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Planning

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What if I owe more to the IRS than I can pay?

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The IRS offers several options to taxpayers who cannot pay their taxes in full when they file their returns.

  • You can charge your taxes on a credit card. The IRS’s credit card service providers charge a convenience fee of about 2.5% in addition to the interest rate your credit card company charges on your balance.
  • You can request to pay your taxes to the IRS in installments. If you owe $50,000 or less and agree to pay off the balance within a six-year period, the approval process is pretty straightforward. Larger balances can be set up on an installment plan too, but they won’t be automatically approved. The IRS will continue to add interest and penalties to your account until you pay off the balance.
  • You can enter into an offer-in-compromise agreement with the IRS to settle your tax bill and get off to a fresh start. Under this arrangement, the IRS will settle your account for a portion of the tax you owe if you agree to file and pay your future taxes on time. You’ll have to submit financial information to the IRS to prove that you don’t have the money or ability to pay off the entire balance.

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What tax breaks are available due to a natural disaster?

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What tax breaks are available if I suffer a loss due to a natural disaster?

If the federal government declares your area to be a major disaster area, the tax law allows individuals and businesses to get a faster refund by claiming disaster losses on their prior years’ returns. This is done by filing an amended return for the prior year.

Also, in some disaster situations, the IRS might allow additional time to file current year returns and pay any tax due.

It is important to check as soon as possible to note any approved filing delays or tax benefits due to your unfortunate circumstance.

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Retirement Account Funding

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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.

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Do you qualify for a home office deduction?

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If you run a business from home, you may be entitled to a home office deduction. This is only if you claim your home office as a business write-off on Schedule C as miscellaneous deductions have been eliminated for tax years 2018-2025.

Your business space doesn’t have to take up an entire room, but you have to use that space exclusively for business purposes.

You must also meet at least one of the following conditions:

  1. Your home must be your principal place of business. In other words, it’s the only place you have to conduct administrative and management activities, such as billing customers, keeping the books, setting up appointments, or placing orders.
  2. You use the space to meet with your customers, clients, or patients.
  3. You use a space in a separate structure not attached to your home; for example, a detached garage.
  4. You use the space to store inventory or product samples, and your home is the only fixed location of your business. For example, you are an outside salesman, and you store product samples in your basement.
  5. You use the space as a licensed day-care facility.

Caution: Taking the home office deduction can limit the tax-free gain on the future sale of your home.

Optional square foot deduction. Taxpayers can use an optional per square foot deduction for a home office. This optional method does not change the criteria of who may take a home office deduction. The deduction is $5 per square foot of home office up to a maximum of 300 square feet (a maximum deduction of $1,500). Your home mortgage interest and real estate taxes can still be taken as itemized deductions. There is no recapture of depreciation in later years for years when this optional method is used.

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What is Alernative Minimum Tax?

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The alternative minimum tax (or AMT) was created many years ago to ensure that higher-income taxpayers with lots of deductions and credits pay at least a minimum amount of tax.

The AMT is a separate tax calculation that disallows many of the deductions and credits used to calculate regular income tax. It also adds back certain income that is not normally taxed. The most common AMT adjustments are for certain itemized deductions and adjustments, such as state and local taxes. Also, if you exercise incentive stock options, sell investments with large long-term capital gains, or take depreciation on business property, you may be hit with the AMT.

You’re required to calculate your tax under both the regular and AMT methods. You then pay whichever tax is higher.

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I’m retired. Do I need to file a tax return?

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Do I need to file a tax return after I retire?

You may need to file a return even after you retire. You’re required to file a return if your income is over certain levels. Generally, you must file a federal income tax return, even if you don’t owe tax, when your gross income exceeds the following limits:

  • Single – $12,550
  • Head of household – $18,800
  • Married filing jointly – $25,100
  • Married filing separately – $12,550

If you are 65 or older or legally blind, you are allowed to make more money before you have to file a return. Single taxpayers who are legally blind or over age 65 can take another $1,700 ($1,350 for each married taxpayer).

If your total income is less than these amounts, you’ll still have to file a return if you are self-employed and your business net income is $400 or more.

Even if you do not have to file a return, you might still want to do so. For example, if you paid taxes to the IRS or had taxes withheld from your wages or pension, the only way you can get your money back is to file a tax return.

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Where’s My Refund?

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The popular “Where’s My Refund” feature on the IRS website allows taxpayers to see the status of their refund after filing their income tax return.

What You Should Know

  1. Refunds of e-filed returns usually take 10 to 21 days to process. Paper returns take longer than e-filed returns. The IRS states that 90% of refunds are processed within this 21 day time period.
  2. Original refund processing projections can change. This can be due to processing backlogs, or errors in your tax return.
  3. Sometimes a delay is a good thing. The IRS has acknowledged there is a huge increase in identity fraud as thieves try to steal tax withholdings. The IRS is using their data match programs to catch as much of this illegal activity as possible. This means the IRS will often intentionally slow down your refund while it runs your tax return through new fraud safety measures.

