Time to Start Organizing Your Deductions

A deduction is an expenditure that will reduce your taxable income. There are two kinds of deductions: adjustments to income and itemized deductions. The adjustments to income are the better of the two, as they reduce adjusted gross income, or “AGI.” Itemized deductions reduce your taxable income.

 

First, we will look at some adjustments to income.

Educator expenses apply to K – 12th grade educators, and are limited to $250 of documented supplies per qualified taxpayer. Expenses exceeding $250 can be taken as a miscellaneous itemized deduction.

A health savings account is an account set up exclusively for paying the qualified medical expenses of the account beneficiary or the beneficiary’s spouse or dependents.

Moving expenses include qualified out-of-pocket expenses or an employer reimbursement that was included in your W-2 form. If you received a non-taxable reimbursement, you cannot deduct the expenses.

Self-employment tax. If you are a sole-proprietor, active partner or have miscellaneous income subject to self-employment tax, you can deduct half of the self-employment tax.

Self-employed pension plans. You can deduct all qualified contributions to self-employed SEP, SIMPLE, and qualified plans.

Self-employed health insurance deduction. For this deduction you must be a sole proprietor or an active partner with net business income or a more than 2% shareholder of an S-corporation. The deduction is limited to net profit. Qualified long-term care insurance premiums, subject to age limitations, are also deductible.

Penalty on early withdrawal of savings is deductible and you will find this fee on your form 1099-INT. These penalties are typically incurred when you cash in a CD prematurely.

Alimony paid is deductible, but you must include the Social Security number of the recipient.

IRA deduction. Report only deductible traditional IRA contributions. Roth IRA contributions are not deductible.

Student loan interest. Up to $2,500 of the interest paid on a qualified student loan is deductible. There are income limitations. You will receive Form 1098-E from the entity to which you paid the student loan interest.

Tuition and fees deduction. Up to $4,000 of higher education tuition and fees can be deducted by taxpayers with an AGI under $80,000 if single, or $160,000 if married filing jointly.

 

Itemized Deductions

Medical expenses in excess of 10% of AGI are deductible as itemized deductions. If you or your spouse is age 65 or older by year end, you may deduct medical expenses in excess of 7.5% of AGI. Medical expenses are deductible in the year paid.

Taxes. State and local income taxes as well as real estate taxes for all property owned are deductible in the year paid. Most income taxes paid to a foreign country or US possession are either deductible as an itemized deduction or can be taken as a credit against tax.

 Mortgage interest paid is deductible, with limitations. Mortgage interest is deductible on up to two homes with a combined secured acquisition debt of $1.1 million (home equity debt is generally limited to $100,000). Points on the purchase or a refinance to make major improvements are deductible, but they may need to be amortized over the life of the loan.

 Charitable contributions must have written substantiation. If less than $250 is given at one time, the bank draft is sufficient. If the gift is $250 or greater, a written acknowledgement of receipt from the charity is required. In most situations, the charitable deduction is limited to 50% of AGI. Non-cash contributions are limited to the fair market value of the items contributed, if they are used items.

 Casualty and theft losses are subject to a $100 deduction and a reduction of 10% of AGI per casualty loss. A casualty is damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

 Miscellaneous deductions are subject to a reduction of 2% of AGI. They include expenses for generating and protecting income, job-related expenses, and unreimbursed employee business expenses.

 Other miscellaneous deductions are deductions that are not subject to the 2% of AGI reduction. Some examples are gambling losses up to the amount of gambling winnings, and special job-related expenses of the disabled.

Be sure to let your tax advisor know if you feel you could be eligible for any of these deductions.

As an enrolled agent (EA), your tax professional must take many hours of continuing education each year to stay up-to-date on the constant changes to the tax code. He or she had to pass a stringent three-part exam, or have relevant experience as a former IRS employee in order to qualify for the EA license.  It’s reassuring to know that your tax adviser is an EA: licensed by the US Department of the Treasury, with unlimited rights of representation before the IRS.

