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Accounting and Tax Planning

A Tax-planning Checklist

By Dan Eger

 

It is that time again, your favorite and mine, tax season!

As we have made it through hopefully the worst of the pandemic, dealing with all the ups and downs of learning this new normal in life, one thing will remain the same — the IRS still wants our money. At some things have not changed due to COVID-19.

Here are some steps to take now to help make filing for the 2020 tax season easier. Below is a list of items to gather. These are the most common required forms and items. The list is not all-inclusive, as everyone’s tax situation is different. Also included are a few other things for you to consider as you prepare to file your 2020 tax return.

 

Documentation of Income

• W-2 – Wages, salaries, and tips

• W-2G – Gambling winnings

• 1099-Int and 1099-OID – Interest income statements

• 1099-DIV – Dividend income statements

• 1099-B – Capital gains (sales of stock, land, and other items)

• 1099-G – Certain government payments

— Statement of state tax refunds

— Unemployment benefits

• 1099-Misc – Miscellaneous income

• 1099-S – Sale of real estate (home)

• 1099-R – Retirement income

• 1099-SSA – Social Security income

• K-1 – Income from partnerships, trusts, and S-corporations

 

Documentation for Deductions

If you think all your deductions for Schedule A will not add up to more than $12,400 for single, $18,650 for head of household, or $24,800 for married filing jointly, save yourself the time required to itemize deductions and just plan to take the standard deduction.

 

• Medical Expenses (out of pocket, limited to 7.5% of adjusted gross income)

— Medical insurance (paid with post-tax dollars)

— Long-term-care insurance

— Prescription medicine and drugs

— Hospital expenses

— Long-term care expenses (in-home nurse, nursing home, etc.)

— Doctor and dentist payments

— Eyeglasses and contacts

— Miles traveled for medical purposes

 

• Taxes You Paid (limited to $10,000)

— State withholding from your W-2

— Real-estate taxes paid

— Estimated state tax payments and amount paid with prior year return

— Personal property (excise)

 

• Interest You Paid

— 1098-Misc – mortgage-interest statement

— Interest paid to private party for home purchase

— Qualified investment interest

— Points paid on purchase of principal residence

— Points paid to refinance (amortized over life of loan)

— Mortgage-insurance premiums

 

• Gifts to Charity (For 2020, filers who claim the standard deduction can take an additional deduction up to $300 for cash contributions.)

— Cash and check receipts from qualified organization

— Non-cash items, which need a summary list and responsible gift calculation (IRS tables). If the gift is more than $5,000, a written appraisal is required.

— Donation and acknowledgement letters (over $250)

— Gifts of stocks (you need the market value on the date of gift)

 

• Additional Adjustments (Non-Schedule A)

— 1098-T – Tuition statement

— Educator expenses (up to $250)

— 1098-E – Student-loan interest deduction

— 5498 HSA – Health savings account contributions

— 1099-SA – Distributions from HAS

— Qualified child and dependent care expenses

— Verify any estimated tax payments (does not include taxes withheld)

 

Sole proprietors (Schedule C) or owners of rental real estate (Schedule E, Part I) need to compile all income and expenses for the year. You need to retain adequate documentation to substantiate the amounts that are reported.

 

Other Items to Consider

Identity-protection PIN

If you are a confirmed identity-theft victim, the IRS will mail you a notice with your IP PIN each year. You need this number to electronically file your tax return.

Starting in 2021, you may opt into the IP PIN program. Visit www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin to set up your IP PIN. An IP PIN helps prevent someone else from filing a fraudulent tax return using your Social Security number.

 

What If You Have Been Compromised?

How do you know if someone has filed a return with your information? The most common way is that your tax return will get rejected for e-file. These scammers file early. You may also get a letter from the IRS requesting you verify certain information.

