Tax Strategies

Preparing taxes isn’t most people’s idea of a good time. Usually, tax time is considered something of a downer, especially for anyone trying to do their own taxes. If you make the sound choice to hire a CPA, the entire process can be a lot easier, though. Here are more strategies, tools, and practices that can make tax preparation simpler and more efficient, helping you to avoid common mistakes and reduce the burden associated with tax season.

Understanding Your Tax Obligations

One of the most important steps in simplifying the tax preparation process is to have a clear understanding of your tax obligations. This includes knowing what income is taxable, what deductions and credits you qualify for, and the deadlines for filing. Tax laws can change year to year, so staying informed about updates is crucial. For example, the standard deduction amounts are frequently adjusted, and tax credits, such as the Child Tax Credit or Earned Income Tax Credit (EITC), may also change.

Many taxpayers miss out on valuable deductions or credits simply because they aren’t aware of them. For instance, education-related expenses like student loan interest or tuition fees may be deductible, while home office expenses can provide a tax break for those working from home.

Organizing Tax Documents

Start by creating a filing system, either physical or digital, to store documents like W-2s, 1099 forms, charitable donation receipts, medical expense receipts, and any other documents relevant to your tax situation. Even a giant cardboard box can help, as long as you’re willing to dedicate some time to organizing it later, before you submit the docs to your CPA. 

For example, if you’re a freelancer or self-employed, you’ll want to keep detailed records of your income and expenses throughout the year, including receipts, invoices, and business-related purchases. This organization will save time when you sit down to file your taxes and reduce the risk of overlooking important deductions.

Many taxpayers find that using a document scanning app to digitize receipts and forms is a helpful way to stay organized. Apps can store these documents in one easily accessible place, making the tax preparation process more manageable.

Consider Professional Help for Complex Situations

Those with complex financial situations, such as owning multiple businesses, receiving income from overseas, or navigating significant investment portfolios, might benefit from hiring a tax professional. Certified public accountants can offer personalized advice and ensure that your tax return is accurate and compliant with all tax laws.

A professional tax preparer like your CPA can also help you with tax planning strategies that may reduce your overall tax burden, such as tax-loss harvesting for investments or timing the sale of assets to take advantage of lower tax rates. The cost of hiring a professional may be offset by the savings they help you achieve through more effective tax management and avoidance of costly errors.

Staying Ahead of Deadlines

One of the most common pitfalls of tax season is missing the filing deadline or failing to pay estimated taxes on time. Late filing or late payment can result in penalties and interest charges, which can add up quickly. To avoid this, it’s essential to be aware of important tax deadlines, such as the April 15th filing deadline for most individual taxpayers.

For self-employed individuals, quarterly estimated tax payments are required. These payments are due in April, June, September, and January. Failure to make estimated payments on time can result in penalties from the IRS, even if you ultimately receive a refund when you file your tax return.

Setting reminders or using tax software that provides alerts can help ensure that you never miss a deadline. Additionally, if you anticipate needing more time to complete your return, you can file for an extension, which gives you until mid-October to file your taxes. Keep in mind, however, that an extension to file is not an extension to pay, so you should estimate your tax liability and make a payment by the original April deadline to avoid interest and penalties.

Taking Advantage of Tax Refund Opportunities

Receiving a tax refund can feel like a financial windfall, but it’s important to remember that a refund simply means you overpaid your taxes during the year. While many people enjoy the prospect of getting a large refund, it may indicate that you could have used that money more effectively throughout the year.

One way to simplify tax season is to adjust your withholding so that you receive less of a refund but keep more of your earnings throughout the year. This can be done by updating your W-4 form with your employer to ensure that the correct amount of tax is withheld from your paycheck. The goal is to break even or come as close as possible, so you neither owe a large amount of taxes nor receive a significant refund. Even though TV commercials show people celebrating when they are getting a refund, that’s no cause for celebration. It just means you’ve given the IRS a free loan.

Continuous Tax Planning

Improving the tax preparation process involves year-round tax planning rather than waiting until the last minute. Tax planning gives you some leeway to make choices that can lower your tax liability or make the filing process smoother when tax season rolls around. 

For instance, you can contribute to tax-advantaged accounts such as retirement accounts (401(k) or IRA), health savings accounts (HSA), or flexible spending accounts (FSA). These contributions reduce your taxable income, which can lower your overall tax liability. Consider donating to qualified charities before the end of the year, too..

Don’t wait until the last minute or burn the midnight oil the night before that all-important postmark date. By taking proactive steps throughout the year, you can simplify tax preparation and avoid the rush and stress that often accompanies tax season.

Tax prep doesn’t have to ruin your week. By staying organized, understanding your tax obligations, and leveraging technology or professional help when needed, individuals can simplify the process and avoid common pitfalls. Continuous tax planning, year-round organization, and the use of professional assistance can all contribute to a smoother tax season with fewer headaches. Contact your CPA to learn more.

by Kate Supino

The IRS grants tax exempt status to certain types of organizations in order to give relief of some financial burden. This status must be applied for. Once granted, your organization will be able to have business income that is free from federal taxes. This can greatly improve an organization’s chances of success, thereby enabling it to do the most public good possible. It’s easier to get and maintain tax exempt status than to lose it and try to get it back. Your CPA is a valuable resource in helping to guide you through the ins and outs of keeping your organization’s tax exempt status. In the meantime, here are some things you need to know.

What Kinds of Organizations May be Tax Exempt?

An organization must be organized and run exclusively for one of the following purposes in order to qualify for tax exemption under Section 501(c)(3) of the Internal Revenue Code: educational, charitable, literary, religious, fostering national or international amateur sports competition, scientific, testing for public safety or stopping cruelty to animals or children.

