Category Archives: Tips

Education, IRS, Tips

Coordinating 529/ESA Plan Withdrawals With Education Expense Benefits

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I’m seeing some confusion about this from tax clients this season, so I realized it’s worth explaining a few of the basics regarding education expenses, 529 college savings plan/ Coverdell ESA distributions, and tax credits and deductions.

There are five main tax benefits used to defray the cost of education:

  1. American Opportunity Tax Credit
  2. Lifetime Learning Credit
  3. Deduction for Qualified Education Expenses
  4. Student Loan Interest Deduction
  5. 529 or Coverdell Plan Contributions and Distributions

The American Opportunity Tax Credit reduces your federal tax bill by up to $2,500 per year for each eligible college student for whom you pay qualified tuition expenses. It can be claimed on behalf of an undergraduate for four years. And if you have more than one child in college at the same time, you can claim for each eligible child. The amount of the credit is calculated as 100% of the first $2,000 in qualified tuition and fees costs paid, plus 25% of the next $2,000 paid for such fees. For lower income taxpayers who don’t owe $2,500 in tax, up to $1,000 of the credit is refundable. Source: Coordinating 529 Plan Withdrawals With The American Opportunity Tax Credit

But there are limitations here: The credit phases out if you make too much money, you can’t claim any portion that was already paid with Pell Grant money, and you cannot claim the AOTC (or any of the education benefits) based on expenses that were also used to calculate the tax-free portion of a distribution from a 529 college savings or prepaid plan, or a Coverdell Education Savings Account (ESA).

The Lifetime Learning Credit is nonrefundable but can reduce the amount of tax you owe by up to $2,000. There is no limit to the number of years this credit can be claimed, but eligible expenses are only those charged by the school for attendance that were not paid for with the Pell Grant or 529 college savings or Coverdell ESAs.  Source: http://finance.zacks.com/can-claim-education-tax-deduction-used-pell-grant-pay-5114.html

The Tuition and Fees Tax Deduction is not allowable if you take one of the educational credits — and it’s usually not as good a deal. But if you don’t qualify for one of the credits (which frequently happens, if your income is too high or you’re not able to take your dependent as an exemption), this deduction can be used to lower your taxable income by up to $4,000. You do not have to itemize deductions to get this deduction; instead, it adjusts your reported income.  Obviously, lowering your income is not as good as reducing your tax with a credit, but it’s still a nice benefit.  As with the others, the deduction is limited to the portion of expenses not paid for with the Pell Grant or 529 college savings or Coverdell ESAs.  Source: http://finance.zacks.com/can-claim-education-tax-deduction-used-pell-grant-pay-5114.html

The Student Loan Interest Deduction is something that may be a benefit in future years — but be careful: predatory for-profit colleges and universities are constantly touting this benefit as a reason to take out large loans, but the benefits often do not come to fruition.  For one, there’s a pretty low limit as to how much you can deduct each year — only $2,500 — and if you exceed that limit, the balance does not carry forward.  That college probably also promised you that getting a degree would make you much more valuable to society, and your income would skyrocket — but the loan interest deduction phases out pretty quickly as your income rises, so chances are, if they’re right… most of this interest will not end up being deductible.  Source: https://www.irs.gov/taxtopics/tc456.html

529 College Savings Plans and Coverdell Educational Savings Accounts are both great vehicles to saving for college.  Similar to a Roth IRA, these contributions are not deductible at the federal level, but all of the principal, as well as the interest, dividends and capital gains — all growth — is non-taxable upon distribution if used for qualified education expenses.  (This is pretty fantastic.)  Add to it that most states will allow a deduction for contributions, and you’ve got a no-brainer for college savings.  The important bits to remember here are: each state has pretty strict rules about what qualifies as a plan; each state decides whether the withdrawal is free of income tax or simply deductible from income; and — here’s the theme of my post — if you take a distribution to pay for educational expenses, you may not also take one of the other educational tax benefits above.  529 plans and ESAs are pretty complicated; make sure to compare and contrast, and understand the potential penalties, before signing up.  Source: http://www.360financialliteracy.org/Topics/Paying-for-Education/College-Savings-Options/529-Plans-vs.-Coverdell-Education-Savings-Accounts

I want to recommend two websites with excellent examples of how to combine these plans to get the best overall tax benefits.  Scroll part-way through to see the “example” sections, and see if any of these scenarios come close to matching your own situation.  Have fun!

