Annual Tax Quiz - Is It Taxable?

Annual Tax Quiz - Is It Taxable?

The IRS seems to always have a surprise up its sleeve for the unsuspecting taxpayer. Here's a fun True or False quiz to test your knowledge of what's taxable. Enjoy!

• If a thief steals someone’s property, he owes tax on the value of the stolen property.

• True. But don't expect the person whose property was stolen to issue a Form 1099. Tax instructions tell you to list this as stolen property on your tax return. This part of the tax code is what famously put gangster Al Capone behind bars.

• Scholarships are never taxable.

• False. If you get scholarship money to cover tuition, fees and books, you pay no taxes. But if your scholarship also covers room and board, travel and other expenses, that portion of the award is taxable. Students who get financial aid in exchange for work must also pay tax on that money even if they use it to pay tuition.

• Minor gambling winnings are not taxable.

• False. When lady luck smiles on you, the tax collector typically doesn’t. While virtually all gambling winnings are deemed taxable income, not all winnings are reported to the IRS. The IRS requires reporting of winnings at various thresholds depending on the game: $1,200 or more from bingo or slot machines, or more than $5,000, minus the wager, from a poker tournament. If reported, the payer will issue you a Form W-2G and report what you won to the IRS. The practical nature of keeping track of and claiming this minor income is a different matter entirely.

• If you lose your job and start collecting unemployment benefits, the IRS will cut you a tax break.

• False. The IRS considers unemployment income to be a replacement for your regular income, and is therefore taxable. (During the pandemic, the IRS was legislated to make this unemployment tax-free, but this was only for a limited time.) The good news is that not all states do the same.

• If someone forgives an amount of money that you owe them, you typically have to pay taxes on that amount.

• True. Debt cancelled or otherwise discharged for less than what you owe – credit cards, mortgages, loans and so on – is generally taxable income per the IRS. Exceptions can include student loans, debts discharged in bankruptcy, or amounts in specific mortgage foreclosures as defined in a special tax law. The creditor may send you a federal Form 1099-C in the amount of the cancelled debt, which means the money also gets reported to IRS.

• An agreement between two small businesses to get free hair cuts in exchange for mowing a lawn is not taxable.

• False. When you exchange services in lieu of cash in a formal arrangement, the fair market value of the goods and services are fully taxable. You should get an IRS Form 1099-B or the like showing the value of cash, property, services, credits or other items that you received from the barter. On the positive side, any expenses you incurred to hold up your end of a deal are typically deductible as a business expense.

7 Tips for Small Business Accounting Success

7 Tips for Small Business Accounting Success

Keeping your company books in order can be a challenge. The following tips, though, can help set your accounting system up for success.

1. Separate business expenses from personal expenses. Keeping your business expenses separate gives the IRS one less reason to deny legitimate business expenses, as the IRS is quick to toss valid tax deductions if personal expenses are co-mingled in your business account.

2. Keep your books current. Setting a goal of having all business transactions recorded by the end of every week can help you accurately record on a timely basis. It is also easier to record one week of transactions at a time, rather than waiting until you have one month’s worth (or more!) of transactions to record.

3. Accurately record capital assets. Because capital assets provide long-term value, they are entered on the balance sheet and depreciated over multiple years. So it is important to understand when a purchase is a capitalized item and record it properly. In addition, you will need to keep a copy of the invoice available for the life of the asset to help prove a gain or loss when you sell or dispose of it. Consider reviewing large purchases once a month to ensure that a capital asset wasn’t accidentally recorded as an expense and keep a file of the invoice and asset id.

4. Perform monthly reconciliations. When you receive your monthly bank statements, ensure they are reconciled to your books within one week, as reconciliations often identify inaccurate transactions. Performing timely reconciliations can help you identify anything that may be amiss as soon as possible.

5. Accurately record sales taxes. Sales tax that your business receives when a customer makes a purchase is recorded as a liability since it is the state's money, not yours. Conversely, sales tax that your business pays when making a purchase is booked as an expense.

6. Save proper documentation. In addition to saving invoices and receipts for sales and purchases, also save documentation that supports all adjustments or journal entries recorded in your accounting system.