If this does happen, there are steps to take to get this rectified:

1. File Form 14039 (Identity Theft Affidavit).

2. Paper-file your return.

3. Visit identitytheft.gov for additional steps.

 

New for 2021: Recovery Rebate Credit

Eligible individuals who did not receive a 2020 economic impact payment (stimulus check), or received a reduced amount, may be able to claim the Recovery Rebate Credit on their 2020 tax return. There is a worksheet to use to figure the amount of credit for which you are eligible based on your 2020 tax return. Generally, this credit will increase the amount of your tax refund or lower the amount of the tax you owe.

 

Who Will Prepare My Return?

Are you going to be preparing your tax return, or will you hire someone to file on your behalf? You might want to plan that out now so you know the required information you will need and the fee structure you can expect to pay for completion of all applicable forms. In addition to all the items listed above, the tax preparer will ask you for a copy of your last tax return that was filed. The IRS offers a ‘file free platform’ to file your tax return if your income is under $72,000. You can find this at irs.gov or the IRS2Go app. There are also some local tax-assistance and counseling programs, depending on your age and income levels (VITA/TCE).

 

Interactive Tax Assistant

The Interactive Tax Assist (ITA) is an IRS online tool (irs.gov) to help you get answers to several tax-law items. ITA can help you determine what income is taxable, which deductions are allowed, filing status, who can be claimed as a dependent, and available tax credits.

 

Be Vigilant

Finally, be especially careful during this time of year to protect yourself against those trying to defraud or scam you. The IRS will never — let me repeat that: NEVER — call you directly unless you are already in litigation with them. They will not initiate contact by e-mail, text, or social media. The IRS will contact you by U.S. mail.

However, you still need to be wary of items received by mail. Anything requesting your Social Security number or any credit-card information is a dead giveaway. Watch out for websites and social-media attempts that request money or personal information and for schemes tied to economic impact payments. You can check the irs.gov website to research any notice you receive or any concerns you may have. You can also contact your tax practitioner for help and assistance.

 

Dan Eger is a senior associate at Holyoke-based accounting firm Meyers Brothers Kalicka; (413) 536-8510.

Accounting and Tax Planning

Looking Back — and Ahead

April 15 has come and gone, and many people are not looking back on the recent tax season with fond memories. Indeed, for many there were surprises and refunds lower than expected. One of the keys to not being surprised or disappointed is planning, as in year-round planning.

By Danielle Fitzpatrick, CPA

Many taxpayers think about taxes only once a year, and that one time is when they are filing their income-tax return. However, taxpayers should be thinking about their taxes year-round.

Many people do not consider how a change in their life may affect their taxes until they see the outcome the following year. Surprises may be avoided if they were to seek the advice of their tax professional ahead of time.

Seeking the advice of a tax professional throughout the year is very important. Certified public accountants (CPAs) who specialize in tax are not just tax preparers. CPAs can be trusted advisors who can help meet your personal wealth-creation, business-management, and financial goals.

Danielle Fitzpatrick

Danielle Fitzpatrick

The 2018 tax-filing season brought some of the biggest tax-law changes that we’ve seen in more than 30 years, and left many taxpayers surprised with their tax outcome. Perhaps you were pleasantly surprised by the additional money you received because you have children, or maybe you were one of the many who were shocked because of the reduced refunds or liability that you owed for the very first time.

If you were unhappy with the results of your 2018 tax return, you now have an opportunity to plan for the future. Review your 2018 income-tax return and determine if changes need to be made. Did you owe money for the first time because your withholdings decreased too much, or because you are now taking the standard deduction due to the loss of several itemized deductions?

Consider this — if your income and deductions were to remain relatively the same in 2019 as they were in 2018, would you be happy with your results, or do you wish they were different?

“If you were unhappy with the results of your 2018 tax return, you now have an opportunity to plan for the future.”

After you have looked at your 2018 income-tax return, you should then consider what changes may need to occur in 2019. Your tax accountant can help you determine how an expected change can impact your tax liability and try to ensure that you are safe-harbored from potential underpayment penalties.

