We are sorry for any loss you have had. Having gone through the loss of parents recently, we understand what you are experiencing. This will seem hard but hopefully this overview will get you through the process.
When any taxpayer dies, a final tax return should be filed to claim income earned in the year of death up to the date of death. This is usually done by the executor or administrator of the estate or a survivor if no executor is named. The filing deadline is the normal April deadline in the year following the date of death.
In general, you would file the final return in the same manner as when they were alive, but “deceased” is written after the name. Claim all the income, deductions and credits they were entitled to up to the date of death.
If your parent is due a tax refund, you can claim it using IRS Form 1310, entitled Statement of a Person Claiming a Refund Due a Deceased Taxpayer. If money is owed, you can submit what is owed with the tax return.
That is all there is to the final tax return. If there are assets to be distributed to beneficiaries, an estate tax return is likely needed. That is more complicated and beyond the scope of this article.
Should you have any questions, please email me at firstname.lastname@example.org.
We do tax returns for a lot of child care businesses and many are not aware of this strategy to increase their tax refund.
The IRS rules regarding depreciation of personal property are very lenient, with the proper documentation. Many of our clients don’t depreciate all of the personal items used in their business.
Most people know that they can depreciate their home, usually using the time-space percentage. And they are pretty good about claiming depreciation on the refrigerator, washer and dryer, TV’s, etc. But there is a great deal more that can be depreciated and all those little things add up. Things like a new chandelier, weatherstripping, that programmable thermostat, a new bathtub, a sandbox, patio, fencing, the pictures on the walls and all the other items that give your home that warm and fuzzy feeling important to children, etc., etc. (we show you how to procure a more exhaustive list below.)
And, if you have been in business for a couple of years and have not depreciated these items, you can still do so by claiming that past depreciation on your next tax return or even amending a prior year return.
So, how much can you gain? It’s different for everyone. You would walk through your house, room by room and determine items that are used in your business or that have value in your business and assign a fair market value (FMV) and a purchase date to each item. The FMV is the tricky part. If the item is new, you can use the receipt. If you don’t have receipts or the item has been in use a while, you can find a value by looking up the items on a charity website, like Salvation Army or Goodwill. The FMV is the price others would pay for that item if sold right now.
If you provide that list to your tax preparer, they can determine the depreciation schedule (how many years you need to fully depreciate) for each item. With that and the FMV, each year’s depreciation can be determined. Let’s say you came up with a list of items that had a total value of $12000 and the average depreciable life was 5 years and you are using straight line depreciation. Further, your time space percentage is 65%. A much simplified calculation would result in $1170 in depreciation ($12000 divided by 5 years times 0.65 = $1560). If you are in the 25% tax bracket, that would give you an extra $390 in your Federal refund plus another $78 for CO (this year and for 4 more years). If you could have depreciated these items for the last 2 years and hadn’t, we could claim that depreciation as well, for the last 2 years plus the current year plus the next 2 years.
Our most recent use of this strategy helped one of our clients gain nearly $800 additional refund this last year.
Want more details on how this could help you? Send an email to email@example.com and just put HELP ME INCREASE MY CHILD CARE BUSINESS TAX REFUND in the memo line. I will send you some info on how to start this process. No charge and no obligation.
Of course, we are hoping that you will allow us to prepare your tax returns. That would save you even more money, this year and every year.
AFS – USE THE BEST FOR LESS
For all you small business owners, it is time to start gathering the paperwork so that you don’t miss any tax deductions for 2016. Here are some of the most common deductions available:
- Home office – a great way to move some personal expenses under the business deduction umbrella, even if you rent. I know that many think this increases your audit likelihood (though I have never seen any evidence of that) but if you are entitled to it, and have good records, you should claim it. If you want more info on this deduction, send an email to firstname.lastname@example.org and I will send you a brochure describing this deduction.
- Office supplies-even if you don’t claim the home office, you must have bought paper, toner, pens, etc. If you used it for your business, deduct it. Just make sure you keep the receipts.
- Furniture-buy a new desk? Chair? Filing cabinets? Deduct them. Either all at once with a 179 deduction or depreciate over several years to give you deductions in future years when income might be higher.
- Other equipment – computers, copiers, scanners, tools, etc. are also deductible and you also have a choice on whether to take full deduction this year or spread it out over several years.
- Software, subscriptions, trade journals, webinars, reference books, etc. Keep track of these as well.
