true, conduct a tax planning exercise prior to making the change.

Consider using the tax filing process to introduce your young adult to the benefits of tax planning. You never know, it could save you money as well as the hassle of undoing an improperly filed tax return.

If you're going through a divorce, taxes may be the last thing on your mind. But divorce involves many potential tax traps and pitfalls. Here are some things to know.

Alimony and child support. Through 2018, alimony is taxable income to the person who receives it and deductible by the person who pays it, as long as it meets certain specific tax requirements. Child support is neither taxable nor deductible. A divorce agreement should clearly spell out the difference between alimony and child support. After 2018, alimony is no longer a taxable event for either party so plan accordingly.

Property settlement. When a divorcing couple agrees to a property settlement, there are no immediate tax consequences. But when it comes time to sell the property, one of the parties could be in for a nasty tax surprise. That's because each spouse receives property with its original tax basis, and a low tax basis may trigger a large capital gain down the road. A truly equitable property settlement should consider the tax basis of assets, not just current market value.

Children. After divorce, the parent who has custody of a child for the greater part of a year generally has the right to claim that child as a dependent. However, the custodial parent may transfer the dependency exemption to the other parent by signing the appropriate IRS form. Why would you ever give away a deduction? Because it may be worth more to your ex-spouse. In exchange for the dependency deduction, you may be able to bargain for more alimony or a larger property settlement.

Tax filing. As a married couple, you probably have been filing a joint tax return. But during divorce proceedings, you may be better off filing separately or, if you qualify, as head of household. Once the divorce is final, your filing status will be either single or head of household. To qualify as head of household, certain requirements for dependents must be met.

Marital status is an important factor in the amount of taxes you will pay. Be aware that in divorce situations some planning might cut your taxes significantly.

Have you recently married, divorced, or lost a spouse? A change in marital status should prompt a review of financial matters, but at such a time it is easy to overlook the details. Here are a few reminders and suggestions.

Insurance coverage. When your marital status changes, review your insurance policies. Combining separately held health insurance policies with a spouse can result in savings and discounts. Most group health insurance policies allow spousal coverage. You may want to opt for coverage under your partner's policy if superior or less expensive coverage is offered. Married couples are often considered a better insurance risk, so together you may qualify for a lower rate. Also evaluate your need for disability or long-term care insurance.

Beneficiary designations. Review beneficiary designations on life insurance policies and retirement accounts.

Estate planning. Update choices that have become obsolete. Incomplete paperwork or inappropriate choices could mean your intended beneficiary may not end up with your assets. You should periodically review and update your existing will and other estate planning documents. This is especially important whenever your marital status changes. Before you get married, consider a prenuptial agreement if there are children from a prior marriage or if you own substantial assets.

Other documents. Review any other important documents. If you change or hyphenate your name, notify the Social Security Administration and Department of Motor Vehicles of your name change. Make copies of your estate papers and final divorce decree. Keep the originals in a safe place.

Tax planning. Your tax liability will likely change when you marry, divorce, or become a widow. Newlyweds may face higher taxes due to the so-called marriage penalty. In either case, you may need to change your income tax withholding or estimated tax payments.

You’ve got it all planned out. Your retirement savings plans are full, you have started receiving Social Security benefits, and your Pension is ready to go. Everything is planned, what could go wrong? Here are five surprises that can turn your plan on a dime.

1. Health emergency and long-term care. When a simple procedure could cost thousands, health care costs can put a huge dent in your plan. Long-term care can cost thousands per month. Have you planned for this? If your health insurance is not adequate you may need to pull money out of your retirement plan to pay the bills. While this withdrawal may not be subject to a penalty, it might be subject to income tax if the funds are from a pre-tax account.

• Tip: Look into creative ways to enhance your health insurance coverage including supplemental health insurance and prescription drug cost coverage. Consider long-term care insurance and other alternative ways to reduce your potential living needs.

2. Taxability of Social Security benefits. If you have excess earnings, your Social Security benefits could be reduced. Even worse, if you are still working, your benefits could be subject to income tax.

• Tip: If this impacts you, consider conducting a tax planning session to better understand your options including the possibility of delaying the receipt of Social Security benefits.

3. Your pension plan. Understand if your pension is in good financial health. Often pensions will offer a lump-sum payout option for you. Should you take it?

• Tip: Review your pension plan’s annual statement. How solid is it? If there are risks, consider cash out alternatives and planning for the potential drop in future income.

4. Minimum Required Distribution (RMD). Forgot to take your minimum required distribution from your retirement plans this year? The tax bite could be quite a surprise as the penalty on the amount not withdrawn is 50 percent!

Tip: Select a memorable date (like your birthday) to review your RMD and take action so this tax surprise does not impact you.

5. Future Tax Rates. The federal government is spending over $1 trillion more than it brings in each year. Cash starved states are looking for new tax revenue. Don’t be surprised when future tax rates continue to rise during your retirement.

Tips:

• Create a retirement plan with higher state and federal tax rates
• Plan for increases in health care costs through Medicare
• Plan for more tax on Social Security benefits
• Plan for higher capital gain and dividend tax rates

There are special tax benefits to members of the U.S. Armed Forces. If you or someone you know is in the military, prior to filing a tax return it makes sense to review your situation. Outlined here are some of the more common.

Combat Pay Income Exclusion. If you serve in a combat zone, certain pay received is not taxable. Usually this combat pay is noted on your W-2 and you will not need to take action to receive this benefit. However, if you are moved from one location to another or are in support of a combat zone, your pay can also be non-taxable.

• Action step: Review your W-2 each year to ensure the proper pay has been excluded from your taxable income. Combat zones are published in IRS publication 3 each year.

Earned Income Tax Credit (EITC). Usually you need to have earned income (wages) to receive the Earned Income Tax Credit. However, as a member of the military, you may choose to use nontaxable combat pay to increase your credit. Even better, you can increase the credit but the combat pay still remains non-taxable income.

• Action step: If you have combat pay, conduct the calculations to maximize your EITC tax benefit.

Deadline Extensions. If you are in a combat zone, you may often receive an automatic extension for filing your tax return. Sometimes this extension may include abatement of fines and interest.

• Action steps: While it is always recommended to file the proper extensions, do not automatically assume if you are late in filing or paying taxes that you are subject to fines and interest if you were in a combat zone. These extensions also apply to service in support of the Armed Forces (Merchant Marines, Red Cross and other civilian support staff). With a few exceptions, these extensions can even be used by those whose spouses are in combat zones.

There are many other tax benefits for military personnel. If in doubt, ask for a review of your situation.

Couples often enter into marriage without ever having had a serious discussion about financial issues. As a result, they find themselves frequently arguing about money. If you are planning a wedding, here are some steps you can take to get your marriage off to a good financial start.

• Premarital financial discussions. You and your intended might enjoy the same movies and the same kinds of food, but are you financially compatible? Take some time to discuss your finances before you tie the knot. Talk about your assets, your debts, your credit ratings, and your financial attitudes, including your spending and saving habits. Do you share the same goals, such as having children, buying a home, or continuing your education? How will you finance your dreams?
• How will you handle your finances as a married couple? For example, who will pay the bills? Will you maintain joint or separate checking accounts? If you maintain separate accounts, how will you split your expenses?
• Premarital financial counseling. Every couple needs to work out their own style for handling money. Call upon your accountant to assist you in setting up a budget, controlling your taxes, and mapping out a financial plan for your future.
• Premarital legal counseling. If you have substantial assets, discuss the merits of a premarital agreement with your attorney. If your partner has substantial debt, ask your attorney how you can protect yourself from his or her creditors.
• Perhaps you plan on buying a house together or combining financial accounts. Your attorney can advise you on the best way to hold title to your assets.

Discussing your finances before you say "I do" may increase your chances for living happily ever after.

When natural disasters occur, they often leave many people with severely damaged or destroyed homes and businesses. Some lose everything they own. If you are affected by a disaster that is declared by the President to qualify for federal assistance, there are several provisions in the tax law that may provide relief.

Extended tax deadline and interest abatement. The IRS is authorized to postpone the deadlines for filing returns and paying taxes for up to one year in a Presidentially declared disaster area. Also, the IRS will not charge interest that would otherwise accrue for the extension period.

Faster refund. Taxpayers suffering losses in a federal disaster area have a choice of which tax year to deduct the casualty loss. You may deduct it on the return for the year the loss occurs, or it can be claimed on your prior year's tax return. Amending your prior year's return may give you a refund of much-needed cash sooner than waiting to deduct the loss on your current year's tax return.

Tax-free gain. If the insurance payments you receive exceed the tax basis of your property, you will end up with a casualty gain. Casualty gains in federal disaster areas receive special tax treatment. For example:

• Individuals may qualify for up to a $250,000 gain exclusion ($500,000 for married couples) on their principal residence. That's because the destruction of the residence is treated as a “sale” for tax purposes.
• No gain is recognized on the insurance reimbursement for the contents of a building as long as those contents were not separately listed on the insurance policy.
• If you replace your property with similar property within four years, you may be able to avoid or postpone paying tax on any gain from your involuntary conversion.

If you suffer a casualty loss, call to discuss the best tax course of action in your situation.

The death of a loved one is a stressful event. In addition to the emotional turmoil, survivors must deal with a number of financial and tax issues, some of them mundane and some quite complex. Here's a quick guide to help you through this difficult time.

• After a death, you should first try to locate your relative's key legal and financial documents. If he or she had a will, notify the executor(s). In the case of a trust, contact the co-trustee or successor trustee. You should also notify anyone who holds a power of attorney.
• If you have been named as executor or trustee, you will probably need tax, financial, and legal advice. Therefore, one of your first calls should be to obtain this help. You will also want to retain an attorney who is experienced in settling estates. This will often be the person who drafted the decedent's estate planning documents, but you are free to use anyone else you wish.
• If you relied on the deceased for financial support, make sure that you have enough money to cover your expenses for the next few weeks. If you have any doubts, please ask for help.
• Once you have taken the preliminary steps above, you can generally put financial matters out of your mind for a few days. Soon, however, it will be necessary to send notifications to some or all of the parties listed below.
• As executor or trustee, you may be required to oversee the probate of the decedent's estate, file a final income tax return, or file an estate tax return. If so, your next job is to gather all of the decedent's financial records. Working with your attorney, can help identify the documents you need and make sense of them once they are located.
• Depending on the nature of the estate, it may be necessary to hire other experts, such as appraisers, investment advisors, and business valuation specialists. If these people are needed, it helps to get started as soon as possible.

After the death of a loved one, you may need to notify the deceased's -

• Insurance agent
• Employer
• Labor union

You also may need to notify -

• The Social Security Administration
• The Department of Veteran Affairs
• The state motor vehicle department
• Mortgage and other lenders
• Credit card companies
• Banks, brokerage firms, and other financial institutions
• Utility companies
• Clubs, associations, and other organizations

There are big moments in everyone’s life. A new birth is one of them. The irony is that most life events also have tax consequences attached to them. When a new member is added to your family or someone you know, here are some tips to consider.

Get A Social Security Number. Obtain a Social Security number for your new addition prior to filing your tax return. To fail to do so not only delays your tax filing, you can also be subject to a $50 penalty. So get this process started right away to avoid unneeded delays at the end of the year.

Put these tax benefits on your radar too. When recalculating your withholdings also account for common tax benefits that come with new dependents. The most common of these benefits includes the Earned Income Credit and the $2,000 Child Tax Credit.

Think funding. It is never too early to start building your little one’s net worth. You can provide gifts of up to $15,000 ($30,000 for married couple) each year in a savings or investment account. This strategy helps take advantage of the kiddie tax exemption for up to $2,100 of unearned income in your child’s name.

Dependent care help. There is also a Dependent Care Tax Credit for those who put their child in a qualified daycare while they work. First, check for a pre-tax benefit of up to $5,000 from your employer as part of your employee benefits package. Even if it is not available through work, you can qualify for the credit by using your direct payments to the qualified daycare.

Consider their education. 529 College savings plans and other tax beneficial educational savings plans are worth considering. Virtually any relative or other adult can start saving tax-free money in your new child’s name. With the ever-higher cost of a college education this benefit is worth beginning as soon as possible.

New filing status? If you are married with a new addition, your filing status remains the same. However, if you are single with a new birth your filing status could be more beneficial to you if you qualify as a Head of Household filer.

Per the tax code, your new bundle of joy provides some joy to your tax situation as well.

One of the benefits available to the men and women of our Armed Services and, in many cases, staff supporting them is the ability to exclude items from taxable income. Here is a list of the most common items that may often be omitted from income tax.

Excluded Items

Combat zone pay 

• Compensation for active service while in a combat zone Note: Limited amount for officers

Other pay 

• Defense counseling
• Disability, including payments received for injuries incurred as a direct result of a terrorist or military action
• Group-term life insurance
• Professional education
• ROTC educational and subsistence allowances
• State bonus pay for service in a combat zone
• Survivor and retirement protection plan premiums
• Uniform allowances
• Uniforms furnished to enlisted personnel

Death allowances 

• Burial services
• Death gratuity payments to eligible survivors
• Travel of dependents to the burial site

Family allowances 

• Certain educational expenses for dependents
• Emergencies
• Evacuation to a place of safety
• Separation

Living allowances 

• BAH (Basic Allowance for Housing)
• BAS (Basic Allowance for Subsistence)
• Housing and cost-of-living allowances abroad paid by the U.S. Government or by a foreign government
• OHA (Overseas Housing Allowance)

Moving allowances 

• Dislocation
• Military base realignment and closure benefit (the exclusion is limited as described above)
• Move-in housing
• Moving household and personal items
• Moving trailers or mobile homes
• Storage
• Temporary lodging and temporary lodging expenses

Travel allowances 

• Annual round trip for dependent students
• Leave between consecutive overseas tours
• Reassignment in a dependent restricted status
• Transportation for you or your dependents during ship overhaul or inactivation
• Per diem

In-kind military benefits 

Dependent-care assistance program

Legal assistance

Medical/dental care

Commissary/exchange discounts

Space-available travel on government aircraft

Note: The exclusion for certain items applies whether the item is furnished in kind or is a reimbursement or allowance. There is no exclusion for the personal use of a government-provided vehicle.

Source: IRS Publication 3 Table 2.

The U.S. Treasury Department and the IRS issued ruling as a direct result of Supreme Court action regarding same-sex couples. In short:

Under the ruling any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, or a U.S. territory that recognizes same-sex marriage will be treated as married for all federal tax purposes. This includes:

• filing status
• personal deductions
• dependency exemptions
• standard deductions
• employee benefits
• tax credits
• retirement plans and contributions

More importantly, this ruling applies regardless of where the same-sex couple currently lives. The ruling applies to originally being married in jurisdictions that legally recognize their marriages.

Other things to note:

• Same-sex couples within this ruling must file either married filing jointly or married filing separately. You may no longer file as a single taxpayer.
• This ruling DOES NOT apply to registered domestic partnerships, civil unions or similar formal relationships.
• If you paid for same-sex health insurance coverage from an employer in after-tax dollars you may be able to shift these premiums into pre-tax dollars.
• State laws are more complex and are currently evolving so try to keep informed of any new developments on this front.

What should parents teach their teenagers about finances? How can you help them avoid the lure of easy credit and overspending?

• First, teach by example. Do you tell your youngster to save for the future when you don't set aside money for retirement? Do you finance your purchases with ever-increasing debt, or does your lifestyle show financial restraint? Children watch their parents, and learn.
• Second, hold regular discussions with your kids about the rudiments of personal finance. When they're younger, you may want to provide an allowance to teach them budgeting and saving skills. As they hit their teenage years, you can show them how to balance a checkbook, use financial software, or read the business section of the newspaper. The teenage years are also a good time to discuss the dangers of credit card debt, the miracle of compound interest, and the wisdom of living within one's means. We learn by mistakes, too. That means you may need to let your teenager flounder a bit while learning the financial facts of life. When Joey spends his entire paycheck on pizza and movies and doesn't have enough left for that new bike helmet he wants, well, now he knows.
• Third, when your teenager stands at the threshold of college, it's time for a refresher course. This is an opportunity to talk to your student again about credit cards, budgeting, emergency funds, and long-term savings. You may want to help your child open an IRA and choose a bank. This is also a good time to clearly delineate your financial responsibilities and those of your college student. Establish a set amount that you'll pay; anything beyond that amount is the student's responsibility.

Becoming a financial grown-up takes time, but you can give your teen a head start with some sage advice and a good example to follow.

Use the following financial checklist if you find yourself considering divorce. This list is not all-inclusive and is no substitute for the professional assistance of your accountant and attorney.

When contemplating divorce

• If you don't already have a credit card in your own name, apply for one.
• Consider establishing a credit history in your own name by taking a small bank loan. If necessary, have a friend or relative cosign.

When a divorce has been decided upon

• Get a lawyer. If you don't know any, ask friends or the state bar association for recommendations.
• Close out joint credit and checking accounts.
• Take taxes into account when dividing property. Assets equal in value may not be equal in their tax consequences.
• Have your attorney specify the tax advice portion of his bill. If you meet the level for deducting miscellaneous expenses, this amount will be tax-deductible.
• Be sure your divorce agreement addresses who gets to claim estimated taxes already paid and who pays any additional IRS assessments on joint returns filed in prior years.

After divorce

• Check all insurance policies as well as your IRA and other pension plans, and change coverage and beneficiaries as appropriate.
• Review your will for appropriate revisions.
• If you're receiving alimony, consider an IRA. Alimony is considered compensation for IRA contribution purposes.
• Review your tax withholding and estimated tax payments for any necessary adjustments.

Law change to have dramatic tax impact in 2019 and beyond

The taxation of alimony will change drastically starting in 2019. Here’s what you need to know:

New rules

Any divorce agreement effective after Dec. 31, 2018 will be subject to new rules for alimony, namely:

• Alimony is no longer tax-deductible for the payer.
• Alimony is no longer taxed as income for the recipient.

That means that alimony will get much less affordable for those paying it, while those receiving alimony will not have to claim it as income.

What the change means

Because a person paying alimony will no longer have a tax break, he or she may not be able to afford to pay as much. This can affect the amount an ex-spouse will receive. That means tax impacts are going to be an even more important part of divorce negotiations.

It also means both alimony and child support will be taxed the same way in agreements signed after 2018 (i.e., neither are tax-deductible for the payer). So if you have children, you'll want to review how payments should be split between the two, depending on whether a divorce agreement is effective this year or later.

Remember, these new tax rules only affect divorce agreements completed in 2019. Agreements made before the end of this year or earlier won’t change. Also be aware that some states require a six-month (or longer) waiting period for couples to either file for divorce, or for a divorce to be finalized.

Helpful tips for handling alimony agreements

Divorce can be unpleasant and traumatic. But if it’s inevitable, you need to do two things:

• Consider alternatives to traditional alimony payments. This might include a different asset split, setting up an annuity or other ideas.
• Get tax help. Because these coming tax changes are so new and so drastic, taxes are going to be front and center in any negotiations with your spouse.

Finally, for those getting married, it may make financial sense to create a prenuptial agreement laying how alimony would be handled in the event of divorce. Note that some state laws forbid any agreement in which spouses waive the right to future alimony payments.

Call if you have any questions about alimony or other tax matters.

If you're considering selling your home or have recently sold your home, there are possible tax consequences. The good news: much of the gain on the sale of your home may be tax-exempt. Here's what you need to know:

Capital Gain Home Sale Exclusion

You can generally exclude $250,000 of any gain on the sale of your main home, or $500,000 if you are a married joint filer. To qualify, the property must be your main home and you must have lived in it for two of the past five years prior to the sale of your property.

• More than one home. If you own more than one home, your main home is the one you live in most of the time.
• Limits. You may not take the gain exclusion if you used the exclusion on another home in the two years prior to the sale of your current property.
• No deduction on a loss. If you sold your home at a loss, in most cases there is no tax benefit available through a deduction.

Tips to Make the Gain Exclusion Work for You

• Know the timing. If you have used the gain exclusion in the past, be very careful that the timing of the sale of your current home meets the two-of-five-years rule. Making a mistake here could cost you a lot in additional tax.
• Two homes? Plan your residency. If you have two properties, plan your living arrangements to ensure the property you'll sell qualifies as your main home. Keep mail, driver's license, tax returns, bank account statements, and other records that show your address to provide evidence to prove your main residence.
• Marriage and divorce. If you have a substantial gain and you are planning on getting married or divorced, you may need to carefully plan the timing of the sale of your primary residence to maximize the use of the $500,000 exclusion available to married joint filers.
• Keep track of improvements. The longer you live in a home, the more likely you will have a gain when you sell it. Remember that the cost basis of your home can be increased by spending on home improvements, which could reduce your gains. Develop a system to keep track of the money spent to improve your residence.

Wouldn't it be nice to have a source of nontaxable income? You may be more fortunate than you realize. Listed here are a number of income items that the IRS does not tax.

1. Tax-Free Interest. Municipal bond interest is federal tax-free. This includes bonds issued by a state or municipality. The tax-free benefit increases the higher your income, but caution must be taken to ensure the underlying municipality is not in dire financial condition.
2. Health Insurance Premiums. For now, health insurance premiums are tax-free. This is scheduled to change in the future to help pay for health care reform, but for now this benefit can be paid in pre-tax dollars.
3. Income from Roth IRA and Roth 401(k) Accounts. While the amounts contributed to these retirement savings accounts is taxed, any earnings made on these contributions is federal tax-free as long as holding period and distribution rules are followed.
4. Health Related Spending Accounts (HSA). Contributions and earnings in these health related spending accounts are tax-free as long as the proceeds in the account are used to pay for qualified health care expenses.
5. Child Support Received. Unlike alimony received, child support income is federal tax-free.
6. Car Pool Revenue. While commuting expenses are not generally deductible, any reimbursement of your commuting expenses by fellow passengers is not reportable as income.
7. Home Sale Gains. Up to $250,000 ($500,000 for married filing jointly) of capital gains on a sale of your principal residence can be tax-free.
8. Certain Employer Compensation. In addition to health care premiums there are a number of employee benefits that are not taxable. All have limits, but every tax-free dollar is money in your pocket. These include;

• airline miles earned on business credit card expenses,
• certain employee provided tuition expenses,
• qualified adoption expense reimbursement,
• up to $50,000 in employer paid term life insurance,
• flex spending accounts for dependent care and health care, and
• commuting expense benefits for parking and mass transit commuting.

Remember any time you can pay for something in pre-tax dollars is like giving yourself a raise. Are you taking advantage of all your federal tax-free income opportunities?

If you are considering selling your home or have recently sold your home, there are possible tax consequences. The good news? Much of the gain on the sale of your home may be tax-exempt. The bad news? If you sold your home at a loss, in all likelihood, there is not a deduction available to you. Here is what you need to know.

