Tax Planning

In case you haven't noticed over the years, the federal government tends to move at a very slow pace. This is particularly true of the IRS, where speed is something that rarely, if ever happens. Unfortunately, this is very frustrating when it involves your tax refund. As the COVID-19 pandemic has taken hold across the United States, it has slowed the IRS down even more. Thus, you may be wondering why your tax refund is taking so long to process. If you’re still checking the mailbox or your bank account to no avail, here are some likely reasons, as well as other tips you might want to keep in mind.

The IRS is Swamped

While the IRS was swamped pre-pandemic, closing its offices in 2020 only exacerbated the problem. Believe it or not, the IRS is still trying to catch up on processing 2019 tax returns, not to mention 2020 tax returns. Thus, the combination of closing its offices and having reduced staff to process tax returns has created the perfect storm for long delays, especially with refunds.

Filing Electronically Won't Help

Though it is far more convenient to file your tax returns electronically, this does not necessarily mean it will result in you getting your tax refund as quickly as you may have hoped. Since there are also millions of other taxpayers filing electronically, this creates the same level of backlog for IRS workers to process. However, even with these issues, most tax returns filed electronically will be processed within 21 days under normal conditions, so patience will need to be a top priority for you while you wait.

Your Return Contains an Error

If there is one thing you don't want to do in life, it is have an error on your tax return. After all, even when you submit a perfect tax return, it takes awhile to get your refund. However, should you submit a return containing an error, the delay can be of epic proportions. When this occurs, there is usually much back-and-forth between you and the IRS before the situation gets resolved. To avoid this scenario, always put your tax return in the capable hands of a CPA you know and trust to get the job done correctly the first time.

You Claimed the Earned Income or Child Tax Credit

When you claimed an additional child tax credit or the Earned Income Credit on your tax return, you likely did not give it a second thought. However, the IRS does. Since the federal government takes a very dim view of tax fraud, the agency usually looks over these tax returns very carefully before approving them and issuing refunds. In fact, the IRS chooses not to issue tax refunds to taxpayers claiming these credits until at least the middle of February each year. Thus, if you don't get your refund as quickly as you expected, this doesn't mean anything is wrong. Instead, someone in the IRS office is likely double-checking your tax credits before sending out your refund.

You Filed a Paper Tax Return

While you may still like to file your tax return the old-fashioned way with a paper return, filing your returns old school almost guarantees your tax refund will be one of the last ones sent out. If you don't believe this, consider that as of April 22, 2021, the IRS was still holding onto 29 million tax returns that require manual processing, of which 5 million were paper tax returns. Thus, while filing electronically does not always guarantee your tax return will go to the head of the line, it's a good bet that at least it won't be stuck at the very end.

You May be a Victim of Fraud or Identity Theft

If you are one of the thousands of unlucky taxpayers each year who become victims of tax fraud or identity theft, this will undoubtedly keep your tax refund in limbo until the situation gets resolved. Unfortunately, trying to convince the IRS that someone else is not you is much more difficult than most people imagine. In these situations, you will not only need the expert assistance of a CPA, but also an attorney who specializes in tax law. While some of these situations can take years to resolve, having experts to assist you from the start usually speeds up the process.

Think a Phone Call will Help? Think Again

When many taxpayers get frustrated waiting for their tax refunds, they tend to think that picking up their phone and making a call to the IRS will convince someone at the agency to wave a magic wand and instantly issue their refund. As nice as this would be, the real world does not work this way. Actually, it will be miraculous if you even get through to speak to an IRS representative. Also, keep in mind that unless you have waited at least 21 days for your refund from a return filed electronically or six weeks after filing a paper return, the IRS won't even look any further into the reasons why you haven’t yet received your tax refund.

Rely on Experts

Finally, now that you know some of the reasons why your tax refund may be late here in 2021, there are a few ways you can hopefully set yourself up for tax refund success. One of the best ways is relying on an experienced and trusted CPA to prepare and file your tax returns. By doing so, you will not only have someone preparing your taxes who is well-versed in the latest IRS rules and regulations, but also someone who can answer any questions you may have, helping you avoid unnecessary errors.

By working to make sure your tax returns are correct and having a little patience along the way, you should soon have a tax refund in your mailbox or bank account.

One of the best ways to put away money for your retirement is with a Roth IRA. A Roth IRA differs from a traditional IRA in that a Roth IRA lets your money grow tax-free, plus allows for tax-free withdrawals. Knowing that, it’s easy to understand why this is such a popular savings option for so many people. But, as with any type of retirement plan where contributions and distributions are part of the mix, the IRS has a complex set of rules that can be ever-changing from year to year. To make sure you understand the Roth IRA rules for 2021 and beyond, here are some key points you should keep in mind.

Earned Income and the Roth IRA

For starters, always remember that only income that meets the criteria of being earned income can be contributed to a Roth IRA. Thus, it seems like you must either work for someone else or have your own business to have that income eligible for Roth IRA contributions. However, certain other forms of income such as untaxed combat pay, military differential pay, and even alimony that is taxed will be looked at as earned income for Roth IRA contributions. 

As for what won't be seen as earned income by the IR; this includes money earned from investments such as stocks or rental property, Social Security and unemployment benefits, child support, and alimony that is nontaxable.