IRS, Tips

Winter Storm Extension: IRS Gives Affected Businesses Extra Time to Request 6-Month Extension

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S-Corporations and Partnerships had a deadline of March 15th this year to file their returns or request an extension.  However, because of Winter Storm Stella, which hit portions of the Northeast and Mid-Atlantic, the IRS granted affected businesses an additional 5 days to do so.

Business taxpayers who were victims of the storm, and unable to file their tax return by the due date of March 15, can request an automatic extension (by filing the usual Form 7004) on or before March 20, 2017.  Important tip if filing Form 7004 by paper: eligible taxpayers taking advantage of this relief should write “Winter Storm Stella” on their Form 7004 extension request.  However, the fastest and easiest way to get an extension is still to file this form electronically.

Source: Winter Storm Extension: Many Businesses Have Extra Time to Request A Six-Month Extension

Education, IRS, Tips

IRS Data Retrieval Tool for FAFSA Will Be Unavailable For “Several Weeks” — What Are The Alternatives?

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Important news from the IRS and the U.S. Department of Education Office of Federal Student Aid:

The IRS Data Retrieval Tool on fafsa.gov and StudentLoans.gov is currently unavailable. We are working to resolve the issue as quickly as possible. However, at this time, the IRS anticipates the online data tool will be unavailable for several weeks.

The online FAFSA and IDR application tool itself remains operational — it’s just the IRS’s DRT portion, which provides tax data that automatically fills in some of the financial information on the application.  The income information needed to complete the FAFSA form and apply for an IDR plan can be found on your tax return.  If you didn’t keep a copy of your tax return, you may be able to access the tax software you used to prepare your return or contact your tax preparer to obtain a copy (please note that many preparers charge a small fee for a copy, since you should be saving the pdf they send you in a safe, easily retrievable place).

If you are unable to get a copy of your tax return, visit www.irs.gov/transcript to view and download a summary of your tax return, called a tax transcript, at Get Transcript Online.  You must verify your identity to use this tool — review the rigorous identity authentication requirements for Secure Access before attempting to register.  You also may use Get Transcript by Mail or call 1-800-908-9946, and a transcript will be delivered to your address of record within five to 10 days.

While the Data Retrieval Tool is offline, the IRS offers other ways for students and families to find the tax information they need to complete student financial aid applications.

As part of a wider, ongoing effort at the IRS to protect the security of data, the IRS decided to temporarily suspend the Data Retrieval Tool (DRT) as a precautionary step following concerns that information from the tool could potentially be misused by identity thieves.

Source: Internal Revenue Service (IRS) and U.S. Department of Education Office of Federal Student Aid (FSA) Statement‎ about the IRS Data Retrieval Tool (DRT)

Education, IRS, Tips

Webinar: Organizing & Operating a 501(c)(3) Non-Profit

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CPA Academy is one of my favorite sources for topic-specific accounting education, and even better — their webinars are free.  Here’s one on a topic I’ve been asked about frequently: how to organize and operate a non-profit.  Jairo Cano, a tax attorney with Agostino Law, will be teaching this 1.5-hour webinar on Monday, March 13 and again on Monday, May 1.  Here’s a summary of the course:

In 2013, the IRS reported that tax exempt organizations held over $3.5 trillion in assets and received more than $1.8 trillion in gross receipts. Given the amount of money that passes through nonprofit organizations, it is not surprising that the IRS has increased its focus on these organizations. This webinar, offered by a leading tax controversy attorney will introduce attendees to:

  • The procedures to request and receive Section 501(c)(3) tax exempt status.
  • The requirement that the organization be organized for an exempt purpose and that it operate exclusively for exempt purposes. This discussion will include an analysis of the restrictions related to the organization’s ability to engage in for-profit activities.
  • The requirement that the organization not operate in a manner that results in providing private inurement to shareholders or a prohibited private benefit. This discussion will include an analysis on how the IRS evaluates compensation and payments for goods and services.
  • The Unrelated Business Income Tax, when it is required and how it is calculated.
  • The procedures to challenge a denial or revocation of exempt status at the administrative level as well as in Tax Court​.

This short, valuable webinar is appropriate for bookkeepers, accountants, controllers, and other non-profit professionals — as well as those looking to enter the industry or volunteer as a board member.

Source: CPA Academy

Illinois, Tips

Chicago Bag Tax “Floor Tax Return” Due March 3rd

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Just a reminder that the “floor tax return” for the Chicago Bag Tax is due this Friday.  Don’t risk a $100 fine — take a look at my comprehensive guide to the bag tax and get this off your “to-do” list asap.  Please share far and wide with other small business retailers in Chicago; I’ve found very few how-to resources, and none that break it down step-by-step, and I’d love for my research for my own clients to be of use to other small business owners.

IRS, Tips

For Tax Preparers: Forms 1095-B and 1095-C Not Required For Filing — Alternatives Are Acceptable

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I had a tough time getting 1095-B & 1095-C forms from clients last year in time for filing, as many of their health insurance providers were delayed in sending them out.  Unfortunately, late last year, the IRS decided to allow providers to file extensions again, and I was dreading the same experience.

So you can imagine that I was pretty pleased to read, in today’s National Association of Tax Professionals e-newsletter:

According to Question 14 on the IRS Health Care Information Forms FAQ, you do not have to wait for either Form 1095-B or 1095-C from your client’s coverage provider or employer to file the individual income tax return. You can use other forms of documentation in lieu of the Form 1095 information returns to prepare the tax return. Other forms of documentation that would provide proof of a taxpayer’s insurance coverage include:

  • Insurance cards.
  • Explanation of benefits statements from the insurer.
  • W-2 or payroll statements reflecting health insurance deductions.
  • Records of advance payments of the premium tax credit.
  • Other statements indicating that the family had health care coverage.

Of course, many of these documents will not confirm that insurance was for the entire year, or all members of the family, so it is still best practice to get the 1095-B or 1095-C.  But when it’s unobtainable, it shouldn’t delay your client’s filing — just make sure they provide it to you once they are able.

Source: Questions and Answers about Health Care Information Forms for Individuals (Forms 1095-A, 1095-B, and 1095-C)

Education, POS - Point of Sale, Tips

Credit Card Processing Guide for Small Businesses

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(In case you know what you came here for, and don’t want to read my long-winded intro, here’s a link to the article you really want to read: Credit Card Processing Guide for Small Businesses – The Simple Dollar.)

I get contacted pretty often by companies asking if they can submit to my blog, or if I’d be willing to tout their product, website, app, etc.  Generally, the answer is “no” — I started this blog as a sort of collection of searchable bookmarks for myself, to save the research and resources that I’ve found helpful in my own practice and for clients; not as a marketing tool, and certainly not as a platform for folks to sell their solutions.

However, once-in-a-while, the information that I’m sent is so valuable and useful that… well, it fits all my criteria for bookmarking and sharing, and I feel lucky that the resource landed in my lap.  This is one of those posts.

I have mixed feelings about personal finance site The Simple Dollar — though much of the content is excellent, some of it is oversimplified, and certain articles seem to encourage readers to believe they can handle challenging financial situations without the advice of a professional.