7. Delegate your accounting tasks. Many entrepreneurs start their business for reasons other than spending hours working on their books. So ask for help. Partnering with an expert to handle your bookkeeping needs can free you up to use your expertise where it’s needed the most — running and growing your business.

Avoid a Penalty and Tax Surprise when Withdrawing from Retirement Accounts

Avoid a Penalty and Tax Surprise when Withdrawing from Retirement Accounts

Retirement accounts that provide tax breaks have very specific rules that must be followed if you want to enjoy the financial rewards of those tax breaks.

One of these rules defines WHEN you're allowed to pull money from your retirement accounts. If you pull money too soon, you're at risk of being levied with a penalty by the IRS. There are several exceptions to this rule, such as paying for qualified higher education expenses or paying for expenses if you become permanently disabled. In general, though, if you withdraw retirement funds before you reach age 59½, you'll be hit with a 10% penalty in addition to regular income taxes. In the April 2023 court case Magdy A. Ghaly and Laila Ryad v. Commissioner, the taxpayers learned this rule the hard way.

The Facts

In 2018, Mr. Ghaly took two distributions from his retirement account.

Distribution #1: Withdrawal

Mr. Ghaly was laid off from his job, and in 2018, he withdrew money from his retirement account to provide for his family. He requested and received a withdrawal of $71,147 from his retirement account. His retirement company provided him with a Form 1099-R indicating the withdrawal was taxable.

Distribution #2: Deemed Distribution

In 2015, Mr. Ghaly took a loan from his retirement account. Because the loan followed certain IRS-approved guidelines, it was not considered a taxable distribution from his account that year. However, when Mr. Ghaly failed to repay that loan when it came due in 2018, it became a taxable distribution. His retirement company provided him with a 1099-R tax form for the deemed distribution.

Mr. Ghaly had not yet reached age 59½ before either amount was distributed.

The Findings

In an attempt to restore those distributions to his account to avoid both the tax on the distributions and the early withdrawal penalty, he opened two retirement accounts in 2020 and made the maximum contributions allowed for each account.

The Tax Court ruled against the taxpayers, stating that the contributions Mr. Ghaly made in 2020 were irrelevant when determining if his 2018 distributions were taxable. Mr. Ghaly was required to pay income taxes on the amounts withdrawn (to the extent those distributions were taxable) and was assessed an additional 10% early withdrawal penalty.

The Lesson

If you are planning an early withdrawal from a retirement account, understand before making the withdrawal whether the 10% penalty applies to you. In Mr. Ghaly's case, he could have explored the substantially equal periodic payment exception or withdrawn money penalty free if used as hardship to pay for his health insurance while unemployed. The lesson: please call if you have questions about an early withdrawal you may be planning before you make it!

IRS Identity Theft Season Begins Now

IRS Identity Theft Season Begins Now

Each year thieves try to steal billions in federal withholdings by stealing your identity. As the IRS focuses more attention on this quickly growing problem, now is the time of year to be extra vigilant.

Early tax filing season is the worst time

Your federal tax account at the IRS currently has plenty of money withheld from your paycheck during the course of the year. Until you file your tax return, the IRS is not sure if it needs to pay some of it back to you in the form of a refund.

Thieves know this too, and will try to file a fraudulent tax return before you have time to submit your own. When thieves file early, they can steal some of your withholdings and be long gone by the time you file your own tax return.

What you can do

1. Beat them to the punch. The sooner you file your tax return, the less likely a thief will beat you to your refund.

2. Get an Identity Protection PIN. All taxpayers who can verify their identity can get an Identity Protection PIN (IP PIN) from the IRS. The IP PIN is a six-digit code known only to you and the IRS that helps prevent identity thieves from filing fraudulent tax returns. If you want an IP PIN, visit irs.gov/IPPIN.

3. Check your credit reports. See if there is any suspicious activity on your accounts and on your credit reports.

4. Protect your ID. Be suspicious. Never give out your Social Security Number, do not leave your credit card unattended, never give ID information to someone who calls you, use the password function on your phone, be aware of strange mail, and shred important documents. Your best defense to IRS ID theft is to use best practices to protect your information.

The IRS is becoming better at spotting fakes

If the IRS suspects something is wrong with your filed tax return they will send you a notice. If this happens to you:

• Respond immediately. Get the direct contact information from the IRS website and let them know that you have a possible identity theft problem.