What is Meant by Tax Exempt?

If an organization has tax-exempt status, it is not required to pay federal corporation income tax on money derived from endeavors that are associated with the objectives for which it was established. Organizations may also depend on their federal tax-exempt status to shield their revenue from state corporate income tax, if they fulfill the standards for such status.

Can Tax Exempt Status be Revoked?

Tax exempt status can be revoked by the IRS. There are several ways that an organization might lose its tax exempt status. One of the most common reasons is for not filing the Form 990 annual return. The IRS will immediately terminate your nonprofit's tax-exempt status if you fail to submit your annual report (Form 990) for three years in a row. There are no exceptions to this law's mandated automatic revocation. Using a qualified CPA to handle all of your organization’s accounting and tax needs is the best way to avoid automatic revocation from not filing.

There are also other ways that your organization can jeopardize its tax exempt status. This status is a privilege, and should be protected against revocation. The following are ways in which you and your team can safeguard your organization’s tax exempt status:

Maintain Stated Purpose

One of the questions that your organization needs to answer for tax exempt status is its intended purpose. Each year, the IRS reviews the activities of the organization to ensure that they align with the original stated purpose. Straying from your purpose—even if they are “related” activities—may jeopardize the tax exempt status. For example, let’s imagine that your original stated purpose was to offer financial benefits to battered women for medical bills. As time went on, you discovered that many of your recipients need day care services or help with health visit payments for their children. If your organization wanders into this territory, even though it’s generally related to the needs of the women you help, the IRS might just decide you’ve broken the terms and revoke your tax exempt status.

Create an Organization System

It’s vital that you have an extremely organized administrative department for your tax exempt organization. At any time, your status may be challenged by the IRS, and you’ll need to be able to pull supporting documentation to confirm any and all claims you’ve made. Whether you use a paper/digital system, an all digital system or an all paper system, it should be impeccably organized. Experts recommend using a cloud backup system so that your administration department has redundancy. Should your on-site files be lost or breached, you’ll be able to instantly restore them from the cloud backup.

Document All Donations

Most tax-exempt organizations engage in some form of fundraising. Even churches solicit donations in the form of tithes and other endeavors. If your nonprofit organization participates in fund-raising activities and asks the public for contributions, you must be ready to provide donors who give more than a certain amount a receipt or other written acknowledgement so they may claim a tax deduction at the end of the year. The IRS mandates that the nonprofit organization evaluate the fair market value of any items or services that a donor supplies in place of making a cash contribution and declare that information on the donor's receipt.

Just as important as giving receipts for donations is keeping an internal record of donations. This number will be reported to the IRS and calculated to determine what portion of the organization’s income comes from donations versus from other sources.

Avoid Politicizing

Participation in any event or action that supports or promotes a specific candidate for political office by nonprofit organizations is absolutely prohibited. Contributions to a candidate's campaign are included in this prohibition.

Hire a CPA

Even though your organization may have tax exempt status, it still may need to file an information return, a federal tax return or possibly a state and local tax return. Only certain tax exempt organizations related to churches and religious organizations do not need to file an annual information return, according to the IRS. In addition, your organization will need to pay taxes on unrelated business income, when it reaches $1,000 or more.
Tax returns and annual information returns for tax exempt organizations tend to be quite complex. For this and other reasons, it’s wise to hire a CPA to handle the taxes and accounting for your tax exempt organization.

What’s the Worst That Can Happen?
If your organization fails in filing an annual information report for three consecutive years, tax exempt status will be automatically revoked. If your organization fails in any of the other above-mentioned areas, it may incur an excise tax. However, the IRS has the power to revoke tax exempt status for reasonable cause. Don’t give them the chance. Do everything in your power to protect this privilege by hiring a CPA.

When it comes to your taxes, you want to save as much as possible. As December 31 gets closer, it's important to turn your attention to maximizing your ability to take advantage of tax breaks. Whether you had a great year financially or found it to be a struggle, here are some great tax strategies you should implement before year's end.

Defer Your Income

While you may at some point have to pay taxes, why do it now when you can put it off until tomorrow? By deferring your income, you can do just that. As an example, if you are self-employed or do freelance work, delaying your billing until the later stages of December will mean you won't receive payment until 2022, which lets you defer your income and pay fewer taxes now. Other ways to defer your income include taking capital gains in 2022 rather than 2021, which applies to you regardless of employment status, and deferring if you expect to be in the same or possibly lower tax bracket next year.

Last-Minute Tax Deductions

A great tax strategy to use, taking some last-minute tax deductions can make your visit to your CPA much more pleasant come tax time. One deduction you should consider is contributing to a charity, since 2021 tax rules allow you to deduct $600 per tax return for married filing jointly and $300 for other tax filing statuses. Also, if you have a property tax bill coming due in early 2022 or a hospital bill, taking deductions on these can also work to your advantage.

The Alternative Minimum Tax

Known as the AMT, you'll need to consult with your CPA ahead of time to make sure you don't accidentally trigger the AMT, since this can result in you having a higher tax bill. For example, state and local income taxes as well as property taxes are not deductible under the AMT. Thus, if you think the AMT will apply to you in 2021, it's best to not pay any installments in December 2021 that are not due until January 2022.

Take Advantage of "Loss Harvesting”

When you take advantage of "loss harvesting," you are using a year-end tax strategy that lets you sell off stocks and mutual funds for losses, then use the losses to offset your tax bill. Should your losses outpace your gains, you're allowed to use as much as $3,000 to do away with other income. Also, excess losses can be carried over year after year for as long as you live, so discuss this in detail with your CPA.