But this article is the best I’ve ever seen on the topic of credit card processing for small businesses.  If you are starting a small business and haven’t yet made the decision about whether or not to accept credit cards; or if you’re at the point in your business’ development where it’s time to make the leap, but you’re not sure in which direction; or if you’re already accepting cards but are worried you’re paying too much: read it.  It’s comprehensive, full of information and examples, and if you’re willing to take the time to study it and take notes, you will not regret the investment.  In fact, it will likely save you time — and definitely money — in the long run.

“Due to the lack of transparency and hidden fees scattered throughout the credit card processing industry, there is a gross misconception of how debit and credit card processing work. This creates a challenge for many small business owners because making an uneducated decision could cost time and money.  For this reason, The Simple Dollar has developed a guide that aims to help small businesses gain in-depth knowledge about credit card payment processing, along with practical strategies to manage their fees and get the most out of their services.”

They offer advice on how to find the lowest possible credit card processing cost:

  • Isolate the markup
  • Choose a pricing model (pass-through pricing is cheapest)
  • Compare multiple processors with fees up-front and in writing
  • Calculate the total cost
  • Negotiate favorable terms (they even offer a list of terms they specifically recommend working on)

As well as suggestions on how to keep costs low, including tips for avoiding punitive interchange rates:

  • Track the processor’s fees
  • Interchange optimization
  • Avoid — Processing expired credit cards, Duplicating transactions, Setting a minimum or maximum limit on your transactions, Charging a usage fee for credit card transactions, Displaying full account numbers on your receipts, Processing Internet transactions with your retail merchant account, Running your personal card through your merchant account, and Splitting one transaction into several smaller transactions

So, give it a read, and share it with others you think might find it useful.  There simply aren’t many guides out there on this topic that are as worthwhile as this one: Credit Card Processing Guide for Small Businesses – The Simple Dollar.

IRS, Tips

Avoid the Rush: IRS Online Options To Get What You Need

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Today, an important note from the IRS, with a page full of great links to help you obtain information and assistance specific to your needs.  Don’t get caught on-hold forever… take a moment to see if your request can be answered more efficiently.

First, I recommend you save this 2-page pdf guide somewhere useful, or print it out and pin it to your bulletin board — the IRS Services Guide is a succinct reference for where to go to find what you need.

For further resources, all of the below comes straight from the IRS at Avoid the Rush: Online Options Help You Avoid Presidents Day Rush.

Avoid the Rush: Online Resources

Refund Delays – By law, the IRS must hold Earned Income Tax Credit or the Additional Child Tax Credit refunds until Feb. 15. Taxpayers will begin to see refunds claiming EITC/ACTC the week of Feb. 27. “Where’s My Refund?” will update for EITC/ACTC refunds on Feb. 18 for the vast majority of early filers who claimed the Earned Income Tax Credit or the Additional Child Tax Credit. Before Feb. 18, some taxpayers may see a projected deposit date or an intermittent message that the IRS is processing their return.

Where’s My Refund? – You just need a little info from your tax return to track your refund.

Finding your Adjusted Gross Income – If you changed tax preparation software products this year, you may be asked for your adjusted gross income to help verify your identity. You must use the procedures outlined on IRS.gov for getting your AGI. We cannot provide you with your AGI if you call.

Letter 4883C – We take many steps to protect you from identity theft. If you receive Letter 4883C, it’s because we stopped a suspicious tax return. Before you call, be prepared to validate your identity. See Understanding Your 4883C Letter for details.

ITIN Renewal – If you have an expired Individual Tax Identification Number and need to file a tax return, there are new rules this year.

Get Transcript – You can view your tax transcript, a summary of your tax return, online or you can order it by mail. You may need this for non-tax reasons such as student or mortgage loan income verification. Or you may need it to find your adjusted gross income.

Appointment Service – We’re trying to eliminate the long lines at our office, especially at this time of year. You must make an appointment for most services at our Taxpayer Assistance Centers. Again, most questions can be answered at IRS.gov.