Excluded gains. You can generally exclude $250,000 of any gain on the sale of your main home ($500,000 if married filing jointly). To qualify the property must be your main home and you must have lived in it for two of the past five years prior to the sale of your property.

More than one home. If you own more than one home, your main home is the one you live in most of the time.

Limits. You may not take the gain exclusion if you used the exclusion on another home in the two years prior to the sale of your current property.

Tips to Ensure the Gain Exclusion Works for You

Know the timing. If you have used the gain exclusion in the past, be very careful about the timing of the sale of your current home. Making a mistake here could cost you a lot in additional tax.

Two homes? Plan your residency. If you have two properties, plan your living arrangements to ensure the property you sell can qualify you for the gain exclusion. You will also need evidence that your property is your main home. Keep mail, drivers license, tax returns, bank account statements, and other records that show your address as support for your residency claim.

Marriage and divorce. If you have a substantial gain and you are planning on getting married or divorced you may need to plan for the sale of your primary residence to maximize the use of the $500,000 (joint) versus the $250,000 (single) gain exclusion. Call for a planning session if this might impact your situation.

Keep track of improvements. The longer you live in a home, the more likelihood of a gain on the property when you sell it. Remember that the cost basis of your home can be increased (reducing possible gains) by the cost of improvements made over time. So develop a system to keep track of the money spent to improve your residence.

No Help for Losses?

While losses on the sale of a personal residence are not generally tax deductible, there are some things you need to know.

Insolvency. If the bank repossesses a property and debt forgiveness is involved, you will need to be aware of the tax consequences. Debt forgiveness is generally deemed income to you, unless you qualify for special foreclosure relief programs.

Disaster. If your loss is due to a disaster in a presidentially declared disaster area, there are other special tax provisions that apply.

One of the first places to look for tax savings

One of the first places to look to ensure your tax bill is not higher than need be is your dependent children. Not only are there tax savings provisions in the tax code like the Dependent Child Care Credit and the Child Tax Credit, there is also the oft-overlooked opportunity to shift taxable income to your children. This opportunity exists because the “progressive” nature of our income tax rates provides an incentive to shift income to lower earning taxpayers. Here are some tips:

Shift unearned income to children.

In 2018, the first $1,050 of unearned income for each child is not taxed and the next $1,050 in unearned income is taxed at a lower rate. Unearned income usually includes anything that is not wages. Typical unearned income includes interest, dividends, royalties and investment gains.

• Tip: Transfer enough in assets to each child to approach these annual unearned income limits as closely as possible. Depending on your marginal tax rate you could be saving as much as 49% in federal income taxes each year!
• Tip: In addition to the unearned income, consider purchasing investments that will have long-term capital gain appreciation. This potentially provides more flexibility in managing the timing and rate of capital gains when the investment is later sold.
• Tip: Remember excess investment income could also subject to the additional 3.8% Medicare surtax. Any investment income that can be shifted to your children could also save you this additional tax bite as well.

Caution: Unearned income above $2,200 in 2019 ($2,100 in 2018)could be subject to the “kiddie tax” if your dependent is under the age of 19 (age 24 if a full-time student providing less than 50% of their own support). The excess unearned income could be taxed at a higher tax rate.

Leverage earned income potential with your children.

Tip: If you are a sole-proprietor you may hire your dependent children under age 18 and not be required to pay Social Security and Medicare taxes.

Tip: Since earned income for your children is taxed at their lower tax rates so finding ways to employ your child can reasonably shift income from your higher tax rate to their lower rate. Care must be taken to be able to defend the work being done by your child and the amount they receive for their work. Some ideas include:

• Use your child in an advertisement for your business.
• Have your child clean your office a few times per week.
• Perhaps your child can make deliveries.
• Perhaps your child can help assemble items or help with mailings.

Caution: Moving assets from you to your children could impact their ability to receive financial aid for college. Understanding how your planning impacts college financing should be considered.

There are many opportunities to leverage the tax advantage of our children. Proper planning in this area should include the shifting of income.

Understanding the rules surrounding investment losses can really help minimize your tax obligation each year. This is because investment gains and income can be subject to a variety of federal tax rates as high as 37 percent. This and a 3.8 percent Medicare investment tax surcharge make planning around when to take investment losses an important tax planning subject.

Know the meaningful rules

What makes investment losses such an important tax planning subject? Here are the relevant tax ramifications surrounding investment losses.

1. Offsetting gains. Investment losses can be used to offset investment gains every year.
2. Short-term versus long-term. Short-term investment gains (from assets owned by you for less than one year) can be subject to ordinary income tax rates up to 37 percent while long-term gains have a maximum tax rate of 20 percent.
3. Netting rules. You first net investment losses against investment gains prior to applying losses against your ordinary income. Where possible you must net short-term losses against short-term gains and long-term losses against long-term gains.
4. Excess losses. Up to $3,000 of excess investment losses can be used to offset your ordinary income in any one year.
5. Unused losses. Unused losses can be carried forward to offset income in future tax years.
6. So given these rules, here are some tips.

Maximizing the impact of investment losses

1. Net losses against short-term gains whenever possible. If you are in a high income tax bracket, try to sell stocks with a loss to offset any investments you wish to sell that you have owned less than one year.
2. Defer taking losses if they will be used to offset lower taxed gains.
3. Time taking an investment loss to take advantage of the annual $3,000 reduction of income it provides.
4. Transfer stock showing a loss from a low tax rate family member to a higher taxed individual.
5. Take full advantage of the loss carry-forward rules. If you sold an investment that had a huge loss in a prior year, you can only take $3,000 against your regular income each year. If this applies to you, conduct an annual review of your portfolio and consider selling investments with a gain to offset more of this loss carry-forward.

Remember, investment losses can be used to offset investment gains and a limited amount of your ordinary income. Since the tax rates vary so greatly, proper planning to match losses against higher taxed items can make these losers a real winner on your tax return.

If you are like millions of taxpayers in the service industry, you may receive tips. The tax code is clear; if you receive tips you must report them as income. Some employers have systems to make this easy, while others do not. Here are some suggestions:

Think 1 2 3

Proper tip reporting has three components.

1. Keeping a daily tip record
2. Reporting your tips to your employer
3. Recording your tips on your income tax return

Recording tip activity

Per the IRS you can keep your tips by either maintaining a tip diary or by saving documents that show your tips. If your employer does not provide you with an electronic form of a tip diary, you can always create your own. The IRS has one for your use in Form 4070A.

Reporting tips to an employer

You should record daily activity in your diary, and then provide a monthly summary to your employer by the 10th of the following month. The report should include the following elements:

• Your name and address
• Your Social Security Number
• Employer name and address
• Time period
• Date submitted to employer
• Your signature

Tip Information:

Cash tips received,

Credit/Debit tips received,

Tips paid out to fellow workers,

Net tips received

Paying taxes

With proper tracking and reporting of tip activity to your employer, filing your taxes on this income can be done without too much trouble. Here are some ideas:

Use your employer for reporting. With proper reporting, your employer can help ensure taxes are withheld and sent in for you. This can help you avoid a large tax bill at the end of the year.

Giving your employer funds. If your tips are a high portion of your income, your wages may not be sufficient to cover your taxes. To solve this, you can provide some of your tip income to your employer to pay a proper level of withholdings on your behalf.

Other things to note

Service charge or tip? If your employer adds a set tip amount to a bill (18% automatic tip for parties of 6 our more), this is not a tip, it is a service charge and treated as wages.

Shared tips. Be careful reporting those tips you share with others. Clearly report your own net tip income to your employer. Do not report gross tips that you share with others on your tax return.

Know the penalty. If you do not report tips to your employer, the potential penalty is 50% of the Social Security and Medicare related taxes you owe on the unreported tips.

Allocated tips. Sometimes employers pay you tips and report them on your W-2 that are above what you report to them. The good news? You receive additional income above your hourly wages. The bad news? You will owe income taxes AND Social Security and Medicare taxes on these tips.

Keeping track of tip income can be made manageable by developing a good reporting system. Please ask for help if you need assistance before it gets out of hand.

When you reach age 70 ½, the trigger requiring distributions from qualified retirement accounts is pulled. This annual Required Minimum Distribution (RMD) applies to Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b), and other defined-contribution plans. Amounts not distributed on a timely basis could be subject to a 50% penalty. Thankfully, the RMD rules do not apply to Roth IRAs.

The RMD rules are established to ensure the deferred tax benefit for certain retirement accounts does not go indefinitely into the future. In other words, the IRS now wants their cut of your tax-deferred savings accounts. The amount you must take out each year is based upon your age, your spouse’s age and your filing status.

The Tax Torpedo

The Tax Torpedo refers to the surprising event of having your Social Security Income taxed. Depending on your income and filing status, up to 85% of your Social Security Benefit could be subject to income tax.

RMD causes Tax Torpedo

If you continue to wait to start taking money out of your retirement accounts, the balance in your accounts may be very high when you reach age 70 ½. These higher balances mean a higher annual withdrawal amount. If your required retirement plan distribution is large enough it may put you into a higher marginal tax bracket as well as trigger taxes on your Social Security.

Some Tips

• Plan withdrawals. Once you hit age 59 ½ you may withdraw money from qualified tax-deferred retirement accounts without experiencing an early withdrawal penalty. To reduce the tax risk on your Social Security, manage annual disbursements from your retirement account(s) to be more tax efficient when you reach age 70½.
• Starting Social Security. You may begin full Social Security Benefits after you reach your minimum retirement age. However, your benefit amount can increase if you delay your start date up until age 70. Consider this as part of your plan to manage a potential Tax Torpedo.
• See an advisor. There are many moving parts in planning for retirement. These include Social Security Benefits, pension plans, savings, and retirement accounts. Ask for help to create the proper plan for you and your family. One element of the plan should include being tax efficient.

Most income you receive is taxable income that is reported to you and to the Federal/State tax authorities. However, there are a few income-producing events that the IRS has said are not taxable. One of them is renting out your home or vacation property.

• The rule: If you receive rental income for less than 15 days per year, that income is generally not taxable income.

Added benefit: In addition to tax-free rental income, you may still deduct your mortgage interest expense and property taxes as itemized deductions. Neither of these tax benefits is reduced with the income from up to two weeks of rental activity.

Would someone want to rent your property?

Sure it sounds good, but why would someone want to rent your property? Here are some ideas:

A sporting event. If a big sporting event is in town, consider renting out your home for participants and fans. Common examples include;

• Football games
• Golf tournaments
• State high school tournaments
• College football and other college events
• Host foreign students/teachers

Rent out your vacation home. If you have a cabin or cottage, consider renting out your place for two weeks. If you find responsible renters, you may have an opportunity to find reliable repeat renters each year.

Vacationer alternative to hotels. Oftentimes travelers from other cities and countries would love to rent out homes or rooms within homes while traveling. This lets these travelers have a real “local” experience versus staying in a hotel.

Know the risks

The hassle factor needs to be considered prior to taking advantage of this free income opportunity. You should also understand the risks involved. Having a proper rental agreement, damage deposit, and insurance are key factors to consider. Also remember to only rent out your property for up to 14 days. Rent received beyond this is taxable and rental income rules apply.

Thankfully there are a number of internet sites that can help you navigate through your options. Here are a couple popular sites to find out more information.

• Vrbo.com (vacation rentals by owner)
• Tripadvisor.com (includes personal rentals with user feedback)

With the increased popularity of lotteries and casinos, more unsuspecting winners are experiencing a lucky payday only to end up with a huge tax headache when filing their income taxes. Here is what you need to know:

Look for the warning signs

You are required to report as income any winnings you receive including, but not limited to:

• slot machines
• bingo
• pull tabs
• horse/dog racing
• game shows
• raffles
• lottery
• gambling (e.g. cards, roulette)

The winnings could be in cash, but also includes the fair market value of prizes such as a car, boat or vacation package. When you win the payer is required to give you a Form W-2G. Receipt of this form should be your clear signal that you have a taxable event.

How the tax math works

Unlike a business, gambling winnings are reported on one part of your tax return while any offsetting gambling losses are reported as a miscellaneous itemized deduction. In plain English, this means:

• Your income is increased by the amounts listed on W-2Gs and any other winnings you had during the year.
• If you do not itemize, you cannot deduct any gambling losses during the year.
• If you do itemize, you must be able to substantiate any gambling losses with an accurate diary, receipts, tickets, statements and other records.
• You may never deduct more in losses than winnings.

Some tips

• Merchandise. If you win a non-cash item, make sure you agree with the market value attributed to the item won. Often the item is overstated by the game organizer as a promotional technique. Ask to see a copy of the invoice that the organizer actually paid for the item. Consider printing out a dated copy of an advertisement of a similar item that is offered for less money.
• Losses. Losses do not need to match winnings for time and date. You may play bingo all year long at a locally hosted charitable bingo hall, but only win the big payout once during the year. You can offset all your losses against this one win, as long as you have accurate records.
• Casino assistance. When you win at a casino ask them for help. They often can help you understand and record your costs/losses. Consider joining the casino's player's club. With it they will send you a winning/loss statement at the end of each year.
• Tax withholdings. Consider withholding some of your winnings to pay for your federal and state tax obligation. This will help reduce the sting on tax day. Also consider submitting quarterly estimated tax payments.
• Professionals. If you consider yourself a professional gambler, business tax rules apply. But make sure this consideration is a defensible position in the eyes of the IRS. The IRS often challenges professional gamblers that attempt to take more in expense than they earn in winnings.
• Reselling merchandise. A special caution if you win an item and then resell it. Using a new car as an example, say you don’t need the car so you sell it for $25,000. You could find your W-2G has a market value of $30,000. In this case you would have $30,000 in taxable income, but only received $25,000. Your personal loss is not a tax deductible item.
• Is there good news? Yes, gambling losses cannot be reduced at the federal level if you are subject to the Alternative Minimum Tax (AMT) or if you are subject to the reinstated itemized deduction phase-out.

Don't ignore the impact of taxes on your investments. While taxes should not drive your investment strategy, understanding how taxes affect your earnings will help you minimize taxes and maximize your return. Some things to consider:

1. Capital gains carry a special favored tax status. The tax rates on long-term capital gains are lower than the rates on ordinary income (such as wages and business income). Consider putting more of your investment dollars into investments that produce capital gain income, such as stocks and real estate that will appreciate in value. Hold investments at least long enough to qualify as long-term.

2. Balance your stock winners and losers. You can deduct annually up to $3,000 of capital losses in excess of gains. Consider selling enough losers each year to arrive at an overall $3,000 loss for the year. Your gains for the year will be sheltered, and then some.

Watch out! If you make a "wash sale" by buying the same security within 30 days before or after the sale, your loss will be disallowed.

If earlier sales generated losses over $3,000, consider selling enough winners before year-end to get back to that level. Taking these gains will not increase your current taxes.

3. Tax-free investments escape federal, state, or local taxes. Many investments can be found that escape taxes at all of these levels. For example, municipal bonds issued by your state of residence are generally exempt from all taxes. Conversely, U.S. Treasury securities are only exempt from state and local taxes.

A sage once said, "It's not how much you make that matters, it's how much you keep." When considering tax-advantaged investments, make sure you compare the after-tax yield of a comparable taxable investment with the yield of the tax-advantaged investment.

4. Consider savings bonds. The U.S. savings bond can be a sound long-term investment. In addition, you don't have to pay state or local tax on the bonds.

5. Invest to build a college fund. Investigate the options available to you that would allow tax-advantaged investing to build college funds for your children.

You should also consider Series EE and I savings bonds for college savings. The bond interest may be exempt from income tax if the bond proceeds are used for certain higher education expenses.

To get tax-free status, the bonds must meet the following requirements:

• They must have been purchased after 1989.
• They must be purchased by someone aged 24 or older. (Don't put the bonds in your child's name.)
• The bonds must be used to pay educational expenses incurred by the bonds' owner, a spouse, or a dependent.
• They must be used to pay higher education tuition and fees. (Bonds redeemed to pay room and board costs don't qualify.)

This interest exclusion is phased out for higher-income families. The income test is based on the parents' income at the time the bonds are redeemed.

6. Investing in real estate offers significant tax breaks. Real estate investments provide tax deferral through growth in the value of the investment due to inflation and other economic forces. Also, investors can engage in tax-deferred exchanges of their property for property of a like kind.

Real estate investors who "actively participate" in managing their property can deduct up to $25,000 a year in losses against other income (although this break disappears once your adjusted gross income exceeds $150,000).

7. Tax-credit investments can be found in certain real estate opportunities. Currently, tax credits are available for real estate investments in low-income housing, rehabilitation of commercial buildings originally placed in service before 1936, and rehabilitation of certified historic structures.

8. Choose the method that minimizes your taxes when you sell mutual fund shares. You can choose among three methods to determine capital gains and losses on mutual fund shares that you've purchased in lots over a period of time: the first-in, first-out method, the specific identification method, or the average-cost method.

Please do not hesitate to ask for assistance in identifying investment strategies that are suited to your tax situation.

Being a parent brings tremendous rewards, but also the challenge and responsibility of supporting and educating your child. Fortunately, the tax code has many ways to help ease a parent's financial burden. Here's an overview of the many ways that taxes can affect your decisions as a parent.

Exemptions and credits

• Most parents can claim a child tax credit for each child under age 17. This is a direct credit against taxes you owe, and it can be partially refundable.
• Other child related credits include the adoption credit to offset expenses of adoption and the childcare credit. This credit allows you to offset some of the costs of paying for child care so that both spouses can work or attend school full-time. Many of these tax breaks phase out for those at higher income levels.

Education expenses

• One of the biggest challenges for a parent is funding a child's college education. A variety of tax breaks can help with this major expense, including savings plans, tax credits, and tax deductions. These measures all have different rules and eligibility requirements.
• There are two main types of savings plans for education expenses: Coverdell education savings accounts and Section 529 plans. Coverdell accounts work rather like an IRA. Contributions grow tax-free, and withdrawals are free of tax if used for qualified education expenses. Coverdell accounts can also be used to pay for K-12 expenses as well as college costs. Section 529 plans provide tax-free earnings and distributions for higher education expenses, and they generally have fewer restrictions than Coverdell accounts.
• The American Opportunity credit and the Lifetime Learning Credit are two tax credits available for education expenses. Each has its own rules and income limits, and you cannot use both credits for the same child in the same year.
• A limited tax deduction is available for student loan interest expense. In addition, interest on U.S. savings bonds can be tax-free if the bonds are used for education expenses.

Child tax issues

• The "kiddie tax" is a rule that affects the investment income of children. A child's unearned income above a threshold amount will be taxed using trust and estate tax rates. The intent is to stop a high-income parent from shifting large amounts of earnings to a child in a lower tax bracket.
• A strategy of "income shifting" can make sense for a family once the child is old enough to escape the kiddie tax. Parents can gift income-earning assets to older children (subject to the annual and lifetime gift limits), and the children will pay tax on the income earned at their own (presumably lower) rates.
• Another tax-cutting strategy is to employ your child in the family business. The business can take a deduction for wages paid, while the child often pays little or no taxes on his or her earnings. It must be a real job, though, and the wages must be reasonable for the work.
• If your children have earnings from summer or after-school jobs, encourage them to open IRA accounts. The additional years of tax-free compounding can produce huge additional savings by the time your children reach retirement age.
• Don't overlook the role of grandparents. They can help pay college expenses, for example, either by contributing to education savings plans or by paying tuition bills directly. Also, by giving appreciated stock to their grandchildren, they may be able to boost the children's savings while reducing overall taxes for the family unit.

Estate planning

• For a parent, estate planning is especially important. The first priority is to make sure your children are protected in the event that something happens to you. Your estate plan should appoint guardians for your minor children, as well as provide for their financial well-being.
• Early estate planning can also help to ensure that your assets pass to your children as you consider prudent. A variety of planning techniques can allow you to transfer assets to your children over the years, often while still leaving you with some control over the assets.

If you're like some taxpayers, you have a pastime that brings in cash but produces a loss after you deduct your expenses. Example: an amateur artist who spends money for paint and canvas but who only occasionally sells a painting. If you could deduct "hobby" losses on your tax return, you could reduce taxes owed on your salary or other income.

Actually, you can deduct your losses, but only if you establish that you are carrying on your pastime with the motive of making a profit.

If you can't prove you have a profit motive, the IRS views your activity as a hobby, not as a business. Expenses of a hobby can be deducted only up to the amount of income from the hobby. You can't deduct hobby losses from your salary or other income.

You can help establish your profit motive in one of two ways. If you show a profit in three out of five years (two out of seven years for horse activities), the IRS will presume you've got a business and not a hobby. However, you can't simply manipulate deductions and income to create profit years.

The other way to demonstrate that you're operating with a profit motive is to conduct your activity in a business-like manner. Get advice from an accountant to assist with keeping accurate books and records. Maintain a separate checking account, advertise your services or products, and get a business phone listing. If you have losses, try to turn your business around by taking classes, consulting with experts, and changing your methods of operation. Be sure you spend enough time at your activity to demonstrate that you're serious about profits. Remember, you don't have to earn a profit, but you must try to do so. If you don't have profits in three out of five years, the burden of proof will be on you to show the IRS that this activity is a business and not a hobby.

If you want to turn your hobby into a business, contact us! We can assist you with the IRS requirements.

The term "kiddie tax" was introduced by the Tax Reform Act of 1986. The IRS introduced this rule to keep parents from shifting their investment income to their children and have this income taxed at their child's lower tax rate. The law requires a child's unearned income (generally dividends, interest, and capital gains) above a certain amount to be taxed using the estate and trust tax tables. Here is what you need to know.

Who it applies to

• Children under the age of 19
• Children under the age of 24 if a full-time student and providing less than ½ of their own financial support
• Children with unearned income above $2,100 ($2,200 in 2019)

Who/What it does NOT apply to

• Earned income (wages and self-employed income from things like babysitting or paper routes).
• Children that are over age 18 and have earnings providing more than ½ of their support.
• Older children married and filing jointly
• Children over age 19 that are not full-time students
• Gifts received by your child during the year

How it works

• The first $1,050 of unearned income is generally tax-free
• The next $1,050 of unearned income is taxed at the child's (usually lower) tax rate
• The excess over $2,100 is taxed using the estate and trust tax table

What to know/do now

1. Maximize your low-tax investment options. Look to generate gains on your child's investment accounts to maximize the use of your child's kiddie tax threshold each year. You could consider selling stocks to capture your child's investment gains and then buy the stock back later to establish a higher cost basis.
2. Be careful to plan your child's level of unearned income. It might inadvertently raise taxes in surprising ways by exposing more income to tax rates that could be higher than yours. With new tax rules, the risk of this occuring is reduced, but not fully eliminated.
3. Leverage gifts. If your children are not maximizing their tax-free investment income each year consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child's financial aid when approaching college age years.

Properly managed, the "kiddie tax" rules can be used to your advantage. But if not properly managed, this part of the tax code can create an unwelcome surprise at tax time.