Age Limits for Roth IRA Contributions

Along with its tax-free advantages, a Roth IRA has no age limits when it comes to contributions. Thus, whether you are well away from retirement age or already in your golden years and want to continue working at your job or business, the IRS will still let you contribute income to your Roth IRA.

Also, it's important to remember that if you are like other people and have multiple retirement accounts, you can still contribute to your Roth IRA. Thus, should you be employed and participate in a company's 401(k) plan, you can contribute to this and to your Roth IRA simultaneously.

High Earners are Restricted

With a Roth IRA, those who have a high amount of earned income may be restricted from what they can contribute, or may in fact not even be eligible to contribute to a Roth IRA. Since income levels for this are generally adjusted by the IRS on a yearly basis, it's important to speak to your CPA to make sure you meet the requirements. 

When determining eligibility, the IRS uses both your tax filing status and modified adjusted gross income. In 2021, couples who file jointly and have an income not exceeding $198,000 can make the maximum contribution of $6,000 to their Roth IRA, or $7,000 if they are above age 50. For single individuals or those whose tax status is head of household or married filing separately, the maximum income level drops to $125,000, but the contribution limits remain the same.

Timing Your Contributions

Since you want the income you contribute to your Roth IRA to get maximum results, it's important to know how timing your contributions can make this happen. For starters, contributions to your Roth IRA can be made all the way up until the tax filing deadline for the next year. Thus, if you want to make contributions to your account for 2021, you will have until April 15, 2022 to do so. However, if you obtain a filing extension for your taxes, this will not give you additional time to contribute to your Roth IRA. 

Can You Get Tax Breaks on Roth IRA Contributions? 

Generally, Roth IRA contributions are not designed so that you can get an immediate tax deduction, since the contributions are not deductible in the same year in which you make them. However, depending on such factors as your annual contribution, adjusted gross income, and filing status, you may be able to qualify for a tax break known as the Saver's Credit.

Offering as much as $1,000 in savings, the Saver's Credit has qualification limits for 2021. For single taxpayers, income levels must be less than $33,000, while head of household filers must have incomes of less than $46,500. As for those with married and filing jointly status, income levels must stay below $66,000.

Withdrawal Rules 

If there is one thing many people love about a Roth IRA, it is that the account has no required minimum distributions. Thus, you are allowed to withdraw contributions made to your Roth IRA whenever you choose and for any reason; all the while not having to worry about paying penalties or owing taxes.

Yet, when it comes to withdrawing your Roth IRA earnings, the rules are a bit different. With this, earnings can be withdrawn without paying penalties or taxes so long as you are at least 59- 1/2 years old and have had your Roth IRA for at least five years. But should you be less than 59-1/2, it is still possible to avoid taxes and penalties if you make a withdrawal on your earnings. But to do so, your withdrawal will need to be made due to you having a permanent disability or wanting to use the money to purchase your first home. Sound complicated? Talk to your CPA to determine how a withdrawal may impact you.

Contributions and Recordkeeping

Even though you are not required to report your Roth IRA contributions on your federal tax return, this does not mean you should not keep detailed records of your transactions. By doing so, you will be able to answer any and all questions should the IRS come calling, such as whether you have met the five-year rule for owning your account or other potential issues. Since you should receive Form 5498 from your Roth IRA custodian or trustee each year you make a contribution, this will make recordkeeping much easier. 

Due to rules constantly changing and the various complexities that go along with retirement accounts, never hesitate to consult with your CPA when you have questions about your Roth IRA. By doing so, you may be able to take advantage of tax credits and other opportunities to maximize your contributions.

If you are like many people, you may be involved in cryptocurrency trading, such as Bitcoin. If this is the case, don't assume that you have found a Shangri-La that means any money you earn is not sought after by the IRS to be taxed. In fact, the opposite is true, since the IRS has for several years been on an all-out offensive to track down those who may have unreported cryptocurrency transactions. If you are curious about how your involvement in cryptocurrency will impact your taxes, here is everything you need to know.

Crypto Transactions are Not Anonymous

When you first started to dabble in cryptocurrency, you may have thought these financial transactions were virtually impossible for the IRS to track. However, that's not the case now. In fact, when blockchain, the technology behind cryptocurrency, became mainstream about a decade ago, most people thought these transactions flew under the IRS radar. But to their surprise, blockchain is an open ledger to the IRS, meaning it can see all of its activities. As a result, the IRS has in the past two years mailed out letters to over 100,000 taxpayers it believes may have failed to report cryptocurrency transactions.

Cryptocurrency is Taxed Like Stocks

To simplify how the IRS views cryptocurrency in relation to your taxes, think of Bitcoin as you would any investments you have made in stocks. Though Bitcoin is called currency, it is viewed by the IRS as property, and is taxed as such. For federal tax purposes, you won't have to worry about paying taxes on your virtual currency until it is exchanged or sold. Also, if you purchase your virtual currency with US dollars, this is not viewed by the IRS as a "taxable event," so no taxes are due in these cases.

Capital Gains

For investors, capital gains taxes are always something that seems to make people gnash their teeth and pull out their hair in frustration. If this sounds like you, it’s important that you pay particularly close attention to how capital gains taxes will impact your cryptocurrency transactions. Based on IRS guidelines, if you have had your cryptocurrency for one year or less, profits on a sale would be considered to be a short-term capital gain and thus taxed as ordinary income. However, if you've held it for more than one year, it would be a long-term capital gain that will afford you a lower tax rate, which could mean saving thousands of dollars in what you may owe the IRS.