• File an Identity Theft Affidavit (IRS Form 14039). This will record your problem with the IRS and they will take extra steps to ensure your account activity is coming from you and not the ID thief.

• File a police report.

• Contact the credit bureaus.

Having your tax withholding stolen and then needing to unravel this problem within the IRS is a major hassle. Try to stay vigilant and know that there are steps to help protect your tax records. Thankfully, if the IRS pays out a refund to someone stealing your identity, they are on the hook for this loss, not you.

Make Filing Your Business's Tax Return Smooth Sailing With These Tips

Make Filing Your Business's Tax Return Smooth Sailing With These Tips

Consider these suggestions for helping to make tax season smooth sailing this year for your small business:

• Reconcile your bank accounts. Preparing an accurate tax return starts with accurate books. Reconciling your bank accounts is the first step in this process. Consider it the cornerstone on which you build your financials and your tax return. Up-to-date cash accounts will also give you confidence that you’re not over-reporting (or under-reporting!) income on your tax return.

• Organize those nasty credit card statements. If you use credit cards for your business, develop an expense report for each statement. The report should recap the credit card bill and place the transactions in the correct expense accounts. Attach actual copies of the expenses with the credit card statement. You will need this to support audits for both income tax and sales tax. Use this exercise to show you are only including business-related expenses by reimbursing your business for any personal use of the card.

• Reconcile accounts payable. One of the first tax deadlines for many businesses is issuing 1099 forms to vendors and contractors at the end of January. Get your accounts payable and cash disbursements up-to-date so you have an accurate account of which vendors you paid.

• Get your information reporting in order. Now identify anyone you paid during the year that will need a 1099. Look for vendors that are not incorporated like consultants or those in the gig economy. And don't forget your attorneys. You will need names, addresses, identification numbers (like Social Security numbers) and amounts billed. Send out W-9s as soon as possible to request missing information.

• File employee-related tax forms. File all necessary W-2 and W-3 forms, along with the applicable federal and state payroll returns (Forms 940 and 941). Do this as soon as possible in January to allow time to identify any potential problems.

• Compile a list of major purchases. Prepare a list of any major purchases you made during 2023. Once the list is created, find detailed invoices that support the purchase and create a fixed asset file. This spending documentation will be needed to determine if you wish to depreciate the purchase over time, take advantage of bonus depreciation, or immediately expense the purchase using code section 179. Your choices create a great tax planning tool.

Should you need help, please reach out for assistance.

Tips for a Smooth Tax Season

Tips for a Smooth Tax Season

With tax season officially underway, here are tips to make filing your return as stress-free as possible:

• Gather your tax information for filing. Items you'll need include W-2s, 1099s, K-1s and other forms you receive from your business, employers, brokers, banks, and others. If you find any errors, contact the issuer immediately to request a corrected copy.

• Organize your records. Once you've started gathering your information, find a place to put all the documents as you receive them, or consider scanning documents to store on your computer. You can also take pictures of the documents with your phone as backup. Missing information is one of the biggest reasons filing a tax return is delayed.

• Create an April 15th reminder. This is the deadline for filing your 2023 individual income tax return, completing gift tax returns, making contributions to a Roth or traditional IRA for 2023, and for paying the first installment of 2024 individual estimated taxes. So create a reminder that works for you.

• Know the deadlines for business returns. If you are a member in a partnership or a shareholder in an S corporation, the deadline for filing these business returns is March 15th. Calendar-year C corporation tax returns are due by April 15th.

• Clean up your auto log. Create and review the necessary logs to support your qualified business miles, moving miles, medical miles and charitable miles driven by you. Gather the logs and make a quick review to ensure they are up to date and totaled.

• Review your child's income. Your child may be required to file a 2023 income tax return. A 2023 return is generally required if your child has earned more than $13,850, or has investment income such as dividends, interest, or capital gains that total more than $1,250.

• Contribute to your IRA and HSA. You can still make 2023 IRA and HSA contributions through either April 15th or when you file your tax return, whichever date is earlier. The maximum IRA contribution for 2023 is $6,500 ($7,500 if age 50 or older). The maximum HSA contribution is $3,850 for single taxpayers and $7,750 for families.