Adjusted Gross Income (AGI) is one of the core tax terms used by Federal and many State taxing authorities. So what is it and why is it important?

The Federal formula for AGI is:

AGI = Gross Income - Adjustments from Gross Income

Gross Income. For most of us, Gross Income is our wages as shown on a W-2 at the end of the year. It also includes taxable interest income, retirement income (including Social Security benefits), and dividends. But there are many other components to Gross Income. Here is a list of the most common;

• Alimony received
• Annuities and pensions
• Commissions, tips, bonuses
• Dividends
• Farm income (net)
• Gains on sales and exchanges
• Business income (loss)
• Illegal gains
• Interest income
• Net rental and royalty activity
• Prizes and awards
• Rents and royalty income (net)
• Retirement plan distributions
• S Corp and partnership income
• Social Security income
• State and local tax refunds
• Trust and estate distributions
• Unemployment compensation
• Wages and salaries
• Loss from sale or exchange

Common Deductions from Gross Income. To get to AGI a number of reductions are allowed. Some are very common, such as alimony paid to someone else, while others are less common. Here is a brief list of the most likely adjustments you may experience.

• Alimony paid
• Contributions to IRAs
• Domestic Production Activities Deduction
• Educator expense
• Medical/Health Savings Account contributions
• Moving expense
• Qualified educational expense
• Qualified student loan interest
• Repayments: Unemployment compensation and jury duty pay
• Savings early withdrawal penalties
• Self-employed health insurance
• Self-employed retirement plan contributions
• Trade and business expense

What you should know

• AGI is not Taxable Income. Before you can determine the tax you will pay, you need to subtract deductions (either the Standard Deduction or Itemized Deductions) and Personal Exemptions for you and your family members. So do not confuse the term AGI with Taxable Income, they are not the same thing.
• AGI is the starting point. On the other hand, AGI is an important figure in the world of taxes.
• State income taxes. Most states use AGI as the starting point to determine your tax obligation to them. They will use this figure and then make adjustments to get to their state basis taxable income.
• Phase-outs. Federal tax legislation reintroduced tax code that reduces your Deductions and Exemptions. This reduction raises your Taxable Income and is based upon your AGI. Understanding and managing your AGI can have a real impact on how much of your Exemptions and Deductions you will be able to use.
• Modified AGI. The IRS and writers of tax code like to use AGI as the starting point for other tax provisions. You might see the term “Modified AGI” when this occurs. The actual definition of Modified AGI will vary depending on the tax calculation being constructed. Typical add backs to AGI are tax exempt interest, excluded portions of Social Security benefits and other tax-free income.

While you do not need to fully understand the details behind the calculation, it is helpful to be aware of this important tax term. It is often the starting point for effective tax planning.

Lending to friends and relatives is a tricky business, and not only because of the stress, it can place on your relationships. There are tax issues involved as well. If you have to lend money to someone close, here are some tips to do it right in the eyes of the tax code.

Charge interest

Yes, you should charge interest, even to friends and family. If you don’t charge a minimum rate, the IRS will imply interest in the loan and tax you for the interest they assume you should be getting. This can occur even if you’re not actually getting a dime.

Charge enough interest

Not only should you charge interest, but the amount must also be reasonable in the eyes of the IRS. If it's not, the IRS will imply interest at their minimum applicable federal rates (AFRs). To stay on the safe side, always charge an interest rate at or above these AFRs, available on the IRS website. The good news is these interest rates are low and almost always below the prime interest rate.

Know the exceptions

If you don’t want to charge interest, you don’t have to IF:

• The money is a gift. You and your spouse can each give up to $15,000 to an individual each year (this maximum remains $15,000 in 2019).

OR:

• The loan is less than $10,000 and is not used to purchase income-producing property.

If you don’t charge interest and the loan is used to purchase income-producing property such as capital equipment or to acquire a business, special tax rules apply. In this case, it’s good to ask for assistance.

Get it in writing

If you expect repayment, write out the terms of your loan. There are a variety of basic loan document formats online that you can use. Creating a loan document may seem unnecessarily formal when dealing with a friend or family member, but it’s important for two reasons.

1. It documents your tax code compliance. By documenting the terms and charging a stated interest rate you can clearly show you are within tax code rules.

2. You avoid misunderstandings. Creating a written document will make it clear that it is a real loan, not an informal gift. Your friend or relative will know that you expect to be paid back and when you expect repayment.

Too often taxpayers receive tax surprises at year-end due to actions taken by mutual funds they own. What can add insult to injury is the unsuspecting taxpayer who recently purchases the shares in a mutual fund only to be taxed on their recent investment. How does this happen and what can you do about it?

Tax surprises

Towards the end of each year, many mutual funds pay a dividend to the holders on record as of a set date. The fund might also distribute funds deemed as capital gains based upon buying and selling activity that takes place in the fund throughout the year. This can create many problems:

• Taxable paybacks. If you purchase shares in a mutual fund just before a distribution of dividends, part of your purchase includes the dividends that are effectively paid right back to you. Not only will the asset value of your recently purchased shares in the mutual fund go down after the distribution, but you will owe tax on a distribution that is effectively your own money!
• Kiddie tax surprise. Many taxpayers purchase mutual funds in their children's names to take advantage of their lower-tax rates. By keeping their child’s unearned income below $2,100 the tax is low or non-existent. A surprise dividend or capital gain could expose much of this unearned income to higher tax rates.
• The $3,000 loss strategy. Each year, you may take a net of up to $3,000 in investment losses. Your losses can offset high rates of income tax with correct tax planning. But first, these losses need to offset capital gains. If you receive a surprise capital gain, you could be reducing the effectiveness of this tax strategy.

What to do

Here are some ideas to help reduce this mutual fund tax surprise:

• Limit year-end activity. Plan your mutual fund moves with this year-end surprise in mind. Consider reviewing and rebalancing your funds at the beginning of the year to avoid fund purchases just prior to dividend distributions.
• Research your mutual funds. If you wish to avoid a year-end surprise, do a little research on your mutual funds to anticipate what will happen with the fund. Check out the historic trends of your funds to determine which are most likely to issue a surprise Form 1099 DIV or Form 1099 B (capital gain/loss).
• Use the knowledge to your benefit. If you like a fund and it has a practice of creating taxable events each year, consider investing in these funds within a retirement account. That way the tax implications can be part of your retirement planning.

No one likes a surprise at tax time. The best course of action is to navigate the options that are best for you.

When faced with questions on your tax return deductions, it is getting all too common for tax authorities to deny everything and then make you prove that your deductions are valid. Do not let this happen to you. Here are some suggestions.

The one-two punch

To prove your deduction most auditors are looking for two key documents. Miss one of the two and your deduction will evaporate like smoke at a campfire.

• Receipts. This is the first of the sure-fire two things you must have to validate a deduction. The receipt should clearly show the company or entity, the date, the value of the activity and a clear description of the activity. In the case of donations, the receipt should also have a statement that confirms you received no benefit in return for your donation. It should also state that you are not retaining part ownership of the donation.
• Proof of payment. This is the second of two sure-fire things you must have to validate a deduction. You will need a canceled check, a bank statement or a credit card receipt and related statement.

Other proof hints

• Contemporaneous. Any proof of payment and receipts should generally match the date of the activity. The IRS and state agencies are quick to dismiss receipts that are obtained after the fact. A good rule of thumb is to ensure receipts and proof of payment are received at the time of the activity. If not, at least make sure you have receipts and payment proof within the tax year the deduction is taken.
• Other proof. In addition to the above, there are certain deductions that require additional documentation. Here are the most common;
• Mileage logs. You will need to show properly maintained mileage logs for business miles, charitable miles and any medical mile deductions.
• Business records. You will need financial statements for any business related activity with supporting documentation.
• Residency. If you live in multiple states or multiple countries, you may have to prove where you lived during the year. Keep records that show your physical presence to support your tax filings.
• Proof of non-reimbursement. If you claim any unreimbursed business expenses, many states are asking you to prove that you were not able to get these expenses reimbursed from your employer. The easiest ways to do this are to show a denied expense report or to get your employer to write a letter that confirms your expenses are not reimbursed. Those most impacted by this are musicians, barbers/hairstylists, construction workers and anyone who uses their own tools to do their job for their employer.

One of the more popular provisions in the tax code is the $250,000 capital gain exclusion ($500,000 for a married couple) of any profit made when selling your home. As long as you follow the rules, most home sales transactions are not taxable events.

• But what if the tax law is changed?
• What if you rent out your home?
• What if you cannot prove the cost of your home?

Your best defense to a potentially expensive tax surprise in your future is proper record retention.

The problem

The gain exclusion is so high, that many of us are no longer keeping track of the true cost of our home. This mistake can be costly. Remember, this gain exclusion still requires documentation to support the tax benefit.

The calculation

To calculate your home sale gain take the sales price received for your home and subtract your basis. This “basis” is the original cost of your home including closing costs adjusted by the cost of any improvements you have made in your home. You might also have a reduction in home value due to prior damage or casualty losses. As long as the home sold is owned by you as your principal residence in at least two of the last five years, you can usually take advantage of the capital gain exclusion on your tax return.

To keep the tax surprise away

Always keep documents that support calculating the true cost of your home. This should include:

• Closing documents from the original home purchase
• All legal documents
• Canceled checks and invoices from any home improvements
• Closing documents supporting the value of the sale of the home

There are some cases when you should pay special attention to keeping track of your home value.

• You have a home office. When a home office is involved, it can impact the calculation of the capital gain exclusion. This is especially true if you depreciated part of your home for business use.
• You have lived in your home for a long time. Most homes will rise in value. The longer you stay in your home the more likely the value of your home will rise over time. For example, a sizable gain can occur when an elderly single parent sells their home after living in it for over 50 years.
• You live in a major metropolitan area. Certain areas of the country are known to rapidly increase in value.
• You rent out your home. Any time part of your home is depreciated, it can impact the calculation for available gain exclusion. Home rental also can impact the residency requirement calculation to receive the home gain tax exclusion.
• You recently sold another home. The home sale gain exclusion can only be used once every two years. If you recently sold a home with a gain, keeping all documents related to your new home will be critical.

The best way to protect this tax code benefit is to keep all home-related documents that support calculating the cost of your property. Please call if you wish to discuss your situation.

Tax credits are one of the most powerful ways to lower your income taxes. A tax credit reduces your tax bill dollar for dollar. A tax deduction, on the other hand, only reduces your taxable income, so your benefit is determined by your tax bracket.

For example, a tax deduction of $1,000 will lower your tax bill by $320 if you are in the 32% tax bracket. A $1,000 tax credit will lower your tax bill by $1,000.

Here are some of the most common tax credits; most are subject to income limits.

• Child credit. Taxpayers who have dependent children under age 17 may be eligible for a child tax credit of $2,000 per child.
• Dependent care credit. Expenses paid for the care of dependent children under 13 and certain other dependents may qualify for a tax credit.
• Education credits. Qualified college and vocational school expenses for eligible students may qualify for a credit. Under the American Opportunity Tax Credit, up to $2,500 per student can be claimed for tuition and fees paid during four years of post-secondary education. Under the Lifetime Learning Credit, up to $2,000 per family is available for post-secondary education expenses and for education expenses to acquire or improve job skills.
• Earned income credit. This credit is intended for low-income taxpayers. The size of the credit depends on the amount of your earned income (wages and self-employment income), investment income, and your filing status. Qualifying children can increase the credit.
• Business credits. There are a number of credits available to businesses. They include the research credit the work opportunity credit, the disabled access credit, and the low-income housing credit.

Don't overlook valuable credits that could reduce your taxes. For details on the credits for which you might qualify, call for a review of your situation.

2018 ALERT: Unless your move is a qualified move related to military service, the moving expense deduction is no longer available. Use this information for filing prior-year tax returns.

Moving is expensive, but if you maintain good records, you may be able to recover some of those costs through tax benefits.

Some of your moving expenses are deductible if your move is work-related. To be deductible, the distance from your old residence to your new workplace must be at least 50 miles more than to your old place of work. If you are starting work for the first time or after a long period of unemployment, your new home must be at least 50 miles from your old home.

If you meet the requirements, here's what you may be able to deduct:

Costs of moving your household goods and personal effects to your new home.

Travel costs, including lodging while en route, from your old home to your new one.

Other Moving Tax Facts

The cost of meals during your move is not deductible.

The costs of pre-move house-hunting trips or living in temporary quarters in the new location are not deductible.

Qualified moving expenses reduce your adjusted gross income. This treatment means you can deduct moving expenses regardless of whether you itemize deductions or take the standard deduction on your tax return. Also, by reducing adjusted gross income, your moving expense deduction may make it easier for you to claim other deductions that are limited by adjusted gross income (for example, the deduction for medical expenses, casualty losses, and miscellaneous itemized deductions).

Reimbursement from your employer for substantiated moving expenses you incurred (and have not deducted in a prior year) is not subject to either income or payroll tax.

You should keep records, receipts, cancelled checks, etc., of moving expenses incurred because the IRS will not take your word for costs involved. You must be able to substantiate your moving expenses or they may be disallowed.

After You Move

Notify all current-year employers for all members of the family so that W-2 statements and other forms arrive on time at your new location.

Review your insurance policies to make sure you still have the coverage you need. Your premiums may change on some insurance due to your new location. Find out when various policies expire so that you can get insurance in your new location without a lapse of coverage.

Check on pension benefits at both your old job and your new one. If you are entitled to money from your old company's pension plan, get advice on the tax consequences of the various options relating to the funds.

Make an appointment for a tax planning session. You may be required to file tax returns in more than one state, and state tax laws vary. Schedule this session early to give yourself ample time to do tax planning.

Review your investment portfolio. Moving may require some adjustments. For example, if you own municipal bonds issued by your old state of residence, earnings on them will probably be taxable in your new state.

If you've moved to a new state, find out the laws governing property rights. Some states are community property states and, in general, consider husbands and wives to be joint owners of property acquired during their marriage. Other states are common law states and property ownership depends on title and the source of acquisition funds. Get the facts so you can arrange your affairs accordingly.

Have your will reviewed to see if changes are necessary. State laws vary; be sure your will still does what you want it to do.

These days, charities need your support more than ever. As you lend a helping hand, keep the following tax facts in mind.

The tax consequences of charitable gifts

• If you itemize, you may deduct cash contributions to qualified charities, as well as the fair market value of donated property.
• Contributions to religious institutions and large, national charities usually qualify for tax deductibility, while contributions to individuals don't. If you have any doubts, check with the IRS to see if your charity is on the list of qualified tax-exempt organizations.
• When you donate brand-new merchandise or stocks and bonds that are publicly traded, it's relatively easy to determine market value. But what's the value of used clothing, furniture, or appliances? According to the IRS, you may take a deduction for used clothing and household items only if they are in "good" or better condition.
• The value of your charitable services is not deductible, but you can deduct out-of-pocket and incidental expenses. Example: You drive to a charity dinner, help out in the kitchen, and donate your favorite casserole. You can deduct the cost of the food and your charitable mileage, but not the value of your time.
• Instead of contributing cash, consider donating stock, mutual funds, artwork, or similar items that have increased in value. You may deduct the full market value of the property, and you'll avoid paying tax on the built-in capital gain.
• With securities that have decreased in value, it's better to sell the securities first and donate the proceeds. That way, you can deduct both your charitable contribution and your capital loss on the sale.
• If you plan to make a large contribution to charity, seek tax advice before rather than after making the gift in order to maximize your tax benefits.

Good recordkeeping is required

If you plan to claim a tax deduction for charitable contributions, you need documentation to support your gift. Here are the IRS requirements:

• Cash, check, and other monetary donations of any amount can be deducted only if substantiated by a bank record or written documentation from the charity.
• If you donate used clothing or household items, you may claim a deduction only if the items are in "good" or better condition.
• If you contribute property with a value above $500, your personal records must also include details of how and when you acquired the property and your cost basis in the property. Always get confirmation of your gift from the charity.
• If you donate an item or a group of similar items worth more than $5,000, all of the previous requirements apply, but you must also obtain a qualified appraisal. There are special exceptions for publicly traded stock and, in some cases, for nonpublic stock.
• If you receive anything of value in return for your donation ("quid pro quo" contributions), your deduction is limited to the difference between what you donate and what you receive. For all quid pro quo donations over $75, the charity must provide you with a written disclosure of the value of the goods or services provided and must indicate that the deduction is limited to the difference between the donation and the value stated.

Health savings accounts can be used to build tax-sheltered nest eggs that can pay out-of-pocket medical expenses with tax-free dollars.

Intended to be used in conjunction with high-deductible insurance plans, health savings accounts (HSAs) are designed to help pay your medical expenses until your insurance policy begins picking up expenses.

To qualify for a health savings account, a taxpayer must meet two basic requirements:

1. The taxpayer must have a health insurance plan with a high deductible (defined as not less than $1,350 for an individual and $2,700 for a family).
2. The taxpayer must be under age 65 when setting up the account.

The accounts can be funded with pre-tax contributions made by employers, tax-deductible contributions made directly by the individual taxpayer, or with rollover funds from certain other accounts.

For 2019, contributions of up to $3,500 for individuals and $7,000 for families can be made. An additional $1,000 can be contributed by those aged 55 or older.

The big difference between an HSA and other tax-favored medical savings accounts is that the funds in an HSA can be invested, and the earnings grow tax-free. Withdrawals used for medical expenses are not subject to income tax. Also, unlike funds set aside for medical expenses in flexible spending accounts, unspent funds in HSAs remain in the account to grow tax-free year after year. After age 65, withdrawals can be made and used for any purpose penalty-free but not income tax-free.

While these accounts will not be the best choice for every business or every individual, they certainly should be considered a tax-saving opportunity worth exploring.

If you donate a used vehicle to charity, you are allowed to take a tax deduction for your generosity, but only if you itemize deductions on your tax return. Here's the current rule governing donated vehicles.

Tax law: The charity must inform the taxpayer of the price the donated vehicle sold for at auction. This is the amount the taxpayer can claim as a tax deduction. If the charity keeps the vehicle for its use, it must give the taxpayer an estimate of the value. This requirement applies when the claimed value of the vehicle exceeds $500.

Application: If a taxpayer gives a car with a blue book value of $3,000 to a charity, that value cannot be used - even as a starting point - for determining the value of the vehicle and the amount of the deduction. If the charity sells the car for $575, that's the amount that can be taken as an itemized deduction. However, if the charity uses the vehicle for its own use or is in the business of training others then the full market value can be used as a deduction.

Note: The vehicle deduction rules apply to other donated vehicles, too, such as boats and airplanes.

Since the value of the deduction for you can vary widely, it is important to donate your vehicle to the right charitable organization to receive the best valuation at the time of donation. So prior to making this valuable donation, try to identify how the charitable group will be using the vehicle.

Are you getting the tax break you deserve?

Taxpayers often overlook and underreport their charitable contributions on their tax return. And while there are no hard statistics, the Treasury Department is not looking out for you to ensure you are reporting all your deductible charitable giving. So what can you do to maximize your deduction?

1. Research the Charity: Make sure the charity you donate to is a qualified charitable organization. The IRS has lists available if you want to check, but the charitable organization should also confirm that your gift is tax deductible.
2. DO NOT donate cash: Recent rule changes require you to document all your cash contributions. So resist the urge to drop coins in a bucket or collection basket, a check is much better.
3. Be careful about donating your vehicle: Make sure the organization you donate your vehicle to either uses the vehicle, or is in the business of using your vehicle to train others. If you donate your vehicle to a group that simply re-sells it, your donation is limited to what they receive for it AND NOT the usually much higher fair market value.
4. Keep track of your non-cash donations: Keeping track of non-cash donations is one of the most overlooked deductions. Keep a slip of paper that documents each donation, include the quality of the item, and take a photo of the goods. Only items in good or better condition can be donated.
5. Keep receipts and acknowledgements: There are many different tax rules here, but the bottom line is if you have a receipt and donation acknowledgement from the charitable organization you have the basics for defending your deduction. Other documentation is often required, but without the receipt and proper gift acknowledgement you are out of luck.
6. Don't forget your miles: You are eligible to deduct your auto mileage at 14 cents per mile while driving for a charitable activity. Driving for meals on wheels, or to volunteer at a cancer fund raiser, and other charitable driving miles are often not tracked by taxpayers.
7. Consider donating appreciated stock: If done correctly you can use the higher value as a donation deduction without paying taxes on the appreciated value of the stock.

Every industry and profession has common terms that are used so often those of us in the business often forget that most people do not have the depth of understanding that a person working within the tax code might have. One of these areas is understanding the differences between the tax terms "deductions" and "credits". Is one better than the other?

Top line. Dollar for dollar, a credit is worth more to you than a deduction. Why? A credit is a direct reduction in tax, while a deduction reduces the amount of income that gets taxed. Here is a simple chart showing the difference.

Assuming you have a $2,000 tax credit, how large a deduction would you need to be indifferent?

Your marginal tax rate: 10% 

Deduction required to equal $2,000 tax credit: 20,000

Your marginal tax rate: 15%

Deduction required to equal $2,000 tax credit: 13,333

Your marginal tax rate: 25% 

Deduction required to equal $2,000 tax credit: 8,000

Your marginal tax rate: 28% 

Deduction required to equal $2,000 tax credit: 7,143

Your marginal tax rate: 33% 

Deduction required to equal $2,000 tax credit: 6,061

Your marginal tax rate: 35% 

Deduction required to equal $2,000 tax credit: 5,714

Note: This example does not account for the possibility that the deduction could move you into a lower tax rate nor does it consider other tax factors.

So on the surface it appears that a credit is worth more than a deduction to you. But the real answer is….it all depends. Here are some things to consider:

• Your marginal tax rate. A similar deduction is worth more to someone in the 35% tax range than it is to someone being taxed at 10%.
• How much is it? A large deduction could be worth more to you than a small credit. In combination with your marginal tax rate, a deduction could be worth a lot more to you than a credit.
• Are there phase-outs? Most credits and deductions phase out when your income is over certain amounts. You must consider this when determining the true tax benefit. Consider that a deduction that reduces your income could make other credits and deductions that were previously phased out now available to you.
• Is the credit refundable? Some credits get a “bonus”. While you cannot deduct your income below zero, you can sometimes receive credits that create a refund even if you owe no tax. Credits that have this “bonus” feature are called “refundable” credits.

When does any of this matter?

• Educational Expenses. A common area in which understanding credits and deductions is important is in the use of educational tax benefits. If you paid tax-deductible tuition for undergraduate studies you must decide what tax alternative is best for you. Among the many alternatives that need to be evaluated are the American Opportunity Credit and the Lifetime Learning Credit (Assuming all of these options remain available to taxpayers.).
• Understanding the Cost. When proposals come through Washington, understanding the difference between credits and deductions can help you understand how the proposed changes impact your tax situation. Remember the value of a deduction to you needs to be filtered with your marginal tax rate to see the true tax benefit. Here is a simple formula.