Keep Very Accurate Records

While it is important to keep very detailed and accurate records about anything related to your taxes, it is absolutely critical you do so regarding your cryptocurrency transactions. In fact, if you are trading cryptocurrency, experts recommend that you download transaction logs from each platform on which you trade cryptocurrency on a regular basis. By doing so, you will be prepared should the IRS decide it's time for an audit of your taxes. If you don’t have any records of your cryptocurrency transactions for the period in question, it is likely the IRS will just decide everything is taxable, which could have you paying thousands of dollars unnecessarily to the federal government.

A Double Whammy at Tax Time

While most people choose to trade cryptocurrency just as they do stocks, others decide to do this and also to use it for everyday transactions, such as buying a cup of coffee or other items. Though this sounds easy enough, it can end up creating a double whammy for you at tax time. For example, if you buy $10 of Bitcoin one day and it is worth $14 the next day, that's great. However, if you take your newfound wealth and buy something, the IRS will view this as you making two separate transactions; those being buying the item plus selling your Bitcoin. Since you incurred a $4 capital gain, the IRS will be free to tax you on that $4 capital gain. As you can see, should you do this over and over each time you use Bitcoin to buy something, the tax headaches can add up very quickly.

IRS Pushing Hard for Regulations

Though the IRS first published official guidelines concerning cryptocurrency and taxes in 2014, it is continuing to put pressure on virtual currency exchanges to become more transparent regarding user data. In fact, federal regulations now state that all US-based digital currency exchanges must report certain user transaction data to the IRS. Also, with more pressure from the federal government on virtual currency exchanges to release even more information, experts believe it is only a matter of time before you will see a decentralized financial infrastructure, meaning it will become even easier for the IRS to gain access to your data regarding cryptocurrency transactions.

States Also Want a Piece of the Action

If you think it is only the federal government that wants a piece of the action regarding the money you've made investing in cryptocurrency, think again. In most cases, state governments will also want their fair share of tax payments from you on these transactions. To calculate whatever gains or losses you may have incurred along the way, you will need to use Form 8949 and report the results on Schedule D. Since the rules that pertain to how cryptocurrency is taxed are still relatively new and subject to change, never try to find all the answers on your own. Though select tax software can help you make some sense of various records, always rely on an experienced CPA who has an in-depth knowledge of cryptocurrency and taxes.

While it can be exciting and of course quite profitable to invest in cryptocurrency, you also see it can take what may have been a somewhat straightforward tax season to which you've become accustomed, and turn it upside down in a hurry. If you have started investing in cryptocurrency and now wonder how it may impact your taxes, schedule a time to seek out advice from a CPA you know and trust.

Now that you are close to retiring, you need to decide where you wish to spend your post-work life. Even if you have planned well and have plenty of financial resources at your disposal, you also realize that money doesn't go as far as it did years ago. Therefore, you need to find a place to live that has low tax rates and other benefits that will make your retirement much more secure from a financial standpoint. If you are ready to find your retirement haven, keep these common tax considerations in mind as you make your retirement destination choice.

State Income Taxes

If there is one tax that can have a huge impact on your retirement funds, it is state income tax. Since your goal is to keep as much of your retirement income as possible in your own pocket, it’s best to seek a retirement destination that offers a very low state income tax, or perhaps even no state income tax. Fortunately, they do exist. As an example, Wyoming offers residents no state income tax, while Kentucky, Mississippi, and Pennsylvania have state income taxes ranging between two and six percent.

Social Security Taxes

Along with having to pay little if any state income taxes, you also want to make sure that your new home also doesn’t have Social Security tax. In doing so, you can reap the full benefits associated with Social Security, which will also frees up more of your money from other sources as well. If this is of prime importance to you, also be aware that many states that offer retirees no Social Security tax are also very retiree-friendly when it comes to pensions and other retirement accounts.

Property Taxes

Whether you have decided to downsize during your retirement or have instead splurged on a luxury townhome or other property, always make sure you are aware of the property taxes that are in place at your preferred destination. Since these taxes can vary greatly from state-to-state, as well as how the values of properties are assessed, this is one type of tax planning error that could cost you thousands of extra dollars per year if you are not careful. If you are looking for an interesting twist on this type of tax, consider Mississippi. In this state, your home will be taxed at 10% of its assessed value. However, retirees are allowed to qualify for the Homestead Exemption, meaning your home's first $75,000 of assessed value will be tax-exempt.

Inheritance and Estate Taxes

If you have a large and valuable estate you want to leave to your family when you pass away, inheritance and estate taxes can quickly eat away at its value. Therefore, you want to look closely at these taxes before settling down in a new location. Currently, the District of Columbia and 12 states across the U.S. have estate taxes, while only four have an inheritance tax. This can be crucial if you are looking at Pennsylvania as your retirement destination, since the state's combination of estate and inheritance taxes is known to be high on estates that are valued at $5 million or more. Yet in Kentucky, it may be very different. In the Bluegrass State, an inheritance tax is in place, yet all members of your immediate family will be exempt from the duty, so keep this kind of thing in mind.