Contribute Maximum Amounts to Your Retirement Accounts

Of all the tax strategies you can implement before the end of the year that will pay off for you in a big way at tax time, contributing the maximum amounts to your retirement accounts is it. This is especially great for 401(k) plans, since your employer will match your contributions.

If you have an IRA, remember that you can make contributions all the way up until the April 18, 2022 tax filing deadline, and that for 2021 you can contribute a maximum amount of $6,000 to your IRA, and another $1,000 if you are at least 50 years old.

Dodge the "Kiddie Tax"

While it may sound relatively harmless, the "kiddie tax" created by Congress could in fact impact your tax bill more than you expected. Created so that a family could not shift its tax bill on investment income to their child's lower tax bracket, you'll need to be careful if you are considering giving your child some stock to sell off so they can pay college tuition. Should your child's unearned income exceed only $2,200, you may wind up paying taxes at your usual rates, meaning you come away with no tax savings whatsoever.

Check Your IRA Distributions

Once you turn 72, you need to start making regular minimum distributions from a traditional IRA by April 1 of the year following the year when you reached age 72. If you fail to do so, the IRS will be waiting eagerly to hit you with one of its most stiffest penalties, the dreaded 50% excise tax. This tax, which is applied to the amount of money you should have withdrawn from your IRA, can be much more than most people expect, and can take what would have been a great tax return and turn it into a disaster. To make sure you don't incur this penalty, discuss your IRA details with your trusted and experienced CPA.

Watch Your Flexible Spending Accounts

As one of the last yet very important tax strategies you should implement before the end of the year, keep a close eye on your Flexible Spending Accounts, also known as FSA.

A great fringe benefit offered by many employers, you win by knowing the money you place into an FSA avoids Social Security and income taxes. However, an FSA is also a "use it or lose it" account, meaning any money in your FSA that is not used by year's end is forfeited.

If you have quite a bit of money in your FSA that you fear may vanish before you can use it, find out if your employer has signed on to the grace period that was implemented by the IRS. If so, you'll be able to spend any money placed in your FSA during 2021 through March 15, 2022. If your employer has not adopted the grace period, you can always plan a very big shopping trip to your local drugstore.

Since some of these tax strategies can be quite complex and easy for you to make costly mistakes along the way, schedule a meeting soon with your CPA. By doing so, you can make sure you are doing your "loss harvesting" properly, avoiding the aforementioned "kiddie tax," and everything else you can to make sure that when your tax returns are prepared, you'll be walking out of your CPA's office with a smile on your face.

If you are a person who has assets of significant value, you want to pass this wealth on to your heirs. To do so while minimizing estate taxes and providing the assets to your heirs tax-free, it is vital you understand tax strategies that work best in these situations. Along with common strategies such as gifting and making direct payments to colleges, universities, and other educational institutions, other possibilities may exist based on low interest rates and the volatility of the stock market. If you wonder which will work best for your situation, let's explore various strategies a bit more in-depth.

Gifting

When you are consulting with your CPA regarding the transfer of wealth to your heirs, gifting should be one of the first topics you discuss in great detail. Thanks to the annual gift tax exclusion, you will have a simple way to reduce estate taxes and shift income to your heirs. In 2021, annual gifts up to $15,000 or $30,000 for married couples can be made to as many individuals or others as you wish. Since the $15,000 will be excluded from the federal gift tax, you won't incur any gift tax liability. Also, your CPA will point out that each $15,000 given away over the course of your lifetime will reduce your estate, meaning federal estate taxes will be lower. However, your CPA will also advise you that any amount you give away that is above $15,000 will reduce your federal lifetime exemption, meaning you will likely be required to file a gift tax return with the IRS.

Direct Payments

During the course of speaking with your CPA you discover you prefer to give more than the $15,000 annual gifting limit to individuals or others, your CPA may suggest making direct payments for medical or educational purposes. While this will indirectly shift income to your heirs, this strategy is only successful if the payments are made directly to the medical provider or educational institution. Should you be a grandparent and want to help out your grandchildren, direct payments can be an excellent way to do so. For example, this strategy can be used to pay tuition directly to a college, university, boarding school, or other educational institution. However, any non-tuition expenses such as books, supplies, and room and board will not be covered. Should you make payments to a medical provider or hospital, remember that any medical expenses that have been reimbursed by insurance will not be covered.

Loans to Your Family Members

Yes, making loans to your family members is considered to be a smart tax strategy in terms of passing wealth to your heirs. When you employ such a strategy, the loaning of cash to family members will be done at low interest rates, which are then reinvested. In doing so, the plan is to reap large profits in the years ahead. Once the money is loaned to your heirs, the focus shifts to mid and long-term applicable federal interest rates. As of October 2021, these rates are .91 and 1.72, which can be locked in by your heirs for many years. Mid-term rates can be locked in for three to nine years, while long-term rates can be locked in for as few as nine years to even 20 or more years if needed. Since you want to ensure this will be the right tax strategy for you and your heirs, talk this over in-depth with your CPA.

Grantor Retained Annuity Trust

The grantor retained annuity trust, commonly referred to as GRAT, is viewed as a very low-risk strategy that may be recommended by your CPA for passing wealth to your heirs. When a GRAT is put into place, you as the donor will transfer assets to an irrevocable trust. In return, an annuity payment is received back from the trust each year. As to how this strategy helps your heirs, it does so by letting them profit long-term from their investments, as long as their returns are higher than the IRS interest rate. Currently, IRS interest rates are extremely low, making this a strategy that is very easy to do and merits great consideration on your part.