TIGTA Warns of “Largest Ever” Phone Fraud Scam Targeting Taxpayers

WASHINGTON — The Treasury Inspector General for Taxpayer Administration (TIGTA) today issued a warning to taxpayers to beware of phone calls from individuals claiming to represent the Internal Revenue Service (IRS) in an effort to defraud them.

“This is the largest scam of its kind that we have ever seen,” said J. Russell George, the Treasury Inspector General for Tax Administration. George noted that TIGTA has received reports of over 20,000 contacts and has become aware of thousands of victims who have collectively paid over $1 million as a result of the scam, in which individuals make unsolicited calls to taxpayers fraudulently claiming to be IRS officials.

“The increasing number of people receiving these unsolicited calls from individuals who fraudulently claim to represent the IRS is alarming,” he said. “At all times, and particularly during the tax filing season, we want to make sure that innocent taxpayers are alert to this scam so they are not harmed by these criminals,” George said, adding, “Do not become a victim.”

Inspector General George urged taxpayers to heed warnings about the sophisticated phone scam targeting taxpayers, noting that the scam has hit taxpayers in nearly every State in the country. Callers claiming to be from the IRS tell intended victims they owe taxes and must pay using a pre-paid debit card or wire transfer. The scammers threaten those who refuse to pay with arrest, deportation or loss of a business or driver’s license.

The truth is the IRS usually first contacts people by mail – not by phone – about unpaid taxes. And the IRS won’t ask for payment using a pre-paid debit card or wire transfer. The IRS also won’t ask for a credit card number over the phone.

“If someone unexpectedly calls claiming to be from the IRS and uses threatening language if you don’t pay immediately, that is a sign that it really isn’t the IRS calling,” he said.

The callers who commit this fraud often:

  • Use common names and fake IRS badge numbers.
  • Know the last four digits of the victim’s Social Security Number.
  • Make caller ID information appear as if the IRS is calling.
  • Send bogus IRS e-mails to support their scam.
  • Call a second time claiming to be the police or department of motor vehicles, and the caller ID again supports their claim.

If you get a call from someone claiming to be with the IRS asking for a payment, here’s what to do:

  • If you owe Federal taxes, or think you might owe taxes, hang up and call the IRS at 800-829-1040. IRS workers can help you with your payment questions.
  • If you don’t owe taxes, call and report the incident to TIGTA at 800-366-4484.
  • You can also file a complaint with the Federal Trade Commission at www.FTC.gov. Add “IRS Telephone Scam” to the comments in your complaint.

TIGTA and the IRS encourage taxpayers to be alert for phone and e-mail scams that use the IRS name. The IRS will never request personal or financial information by e-mail, texting or any social media. You should forward scam e-mails to phishing@irs.gov. Don’t open any attachments or click on any links in those e-mails.

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes winner) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.

Read more about tax scams on the genuine IRS website at www.irs.gov.

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From: http://www.treasury.gov/tigta/press/press_tigta-2014-03.htm

Mid-Year Tax Planning – 2014

Tax Season 2014 has come and gone and now it’s time to think about tax planning for tax year 2014.  Items which could impact your 2014 taxes include certain life events and expired tax provisions.

Certain Life Events

Have you recently had a birth, adoption or death in your family?  Have you gotten married, divorced, retired, or changed jobs this year? If any of these life events occur in 2014, they will have a potential impact on your 2014 taxes.  For example:

1)      For Qualifying Children under the age of 17, a tax credit up to $1,000 per qualifying child may be allowed (which may be refundable.)

2)      If you have retired (or are planning on retiring), we need to analyze how your change in income resulting from receiving IRA or pension distributions, and/or Social Security benefits will impact your tax liability.

3)      A divorce or marriage could impact your tax situation in multiple ways (for example, alimony paid or received, deductions for mortgage interest and real estate taxes on your home, QDROs (qualified domestic relations orders) and potential changes in the standard deduction and personal exemptions allowed.)