Healthcare Expenses Tax

Even if you are approaching retirement in good health, you know that eventually healthcare costs may become a concern following an injury or illness. Rather than find your retirement savings getting depleted by these costs, look for a place to retire that has low or no taxes on healthcare-related expenses. In more and more states, retirees can find tax exemptions on prescription drugs and other healthcare costs. In addition, you should always try to find a location that puts you in relatively close proximity to a hospital, since this will mean excellent medical care may be only minutes away.

Retirement Accounts

In addition to your Social Security, you of course have many other avenues of retirement income, such as an IRA, military pension, 401(k), and so forth. Because you have worked hard and planned well to build up these accounts, don't move somewhere and start letting taxes chip away at retirement income you are counting on to let you live a certain lifestyle. Fortunately, as the U.S. population has continued to get older over the past decade, more and more states have reduced or eliminated taxes on retirement accounts. For example, in Alabama, almost all types of public, private, and military pensions are exempt from taxes.

Sales Taxes

When you go to the grocery store and other stores to buy food and various other purchases, always pay attention to the sales taxes you are being charged. If you move to a location at retirement where these taxes are quite high, this will be one tax that is sure to take more and more money out of your pocket on a regular basis. Unfortunately, 45 states as well as D.C. collect sales taxes. As for the states that possess the highest combined local and state sales tax rates, these include Arkansas, Louisiana, Tennessee, Alabama, and Washington State.

Consider the Overall Picture

When you are looking for the perfect retirement destination, the truth is that you may not be able to find one that checks all the boxes regarding your taxes. For example, if you are wanting to retire to Myrtle Beach in South Carolina, you'll be glad to know the state has no Social Security tax and the fourth-lowest property tax rates in the nation. However, its state income tax rate is almost the highest in the country. Therefore, always consider the overall picture as it pertains to your finances, healthcare, and other areas before making a final decision.

With so many tax decisions to be made before you retire, now is the time to schedule a meeting with a trusted CPA to discuss these and other important tax matters.

If you are like many people, you are thinking about what may be ahead as you near retirement.  Whether you are within a few years of retirement or still have decades to go, contributing as much as possible to your retirement plans can pay off big in the years ahead.  But as you know, the contributions to various plans can change from year to year, so it's important to know what you can or cannot do regarding your 401(k), IRA, or other plan.  As we now get 2021 underway, here are the contribution limits for various plans of which you should be aware.

401(k)

As an employee who participates in your employer's 401(k), 403(b), 457, or the Thrift Savings Plan offered by the federal government, your annual contribution limit will be $19,500, just as it was in 2020.  Also, if you are an employee who is age 50 or older and want to take advantage of the 401(k) Catch-Up contribution, this will also stay the same as it was in 2020, coming in at $6,500.  For this contribution, it's important to remember that even if you will not be reaching age 50 until December 31, 2021, you are still allowed to make this $6,500 catch-up contribution.  In addition, remember that you can make changes to your 401(k) at any point during the year, not just during the open enrollment period.

Solo 401(k) and SEP IRA

Should you be part of the group that contains self-employed individuals and small business owners, you likely have set up a Solo 401(k) or a SEP IRA.  If you have, you will be able to contribute a bit more in 2021 than in 2020.  Starting in 2021, the contribution limit increases from $57,000 to $58,000.  Remember, this amount is based on a percentage of your salary that you are allowed to contribute as an employer.  Also, the compensation limit used to determine the savings calculation has also changed in 2021, increasing $5,000 from $285,000 to $290,000.

Individual Retirement Accounts

Some of the most popular and effective ways to save for retirement, Individual Retirement Accounts have actually not changed from 2020 to 2021.  Whether your IRA is a pretax, Roth, or a combination, your annual contribution limit will stay at $6,000.  As for the catch-up contribution limit, which if you remember is not subject to adjustments for inflation, it also stays the same as it was in 2020 at $1,000.  Should you be wanting to make contributions to your IRA, be aware that you can make 2021 contributions until April 15, 2022.

Defined Benefit Plans

For many self-employed individuals who are considered to be especially high-earners, a defined benefit plan is often the retirement account of choice.  If you have a DBP, your annual benefit limitation will stay at $230,000 in 2021.  Since this is considered to be one of the best pension plans available for individuals, it may be something you would want to learn more about from your CPA.

SIMPLE

Though not as common as an IRA or 401(k), many people do have a SIMPLE retirement plan If you do, you won't experience any changes in your annual contribution limits. The annual contribution limit will be $13,500, while the catch-up limit will stay at $3,000. 

Deductible IRA Phase-Out

If you have a traditional pretax IRA and enjoy being able to deduct your contributions, 2021 will allow you to earn just a little more along the way.  For example, as a taxpayer who contributes to a traditional IRA, the deduction in 2021 will be phased out for those who are singles and heads of households, are not covered by a retirement plan at their workplace, and have a modified adjusted gross income ranging from $66,000-$76,000 per year.  As for married couples who file jointly and one spouse who makes the IRA contribution is also covered by an employer retirement plan, the range of income phase-out has moved to between $105,000-$125,000.  In either case, this results in an increase of $1,000 from 2020. 