Free File – Do your taxes yourself, using free, brand-name software through the IRS Free File program. A dozen partners offer free federal tax prep, and in many cases free state as well,  to anyone earning $64,000 or less. Taxpayers earning more can use Free File Fillable Forms.

VITA/TCE – Need help doing your taxes? Find volunteer help near you through our Volunteer Income Tax Assistance program or AARP’s Tax Counseling for the Elderly.

Avoid the Rush: Keyword Search

Still can’t find what you’re looking for?

Use our search tool to track down your topic and get the answer at your fingertips. Or, try our Interactive Tax Assistant. This is similar to the tool used by our customer service representatives to answer your tax questions. Our Help and Resources page also contains valuable information.

Avoid the Rush: News Releases

IR-2017-32, Feb. 14, 2017, Avoid the Rush: Be Prepared to Validate Identity if Calling the IRS

IR-2017-30, Feb. 13, 2017, Avoid the Rush; Use IRS.gov for Quick Answers to Questions

Source: Avoid the Rush: Online Options Help You Avoid Presidents Day Rush

Education, IRS, QuickBooks Software, Tips

Self-Employed? Avoid These Common Tax Mistakes

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I recently had the pleasure of being asked by Hustle & Co to contribute to their blog post on common mistakes that freelancers and the self-employed tend to make regarding taxes.  My quotes in their article came from a longer version intended for my blog — and lucky day: you can now read the full version here.

What are common mistakes that freelancers or self-employed people tend to make when preparing for or filing taxes, and how can these mistakes be avoided?

The biggest mistake that self-employed people tend to make when preparing for taxes is that they don’t seek professional help. (I’m not saying this just because I’m a CPA; I’m saying it because I see the results of this mistake regularly.) To clarify, by “professional help”, I’m not suggesting you go to a big tax prep chain and hand in your shoebox of receipts at tax-time; I’m saying that involving an accountant in your business should be one of the first steps a freelancer takes, well before taxes are due. This doesn’t mean you can’t file your own taxes… but if you take the time to consult with an expert first, you’ll make way fewer mistakes when you do. A qualified accountant who specializes in your industry can help you with so many of the key issues that otherwise might come back to haunt you at tax-time:

1) Selection of the right type of entity: sole proprietor, single-member LLC, partnership, multi-member LLC, S-Corp, C-Corp, cooperative, not-for-profit, etc.
2) How to fund your business without tapping into retirement funds and paying a major tax-time penalty.
3) Setting up accounting software and tracking income and expenses properly.
4) Deciding whether to file taxes on the cash basis or accrual basis.
5) Understanding the home office deduction rules.
6) Sorting through the complexities of health insurance: what’s deductible and where; do you qualify for exemptions; how to minimize any penalty for lack of coverage.
7) Explaining the rules for what is deductible, and helping to identify commonly missed deductions such as travel, equipment, cell phone, meals & entertainment, dues & subscriptions, and mileage.
8) Demystifying and debunking what your “uncle’s friend’s lawyer” said you should do to save on your tax bill.

In other words, find an accountant who you feel comfortable with, ask them a million questions, and develop a relationship with them, involving them on your team.

The second-biggest mistake that self-employed people tend to make when preparing for taxes? Looking for an accountant during tax season. By that time, we’re all knee-deep in our existing clients’ needs, and most of us don’t have time to help you convert to QuickBooks or organize your receipts. If you haven’t found someone by tax time, then it might make sense to approach potential accountants with the suggestion that you’d like them to help you file an extension and get organized after tax season is over; you’re more likely to have good luck getting them to work with you.