Roth IRA Conversions

Arguably the most attractive option to most people who are wanting to pass on their wealth to heirs, Roth IRA conversions make a lot of sense from various standpoints. Unlike a traditional IRA where contributions are made pre-tax and distributions are considered to be taxable income, a Roth IRA has taxes paid upfront, meaning all distributions are completely exempt from income tax. Because of this, you may want to discuss converting a traditional IRA to a Roth IRA with your CPA, since you can then roll this over to an heir.

This option is particularly popular in times when a financial crisis looms, since it offers numerous tax advantages to both you and your heirs. Once a conversion is done, it is looked at as a rollover, and the trustee of the traditional IRA transfers money from that IRA to the trustee of the Roth IRA. Upon this taking place, the account owner will pay income tax on the amount of money that is rolled over in the year the account was converted. However, this is not a bad thing, since it will let the account accumulate assets tax-free. As an added bonus, all future distributions are also tax-free, so keep this in mind when discussing this strategy with your CPA.

Since you have numerous tax strategies you can consider using to pass wealth to your heirs, knowing as much as possible about how each will pertain to your individual financial situation and goals is imperative to making the best decision for you and your heirs. Rather than rush into a decision that may have far-reaching tax implications for everyone involved, schedule a meeting with your CPA. By doing so, you can learn the pros and cons of various strategies and make a decision that will give you and your heirs peace of mind.

As a business owner, tax season is probably not a time of year you look forward to each time it rolls around.  However, you also know that getting your taxes completed and filed as easily and quickly as possible will make your life much easier in the months ahead.  Unfortunately, many business owners get so caught up in other activities during the year that they fail to have their records properly organized prior to meeting with their CPA.  As a result, tax filing becomes more difficult than necessary.  Without various receipts and other documentation, you as a business owner could ultimately pay far more in taxes than is necessary.  To avoid this scenario, here are some excellent recordkeeping strategies to simplify this year's tax preparation.

Separate Business and Personal Expenses

If you want to make life difficult for yourself and your CPA, have all of your business and personal expenses lumped together.  When this happens, it becomes much more complicated to properly track the money that comes in and goes out of your business. In turn, this makes it more likely that transactions will be miscategorized on internal financial statements and subsequently on tax returns. 

Add Records to Files as You Get Them 

As you accumulate various documents during the year that will be needed at tax time, make it a point to add these to your files immediately upon getting them.  If you don't, and simply lay them down here and there, it is inevitable that important receipts and other documents will be lost, misplaced or accidentally discarded.  By filing documentation right away, you will always know exactly where things are when it comes time to submit them to your CPA.

Don't Purge Your Records 

One of the most common mistakes seen by CPAs is business owners purging their files of records and receipts that may still be needed at tax time.  One of the responsibilities that CPAs have is to ensure that deductions can be backed up by receipts or documentation. In most cases, tax records should be kept for at least three years, and other records pertaining to property or employees should be kept for up to seven years. The IRS provides schedules that you can refer to as to when it’s safe to pure records. But to be on the safe side, don’t purge records or files unless your CPA gives you the okay.

Maintain Separate Bank and Credit Card Accounts 

Maintain a separate bank account for your business and a separate business credit card account as well.  This will greatly simplify the tax preparation process. This way, you or your CPA won’t have to go through each credit card statement trying to decipher whether or not certain expenses were related to your business.

Have a System and Stick With It 

No matter what, decide on a recordkeeping system for your business and stick with it.  Whether you choose to keep records on an Excel spreadsheet, have file folders in a cabinet or desk, or use an app or other online system, choose a recordkeeping system you are comfortable with and won't change your mind about a few months later.  By establishing a system and sticking with it, you won’t have to reinvent your recordkeeping process over and over again.

Have a Plan B 

Just like the Boy Scouts, you should always be prepared just in case disaster strikes.  Therefore, always have a Plan B in place for your recordkeeping strategies.  For example, if you choose to keep most of your records online, it is also recommended that you still keep the actual physical copies of invoices, receipts, and other important documentation related to your business.  After all, if your computer crashes and you don't have backup files in place and have no paper trail to follow, you may find yourself in desperate circumstances come tax time. 

Invest in a Good Bookkeeping System

While you rely on your CPA at tax time and at other times during the year, they will not be holding your hand each day as you conduct business.  Therefore, it is recommended that you invest in a good bookkeeping system for your business to handle daily and monthly transactions.   

If in Doubt, Keep It

While it was mentioned earlier not to purge your files of records you think will no longer be needed should the IRS come calling, it is also crucial you don't simply assume you won't need various documents.  This includes such items as appointment calendars, photographs of office equipment, telephone records, vehicle maintenance records, or even photos of you and your client shaking hands at a meeting. As your CPA will tell you, if there is any doubt whatsoever about needing a receipt or other document at some point, it is best to hang on to it for future reference.  Therefore, always make sure you not only get receipts for any activity associated with your business, but that you also keep them filed away, just in case. 

Pay Attention to Your CPA

When you are meeting with your CPA regarding your taxes or other matters, always pay attention to what they are saying.  By doing so, you will become much more aware of what is expected of you as a business owner during the year.  For example, if certain IRS guidelines change in an area that will directly impact your business, make sure you are very clear as to how these changes will apply to such areas as sales tax, estimated quarterly income taxes, and other related areas. Be sure to take advantage of this one-on-one time to ask any questions you have, no matter how small it may seem. Getting the details right can make the difference between a simple tax return process and an overly complicated one. 

