CHRISTINE REYNOLDS, E.A. NTPI FELLOW®
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Tax Cuts and Jobs Act

1/3/2018

 
With the President signing the new bill in December there are a number of questions and concerns about how this will affect us and what will this do to our taxes.  I have compiled a few resources to help you out.  Go to my website at modestotaxes.com and hit the *NEW* tab. There you will find a calculator, a brief comparison and a more in depth comparison of the new laws and rates versus the old laws and rates.  Hopefully this will answer some of your questions.  And as tax season hits and we prepare your taxes for 2017 we will look ahead to 2018 and try to help you make adjustments as needed.

Record Retention.  How long is long enough?

1/9/2017

 
Federal law requires you to maintain copies of your tax returns and supporting documents for three years.  But, this is just for those years we call the open years.  The IRS has 3 open years to look over your returns and assess additional taxes or audit the information.  However, if the IRS believes you have underreported your in income by 25% or more than they may go back six years in an audit.  If you do not file at all or there is an indication of fraud then all bets are off and there is no time limit. So what is the best practice for keeping returns and documents?  Here is a comprehensive list of documents and the suggested time frame for keeping them.

Personal Documents To Keep For One YearWhile it's important to keep year-end mutual fund and IRA contribution statements forever, you don't have to save monthly and quarterly statements once the year-end statement has arrived.
Personal Documents To Keep For Three Years
  • Credit Card Statements
  • Medical Bills (in case of insurance disputes)
  • Utility Records
  • Expired Insurance Policies
Personal Documents To Keep For Six Years
  • Supporting Documents For Tax Returns
  • Accident Reports and Claims
  • Medical Bills (if tax-related)
  • Sales Receipts
  • Wage Garnishments
  • Other Tax-Related Bills
Personal Records To Keep Forever
  • CPA Audit Reports
  • Legal Records
  • Important Correspondence
  • Income Tax Returns
  • Income Tax Payment Checks
  • Property Records / Improvement Receipts (or six years after property sold)
  • Investment Trade Confirmations
  • Retirement and Pension Records (Forms 5448, 1099-R and 8606 until all distributions are made from your IRA or other qualified plan)
Special Circumstances
  • Car Records (keep until the car is sold)
  • Credit Card Receipts (keep until verified on your statement)
  • Insurance Policies (keep for the life of the policy)
  • Mortgages / Deeds / Leases (keep 6 years beyond the agreement)
  • Pay Stubs (keep until reconciled with your W-2)
  • Sales Receipts (keep for life of the warranty)
  • Stock and Bond Records (keep for 6 years beyond selling)
  • Warranties and Instructions (keep for the life of the product)
  • Other Bills (keep until payment is verified on the next bill)
  • Depreciation Schedules and Other Capital Asset Records (keep for 3 years after the tax life of the asset)

Business Documents To Keep For Three Years
  • Employee Personnel Records (after termination)
  • Employment Applications
  • Expired Insurance Policies
  • General Correspondence
  • Internal Audit Reports
  • Internal Reports
  • Petty Cash Vouchers
  • Physical Inventory Tags
  • Time Cards For Hourly Employees
Business Documents To Keep For Six Years
  • Accident Reports, Claims
  • Accounts Payable Ledgers and Schedules
  • Accounts Receivable Ledgers and Schedules
  • Bank Statements and Reconciliations
  • Cancelled Checks
  • Cancelled Stock and Bond Certificates
  • Employment Tax Records
  • Expense Analysis and Expense Distribution Schedules
  • Expired Contracts, Leases
  • Expired Option Records
  • Inventories of Products, Materials, Supplies
  • Invoices to Customers
  • Notes Receivable Ledgers, Schedules
  • Payroll Records and Summaries, including payment to pensioners
  • Plant Cost Ledgers
  • Purchasing Department Copies of Purchase Orders
  • Sales Records
  • Time Books
  • Travel and Entertainment Records
  • Vouchers for Payments to Vendors, Employees, etc.