- Mileage or auto expenses- mileage is an item that is often audited but I think the reason is because it is low hanging fruit for the IRS. People are lousy at keeping mileage records. We provide free pocket notebooks for our clients to record daily trips. There is also a number of apps you can use for your cell phone to keep track of this. Mileage quickly adds up and can result in a very nice deduction. The highest I have seen is about $18,000 for a salesman that had a 5 state territory. OR Sometimes, vehicle expenses provide a better deduction. We usually look at both if we have the data. This includes gas, maintenance, vehicle depreciation, insurance, leases,etc. (multiplied by business use percentage). You are allowed to choose the method (mileage or expenses) that provides the most tax benefit for you.
- Travel, meals, entertainment and gifts – when you are out-of-town for business, the hotel is fully deductible. Likewise, travel by air, car, train or bus is deductible. Note that only 50% of your meals and your clients meals are deductible and you should write client name and business meeting purpose on your receipt. Gifts to clients or employees are deductible up to $25 per person per year.
- Self-employed people can deduct their health insurance premiums. If their spouse or children worked for them they can deduct those as well. Note that the deduction can’t exceed your profit (can’t create a loss). If you are incorporated, premiums may also be deductible but that is much more complicated and beyond the scope of this article.
- Retirement contributions are of course deductible. Anyone can deduct an IRA but business owners have options available to them that allow much higher deductible contributions than wage earners.
- This is not a deduction but it is important. Make sure you are paying self-employment taxes on your business income. Half of this payment is deductible on your 1040 (this is how you fund your social security account for eventual retirement). As your business grows and these taxes become a thorn, there are options available to help reduce the tax burden.
- Pay your kids. You are probably giving them money anyway. If you have something they can do in your Schedule C business that is age appropriate, pay them from your company and deduct it. You must have good documentation for this including pay sheets and a job description. Have them put some of their earnings in a Roth IRA or Education IRA to help show them how to save.
Remember that any unsubstantiated deductions in an audit will be automatically tossed by the IRS. KEEP THOSE RECEIPTS. Some receipts are still printed on thermal paper which fades over time. If necessary, copy onto something more permanent.
I know this work is a pain but think of what you gain. Let’s say you are in the 25% tax bracket. Add in 5% for CO taxes and you will cut 30% of documented expenditures from your tax bill. If it takes you 8 hours to put together $3000 in expenses, you will save nearly $900 in taxes. Calculate the hourly rate. You’ll like it!!!
AFS- your small business tax specialist. USE THE BEST FOR LESS
This article is condensed from one by Brian Vnak published on Sept. 27, 2016 at www.Marketwatch.com.
I love how people come up with these strategies. Granted, it only fits a narrow swath of society, but for those it fits, it is awesome.
Our parents are aging and living longer than ever. Many of their children are helping with their parent’s finances in a caretaker role. Busy schedules often mean opportunities for tax deductions go unnoticed and are unused.
Like anyone else, people 65 and over can deduct medical expenses that exceed 10% of their adjusted gross income (AGI) if they itemize. Medical expenses typically increase as we age but we often also see income drop or level off. When this happens, you could see medical deductions that go unclaimed as the amounts claimed exceed taxable income. Let me explain.
Let’s say that John’s mother has an income of $40,000. $22000 of this is non-social security taxable income from an IRA and interest. She normally takes the standard deduction because her house is paid off and she can’t itemize. In 2015 with that income and the standard deduction of $7850 (this is higher for elderly people) and her $4000 exemption, she would have taxable income of $10150.
But let’s say that John’s mother had $30,000 of medical expenses. Her AGI was $22,000 so she can deduct all but $2200 of those bills on a Schedule A. She paid taxes on her home and gave some items to charities so let’s say her total deduction was $30,000. But she only had taxable income of $10150. Subtracting the $30,000 from that leaves a negative $19,850, which is the part of the deduction that is wasted. She doesn’t have enough taxable income to deduct the entire amount.
But she has an IRA. What if she converts some of a traditional IRA to a Roth IRA. If she converted $30,000, she would be able to use up all of the available deduction without paying any more taxes than she would have using the standard deduction. (In practice, a bit more of her social security would be taxable but that would be minimal.) And the Roth IRA is still under her control, available if she needs it but she will never have to pay taxes on the any withdrawals from the Roth in the future. Even on the earnings. And, upon her death, her beneficiaries are likely not to have to pay taxes on distributions from a Roth account either (though they would on distributions from traditional IRA’s).