Take the time now to implement these important record keeping strategies into your business practices.  Once you do, you will find that the entire tax preparation process goes along very smoothly.

The percentage of tax returns being audited each year has steadily declined, due in part to dwindling government resources. Still, if you’ve been notified of a pending audit, those percentages don’t mean much. The only thing that matters is the situation that you’re now in. There are two kinds of audits; in person and by mail. It’s disconcerting to receive an audit notification, no matter what kind. If you find yourself in this situation, here’s how to handle it.

Notify Your Accountant

The first phone call you should make is to your tax accountant. Your accountant will be an invaluable resource as the audit progresses, so you need to give them the pertinent date(s) of the audit to ensure the accountant’s availability. In addition, numerous financial documents will need to be provided to the auditor, and your accountant will have many of these records. They’ll need some time to get everything together and organized. The sooner you notify your accountant, the better prepared they—and you—can be.

Don’t Postpone Unless It’s Legitimate

You’re permitted to postpone or reschedule the date of your audit for certain reasons. Legitimate reasons to postpone an audit include:

• you need more time to acquire legal representation

• current date is unavailable for your accountant

• you have other unbreakable commitments during that time

• you need more time to gather records

• there’s a medical condition that needs to be resolved first

Don’t ask for a postponement unless you have a legitimate reason for doing so. You should strive to appear as compliant as possible. Auditors can sense when a person is trying to postpone just to be difficult. It won’t help your case to get on the auditor’s bad side before you’ve even met. Also, be sure you aren’t postponing simply out of fear. You’ll only be delaying the inevitable. If you can meet the date, do so.

Know That You Can Request a Change of Venue

If you’ve moved out of state since the year of filing, your audit venue could be inconvenient for you to get to. You aren’t required to go out of your way to make an appearance miles from your business or residence.

Contact the auditor or office to make a polite change of venue request that’s nearer to your location. Do this as soon as possible after you receive your audit notification. Be prepared to explain why you are asking for the change in venue as well as provide proof of your new residency, if requested.

Understand Your Rights

Whether you’re being audited as an individual taxpayer or your company is being audited, you have certain rights. You should memorize these rights to ensure that you’re being treated fairly. According to the IRS you have a right to:

• professional and courteous treatment by IRS employees

• privacy and confidentiality about tax matters

• know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided

• representation by oneself or an authorized representative

• appeal disagreements, both within the IRS and before the courts

Carefully Review the Notification

The stress of receiving an audit notification can make it difficult to understand what’s involved. If you’ve never seen one before, it can also be confusing to read the document and find out what tax year is involved, who your auditor will be and how to contact them. The information will all be there, however.

Audit notifications are often accompanied by a detailed list describing all the records that will be reviewed in the course of the audit. Thoroughly review the notification and any attachments so that you completely understand what’s being requested. After you’ve contacted your tax accountant and sent them a copy of the notification, take a day to digest the news. Then go back and read and review the notification until you’re certain you have a firm grasp on what’s happening.

Don’t Hide or Hold Back

If you feel like you might be in big trouble with the audit, you might be tempted to hide certain things or hold back requested information. You might be tempted to do this even if you have no idea whether you’re “guilty” of something. This would be a mistake of great magnitude. There are, of course, penalties for deliberately filing false returns. However, there are even greater penalties for deceiving an auditor, impeding the process of an audit or engaging in other deceptive practices during an audit.

Make a commitment to provide anything and everything that the auditor requests. Even if you’re unsure of why they’re asking for certain things, go ahead and provide it. Again, you want to be as agreeable as you can with your auditor. The more aboveboard you are, the smoother the audit can progress and the faster it will be over with.

Keep Detailed Records

Your auditor will do everything in their power to conduct an organized audit with a paper trail of what was submitted and when. However, don’t rely on that. Immediately start a file for the audit so you can keep track of everything from day one. Keep your own detailed records of every step of the record, including phone calls and emails. Only submit copies of paperwork unless originals are specifically requested. In that case, keep a copy of the original in case it’s not returned for some reason. In the event that you end up disputing the audit findings, this record of the process will prove helpful.

Finally, don’t let an audit notification derail your life. Try to deal with the audit as objectively as possible. It’s certainly stressful to receive such a notice, but keep in mind that an audit is not a personal attack on you or your business. With very rare exceptions, the IRS doesn’t single out people or organizations for audits. Whatever the audit findings turn out to be, you’ll get through it. Your tax accountant can help you to deal with any financial repercussions from the audit, including implementing a payment plan for any back taxes due. For more information and help with dealing with an audit notification, contact your tax professional.

There are three financial statements that every company needs to understand, review and produce, on an annual basis, at a minimum.  These consist of the Profit and Loss statement (P&L), Balance Sheet (BASH) and the Cash Flow statement.  The profit and loss statement, also commonly known as the income statement, shows the changes in the company’s profitability over the course of time.  The profit and loss can be reported in either the Cash or Accrual method.  The cash flow statement is similar, however it shows the company’s income  and outlays in a cash methodology only.  The balance sheet reports the company’s assets and liabilities in a specific snapshot of time.