Business Records To Keep ForeverWhile federal guidelines do not require you to keep tax records "forever," in many cases there will be other reasons you'll want to retain these documents indefinitely.
  • Audit Reports from CPAs/Accountants
  • Cancelled Checks for Important Payments (especially tax payments)
  • Cash Books, Charts of Accounts
  • Contracts, Leases Currently in Effect
  • Corporate Documents (incorporation, charter, by-laws, etc.)
  • Documents substantiating fixed asset additions
  • Deeds
  • Depreciation Schedules
  • Financial Statements (Year End)
  • General and Private Ledgers, Year End Trial Balances
  • Insurance Records, Current Accident Reports, Claims, Policies
  • Investment Trade Confirmations
  • IRS Revenue Agent Reports
  • Journals
  • Legal Records, Correspondence and Other Important Matters
  • Minutes Books of Directors and Stockholders
  • Mortgages, Bills of Sale
  • Property Appraisals by Outside Appraisers
  • Property Records
  • Retirement and Pension Records
  • Tax Returns and Worksheets
  • Trademark and Patent Registrations

Possible year end moves to make.

11/21/2016

 
From ​THOMSON REUTERS TAX & ACCOUNTING NEWS  
Federal Taxes Weekly Alert, 11/23/2016
Year-end moves for those who believe President-elect Trump will cut their taxes next year

​
In his first televised interview, President-elect Trump declared that a “major tax bill lowering taxes in this country” would be one of his top three priorities. Those middle and upper income taxpayers who are betting he can deliver on this promise, and put his tax reduction plan in place for 2017, should revisit their year-end tax moves to make the most of what might be windfall savings next year.
Defer income to 2017. The Trump tax plan would feature three tax brackets instead of current law's seven, and a top tax rate of 33% instead of current law's 39.6%. The upshot of these and other tax-reduction changes, if retained in the final tax plan, would be reduced taxes for middle and upper income taxpayers, with the biggest tax savings realized by the wealthiest taxpayers.
The standard year-end tax-savings wisdom always has been to defer income, where possible, into the coming year. This standard approach would make even more sense for middle and upper income taxpayers if the Trump tax plan prevails over others in Congress, and goes into effect for tax year 2017.
Here are some of the ways to defer income until 2017:
  • An employee who believes a bonus may be coming his way may be able to request that his employer delay payment of any bonus until early in the following year. For example, if a bonus would normally be paid on Dec. 15, 2016, an employee may ask the employer before Dec. 15 to defer any bonus coming his way until Jan. 2, 2017. By deferring the bonus, the employee will succeed in having it taxed in 2017. But note that if an employee waits until a bonus is due and payable to request a deferral, the tax on the bonus will not be deferred. Also, if the deferral extends beyond 2-½ months after the close of the tax year, the bonus will be treated as nonqualified deferred compensation (currently includible in income to the extent not subject to a “substantial risk of forfeiture” if the arrangement fails to meet certain distribution, acceleration of benefit, and election requirements).
  • Income that a cash basis taxpayer earns by rendering services isn't taxed until the client, patient etc., pays. If the taxpayer (e.g., consultant, business person, medical professional) holds off billing until next year—or until so late in the year that no payment can be received in 2016—he will succeed in deferring taxable income until next year.
  • Defer “first year” required minimum distributions (RMDs) from an IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year a taxpayer reaches age 70-½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-½, the first distribution calendar year is the year in which the IRA owner attains age 70-½. Thus, if a taxpayer turns age 70-½ in 2016, he can delay the first required distribution to 2017, but if he does so, there will have to take a double distribution in 2017—the amount required for 2016 plus the amount required for 2017. Delaying 2016 distributions to 2017 thus will bunch income into 2017, but that would be beneficial if the taxpayer winds up in a substantially lower bracket that year.
  • Defer a traditional IRA-to-Roth IRA conversion until 2017. Such a conversion generally is subject to tax as if it were distributed from the traditional IRA or qualified plan and not recontributed to another IRA. Thus, a taxpayer who plans to make such a conversion should defer doing so if he believes the conversion will face a lower tax next year.
Defer property sales. The President-elect's plan to repeal the Affordable Care Act (“Obamacare”) also would repeal the 3.8% surtax on investment income. This surtax applies to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for other taxpayers). As a result, if the surtax is repealed for 2017, taxpayers within the reach of the surtax, and are contemplating the sale of property that would generate a large investment gain, would benefit by deferring the sale until next year (assuming of course that the sale price would stay more or less the same).
If the sale can't be postponed, it may be possible to structure the deal as an installment sale. By making a sale this year with part or all of the proceeds payable next year or later, a non-dealer seller to whom the installment method applies becomes taxable in any year on only that proportion of his profit which the payments he receives that year bear to the total sale price. If the 3.8% surtax is repealed for tax years beginning after 2016, the profit on the post-2016 installment payments would escape the surtax. Note that the Trump tax plan would keep current law's maximum tax rate of 20% of capital gains.
On the deduction side. Itemized deductions produce no tax savings for a year in which a taxpayer claims the standard deduction, and many more taxpayers would claim the standard deduction under President-elect Trump's tax plan. It calls for a dramatically increased standard deduction: $30,000 for joint filers (up from $12,600 for 2016) and $15,000 for singles (up from $6,300). If the boosted standard deduction makes it into law for 2017, many taxpayers who itemize under current law and wouldn't be able to under the Trump plan would be better off accelerating next year's itemized deductions into this year, when they will generate a tax savings. And, even if the standard deduction proposal is watered down, itemized deductions still will be more valuable to a taxpayer this year than next if he expects to be in a lower marginal tax bracket in 2017.
For example, those whose medical expenses exceed the 10% of AGI floor (7.5% of AGI for those age 65 or older) could accelerate into this year discretionary or elective medical procedures or expenses, such as dental implants or expensive eyewear. Individuals could boost charitable contributions (e.g., making two years worth of contributions this year to a favorite cause), pay state income tax and local property tax a bit early (keeping in mind that such taxes are not deductible for alternative minimum tax purposes), or making a year-end mortgage payment.