Deduction Amount x Your Tax Rate = Your Tax Benefit

Included for your reference are some of the more common deductions and credits. Thankfully, professional tax software allows for quick analysis of the choices.

Common Credits

Earned Income Tax Credit

Child Tax Credit

Adoption Credit

American Opportunity Credit

Lifetime Learning Credit

Dependent Care Credit

Retirement Saving Credit

Elderly Disabled Credit

Foreign Tax Credit

General Business Credits

Common Deductions

Medical Expenses

Charitable Contributions

Property Taxes

State Income Taxes

Mortgage Interest

Standard Deductions

Alimony paid (through 2018)

IRA and HSA contributions

Qualified Education Expenses

Note: Many of these credits and deductions are not a permanent part of the tax code. Some have been repeatedly extended while others have or will expire without congressional action.

A common misconception in tax filing has been that if you use the Standard Deduction versus itemizing your deductions you have few additional benefits available to reduce your tax bill. This is often not the case.

Standard or Itemize?

Every taxpayer can take the Standard Deduction to reduce their income prior to applying exemptions. However, if your deductions are going to exceed the standard amount you may choose to itemize your deductions. The primary reason someone itemizes deductions is generally due to home ownership since mortgage interest and property taxes are deductible and are generally high enough to justify itemizing.

Common sources of itemized deductions are: mortgage interest, property taxes, charitable giving, high medical expenses, and other miscellaneous deductions.

What is Available

So what opportunities to reduce your taxable income are available if you use the Standard Deduction? Here are some of the most common:

• IRA Contributions of up to $5,500 or $6,500 if age 50 or over ($6,000 in 2019; $7,000 if age 50 or over)
• Student Loan Interest ( up to $2,500)
• Educator Expense Deduction of $250
• Health Savings Accounts (if you qualify)
• Moving Expenses for job related moves
• Self-employed health insurance premiums
• Alimony through 2018 only
• ½ of self employment tax
• Numerous education incentives like; Savings Bond Interest, Coverdell accounts, American Opportunity Credit and Lifetime Learning Credit
• Plus numerous credits including; Earned Income Credit, Dependent Care, Child Tax Credit, Retirement Savings, and Elderly Credit

Income limitations often apply to these tax reduction opportunities, but for those who qualify, the tax savings can be significant. This list is by no means complete. What should be remembered is to rely on a complete review of your situation prior to jumping to the conclusion that tax breaks are just for someone else. That someone else might just be you, the Standard Deduction taxpayer.

Each year standard mileage rates for business travel, medical driving, moving mileage and mileage rates for charitable driving are set by the IRS.

Too often this deduction is overlooked because proper documentation was not followed. Here are a few tips to ensure you receive the full benefit of this tax deduction.

1. Tip 1: Track your applicable mileage in an auto log. This log is required to ensure your deduction is not disallowed during the course of an audit. Please make sure the business/charitable/medical purpose, date and distance is clearly noted.
2. Tip 2: Also keep track of parking, tolls and other miscellaneous travel expenses. These can often be deducted in addition to the standard mileage rate.
3. Tip 3: Submit expense reports if your mileage can be reimbursed. Most employers will reimburse you for business mileage at the approved rate, but many employees fail to ask for reimbursement. Remember, your employer can deduct this reimbursed expense on their tax return as well.
4. Tip 4: Keep track of medical miles. Even though you need to surpass a percent of your income prior to taking medical expenses as an itemized deduction, still keep track of qualified medical miles. It often only takes one major medical bill to make all your other excess medical expenses deductible.
5. Tip 5: Plan your business trips to ensure your miles are deductible. Commuting miles to and from work are not deductible. However, if you stop off at a supplier first, then the mileage from the supplier to your workplace is a deductible expense.
6. Tip 6: Do not forget charitable miles. This deduction is one of the most often overlooked deductions. Do you drive for Meals on Wheels or for a school function? Do you volunteer as a coach for a non-profit sporting group? These miles add up over time and are often not properly documented.

It seems like summer has just begun and the Back to School advertising blitz has already started in the media. Are there tax savings tip opportunities within this nightmare for our kids? Certainly, if you are tax smart about your spending. While the amounts may be small, they can add up in a hurry. Here are some ideas:

1. Teachers, save your out-of-pocket expenses. There is a $250 deduction for qualified educators out-of-pocket classroom expenses. This deduction can be taken even if you do not itemize your deductions.
2. Purchasing the class supply list could have deductions in it. Often schools send a list of requested supplies for the school year. Some of the items on the list are clearly for personal use (such as an erasure or a ruler) while other items on the list are often for school use and classroom use ( such as 24 pencils or paper towels). This classroom supply technique effectively transfers the school expenses to our children. Keep track of these non-cash classroom/school donations for possible charitable deductions.
3. Donate funds versus buying the supplies. Instead of buying the classroom supplies yourself, consider providing a check written to the school as a donation. This helps in two ways: First, it becomes a clear cash donation with a canceled check as a receipt. Second, if your school has a good supply agreement, the purchasing power of your donation will go further.
4. Get confirmation. Whenever you donate, get a written confirmation from the school or your child’s teacher representing the school. This is a must if your donation is $250 or more. Most teachers do not have the form, so bring one with you that the teacher can sign. You can get the directions on www.irs.gov or simply use a respected charitable group like Goodwill, or the Red Cross for a format to copy.
5. Leverage the school’s PTA.This non-profit parent group is a great resource to help your school AND help you get deductible donations for funds you would otherwise provide to your child’s school.
6. Use checks not cash. If you usually provide donations to the school in the form of cash (like providing additional money to help other kids go on field trips) make those donations in the form of a check. Cash donations without receipts are no longer deductible.
7. Donate funds versus taking the raffle ticket. Raffles, subscription drives, and silent auctions are fun ways schools raise funds. To maximize your ability to deduct your donations, fore-go the possible prize. Then the entire donation is clearly deductible.
8. Don't forget your out-of-pocket expenses for your volunteer activities. Perhaps you donate your time at school functions, donate books to the school library, or help assist the teaching staff. Your out of pocket expenses and your mileage should be tracked for charitable deduction purposes.

Finally, don't forget to review state rules for educational expenses. There are often credits available for out-of-pocket school and other educational expenses.

There is a simplified way to take a home office expense for a portion of your home. This 'safe-harbor' option greatly simplifies how to record valid expenses for business use of your home. Here is how it works.

• You may opt to take your office space square feet times $5 and use this as a valid home office expense up to $1,500 (300 sq. ft.).
• This replaces the cumbersome allocation of valid home expenses like electricity, heat, depreciation, and other home expenses that are allocated by a % of the home devoted to your office space.
• You may still take property taxes, mortgage interest deductions and casualty losses as itemized deductions on your personal tax return. Better still, you no longer need to allocate these expenses between personal and business use.
• Your home office must still qualify for the deduction using current home office standards in the tax code. Foremost among these is that your home office must be used regularly and exclusively by the business.
• The deduction may not be taken in excess of available business revenue.
• You may still take other qualified business expenses unrelated to the home. This “safe-harbor” calculation is meant to simplify the household expense allocation process only.

What you should know

• The IRS estimates 3.4 million taxpayers used 1.6 million hours to calculate the home office deduction’s old format to allocate their home office use.
• If the IRS reviews these returns in the future it hopes to save a tremendous amount of time and effort used in prior years to confirm the accuracy of the old home office allocation.
• Conduct the home office use calculation using the safe-harbor and the traditional method to ensure the safe-harbor opportunity makes the most sense for you.
• One of the nice benefits of the safe-harbor rule is that your home value (basis) is not reduced by depreciation. This should help reduce risk of a tax surprise from depreciation recapture calculations when you sell your home.

The tax code allows deductions for qualified miles driven for business, medical, moving and charitable purposes. But to claim this deduction you must keep adequate records of actual miles driven. During an audit this is an often disallowed deduction, despite the fact that you actually drove the distance claimed. Here are some suggestions.

1. Keep a log. The tax code is clear on this point. You may not estimate your miles driven. You must support your claimed deduction, ideally with a detailed mileage log.
2. Create good habits. Your odometer reading and miles driven should be noted as soon as possible after the event. Keep a log book in your car and note the miles each day. Logs created after the fact with estimated miles driven could be disallowed during an audit.
3. Make thorough entries. Note the odometer readings, date, miles driven, the to/from locations, and the qualified purpose for the trip.
4. Don't lose out on the extras. The deduction for miles driven is meant to provide a deduction for fuel, depreciation, and repairs. You can also deduct out-of-pocket expenses for tolls, parking and other transportation fees. Keep a running total of these fees in the back of your mileage log.
5. Keep separate logs for each deduction. Remember you may deduct mileage for business, charitable purposes, qualified moving and medical miles. It is best to keep track of each in a separate mileage log.
6. Alternative business transportation deduction. When it comes to deducting business transportation expense, remember the miles driven method is not the only one available to you. You may also deduct your actual expenses, but how and when you make this determination is important. In the initial year of placing your auto into service for your business, it is best to keep track and record all your actual auto expenses. An analysis can then be conducted to see which method is best for you to maximize your deduction.

One way to reduce your tax bill this year is to donate appreciated stock to a charity of your choice versus writing a check. This part of the tax code provides a tax benefit to you in two ways:

1. Higher deduction. Your charitable gift deduction is the higher Fair Market Value of the appreciated stock on the date of your donation and not what you originally paid for it.
2. No capital gains tax. You do not have to pay tax on the profits you made on the stock. As long as you have owned the investment for over one year, you can avoid paying long-term capital gain tax on the increased value of your stock.

Other benefits

• The Alternative Minimum Tax (AMT) does not impact charitable deductions as it does with other deductions.
• Remember this approach also provides more funds to your selected charity. By donating cash or check, those additional funds are instead paid as federal taxes.
• This tax benefit could be worth even more with an increase in the maximum long-term capital gain tax rate and the introduction of the potential 3.8% Medicare surtax for investments.
• This benefit is for everyone who itemizes deductions that have qualified assets, not just the wealthy.

Things to consider

• Remember this benefit only applies to qualified investments (typically stocks and mutual funds) held longer than one year.
• Consider this a replacement for contributions you would normally make to qualified organizations.
• Talk to your target charitable organization. They often have a preferred broker that can help receive the donation in a qualified manner.
• This benefit also works for mutual funds and other common investment types, but be careful as many investments such as collectibles, inventory and other property do not qualify.

Contribution limits as a percent of Adjusted Gross Income may apply. Excess contributions can often be carried forward as deductions for up to five years.

How you conduct the transaction is very important. It must be clear to the IRS that the investment was donated directly to the charitable organization.

Your home. Your office. Are they one and the same? If so, you may be able to take a home-office deduction that can save income and self-employment taxes.

The deduction gives you the opportunity to claim expenses related to the business use of your home, such as utilities, repairs, and insurance. Meet the requirements, and you're eligible whether you rent or own your home.

Taxpayers who qualify may use a simplified deduction calculated at $5 a square foot for up to 300 square feet of an area in a home that is used regularly and exclusively for business. The deduction is capped at $1,500 a year.

Here are two questions that can help you decide if you qualify for a home-office deduction.

Do you pass the regular and exclusive business use test? The rules say you have to use your home office on a continuing basis, and that it has to be dedicated to your business.

While you're not required to have a separate room, personal or family use of your work area means no deduction.

What business activities do you conduct in your office? Meeting customers or clients in your home office qualifies as business use.

Taking care of the management and administrative tasks such as writing reports and billing clients also qualifies, as long as you don't have another office that you use primarily for the same activities.

If your office is separate from your home and you meet the regular and exclusive business use test, you can deduct related business expenses - even if you don't meet clients or perform management activities there.

Special rules apply to work-at-home employees and daycare facilities. In addition, exceptions apply when you use your home for storing inventory or product samples. Please call us if you would like more information.

Since 1975, the Earned Income Tax Credit (EITC) has provided a tax break to millions of Americans each year. The credit was originally established to give low and medium income taxpayers a break on their Social Security taxes while providing an incentive to work. The EITC is often the subject of missed opportunity as the IRS estimates as many as 20% of taxpayers that qualify for the credit do not include it on their tax return. Here are some things to consider:

Q. Do I have to have children to qualify? Do I have to be married?

A. No. One of the most common errors is thinking the EITC is only for married couples with children. Both single and married taxpayers can qualify for the EITC. Even taxpayers without children may qualify for the credit if they meet certain age and residency requirements. You may NOT, however, file your tax return as "married filing separate" and still receive the credit.

Q. How much can I earn and still qualify for the EITC?

A. If you earned $54,884 or less in 2018 you could qualify ($49,194 if you are unmarried).

Q. If I did not earn income can I still get the credit?

A. No, you must have “earned” income to qualify for the credit. You have earned income if you worked for someone else (wages), are self-employed, or have income from farming. Nontaxable combat pay for military members qualifies as does some cases of disability income.

Q. How much is the credit?

A. The maximum credit could be worth $6,431 to you in 2018 ($6,557 in 2019). The amount of the credit depends on your filing status (married filing jointly, single, widow, or head of household), your income, and how many qualifying children you have.

Q. What else should I know?

A. A valid social security number is required for you, your spouse, and any qualifying children to receive the credit. It is also important to save information to support your claim for the credit. If the IRS thinks you recklessly disregarded the rules and claimed the credit in error, they could prohibit you from receiving the credit for two more years. If the filing was deemed fraudulent, you could be barred from using the credit for 10 years!

Remember to check for your EITC every year. Just because you did not qualify in the past does not mean you can't qualify for the credit in the future. Many other rules apply but thankfully professional tax preparation software does a good job evaluating your qualifications.

If you are eligible for the Premium Tax Credit you can decide to take it now based on your estimated income or take it later when you file your tax return. Who does this impact and what should you do?

What is the Credit and who is eligible?

Topline: If you have health insurance available from your employer, this credit is not for you. If, on the other hand, you are self-employed, your employer recently provided you a notice they are moving health insurance coverage to the “exchange or marketplace”, or you currently do not have health insurance then this information is important to understand.

Open enrollment for health insurance plans through the Marketplace runs from November 1st through December 15th. If you are eligible and enroll in one of these plans through the Insurance Marketplace you may be eligible to have your premium reduced by the new Premium Tax Credit.

To be eligible for the Premium Tax Credit you must;

• buy your health insurance through the new Health Insurance Marketplace (state exchanges)
• be ineligible for health insurance coverage through an employer or through other government programs
• not be claimed as a dependent on someone else’s tax return
• if married, file a joint tax return
• meet certain income requirements

Take it now or claim it later?

One of the tricky decisions you’ll make if enrolling for health insurance through the Marketplace is deciding to take the Premium Tax Credit to reduce your monthly health insurance premium payments or wait and receive the tax credit when you file your tax return. Here are some tips:

• Predictable income? If you can accurately predict your income and number of dependents consider applying an estimated credit now to reduce your monthly health insurance cost.
• Predictable family situation? If you know the number of dependents you will have and your status (married, single, etc.) in addition to your income consider applying the credit during the year. If your family situation changes during the year you can always update your profile in the plan.
• Understand the downside. If you misrepresent your income and it impacts your eligibility for the Premium Tax Credit you will have to repay the credit on your tax return. This could become a real financial hardship.
• Middle ground? Consider estimating your income, but make it slightly higher than you anticipate. This way your monthly health insurance premium will be a bit higher, but you may also receive a larger refund at the end of the year.

Remember, if you do not have health insurance you may be subject to new penalties payable when you file your tax return.

Although the child tax credit is simple in concept, it's actually quite complicated in application. On their tax returns, taxpayers are entitled to a tax credit of $2,000 for each dependent child under age 17. That seems simple enough, but a look at the details reveals how complex the child tax credit really is.

• Credit phases out. The credit begins phasing out at the rate of $50 for each $1,000 of modified adjusted gross income in excess of $400,000 for joint tax filers ($200,000 for single taxpayers). The length of the phase-out range varies depending on the number of children a taxpayer has who qualify for the credit.
• Refundable - with exceptions. Some lower-income families who qualify for the child tax credit, but who don't earn enough to pay income tax, may be entitled to a check from the government through what is called a "refundable credit." A refundable credit means you get the benefit of the credit even when you don't pay enough in taxes to use the credit. The government sends you a check for the amount of credit that exceeds your tax liability.
• What about divorce? In the case of divorced or separated couples, the spouse who is entitled to the dependency exemption is entitled to take the child tax credit.
• Withholding adjustments. If you will be eligible to claim more (or fewer) dependent children under age 17 on your tax return this year than you claimed last year, consider adjusting your withholding. You can adjust your withholding at any point in the year by giving your employer a revised Form W-4.
• Credit protected from the AMT. The current law protects child credit from being reduced by the alternative minimum tax (AMT). This tax hits taxpayers with a large number of deductions and exemptions.

There is a lot of confusion about home equity loans following the passage of the Tax Cuts and Jobs Act (TCJA). The act changes the rules on whether the interest on these loans is deductible. So is it?

The short answer: Not unless you’ve used the money to buy, build or substantially improve your home.

The IRS indebtedness rules

For decades, taxpayers have been using home equity loans to finance home improvements by borrowing against the value of their home. But they’ve also used home equity loans and lines of credit for alternative purposes, such as paying off credit card debt, paying for big purchases, or simply to finance living expenses.

Those alternative purposes are removed from the tax code beginning in 2018. Before the change, you could deduct interest on up to $100,000 in home equity indebtedness not spent on your home. Now, the interest is deductible only if it is used to buy, build or substantially improve your home. The IRS calls this acquisition indebtedness.

Example: Sam got into trouble with his credit cards in 2015 and took out a $100,000 home equity loan to consolidate his debts. It lowered his annual interest rate to 6 percent from 12 percent and he was able to deduct $6,000 in interest every year as an itemized deduction. Starting in 2018, Sam will no longer be able to deduct those interest payments because the loan was not used to build, buy or substantially improve his home.

What you need to know

• Lower debt limits. The limits on the amount of acquisition indebtedness that you can use to deduct interest drops to $750,000 from $1 million. This lower limit only applies to new loans incurred after Dec. 15, 2017.
• Less deductible interest. All interest on home equity loans and lines of credit used for anything other than to buy, build or substantially improve your home is no longer deductible.
• Enforcement challenge. It's anyone's guess how the IRS will enforce this rule. Your best bet is to retain any receipts for home improvements and to figure out ways to apply any outstanding loan balances to home improvement activity.
• Don't confuse terminology. Try not to get confused by the terms the IRS uses and what your bank may use to refer to your loan. The IRS doesn't care whether the bank calls the loan a home equity loan or something else; it only cares how you use the funds.

When you get ready to file your tax return, make sure a review of interest is on your list. You will need to substantiate the use of deductible interest going forward.

Your charitable contribution deductions are still a great tax savings tool, but they may require more planning following the passage of the Tax Cuts and Jobs Act (TCJA) last year.

Background

Typically, cash and non-cash charitable donations can be deducted on an itemized return. But with the standard deduction nearly doubling to $12,000 for single filers ( $12,200 in 2019)and $24,000 for married joint filers ($24,400 in 2019), itemizing every year is less beneficial for many taxpayers.

This is especially so because many other itemizeable deductions have been reduced by the TCJA, including miscellaneous itemized deductions, state and local tax deductions, and home loan interest deductions.

Leverage charitable tax planning

If you want to donate and get beneficial tax treatment, you can still make it work. Here's how:

• Conduct a year-end tax forecast. Plan now to see how close the amount of all your yearly itemizeable items will come to exceed your standard deduction threshold.
• Bundle two-in-one. Consider bundling two years of charitable giving into one year. This will allow you to maximize your itemizations in one year while using the tax savings of the standard deduction in the other year to help pay for your donations.
• Maximize your charitable deduction. When you can take advantage of the charitable deduction, consider donating appreciated stock held longer than one year. This is a better alternative than writing a check as you avoid paying capital gains and you can deduct the fair market value of the stock as a donation.

Itemized deduction rules have changed, but you can still take advantage of the tax-deductibility of your charitable giving. You simply need to adjust your planning. Call if you'd like to discuss this or any other tax-planning strategies.

One of the things that’s going away under the new tax reform laws implemented this year is an employee’s ability to deduct unreimbursed expenses related to their job.

Farewell to miscellaneous itemized deductions

The deduction for unreimbursed employee expenses was among the qualified 2-percent miscellaneous itemized deductions that were eliminated by the Tax Cuts and Jobs Act (TCJA) passed in late 2017. This could be a blow for employees who had relied on it to deduct unreimbursed expenses for such things as work-related meals, entertainment, gifts, lodging, tools, supplies, professional dues, licensing fees, work clothes and work-related education.

A win-win solution

If you are an employee who has used this tax deduction, here are some tips to minimize its loss:

• Determine the impact. Review your past tax records to help estimate how much you expect to pay in unreimbursed work expenses and what the tax deduction was worth to you.
• Discuss the situation with your employer. If the loss of this deduction is a hardship, talk to your employer about how you will be affected.
• The win-win. Ask your employer to consider reimbursing you for your work-related expenses directly. Your employer can probably deduct those expenses from their business return without increasing your taxable income. This will save them tax dollars when compared with the cost of raising your pay in order to indirectly compensate you for your unreimbursed expenses.

If you are an employer, consider talking to your employees about their unreimbursed expenses now that the tax laws have changed. If you wish to reimburse their qualified business expenses, make sure your reporting adheres to IRS accountable plan rules so that your reimbursements are deductible as a business expense and do not add to your employees' incomes.

One of the largest tax breaks available to most individuals is the ability to exclude up to $250,000 ($500,000 married) in capital gains on the sale of your personal residence. Making the assumption that this gain exclusion will always keep you safe from tax can be a big mistake. Here is what you need to know.

The rule’s basics

As long as you own and live in your home for two of the five years before selling your home, you qualify for this capital gain tax exclusion. In tax-speak you need to pass three hurdles:

• Main home. This tax term defines what a main home is. It can be a traditional home, a condo, a houseboat, or mobile home. Main home also means the place of primary residence when you own two or more homes.
• Ownership test. You must own your home during two of the past five years.
• Residence test. You must live in the home for two of the past five years.

Some quirks.

• You can pass the ownership test and the residence test at different times.
• You may only use the home gain exclusion once every two years.
• You and your spouse can be treated jointly OR separately depending on the circumstances.