The P & L  reports all of the income, or revenue, that the company receives through its normal course of business.  This is often known as the “top line.”  You subtract the costs associated with doing business, which can consist of Cost of Goods Sold for product related businesses, and ordinary operating expenses.  Once loss is subtracted from the “top line”  income, the end result is known as the “net income” or “bottom line” and is the profit,  or earnings of the business.  The profit and loss statement is often used to calculate metrics which include gross profit margin, product profit margin, operating profit margin, net profit margin, and operating ratios.  Operating margin measures how much a company makes on each dollar of sales after paying for the variable costs of production (raw materials and labor), but not the operating costs, interest or taxes associated with the products.  The net profit margin is the percentage of revenue remaining after all the operating expenses have been deducted from the company’s total revenue.  The operating ratio shows the company’s overall efficiency by comparing the total operating expenses to net sales.  As the company moves through the year, it is important to keep track of the net income to maintain a good pulse on the company’s spending practices.

The balance sheet is used to show both what the company has as its resources,  and what it owes at any given moment.  It also shows what the company’s owners or investors have put into the company.  The goal is to have more assets (resources) than the company has liabilities (dues) and equity (owner’s stake) combined.  This is because,  if the company were to close, the assets would be used to pay off its liabilities and the owners.  The flip side of this is that the company uses its borrowed monies (liabilities) or owner’s investments (equity) to purchase assets.  Therefore, the ratio of assets to liabilities and equity is important to keep track of.  As the balance sheet is a snapshot in time, it cannot inform the company of its trends, but can provide a look at its current overall health.  It is useful in determining the company’s debt-to-equity ratio.  The D/E is calculated by dividing a company’s total liabilities by its owner equity.  This is used to determine the company’s financial leverage.  In other words, how much of the company’s operations are being financed through debt versus income.  The accounts can vary by entity or industry, but most balance sheets will include the following asset accounts:  cash (bank) and cash equivalents (brokerage), accounts receivable (invoices to customers), inventory (product not yet purchased), prepaid expenses, and fixed assets (land, buildings, machinery, equipment).  The liabilities generally consist of:  accounts payable (vendor bills), rent and operating costs payable, customer prepayments, wages and payroll taxes, short term debt (credit cards, short term loans), long term debt, and pension/retirement fund payables.  The balance sheet is a vital piece of information, but due to its static nature, is fairly limited in its usefulness.  It is important to note that the balance sheet and trial balance are two different statements.  The trial balance is used as an internal report only that provides information on the account level of the general ledger.

The cash flow statement is used to show the company’s income and expenses in the cash method.  There are two types of accounting methods utilized by companies to track and report their net profit or loss.  One is accrual, meaning that the transactions are recognized by economic events rather than the timing of when they occur, and one is cash.  If the company reports in an accrual method, the cash flow statement is an important item to review to see the state of the company in real time, or the cash position.  The cash flow statement is broken down into three parts:  cash flow from operations, cash flow from investing, and cash flow from financing.  Cash flow from operations includes transaction from all operational business activity.  This begins with net income, derived from revenue less expenses, and then reconciles all noncash items to cash items involving operational activities.  These include accounts receivable (reduced from revenue as cash is not yet received), accounts payable, depreciation, amortization and prepaid items (reduced from expenses as they are not yet paid).  The cash flow from investing includes cash spent on property, equipment or other capital expenditures.  As these  appear on the balance sheet, they are not part of the net profit figure but need to be accounted for in the cash outlay.  Cash flow from financing provides an overview of cash used in the company’s financing to determine how much money the company has paid out in dividends and buybacks.  This covers any cash obtained and paid back from fundraising efforts or loans.

While presentation of these statements varies from industry to industry, large discrepancies between yearly reports should be reviewed heavily.  A company’s ability to generate earnings consistently over time is a major driver for investors and a key for the company’s financial management to understand their past, current and on-going financial position.  No single statement can give someone the full picture of  the company and its trends, but these three financial statements,  used in conjunction,  can greatly aid in determining profitability, ability to pay back debts, and how to plan for the future.

Now that tax season is here, the early indications of the effects the 2017 Tax Reform are starting to show.  While fewer people have filed their returns than this time period in past years, the data is showing that more and more Americans are seeing lower refunds  than in years past.  Many taxpayers did  not understanding the full implications of the tax reform and failed to make the proper changes.  Since we are still relatively early in the year, now is the time to review those possible changes for 2019.

The easiest change to make is to your withholding.  The IRS has updated the withholding tables and every working taxpayer should review their Form W-4.  The W-4 is essential in your taxation as it lets you select your withholding allowances and appropriate filing status.  It is best to fully understand how to complete your Form W-4, as it will ensure you are withholding the proper amount.  The amount that is taken out through your W-4 is a delicate balance of withholding enough that come tax time, you have paid enough, without over withholding and making funds tight during the year.    If you withhold a larger amount, you may have a larger refund, while withholding a smaller amount may mean paying at tax time.  You can adjust your W-4 throughout the year if things change regarding your income, filing status, qualifications for credits, or other  taxation items.

Tax reform has also changed the capital gains rate and dividends are another  income source that qualifies for the lower tax rate.  Before tax reform, the rules for lower rates on these types of investment income were easier to understand.  Previously,  taxpayers in the 10% and 15% brackets paid 0%, the 25% to 35% brackets paid 15%, and the 39.6% bracket paid 20%.  Utilizing smart investment strategies to receive qualified dividends and long-term capital gains during this period may greatly impact your tax burden.  Work with your investment broker to ensure that you meet the requirements of the “qualified dividend”, as nonqualified is taxed at the higher ordinary income rate. 

The standard deduction looks quite different after the tax reform laws.  With the loss of the personal exemption, many taxpayers looked to the standard deduction to assist them in reducing the taxable income reported on their return.  The standard deduction reduces the earned income that is subject to tax automatically without the need to apply for credits or prove qualifications.  Between 2017 and 2018, the standard deduction doubled for most taxpayers.  There will be a slight increase in the standard deduction between 2018 and 2019.