Saver's Credit

Applying to people who are low to moderate-income workers, the contribution limits have also increased slightly from 2020 to 2021.  For married couples filing jointly, the income limit moves from $65,000 to $66,000 in 2021.  For heads of household, the limit increases from $48,750 to $49,500, while single people and married couples who file separately will enjoy an increase from $32,500 to $33,000.

Qualified Longevity Annuity Contract

If you have an IRA or 401(k) and have some of the money from these accounts invested in a Qualified Longevity Annuity Contract (QLAC), the dollar amount that can be invested into the QLAC will remain at $135,000.

Roth IRA Phase-Out

Thanks to the inflation adjustment, you may be able to save on your Roth IRA phase-out for 2021.  As for the adjusted gross income phase-out ranges, married couples filing jointly will see a $2,000 increase to a range of $198,000-$208,000.   As for singles and heads of household, the income phase-out range will have a $1,000 increase to a range of $125,00-$140,000. 

Since you want to make sure you take advantage of all the opportunities afforded you in 2021, it is crucial you have a complete understanding of what may be available to you as you plan for your retirement.  To do so, you should schedule a consultation with a CPA whose experience and knowledge you know and trust.  By doing so, you can learn about the various retirement contributions related to different accounts, discuss the various options that may be open to you, and make informed decisions that will give you peace of mind.

When you own real estate investment properties, there are a lot of tax benefits to be aware of. One of those is depreciation, and it can save you quite a bit of money on your tax bill. While you probably already take other deductions on your property, the depreciation benefit is an extra one that's separate from the other deductions. Thanks to depreciation, some real estate investors may pay little to no tax on the income they receive from their properties. But that doesn't mean depreciation is magic, or that there aren't any potential problems and pitfalls to consider. Here's what you need to know about depreciation.

What is Depreciation and Why Does it Matter?

Depreciation is a calculation based on acquiring a property that generates income. This calculation is figured over a number of years, and it's not quite the same as the depreciation that's seen on other, non-real-estate, assets. While you have money coming in from your investment, you also have costs and a "useful life" of the property. IT should last for a number of years, so you want to make sure the depreciation gets spread over all those years. You get a benefit from depreciation because it reduces the amount of rental income that's taxable each year. That can mean a very big break on what you'll pay to the IRS.

The land the building is sitting on can't be depreciated, but the building can be. Keep in mind you have to be careful to follow IRS rules about depreciation, though. For example, a commercial property is assumed to have a useful life of 39 years, while a residential property has a useful life of 27.5 years. If you have a four-unit residential property (a four-plex), and it's worth $450,000, you can take depreciation of $16,364 every year for 27.5 years. You arrive at that number by dividing the $450,000 by 27.5. But as a real estate investor, it's often easier to choose a good CPA and let them handle your tax calculations.

Do You Qualify for Depreciation?

You have to keep the property as an income-generating asset. You can't fix it and flip it, and then try to claim depreciation based on what you paid for it. First of all, you didn't keep the property. Second of all, you might have actually made money on the sale of it, but you aren't going to make any money on a yearly basis since you don't own the property anymore. Even when you keep ownership of the property, some of the things you do to the property to improve it won't count for depreciation, either. A new furnace has a useful life of over a year, so it counts. Lawn care doesn't, so it doesn't. Useful life of the improvement has to be one year or more.

Another very important consideration for depreciating a real estate rental property is the determination of a useful life. That could seem complicated, but it's one of the things the IRS has made easy. By setting rules for how long a "useful life" is when it comes to real estate, the IRS has essentially said that certain properties "live" for certain periods of time, after which depreciation is no longer possible. If you buy a commercial property as an investment and hold it for 40 years, for example, that 40th year (and anything beyond it) wouldn't allow for any more depreciation. You would have, effectively, "used it up."

The best way to calculate the depreciation on your property is to let your CPA do it for you. Your CPA is experienced with all kinds of property depreciation, including real estate depreciation benefits. If you have any questions about depreciation, your CPA is your best resource.

Real Estate Related Property is Also Depreciable

Remember, it’s not just the property itself that can be depreciated when you own rental property. You can also depreciate related property, such as appliances, furnaces, central air conditioning units, carpeting and much more. In general, improvements to the property are depreciable, like a new roof, new front porch, new driveway, etc. But simple maintenance is not depreciable, like new paint, insulation or a new screen door. Those kinds of expenses are tax deductible, however.

Each of the related property depreciations will be calculated according to their useful life, as determined by the IRS. This can get complex, so this is another reason why you should rely on your CPA to take care of it on your behalf. All you need to do is remember to keep detailed records of all the purchases related to your real estate property.

What's the Bottom Line With Depreciation?

Real estate depreciation is an important part of your tax deduction options as an investor, but there can also be some gray areas that can lead to confusion. You can avoid all of that by hiring a good CPA and providing them with your property records and information. That way you'll be sure to get all the deductions you are legally entitled to, without accidentally claiming or mis-categorizing something that could cause a problem. Even honest mistakes can be problematic where the IRS is concerned, and it's often a "better safe than sorry" situation for any real estate investor. With a good CPA on your side, you won't have that risk to worry about.

If you experience a job loss, you will of course have numerous questions as to how it will impact your job situation. Whether you are an employee who lost your job or a business owner who had to lay off your workers, here are some important details to keep in mind.

How Will Your Job Loss Affect Your Tax Situation?