When to pay attention

• You have been in your home for a long time. The longer you live in your home the more likely you will have a large capital gain. Long-time homeowners should check to see if they have a capital gains tax problem prior to selling their home.
• You have old home gain deferrals. Prior to the current rules, home-gains could be rolled into the next home purchased. These old deferred gains reduce the cost of your current home and can result in capital gain exposure.
• Two homes into one. Often newly married couples with two homes have potential tax liability as both individuals may pass the required tests on their own property but not on their new spouse’s property. Prior to selling these individual homes, you may wish to create a plan of action that reduces your tax exposure.
• Selling a home after divorce. Property transferred as a result of a divorce is not deemed a sale of your home. However, if the ex-spouse that retains the home later sells the home, it may have an impact on the amount of gain exemption available.
• You are helping an older family member. Special rules apply to the elderly who move out of a home and move into assisted living and nursing homes. Prior to selling property, it is best to review options and their related tax implications.
• You do not meet the five-year rule. In some cases, you may be eligible for a partial gain exclusion if you are required to move for work, disability, or unforeseen circumstances.
• Other situations. There are a number of other exceptions to the home gain exclusion rules. This includes foreclosure, debt forgiveness, inheritance, and partial ownership.

A final thought

The key to obtaining the full benefit of this tax exclusion is in retaining good records. You must be able to prove both the sales price of your home and the associated costs you are using to determine any gain on your property. Keep all sales records, purchase records, improvement costs, and other documents that support your home’s capital gain calculation.

In order to continue receiving a Premium Tax Credit, you must file income tax returns as soon as possible. Any delay could stop eligibility for advance payments of this credit during the current tax year. Remember, these payments help reduce each month’s health insurance premium. It could also generate notices from the IRS to pay back some or all of prior advance payments of the credit.

Background

Those who use the Affordable Care Act to purchase health insurance on the Marketplace are often eligible to reduce their insurance premium using the Premium Tax Credit. Many had the credit sent directly to their health insurance company each month to reduce their premium. This is called “advance payments of the premium tax credit” by the IRS.

Current Situation

The IRS is now reviews payments of the Premium Tax Credit. To continue receiving the credit you must file tax returns. If you filed an extension and do not plan to file your tax return until October 15th, you could be ruled ineligible for the credit next year because you have not yet filed your tax return.

Impact

Your insurance premiums could increase next year if you are ruled ineligible for the advance premium credit payment. This could cause financial hardship. You may be asked to repay prior year Premium Tax Credit Payments as well.

Action

If you received any Premium Tax Credit or expect to do so in the future, you must file tax returns as soon as possible per the IRS.

Call if you need a review of your situation.

“Before taking action talk to your tax adviser.”

How many times have you seen this legal disclaimer and have your eyes glossed over? Unfortunately, there are too many times when taxpayers do not follow this advice and then must pay the price with an unnecessarily high tax bill.

Here are some of the most common situations that can save you money by seeking advice before you act.

• Getting married
• Selling a home
• Donating stocks and investments
• Getting divorced
• Change in dependent status
• Approaching retirement
• Starting a business
• Managing participation in tax-advantaged retirement accounts like 401(k), 403(b), and various IRAs
• Death and birth of loved ones
• Donating high value items
• Selling stocks, bonds, mutual funds or business property (rentals)
• An audit
• Tax efficient transfer of your estate
• Selling or buying high value assets (art, collectibles, real estate, and small business assets)
• Determining Social Security benefit strategy

In advance of any of these events, or when in doubt, please ask for assistance. There are too many stories that include the words “if only he had talked to someone first.”

Are you planning to use your vacation home soon? If you're not going to use it, have you considered renting it? Or are you thinking of buying a vacation home? Vacation homes, with proper tax planning, can help create tax benefits.

Some types of qualifying vacation or "second homes" which might have escaped your notice are boats, motor homes, timeshares, and trailers. Three simple tests must be met to have a second home: each must have sleeping, cooking, and toilet facilities. If your camper has these facilities, you have a second home for tax purposes.

• Owners of vacation homes face a set of tricky tax rules. How these apply to you depends on your personal and rental use of the home during the year. Here are the general rules:
• 100 percent personal use. If you never rent out your vacation home, you can generally deduct mortgage interest and property taxes. Or, if you rent it out for 14 days or less, the rental use is disregarded. The rental income is tax-free and any expenses related to the rental period are nondeductible.
• 100 percent rental use. If the home is rented without personal use, it's treated as rental property. (Personal use means use by your family or anyone who doesn't pay full market rent.) With rental property, you can deduct interest, taxes, operating expenses (utilities, maintenance, etc.), and depreciation. However, your current loss deduction may be limited by the passive loss rules.
• Mixed personal and rental use. If there are more than 14 rental days and personal use doesn't exceed the greater of (1) 14 days, or (2) 10 percent of rental days, you have a rental property. This can be bad news. Interest and taxes must be allocated between rental and personal use. If there is a rental loss, it may not be currently deductible because of the passive loss rules, and the interest allocable to the personal use part of the year is not deductible. If personal use exceeds the greater of 14 days or 10 percent of rental days, special vacation home rules apply. You can generally deduct interest and taxes. The rental income is reduced by allocable interest and taxes. Remaining rental income can be offset but not exceeded by operating expenses and depreciation. Disallowed rental expenses are carried forward to future years.
• Optimize your tax benefits. Although they're complicated, the vacation home rules present a place where you can easily make adjustments to optimize your tax benefits. Sometimes it's better to use the home more often, sometimes less often.

Unfortunately, there are few rules of thumb in this complex area. You need to review the rules as they apply to your specific situation.

Be aware that important tax consequences are often associated with some fairly common events involving your home. Here are some handy things to know.

• Home purchase. When purchasing a home, you may pay a portion of the mortgage interest in advance. This loan origination fee, or “points,” is a percentage of the total amount borrowed.
• If points are paid for a principal residence, you generally can deduct the full amount in the year paid, even if the points were paid by the seller. One caution: you must reduce your home's tax basis (cost) by the amount of seller-paid points.
• Of course, one of the greatest tax benefits of homeownership kicks in during the early years of the mortgage, when most of your payments go toward tax-deductible interest.
• IRA withdrawals. The tax law allows penalty-free IRA withdrawals, up to a lifetime limit of $10,000 for the purchase of a first home for you or members of your family. Withdrawals from Roth IRAs for qualifying first-home expenses can be both penalty- and tax-free after the Roth is five years old.
• Refinancing. What happens if you refinance? If you pay points, the general rule requires that you prorate deduction over the life of the loan. But if some of the refinance proceeds go toward home improvements, you may be able to take a current deduction for the portion of the points related to those improvements.
• Improvements. If you take out a loan to make substantial improvements to your principal residence, and the loan is secured by that property, the interest is generally deductible. Remodeling often increases the value of your property. Remodeling costs also increase the property's basis, potentially reducing capital gains tax if a future sale is partially or fully taxable. Other home improvement costs generally are not deductible, but if you upgrade your home for medical reasons - say, to add a wheelchair ramp or stair lift - you may be able to deduct a portion of the cost as a medical expense.
• Home office. The home office deduction can be another tax break of home ownership. If you use part of your home regularly and exclusively as a principal place of business, you may be able to deduct costs associated with that part.
• Home sale. When you sell a home that you have owned and used as your principal residence for at least two of the five years before the sale, you can generally exclude from taxation up to $250,000 of profit if you're single and up to $500,000 if you're married filing jointly. Profits in excess of those amounts are subject to regular capital gains rates and rules. The definition of "principal residence" includes not only the conventional single-family house, but also such homes as house trailers, mobile homes, houseboats, condominiums, cooperative apartments, and duplexes.
• Selling at a loss. Unfortunately, if you sell your home for less than you paid for it, you may not take a tax deduction for your loss.

Taxes often come into play for homeowners, and it's important to be aware of potential benefits and pitfalls.

Parents facing college expenses have several provisions in the tax law to consider. The benefits don't apply to all, but there is something of interest for many families.

Tax credits

• The American Opportunity Tax Credit is available for certain tuition and fees, and it allows you to reduce taxes annually up to $2,500 per student for four years of college. The credit is equal to 100% of the first $2,000 of qualified expenses and 25% of the next $2,000.
• The Lifetime Learning Credit covers any year of post-secondary education, with a maximum credit of $2,000, no matter how many students in the family are eligible. Both the American Opportunity Tax Credit and lifetime learning credits phase out for taxpayers with higher incomes.

Other education tax incentives

• Individual retirement accounts (IRAs). Existing IRAs can also be a source of college funds. You may make withdrawals before age 59½ without penalty for amounts paid for college or graduate school tuition, fees, books, room and board, supplies, and equipment.
• Education savings bonds. Interest on Series EE and Series I bonds issued after 1989 is nontaxable when used to pay tuition and fees for you or your dependents. This tax break begins to phase out once income reaches certain levels.
• Section 529 plans allow individuals to set up an account on behalf of someone else (say a child or grandchild) that can be used to pay college expenses. There are two types of plans:
• Prepaid tuition. Prepaid tuition plans are designed to hedge against inflation. You can purchase tuition credits, at today's rates, that your child can redeem when he or she attends one of the plan's eligible colleges or universities. Both state and private institutions can offer prepaid tuition programs. Using tuition credits from these programs is tax-free.
• College savings plans. College savings plans are state-sponsored plans that allow you to build a fund to pay for your child's college education. Your contributions are not tax-deductible, but once in the plan, your money grows tax-free. Provided the funds are used to pay for qualified college expenses, withdrawals are tax-free. Qualified expenses include tuition, fees, books, supplies, and certain room and board costs. Private institutions are not allowed to set up college savings accounts.
• Student loan interest deduction. Interest on certain student loans can be deducted whether or not you itemize your deductions. The maximum deduction is $2,500 per year over the loan repayment period.
• Other tax benefits. Most scholarships remain tax-free, nontaxable employer-paid tuition may be available, and education expenses related to your job still may be deductible.

When you start examining your situation, remember that many of these provisions are designed so that you can't benefit from more than one in any given year. We can help guide you through the maze and help ensure that you receive the maximum possible benefit.

The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain.

A like-kind exchange simply involves swapping assets that are similar in nature. For example, you can trade an old business vehicle for a new one, or you can swap land for a strip mall. However, you can't swap your vehicle for an apartment building because the properties are not similar. Certain types of assets don't qualify for a tax-deferred exchange, including inventory, accounts receivable, stocks and bonds, and your personal residence.

Typically, an equal swap is rare; some amount of cash or debt must change hands between two parties to complete an exchange. Cash or other dissimilar property received in an exchange may be taxable.

It is not necessary for the exchange of properties to be simultaneous. However, in the case of such a "deferred" exchange, the replacement property must be specifically identified in writing within 45 days and must be acquired within 180 days (or by tax return due date, if earlier), after transfer of the exchange property.

With a real estate exchange, it is unusual to find two parties whose properties are suitable to each other. This isn't a problem because the rules allow for three-party exchanges. Three-party exchanges require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property. Then he forwards the money to your closing agent to complete the exchange.

When done properly, exchanges let you trade up in value without owing tax on a sale. There's no limit on the number of times you can exchange property. If you would like to learn more about tax-deferred exchanges, contact us.

Here are a five last-minute tax saving ideas. But act soon, the tax year is quickly nearing an end.

1. Make a late-year charitable donation. Even better, make the donation with appreciated stock. You can often receive the higher value donation without paying capital gains.
2. Make contributions to your retirement plan AND take any required minimum distributions from your retirement accounts. The penalty for not taking minimum distributions can be high.
3. Take any final investment gains and losses. Net your capital losses against your higher taxed ordinary income whenever possible. You can also take up to $3,000 in capital losses each year.
4. Gather up non-cash items for donation, document the items, and give those items in good or better condition to your favorite local charity.
5. Consider making any final gifts to dependents. While the "kiddie tax" may require applying a higher tax rate to your children's earnings, there is an amount that is taxed at their, usually lower, tax rate.

Reminder: Remember to avoid putting cash in the kettle. While it may "sound" good, writing a check is a much better idea as cash donations are now no longer tax deductible without a receipt, canceled check, or statement.

For the last couple of years, the IRS has been penalizing late filers of Sub S Corporation tax returns. This is despite the fact that late filing of the Sub S tax return (the 1120S), due March 15th, often does not impact the receipt of the taxes due on April 15th. Those that are getting this "gotcha" penalty are often couples and other small firms who have formed a Sub-S Corporation to provide legal protection for their small businesses.

How much is the penalty?

The penalty is calculated based on each partial month the return is late times the number of shareholders. So a return filed 17 days late with no tax due could cost a married couple with an S-Corporation $300 to $400 in penalties!

What you need to know

If you have a Sub S Corporation, or other flow-through entity for that matter, either file an extension or submit your tax return on time. Remember, an extension gives you six months to file and you do not owe the tax until the flow-through tax return due date (typically April 15th).

If you receive a penalty, challenge it. A well-worded request for reversal of the late filing penalty can be successful. Remember the Treasury Department is still receiving the taxes owed to them on a timely basis.

Remember you have until you file your tax return (excluding extensions) to make a contribution to a Traditional IRA or Roth IRA. This is typically April 15th following the end of the plan contribution year.

The annual contribution amount is $5,500 ($6,000 in 2019) or $6,500 if you are age 50 or over ($7,000 in 2019). Prior to making the contribution, if you or your spouse are an active participant in an employer's qualified retirement plan, you will want to make sure your modified adjusted gross income (MAGI) does not exceed certain income thresholds.

Note: Married IRA limits depend on whether either you, your spouse, or both of you participate in a qualified employer-provided retirement plan. If married filing is separate and either spouse participates in an employer's qualified plan, the income phase-out to contribute is $0 - $10,000.

If your income is too high to take advantage of these IRAs you can always make a non-deductible contribution to an IRA. While the contributions are not tax-deferred, the earnings are not taxed until they are withdrawn.

It is one thing to be taxed on retirement contributions and their related earnings when you withdraw funds from your Traditional IRA during retirement, it is quite another when you pay the tax PLUS a 10 percent penalty for early withdrawal. Need funds prior to retirement and want to avoid the early withdrawal penalty? There are cases when this can be done:

1. Medical Insurance Premiums if Unemployed. If you have been receiving federal or state unemployment for 12 or more consecutive weeks, you may pay for medical insurance premiums from your Traditional IRA without paying the 10% early withdrawal penalty. The premiums may cover yourself, your spouse, and your dependents’ medical insurance premium.
2. Qualified Higher Education Expenses. You may pay for tuition, books, fees, supplies, and equipment at a qualified post-secondary institution for yourself, your spouse, your child or grandchild from your Traditional IRA without paying the 10 percent penalty.
3. Medical Expenses. If you need to withdraw from your IRA to fund medical expenses in excess of 10 percent of your Adjusted Gross Income you may do so penalty-free.
4. First-Time Homebuyer Expenses. IRA distributions of up to $10,000 to help pay for the qualified acquisition costs of a first-time home avoid the early withdrawal penalty too. This is a lifetime limit per individual. A first-time homebuyer is defined by the IRS as not having an ownership interest in a principal residence for two years prior to your new home acquisition date. Even better, to qualify the home can be for you, your spouse, your child, your grandchild, your parent or even other ancestors.
5. Conversions of Traditional IRAs to Roth IRAs. Want to convert your Traditional IRA into a Roth IRA to avoid paying taxes on future account earnings? No problem, this too is considered a qualified event to avoid the 10 percent penalty.
6. You're the Beneficiary. If you are the beneficiary of someone else’s IRA and they die, there is usually an opportunity to withdraw funds without the penalty. Plenty of caution is required in this case, because if treated incorrectly the penalty might apply.
7. Qualified Reservist. If you were called to active duty after 9/11/2001 for more than 179 days, amounts withdrawn from your IRA during your active duty can also avoid the 10 percent penalty.
8. Annuity Distributions. There is also a way to avoid the 10% early withdrawal penalty if the distributions “are part of a series of substantially equal payments over your life (or your life expectancy)”. This option is complicated and must use an IRS-approved distribution method to qualify.

Some Thoughts.

• Remember, the above ideas help you avoid an early withdrawal penalty for funds taken out of your Traditional IRA prior to reaching the age of 59 ½. After this age, there is no early-withdrawal penalty. The penalty is also waived if you become permanently or totally disabled or use the funds to pay an IRS tax levy.
• While the above events allow you to avoid the early withdrawal penalty you will still need to pay the income tax due on the withdrawn funds.
• While generally the same, the 10 percent early withdrawal penalty rules are slightly different for defined contribution plans like 401(k)s and other types of IRAs.
• Before taking any action, call to have your situation reviewed. It is almost always better to keep funding your Traditional IRA until you retire.

Many clients like to keep their Federal Tax Withholdings as low as possible to avoid the IRS having their funds interest-free throughout the year. Other taxpayers, especially those with non-payroll income, must make quarterly payments to the IRS. As long as these quarterly payments are made timely and the amount of the payments is sufficient in the eyes of the IRS you will not be subjected to underpayment penalties. However, if under paid, the IRS applies late payment penalties in addition to the income tax owed. This penalty applies even if you file your 1040 tax return on or before April 15th.

Federal Tax "Safe Harbor Rules"

1. If your federal tax obligation is less than $1,000 no underpayment penalties apply.
2. You withhold at least 90% of this year's federal tax obligation.
3. You withhold at least 100% of last year's tax obligation
4. If your gross income is greater than $150,000 ($75,000 if you are married filing separately) you must withhold the smaller of 90% of this year's tax obligation OR 110% of the tax shown on last year's tax return.

If you find federal tax withholdings made so far this year to be too low, what can you do?

Late Payment Penalty Avoidance Tip

If you are an employee there may be a way to avoid a penalty if you underpaid or neglected to pay your estimated tax payment for a quarter. Increase your payroll withholdings in later months of the year to build up your federal withholdings to cover the shortfall. Trying to catch up by paying more on your next estimated quarterly tax payment wouldn't work since the prior quarter's shortfall remains per IRS penalty calculations.

For whatever reason, in calculating a potential underpayment penalty, payroll withholdings are treated as if they were all made at the beginning of the year, while quarterly tax payments (form 1040-ES) are tracked by the date received.

To increase your withholdings simply provide your employer with a revised W-4. Just be careful that you leave enough in your paycheck to avoid other financial hardships.

While most interest expense is no longer tax-deductible, it is a viable deduction if the interest is on your primary or secondary residence. While limits apply, the use of a secondary loan on your primary or secondary residence can also qualify for interest deductibility. However, “home equity” loan interest can often lose its tax-deductibility if you're not careful. Here is what you need to know.

Home Acquisition or Home Equity Debt?

The first thing to understand is whether the debt secured by your residence is considered "Home Acquisition Debt" or "Home Equity Debt" per the IRS.

• Home Acquisition Debt: Home Acquisition Debt is debt used to purchase, or refinance a primary or secondary residence. It also includes debt used to substantially improve your property. Interest deductibility of this type of debt is limited to the fair market value of the property or a total Acquisition Debt limit of $750,000 ($375,000 if married filing separately). The interest expense is deducted as an itemized deduction on Schedule A of your 1040.
• Home Equity Debt: Home Equity Debt is all other debt secured by your primary or secondary residence. Interest deductibility of this type of debt is limited to the fair market value of the property taken in conjunction with Home Acquisition Debt. Unfortuantely, new tax legislation now suspends this IRS defined home equity dept.

Home Equity Debt can still be deductible

While the IRS definition of "Home Equity Debt" is gone for now, you can still deduct the interest as Home Acquisition Debt if you use the loan or line of credit to buy, build or substantially improve a qualified residence. But this also means if you use the proceeds of this additional loan for any of the following reasons it is NO LONGER deductible;

• Consolidating credit card debt
• Financing college costs
• Starting a business
• Buying a car, boat or another major vehicle
• Funding medical procedures

Home Equity Debt Pitfalls

If you are counting on using your Home Equity Loan interest as a tax deduction you will want to make sure you understand the pitfalls. All too often home equity loans and their related interest become a problem when:

• The loan interest is disallowed because it is not secured by a main or second home.
• The outstanding loan balance exceeds the fair market value of your house. When this occurs there is no longer equity to support the loan. Best case; you lose interest deductibility on your tax return. Worst case; your bank demands repayment of your home equity loan because your home no longer provides adequate collateral.
• You decide to use your home as a home office or as rental property. In this case the interest becomes a business expense, not an itemized deduction.
• Total Acquisition Debt exceeds $750,000 ($375,000 if married filing separate).
• You refinance to pull out equity. This not only creates additional leverage on your property, it could cause you to surpass the home equity debt limit AND require the need to purchase mortgage loan insurance.

While Home Equity Debt as defined by the IRS is gone, loans secured by your home can still provide a valuable tax deduction. You must stay vigilant to the rules and understand your situation. Remember a default on a credit card doesn't necessarily risk losing your home, a default on your home equity loan could put you on the street.

Every year thousands of taxpayers are hit with a heavy 50 percent penalty for not withdrawing enough money from their retirement plan(s). Here is what you need to know to ensure this does not happen to you or someone you know.

Who is subject to Required Minimum Distribution (RMD) rules?

• Anyone who participates in a qualified retirement plan like IRAs (traditional, SEP, SARSEP, and SIMPLE), Roth 401(k), 401(k), 403(b), 457(b) and profit sharing plans AND
• is 70 ½ years or older,*
• who is generally retired OR
• who is the beneficiary of a plan
• Exception: Owners of qualified Roth IRA accounts

The confusion of multiple tables

To determine the amount that must be withdrawn each year you need to go to the correct life expectancy table published by the IRS in Publication 590. There are three tables:

Joint & Last Survivor.

When to use: Your spouse is the sole beneficiary AND your spouse is more than 10 years younger than you.

Uniform Lifetime Table.

When to use: Your spouse IS NOT more than 10 years younger than you OR your spouse is not your sole beneficiary

Single Life Expectancy.

When to use: You are a beneficiary of another account

How much do I need to take out and when?

Once you find the correct table, determine your life expectancy and divide the result by the balance in your account as of December 31st of the previous year.

• The amount must be withdrawn by December 31st of the year. Exception: in your initial RMD year you have until April 1st of the following year to withdraw the funds.
• Thankfully, many retirement account administrators will make the RMD calculation for you. But it is still your responsibility to ensure the calculation is correct.
• The deadlines are strict so don’t miss them. The 50% penalty can be applied each year, so the impact can be dramatic over time. On the other hand, if you are penalized and have a defensible reason you did not take the RMD, you should try to get the penalty reduced or eliminated.
• Remember to conduct the calculation each year. Not only do life expectancy numbers change as you age, so does the balance in your retirement savings accounts.

Some Tips to Help Never Forget

Want to make sure this doesn’t happen to you? Here are some tips.

• Calculate the RMD for each account in early January each year. Set up automatic periodic withdrawals from the account to accommodate the RMD.
• Make a review of your accounts part of your tax planning each year.
• Ask for help. At first, finding the correct life expectancy table and determining the correct calculation can be overwhelming. Have someone review your calculations until you feel comfortable with the process.
• Connect your RMD to a key event like your birthday or anniversary. Then give yourself the additional gift of a payday out of your retirement account.

* Can be later if you are still actively working. If, however, you are a 5 percent or greater owner of the business sponsoring the retirement plan you must take an RMD when 70 ½ whether retired or not.

