Taxpayers can take steps now to Get Ready to file their taxes in 2020

Taxpayers can take steps now to Get Ready to file their taxes in 2020

There are steps people can take now to make sure their tax filing experience goes smoothly next year. First, they can visit the Get Ready page on IRS.gov to find out more.

Here are a few other things people can do now:

Check their withholding and make any adjustments soon
Since most employees typically only have a few pay dates left this year, checking their withholding soon is especially important. It’s even more important for those who:

  • Received a smaller refund than expected after filing their 2018 taxes this year.
  • Owed an unexpected tax bill last year.
  • Experienced personal or financial changes that might change their tax liability.

Some people may owe an unexpected tax bill when they file their 2019 tax return next year. To avoid this kind of surprise, taxpayers should use the Tax Withholding Estimator to perform a quick paycheck or pension income checkup. Doing so helps them decide if they need to adjust their withholding or make estimated or additional tax payments now.

Gather documents
Everyone should come up with a recordkeeping system. Whether it’s electronic or paper, they should use a system to keep all important information in one place. Having all needed documents on hand before they prepare their return helps them file a complete and accurate tax return. This includes:

  • Their 2018 tax return.
  • Forms W-2 from employers.
  • Forms 1099 from banks and other payers.
  • Forms 1095-A from the marketplace for those claiming the premium tax credit.

Confirm mailing and email addresses
To make sure these forms make it to the taxpayer on time, people should confirm now that each employer, bank and other payer has the taxpayer’s current mailing address or email address. Typically, forms start arriving by mail or are available online in January.

People should keep copies of tax returns and all supporting documents for at least three years. Also, taxpayers using a software product for the first time may need the adjusted gross income amount from their 2018 return to validate their electronically filed 2019 return.

File electronically and choose direct deposit for a faster refund
Errors delay refunds. The easiest way to avoid them is to file electronically. Using tax preparation software is the best and simplest way to file a complete and accurate tax return. Tax prep software guides taxpayers through the process and does all the math. In fact, taxpayers can start looking into their filing options now.

Another way to speed thing up is to use direct deposit. Combining direct deposit with electronic filing is the fastest way to get a refund. With direct deposit, a refund goes directly into a taxpayer’s bank account. They don’t need to worry about a lost, stolen or undeliverable refund check.

Share this tip on social media — #IRSTaxTip: Check their withholding and make any adjustments soon https://go.usa.gov/xpBfX

Why Outsourcing A Company’s Bookkeeping Saves Time and Money

With Gentry and Associates, CPA

For business owners, keeping accurate books is paramount. Making mistakes adds up, especially if those mistakes lead to an audit or bankruptcy. With thirty percent of small businesses failing within two years because of expenses outweighing profits, it is more important than ever to keep accurate books. Hiring a CPA to perform bookkeeping tasks is not without cost, but it can save a lot of money in the long run.

Even the most seasoned business owners make bookkeeping mistakes when they lack the proper experience. Mistakes encompass data entry errors, missing entries, double entries, and confusion regarding types of expenses. A trained bookkeeper with a keen eye is less likely to make such mistakes.

Part of a bookkeeper’s role is to pay bills, maintain a budget and accurately invoice with timeliness. It’s easy to fall behind on paying and accounts receivable when one is running their own business. No more late fees and getting paid on time are just some advantages to an outsourced bookkeeper.

When business owners hire a bookkeeper, they can then direct their time and efforts elsewhere. Bookkeeping is a task that is important, detailed, and, optimally, distraction-free. Hiring a CPA as your bookkeeper allows business owners to focus on their business and not worry about the books.

Depending on the size and complexity of the business, a bookkeeper can be full-time, part-time, temporary, or contracted. Each choice comes with its own benefits. Whether a company is comprised of one individual or many, outsourcing this important task is often the best alternative. Doing so permits the bookkeeper an element of objectivity often necessary for the successful completion of bookkeeping tasks. Also, adjusting bookkeeping to a company’s needs is an important factor in saving a company money and can be more easily achieved in this manner.

With a bookkeeper, it is easier to assess where a company stands financially. Overall financial assessments display where money should be dispersed, allocated or saved. A bookkeeper can simplify and explain confusion and concepts.