At AFS, we are always looking for ideas like this that we can utilize for our clients.
Use the BEST for LESS. Call us for your tax needs at 303-745-3962.
Even Einstein didn’t understand how taxes work. He is famously quoted as saying “The hardest thing in the world to understand is the income tax”.
So, in a nutshell, here is how it all works…
- Add taxable income from all sources to figure total income. This includes investments, wages, jury duty, business income, royalties, etc.
- Then subtract allowed “adjustments to income” to determine adjusted gross income (AGI).
- Subtract standard or itemized deductions and personal exemptions to determine taxable income.
- Look up taxes owed in table.
- Subtract allowable credits to determine final tax bill.
That is how the Form 1040 works. Items 1 and 2 are on the first page, items 3-5 are on the 2nd page. The trick in reducing taxes is knowing the opportunities available in each of the aforementioned categories and which forms to use to capture those opportunities.
3 of the main strategies for reducing taxes then are:
- Earn as much nontaxable income as you can. You have more control over business or investment income than other income. For instance, there are ways to shift some personal expenses under the business umbrella to reduce taxable income. As for investments, that income can be accessed in a number of tax-advantaged ways if set up properly.
- Make the most of adjustments to income, deductions and credits. Adjustments to income and deductions both reduce taxable income. Credits reduce taxes owed and are thus generally more valuable than deductions. The size of credits can depend on income. Knowing the thresholds, breakpoints, etc. can help reduce taxes. Sometimes credits can be shifted from one taxpayer to another to increase their size.
- Shift income to other taxpayers and other tax years. Delaying income to a future tax year or bunching deductions in a current year would be examples of this. Shifting income to a lower tax bracket taxpayer, such as a parent or child, can save more. For example, if you have a business, hire your child. Money that you are already providing them could be paid in a wage, if done properly. Their tax bracket is typically much lower than yours or non-existent and the money you are paying out becomes deductible, reducing your taxes.
A good tax preparer recognizes opportunities in your personal situation that could be applied to each section of the tax form and helps you use them to reduce taxes. This generally takes years of experience and continuous training as tax laws change.
We at AFS have been doing this since 2004, and we do it at a much lower cost than the vast majority of our competition. Save on your tax preparation and save on your tax liability.
CALL US TODAY for your tax needs. 303-745-3962
Will I owe taxes when I sell my home? This is a very common question and I am happy to say that most people don’t owe taxes upon sale of a personal residence.
So, let’s review the rules.
Individuals are allowed to exempt up to $250,000 of gain and married couples can exempt up to $500,000 of gain on the sale of their principal residence. This is true if three provisions are satisfied:
- OWNERSHIP The individual, if filing single, or at least one of the spouses if filing joint, owned the home for at least 2 years during the 5-year period ending on the date of the sale.
- USE The individual (single filer) or both of the spouses (joint filers) used the home as a principal residence for at least 2 years during the 5-year period ending on the date of sale. (This means that sale of your rental property may or may not be eligible for the exclusion.)
- Neither the individual (single filer) nor either of the spouses (joint filers) excluded gain from the sale of another home during the 2-year period ending on the date of the sale.
A principal residence is defined as the taxpayer(s) main home, where he/she/they live most of the time. A taxpayer can only have one main home at any time.
Gain is calculated as the adjusted selling price minus the adjusted basis of the home. Basis, at minimum, is the purchase price of the home plus capital improvements. The selling price is reduced by costs of sale.
Let’s do a simple analysis. Assume you purchased a home in 1995 for $100,000 and invested $50,000 in it over the years for landscaping, fencing, new kitchen and bathroom. You sell it for $350,000 in 2016. There were $25,000 in selling costs (commissions, fees, etc.). Your gain is the adjusted selling price of $325,000 ($350,000 minus $25,000 = $325,000) minus the adjusted basis of $150,000($100,000 plus $50,000 = $150,000) or $175,000.
The three provisions listed above are all met. Therefore, whether you file as single or married, the $175,000 in gain is non-taxable, total profit.
There are often complications that need to be addressed in determining whether there is any taxable gain. If you,
- used the home as your principal residence for less than 2 years out of the last 4, the amount of gain exemption will be reduced, possibly (but not always) resulting in taxes owed on the sale
- used the home in a business and depreciated part of it (such as a day care) or claimed home office depreciation, then that depreciation has to be recaptured and there will be some taxable gain.