• Calculate your estimated tax if you need to extend. If you file an extension, you'll want to do a quick calculation to estimate your 2023 tax liability. If you owe Uncle Sam any money, you'll need to write a check by April 15th even if you do extend.

Delay of New Tax Reporting Rules Could Cause Confusion

Delay of New Tax Reporting Rules Could Cause Confusion

Because of a late-breaking change by the IRS in November, you may still receive an unfamiliar tax form that may need to be reported on your business’s 2023 tax return.

Here’s what you need to know about this change and how it could affect you and your business.

Background

Credit card and electronic payment processing companies use Form 1099-K to provide information to the IRS about payments they’ve made to you if certain thresholds are met.

Under the old rules, the payment processing companies would only provide payment information to the IRS if you exceeded both $20,000 in payments AND 200 or more total transactions during a year for that particular processor.

Starting with the 2022 tax year, this $20,000 threshold was lowered to $600, while the 200 transaction criteria was eliminated.

After receiving feedback on how burdensome this new law was going to be for millions of taxpayers and business owners, the IRS in late 2022 delayed the implementation of the new $600 threshold until 2023.

The IRS in November of this year again delayed the implementation of the $600 threshold, this time with plans to use 2024 as a transition year with a $5,000 threshold before eventually enforcing the $600 threshold in 2025 or a later year.

What you should do

If you receive one or more Form 1099-Ks (even if you’re not supposed to!) here are some steps to consider:

• Save the form. If you receive a 1099-K, save the form! You will need to account for this information on your tax return or face the possibility of the activity triggering a correspondence audit from the IRS.

• It’s a business transaction. If you receive the form due to activity on sites like Amazon, Etsy, or you are reselling tickets or taking rent payments, you are considered to be in business in the eyes of the IRS, even if you lost money on a transaction.

• Capture relevant expenses. While the revenue reported on Form 1099-K must be reported on your tax return, remember that you can also include any related expenses to reduce reportable income. If you do have expenses to report, you’ll likely need to fill out Schedule C on your tax return.

• Stay organized. If you receive any Form 1099-Ks, your tax return will now be more complex. But you can help by staying organized with great documentation to explain exactly what the income was that you received from third-party payment platforms.

Ensure Your Donations Pass the IRS Test

Ensure Your Donations Pass the IRS Test

Here's a handy checklist to make sure your donations comply with IRS rules

Charitable contributions may come to mind as you look for different ways to lower your 2023 tax bill before the end of the year, as donations are a great way to give to a deserving charity while giving back to you in the form of a tax deduction.

The IRS, however, can be quick to disallow charitable contributions without proper documentation. Here are 6 things you need to do to ensure your charitable donation will be tax deductible.

1. Confirm eligibility of charity. Only donations to qualified charitable organizations registered with the IRS are tax-deductible. You can confirm an organization qualifies by calling the IRS at (877) 829-5500 or visit www.irs.gov and click on the charities and non-profits tab.

2. Ensure you can itemize. You must itemize your deductions using Schedule A in order to take a deduction for a contribution. For 2023, you need to have at least $13,850 worth of deductions to itemize ($27,700 if married). If you're going to itemize your return to take advantage of charitable deductions, it also makes sense to look for other itemized deductions. These include state and local taxes, real estate taxes, home mortgage interest and eligible medical expenses over a certain threshold. If your deductions are not going to exceed these thresholds, delay your deductions until next year and bundle two or more years of contributions into one year.

3. Get receipts. Get receipts for your deductible contributions. Receipts are not filed with your tax return but must be kept with your tax records. You must get the receipt at the time of the donation or the IRS may not allow the deduction.

4. Pay attention to the calendar. Contributions are deductible in the year they are made. To be deductible in 2023, contributions must be made by Dec. 31st. Contributions made by credit card are deductible even if you don’t pay off the charge until the following year, as long as the contribution is reported on your credit card statement by Dec. 31. Similarly, contribution checks written before Dec. 31 are deductible in the year written, even if the check is not cashed until the following year.