Tax credits are also a great way to reduce your taxation.  If you are a student, the Lifetime Learning and American Opportunity credits are still available to you.  The Lifetime Learning credit provides for a 20% credit of up to $10,000 in qualified expenses, provided the taxpayer is eligible.  This credit applies to graduate school, trade schools and other nontraditional education.  The American Opportunity credit applies to 100% of qualified tuition and fees up to $2,000 and another 25% of the next $2,000 for a total of $2,500 in credits for eligible taxpayers, and applies to  undergraduate education only.  If your children are too young for higher learning, you still may be able to get a credit for them with the child tax credit, which  can provide up to $2,000 in credits for children residing with the taxpayer that qualify.  There is also a credit for making retirement contributions.  The Saver’s credit pays up to $1,000 per person that qualifies for making contributions to an IRA, 401K plan, or other similar retirement accounts.

Many taxpayers ask if the itemized deductions are going to become a thing of the past.  While the standard deduction increase made it possible for many taxpayers to forego the itemized deduction calculations, it is important to note that they are still in affect and depending on your situation.  The mortgage interest deduction still allows for taxpayers to deduct interest on up to $750,000 of mortgage debt (with a grandfathered deduction of up to $1 million on certain qualified mortgages).  Also, home equity debt may  qualify for the deduction of interest associated with the loan, depending on use.  State and local taxes, as well as real estate taxes are still on the table for deductions, although  state and local taxes are capped at $10,000 in the new tax reform.  Charitable donations to qualified charities are also still available as a deduction with proper documentation  by the receiving charity.  In reviewing whether or not to  take the itemized deduction over the standard, it is best to strategize ahead of time to determine where you can make changes that would allow you the best outcome.

Retirement IRA contribution limits will increase in 2019 by $500 for all taxpayers.  401(k) contribution limits have also increased by $500 annually.   It is important to remember that the tax deductions that apply to the different types of retirement vehicles still apply.  Be sure to review your type of retirement, along with income phase-out rules before relying on retirement contribution deductions. Tax savings may also apply if the taxpayer is able to make contributions to a 529 plan, Coverdell ESA plan, or a health savings account.  Some states allow credits for making contributions to state 529 or educational plans. 

Reviewing which credits you may qualify for and planning ahead to get the most out of your contributions will be beneficial come tax time.

Most of the time, children are considered to be an extension of their parents when it comes to legal application until the age of majority.  Therefore, many taxpayers are surprised to learn their child is a separate taxpayer, even as a minor.  If your child has enough income, he or she has an obligation to file a return and pay the tax.  In some cases, you may include their income on your tax return; in others, they'll have to file their own tax return, or you will have to file a separate return on their behalf.  Whether this is required depends on both the amount and source of the minor's income.

The first thing to look at is their earned income.  Earned income is defined in general as taxable employee pay, long term disability benefits, and self-employment net income, as well as other less common sources.  A minor who may be claimed as a dependent must file a return once their income exceeds their standard deduction.  Starting in 2018, the standard deduction for a dependent child is total earned income plus $350, up to a maximum of $12,000.  Thus, a child can earn up to $12,000 without paying income tax.  The second thing reviewed is the unearned income.  While there are several items that fall in this category, the most common to minor children are interest and dividends.  If your child's income is above this year's level, he or she must file; below that point, he or she isn't required to file a tax return.  If the child has both earned and unearned income, both amounts must be added together to determine if the total income triggers the mandatory filing requirement.  If your child’s income is below the minimum threshold but owes Social Security or Medicare taxes on his or her coffee hour tips, a return must be filed.  Additionally, even if your child does not meet any of the filing requirements discussed, he or she should file a tax return if (1) income tax was withheld from his or her income, or (2) he or she qualifies for the earned income credit, and/or any additional credits.  See the tax return instructions and talk to your CPA  to find out who qualifies for these credits.  By filing a return, your child may get a refund.

Prior to 2018, if your child needed to file a return based solely on unearned income, the IRS allowed for you to claim the income on your return given certain restrictions, and the income was taxed at the parents’ rate.  This is known as the “kiddie tax” and prevented parents from transferring income producing assets to their children to pay lower tax rates.  However, the Tax Cuts and Jobs Act of 2017 greatly modified this alternative for tax years 2018 through 2025 by changing the rates for the kiddie tax by using the estate and trust tax brackets.  These are taxed at the highest rate of thirty-seven percent for 2018, which, as an example,  is not reached by a married filing joint couple until their income tops $600,000.  If you determine to claim the child’s income on your own return, you will report this income on Form 8814 and attach it to your return.  If you make this election, you still get the benefit of the child’s standard deduction.

Some benefits that might be claimed on a child’s separate income tax return are not available if you report the child’s income on your tax return.  For example -  your child forfeits interest from making an early withdrawal from a savings account,  itemized deductions, including state income tax and charitable contributions that add up to tax savings from those itemized deductions would potentially be available,  and if your child is blind, a larger standard deduction is available on a separate tax return.  In addition, the tax on the child’s income may be somewhat higher if the child received capital gains distributions.  You get the benefit of the capital gains rate on any portion of the child’s income taxed at your rate but lose the benefit on any portion taxed at the child’s rate.