Outsourcing a company’s bookkeeping provides many benefits with a great deal of flexibility. For accurate, stress-free bookkeeping in the greater Chattanooga area, contact Gentry and Associates for more information at (423) 648-6240, or find out more online at gentrycpa.com.

Employee Business Expenses

One of my clients was recently audited by the IRS for deducting unreimbursed employee business expenses on his tax return. These expenses are deductible as an itemized deduction on Schedule A of Form 1040. Those expenses make their way to the Schedule A (Itemized Deductions) by way of Form 2106 (Employee Business Expenses). To get the “big picture”, if you are an employee and receive a W-2 for your wages, Form 2106 is designed to allow you to deduct business expenses that your employer requires you to pay as a condition of employment, but they do not reimburse you for incurring these expenses. Even though any job may have unreimbursed business expenses, the most common situation where this arises is “outside salesmen” such as insurance agents. Any job can require employees to pay business expenses that are not reimbursed. For instance, we had a high school teacher who was also the football coach. He not only had additional business miles to go to practices and games, but he also was running junior high programs for 3 elementary schools that were “feeder schools” for the high school. Be aware of your situation; you may have unreimbursed business expenses also.

Common unreimbursed business expenses are business use of your personal auto for business purposes. (Even though, you can track and deduct actual expenses, most people chose to deduct standard mileage rate. The amount the IRS allows per mile is currently 53.5 cents per mile. This is not bad considering that the average car costs less than 15 cents per mile in gasoline.) Another common unreimbursed business expense, is the cost of using a portion of your home as an office or as a storage place for supplies used on your job. As an example of how this works is as follows: If you use 200 square feet of your 1000 square foot apartment as a home office, you can deduct 20% of your rent, utilities, repairs, etc. The same can be true of your cell phone. In addition, meals and entertainment may be deductible if needed in your business but not reimbursed by your employer.

This seems too good to be true. Right? Read on.

The reason for this brief article is to prepare you what records the IRS expects if you are audited.
First, the IRS requires a letter from your employer on the employer’s letterhead stating the company’s reimbursement policy. The IRS is not only checking to see how much your employer reimburses for employee business expense, but they are checking to see what expenses you are required or expected to incur. If your employee provides an office in which you can do your job, the IRS will not allow you to take a deduction for another office at home. Also, if they don’t require you to have a cell phone, there goes another deduction. As you can see the Company’s employee business expense reimbursement letter is much more important than it appears. Many small companies may need assistance in writing this letter. Your employer may not think to tell you that a cell phone, laptop computer and client meals and entertainment are required, but what would sales be without them. Also, if you share a desk with 5 other people, I don’t consider that being office space provided by employer. The letter should state that an office at home is required even if they don’t strictly enforce that requirement. The letter must also say you are required to make sales calls sales calls and they do not reimburse for the use of your vehicle to make these sales calls. They should outline your territory (if any) and list expected contact frequency. The same is true for expenses like meals and entertainment that are necessary while making sales calls. Without these requirements, the IRS could challenge these deductions even if everything else concerning these expenses are properly documented.

Now, a few words concerning required documentation required to deduct employee business expenses.

If you need to use your personal vehicle to perform your job duties, what should you document. You need to show proof of both the total miles and business miles. The best way to prove total miles put on your vehicle during a year is to get an oil change close to the end or beginning of the year each year. The reason is that the documentation from an oil change receipt shows the odometer reading. You will need one that is dated near the beginning of the year and one that is near the end of the year. If you traded cars during the year, you will need odometer reading document at trade in to prove the ending odometer reading. You will also need the odometer reading document from the purchase of the new car to support its beginning odometer reading and an oil change receipt at the end of the year to support the ending odometer reading for the new car. After documenting total miles, now you need to support business miles. A detailed log of each trip is not required, but you need a schedule showing your typical route over a period of time such as a week or a month. List the business mile to run this route. Or you mileage may be best represented by appointments on a calendar or day planner. Using that assign the business miles required each day.

