taxes

March 16 2023

Sharing Economy Now in IRS Spotlight

IRS, IRS Rules, Tax Law, Tax Planning taxes

40% are unaware of their tax responsibilities

40% of the workers in the Sharing Economy are unaware of their tax responsibilities.
Over 60% of the service provider companies are not training their new workers on their tax responsibilities.

Source: Written statement of Nina E. Olson, National Taxpayer Advocate given at the Hearing on “The Sharing Economy” to the Committee on Small Business, U.S. House of Representatives, May 26, 2016.

Tax compliance is a problem for Uber drivers, Airbnb and others deemed to be in the new Sharing Economy. The IRS is aware of this and has launched a “Sharing Economy Tax Center” on their website to help this growing group of workers. Here are ideas to keep you out of this IRS spotlight.

The Sharing Economy

The sharing economy consists of workers that are taking part in the service economy by “sharing” their resources for part-time or full time employment. Some common examples are:

Cab services: use your car
Delivery services: use of your car
Short-term rentals: use of rooms, apartments, and homes
Home services: use of your personal tools and supplies

Note: While the IRS seems to be focusing on this new “Sharing Economy” really any freelance worker has the same tax challenges as these workers.

Key Tax Responsibilities

If you use your car as a cab or rent out your home for the big golf tournament, you will need to understand the following tax obligations.

Employee or contractor? You need to know which of these defines your employment arrangement. Your personal tax obligations are markedly different under each scenario. As an employee, the service company is responsible for paying the business portion of Social Security and Medicare. They will pay unemployment taxes. They will also withhold your portion of Social Security, Medicare, federal taxes and state taxes and send them in for you. These payments are reported to you on a W-2. This is not the case if you are a contractor.

Social Security and Medicare. All employers are required to pay Social Security and Medicare taxes. As a contractor you will need to reserve 12.4% of your net income for Social Security and 2.9% for Medicare payments.

Estimated taxes. You may need to send in quarterly estimated tax payments to avoid tax penalties when you file your tax return.

Other taxes. You may be subject to other taxes including unemployment taxes.

Depreciation. This area can be confusing. You are able to expense a portion of the cost of capital assets (like your car) if they are used for business purposes. However, if also used for personal use you will need to adjust the amount available for depreciation.

Special tax rules. Other areas of the tax code have special provisions. The most common of these is use of your home for business or rental.

The tax rules for those in the new service economy are complex and confusing. Ask for help before it gets out-of-hand or visit www.irs.gov and search “Sharing Economy Tax Center.”

February 16 2023

Tax Credits versus Tax Deductions

Credits, Individual Taxes, Tax Planning deductions, taxes

Which is worth more to you?

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	Deduction required to equal $2,000 tax credit
10%	20,000
15%	13,333
25%	8,000
28%	7,143
33%	6,061
35%	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	Common Deductions
– 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	– 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.

August 25 2022

Is Disability Income Taxable?

Financial, Individual Taxes, IRS Tax Planning, taxes

Question: Is my disability income taxable?

Answer: Money received from worker’s compensation for sickness or illness is not subject to income tax. Amounts received under a private accident policy for which you pay the premiums are also nontaxable. To the extent your employer pays the insurance premiums, your benefits will be subject to tax.

The punitive damage amount in any legal settlement, if any, is generally includible in taxable income as is any interest included in the damage award.

August 23 2022

Business, Medical and Moving Mileage Increases for Final Six Months of 2022

Business Taxes, Financial, IRS, Tax Tips deduction, IRS, taxes

The business mileage rate is increasing by 4 cents, to 62.5 cents per mile, while the medical and moving mileage is also increasing by 4 cents, to 22 cents per mile, for the final six months of 2022. The previous rates of 58.5 cents for business mileage and 18.0 cents for medical and moving mileage still apply for the first six months of 2022.

In recognition of the recent spike in gas prices, the IRS made this special adjustment for the second half of 2022. The IRS normally updates the mileage rates once a year in November or December for use during the subsequent year.

“We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses, and others who use this rate,” said IRS Commissioner Chuck Rettig in an IRS press release.