When you lose a job, it may create many changes related to your tax situation. As an example, severance pay as well as payments for accrued sick leave or vacation pay are considered taxable income. Because of this, you may have a larger tax bill due to this income, especially if a minimal amount of taxes were withheld originally. In addition, any unemployment compensation you receive is also taxable income, which is something many people overlook at tax time. As for income you may be receiving after your job loss that is not taxable, this will include SNAP benefits or other public assistance, as well as the recent stimulus payments sent due to the COVID-19 pandemic.

Are You Eligible to Receive Unemployment Compensation?

When trying to decide whether or not you are eligible to receive unemployment compensation, a number of different factors may come into play. Depending on your individual circumstances, there are several types of unemployment compensation for which you may be eligible, including:

• State unemployment benefits from Federal Unemployment Trust Fund
• Railroad compensation unemployment benefits
• Assistance from Disaster Relief and Emergency Assistance Act
• Disability payments paid to you as substitute for unemployment benefits
• Trade readjustment allowances via Trade Act of 1974
• Pandemic Unemployment Assistance via CARES Act of 2020

Remember that if you are self-employed or have other circumstances that normally disqualify you from receiving standard unemployment benefits, the CARES Act of 2020 has expanded unemployment assistance to you and many other individuals. To prove your income, you must use a current-year tax form.

What if You Voluntarily Quit Your Job?

If you voluntarily quit your job due to your concern about possible exposure to COVID-19, most likely you will not be eligible for Pandemic Unemployment Assistance. However, since individual situations can vary and extenuating circumstances may have been present at the time, certain scenarios are possible that could in fact make you eligible for PUA. Therefore, it is best to apply for benefits and learn whether or not you do qualify for assistance.

Is Unemployment Compensation Considered to be Tax-Free?

Unfortunately, the answer is no. Whether you receive unemployment benefits from your state or from the federal government, United States law dictates that all unemployment compensation received by individuals is considered to be taxable income, and thus must be reported as such on your federal tax return. In addition, if you belong to a union and receive benefits paid to you by your union, this must also be included as income on your tax return. However, if you made contributions to a special union fund that are not deductible, you will only report as income the amount you received that exceeds your contributions.

Can Federal Income Tax be Withheld from Unemployment Benefits?

Here, the answer is yes. But to do so, you will need to fill out Form W-4V, Voluntary Withholding Request. By filling out this form and submitting it to your state's Department of Labor, 10% of your total payment will be withheld as tax. Should you choose to not withhold taxes, estimated tax payments may need to be made during the year, and you may also owe taxes when you file next year's tax return, so keep this in mind. Prior to filing your tax return, you should receive Form 1099-G, Certain Government Payments. On this form, it will show the amount of unemployment compensation you received, as well as the amount of federal income tax you withheld.

Are Expenses Related to a Job Search Deductible?

While this was the case in years past, tax reform has eliminated many of these 
deductions. Thus, for the tax years 2018-2025, you will no longer be allowed to deduct such expenses as travel, outplacement agency fees, resume preparation services, and other related expenses when having your taxes prepared.

Are Individuals Required to Actively Seek Work During COVID-19?

While you normally would need to be actively seeking employment to receive unemployment benefits, that requirement has been waived due to COVID-19. Under the CARES Act of 2020, state unemployment agencies have the flexibility to determine if a person can or cannot actively seek work due to COVID-19 quarantines or movement restrictions such as stay-at-home orders, or due to a COVID-19-related illness.

What if Your Employer Goes Out of Business or Files for Bankruptcy?

Should your employer go out of business or file for bankruptcy, they are required to provide you with a W-2 form no later than January 31. On this form, all wages you earned as well as any taxes withheld will be displayed. While waiting to receive your W-2, it is vital you keep up-to-date records along with previous pay stubs. If for any reason your employer or their representative fail to provide you with a W-2, do not panic. Instead, contact the Internal Revenue Service as soon as possible, since the IRS can provide you with a substitute W-2 form.

What if Your 401(k) Plan was Liquidated?

If your employer went out of business or filed for bankruptcy, there is a chance your 401(k) plan may have been liquidated. If this occurred, the good news is that you still have options available to you. In most cases, you will have up to 60 days to roll it over into another 401(k) plan or other type of qualifying retirement plan, so give this careful thought.

Since it is likely you will have many questions as to how your job loss will impact your tax situation, don't take chances on making critical and costly mistakes. Instead, turn to an experienced and knowledgeable CPA who can sit down with you and answer your questions in greater detail.

For most people, paying taxes is straightforward. You get a paycheck from your employer and the employer has already deducted the amount you owe to the IRS. When it comes time to file your tax return, the discrepancy between what you owe and what you already paid might be minimal. You might have to cut a check to the IRS, but it’s fairly manageable. However, if you get a 1099 or you had other income where taxes weren’t taken out ahead of time, the amount you wind up owing come tax time might come as a shock. What now? What’s the best course of action if you can’t pay your taxes?

How the IRS Views the Situation

The IRS has a stern but understanding view of taxpayers who can’t pay their tax liability. As long as you are a taxpayer who is trying to be honest and upstanding, you probably won’t be in legal trouble. It’s only those who willingly try to defraud the government of their due taxes who face criminal charges.