Keep in mind if your employer does not require that you work from your home, the miles from your home to your first sales call will be considered “commuting” (IRS talk for not deductible). The same is true of the miles from your last sales call back to your house. As you can see, that letter from your employer and the wording included in that letter is extremely important.

Finally, you think if you have your credit card statement, the IRS will consider it to be documentation of business expenses such as meals and entertainment. You will need more than just a credit card statement to support the business purpose of the expenditure. You need notations telling the name of the customer, or potential customer, and the business purpose of the meeting. Of course, the credit card statement will have the other information needed such as the date of the meeting.

Hopefully, this article gives you an opportunity to get an insight into how the IRS thinks. Be a good boy scout. “Be prepared” if you plan to claim unreimbursed employee business expenses.

Steve Gentry, CPA

Where is My Refund?

If it has been at least 21 days since you filed your tax return and you have not received your refund, you can log onto IRS.gov click on the link that says “Where is My Refund?”  The following Youtube video should explain the details of how it is done.

What the IRS Knows About You

The IRS gets information from third parties and matches this information to you through its computers. Stay one step ahead by being extra careful to report on your tax return what the IRS already knows about you. (You should receive from the third parties copies of all the information they send to the IRS.) What the IRS knows and how:

Your Income. The IRS knows, of course, if you have been paid over $600. The payer must report this payment to the IRS on Form 1099-MISC, Statement for Recipients of Miscellaneous Income. Included in this category:

Free-lance income.

Rent or royalty payments.

Prizes and awards that are not for services.

Payments made by medical and health-care insurers to a doctor or other supplier of medical services under and insurance program.

Attorney’s and accountant’s fees for professional services.

Witness or expert fees paid by a lawyer during a legal proceeding.

Payments made to entertainers for their services.

Your wages. The IRS knows from your W-2 Form exactly how much you earned in regular income, bonuses, vacation allowances, severance pay, moving-expense payments, and travel allowances. Your W-2 must be attached to your return.

Interest income. The IRS knows if you’ve been paid any interest. Banks and financial institutions must report these payments to the IRS on Form 1099-INT, Statement for Recipients of Interest Income. Trap: Some interest income is reported to the IRS even though you haven’t received it yet. It must be reported as part of your income.

Dividend income. The IRS knows if you’ve received over $10 in money, stock, capital-gain distributions, or property from a corporation. The corporation must report these payments to the IRS on Form 1099-DIV, Statement for Recipients of Dividends and Distribution. Important: Make sure the report agrees with your records.

Tax-refund income. The IRS knows about tax refunds you receive. State and local governments must report such payments of over $10 on Form 1099-G, Statement for Recipients of Certain Government Payments. Important exception: If you didn’t claim the state and local taxes that you paid as itemized deductions on your federal return, you don’t have to report these refunds as income. If you receive a Form 1099-G, analyze it carefully to see whether you must include it in income or if you qualify under this exception.

Gambling winnings. The IRS knows about money you won from horse racing, dog racing, jai alai, lotteries, raffles, drawings, Bingo, slot machines, and Keno. It’s all reported to the IRS on Form W-2G, Statement for Recipients of Certain Gambling Winnings. The general rule: Payments of $600 or more must be reported by the payer. Exceptions: Bingo payments of $1,200 or more and Keno payments of $1,500 or more will be reported.

Other income the IRS knows about:

Original-issue discounts.

Mortgage interest received from individuals in the course of a trade or business.

Money received from broker and barter exchanges.

Distributions from pension and profit-sharing plans, IRAs, etc.

Cash payments of over $10,000 received in a trade or business.

Cash deposits of over $10,000 made to your bank account.

Fringe benefits received from your company.

Social Security benefits.

Tax-shelter participation.

Unemployment income.

Well-known and hidden deductions

Hidden Deductions In Unreimbursed Business Expenses

If you have any out-of-pocket expenses in connection with your employment, and you don’t get reimbursed for them, you may be entitled to deduct them to the extent that they exceed 2% of your Adjusted Gross Income. These expenses include well-known deductible costs, such as those incurred for business entertainment or travel, and business use of your car or home computer. They also include other, not-so-obvious expenses, such as the costs of an attaché case, a special gold or sterling silver pen or pencil set, or pictures to decorate your office. Stationery, office supplies, business books, subscriptions to professional publications and business newspapers, and dues for professional associations, societies, or unions.