Expiring Tax Provisions

Given the current political climate, it is not known if or when an agreement on extending the Expiring Tax Provisions (“extenders”) may be reached. These extenders have made tax planning a challenge for both taxpayers and tax professionals. Therefore, if any of these provisions impact you, it is important that you contact me so that we may discuss the possible tax consequences:

1)      Sales Tax Deduction: Prior to 01/01/2014, taxpayers may have been eligible to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A. This included the sales tax paid on the purchase of a vehicle. This deduction is no longer available to individuals.

2)      Mortgage Insurance Premiums: Prior to 01/01/2014, taxpayers may have been eligible to deduct the amounts paid for qualified mortgage insurance premiums along with their mortgage interest (subject to adjusted gross income limitations). Effective 01/01/2014, no deduction is allowed for these premiums paid or accrued after this date.

3)      Tax-free Distributions from Individual Retirement Plans for Charitable Purposes: Prior to 01/01/2014, taxpayers over 70 ½ may have been eligible to exclude from their gross income distributions up to $100,000 from their IRA to a qualified charitable organization. This permitted taxpayers to satisfy their Required Minimum Distribution (RMD) and not include the amount in their income. As this reduced their Adjusted Gross Income (AGI), which favorably impacted the taxable amount of Social Security benefits received, this was a large tax advantage for taxpayers.This special distribution provision is not available for distributions after 2013.

4)      Qualified Principal Residence Debt Exclusion:  Prior to 01/01/2014, the discharge of principal residence debt (qualified mortgage on a taxpayer’s main home incurred to buy, build or substantially improve his or her main home) was generally excluded from gross income. As many taxpayers are still experiencing financial difficulties resulting inforeclosures, short sales or debt forgiveness on their primary residence, the tax ramifications for 2014 will have major tax consequences.

Other Steps to Consider Before the End of the Year

You should thoroughly review your situation before year end to determine the best tax strategies for 2014 and the impact on 2015 as well. Accelerating income/deferring deductions into 2014 or deferring income/accelerating deductions to 2015 are just a couple of approaches that could benefit you.

If you have any foreign assets, be aware that there are reporting and filing requirements for those assets. Noncompliance carries stiff penalties.

Please call us with any questions you may have.

 

Are Social Security Benefits Taxable?

Are Social Security benefits taxable? Depends on your individual situation! Some people must pay taxes on part of their Social Security benefits. Others find that their benefits are not taxable.

Here are a notes about how Social Security affects your taxes:

  • If you received these benefits in 2013, you should have received a Form SSA-1099, Social Security Benefit Statement, showing the amount.
  • If Social Security was your only source of income in 2013, your benefits may not be taxable. You also may not even need to file a federal income tax return.
  • If you get income from other sources, then you may have to pay taxes on some of your benefits.
  • Your income and filing status affect whether you must pay taxes on your Social Security.
  • A quick way to find out if any of your benefits may be taxable is to add one-half of your Social Security benefits to all your other income, including any tax-exempt interest. Next, compare this total to the base amounts below. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. The three base amounts are:
    • $25,000 – for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year
    • $32,000 -for married couples filing jointly
    • $0 – for married persons filing separately who lived together at any time during the year


For more on this topic visit IRS.gov.

New Earned Income Credit (EIC) Documentation Requirement

As the taxpayer claiming a child (or children), you need to provide documentation that the child/children actually live with you.  Below is a list of documents that may be used to support that claim:

  • School records or statement showing the child’s (your) address
  • Landlord or property management statement
  • Health care provider statement
  • Medical records
  • Child care provider records
  • Placement agency statement
  • Social service records or statement
  • Place of worship statement
  • Indian tribal official statement
  • Employer statement

Be sure to include at least one of these things with the documentation you provide to your tax preparer to do your tax return if your income is low enough that you expect to qualify for the EIC.