Every year taxpayers are hit with tax surprises that could be avoided if they just knew the rules. Here are five big ones that are easy to avoid with some simple planning.

Mistake #1. Withholding too little. This results in a tax surprise when filing your income tax. Don’t be too hard on yourself if this happens to you. Social Security withholdings have changed each year and new tax laws make it very difficult to withhold the proper amount from each paycheck.

The plan: Check your withholdings after filing each year’s taxes. Make adjustments as necessary by filing a new W-4 with your employer.

Mistake #2. Inadvertently withdrawing funds from retirement plans. Amounts taken out of pre-tax retirement plans like 401(k)s and IRA’s can create taxable income. The most common inadvertent withdrawal occurs when you roll over funds from one retirement plan to another. If done incorrectly all the rollover could be deemed taxable income.

The plan: Do not touch your retirement accounts if at all possible (Exception: when you reach age 70 ½ you may be subject to Required Minimum Distribution rules). If you do withdraw funds, ensure you have the proper withholdings taken out at time of withdrawal. Direct rollovers into your new plan are always a better alternative than receiving the withdrawal from the plan administrator and then conducting the transfer yourself.

Mistake #3. Not taking advantage of tax-deferred retirement programs. There are numerous opportunities to shelter income from tax through tax-preferred retirement programs.

The plan: Review your retirement savings options and plan to contribute as much as possible to your plans. Pay special attention to plans that include an employee match component. This attention can reduce your taxable income each year.

Mistake #4. Direct deposit mix-ups. You may now have tax refunds directly deposited in up to three bank accounts. The problem: what if one of the account numbers is entered incorrectly? Unfortunately, unlike replacing a lost check, the IRS does not have a good means of correcting this type of error. There have been instances where taxpayers have lost their refunds when this occurs.

The plan: Many taxpayers do not feel comfortable giving the IRS direct access to their bank account. If you are in this camp, the digital deposit problem is solved. If you use direct deposit, avoid depositing your refund into more than one account. Ideally, have a second person double-check the account number on your tax form prior to submitting the return.

Mistake #5. Not keeping correct documentation. You know you drove the miles, donated the items to charity, had the medical expense, and paid the daycare. How can the IRS be disallowing your valid deductions? Remember without correct documentation the IRS is quick to disallow them.

The plan: Set up good recordkeeping habits at the beginning of each year. Create both a digital and paper folder separated by income and expense type. Keep a mileage log and properly document your charitable contributions.

The earlier the better when it comes to adopting a strategy to reduce your taxes. But even if time gets away from you, there are some year-end actions you can take to cut your taxes.

Here are some last-minute tax cutters you might consider:

1. Review income and deductions. It's all in the timing. The most fundamental year-end tax move is to adjust the timing of income and deductions. If your income is high, deferring receipt of more income at the end of the year can save taxes. If you're close to the line on itemizing deductions, accelerating payment of deductible expenses might save taxes.

The first step in timing is to know where you stand now. Then try to forecast where you'll be next year at this time. If you think your next year's tax rates will be higher than the current year's, you might save money by switching tactics and accelerating income.

2. Postpone income. If you're due a bonus, see if your employer will hold off writing the check until January. If you own a cash-basis business, you can time receipt of income by waiting until close to the end of the year to send your December billings.

You can't defer taxes by simply not putting a check in the bank. If you have an unrestricted right to the money, it's income in the year it's available - whether or not you choose to receive the funds.

3. Bunch your payments. Some taxpayers find they have almost enough deductions to exceed the standard deduction. If this is your situation, try bunching payments into one year to take advantage of itemizing. The next year use the standard deduction, and then bunch your payments again the following year. This way you'll itemize every other year.

Other limits to watch are the medical expense limit and the miscellaneous itemized deduction limit. By bunching payments into one year or changing the timing of certain services, you may be able to get a deduction.

4. Pay deductible expenses before December 31. Paying your state income tax estimate before December 31 accelerates your federal deduction. You can also pay property taxes early, make an extra mortgage payment (the interest portion is deductible), pay your tax preparer for your year-end planning meetings, or opt to have dental work or elective surgery before the end of the year. Keep in mind that the IRS doesn't allow a deduction for payments made before the services are performed.

5. Be charitable. You can make cash contributions or charge them on your credit card and take a current deduction. If you give appreciated property to charity, you'll get to deduct the full market value. You may need an appraisal to determine the value of some property.

6. Contribute to a deductible IRA if you qualify. You have until the April tax filing deadline to open an IRA and make a deductible contribution for the prior year.

7. Contribute to your company's 401(k). If you have a 401(k) plan at work, make as large a contribution as you're allowed to make.

8. Set up self-employed retirement plan before December 31. If you're self-employed and you want to make a contribution to a Keogh or similar plan, the plan must be adopted before year-end, even though you have until the April tax filing deadline (or later if you get a filing extension) to make a deductible contribution for the previous year.

9. If necessary, adjust your income tax withholding before year-end to avoid underpayment penalties. Withheld taxes are considered paid in equal amounts during the year regardless of when the tax is withheld. Therefore, a year-end adjustment to your withholding could help you avoid a penalty.

10. Consider your marital status. If planning a wedding or divorce, be aware that your marital status as of December 31 determines your tax status for the whole year. Changing the dates of a year-end event may save taxes.

11. Offset capital gains. Review your investment portfolio to determine whether you should sell some losers before year-end in order to offset capital gains you've already realized. Capital losses are first netted with capital gains and then are deductible against ordinary income (limited to $3,000 a year).

12. Check exposure to the AMT. If you have tax preference items, do an alternative minimum tax (AMT) computation when you do your regular tax estimate. If the AMT will apply to you, you may still be able to shift income or deductions to avoid or reduce the tax.

13. Plan for losses. Check your basis in any S corporation in which you are a shareholder and where you expect a loss this year. Be sure you have sufficient basis to enable you to take the loss on your tax return.

14. Look before you leap. A word of caution about year-end tax-cutting maneuvers: don't rush into transactions which you hope will reduce your tax bill only to find out you've created other problems. Do not enter into transactions solely for the tax benefits. All investments should be economically sound. There are those who will sell you so-called "tax" solutions. Analyze such options carefully.

When you are ready, please call to discuss your situation and to set up a personalized tax plan.

Frequent tax law changes have made the tax code very complicated; only the informed taxpayer can take advantage of tax-cutting opportunities that remain.

Here are some suggestions you should consider if you're interested in cutting your taxes.

1. Reduce your consumer debt. The interest you pay on consumer debt is not deductible. Consider shifting consumer debt to a home-equity loan (where available and not to exceed $100,000) to maintain deductibility for the interest. Don't rush into anything, however. Consider loan origination costs and points you may have to pay. Also, realize that if you can't make the payments on the home-equity loan, you could lose your house.

2. Rehabilitate an old building. One tax break that may be attractive to you is the credit for rehabilitating old buildings - either commercial or certified historic structures. If you don't want to do the work yourself, consider investing in partnerships that rehabilitate old structures.

3. Watch for AMT liability. The alternative minimum tax (AMT) is the one you pay when too many tax preference items reduce your regular tax below a certain amount. If you use preference items to reduce your taxes - such as accelerated depreciation, private activity bond interest, etc. - you may want to shift income and deductions to keep the alternative minimum tax from applying to you.

4. Time any change in marital status with a view to minimizing taxes. Among the areas that could be affected are deductibility of IRA contributions, lost itemized deductions, and a shift to a different tax bracket. You might be able to cut your tax bill by delaying or accelerating a marriage or divorce.

5. Contribute to a retirement plan. Retirement plans are still an excellent tax shelter. Consider a a retirement account strategy to reduce your self-employed income, even part-time or in a second business. If you're an employee, find out if your company has a 401(k) or other plan and make contributions to it. If you qualify, you should also consider an IRA.

6. Use your vacation home wisely. If you own a second or vacation home, find out whether you get a better tax break by treating the property as a second residence or as a rental property. The number of days you personally use the home is crucial, so get details immediately.

7. Avoid the "kiddie" tax. Check the income of any children under the age of 19 (24 for full-time students). Unearned income beyond a certain amount will be taxed at your highest rate. Shifting investments or making other adjustments may be appropriate.

8. Make your hobby a business. If you're making money from a hobby, turn your hobby into a business so that you can write off your expenses. You must be able to demonstrate that you engaged in the activity for a profit. To do that, conduct the activity as a business. Keep records, and get a separate bank account for the activity. The IRS will expect your sideline business to show a profit in three out of five years, or you'll have to prove your profit motivation in order to deduct losses.

9. Don't overlook medical deductions. If you help to support an elderly relative who lives in a nursing home for medical reasons, the cost of the nursing home may qualify for the medical deduction. If you make improvements to your home for medical reasons, the cost of such improvements are medical expenses to the extent the improvements do not increase the value of your home. That includes such things as widening doorways for wheelchair use or modifying the home to accommodate an individual with a medical problem.

10. Take the child care credit if you qualify. If you pay for child care services while you work or go to school, you may qualify for the child care credit. The credit is allowed only for children under the age of 13. You must report on your tax return the name, address, and taxpayer identification number of the care provider.

There are other tax-cutting strategies in addition to those mentioned here. If you would like assistance in selecting tax-saving strategies that make the most sense in your situation, please call.

The Roth IRA has been widely discussed and analyzed. One of the most challenging questions this retirement vehicle brings up is whether or not you should convert your existing IRA to a Roth IRA.

How the Roth IRA works:

You're allowed to contribute up to $5,500 to a Roth IRA in 2018 ($6,000 in 2019) plus an additional $1,000 if you are 50 or older, the same as any other IRA, but your contributions aren't tax-deductible. However, there's an important, offsetting benefit: Principal and earnings in a Roth IRA may never again be subject to federal income tax, and a Roth IRA isn't subject to mandatory distribution requirements.

Example: Barbara contributes $5,500 to a Roth IRA. Although Barbara receives no tax deduction, this IRA can grow to any amount and it could never again be subject to tax. And for the rest of Barbara's life, withdrawals may be as large or small as desired, provided Barbara is at least 59 1/2 years old and she's had the IRA for at least five years.

What about a conversion?

The law also allows you to convert an existing IRA to a Roth IRA. If you convert to a Roth IRA, you'll have to pay regular income tax on your existing IRA. But once you pay the tax, your rollover Roth IRA will offer the benefits of a Roth IRA.

Fortunately, the conversion lends itself to a checklist approach. The checklist below is designed to give you a start in dealing with the conversion question, but it's not intended to be the last word.

Do you currently have an IRA? 

Yes______ No______

Use this checklist to help you decide if you should convert to a Roth:

Do you expect to be in a higher tax bracket when you retire? 

Yes______ No______

If you expect to be in the same or lower tax bracket when you retire, it may not make sense to pay the conversion tax today.

Will you be able to pay the resulting income tax with cash from outside your IRA? 

Yes______ No______

If you must tap into your IRA to pay the tax, conversion to a Roth IRA is unlikely to pencil out. But remember: you can reduce the potential tax bill by making a partial conversion.

Will you be able to leave the money in the rollover Roth IRA for at least five years? Yes______ No______

You could incur tax and a penalty if you tap your Roth IRA in less than five years.

If you checked "Yes" to all questions, you might be a good candidate for a rollover Roth IRA. However, even if the checklist indicates that you should convert to a Roth IRA, your personal situation may still point in the opposite direction.

Before you make a final decision - yes or no - be sure to contact an expert for investment and tax advice. Should you wish additional information please call. Describe the item or answer the question so that site visitors who are interested get more information. You can emphasize this text with bullets, italics or bold, and add links.

1. Maximize deductions. If you find you're not able to use all of your itemized deductions these days, you're not alone. Several of the deduction categories must meet thresholds before you can take any deductions. For example, you can only deduct medical expenses above 10% of adjusted gross income in 2019.

Many taxpayers feel they are "wasting" deductions because they don't meet the threshold levels. One way around this is to bunch deductions, timing your discretionary expenses so you exceed the threshold one year but not the next.

2. Minimize taxable income while saving for retirement. If you're an employee, invest as much as you can afford in any 401(k) or similar deferred-income plan provided by your employer. Dollars put into these plans don't even show as taxable income on your W-2.

You can also reduce your current-year taxes by making tax-deductible IRA contributions, if you qualify.

If you're self-employed, use a SEP (simplified employee pension), a SIMPLE (Savings Incentive Match Plans for Employees), or a 401(k) plan to shelter income. You can also take advantage of these plans if you're employed, but have outside earnings from a sideline or home business.

3. Review investment strategies. If you are in the higher tax brackets, consider investing in tax-free instruments such as municipal bonds. Compare the return with the after-tax equivalent you could earn from taxable instruments of the same risk.

Remember, however, that tax consequences alone should never drive your investment decisions.

4. Check taxability of social security benefits. Social security recipients may benefit from strategies to reduce or defer taxable income. If your "provisional income" exceeds certain levels, it will trigger taxation on a higher percentage of social security benefits. Be sure to review the options available in your situation.

5. Be charitable. One excellent tax-saving strategy to consider is donating appreciated property. For example, you may own 20 shares of stock worth $50 a share that you bought several years ago for $5 a share. If you sold the shares, the $900 difference between the current value ($1,000) and your cost basis ($100) would be taxed as a long-term capital gain.

However, you can donate the shares to your favorite charity and take a deduction for the full $1,000 without paying any tax on the gain.

6. Review your interest expense. If you are paying any interest that is not tax deductible (such as interest on auto loans or credit cards), consider paying off the debt, or convert it to debt that will allow for deductible interest (such as a home-equity loan, where available).

7. Pay attention to recordkeeping. Good recordkeeping can save taxes, particularly when you're determining gain or loss on the sale of mutual fund shares. Whether you make regular, periodic investments in mutual funds or simply make lump-sum deposits and reinvest all of the dividends, detailed records are imperative for determining your gain or loss. Good records and the right choice of cost-allocation method will minimize your tax bill.

The IRS recognizes three major methods of calculating the basis (cost) of the mutual fund shares you sell: (1) the first-in, first-out (FIFO) method, (2) specific identification of shares, and (3) the average cost method. Choose the right method to minimize your taxes.

8. Watch out for the marriage penalty. If wedding bells are in your future, beware of the marriage penalty. This is a feature in the tax law that causes some married couples to pay more tax than two singles earning the same amount of income. In some cases the marriage penalty is unavoidable (short of not getting married), but in other cases a little advance planning can save a sizable amount of tax.

9. Maximize your child care credit. If you and your spouse are both employed at full- or part-time jobs, make sure you get the maximum benefit from the child care credit. When calculating the credit, remember that you may be able to include the cost of day care, nursery school, babysitting, and summer day camp.

These are just a few strategies available for cutting taxes. Please call if you wish additional assistance.

If you want certain individuals to receive property from your estate, there may be advantages to making those gifts while you are still alive.

Consider these facts about making lifetime gifts:

• Gifts to spouses. The tax law permits a married individual to make gifts of any amount to a spouse without incurring any gift tax. The value of these gifts is not includable in the estate of the donor.

• Annual gift exclusion. To individuals other than your spouse, in 2019 you can transfer $15,000 per year ($15,000 in 2018), per recipient, without incurring gift tax.

If you're married and your spouse joins in the giving, you can transfer double that amount annually to each recipient (even if the gifted property is owned by only one spouse).

A consistent program of gifts under the annual exclusion rules can create substantial estate tax savings.

Example: You have two married children and four grandchildren. Each year, you make eight gifts equal to the annual exclusion amount. You will pay no gift tax and use none of your unified estates and gift tax credit.

• No tax deduction for gifts. Note that gifts to individuals do not entitle you to an income tax deduction. A gift to an individual isn't a charitable contribution. Conversely, a gift doesn't constitute taxable income to the recipient. Gifts of income-producing property may, however, reduce your taxable income. Once you've given the property away, the recipient, not you, receives the income it produces and pays any income tax due on it.
• Flexibility in giving. One advantage to annual gift-giving is that it is relatively simple to do, especially if you're giving away cash. Another advantage is flexibility; you can see how much you can afford to give away each year. You can give away anything – cash, stock, art, real estate. Valuation is the fair market value on the date of the gift. Subsequent appreciation, if any, belongs to the donee, not you.
• Don't be hasty. Before you give away assets, be sure you will not need them yourself to provide income in later years. Consider the impact inflation will have on your resources.
• All gifts count. All gifts during the year, including birthday and holiday presents, count toward the annual gift tax exclusion. If the total exceeds the exclusion, a gift tax return is required.
• Year-end gifts. A gift made by check isn't complete until the recipient actually deposits or cashes the check. Plan accordingly when making year-end gifts, especially if you want such gifts to be counted toward the current year's gift tax exclusion.
• Ownership requirements. For a gift to be valid, you must part with ownership. Pay special attention to this rule if you make gifts of stock in the family business or gifts of your personal residence.

Choose the right gift

Making gifts of the wrong type of property can defeat your tax planning. The best property to give will depend on your tax goals. Are you trying to reduce current income taxes, future estate taxes, or both?

Here are some items which may not be suitable gifts when trying to accomplish certain objectives.

• Assets with potential tax losses. The tax loss from selling certain assets may be more beneficial to the donor than to any intended recipient.
• Property you intend to use. If you continue to use property, such as a residence, after you have given it to another, you may not get the tax benefits you sought.
• Contracts. If you are currently receiving contract payments on which you are reporting gain, a gift of this contract will generally accelerate all the tax on the contract.

Making lifetime gifts can substantially reduce your income tax and estate tax if done properly. If you would like details or assistance, please contact us. We're here to help.

The tax laws are complex, and they change every year. Here are some suggestions that can help make filing your tax return an easier task.

1. Start early. Any unpleasant chore becomes more difficult if it's left until the last minute, so get an early start on filing your tax return. Get out last year's return and look it over. Your prior return or a tax organizer can be a real timesaver, and a money saver as well, since it jogs your memory concerning income and deductions you might otherwise overlook.
2. Summarize deductions. Go through your checkbook, credit card statements, and receipts for cash purchases looking for possible deductions. Add up the totals for medical expenses, union dues, mortgage interest, real estate taxes, charitable donations, work-related expenses, personal property taxes, and any other items that you think may be tax deductible.
3. Gather tax documents you receive. Save all documents you receive that contain information you'll need for tax return preparation. Typical forms include:

• Form W-2 / statement of wages
• Form 1099-R / distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, etc.
• Form 1099 / interest, dividends, royalties, etc.
• Form 1099-G / state and local income tax refunds
• Form 1099-B and brokerage statements / sales of securities
• K-1s / income and deductions from partnerships, S corporations, trusts, estates
• Form 1095 / proof of health insurance

4. Correct discrepancies before you file. The IRS matches the documents it receives from various sources with the information you report on your tax return - for example, the interest income as reported on Form 1099. If you receive information returns that are inaccurate, contact the issuer to get a corrected form. If you cannot get a correction, plan on attaching an explanatory note to your tax return.

5. Don't forget tax-exempt income. Don't forget to keep records concerning your tax-exempt income. The amount must be reported on your tax return, even though it is not taxable income to you.

6. Get required numbers. Your return requires that you give social security numbers for any dependents you claim.

7. Review children's filing requirements, too. As you gather information on your income and expenses, don't forget to review the same information for your children. Your children may have filing requirements.

8. Schedule your tax appointment early. Afterward, you may need time to chase down missing records or resolve other problems before the April filing deadline.

9. Identify your tax payments. In order to have your tax payments properly identified and credited to you, put complete information on every check you send to the IRS. Include your name, address, social security number or business ID number, type of tax being paid, and the tax year involved. Don't combine two or more payments on one check; always send a separate check for each tax payment.

10. Keep good records. Assume that your return could be selected for an audit, and keep good records. Keep bank statements, canceled checks, and records supporting income and deductions for seven years from the date your return is filed (including any filing extensions).

Tax law changes so frequently that you must be concerned with tax planning year-round, or you'll miss opportunities to lower your tax bill. Are are some common areas that can mean big money savings with proper planning.

1. Familiarize yourself with the income levels at which various tax breaks phase out. While it doesn't make sense to make less income just to qualify for a tax break, shifting income from one year to another may sometimes be a smart thing to do.

Learn about the tax credits and deductions for which you might qualify. Then estimate your income, and if it will be just beyond qualification range, look for opportunities to defer income until a later year. Investment income can often be shifted, or you might delay the exercise of stock options or the receipt of a bonus.

2. Don't pay tax on a home sale. The law lets you sell your home tax-free if you meet certain requirements.

The home must have been owned and used as your principal residence for at least two of the five years prior to the sale. Couples can enjoy $500,000 of tax-free profits in a home sale, while singles qualify for up to $250,000 of tax-free gain.

To the extent possible, time home sales to meet the requirements in order to enjoy tax-free profits.

3. Factor education tax breaks into your college planning.

First, there's the American Opportunity credit for a percentage of qualified higher education expenses.

Second, the Lifetime Learning credit allows a deduction for a percentage of qualified expenses paid for any year the American Opportunity credit isn't claimed, and it even applies to job-related classes.

Third, you may qualify for a deduction for interest paid on student loans.

Fourth, education savings accounts allow annual nondeductible contributions for every child under 18, with tax-free withdrawals for qualifying education expenses. These section 529 plans are great tools to save for college expenses.

Check the income phase-out levels for these breaks. Careful planning is required to find what's best in your particular circumstances.

4. Invest to take advantage of lower long-term capital gains tax rates. You can cut your tax bill significantly by holding an appreciated investment long enough to qualify for long-term rather than short-term tax treatment.

5. Conduct an investment review to confirm you have the right investments in your tax-deferred accounts. To take best advantage of the lower long-term capital gains tax rates, investments that produce interest income should be held in tax-deferred accounts, while those that produce capital gains should be held in taxable accounts. Putting capital gain investments in tax-deferred retirement accounts could turn income that would be taxed at lower rates into ordinary income taxed at much higher rates.

6. There's never been a better time to contribute to an IRA. Even nonworking spouses may be able to contribute to an IRA. Individuals covered by a retirement plan at work or whose spouses are covered by a plan may still qualify to make deductible IRA contributions if their income doesn't exceed certain levels.

7. Your IRA options may include a Roth IRA. With a Roth IRA, your contributions won't be tax-deductible, but the account will grow tax-free, and you won't pay federal income tax on distributions from the account once it's been in existence for five years and after you've reached age 59½.

8. Consider rolling your IRA into a Roth. If you have a traditional IRA, you might want to consider rolling your existing IRA into a Roth IRA. You'll have to pay income tax on the rollover, but the account can escape federal income taxation thereafter.

9. If you work at home, get details on the home office deduction. More people can now qualify to take a deduction for home office expenses. Your home office may qualify as your "principal place of business" if you use it regularly and exclusively for administrative and management activities but perform the income-producing activities at another location.