Business Use Of Your Home Computer

Do you have a personal computer in your home? In order to deduct accelerated (ACRS) depreciation of a home computer, you must use it at least 50% for business. Calculate the amount of your deduction by multiplying the percent of business use by the ACRS depreciation rate. Or you can use the Section 179 write-off, which is $17,500 in the first year, depending on several variables. (Check this out with your tax adviser.)

If you use your personal computer less than 50% for business, you can take only straight-line depreciation. Caution: Business use doesn’t include use for investment purposes.

If you claim a deduction for your home computer as a requirement of your employment, you must prove that you maintain it at the request of your employer.

Not To Be Overlooked

  • Client pass-troughs. The party that pays a meal expense is subject to the 50% deduction limit. Thus, if a company pays for a meal on behalf of a client, and bills the client for the meal, the client may deduct only 50% of its cost. But if the client paid only a general fee for services, it could deduct the whole fee as a business expense, while the company would have to include the whole fee in income and be able to deduct only 50% of the meal costs it incurred. Here the billing of itemized meal costs to the client is the key, and this item should be considered when drafting client agreements.
  • Company parties. Holiday parties, summer outings, and other traditional company gatherings that take place primarily for the benefit of the company’s employees are not subject to the 50% limit on meal deductions.

How To Audit-Proof Your Expense Diary

Audit-proofing your business-expense diary is a very simple matter. Just include answers to each of these questions. (An easy way to remember the questions-the four W’s and $):

  • Who was with you?
  • Where were you?
  • Why were you there?
  • When were you there?
  • How much money did you spend?

Remember, you need a receipt for all expenses that exceed $25. Otherwise, no deduction will be allowed.

Top 10 Filing Mistakes To Avoid

1. Incorrect amount of tax entered from the tax table. Find your correct filing status at the top of the tax table and copy the correct amount from that column onto your return.

2. Error in computing the credit for child- and dependent-care expenses. Carefully work through Form 2441 and the accompanying worksheet contained in the instructions. The child-care credit could be limited if you are subject to the Alternative Minimum Tax. The worksheet will help you figure out if the limit applies.

3. Not claiming the earned income credit. Low-income taxpayers may be entitled to a credit. To see if you qualify, use the earned income-credit worksheet contained in the instructions for filing your tax return.

4. Income tax withholding and estimated tax payments entered on the wrong line. Federal income tax withheld is reported on one line. Estimated tax payments go on the next line.

5. Wrong Social Security number. If you use the IRS peel-off mailing label, check to make sure your number is correct. And…double-check your Social Security number on your W-2.

6. Indicating overpayment to be credited to estimated tax…when you actually want a refund. Be sure to mark the correct line.

7. Adding income, deductions, or credits incorrectly. Double-check the arithmetic for all these amounts before filing your return.

8. Entering Social Security tax withheld instead of federal withholding tax. Copy the amount of federal tax withheld from Box 9 of your W-2.

9. Incorrect computation of refund or balance due.

10. Computation error when figuring medical and dental expenses. You must figure your Adjusted Gross Income before you can calculate the deduction for medical and dental expenses. Read the instructions carefully for the rules of how to do this.

Tips for Avoiding Identity Theft

Do not give out personal information over the phone, through the mail or over the Internet unless you have initiated the contact or know with whom you are dealing.

Shred all discarded documents, including bank statements, pre-approves credit card offers, insurance forms and other documents that contain financial information.

Do not use your mother’s maiden name, birth date or last four digits of your Social Security number when creating a password.

Carry only credit cards you use on a regular basis. Never carry your Social Security card, birth certificate or passport unless necessary.

Do not write your Social Security number on checks or give it out to businesses. If a government agency requests the number, a privacy notice should accompany the request.

Do not put your credit card number on the Internet unless it is encrypted on a secure site.

Cancel all credit cards you have not used in the last six months.