As for mistakes that I see on a lot of prior-year tax returns that new clients bring me, here are some of the most common:
1) All income is taxable — not just the income that is reported on your 1099-MISC forms.
2) Speaking of 1099-MISC forms… double-check yours the moment they arrive and request corrections immediately. Don’t wait until April.
3) Keep a mileage log or recreate your mileage log from the last tax year based on calendar entries. The IRS does not allow vehicle mileage deductions without one.
4) Speaking of mileage — commuting is not deductible.
5) If you have inventory, count it at 12/31 or as close to it as you can. Even cash-basis taxpayers have to report inventory and cannot include it as a cost of sales.
6) Be careful deducting educational expenses. The IRS will not allow a deduction for education a) to meet minimum requirements of a job, nor b) that qualifies you for a new trade or business. They do, however, allow a deduction for education to “maintain or improve skills”.
7) Gifts to business clients, vendors and the like are only deductible up to $25 per person, per year. (Seriously — it was never indexed for inflation.)
8) Understand the rules of the entity type you chose. (For example, if you’re an S-Corp, pay yourself “reasonable compensation” via payroll; it’s the law.)
9) Depreciable basis on property does not include land. Ever. (If you own your own home and are claiming a home office deduction without using the safe harbor, this means you.)
10) Speaking of depreciation — it’s not optional. You can’t decide not to depreciate something just because you feel it’s too complicated. If the IRS audits you, they will reduce the basis of your property by the amount of the depreciation you should have taken, and you’ll pay gain on the disposal of your property without having had the benefit of the deduction. Sound complicated? (It is. Hire a professional.)

Education, IRS, Tips

IRS Warns Of W-2 Phishing Scam

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The IRS is warning taxpayers, business owners and tax preparers of a Dangerous W-2 Phishing Scam Evolving; Targeting Schools, Restaurants, Hospitals, Tribal Groups and Others.  If you are a victim of or inadvertently assisted in W-2 information theft, please contact the IRS at once, so they can protect the affected taxpayers from tax-related identity theft.

Tax preparers have additional responsibilities and should read this IRS info on what to do if you suffer a data breach of client information.

Here’s how the scam works: Cybercriminals use various spoofing techniques to disguise an email to make it appear as if it is from an organization executive. The email is sent to an employee in the payroll or human resources departments, requesting a list of all employees and their Forms W-2.

This phishing variation is known as a “spoofing” e-mail. It will contain, for example, the actual name of the company chief executive officer. The following are some of the details that may be contained in the emails:

  • Kindly send me the individual 2016 W-2 (PDF) and earnings summary of all W-2 of our company staff for a quick review.
  • Can you send me the updated list of employees with full details (Name, Social Security Number, Date of Birth, Home Address, Salary).
  • I want you to send me the list of W-2 copy of employees wage and tax statement for 2016, I need them in PDF file type, you can send it as an attachment. Kindly prepare the lists and email them to me asap.

In the latest twist, the cybercriminal follows up with an “executive” email to the payroll or comptroller and asks that a wire transfer also be made to a certain account. Although not tax-related, the wire transfer scam is being coupled with the W-2 scam email, and some companies have lost both employees’ W-2s and thousands of dollars due to wire transfers.

The IRS, states and tax industry urge all employers to share information with their payroll, finance and human resources employees about this W-2 and wire transfer scam. Employers should consider creating an internal policy, if one is lacking, on the distribution of employee W-2 information and conducting wire transfers.

Organizations receiving a W-2 scam email should forward it to phishing@irs.gov and place “W2 Scam” in the subject line. Organizations that receive the scams or fall victim to them should file a complaint with the Internet Crime Complaint Center (IC3,) operated by the Federal Bureau of Investigation.

Employees whose Forms W-2 have been stolen should review the recommended actions by the Federal Trade Commission at www.identitytheft.gov or the IRS at www.irs.gov/identitytheft.
Employees should file a Form 14039, Identity Theft Affidavit, if the employee’s own tax return rejects because of a duplicate Social Security number or if instructed to do so by the IRS.

The IRS also has a page offers all sorts of helpful security awareness tips for taxpayers as well as tax preparers.