© 2016 Thomson Reuters/Tax & Accounting. All Rights Reserved.

AFFORDABLE CARE ACT

1/6/2015

 
In 2010, when Congress passed the Affordable Care Act (commonly called Obamacare), the effects seemed far away to many of us. Now that 2014 is here, there will be several direct effects upon every American, with the requirement that all Americans of all ages obtain qualified health insurance for the entire year. The requirement to obtain health insurance applies to you individually as well as to anyone you claim as a dependent on your return. 

Several new forms will be issued to taxpayers this year, primarily Form 1095-A, B and C. These forms provide the necessary information to report your health insurance coverage, calculate any credit and calculate any penalty that may apply.

Because much of the reporting for 2014 will be voluntary you may not receive any Forms 1095 but in order to complete your tax return you will need the following.

  1. Health insurer(s) for the year;
  2. Number of months of coverage;
  3. Members of your family covered by the above health insurance throughout the year;
  4. Your county of residence all year;
  5. Signed health insurance information form for our records.


If you received an advance payment of the Health Care credit by purchasing insurance through the Exchange please be aware that if you received a greater credit than allowed you will be forced to repay the excess with this year’s return.

TAX HIGHLIGHTS FOR 2014

1/6/2015

 
2014 Updates
Annual Gift Tax Exclusion: The most commonly used method for tax-free giving is the annual gift tax exclusion,
which for 2014 allows a person to give up to $14,000 to each donee without reducing the giver's estate and
lifetime gift tax exclusion amount.