If you order a new credit card, make sure it arrives within the appropriate time. If not, call the credit card grantor to find out if it was mailed and to what address.

Order your credit report at least twice a year. Correct all mistakes with the credit bureau.

Tax-Free-Income Loopholes

One of the shortest sections of the federal Tax Code is Section 61. It defines gross income as “all income from whatever source derived.” But don’t take this literally. There are many kinds of income that are not taxable. Types of income that you don’t pay federal income tax on:

Gain on the sale of your home

If you sale a house that was your primary residence for at least 2 of the previous 5 years you can exempt up to $250,000 from tax ($500,000 if married filing jointly).  If you don’t mind moving every few years this strategy can be used over and over.  This is ideal for a young couple that buys a run down house and moves into it while they fix it up.  They would then sell the house after living there for at least 2 years, and pay no taxes on the gains (up to the limits listed above).  Then they can buy another run down house and do it all again.

Gifts you receive. Any gift tax is payable by the person who makes the gift. The recipient gets the gift free and clear of tax.

Money you borrow. Normally, borrowing is not a taxable transaction. But you’ll be taxed if you borrow from your IRA, if you borrow more than $50,000 (or half your account) from your company pension fund, or, in some cases, if you get an interest-free loan from your company or a family member.

IRA rollovers. No tax is payable on a lump-sum distribution that is received from a company pension plan if you put it into an IRA within 60 days. (Tax will be withheld, however, if you don’t transfer the money directly from the company plan to the IRA trustee.) You can also take money tax-free from your IRA if you roll it over within 60 days into another IRA.

Inheritances. Beneficiaries don’t pay federal estate tax on anything they inherit – the estate pays any tax that’s owed. Moreover, if you inherit property that’s increased in value, you receive it at its “stepped-up” estate value. you would then use this value, rather than the original cost, to calculate your taxable gain if you sell the property.

Life insurance proceeds. The beneficiary gets the full amount tax-free. But the estate may be liable for estate tax on the proceeds.

Property settlements between spouses in divorce or separation proceedings. The recipient owes no tax at the time property is transferred. (There may be a tax later if property is sold at a gain.)

Child-support payments. They are tax-free to the recipient. Alimony payments to a spouse or ex-spouse, however, are taxable to the recipient.

Money recovered in lawsuits for personal injuries or defamation of character. But money recovered to compensate you for lost wages or other income is taxable.

Workers compensation payments.

Disability payments from accident and health-insurance plans. The payments are tax-free if you paid for the insurance, but taxable if your employer paid the premiums.

Federal income tax refunds. (But any interest the IRS pays you on a late refund is taxable.)

State income tax refunds…provided you didn’t itemize deductions on your federal return for that year.

Municipal bond interest. Generally, it’s exempt from federal income tax and sometimes from state and local taxes, as well. However, interest from some “private purpose” municipal bonds is subject to the Alternative Minimum Tax. And, municipal bond interest is taken into account in figuring your income level to determine whether any of your Social Security benefits are taxable.

“Like-kind” property exchanges-swaps of tangible property or real estate are tax-free if the properties are of similar nature.

Vacation home rental. If you rent your vacation place out for 14 days or less, the income is not taxed.

Kids’ wages. Dependent children can earn up to the annual standard deduction amount for single taxpayers which is $6,300 in 2016.

Kids’ investment income. Dependent children can receive up to $600 of unearned income tax-free (dividends, interest, etc.).

Scholarships and fellowships granted on or before August 16, 1986, to candidates for degrees, are tax-free. But, if granted after that date, they are tax-free only to the extent they are used to cover tuition, fees, books, and course equipment. Grants for room and board, etc., are taxable.

Fringe benefits from your employer. Examples: Health insurance, pension contributions, up to $50,000 of life insurance coverage, up to $5,000 of death benefits, education expenses (up to $5,250 a year), certain child- and dependent care, legal services under group plans, and supper money.

Meals and lodging, if furnished by your employer for the employer’s convenience-for example, to enable the employee to remain at the workplace.

Recordkeeping Hotline

Recordkeeping Alert

As a result of Tax Reform, recordkeeping is now necessary in some areas that never required records before. Crucial: Keep flawless records.