Using “Where’s My Refund”

In the meantime, if you wish to check on the status of your refund this is what you should know:

Log on to: www.irs.gov and click on “I’m Waiting for my Refund.”

When to check:

  • 24 hours after an e-filed tax return confirmation (usually within 2 days of e-filing)
  • 4 weeks after a mailed tax return is sent

What you need to provide:

  • Social Security number
  • Filing Status
  • EXACT refund amount

Remember, the information provided to you by the IRS is not a guarantee of payment. So please fight the urge to spend your refund before you receive it. Unfortunately, no amount of calling or checking will change the speed of returning your money. With 140 million tax returns processed each year, sometimes all you can do is wait.

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What is the best way to assemble records to prepare my tax return?

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First, don’t wait until the last minute to sort through your records. Set up a filing system early in the year and stay on top of your filing.

Second, realize that there’s no one particular system that works for everyone. If you use a tax organizer, you may want to set up your files in the same order, so you can easily locate the items you’ll need to complete it. Otherwise, you might want to use last year’s return as a guide, and organize your files in the same order they were reported on your prior-year income tax return.

Third, when you receive important tax documents, such as your W-2, 1099s, mortgage interest statements, retirement account statements, etc., verify that the information is accurate before filing the documents with your other records. Contact us for more information.

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Can I itemize deductions this year?

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If you have enough personal expenses, you may save income taxes if you itemize your deductions. Compare your itemized deductions with the standard deduction for your filing status, and use the larger of the two.

Itemized deductions include the following:

  • Medical expenses – only to the extent they exceed 7.5% of your adjusted gross income.
  • Taxes – this includes state and local taxes, real estate taxes, and personal property taxes.
  • Interest you pay – such as home mortgage interest, certain points, and investment interest. This is limited to $10,000.
  • Charitable gifts – this includes gifts of both cash and property.
  • Casualty and theft losses in Federally declared disaster areas – above certain thresholds.

The standard deduction is indexed annually for inflation.

In 2021, each married taxpayer over age 65 or legally blind receives an additional $1,350 deduction. Singles receive an additional $1,700 deduction.

So will you itemize? Probably yes if you are:

  • Own a home
  • Single
  • Have high medical bills
  • Donate a lot to charity

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Give your business an internal control checkup

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Internal accounting controls are vital to every business. The coffee shop owner needs to be sure that all sales are rung up and that all cash is deposited in the bank. The plumber needs controls to make sure that all time and material costs are captured and assigned to the right job.

Proper internal controls should be part of everyday procedures in a business. They should work in a way that helps prevent fraud and theft or detects them early. Having an audit or review of your financial statements once a year will not necessarily detect fraud.

Every business should be sure it has set up an adequate system to safeguard all its assets- cash, inventory, equipment, etc.- with periodic reviews to be sure the controls are working.

Use the following checklist to review your internal control procedures. The list is not all-inclusive and is no substitute for thorough internal control analysis.

Cash

  • Are cash handling and cash recordkeeping duties segregated?
  • Are all expenditures authorized and documented?
  • Do you conduct unannounced checks of petty cash and other cash accounts?
  • Do you prohibit any single employee from handling a transaction from start to finish?
  • Do you deposit all receipts intact to the bank daily?
  • Do you prepare bank reconciliations?

Sales

  • Do you have proper segregation of duties to preclude an employee from pocketing cash from a sale but never reporting the sale?
  • If you have too few employees for adequate segregation of responsibilities, do you play an active role in monitoring sales activities?

Accounts Receivable

  • Do you have different employees responsible for the various duties associated with accounts receivable? (For example: taking the order, shipping the product, customer billing, collecting receivables, depositing collections in the bank.)
  • Do you account for and physically control returned merchandise?
  • Do you bill customers promptly?
  • Is an accounts receivable aging schedule prepared regularly?
  • Do customers receive monthly statements?

Inventory

  • Are inventories physically counted at least annually?
  • Is central control over inventories maintained?
  • Are perpetual inventory records maintained?
  • Is inventory adequately insured?
  • Do you maintain safeguards against theft and pilferage?

Fixed Assets

  • Are fixed assets acquired only with proper authorization?
  • Do you take regular inventory of fixed assets?
  • Are discrepancies between physical counts and accounting records resolved?
  • Are fixed assets adequately insured?
  • Are small tools and supplies properly safeguarded?

Debts

  • Is there proper authorization for the creation of any debt?
  • Are liabilities promptly recorded?
  • Are accounts payable checked for accuracy?
  • Are bills paid only when the merchandise has actually been received?
  • Do you take advantage of vendor discounts?

Stock

  • Are designated officers the only ones allowed to sign stock certificates?
  • Are stock certificates prenumbered and carefully accounted for?

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