Retirement Plan Contributions:
Traditional IRAs: $5,500 ($6,500 over 50 years of age) subject to income limitations.
Roth IRA: $5,500 ($6,500 over 50 years of age) subject to income limitations.
401(k) Contribution: $17,500 ($23,000 over 50 years of age).
SIMPLE Plan Contribution: $12,000 ($14,500 over 50 years of age).

Capitalization v. Expensing for Materials and Supplies and Repairs: Effective for taxable years beginning on or
after January 1, 2014, the IRS finalized regulations that determine when taxpayers should capitalize or deduct as
a current expense repairs on tangible property, plus the deductibility of materials and supplies. A deduction for
materials and supplies is allowed under a de minimis rule that includes property that has an acquisition or
production cost of $200 or less. Also, another de minimis safe harbor states that for repairs to be deductible,
among other requirements, the unit of property must cost less than $5,000 per invoice or item substantiated by
the invoice for taxpayers with applicable financial statements and $500 per invoice for taxpayers without
applicable financial statements.

Child Tax Credit: A tax credit of $1,000 per qualifying child under the age of 17 is available on this year's return.

Education Credits: The maximum credit for 2014 is $2,500 (100% on the first $2,000, plus 25% of the next
$2,000) for qualified tuition and fees paid on behalf of a student (i.e., the taxpayer, the taxpayer's spouse, or a
dependent) who is enrolled on at least a half-time basis. The credit is available for the first four years of the
student's post-secondary education. For 2014, the credit is phased out at modified AGI levels between $160,000
and $180,000 for joint filers and between $80,000 and $90,000 for other taxpayers.
The Lifetime Learning credit maximum in 2014 is $2,000 (20% of qualified tuition and fees up to $10,000). A
student need not be enrolled on at least a half-time basis so long as he or she is taking post-secondary classes to
acquire or improve job skills. As with the Hope (American Opportunity Tax Credit in 2014) credit, eligible
students include the taxpayer, the taxpayer's spouse, or a dependent. For 2014, the Lifetime Learning credit is phased out at modified AGI levels between $108,000 and $128,000 for joint filers, and between $54,000 and
$64,000 for single taxpayers.

Residential Energy Efficient Property Credit: Until 2016, tax incentives are available to taxpayers who install
certain energy efficient property, such as photovoltaic panels, solar water heating property, fuel cell property,
small wind energy property and geothermal heat pumps. The property purchased cannot be used to heat
swimming pools or hot tubs.

Capital Gains Rates
• Capital gains on property held one year or less are taxed at an individual's ordinary income tax rate.
• Capital gains on property held for more than one year are taxed at a maximum rate of 20% (0% if an individual
is in the 10% or 15% marginal tax bracket; 15% for individuals in the 25%, 28%, 33% and 35% brackets).

Investment Income Tax: Continuing from enactment in 2013, a 3.8% tax is levied on certain unearned income.
The tax is levied on the lesser of net investment income or the amount by which modified AGI exceeds certain
dollar amounts ($250,000 for joint returns and $200,000 for individuals). Investment income is: (1) gross income
from interest, dividends, annuities, royalties, and rents (other than from a trade or business); (2) other gross
income from any business to which the tax applies; and (3) net gain attributable to property other than property
attributable to an active trade or business. Investment income does not include distributions from a qualified
retirement plan or amounts subject to self-employment tax. This rule applies mostly to passive businesses and
the trading in financial instruments or commodities. With this additional tax, the maximum net capital gains
rate is 23.8% in 2014. Because distributions from qualified retirement plans are not subject to the tax, taxpayers
may want to invest in retirement accounts, if possible, rather than taxable accounts.

Tax Return Related Identity Theft
Fraudulently filed tax returns are becoming an issue for both the Internal Revenue Service and taxpayers. An
identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund. This link
provides information on how to protect yourself, what to look for, and what to do if you become a victim:
www.irs.gov/uac/Taxpayer -Guide-to-Identity -Theft.