Also, basis adjustments can be very complicated. Sometimes they work in your favor and sometimes they don’t.
We can help you determine the tax implications of your home sale. Call us before you sell to avoid ugly situations at tax time.
AFS – USE THE BEST FOR LESS
With Trump as President and with a Republican House and Senate, there is likely going to be broad agreement on tax reform.
Here is what appears to be likely, though proposals are somewhat fluid:
- The corporate tax rate will be lowered to as low as 15%. If this happens, expect a large part of the $2.4 trillion in corporate profits to be brought home. The tax windfall would pay for a lot of pet projects in Congress and would likely be a way to garner some Democrat support. (I think there should be some way of assuring that much of that goes to capital development in the US and not into stock repurchase plans.)
- Lowering top tax rate to 33 percent from 39.5% (not counting Medicare surtax) and lowering number of brackets from 7 to 3. New brackets would be 12%, 25% and 33%.
- Capping the capital gains tax at 20 percent.
- Eliminating the estate tax (never could figure out why the government thought they owned half of what a private individual accumulated upon their death-I guess rationale is to prevent accumulation of too much wealth in a family but it just makes trust lawyers richer as the rich find ways to avoid the tax)
- Presumably the penalty or tax or whatever on your health plan will be eliminated as part of the repeal of Obamacare.
Pass through entities, partnerships and S Corps, will be very favorably impacted here which will be a big plus for small business which creates 2/3 of the jobs in the country.
The aforementioned changes are those that seem to align with the Republican plans. Other changes that might be put forth:
- Trump also discussed eliminating the “net investment income tax” which was part of Obamacare.
- Capping itemized deductions at $100,000 for single filers and $200,000 for married filers
- Eliminating the head of household filing status
- Make the standard deduction $15,000 for single individuals and $30,000 for married couples.
- An “above the line” child care deduction for children up to 13 years of age for average child care expenses. This deduction would be phased out for higher income earners.
- Adds credits of up to $1200 a year for child care costs as “spending rebates” for low-income taxpayers. These may be aligned in some manner with the earned income tax credit.
- Carried interest would be taxed at ordinary income rates instead of the current capital gains rates that currently aids Wall Street professionals. This proposal aligns with those of Warren and Sanders.
- The individual alternative income tax would be eliminated.
Those are the most recent proposals we have seen as of today. Their projected effect on the Treasury depends a lot on whether or not they are scored dynamically or via static models. I think the goal will be to try and break even when scored dynamically so there will be some bargaining that goes on with heavy input from all the usual sources but the end result will be the same.
My prediction will be some significant tax cuts passed by Congress within the first few months of the next session. This combined with cuts in regulations should cause a pretty good boost in the economy. If corporate profits also come back to US shores, that will be icing on the cake.
As proposals solidify, we will keep you try and keep you informed at to the effect on tax payers.
Questions or comments? Shoot us an email. What do you think of these proposals? What would you add? What are your concerns?
For small business owners, you should be aware that the IRS has moved up the filing due date for 1099-MISC forms that report non-employee compensation in Box 7. The new due date is January 31st, the same as the date the forms are supposed to be issued to recipients. For other types of 1099 filings, the due date is unchanged and is the end of February in the year after the income was paid.
Businesses have to file a 1099-MISC for payments of $600 or more to independent contractors during the course of the year.
The penalty for not issuing the form on time is $30-$100 per form, depending on how late the form is, up to $500,000. If non-issuance is intentional, the penalty can be $250 per form with no limit.
If you don’t receive a 1099-MISC, you should report the income anyway. It is not a mismatch if you report extra income. You will get a mismatch letter if the IRS has records of payment to you that you don’t report. This often happens when the issuer of the 1099 has the wrong address for you. The business that issues the form will be concerned with filing on time to avoid penalties, not on whether the address is correct.
If you don’t claim income reported to the IRS and get a mismatch letter, you will owe taxes, penalties and interest for under reporting income. These charges can add up quickly. You should always update the 1099 issuers with changes in your address but you should also be sure that the post office has a change of address on file if you move and you can also file a change of address Form 8822 with the IRS. You want to make sure that you get copies of anything the IRS receives to avoid extra costs and headaches.
The earlier filings will be a bit of a pain for businesses but should be helpful to contractors that like to file early in the tax season.