The value of your mileage deduction could increase 7%

Here’s how the business mileage increase could affect the bottom line on your 2022 tax return:

Example: You’re in the 12% tax bracket and have 1,000 business miles to report on your 2022 tax return. You drive 500 miles in the first six months of 2022, which will be recorded using the 58.5 cents rate. You drive another 500 miles in the second six months of 2022, which will be recorded using the 62.5 cents rate.

500 miles x 58.5 cents = $292.50 deduction x 12% tax rate = $35.00 reduction in taxes
500 miles x 62.5 cents = $312.50 deduction x 12% tax rate = $37.50 reduction in taxes

The 58.5 cents mileage rate results in a $292.50 tax deduction for you. Since you’re in the 12% tax bracket, this deduction will lower your taxes by $35.00.

The 62.5 cents mileage rate results in a $312.50 tax deduction for you. With a 12% tax rate, this deduction will lower your taxes by $37.50, which is $2.50 or 7% more than the $35.00 deduction you received for the first six months of 2022.

A reminder to keep great mileage records

The IRS mandates that you track your vehicle expenses as they happen (this is called contemporaneous recordkeeping). You’re not allowed to wait until right before filing your tax return to compile all the necessary information needed to claim a vehicle deduction. Whether it’s a physical notebook you stick in your glove compartment or a mobile phone app, pick a method to track your mileage and actual expenses that’s most convenient for you.

So be sure to keep great records so you can take advantage of this increase to the business, medical and moving mileage rates.

August 11 2022

Is Bond Interest Taxable?

Bonds, Tax Law, Tax Tips bonds, interest rates, taxes

Question: Is bond interest taxable?

Answer: That depends on the type of bond. For example:

Corporate bond interest is taxable.

Municipal bond interest is generally not subject to federal income tax.

Treasury bond interest is free from state and local income taxes.

Savings bond interest may or may not be taxable depending on the issue and what you use the bond interest for. For example, the interest on certain Series EE and Series I bonds is nontaxable if it is used for qualified education expenses.

August 9 2022

What is the difference between a tax deduction and a tax credit?

Credits, IRS IRS, Tax credit, tax deduction, taxes

Question: What is the difference between a tax deduction and a tax credit?

Answer: A deduction reduces your taxable income, and a credit is a dollar for dollar offset against your computed tax liability. Some credits are refundable, meaning that if your credit is larger than your tax liability, the IRS will pay you the difference.

This example may help. A $100 deduction will reduce your taxes by $24 if you are in the 24% tax bracket. A $100 credit will reduce your taxes by $100.

July 28 2022

How to Correct an Error on my Tax Return?

Business Tips, Financial, Planning IRS, tax returns, taxes

Question: After I filed my tax return, I discovered an error. How do I fix it?

Answer: Oversights and errors are not uncommon, so the IRS provides a way for you to correct them. You can correct your return for up to three years after you file your original return by filing an amended return with the IRS.

You need to tell the IRS why you are correcting the return, and include the appropriate documentation with your amended return.

If you’ve discovered income or deductions that you should have reported on your income tax return, give us a call. We can help you set the record straight and pay only the tax actually due.

December 16 2021

Some Last-Minute Tax Moves

Tax Tips Accounting, IRS, Tax Planning, tax returns, taxes

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

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.
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.
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.
Gather up non-cash items for donation, document the items, and give those items in good or better condition to your favorite local charity.
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.

Need help with tax planning? Contact us for more information.

September 18 2019

When to Ask for Help

Tax Planning, Tax Tips money savings, Retirement, taxes, we can help

Or run the risk of a high tax bill

“Before taking action talk to your tax adviser.”

How many times have you seen this legal disclaimer and have your eyes gloss 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.”

Gilliland & Associates, P.C. is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.

June 20 2018

Parents, Children, and Taxes

Credit, Credits, IRS, IRS Rules, Refunds, Tax Break, Tax Law, Tax Planning, Tax Tips 529 plans, Child Care, children, Credits, deductions, Education, k-12, Parent, Plan, Spouses, taxes

Image courtesy of PhotoStock at FreeDigitalPhotos.net

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

Being a parent usually cuts your tax bill in at least two ways. You can generally claim a dependency exemption for each child under age 19, or under age 24 for full-time students. You can also 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 credits include the adoption credit to offset expenses of adoption and the child care 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 at the parent’s highest rate until the child reaches a certain age. 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.

Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.