Individuals may be subject to underpayment penalties on both their federal and state returns if they do not meet specific payment requirements each year through withholdings and/or estimated tax payments. Your accountant can also help you determine if a change in withholdings at work or through your retirement is necessary, or whether there is a need to adjust or make estimated tax payments.

These changes can help you avoid, or reduce, any potential underpayment penalties.

There are so many changes in a person’s life that could impact their tax return. Some changes include, but are not limited to, getting married or divorced, having a baby, sending a child to college, retiring, or starting a new job.

Maybe you have decided to start your own business and now are responsible for self-employment tax. Or maybe you have decided that you need to sell that rental property or second home you have had for many years. Perhaps you are a beneficiary of an estate for a loved one who passed away or have decided to sell stock through your investments. These are all examples of changes that could significantly impact your taxes.

Businesses also experience changes that could have an impact on their business returns. These changes include, but are not limited to, purchasing or selling a business, investing in a new vehicle or piece of equipment, or maybe the company has grown and you want to start providing benefits to your employees.

All the above examples could have a major impact on your individual or business income-tax returns, and that impact could be reduced if you were to reach out to a tax professional for advice before the next tax season. Besides the changes briefly mentioned above, here are two lists of questions (personal and business) that may be helpful in your next discussion with your tax professional.

First, some questions to ask your accountant in relation to your personal taxes:

• How much should I be contributing to my retirement, and which type of retirement best suits my needs?

• Am I adequately saving for my children’s education, and should I consider an education savings plan?

• Do I have adequate health, disability, and life insurance?

• When should I start taking Social Security benefits?

• When do I sign up for Medicare?

• Have I properly planned for Medicaid?

• Do I need a will, or when should my existing will be updated?

• Should I consider a living trust?

• Are my bank accounts, retirement accounts, and investment accounts set up appropriately so they avoid probate if I pass away?

• Are my withholdings and/or estimated tax payments adequate?

• When should I sell my rental property, and how much should I expect to pay in taxes?

• Can I still claim my child as a dependent even though they are no longer a full-time student?

• I’m inheriting money from a loved one who passed away; will this affect my taxes?

• I’m thinking about starting my own business; how will this impact my taxes going forward?

• My financial advisor told me I would have significant capital gains; how will this affect my tax liability?

Here are some questions to ask your accountant in relation to your business:

• What business structure is most appropriate for my circumstances?

• How do I know if my business is generating a profit?

• Am I pricing my products and services properly?

• How would my business function if my bookkeeper left tomorrow?

• What controls should I have in place to prevent employees from misusing company funds?

• Should I upgrade my accounting software?

• Do I need compiled, reviewed, or audited financial statements?

• Are my withholdings and/or estimated tax payments adequate?

• Can I claim a deduction for an office in my home?

• Should I buy a new truck or equipment before year-end?

• Should I buy or lease a vehicle?

• Should I implement a retirement plan before year-end?

• What is the overall value of my business?

• What should my exit strategy be?

• What are the tax consequences of selling my business?

Whether you are experiencing a major change in your life or want to plan for your future, do not forget to reach out to your tax professional to determine how it may affect your income taxes. u

Danielle Fitzpatrick, CPA, is a tax manager at Melanson Heath. She is part of the Commercial Services Department and is based out of the Greenfield office. Her areas of expertise include individual income taxes and planning, as well as nonprofit taxes. She also works with many businesses, helping with corporate and partnership taxes and planning

Accounting and Tax Planning

Items That Add Up

By Kathryn A. Sisson, CPA, MST

There are many changes that businesses and individuals should be aware of under The Tax Cuts and Jobs Act (TCJA), the most significant tax legislation in the U.S. in more than 30 years. Here are the 10 changes that will have the most significant impact this tax season.