5. Be extra careful with noncash donations. You can make a contribution of clothing or other items around your home you no longer use. If you decide to make one of these noncash contributions, it's up to you to determine the value of the contribution. Many charities provide a donation value guide to help you determine the value of your contribution. Your donated items must be in good or better condition and you should receive a receipt from the charitable organization for your donations. If your noncash contributions are greater than $500, you must file Form 8283 to provide additional information to the IRS. For noncash donations greater than $5,000, you must also get an independent appraisal to certify the value of the items.

6. Keep track of mileage. If you drive for charitable purposes, this mileage can be deducted on Schedule A. For example, miles driven to deliver meals to the elderly, to be a volunteer coach or to transport others to and from a charitable event, can be deducted at a rate of 14 cents per mile. A log of the mileage must be maintained to substantiate your charitable driving.

Remember, charitable giving can be a valuable tax deduction — but only if you take the right steps.

The temperature isn’t the only thing falling this time of year.

Your 2023 tax bill can also be falling with a little bit of proactive planning, but time is running out!

To help you make the most of potential tax saving moves before the end of the year, this month's newsletter features several year-end tax cutting ideas.

Also have fun with the entire family by testing your holiday knowledge with our annual trivia quiz! Also learn about tax surprises to watch out for, and some key ingredients to be mindful of if you’re a part of a business partnership.

Please feel free to forward this newsletter to someone who may be interested in a topic and call with any questions you may have.

News Letter and Quiz

Here are some tips that should trigger you to conduct a full tax planning session to ensure your tax bill next year is not higher than it needs to be.

1. You owed tax last year. If you have not adjusted your withholdings, you could be in for a big tax bill. Time to take a look and plan accordingly.

2. Your household income changes dramatically. Whether higher OR lower, a change in income will impact your taxes, especially if it impacts availability of deductions or credits.

3. You are getting married or divorced. Married filing joint brings benefits and tax surprises. So does the impact of being single once again.

4. You have kids attending college next year. There are a number of tax programs that can help.

5. You have a small business. There are depreciation benefits plus the qualified business income deduction to consider. Plus you will need to understand the flow through impact your business profits will have on your personal tax return.

6. You plan on selling investments. Capital Gains tax rates can now range from 0% to 37% (depending on long or short term gains and your income level).

7. There are changes in your employer provided benefits. These changes could impact your taxable income this year.

8. You buy, sell or go through home foreclosure. There are tax benefits AND tax surprises when you buy or sell a home. A planful approach can make all the difference.

9. You have major medical expenses. The threshold for itemizing medical deductions is 7.5%. This means to itemize these expenses, they must exceed 7.5% of your income. But with proper planning, there are other ways to pay these expenses with pre-tax money!

10. You recently lost or changed jobs. Federal unemployment benefits are taxable and need to be accounted for in your tax plan.

11. Your estate has not been reviewed in the past 12 months. New gift tax and estate tax laws make 2023 a key year for an estate tax review.

12. You have a new child or dependent. These treasures bring joy AND a different tax obligation!

Accounting may seem like an investment in the beginning but we have been able to save our clients so much more over time.

And on top of that we have been able to give our clients peace of mind so they can focus on their business.

Spend Less with These 5 Money Tips

Spend Less with These 5 Money Tips

Data shows that record inflation has finally started to slow down.  However, a lot of damage has already occurred. Each bill we pay and purchases that we make have increased costs. Today we are sharing some great ideas for spending less to help lessen the pain of these higher prices.

• Pay down high-interest debt. You can start spending less money today by paying down high-interest debt. Data shows that individuals and businesses who don't pay off their credit card balance each month pay an average interest rate of 22.16%  Ouch!  That’s a lot!  

• Revisit your subscriptions.  Identify your monthly subscriptions.  Ask yourself these questions: Can you eliminate some of your subscriptions? How about reducing the cost of your subscriptions? Do some subscriptions have overlapping benefits? It’s possible you have a subscription you totally forgot about. Even canceling a few can help you spend less each month.

• Shop around for insurance. It is always wise to shop for insurance and compare rates for homeowners and auto insurance, as well as any other coverage you have.

• Eat at home. Learn to cook and have fun with it!  If you eat out or stop for take-out less, your wallet will thank you!  According to data from the Bureau of Labor Statistics, food spending was up 12.7% in 2022, partly because of a 20% increase in food spending away from home.