If you find that you are unable to pay your taxes there are provisions in place for such a scenario. However, the IRS does expect you to apprise them of your situation so that a solution can be put into place.

Steps to Take if You Can’t Pay Your Taxes

The first thing you should do is file your tax return anyway. Even if you can’t pay your taxes, the IRS expects you to file your tax return on time, whether by the initial filing date or by the extension deadline. (Be aware, though, that even if you file for an extension, you’re still expected to pay by the initial due date.)

When you pay later than the initial filing deadline, you’ll be on the hook for penalties and interest charges. Therefore, if you can only pay a small amount of the taxes you owe, that’s better than paying nothing. That way, you’ll pay less in interest.

You should also contact the IRS directly if you find yourself unable to pay your taxes. Ordinarily, you can call the IRS on their 800 number. Once you get through, you can request a payment extension or ask to be put on an installment plan. If this is the first time something like this has happened, the IRS may even waive a penalty charge. You should know that if you fall through on the payment plan, you may get dinged with the penalty after all, as well as accrue more interest charges.

If you are offered an installment plan, take it. Paying taxes on an installment plan doesn’t ruin your credit or cause any negative reporting against you. The only way an installment plan can hurt you is if you don’t hold up your end of the bargain.

Don’t feel like you should take the “high road” and try to save up so you can make a lump sum payment by the time your extension deadline comes up. This is a mistake that many taxpayers make, and it invariably causes more problems. If you think you’ll be able to make the payment by the extension deadline and then can’t do it, you’ll incur more interest, plus the penalty, plus the wrath of the IRS for not contacting them to begin with.

Ramifications of Not Paying Taxes

If you don’t take a proactive approach to your tax payment problem, the situation could turn even more serious. Technically, the IRS is within its legal right to file criminal charges. This is isn’t commonplace, but it does happen in certain situations.

What is commonplace is for the IRS to garnish your wages. If your taxes go unpaid, the IRS will contact your employer directly with a garnishee order. Your employer will be forced to withhold money from your paycheck that will go toward back taxes. The worst thing is, there’s no limit to how much the IRS can ask to be withheld. Theoretically, you could be left with a paycheck less then ten dollars. The IRS doesn’t take responsibility for how you’re supposed to pay your bills after a paycheck garnish order.

This can all be avoided by simply contacting the IRS to let them know your situation. As long as you do everything in your power to get your taxes paid and adhere to the installment payment agreement, then you’ll likely be okay.

Remember, keep copies of all your correspondence to and from the IRS. When your back taxes are paid off, you’ll receive a written notice from the IRS, which you should keep in your permanent files.

How to Avoid This Situation Next Year

If you were unable to pay your taxes by the deadline, take a good hard look at why this happened. If you’re self-employed, you should have been making quarterly tax payments on your income all during the year. Ask your CPA how to do this if you are unsure how to do it.

If your W-2 employer hasn’t been taking enough out of each of your paychecks, maybe you’re claiming too many exemptions. You might want to file a new W-4 form so you have the proper amount taken out.

Whatever the reason, it’s very important that you don’t repeat the mistake in the future. If the IRS starts to see a pattern, they may look at it like tax evasion instead of a simple case of not having enough to pay when it’s due.

Talk to your CPA about your tax payment difficulties as soon as you become aware of it. Together you can come up with a solution that will help you avoid having the situation occur again in the future.

In this gig economy, more taxpayers than ever before are receiving tip income. Whether the tips are from waiting tables, driving for Uber, or making home deliveries, those tips are considered taxable income. However, there is a lot of confusion over how to report tip income, what is the threshold for reporting and who should report it. Here is all you need to know about reporting tip income.

How Does the IRS Regard Tips?

Tips are considered regular income by the IRS. The IRS categorizes the following types of income as tips:

• Cash tips directly from customers
• Electronic tips through credit card, debit card and gift card payments
• Non-cash tips, such as tickets and other valuable items
• Tips paid out as disbursements from a tip “pool”

All tips in any form noted above are required to be reported as regular income, and they are taxable as such.

What Are The IRS Regulations Regarding Tips?

It may come as a surprise to some, but the IRS actually stipulates that anyone who regularly receives tips in the course of their employment must keep a daily record of tips received. The method of keeping the record is up to the taxpayer.

Another IRS regulation has to do with reporting to the employer. The taxpayer who receives tips must report those earnings to the employer by the 10th of the following month in which the tips were received. For instance, if you earned $1,200 in tips in January, you must report that figure to your employer by February 10th, or on the next business day. There is a specific IRS form for reporting tips to employers, Form 4070, available in Publication 1244. Alternatively, the employer may provide another form—hard copy or digital—for employees to report tips. Furthermore, an employer may, at their discretion, require that an employee report their tips to the employer more than once a month, but not less than once a month.

Tips totaling less than $20 in any month need not be reported. However, for the sake of consistency, if a taxpayer routinely reports tips on a month basis, it may behoove them to report something in every month, even if the total is less than $20. Otherwise, this may raise a red flag and look like an oversight rather than a choice.

Clever Ways to Keep Track of Cash Tip Income

If you have a job where you get tips every shift you work, it can quickly become tedious to try and keep track of all your tips; especially if you get cash tips. Yet, it’s important that you do so. You can incur serious and costly IRS penalties if they determine that you have not been accurately reporting your tip income. It’s definitely worth it to come up with a tip tracking system that works for you. Here are some clever ways to keep track of tip income.