Realize that in tax planning, the earlier you start, the more effective your tax-cutting efforts will be. Also realize that not every strategy is appropriate for everyone.

Suppose you retire to a new state with warm weather and lower taxes. If you keep a part-time home in your original state or you later decide to return, you could have a tax problem. State tax authorities may argue you never really left, and that you owe them a big tax bill for all the income you earned while away. Here are tips to ensure this does not happen to you.

Understand "domicile"

Tax residency is usually based on the concept of "domicile." You may have many homes, but you can only have one domicile. A domicile is a place you intend to be your permanent home, and where you intend to return after being away. When these cases go to court, they are often decided by determining a person's intentions regarding their domicile. Consider this hypothetical example:

Illinois resident Steve Seeyoulater moved to an apartment to pursue a lucrative job opportunity in Indianapolis, leaving his wife and children behind in Chicago. Steve reasoned that since he spent more than 70 percent of his time in Indiana, he could file his state return there and take advantage of its lower tax rate. The state of Illinois could easily disagree with Steve's assumption, since on the surface Steve intends for his permanent home to remain where his family is, in Illinois.

Know the rules before you move

Before moving, research the residency rules in your home and destination states. They often vary from state to state. Some states have specific guidelines on the number of days its residents must be in the state. Others are less exact.

Keep good records

If you say you are in a state for a certain period of time, be ready to support your claim. If during an audit your credit card receipts conflict with where you claimed to be at the time, you will have problems.

Demonstrate your intentions

If you're going to file as a resident of a new state but also have a potential tax claim in another state, you have to be able to demonstrate your sincere intent to change your domicile. Here are some things you can do:

• Change your driver's license to reflect your new home.
• Register to vote in your new state.
• Relocate your checking and savings accounts to a local bank.
• Use local service providers. Start going to a new, locally based doctor, dentist and church.
• Make sure as many things "near and dear" to your heart are located in the new state. These can include your loved ones, pets or favorite personal items.
• Spend the required amount of time in your new home, according to the state's tax laws.

The last thing you want is a call from a state auditor looking for income tax. By being prepared, you can greatly reduce the risk of a surprising tax bill. Reach out if you'd like to discuss your unique situation.

There are many ways to save for college, but one thing is certain: it is never too early to start. One way to save for college is with a "Section 529" plan. These plans offer a way to pay for college expenses with some nice tax advantages.

What are they?

Section 529 plans allow you to set up a tax-advantaged account to pay for your child's college education. There are two types of Section 529 plans: prepaid tuition programs and college savings plans.

• Prepaid tuition programs let you lock in today's tuition costs by purchasing tuition credits or certificates that a student redeems when he or she starts college.
• College savings plans let you make contributions to a state-sponsored savings account to build a fund for your child's college expenses. These accounts are generally managed by a private mutual fund company. This is the Section 529 plan you've probably been hearing about, and it is this type of college plan that is the focus of this article.

How do Section 529 college savings plans work?

• Make a gift to set up an account. You start by setting up an account and naming your child (or anyone else) as the beneficiary. Your contribution is considered a gift. Your contributions qualify for the $14,000 annual tax-free gift exclusion ($28,000 for married couples making a joint gift). Special rules for 529 plans let you average your gift over five years. This means married couples can make a $140,000 joint gift and individuals can make a $70,000 gift in a single year, without incurring gift tax. However, you cannot make additional gifts to your child for five years, or you may owe gift tax.
• Your contribution is limited. You aren't permitted to make contributions to a 529 plan beyond what is necessary to pay for your child's college expenses. Each plan sets its own limit. Most plans allow you to make either a lump-sum contribution or a series of monthly contributions. All contributions must be made in cash; you can't contribute shares of stock or other property to these plans.
• You remain in control. You cannot choose the investments in the fund - you must choose one of the plan's investment options. However, you do remain in charge of all withdrawal decisions. You can allow your child to make withdrawals to pay for college expenses. If your plan permits it, you can change the beneficiary to one of your other children. If you change your mind about maintaining the account, you can even request a refund (tax and penalties will apply).
• Your child can withdraw money to pay for college expenses. Section 529 funds must be used for qualified higher education expenses, such as tuition, fees, books, and supplies. They can also be used to cover certain room and board expenses, as long as your child attends school at least half-time. If your child receives a scholarship, you can request a penalty-free refund up to the amount of the scholarship. In addition, you can withdraw the funds if your child becomes disabled or dies. If the funds are withdrawn for any other purpose, you (not your child) pay tax on the earnings that have accumulated in the fund.
• You can change plans. You can make a tax-free rollover to another plan with the same beneficiary. That allows you to move your child's plan to another state's plan without losing the tax benefits. This tax-free rollover treatment only applies to one transfer within any 12-month period.

What are the benefits?

• Section 529 plans offer tax benefits. Your contribution is not tax-deductible, but your investment grows tax-deferred. That allows your money to grow faster than a similar investment in a taxable account. Qualified distributions from Section 529 college savings plans are tax-free.
• Section 529 plans offer an estate planning opportunity. Section 529 plans let wealthy parents or grandparents transfer wealth out of an estate and into an account a child can use to pay for college expenses.

What are the disadvantages?

While these plans offer an attractive alternative to other college funding plans, they are not without drawbacks. There are a number of factors you should consider before you invest in a Section 529 college savings plan.

• Substantial penalties apply to nonqualified withdrawals. Any nonqualified distributions will be subject to withdrawal fees and penalties. You'll also owe income tax on the distribution.
• Your state plan may not meet your investment expectations. You should choose from among the available plans the one that meets your risk tolerance and performance expectations. But what if you are unhappy with a plan's investment performance? If your plan allows rollovers, you can move the funds into another plan. If you simply request a refund, you'll have to pay income tax and penalties on the distribution.

Do your homework.

The same federal income tax rules apply to all Section 529 college savings plans. However, each plan has unique features. Here are some items you should compare when you evaluate different plans.

• State income taxes.
• Investment return.
• Enrollment fees.
• Maximum contributions.
• Flexibility in making contributions.
• Withdrawal fees and penalties.
• Transferability to another beneficiary or another qualified plan.
• Choice of schools.
• Participation by nonresidents.
• Beneficiary age restrictions.
• Covered education expenses, including restrictions on room and board.

Section 529 plans provide an attractive, tax-favored way to save for college. However, they are not the right choice for everyone.

You’ve loved dogs all your life so you decide to start a dog breeding and training business. Turning your hobby into a business can provide tax benefits if you do it right. But it can create a big tax headache if you do it wrong.

One of the main benefits of turning your hobby into a business is deducting all your qualified business expenses, even if it results in a loss. However, if you don’t properly transition your hobby into a business in the eyes of the IRS, you could be waving a red flag that reads, “Audit Me!” The agency uses several criteria to distinguish whether an activity is a hobby or a business.

The business-versus-hobby test

A. Business

B. Hobby

Profit Motive:

A. You have a reasonable expectation of making a profit

B. You may sell occasionally, but making money is not your main goal

Effort and Income

A. You invest significant personal time and effort. You depend on the resulting income.

B. It's something you do in your free time; you may make the bulk of your money elsewhere.

Reasonable Expenses

A. Your expenses are ordinary and necessary to run your business

B. Your expenses are driven by your personal preferences and not strictly necessary

Background

A. You have a track record in this industry, and/or a history of making profits

B. You don't have professional training in the field and have rarely or never turned a profit

Customers

A. You have multiple customers or professional clients

B. You have few customers, mainly relatives and friends

Professionalism

A. You keep professional records, including a separate checkbook and balance sheet; you have business cards, stationary, and a branded website.

B. You don't keep strict professional records of your activities; you don't have a formal business website or business cards

Honest assessment

If your dog breeding business (or any other activity) falls under any of the “hobby” categories on the right side of the chart, consider what you can do to meet the businesslike criteria on the left side. The more your activity resembles the left side, the less likely you are to be challenged by the IRS.

If you need help to ensure you meet the IRS’s criteria for businesslike activity, reach out to schedule an appointment.

Now that college students are settling into their first weeks of school, it's important for parents and students to recall that the $4,000 tuition and fees deduction they may have relied on in past years is no longer available. The good news is that there are alternatives. Here are two of the more popular education credits:

Alternative No. 1: The AOTC

The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 per student per year for qualified undergraduate tuition, fees and course materials. The deduction phases out at higher income levels, and is eliminated altogether for married couples with a modified adjusted gross income of $180,000 ($90,000 for singles).

Alternative No. 2: The Lifetime Learning Credit

The Lifetime Learning Credit provides an annual credit of 20 percent on the first $10,000 of qualified tuition and fees ($2,000 credit), for either undergraduate or graduate level classes. There is no lifetime limit on the credit, but in 2019 only couples making less than $116,000 per year (or singles making $58,000) qualify for the full credit. Unlike the AOTC, this deduction is per tax return, not per student.

Credits usually beat deductions

Both the AOTC and the Lifetime Learning Credit are generally more valuable than the expired tuition and fees deduction, because as credits they reduce your income tax directly, while the deduction merely reduced how much of your income is taxed.

In addition to the two alternative education credits, there are many other tax benefits that reduce the cost of education. This includes breaks for employer-provided tuition assistance, deductions for student loan interest, tax-beneficial college savings options, and many other tax-planning alternatives.

Please call if you'd like an overview of the alternatives available to you.

Following these tips when you receive a payment from the Federal or State government can save you more headaches than you can imagine.

• Tip: Double check the dollar amount of your refund check before you cash it. Make sure it matches the amount on your tax return.
• Tip: If you have a direct deposit of your refund, only deposit it into one account. This makes matching the dollar amount easier to do.
• Tip: Never cash a check received from the IRS or State tax departments that you cannot tie back to a specific reason or tax filing.

The reason for caution

• Wrong amounts usually mean errors. The error could be yours, or the error could be from the IRS. For example, if the IRS misapplies a quarterly payment or modifies your tax return, they often will send back an amount that does not tie to your filed tax return.
• No explanation. Often checks received from the government have little to no description to help you figure out what the check is for and why is has changed from the amount you expected.*
• Owed money can create penalties and interest. Once cashed, the door is open for a future IRS bill with interest and penalties. For example, a small businessman sent in his quarterly payroll filing. The IRS misapplied the funds, determined the account they applied the money to had no tax, and then sent a check back to the taxpayer. The taxpayer cashed the check. Two years later the business received an underpayment notice along with substantial interest and penalties. The service even applied liens on the taxpayer’s bank account.
• It may mean identity theft or missing forms. A check with an unusual dollar amount could mean the IRS does not have the corresponding tax form on record. It could also mean your taxpayer account has been compromised.

Should you receive a payment that does not make sense to you, please review your tax return and call for assistance. An un-cashed check received in error can often be returned to avoid confusion and hassle when the IRS finally corrects the problem.

*Note: Sometimes the memo line will include interest paid to you from the IRS. This interest will need to be reported on next year's tax return.

The "tax gap" is a concept developed by the Internal Revenue Service to measure voluntary compliance with the tax laws by taxpayers. The tax gap is the difference between what taxpayers should have paid and the amount that is actually paid voluntarily and timely.

According to the latest tax gap figures, about 83% of all taxes owed are paid as due. That leaves a 17% noncompliance rate for a tax gap of about $450 billion. IRS enforcement activities, including tax return audits, collect about $65 billion of this tax revenue shortage.

There are three components to the tax gap: nonfiling, underreporting, and underpayment. The tax gap does not include taxes that should have been paid on income from illegal activities.

Underreporting accounts for about 84% of the tax gap. The largest sub-component for underreporting involves individual taxpayers understating their income, taking improper deductions, and overstating business expenses. Noncompliance is highest where there is no third-party reporting and/or withholding such as there is with W-2s and 1099 information slips.

The current IRS measurement of the tax gap was done using tax returns from a few years ago. The information on the tax gap assists the IRS in selecting tax returns for audit. The intent is to select those tax returns that will lead to the greatest amount of additional tax. This not only improves IRS efficiency, but it also demonstrates to taxpayers that others will be paying according to the tax laws.

What does all this mean to you? If a large portion of your income is not subject to third-party reporting, you may be in a group that is on a potential tax return audit list this year.

The "baby boomers," Americans born between 1946 and 1966, are moving like a wave into their fifties and sixties. Unfortunately, many of them are facing new financial pressures. Their kids are likely to need help paying for increasingly expensive colleges. Their folks are getting older and living longer. Boomers are digging into their wallets to make up the shortfall in their parents' retirement income, and many are trying to help cover the costs of long-term care. On top of that, they're struggling to save for retirement and pay for the groceries. No wonder they feel squeezed.

If you're part of the "sandwich generation," take heart. Careful planning and a little diligence can help to alleviate some of this pressure.

First, you need to identify your priorities. How important to you are such things as setting aside funds for retirement, paying for your kids' schooling, and helping your parents with the cost of long-term care? Once you've identified your priorities, you can set realistic goals to address them, putting the bulk of your financial resources and energy toward meeting the most important goals first.

• Retirement. Many people would like to retire at a relatively young age. But some may have to rethink that goal in light of other financial demands like college tuition and care for elderly parents. Working longer can have distinct benefits. Besides funding an accustomed lifestyle for a few more years, working longer and leaving your retirement accounts intact will give the funds more time to grow.
• Education. Many families want to help finance the education of their children. Tuition, books, and other college costs can eat up tens of thousands of dollars. If your child is still young, it's a good idea to start saving early and invest for growth. If your child is ready to start college but isn't financially prepared, you might consider letting him or her finance a portion of the cost by working or obtaining loans. College-age kids have their working lives ahead of them. Their income, including their ability to repay loans, should increase.
• Parents. For many in the sandwich generation, helping to pay for the high cost of a parent's long-term care is a priority. For example, a year in a nursing home can cost $30,000 to $50,000. At some point, your parents may need financial help to cope with such high expenses. In the meantime, you may be able to help them manage their finances and consider options such as long-term care insurance. You might want to meet with their banker, lawyer, and accountant to look over your parents' financial status and review legal papers, including such documents as power of attorney, wills, and trusts.

Feeling squeezed? Call if you wish a review of your situation.

With the backlog of tax return filing due to late changing tax laws, want to ensure your refund gets to you in the shortest amount of time? More importantly, how can you avoid receiving a letter from the IRS? Here are some of the most common tax filing mistakes:

• Forgetting a W-2 or 1099: The IRS does an effective job in comparing W-2s and 1099s they receive from organizations to the amounts you claim on your tax return. If they do not match, rest assured you will receive a notice in the mail asking for clarification.
• The 1095 form: Through 2018, all taxpayers must now prove they have valid health care coverage for themselves, their spouse, and their children. This is done with Form 1095. Make sure you receive yours prior to filing your tax return.
• Duplicate dependent reporting: If more than one tax return claims the same person as a dependent, the second return will be rejected. The IRS does not try to determine which tax return is correct. They leave that up to you.
• Forgetting a name change: If you fail to change your name with Social Security after marriage and you file a tax return with your "new" last name, be prepared for either a rejected tax return or an adjusted tax return.
• Other missing information: When preparing your tax return, often the return is held up because key information is missing. These missing items range from property tax and mortgage interest statements to 1099s and W-2s.

Signing the e-file authorization form: Your tax return cannot be e-filed without proper authorization. After reviewing your return, a properly signed Form 8879 must be received.

The tax code is filled with terms we rarely use in everyday conversation. Two of the more common are Marginal Tax Rates and Effective Tax Rates. Knowing what they mean can help you think differently about your potential tax obligation.

Definitions

• Marginal Tax Rate: This is the tax rate applied to the “next” dollar you earn. Since our income tax rates are progressive, the next dollar you earn could be taxed at as little as zero or as high as 37%!
• Effective Tax Rate: This is the tax rate you actually pay. This is simply taxes you pay divided by your total taxable income. Said another way, after taking your income and then applying taxes, deductions, credits, exemptions, and other adjustments you are left with your true tax obligation. This obligation is a percent of your income.

A Simple Example

Consider two people; Joe Cool who earns $50,000 and Chuck Browne who earns $500,000. If we had a flat tax of 10%, Mr. Cool would pay $5,000 in tax and Mr. Browne would pay $50,000 in tax. Both of their Effective Tax Rates would be 10% AND their Marginal Tax Rates would also be 10% because each additional dollar they earn would be taxed at the same 10%. However, it is a different picture when you apply our progressive tax rates:

Why Care?

• Calculating Returns. The true return you receive on any taxable investment will be determined by your Marginal Tax Rate. A $500 profit from a new investment could cost Joe Cool 22% in federal tax, but it could cost Chuck Browne 35% in federal tax.
• Phase-outs can provide a dramatic impact on Effective Tax Rates. The simple examples above do not account for income limits applied to many tax benefits. Additional income could have a very dramatic impact on Joe Cool if it triggers losing things like an Earned Income Credit, or Child Tax Credit. This could increase your Effective Tax Rate while not touching your Marginal Tax Rate.
• Extra work can help the taxman more than you. There have been cases where adding a second job can actually cost you money by not understanding the impact of the income on your Effective Tax Rate. This is especially true for retired workers receiving Social Security Retirement Benefits. That extra job may make your Social Security benefits taxable.
• It’s not that simple. In addition to all the different income phase-outs for credits and deductions, your Effective Tax Rate could be impacted by the elimination of itemized deductions, reduction of exemptions, the Alternative Minimum Tax, and the marriage penalty.

It is a good idea to understand your Effective Tax Rate and your Marginal Tax Rate. Look at last year’s tax return and calculate your Effective Tax Rate. Then look at your income and determine what your Marginal Tax Rate is if you earn additional income. If you anticipate an increase in earnings, consider forecasting the impact on your Effective Tax Rate. You may be surprised by the result.

The tax filing deadline is upon us. The sense of relief that another 1040 form is filed is like lifting a weight from your shoulders. But wait! April 15th is also the 1st quarter estimated tax due date! So how do you know if you need to place another check in the mail? Here are triggers that suggest you may wish to consider sending in a quarterly estimated tax payment.

1. You needed to file quarterly estimated tax payments last year or your current tax return requires an additional tax payment in excess of $1,000.
2. You receive income that does not have taxes withheld. Common sources of this type of income are Social Security Benefits, part-time jobs, and self-employment income.
3. You have rental property, investment income, or interest income. In this case you may wish to consider calculating your estimated tax obligation for next year to determine if estimated tax payments are required.
4. New tax changes could impact your tax bill. If you and your spouse both work, the marriage penalty and additional taxes for middle and upper-income households could impact the amount owed next year.
5. Any life events in your near future? Remember certain events such as marriage, divorce, or the birth of a child can change your tax obligation up or down. Perhaps you expect earnings from a small business or investment to impact your taxable income during the year.

If you think you might owe estimated taxes remember to make payments each quarter by the 15th (or the following Monday if it falls on a weekend) during the months of April, June, September, and January. You are required to prepay 90% of next tax year's bill or 100% of the prior year tax bill (110% if your adjusted gross income is over $150,000) to avoid underpayment penalties. If you do not, penalties for underpayment may apply to you in addition to the tax surprise facing you next April.

For most taxpayers, you have until April 15th of the following year to contribute up to $5,500 ($6,000 in 2019) and $6,500 if age 50 or over ($7,000 in 2019) into a Traditional IRA or a Roth IRA. Is an IRA an option worth considering for you? If so, which is better?

Traditional IRA

A Traditional IRA is an individual savings account that allows you to contribute money for your retirement. Depending on your income level, you may deduct the contributions from your taxable income. Any earnings made in a Traditional IRA account remain tax-deferred until the money is withdrawn from the account. Tax is only paid on the money once it is withdrawn. After the account holder reaches age 70 1/2 you may no longer make contributions into your Traditional IRA and minimum required distributions must be taken from the account each year. Anyone with earned income can create a Traditional IRA, but if you also have a retirement account with an employer, there are income limits to the amount you can contribute to your IRA in pre-tax dollars.

Roth IRA

A Roth IRA is an individual retirement account that allows you to contribute income that has already been taxed ("after-tax" dollars). Withdrawals of earnings on contributions from Roth IRA accounts are federal income tax-free so long as a 5-year holding period has been met and the account holder is at least 59 1/2 years old, disabled, or deceased. Withdrawals of contributions are always tax-free since you already paid the tax on the contributions. There are no required minimum distributions nor are there age limits for contributions.

• Traditional IRA contributions that qualify for pre-tax treatment will allow a larger beginning investment to compound over time versus a Roth IRA.
• Roth IRA contributions, though smaller because of tax treatment, could create earnings that are never taxed.
• Roth IRA accounts have more flexible contribution and withdrawal rules.

So the answer is. . .it all depends. If you think tax rates will be significantly higher when you withdraw your retirement savings, then think seriously about a Roth IRA.

If you think your retirement account investments will perform well, then perhaps the earnings growth in a Traditional IRA will more than pay for the additional tax at time of withdrawal.

As our students prepare to head back to school, many families face the difficult decision to save for retirement or use those funds to pay for their children’s college education.

The dilemma

With student loan amounts in the trillions of dollars, our kids are exiting college with debt the size of small home mortgages. Given that both education and health care costs continue rising dramatically from year to year, it is hard for you to prepare financially for both college and retirement. What should you do?

Retirement prior to education

In most cases, it is more important for parents to put their financial needs ahead of their children. Why?

• One of the best ways you can help your child in the long term is to ensure you won’t be a financial burden on them in the future.
• Your children can take out education loans, while lending options during retirement years are limited.
• There are numerous programs available to your child to help them afford college.
• While it may take years for your child to repay a student loan, they will have future income potential to do so. Your income will be lower or cease upon retirement.

Some tips to consider

There is plenty of opportunities to fund both retirement and college education in a tax-advantaged way. You might wish to consider funding basic retirement needs first, then look at tax-advantaged educational savings programs.

• Retirement: First fund employer-provided 401(k) and similar programs, especially if there is an employer match. Max your annual contribution limits if at all possible. After this there may be funds available for your children.
• Child’s education: Look into Coverdell savings plans, 529 college savings plans, and children’s retirement plans. Remember to include others in your plan, like grandparents, as a possible funding source for college savings.

Consider other ways to generate college funds. Here are some ideas;

• Start saving for both retirement and college early. Use the time to help grow the value in your accounts.
• Attend a public versus a private college
• Look into work-study alternatives
• Review and apply for grants and scholarships
• If you have older children, consider a “pay it forward” strategy, where a younger child’s college fund helps an older child, who then pays the funds back with interest prior to the younger child going to school.

Making financial decisions like this is tough, but with proper planning and insight, a path that works for you can often be found.

The U.S. Treasury Department recently released an audit report revealing a disturbing level of non-compliance in alimony reporting on tax returns. This non-compliance will result in a vast increase in tax return reviews now and in the years to come. Here is what you need to know.