Individuals

1. Tax Rates. The 2018 tax brackets have changed, resulting in lower tax rates for most individuals. For example, the 15% tax bracket has been reduced to 12% and the 25% bracket to 22%.

2. Income-tax Withholding. As a result of the lower taxes rates, income-tax withholding during 2018 also decreased for most individuals. This could result in underpayment of taxes for 2018, depending on your tax situation. Taxpayers should carefully review their withholding going into 2019 and discuss it with their tax professional.

3. Itemized Deductions. TCJA made several changes to itemized deductions as noted below.

Medical Expenses: TCJA lowered the threshold for the medical-expense deduction to 7.5% of AGI for 2017 and 2018. The threshold for 2019 is 10% for most taxpayers.

State and Local Taxes: TCJA limits the deduction for state and local taxes to $10,000 per year. This includes payments for state income tax, property tax, and excise tax. The same $10,000 limit applies regardless of whether you are a single taxpayer or if you are married and file a joint return. The deduction for taxpayers who are married and filing separate returns is limited to $5,000.

Kathryn A. Sisson

Kathryn A. Sisson

Mortgage Interest: Interest is generally deductible on original home acquisition debt up to $750,000. Home-equity interest is deductible only if the funds were used to improve the mortgaged property.

Charitable Donations: Donations are generally deductible up to 60% of AGI, up from 50%, for most donations. You could also consider giving directly from your IRA if you are over age 70 1/2 or gifting appreciated stock directly to a charity. Discuss with your tax professional in order to maximize your benefit.

Miscellaneous Itemized Deductions: TCJA has eliminated miscellaneous itemized deductions. These include deductions for unreimbursed employee business expenses, tax-preparation fees, and investment-advisory fees.

4. Increased Standard Deduction. One of the most significant provisions of TCJA is the near-doubling of the standard deduction for all taxpayers. For 2018, the standard deduction amounts are $24,000 for joint filers, $18,000 for head of household, and $12,000 for all other filers. The limitations on itemized deductions as noted above and the increased standard deduction amounts may make it less advantageous to itemize deductions.

5. Personal Exemptions. TCJA eliminated personal exemptions for 2018. For 2017, taxpayers received a personal exemption deduction of $4,050 per person. Therefore, a family of four received a deduction of $16,200 in 2017 that is no longer available under the new tax act.

Businesses

6. Tax Rates. A flat tax rate of 21% replaces the graduated tax rate brackets for C corporations that ranged from 15% to 39% in prior years.

7. Qualified Business Income (QBI) Deduction. A deduction of up to 20% of business income may be available to owners of pass-through entities. There are limitations based on several factors, including income of the taxpayer as well as the type of trade or business. The purpose of the deduction is to provide some parity between the new flat 21% corporate rate and the tax rates paid by owners of pass-through entities on their individual income-tax returns.

8. Depreciation. TCJA made significant changes to encourage businesses to expand and invest in new property; 100% bonus depreciation is now available for federal purposes, and the limitation on expensing certain assets has been increased to $1 million, with a $2.5 million investment limitation.

9. Business Credits. TCJA created a Family Leave Credit for employers making family-leave payments to employees. The credit is available only to employers who have a written policy in place for the payment and credit.

10. Deductions. Previously, the deduction for meals and entertainment was limited to 50% of expenses incurred. For 2018, 50% of meals are still deductible; however, entertainment expenses are no longer deductible.

Many of these changes are significant and warrant your full attention. As you approach tax season this year, seek the assistance of tax professionals, and do not follow your neighbor’s tax advice.

Kathryn A. Sisson, CPA, MST is a tax manager in the Commercial Services Department of Melanson Heath in Greenfield. She has 20 years of experience in public accounting and has been with Melanson Heath for 10 years. She has extensive experience in corporate and individual income-tax planning and review as well as financial-statement compilations and reviews. Her corporate experience includes working with businesses doing business in multiple states. She is also a QuickBooks ProAdvisor assisting many clients with general ledger systems and software training.

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