Keeping Track of Waiter Tips

If you wait tables for a living, it’s likely that you wear some kind of apron or other uniform apparel with pockets. An easy way to keep track of cash tips. Simply designate one pocket for all your tip earnings; don’t keep anything else in that pocket. At the end of the night, just add up all the bills and coins and record them in a little notebook, along with the date. The notebook will serve as proof should the IRS ever decide to question the accuracy of your cash tips reporting.

Keeping Track of Driver Tips

If you work for Uber, Lyft or drive a limousine service, cab, airport shuttle or work in some other driving capacity, it can be awkward to track your cash tips income. You may even occasionally have to dip into your own wallet to give a customer change for a large bill. Since you’re sitting down and may have little time in between pickups, you need a system that is quick and accurate. The easiest way is to just keep a small notebook on the passenger seat next to you. Date each page ahead of time. When you get a cash tip that day, just note it on the page. You can add up your cash tips at the end of each day or wait until the end of the week to do daily tallies.

How to Report Tips to the IRS

When your employer issues your W-2, they will have already included all your reported tip income in Box 1 of the form. In other words, your tip income was added to your regular income and entered in Box 1. If for some reason you did not report all your tips to your employer, then you can add that amount when you file your tax return. If your employer allocated tips to you, such as from a general tip “pool,” that will show up in Box 8 of your W-2 form.

What if You Don’t Report Tips?

Bear in mind that even if you assert that you don’t receive tips, your employer is reporting a certain percentage of tip income to the IRS under your social security number. So eventually the IRS will contact you about your unreported tip income. At that point you’ll need to pay taxes on that unreported income, possibly along with a penalty. Your tips are considered part of your regular income, even though they may seem like they’re extra “bonus” money. It’s always best to be completely honest and forthright about all of the tip money you receive.

There are nuances and details about tip income that your accountant can help you with. You can also refer to IRS Publication 531 for more information about reporting tip income.

Do you have an elderly parent or adult relative that you take care of? It doesn’t have to be a parent; it could be an adult child with special needs, an elderly aunt or another close relative. As long as it is a qualifying relationship, the IRS allows you to claim such a persons as a dependent on your tax return. There are certain criteria and it must be done in a certain way, but it can be done. Below are the general guidelines, but you should consult with your tax professional for details.

They Don’t Necessarily Have to Reside With You

The great thing about claiming an elderly parent or relative as a dependent is that they don’t necessarily have to live with you. This is great news for people with parents who wish to live in their own home for the sake of independence. Since there are so many services these days to help independent-minded seniors, this allowance makes it easier for both the senior and the adult child.

You Might be Entitled to Extra Deductions

If the relative does reside with you, you might be entitled to extra deductions on things like your mortgage and utilities. You would need to break down what percentage of money you spend on the relative for their care. Your CPA can guide you on how to do this.

They Have to be U.S. Citizens

The person needs to be a U.S. citizen, U.S. resident alien or U.S. national with a social security number in order for them to qualify as your dependent. This may seem obvious, but consider a case where a person marries a foreign national. The mother-in-law resides in another country but you take care of all her expenses because she’s disabled or for another reason. Unfortunately, even if all the other criteria are met, you wouldn’t be able to claim her as a dependent. There are exceptions for persons residing part-time in Mexico or Canada, but you’d need to consult with your CPA for details about possible dependent-status.

They Don’t Need to be Elderly

This claim isn’t only for elderly adults. If you take care of any adult and you satisfy these criteria, you might be able to claim them as a dependent. Their marital status and how they file their own taxes will affect whether or not you can take the claim, so be sure to consult with your CPA.

They Can’t Have Gross Income Over a Certain Amount

Whether or not your elderly relative lives with you, they can’t make over a certain amount in gross income. This amount changes each year, so you should check with your CPA to make sure of the exact figure before you file. When calculating your elderly relative’s gross income, don’t include social security income or other tax-exempt income.

They Have to Get Over Half Their Support From You

Another criteria to keep in mind is that your elderly relative must get over half of their support from you. This may include things like housing costs, food, medical expenses, transportation, home health aid, housecleaning services and other expenses. If you share the financial support with siblings, this could pose a problem. Whoever is going to take the claim must be providing over half of the support. If you want to take the claim, you might consider upping your financial support and letting your siblings contribute in non-monetary ways. Whichever way you decide to do it, be sure to do a thorough and comprehensive breakdown of all your elderly relative’s expenses so that you can be sure you’re actually entitled to claim them as a dependent.

You Can Share the Exemption

If you do have siblings who contribute financially and you want to keep that arrangement, you and your siblings could also decide to alternate the claim in different tax years if you can show that in the aggregate the support test is satisfied. This would entail filing Form 2120, “Multiple Support Declaration.” Your CPA can help you to figure out the calculations and let you know if it’s possible in your situation.

Knowing when to claim an elderly parent or relative as a dependent and how to do so is fairly complicated. However, don’t let the complexity of it dissuade you from making the claim. If you care for an elderly relative or other qualifying person and you meet the criteria, you’re entitled to take the claim. Just let your CPA guide you and handle the details so that you can concentrate on caring for your loved one.