IRA contributions. For most people, the new rules have cut out deductible Individual Retirement Account contributions. If you or your spouse has a company pension plan and your Adjusted Gross Income is greater than $50,000 ($35,000 for single taxpayers), your IRA contributions aren’t deductible. However, nondeductible contributions to IRAs are still slowed (generally up to $2,000).

Recordkeeping alert: Taxpayers who have both deductible and nondeductible IRAs must now begin keeping special, detailed records of all their contributions for tax purposes. Reason: When you withdraw money from your IRA, the IRS aggregates all your IRA accounts together and treats the withdrawal as if it were both from your deductible and your nondeductible contributions, even if they were in separate IRAs. Result: Part of every withdrawal is going to be taxed, and part of every withdrawal is going to be tax-free.

Since the deferred earning on IRAs are taxed at withdrawal, every withdrawal must be broken down into three parts to figure out the tax:

Earnings on the IRA. (100% is taxed at withdrawal whether the earnings are from deductible or nondeductible contributions.

Return of a deductible contribution (i.e., contributions made before 1987, while you were still allowed to deduct the contribution on you tax return). It’s taxed at withdrawal because it wasn’t taxed in the year you made the contribution.

Return of a nondeductible contribution (i.e., contributions made in 1987 or after that will not be deductible on your tax return). It’s not taxed at withdrawal because it was taxed in the year you made the contribution.

   Income shifting. Gifts to children under age of 14 that generate investment (unearned) income over $1,300/year will be taxed at the parents’ tax rates.

Recordkeeping alert: Avoid mixing this type of unearned income with the child’s earned income (which is always taxed at the child’s own rates no matter how much he/she earns). Put the unearned income into an account that is separate from the earned income so there will be no question as to how to treat the income for tax purposes.

Meal and entertainment expenses that you incur in the course of your business are only 50% deductible. This limit applies whether you are eating out alone or entertaining clients in order to get new business. Included in this limit: Food, beverages, cover charges, gratuities, taxes, theater tickets, etc.

Exception: An employment who is reimbursed for these expenses by his employer doesn’t have to worry about this rule once he has properly accounted for them to his employer. The employer, rather than the employee, takes the 50% deduction.

Recordkeeping alert: Don’t lose or misplace a single receipt for meal and entertainment expenses. Keep a diary to record the details, especially if you entertained others. Carry this diary around with you at all times.

Interest Recordkeeping Requirements

The IRS requires that you document fully the flow of funds for all loans you take in order to determine the deductibility of the interest.

Personal mortgage interest on two residences is fully deductible up to certain limits. The deductibility of other interest depends on how the funds are used.

For example, funds you borrow for the purpose of making investments are deductible to the extent of your investment income. Personal interest isn’t deductible. Interest that you pay on funds used to purchase a passive activity or real estate is lumped with the gains or losses from that activity. To the extent that there’s a net loss, the interest may not be deductible because of the limitations inherent in those transactions.

The recordkeeping requirements are very stringent. In the past, if you borrowed money on a margin account, the IRS presumed that the interest was for investment purposes. Now the burden is on you, the taxpayer, to show proof of the flow of funds.

Advice: If you borrow money and want to get a tax deduction for the interest, keep careful records to indicate the uses and applications of the monies borrowed. Also, keep records proving you repaid the principal. Obviously, if you have a choice of which loan to repay first, you should repay the loan that gives you the least deductibility of interest.

Retaining Records

Most records have to be held for only three years after the due date of you tax return. That’s when the statute of limitations expires for tax audits by the IRS and refund claims by the taxpayer. But some records should be kept indefinitely, especially those relating to the acquisition of property, whether by purchase, gift, or inheritance. Reason: If you ever sell the property, you can’t determine profit or loss without proof of its original cost or other tax basis.

Lost Records

John and Louise Kranc deposited all their records with their accountant in order to prepare their tax return. The accountant lost the records. The Krancs then argues that the substantiation requirements for their deductions should be waived because it wasn’t their fault that the records had been lost. Tax Court: The Krancs were out of luck. They should have kept copies of the records they gave to the accountant.