If you are claiming a disabled child, you will need to prove the disability by providing at least one of the following:

  • Doctor statement
  • Other health care provider statement
  • Social services agency or program statement

Lastly, if a Schedule C for a self-employed business is filed as part of the tax return, the tax preparer must document the existence of the business and document what records were used to determine the business income and expenses claimed for the business.  These records to submit to your preparer include the following:

  • Business license
  • 1099-MISC forms
  • Records of gross receipts
  • Income summary
  • Expense summary
  • Bank statements

These are permanent documentation requirements for 2013 tax returns and beyond for anyone claiming the federal Earned Income Credit.

 

 

Affordable Care Act — Let us help!

As you’ve probably already seen on the news, there is a law that most Americans are required to carry health insurance for themselves and their dependents on January 1, 2014, or pay a penalty when they file their tax return. This is known as the Individual Mandate of the Patient Protection and Affordable Care Act.

But… what exactly does that mean? And does it affect you?

You are only exempt from the mandate if you are:

a. Members of certain religious groups and Native American tribes
b. Undocumented immigrants
c. Incarcerated individuals
d. People whose incomes are so low they don’t have to file taxes
e. People with household income below 100% of the federal poverty level in states that did not expand Medicaid
f. People who are uninsured for a period that is less than 3 months
g. People for whom health insurance is considered unaffordable (where insurance premiums after employer contributions and federal subsidies exceed 8% of family income)

If you have qualified health insurance, you are covered and are not required to take any action. Examples of qualified health insurance are:

a. Medicare
b. Medicaid or Children’s Health Insurance Program (CHIP)
c. TRICARE for Life program
d. Veterans’ health care
e. Health coverage plan available to Peace Corps volunteers
f. Employer-sponsored plans, provided that:

i. The plan covers at least 60% of covered costs.
ii. The employee’s cost for self-only coverage is not more than 9.5% of the employee’s household income. If the cost of the insurance is more than 9.5% of household income, the employee may be eligible for a subsidy if they purchase insurance through a Health Insurance Marketplace (or Exchange). They must opt out of the employer insurance: they cannot be enrolled in qualified insurance and be eligible for the premium assistance credit, even if that insurance is greater than 9.5% of household income.

If you are not exempt and not covered by qualified health insurance, you may qualify for a premium assistance credit to help off set the cost of the insurance if you buy insurance through a government-run Exchange. To do so, household income must be between 100%–400% of the federal poverty level to be eligible for a credit.

Through a reputable program, we are happy to provide to you a reliable site that will provide in-depth calculations of the premium assistance credit as well as list the various health insurance plans available to them within the Exchange and through the private market, and the cost of those plans.

If you are under 65, visit this link to check your eligibility for a government subsidy under the Patient Protection and Affordable Care Act.

For anyone 65 and over, visit this link to shop for medicare insurance.

Tax season opens Jan. 30th

It might not be as exciting as deer season or football season, but tax season opens this year on Jan. 30th.

Following the January tax law changes made by Congress under the American Taxpayer Relief Act (ATRA), the IRS recently announced that plans to open the 2013 filing season and begin processing individual income tax returns on that day.

The IRS will begin accepting tax returns on that date after updating forms and completing programming and testing of its processing systems. This will reflect the bulk of the late tax law changes enacted Jan. 2.The announcement means that the vast majority of tax filers — more than 120 million households — should be able to start filing tax returns starting Jan 30.

The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits.

The IRS will not process paper tax returns before the anticipated Jan. 30 opening date. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit.

The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on Jan. 1, 2013, with many affecting tax returns for 2012. While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it can begin accepting tax returns.

Who Can’t File Until Later?

There are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS hopes to begin accepting tax returns including these tax forms between late February and into March; a specific date will be announced in the near future.

The key forms that require more extensive programming changes include Form 5695 (Residential Energy Credits), Form 4562 (Depreciation and Amortization) and Form 3800 (General Business Credit). A full listing of the forms that won’t be accepted until later is available on IRS.gov.

As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure as smooth a tax season as possible under the circumstances.

Updated information will be posted on IRS.gov.