• Start using a budget.  As painful as it may seem, a written budget you can and will stick with, can help you reduce your spending dramatically. There are many budgeting apps available and a pen and paper work well too.

The cost of everything may have skyrocketed, but you still have at least some control over where your money goes each month. Consider these steps to cut your spending; you may be surprised at how much you save.

Tips to Improve Your Cash Flow

Improving cash flow is always worth your time and can eliminate a lot of stress that accompanies being a business owner.  One way to better define cash needs is to divide your cash into separate categories – long-term and short-term expenditures.

The short-term category is for cash you require to pay expenses over the next 12 months. The long-term category  is for cash you need to pay expenses in that are due long term.

Beyond just being able to pay recurring monthly bills, there are several reasons why having a reasonable amount of cash set aside is crucial for your business.

• Better liquidity. By having a substantial amount of cash set aside, a business can take advantage of unexpected growth opportunities or get through a surprise reduction of revenue.

• Cash flow interruptions.  Substantial levels of cash can be used to carry you through delays in receiving client payments or handling supply chain interruptions.

• Pay suppliers on time. Waiting as long as possible to pay a vendor may seem like a good idea for improving short-term cash flow, but vendors who are paid on time may be more  flexible when it comes to pricing and extended payment terms.

• Keep small expenses under control. It’s easy to ignore small expenses. However,  these incidental costs can add up quickly. Audit these expenses at least once per year and cancel services that are no longer needed.

• Keep inventory moving. The longer inventory sits on a warehouse shelf, the more time you’ll have to wait before you can turn that piece of inventory into cash. You also run the risk of the inventory left on your shelves becoming obsolete.   Concentrate on not carrying inventory that will be on your shelves longer than 6 months.

• Maintain a great relationship with your banker. A short-term loan or line of credit is one way to handle an unexpected cash shortfall. Of course, you need to qualify for the line of credit first. A good business relationship with your banker can help you get emergency cash if needed.

Improving your cash flow can be more difficult than it appears. We would love to help you brainstorm ideas for improving your business’s cash flow.  616-802-4212

Ways to Get the Most our of Your Social Security

Ways to Get the Most our of Your Social Security

You may begin receiving your Social Security retirement benefit as early as age 62. But by delaying the beginning date,  you can receive a check that is estimated to be 8 percent higher for each year you delay receiving your benefit, to a point.

The facts

Full retirement age. If you were born between 1943 and 1954,  you will reach your full Social Security benefit payment at age 66. 

Early benefit drawbacks.  You may also start receiving your benefit at age 62. However, starting your benefits before reaching your full retirement age will reduce the amount paid to you permanently.

Bonus payment. Great news!  You may receive a bonus for each year you delay receiving benefits past your full retirement age. Your Social Security benefit is increased by a whopping 8 percent per year.

The maximum amount. After age 70, the Social Security benefit is maximized. There is no reasoning to delay further as starting your benefits later adds no additional payments.

Is it worth it to delay collecting benefits?

There are a few reasons for delaying receiving your Social Security benefits until you reach age 70:  Hint…reach for your magic crystal ball!

You expect to live longer. If your family has a history of longevity, you may want to delay your initial Social Security benefits. 

You don’t need the income. If you are still working or have alternative income sources, it may be better to delay your benefits. 

Your spouse has passed. You will need to review the possibility of receiving survivor benefits based on your spouse’s earnings. Later, you could then start collecting your own Social Security retirement benefits based on your earnings.

Your benefits are taxed. If you have other income, your Social Security retirement benefits could be subject to income tax if you are not yet at the full retirement age.

Should you delay receiving your Social Security benefits? That’s a tough question!  Weigh all your options carefully before making this important decision!

5 Easy Money Tips

5 Easy Money Tips

Check out these 5 great money tips to help you get ahead or move into a better financial position.

Make savings account deposits effortless. Set up weekly or monthly automatic transfers to help you save before you have a chance to spend!

• Pay down debt.  As of May, 2023, average credit card interest rates were at  22.16%. At that rate, paying down $10,000 in debt with a monthly payment of $200 would take 134 months and cost $16,654 in interest alone.  YIKES!   If you have credit card debt, consider paying it down as fast as you can.