Here are a few tax planning tips to help reduce taxable income for 2016. It’s not too late to utilize some of these strategies.
- You can accelerate deductions and defer income- for example, make an extra mortgage payment before the end of the year or put off that bonus until 2017. The former exemplifies an increase in deductions while the latter is an example of reduced 2016 income.
- Sometimes you can bunch itemized deductions to exceed a threshold that will then result in a reduced tax liability. The best example of this is probably medical expenses. These have to exceed 10% of your AGI before they produce a deduction on your Schedule A (itemized deduction form). If you know you are going to be close to that number, and you need a medical procedure, schedule it for 2016 so that the cost of that procedure is deductible. Or, there is a 2% AGI threshold for miscellaneous expenses which include professional fees like legal advice or tax planning or other unreimbursed business expenses you may be incurring, such as travel.
- It’s getting late for this one but you can file a new W-4 with your employer and boost your withholding for the last few paychecks.
- Of course, you can always add more money to a retirement account. 2016 contribution limits are $18000 for a 401(k) and $5500 for an IRA (more if you are over age 50).
- If you converted a traditional IRA to a Roth IRA in 2016 and the account value went down, you can reverse that conversion and you have up until the extended deadline to make that change. You could then convert later and pay less tax on that transaction.
- Charitable deductions are very common. Just remember that any cash contributions must be documented in some fashion. If you claim more than $500 in donations of property, Form 8283 must be filled out and accompany your tax return. If you claim more than $250 for a car donation, you will need written acknowledgment from the charity that received the vehicle.
- If you are taking RMD’s (Required Minimum Distributions) from your IRA, you might consider contributing that amount directly to a charity. This will reduce your AGI and is very helpful for those that don’t itemize and the contribution still counts toward the satisfaction of your minimum RMD for the year.
- Reduce your taxable estate by giving up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. You get a new gift tax exclusion each year. Both you and your spouse can combine your gift and give up to $28,000 to a single beneficiary.
If you need help determining if any of these are appropriate or beneficial, please give us a call. Always glad to help.
Owning a business often allows you to move what would otherwise be personal expenses into the business category. But many under use the deductions available to them.
The most common one is the home office deduction. This is actually well known but many hesitate to use this because of unnecessary fear of increased audit likelihood. However, this deduction is completely legitimate for most businesses that work out of the home. If you have good records and a legitimate claim, there is no reason not to claim it. If you are unsure, talk to your tax preparer.
Health care premiums These are deductible if you itemize but medical expenses are subject to the 10% threshold. Only those medical expenses that exceed 10% of your adjusted gross income are deductible. Also, many people don’t itemize in which case they are usually unable to claim any deductions for health care premiums or other medical expenses.
But if you are self-employed, these premiums are fully deductible on the front of your tax return. Even if you are incorporated or in a partnership, there are ways to deduct premiums and other medical expenses from your business income.
Pay your parents/pay your children If you have a valid business need for labor that is well documented, you can deduct wages or other payments to your family members. With a bit of recordkeeping, the allowance you pay your kids can be converted into a deductible wage. Or, here is a great example of payments to a parent. We had a client that wanted to help his Mom out but she didn’t want ‘charity’. He put her on the payroll where she performed light duties, one of which was baking cookies for weekly meetings.
Education If you are taking courses that maintain or improves a skill required in your business, it is probably deductible. This could include tuition, course fees, lab fees, webinars, certifications, and travel between your business and class location. Education credits may also be available and if so, you need to determine which is more advantageous. Don’t forget journals, subscriptions or other materials that help you improve your business or improve your skills.
Past missed depreciation We see this most often in home child care businesses, but it could apply to many others. Business owners often don’t take all the depreciation expenses they are entitled to. We recently helped one day care business owner recoup unclaimed depreciation for the prior 3 years for which they received an extra $800 in refunds.
Loss carryovers Many businesses just starting out operate at a loss and may end up with losses that can’t be used in that particular year. But, many of these losses can be carried over to future years where there benefit is fully used. Be aware of these and make sure they don’t get lost from one year to the next.
SAVE ON TAX PREP Don’t forget that savings can also come from where you have your taxes done. AFS tax services are typically priced at about 60% or less of that charged by the national chains and even less when compared to CPA’s and other accounting firms.
AFS – use the best for less
If you're an individual, a family or a small business, we can help you with all your tax needs. Contact us today to see how we can help.