Ultimately,  the responsibility for filing your child’s tax return rests with your child if he or she is capable of doing so. If he or she is not old enough to understand how to prepare a tax return, then it becomes your responsibility to file it for them, or to include their income on your return.  Your child doesn’t have to be of legal age to sign an income tax return.  Any child old enough to sign his or her name can do this.  There’s a catch, though -  If you sign the return and the IRS ends up having questions, they can deal directly with you.  If your child signs the return, there will be limits on what they can discuss with you and what actions you can take to resolve any issues, unless you have a valid power of attorney to act on your child’s behalf.  There is a middle ground.  Your child can sign the return but show you as the “third party designee” using a space provided for this purpose near the signature line of the return.  That gives you limited authority to deal with the IRS on the tax return without a power of attorney.

Paying the tax (and interest and penalties, if applicable) is the child’s obligation.  You can pay for the income tax from your own money, but in general the IRS considers this a gift to your child.  So long as your child remains a dependent, there will be tax implications for you.  Many families review various tax return preparations and results to determine which filing combination will result in the best tax benefits for everyone.  Always consult a tax professional if your situation is complex.

With the introduction of the Tax Cuts and Jobs Act, many taxpayers are wondering how it will affect the tax deductibility of their medical items – like insurance.  Largely, the new tax bill has left these deduction as they were, albeit perhaps harder to take the itemized deductions

The first medical deduction that most people thing of is actual medical expenses.  To the extent your qualified medical expenses for your entire household (including qualified dependents) are more than 7.5% of your 2018 adjusted gross income, you can still take these deductions on Schedule A of your 1040 Federal return.  This percentage will increase back to the 10% in 2019 and beyond.  The obvious strategy here is to schedule as many medical procedures as possible in a single year, preferably 2018.  One important item of note is to know if any of your out of pocket expenses will be reimbursed by your insurance company at a later date.  If this does occur, you will be required to report that reimbursement as income if you took a deduction for the full value of the expense.  The items that are deductible as medical expenses include: preventative care, substance abuse treatment, surgery, dental, vision, lab work, acupuncture, some respiratory relief, certain psychologists and psychiatrists, prescription medication, equipment, certain cosmetic surgery, hospitalization, medically necessary costs as prescribed by your physician, co-pays, travel to and from medical appointments, nursing care and in-home care, hospice, and more.  See IRS Publication 502 for the full list.   Medical expense must be paid out of pocket with after tax dollars.  This means that you cannot include the medical expenses that you paid for with funds from your HSA for FSA.  Contributions to an HSA or FSA by your employer are not tax deductions to you.

Health insurance too is only deducible if you pay for it with after tax dollars.  Medicare Part A premiums can be deducted if a taxpayer is not covered under Social Security and is voluntarily enrolled in Medicare Part A.  Medicare Part B and Part D can also be deducted.  If your health insurance is paid for by your employer, or deducted from your paycheck pre-tax, you cannot deduct these premiums.  Likewise, you can not deduct any healthcare subsidy from state or federal governments.  If you use your health insurance premiums paid as a deduction against your self-employed income, you cannot also take it against your Schedule A medical expenses.  Self-employed health insurance can be taken as a deduction even if you are not able to itemize.

Disability insurance premiums are often overlooked by many as deductions on their return.  These premium deductions can be tricky though.  While the IRS allows for self-employed taxpayers to deduct the “overhead insurance” that pays for business overhead expenses, it does not allow for deduction of premiums that pay for lost earnings during sickness or disability.  Additionally, if you deduct the cost of your premium, benefits paid from the policy are then considered taxable income.  However, if you do not use the premiums as a deduction, then the payouts can be used tax-free.  And again, if your employer paid for your premiums, then the benefits are taxable to you.  Check with your accountant to make sure that your premiums are being handled in the most advantageous way for you.

The premiums for qualified long-term care insurance are also deducible on Schedule A of For 1040.   However, there is a limit on how large a premium can be deducted depending on the age of the taxpayer at year-end.  Any premium amounts for the year above the limit are not considered to be a medical expense for the deduction.  To be considered qualified plans, the policy must adhere to offer both activities of daily living (ADL) and cognitive impairment triggers.  Benefits from reimbursement policies, which pay for the actual services a beneficiary receives are not include in incomes.  Per dies policies are not included in income except amounts that exceed the beneficiary’s total qualified long-term care expenses or the daily limit for the year, whichever is greater.

Health Savings Accounts (HSA) are one way to benefit with a tax-advantaged savings component with a high-deductible health insurance policy.  HSA contributions are tax-deductible, even for those that do not itemize.  Earnings in a Health Savings Account accumulate tax-free.  And, provided you use the distributions for qualified medical expenses, these funds remain tax-free. With HSAs, the funds can be rolled from year to year within the account to aid with upcoming medical bills.  Like the HSA, FSAs are medical flexible spending accounts.  These let you set aside before-tax money with which to pay out of pocket medical expenses.  The drawback to the FSA is that you must utilize the money within the year.   Some employers offer a Health Reimbursement Account which will reimburse employees for certain qualified medical expenses and the reimbursements are tax-free.  In general, these policies roll over form year to year.

Life insurance premiums are deductible as business-related expenses if the insured is an employee or corporate officer and the company is not the direct or indirect beneficiary of the policy.  The death benefits are generally tax-free to the individual policy owner, although death benefits for business-related beneficiaries can have certain situations where it can become taxable.  Employers offering group-term life coverage to employees can deduct premiums they pay on the first $50,000 of benefits per employee.

With TCJA effectively doubling the standard deduction, for all filing statuses, the itemization deduct will be harder to achieve.  In many cases it may be better to use a pre-tax savings plan to pay for out of pocket medical expenses.  Any medical expense that are paid out of an HSA, FSA or HRA are effectively one hundred percent tax deductible.  However, if it appears that you do have enough itemized deductions to claim them, then including the medical expenses may offer you even more tax savings.