• Maximize your savings accounts. While interest rates on loans and other debt are rising, higher interest rates also give you an opportunity to earn more on your savings. High-yield savings accounts are paying more than 5.00% currently. Take the time to shop banks and credit unions to maximize your return.

• Boost retirement contributions. In 2023 you can contribute up to $22,500 in a 401(k) ($30,000 if 50 or older), and up to $6,500 in an IRA ($7,500 if 50 or older).

• Create and use a monthly budget. Perhaps compiling a monthly budget is in your future!  You can use your budget to track your spending throughout the month to see how your actual purchases and bills coinside with your planned budget. Update your budget to reflect actual spending and cut spending on items that you have the most ability to control, such as dining and entertainment.

• These ideas can help provide some financial stability  to you and your family, regardless of the economy is performing.

How To Deal With A Letter From The IRS

How To Deal With A Letter From The IRS

After temporarily suspending the mailing of many collection notices during the COVID-19 pandemic, the IRS is resuming its normal operations which includes the mailing of notices that pertain to unfiled tax returns, tax return delinquencies, intents to levy, and withholding compliance.

If you receive one of these notices from the IRS, don't automatically assume it's correct and submit payment to make it go away. The IRS can be wrong more often than you think! These IRS notices do need to be taken seriously, but not without undergoing a solid review. Here are some suggested steps to take if you receive one:

• Stay calm. Try not to over-react to the correspondence. This is easier said than done, but remember that the IRS sends out millions of these types of correspondence each year. The vast majority of them correct simple oversights or common filing errors.

• Open the envelope! You would be surprised how often taxpayers are so stressed by receiving a letter from the IRS that they cannot bear to open the envelope. If you fall into this category, try to remember that the first step in making the problem go away is to open the correspondence.

• Conduct a careful review. Review the letter. Understand exactly what the IRS is telling you needs changed and determine whether or not you agree with their findings. The IRS rarely sends correspondence to correct an oversight in your favor, but sometimes it happens.

• Respond timely. The IRS will tell you what it believes you should do and within what time frame. Ignore this information at your own risk. Delays in responses could generate penalties and additional interest payments.

• Correct the IRS error. Once the problem is understood, a clearly written response with copies of documentation will cure most of these IRS correspondence audits. Often the error is due to the inability of the IRS computers to conduct a simple reporting match. Pointing out the information on your tax return might be all it takes to solve the problem.

• Certified mail is your friend. Any responses to the IRS should be sent via certified mail or other means that clearly show you replied to their inquiry before the IRS's deadline This will provide proof of your timely correspondence. Lost mail can lead to delays, penalties, and additional interest tacked on to your tax bill.

• Don't assume it will go away. Until receiving definitive confirmation that the problem has been resolved, you need to assume the IRS still thinks you owe the money. If no correspondence confirming the correction is received, a written follow-up to the IRS will be required.

Get help! You are not alone. Getting assistance from someone who deals with this all the time makes the process go much smoother.

Deduct Business Meals the Right Way

Deduct Business Meals the Right Way

Suppose you take a favorite client out to dinner to celebrate a business  milestone.. If you own a business, are self-employed or run a side business, can you deduct any of the cost?

Make it clear that it is a business meal

Previously, small businesses could deduct 50 % of the costs of both business meals and entertainment with

clients. Now, the meal deduction is still 50% but entertainment costs are no longer deductible.

The problem is that separating a business meal from client entertainment is not always easy. If you provide a  client dinner and tickets to a sporting event, the tickets are not deductible, but the meal may be.

If you use the meal to discuss business, you should be safe to take the deduction. But if it’s just to socialize, it is not deductible.

Document it

The easiest way to do this is to keep a business log. In addition to recording the time, date, place, and cost of the meal, list each person that was present, their position in the company, and their professional title. Then add a short description of the specific business purpose, such as: Discussed new products and competitive price structure.

Avoid luxury meals

Deductions for large expenses on meals and entertainment will always be hard to defend. So if you are having a serious business discussion over dinner, make sure it’s not at a luxury restaurant.

Remember, business meals are still deductible, but must be properly documented. If done correctly this deduction should withstand any audit risk

Reminder: Third Quarter Estimated Taxes Due

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The third quarter due date is now here.