The payment of taxes

8/13/2014

 
One may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.

Judge Learned Hand - famed american judge

Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)

Tax Season

1/8/2014

 
Tax season opens January 31.  Start gathering your info now

What are the odds of being audited?

4/19/2013

 
Clients  often ask me, "what are the chances I will be audited?"  Well here are the numbers from last year, according to the Internal Revenue Service's Fiscal Year 2012 Enforcement and Service Results report, which covered the tax season that ended in April 12, 2012:

 Total of All Individual Returns Filed: 143,399,737
-
Mail/Correspondence Audit: 1,122,216
- Field Audit/In Person: 359,750
- Total Combined Audits: 1,481,966
- 1.03 percent

 
Total Individuals with Income Under $200,000:
138,554,470

- Mail/Correspondence Audit: 1,012,898
- Field Audit/In Person: 290,015
- Total Combined Audits: 1,302,913
- 0.94 percent

 Total Individuals with Income Over $200,000: 4,845,267
- Mail/Correspondence Audit: 109,318
- Field Audit/In Person: 69,735
- Total Combined Audits: 179,053
- 3.70 percent

 Total Individuals with Income Over $1 Million: 337,477
- Mail/Correspondence Audit: 23,139
- Field Audit/In Person: 17,826
- Total Combined Audits: 40,965
- 12.14 percent

So what does that mean?  Well, as you can see the chances of being audited are less than 1% if you make less than 200k.  But that doesn't mean you shouldn't be prepared.  Keep all documents that pertain to your tax return and make sure you have the necessary reciepts to backup the deductions you are taking especially those that deal with mileage, meals and contributions as those are areas they often look at. 

Some Miscellaneous deductions to consider

3/15/2013

 
Taxpayers often forget or don't realize that there are a number of miscellaneous items that they
can deduct on their schedule A such as tax preparation fees, job expenses, investment fees, job 
education costs etc.  The total of these deductions must be greater than 2% of your adjusted gross income, but added together they just may hit the mark and save you a few extra dollars. The following is a list from 
IRS pub 529 of common unreimbursed employee expenses.  Keep in mind that these expenses must be paid or incurred during your tax year, for carrying on your trade or business of being an employee, and ordinary and necessary.
Business bad debt of an employee
Business liability insurance premiums.
Damages paid to a former employer for breach of an employment contract.
Depreciation on a computer your employer requires you to use in your work.
Dues to a chamber of commerce if membership helps you do your job.
Dues to professional societies.
Educator expenses.
Home office or part of your home used regularly and exclusively in your work.
Job search expenses in your present occupation.
Laboratory breakage fees.
Legal fees related to your job.
Licenses and regulatory fees.
Malpractice insurance premiums. 
Medical examinations required by an employer. 
Occupational taxes.
Passport for a business trip. 
Repayment of an income aid payment received under an employer's plan. 
Research expenses of a college professor.
Rural mail carriers' vehicle expenses.
Subscriptions to professional journals and trade mag-azines related to your work. 
Tools and supplies used in your work. 
Travel, transportation, meals, entertainment, gifts, and local lodging related to your work.
 Union dues and expenses.

Be sure to take advantage of the education credits

3/1/2013

 
The education credits, including the American Opportunity Credit, were extended through 2012 for expenses
paid for tuition, certain fees and course materials for higher education. The maximum credit available is $2,500 in 2012 which includes 100% of qualifying tuition and related expenses not in excess of $2,000, plus 25% of those expenses that do not exceed $4,000. Additionally, the Lifetime Learning Credit sticks around for 2012, capped at $2,000, which applies to 20% of the first $10,000 of qualifying out-of-pocket expenses   The above-the-line Tuition and fee deduction was also extended so that taxpayers who don’t itemize can continue to benefit.  So don't overlook these credits as they can mean big savings on your return and they may be gone soon. 
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