The study

The Treasury Inspector General for Tax Administration (TIGTA) recently conducted an Audit of 2010 tax returns that claimed an alimony deduction. What they found:

• Over 560,000 taxpayers reduced their income for alimony paid in 2010.
• 47% of the claimed alimony deduction tax returns did not match the required income reporting from those who received the alimony.
• The discrepancy was more than $2.3 billion in unreported 2010 income.

Please note: You may reduce your income for qualified alimony payments. Those that receive alimony must include the payments as income on their tax return. As a clarification, in most cases, spousal maintenance is considered alimony by the IRS while child support is not considered alimony.

Further, the audit determined that the IRS does not adequately track this non-compliance. Nor are proper penalties being assessed when the person paying alimony does not correctly report the Social Security Number (SSN) or Tax Identification Number (TIN) of the person receiving the funds.

Things to consider

• If you receive alimony. You must report this income on your tax return. If you are receiving income from an ex-spouse that you believe is child support, have documentation to support this claim.
• Mis-match audits will rise. The IRS has corrected their audit filters to capture major alimony mis-matches. Given this, you should expect a notice or audit if there is a major alimony discrepancy.
• Penalties are coming. If you do not correctly report the SSN or TIN of the person receiving alimony you will now start to see penalty notices. The programming error in the IRS system has been corrected. So get a correct identification number for the person who receives your alimony payments and report it on your tax return.
• Keep documentation close. Since you know the risk of audit in this area is high, keep your documentation handy. If paying alimony, having it automatically deducted from your paycheck will help you accurately report your payment amounts.
• File a tax return. In 2010, $937.2 million of the claimed alimony deductions had no corresponding income tax returns filed reporting the income. This non-reporting area is a highly recommended audit target for the IRS.
• Talk to your ex. While possibly an unpleasant task, a quick discussion regarding claimed alimony can identify whether you have a reporting problem. Hopefully, this communication can solve any potential problems prior to the involvement of the IRS.

As a final note, alimony will no longer be a taxable event for divorce decrees after 2018. However, prior rules apply for divorces finalized prior to this date.

Now is the time you will start receiving year-end informational tax forms. We’re all fairly familiar with W-2s from our employer, but you will also probably receive a number of different 1099s. Make your tax filing experience smooth this year by staying on top of these informational tax returns. Here are some tips.

Know the different types of 1099s. The most common 1099s that taxpayers receive are:

• 1099 INT: for interest received
• 1099 DIV: for dividends received
• 1099 B: for brokerage transactions (selling stocks and mutual funds)
• 1099 R: for annuity, retirement, and pension income
• 1099 MISC: for miscellaneous income
• 1099 K: for merchant card activity

1. Make a list. Review last year’s list of informational tax forms and create a checklist of them. Add to that list any new forms you might expect to receive. Mark them off your list as you receive them.
2. Check for accuracy. Review each of the informational tax forms for accuracy. Is the income, interest, annuity or other income correctly reported? If cost is reported on the 1099 B, is it the correct amount? Make sure your name and your tax ID (Social Security Number) are also correct.
3. Take corrective action. If you have not received your information return by the mid February, contact the issuing organization. Also call and start the process to correct any errors you find. Make sure you follow up any correction request in writing.
4. Conduct withholding verification. If the supplier withheld any tax on this activity ensure it is noted as well.
5. Understand those 1099 Ks. This is the new kid on the 1099 block and was introduced to try to capture sales activity from places like e-bay and Amazon. If you receive one of these, please pay special attention to the information being reported to you and the IRS. These forms are complicated and track payment processing transactions. If not properly understood, you could inadvertently double book income on your business activity. Describe the item or answer the question so that site visitors who are interested get more information. You can emphasize this text with bullets, italics or bold, and add links.

While there are many tax-advantaged retirement savings plans, the various options and rules can make the most sophisticated of us cringe. One of the things to consider is whether you can continue funding your retirement account after you reach the age of 70 ½ (6 calendar months after you reach your 70th birthday). Here is what you need to know if you wish to have this option.

The Basics: the 70 ½ age-based limit

A number of retirement accounts no longer allow you to contribute funds after you reach age 70 ½ or older. Many of these same accounts also trigger Required Minimum Distributions (RMD) rules after this age 70 ½ date. So not only must you stop contributing funds into your retirement account, you must also withdraw some of it and pay income tax on the withdrawal. This is true with 401(k) accounts after retirement and traditional IRA accounts. The RMD rules aside, here are some options for you should you wish to continue making retirement plan contributions.

Some Options

1. Look into Roth accounts. Roth IRAs and Roth 401(k) accounts allow you to continue making contributions after 70 ½. In fact you can continue to contribute into these accounts for as long as you have income. However, there are differences. Roth IRA’s have income limitations and are not subject to RMD rules. In the case of a Roth 401(k), you can contribute as long as you are working and are a participant in your employer’s plan, but you are subject to RMD regulations. While contributions must be made with after-tax earnings, your marginal tax rate is probably lower once you reach retirement age.
2. The SIMPLE IRA option. There is not an age limit for contributions into this type of small business IRA account. So if you plan to continue to build your retirement nest egg after reaching age 70 ½, look into this type of retirement plan. An added bonus in this retirement account is that continued participation also includes receiving any employer match funding. The downside is that this plan requires annual distributions after reaching the 70 ½ year old age limit.
3. Contributions while still working. If you work for an employer after retirement age you can continue to participate in employer sponsored plans. So if you are looking to supplement your income after age 70 and your employer offers a 401(k) or similar program you can continue to participate no matter your age as long as you are employed and are active within the plan.

The rules around retirement plan contributions and distributions are complex. Not the least of which are rules placing limits on 5 percent or greater owners of small businesses. Should you wish to explore your contribution options, please ask for assistance prior to taking action.

Retaining copies of your federal tax return is important. Not only will you need the return in case of audit, but the tax return is often used to secure student aid, obtain loans, purchase a home or business, plus much more. What can you do if you cannot find a copy of your tax return?

• E-filed tax returns have their data stored in software. One of the benefits of e-filed tax returns means there is a digital copy of your tax information. If necessary another digital copy could be produced.
• IRS requested transcript. The IRS can provide you with a transcript of your current tax return or transcripts from the prior three years. To request a transcript from the IRS using their online tool go to www.irs.gov and search for their order a transcript tool. Information will be provided to you within approximately 5 to 10 business days.
• Request an actual copy. If you require an actual copy of your tax return, one can be provided for $50 by filling out Form 4506. But plan accordingly, as it can take up to 75 days to process your request.
• Copies of informational returns. If you are missing a W-2 or 1099 you can also contact the company that originally issued the tax form. They will have these forms on record for their own audit purposes.
• Copies sent to third parties. Your request for a transcript can also be sent to a third party with your authorization. If you wish to take this route, please note that you may lose some control as to who has this personal information.
• Understand the different transcripts. When making a request for a transcript from the IRS you need to understand what you are requesting.
• Return transcript. This includes most of the lines of your tax return as originally filed.
• Account transcript. This is the status of your tax account. It includes the balance owed on your account, any record of any payments, and adjustments after the return was filed.
• Record of account. This is a combination of the return transcript and the account transcript.

If need be, you can also request a verification of non-filing of a tax return.

While there are many tax-advantaged retirement savings plans, the various options and rules can make the most sophisticated of us cringe. One of the things to consider is whether you can continue funding your retirement account after you reach the age of 70 ½ (6 calendar months after you reach your 70th birthday). Here is what you need to know if you wish to have this option.

The Basics: the 70 ½ age-based limit

A number of retirement accounts no longer allow you to contribute funds after you reach age 70 ½ or older. Many of these same accounts also trigger Required Minimum Distributions (RMD) rules after this age 70 ½ date. So not only must you stop contributing funds into your retirement account, you must also withdraw some of it and pay income tax on the withdrawal. This is true with 401(k) accounts after retirement and traditional IRA accounts. The RMD rules aside, here are some options for you should you wish to continue making retirement plan contributions.

Some Options

1. Look into Roth accounts. Roth IRAs and Roth 401(k) accounts allow you to continue making contributions after 70 ½. In fact you can continue to contribute into these accounts for as long as you have income. However, there are differences. Roth IRA’s have income limitations and are not subject to RMD rules. In the case of a Roth 401(k), you can contribute as long as you are working and are a participant in your employer’s plan, but you are subject to RMD regulations. While contributions must be made with after-tax earnings, your marginal tax rate is probably lower once you reach retirement age.
2. The SIMPLE IRA option. There is not an age limit for contributions into this type of small business IRA account. So if you plan to continue to build your retirement nest egg after reaching age 70 ½, look into this type of retirement plan. An added bonus in this retirement account is that continued participation also includes receiving any employer match funding. The downside is that this plan requires annual distributions after reaching the 70 ½ year old age limit.
3. Contributions while still working. If you work for an employer after retirement age you can continue to participate in employer sponsored plans. So if you are looking to supplement your income after age 70 and your employer offers a 401(k) or similar program you can continue to participate no matter your age as long as you are employed and are active within the plan.

The rules around retirement plan contributions and distributions are complex. Not the least of which are rules placing limits on 5 percent or greater owners of small businesses. Should you wish to explore your contribution options, please ask for assistance prior to taking action.

Here is a tax planning tip for those who file their tax returns early and wish to contribute to a tax-deductible IRA, but do not have the funds to do so.

Say you want to pay into an IRA to get a tax break but you don’t have the money? Take heart, there are ways to get around this. The IRS allows you to take the deduction now and pay later when you get your refund.

How it works

• Step 1: Prepare your tax return early in the year (early February). Run the tax return considering an income reducing contribution to a tax-deferred IRA. If you do not have the funds to put into the IRA, but your tax return has a refund that can fund your contribution, you are ready for step 2.
• Step 2: File your tax return with the IRA contribution noted. File the tax return as early as possible to ensure your refund gets back to you prior to April 15th. E-file the return if at all possible.
• Step 3: Fund your IRA prior to April 15th. Tell your IRA investment firm you wish your IRA contribution to be for the prior year.

That’s it. You have now effectively had the income reduction benefit of your IRA contribution help fund the account through your tax refund.

The risks

• Timing is everything. If you use this technique it is critical that the IRA is funded on or before April 15th. If it is not, your tax return will need to be amended.
• Refund not received in time. If you do not receive your refund in time, you may not have the funds to make a timely IRA deposit. In this case, you may need to borrow funds on a short-term basis until the refund is received.
• No extensions. The IRA contribution for the prior year must be made by April 15th of the following year (the original filing due date). This is true even if you file your return under an approved extension period.

While not for everyone, this tax tip could help you fund more of your retirement on a tax-deferred basis.

Long-term care insurance has the same tax-favored status as regular health insurance.

In recent years, a number of employers have started to offer long-term care insurance as an optional employee benefit, and most insurance companies offer individual policies.

Insurance typically covers the cost of extended care in a nursing home, or in your own home if you become chronically ill or disabled and unable to care for yourself. The costs of such care over an extended period can be overwhelming and can rapidly wipe out your retirement savings.

Regular health insurance usually doesn't cover prolonged nursing care or home assistance, and Medicare only provides coverage for a few months of nursing care after you have been hospitalized. Medicaid will cover such costs, but only if you've exhausted virtually all of your assets.

The tax breaks

Both the premiums you pay for qualified long-term care insurance and the benefits you receive enjoy favorable tax treatment.

Benefits received under a qualified policy that pays only actual expenses are tax-free. In contrast, part of the benefits from policies that pay a set dollar amount (per diem) may be taxable.

The premiums you pay for long-term care insurance may be deductible as unreimbursed medical expenses if you itemize deductions. There is a limit on the amount of annual premiums you can deduct, depending on your age. Also, it's important to remember that unreimbursed medical expenses are deductible only to the extent that the total exceeds 10% of your adjusted gross income in 2019 and beyond (7.5% in 2018).

If you're self-employed, you may deduct the same percentage of long-term care premiums that applies to regular health insurance premiums.

The need for long-term care insurance

Long-term care insurance is not for everyone. You should consider it if you are not wealthy enough to pay for long-term care as you need it.

You may also want to consider whether your family health history suggests you'll die relatively early or live to old age.

What to look for in a policy

If you decide to buy a policy, determine whether it qualifies for favorable tax treatment, and look carefully at factors such as eligibility for benefits, the types of care it covers and whether it contains inflation protection.

Some policies offer lifetime coverage while others are for a fixed term. If you choose the latter, look into restrictions on renewability.

In addition, most policies have a form of deductibility, called an "elimination period," which is the number of days before coverage begins. The longer the elimination period, the lower the premium. Match the elimination period to what you can afford, remembering that Medicare may cover your costs for an initial period.

And finally, these policies are not cheap, so take your time and do your homework before you commit. 

Out of sight, out of mind. When it comes to old tax returns, that's an approach many people like to follow. But before you completely forget about your old tax forms, you may wish to consider filing an amended return.

Why file an amended return?

If you made a mistake on a prior-year tax return, an amended return is the way to set things right. Arithmetic errors, missing information, and oversights are all fairly common, and generally there's no reason to fear filing an amended return - whether you owe money to the IRS or vice versa.

Certain special situations can also trigger amended returns. For example, if you suffer a casualty loss in a presidentially declared disaster, you may deduct the loss on your tax return for the year of the disaster, or you may amend the prior-year return and deduct the loss in that year. The best strategy depends on your tax bracket for both years, plus other factors such as the amount of your loss and whether it occurred early or late in the year.

An amended return can help ease the sting of certain business and worthless security losses. You also may benefit from an amended return if there's a retroactive change in the tax law as a result of new legislation or a favorable court ruling.

Use Form 1040X

Form 1040X ("Amended U.S. Individual Income Tax Return") is the IRS form designed for amended filings.

Generally, you have three years from the time your return was filed or two years from the time the tax was paid, whichever is later, to file an amended return.

Be sure the changes you want to make are valid. The tax laws have changed frequently over the past several years. What was deductible one year might not be deductible the very next year, and the list of items includable in taxable income has also changed from year to year.

Also, although filing an amended return is not necessarily a red flag for an audit, some changes are looked at more closely than others. For example, claiming additional travel and entertainment expenses on an amended return may be risky.

If you have omitted income from your return, you should file a 1040X as soon as you become aware of the omission. You may owe additional taxes, interest, and perhaps penalties. The proper presentation of previously omitted items is crucial and is best left to a professional.

Regardless of the reason for the amended return, be sure to keep good records to substantiate the reasons for the change.

If, as a result of the changes, the IRS owes you, you will receive a refund with interest. If you owe the IRS, payment should be made with the 1040X. The IRS will bill you for any additional interest.

Some popular tax preparation software is relatively inexpensive, but what does using software to prepare your taxes really cost you? Missed deductions and tax credits, improper or overlooked tax elections, unnecessary penalties, and neglected long-term tax planning can be very expensive. Are you familiar with the rules and qualified to tackle your taxes by yourself?

It's likely that your tax concerns will become more complicated as your investments grow, your family grows, and you grow older. Though many tax software producers claim that their products can prepare complex returns, you may want to think twice before relying on software for all of your tax and financial guidance.

Major milestones in your life, such as marriage, divorce, having a child, college, retirement, and inheritances, are all good reasons to consult with your tax advisor. Job changes can necessitate big financial and tax decisions, including rolling over your 401(k), exercising stock options, deferred compensation issues, and perhaps even starting your own business. An established relationship with a tax professional who is familiar with your finances, your family, and your goals can prove to be invaluable.

Although software may help you make choices on your tax return that result in the lowest tax this year, you should consider the long-term effect of your choices in order to pay the lowest total tax over a number of years.

If you have been preparing your own returns, it's a good idea to let a professional preparer review your returns at least every three years. That's because you only have three years to amend a return to change any items of income, deductions, or credits that were reported in error or omitted on your original return.

At the end of June, the IRS unveiled a new version of the 2018 Form 1040. This postcard-sized 1040 form replaces the old 2017 1040, as well as forms 1040EZ and 1040A. While some in Washington are celebrating the design as a simpler way to file, a closer look tells a different story.

What is changing?

• Fewer lines. The new form has only 23 lines - 50 lines less than the 2017 1040. Some of the lines saved come from the elimination of exemptions, but most come from combining many old lines into a single line.
• Six new schedules. The complete 2018 1040 tax form is now seven tax forms. The 50+ lines removed from the old 1040 now exist on one of six new schedules. These schedules (referred to as Schedule 1, Schedule 2, etc.) use many of the same line numbers and descriptions as the old 1040, which will help for year-over-year comparability.
• Many new lines. Lines are added to accommodate new tax legislation, like the “Qualified business income deduction” for the new 20-percent pass-through deduction for business owners.

What you need to know

• Virtually everyone now files multiple forms. This new 1040 system is anything but simple. Now the majority of taxpayers will need to complete at least one of the new schedules to file with their 1040. Even taxpayers previously using the simple 1040EZ might be required to file an additional schedule or two. The IRS website states that only “taxpayers with straightforward tax situations” will be able to skip the new schedules.
• The postcard goal is met. While the newly proposed form 1040 is postcard-sized, the type is now smaller and filing the 1040 form now requires a lot of retraining and reprogramming. Tax software companies are reprogramming their software, and the IRS is telling congress it needs millions of dollars to implement the changes.
• New forms often change. Be aware that this version of the 1040 is new and revisions are expected as forms are used and problems arise.

Unfortunately, the new 1040 form appears to be more a product of political desire rather than a strategic redesign. This added confusion is one more reason taxpayers will need help navigating this new tax landscape.

There are new tax filing deadlines effective for 2016 tax returns and beyond. Here are the major changes worth noting.

Small Business Partnership and Limited Liability Corps

Small businesses that are organized as a partnership or limited liability companies filing Form 1065 must file their tax return on or before March 15 of the following year. This moves the required filing date up one month versus last year.

Who: Partnerships and LLC’s taxed on Form 1065

New filing deadline: March 15th (old filing Date was April 15th)

Calendar year C-Corporations

Year-end C Corporation tax filing date is a month later. The old filing date of March 15th is now moved to April 15th.

Who: Year-end C Corporations

New filing deadline: April 15th (old filing date was March 15th)

Note: If your C Corporation is a non-calendar year filer, your deadlines may change over the next few years so please be alert to this.

Foreign bank accounts

Foreign bank account reporting dates are changing. Annual reporting of foreign bank accounts moves from June 30 to April 15th. This is FBAR Form 114

Who: Anyone with foreign financial accounts.

New filing deadline: April 15th (old filing date was June 30th)

IRS now required to delay refunds to many taxpayers

Topline: If next year’s tax return claims an Earned Income Tax Credit or the Additional Child Tax Credit your refund will be held by the IRS until February 15th.

The delay in sending out tax refunds is mandated by tax law legislation because of the proliferation of identity theft and tax fraud. This extra time will be used by the IRS to help prevent revenue loss from early tax return filings claiming invalid tax refunds. Those most impacted by this change are early tax return filers. While the IRS plans future correspondence to alert taxpayers to this change, here are some things to note.

• Entire refund. If your tax return claims either of these credits, your entire refund will be held until February 15th.
• Do not delay. If you typically file early, do not delay filing your tax return because of this rule change. Tax returns can still be processed. Only the refund payment is being delayed.
• The bottleneck. Filing early can help you avoid the bottleneck of tax refund processing. On February 15th you will want to be at the front of the line to receive your money.
• Plan accordingly. If you historically plan on receiving and using an early refund, you will now need to plan for this delay.

The IRS is clear on its point of view. If you barter you must include the barter activity's fair market value as income on your tax return in the year the barter activity is performed. But is it really that simple? Here are some things to consider if you barter.

What is fair market value? The classic definition is the price someone is willing to pay and someone is willing to receive for the exchange of goods or services. But we all know this requires a level of judgment. What if an item is on sale when the barter activity is performed? Are prices always the same for a similar item or service? Prior to establishing the value of a barter item, shop around and take the lowest defendable value possible for your bartered item.

Example: You barter dog grooming for lawncare work. If you offer a range of prices from $20 to $60 for your grooming service what rate do you use? You must be prepared to defend your barter value. Perhaps shopping competitors can help establish a lower value.

What about your costs? The IRS barter documentation is so focused on capturing and taxing your barter income it under informs taxpayers on the reasonable reporting of costs associated with that income.

Example: If two retailers exchange wholesale goods of equal value for resale, the cost of goods could logically eliminate much of the fair market value of the barter income. What if the fair market value of the goods received is worthless because you discover it is distressed? Then you could actually have a barter-based loss on your books.

Is the barter fair? If you are bartering with another firm, look at the “tax value” of the barter. This can change the true value of the barter depending on the “hard costs” associated with the barter activity.

Example: A painter exchanges $3,000 house painting with a law firm for legal services.

If both firms are sole proprietors, the salary of the owners is reflected in their net income. Self-employment taxes, sales taxes, and other taxes would also need to be applied to the net income number of each barter participant. In this case, the barter does not appear equal.

Caution with barter exchanges. With barter exchanges, you receive credits (vouchers) for your provided services prior to using those credits on another service. Since you are required to report income when your service is provided, you could potentially have barter income without receiving the benefits for your barter activity until later years.

Clear reporting. If you use bartering in your business, you generally report the activity on 1099-B's each year, separate from other informational reporting.

April 15th, April 18th, or April 19th?

How can something as simple as an April 15th filing due date for individual tax returns and 1st quarter estimated tax payments be made complicated? Glad you asked, here is what you need to know.

Explanation

The ingredients. Washington D.C. Emancipation Day, Maine and Massachusetts Patriots Day, the location of IRS filing centers, and a weekend. Mix these ingredients with tax code and revenue procedures to create a filing date maze that takes an IRS analyst to figure out.

The recipe

• When April 15th lands on a weekend the filing due date is automatically moved to the next Monday as long as it is not a recognized legal holiday.
• If April 15th falls on a legally recognized holiday, move the filing date to the next non-weekend, non-holiday date.
• The due date must allow for individuals to drop their tax returns and payments off at their scheduled filing center. So, if the filing center is closed due to holiday, move the filing date to the next available non-holiday, non-weekend date.
• Recognized legal holidays are based on Washington D.C. Why? Because the law says so. This brings the April 16th Emancipation day uniquely observed in Washington D.C. into play for determining tax filing due dates.

The result; a mess.

• When Emancipation Day lands on Saturday, April 16th, it is observed on April 15th. Thus the filing due dates for tax returns and first quarter estimated tax payments moves to April 18th. But wait, a tax-filing center is located in Massachusetts and it is closed on April 18th for observance of that state’s Patriots Day celebration. Since only Maine and Massachusetts observe this holiday they get til April 19th to file their individual tax returns. But estimated tax payments are still due on April 18th for them because they are sent to a center in a different state that is open on the 18th.

Your best bet?

• Always be prepared to file your tax return AND 1st quarter estimated tax payment on or before April 15th. You can then keep your filing life simple despite the date mess created by Washington.