Due date: Friday, Sept. 15, 2023

You are required to withhold at least 90 percent of your 2023 tax obligation or 100 percent of your 2022 obligation.* A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment is necessary. Here are some other things to consider:

• Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. A quick payment at the end of the year may not help avoid the underpayment penalty.

• W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough funds to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.

• Self-employed. Remember to pay your Social Security and Medicare taxes in addition to your income taxes. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter when you pay your estimated taxes.

• Don't forget state obligations. You are also normally required to make estimated state tax payments if you're required to do so for your federal taxes. Consider conducting a review of your state obligations to ensure you meet these quarterly estimated tax payments as well.

*If your income is more than $150,000 ($75,000 if married filing separately), you must pay 110 percent of your 2022 tax obligation to be safe from an underpayment penalty.

A Tip to Avoid Late Payment Penalties

A Tip to Avoid Late Payment Penalties

What to do if you miss a quarterly estimated tax payment

Many clients like to keep their Federal Tax withholdings as low as possible to avoid the IRS having their funds interest-free throughout the year. Other taxpayers, especially those with non-payroll income, must make quarterly payments to the IRS. As long as these quarterly payments are made timely and the amount of the payments is sufficient in the eyes of the IRS you will not be subjected to underpayment penalties. However, if underpaid, the IRS applies late payment penalties in addition to the income tax owed. This penalty applies even if you file your 1040 tax return on or before April 15th.

The Safe Harbor rule

The tax code has a basic set of rules to determine if you owe a late tax payment penalty. The rule is called The Safe Harbor Rule. Here is a recap of the rule. If you follow the rules, you can avoid any penalties.

1. If your federal tax obligation is less than $1,000 no underpayment penalties apply.

2. You withhold at least 90% of this year's federal tax obligation.

3. You withhold at least 100% of last year's tax obligation

4. If your gross income is greater than $150,000 ($75,000 if you are married filing separately) you must withhold the smaller of 90% of this year's tax obligation OR 110% of the tax shown on last year's tax return.

If you find federal tax withholdings made so far this year to be too low, what can you do?

Late Payment Penalty Avoidance Tip

If you are an employee there may be a way to avoid a penalty if you underpaid or neglected to pay your estimated tax payment for a quarter. Increase your payroll withholdings in later months of the year to build up your federal withholdings to cover the shortfall. Trying to catch up by paying more on your next estimated quarterly tax payment wouldn't work since the prior quarter's shortfall remains per IRS penalty calculations.

For whatever reason, in calculating a potential underpayment penalty, payroll withholdings are treated as if they were all made at the beginning of the year, while quarterly tax payments (form 1040-ES) are tracked by the date received.

To increase your withholdings simply provide your employer with a revised W-4. Just be careful that you leave enough in your paycheck to avoid other financial hardships.

How To Deal With A Letter From The IRS

How To Deal With A Letter From The IRS

If you receive a notice from the IRS, don't automatically assume it's correct and submit payment to make it go away. Here are some suggested steps to take if you receive one:

• Stay calm. Try not to overreact to the correspondence. This is easier said than done, but remember that the IRS sends out millions of these letters each year. The vast majority of them correct simple oversights or common filing errors.

• Open the envelope! You would be surprised how often individuals are so stressed by receiving a letter from the IRS that they do not open the envelope. If you fall into this category, try to remember that the first step in making the problem go away is to open the correspondence.

• Complete a careful review. Review the letter. Understand exactly what the IRS is telling you needs to be changed and determine whether or not you agree with their findings. 

• Respond in a timely manner. The IRS will tell you what it believes you should do and within what time frame. Don't delay your response to the IRS.   Delays can generate penalties and additional interest payments.

• Correct the IRS error. Once the problem is understood, a clearly written response with copies of relative documentation may correct the issue.   It may be as simple as communicating that the information on your tax return is correct.  This could easily solve the problem.

• Don't assume it will go away. Until receiving communication that the problem has been resolved, you need to assume the IRS still thinks you owe the money. If no correspondence confirming the correction is received, a written follow-up to the IRS will be needed.

• Get help! You are not alone. Getting assistance from a firm that deals with this all the time makes the process go much smoother and takes the stress away.  If you are in this situation, feel free to call us today!