Medical Savings Accounts (MSAs)

We had a client recently ask if distributions from an MSA are reported with the Form 1040. Below is some important information that we hope will help answer this question for anyone with this same question. As always, consult with your tax professional for how this affects your own personal tax situation.

Archer MSAs were created to help self-employed individuals and employees of certain small employers meet the medical care costs of the account holder, the account holder’s spouse, or the account holder’s dependent(s).

Filing Form 8853

You must file Form 8853 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your Archer MSA during the year. You must file the form even if only your employer or your spouse’s employer made contributions to the Archer MSA.

If, during the tax year, you are the beneficiary of two or more Archer MSAs or you are a beneficiary of an Archer MSA and you have your own Archer MSA, you must complete a separate Form 8853 for each MSA. Enter “statement” at the top of each Form 8853 and complete the form as instructed. Next, complete a controlling Form 8853 combining the amounts shown on each of the statement Forms 8853. Attach the statements to your tax return after the controlling Form 8853.

How you report your distributions depends on whether or not you use the distribution for qualified medical expenses.

  •  If you use a distribution from your Archer MSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8853. Follow the instructions for the form and file it with your Form 1040 or Form 1040NR.
  • If you do not use a distribution from your Archer MSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8853 and file it with your Form 1040 or Form 1040NR. If you have a taxable Archer MSA distribution, include it in the total on Form 1040 or Form 1040NR, line 21, and enter “MSA” and the amount on the dotted line next to line 21. You may have to pay an additional 20% tax, discussed later, on your taxable distribution.

Moving Expenses

Summertime is a time that a lot of taxpayers are relocating for job changes, so we thought this would be a good time to cover some of the expenses that you may be able to deduct on your tax return. This list may not include all the expenses you may be eligible to take but it will help make you aware of some of the more common expenses you will encounter. As always, consult with your tax preparer who is an Enrolled Agent or Registered Tax Preparer for professional help in this area.

The following applies if you are moving to start a new job or even the same job at a new job location.

Expenses must be close to the time you start work. Generally, you can consider moving expenses that you incurred within one year of the date you first report to work at a new job location.

Distance Test. Your move meets the distance test if your new main job location is at least 50 miles farther from your former home than your previous main job location was from your former home. For example, if your old main job location was three miles from your former home, your new main job location must be at least 53 miles from that former home.

Time Test. Upon arriving in the general area of your new job location, you must work full time for at least 39 weeks during the first year at your new job location. Self-employed individuals must meet this test, and they must also work full time for a total of at least 78 weeks during the first 24 months upon arriving in the general area of their new job location. If your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test. There are some special rules and exceptions to these general rules, so see Publication 521, Moving Expenses, for more information.

Travel. You can deduct lodging expenses (but not meals) for yourself and household members while moving from your former home to your new home. You can also deduct transportation expenses, including airfare, vehicle mileage, parking fees and tolls you pay, but you can only deduct one trip per person.

Household goods. You can deduct the cost of packing, crating and transporting your household goods and personal property, including the cost of shipping household pets. You may be able to include the cost of storing and insuring these items while in transit.

Nondeductible expenses. You cannot deduct as moving expenses: any part of the purchase price of your new home, car tags, a drivers license renewal, costs of buying or selling a home, expenses of entering into or breaking a lease, or security deposits and storage charges, except those incurred in transit and for foreign moves.

Reimbursed expenses. If your employer reimburses you for the costs of a move for which you took a deduction, the reimbursement may have to be included as income on your tax return.

VERY IMPORTANT! Update your address: When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS.

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If your payroll tax deposit rule is semimonthly, it is time to schedule your tax deposit using EFTPS for payrolls on August 1st to the 3rd. This is due on August 8th.

This is the type of reminder you can get right on your Facebook feed if you follow us! We strive to keep our clients and all tax payers up to date on deadlines, etc. A great way to keep up to date is by following our page. We promise not to spam you with multiple posts a day, but we will keep you notified of things you need to know about your tax and bookkeeping needs.

Schoppe’s Bookkeeping & Tax Service, Inc.

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