Author Archives: c12734001

Tracking Utilities for Home Office Expense

If you plan to claim a deduction for Expenses for Business Use of Your Home (home office expense) on your tax return, you need a reliable method to calculate your deductible utility costs. IRS rules require that you separate utility expenses that apply to only the residential portions of your home (such as cooking gas or electricity used by your refrigerator) from those that pertain to the entire property. Only the latter type can qualify as home workspace expenses.

For example, if your cooking range, water heater and furnace all run on natural gas, you may need to figure out the gas cost associated specifically with heating your home. One way to do this is to average your gas bills from summer months when you did not use heat. This average shows how much of your gas bill is attributable to your range and water heater. By subtracting this amount from your gas bill for every month, you can calculate how much money you spent specifically on heat during the year. You may then be able to deduct a portion of this total as a home office utilities expense, based on the area of your workspace.

An experienced tax pro can give you other ideas for tracking and calculating the allowed utility costs associated with your home office. The IRS does not require perfect accuracy, but your calculation methods must be logical, reasonable and based on written evidence such as monthly utility bills.

20% Qualified Business Income Deduction for Self Employed

If you are a freelancer or otherwise participate in the “gig economy”, you may be able to claim a new tax deduction under the Tax Cuts and Jobs Act (TCJA). The Qualified Business Income (QBI) Deduction applies to self-employment earnings (basically, any income you receive in a setting where you are not classified as an employee). Under the provision, individuals may be able to deduct up to 20% of their self-employment income on their tax returns. The deduction is up to 20% of qualified business income that is in ADDITION to the usual business expense deductions.

The QBI deduction is claimed “above the line” (e.g. before Adjusted gross income (AGI)) on your tax form which means it reduces your gross income whether you itemize deductions or don’t itemize your deductions.

The deduction is subject to a number of rules, including income restrictions for certain self-employment activities, and limits on the size of the deduction relative to your taxable income. The total taxable income limit (business income + capital gains + employment income) to receive the full 20% deduction for certain businesses is:

  • $315,000/yr for married couples
  • $157,500/yr for all others.

The 20% deduction percent is reduced from $315,00 to $415,000(MFJ) and from $157,500 to $207,500 (all others) over which you can’t claim the deduction. The income limitation applies to the following specified service trades or businesses:

  • Health
  • Law
  • Accounting
  • Actuarial science
  • Performing arts
  • Consulting
  • Athletics
  • Investing & investment management
  • Trading
  • Dealing in securities, partnership interests, or commodities
  • Any business with a principal asset of a reputation or skill of one or more of its employees or owners

The deduction does not apply to business income outside the Unite States, Income from business investments, W-2 (wages) income paid to an S-Corporation owner, or guaranteed payments to a partner.

Because this 20% deduction it reduces your AGI (i.e., it is above the AGI line) it may help you qualify for other tax deductions. This is a wonderful tax break that incentivizes self-employment and business ownership.

Contact me for any help needed at: 877-727-6577 or email me at:  lisa@yourtaxdiva.com

 

Save Tax Deduction Receipts for 3 yrs (6yrs for omitted income)

For most personal or business expenses that you claim as deductions on your tax forms, the IRS requires that you preserve written documentation of each expense. Acceptable forms of written evidence include receipts, invoices, canceled checks, and credit card and bank account statements. These documents should clearly show the date, location, amount and, if possible, nature of each expense. An experienced tax pro can help you review your supporting evidence to make sure it satisfies IRS rules.

Importantly, your documents need not be originals. Photocopied, scanned or photographed receipts are okay, as long as they clearly show all the information on the original document. However, since you may be required to present your evidence on paper in the event of an audit, you should save digital files in a form that allows you to print hard copies.

In most cases, IRS rules require you to save your written documentation for 3 years after you file your return. This is because the IRS can randomly audit your return up to three years after the filing date or if it suspects you made an error

That IRS Audit deadline extends to 6 years if the IRS believes you under reported income by 25 percent or more. So if there is a chance that you have omitted income from your tax return that you should have reported, you must maintain your records for six years after filing.

IRS Makes it Easier to Deduct PCs

Previously the IRS classified many computers and computer peripherals (such as printers) as “Listed Property.” If your business use of Listed Property is less than 50%, you are usually required to distribute the business portion of the property’s cost over your tax returns for multiple years, using a depreciation method that is unfavorable to the taxpayer.

However, computer equipment placed in service after December 31, 2017 has been removed from the Listed Property category. This change in classification makes it much easier to deduct computer costs as business expenses on your tax returns. Under the new rules, you may be able to deduct the business-use portion of the cost of computer equipment put in service in 2018 or later using any appropriate depreciation method, even if your business use is less than 50%.

In particular, you may be able to use the 100% bonus depreciation option that is available through 2022 under the Tax Cuts and Jobs Act (TCJA). This option could allow you to deduct the entire business-use portion of the cost of computer equipment in a single year, usually the year in which you put the equipment into service. If you use your computer for both business and personal tasks, feel free to contact me to help you determine the proper business-use percentage to use in order to calculate your deduction.

This Tues (10/15) is the 6 mo Filing Extension Deadline

If you requested an extra six-month extension in April to file your 2018 personal income tax return, that deadline to file is coming up this week on Tuesday, October 15th.

If you are an employer that makes contributions into employee Simplified Employee Pension IRA accounts, October 15th is also the six-month extension deadline to make those deposits.

If you miss the 6 month extension date (10/15) you will have failure to file penalties which can add up to 25% of the tax due. If you miss the 10/15 deadline you will have a failure to file penalty of 5% of your balance due for every month (or part of a month) added to your account until you file your tax return.

If you can’t pay your taxes the IRS offers installment agreements that lets you pay a set amount per month until the tax is paid. The IRS recommends you pay your tax due with a credit card or a loan because most of the time the interest on the credit card or loan will be lower than the combined penalties and fees you’ll pay the IRS.

If you owe a large amount and have no way to pay through installment agreements, you may be able to work out an offer in compromise and settle for less than the full amount.

Tax Credits for Higher Education

If you or any of your dependents are enrolled in a higher education program this fall, you may qualify to claim one or more credits on your 2019 tax return.

The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 for a student pursuing a degree or certified credential at a college or vocational school. You may claim the credit for up to four years for each qualifying student, and you may claim multiple AOTCs if you have more than one student in your household. The AOTC is partially refundable, meaning that if your tax is reduced below zero, up to $1,000 of the credit may be refunded to you. Generally, a taxpayer whose modified adjusted gross income is $80,000 or less ($160,000 or less for joint filers) can claim the AOTC credit for the qualified expenses of an eligible student

The Lifetime Learning Credit (LLC) is available for household members enrolled in one or more courses at a higher learning institution, or in a qualifying course to develop or improve professional skills. A maximum nonrefundable credit of $2,000 (regardless of the number of qualifying students) may be claimed per year, for any number of years. The Lifetime Learning Credit applies to 20% of the first $10,000 of a taxpayer’s out-of-pocket expenses for all students attending an institution of higher education.

Both credits are subject to income limits and other eligibility restrictions. A qualified tax advisor can help you determine your eligibility for both credits.

Age Limitations for 3 key Child Tax Deductions

Several key tax credits end when dependent children reach a particular age. Here is a quick summary of the age rules for three of the most important tax credits for parents, as well as the most important exceptions:

Child and Dependent Care Credit: Child must be under 13 years of age (12 years old or younger), OR live with you more than half the year and be incapable of self-care.

[The Child and Dependent Care Credit is 20% to 30% of up to $3,000 of child care and similar costs for a child under 13 and up to $6,000 of expenses for two or more dependents. To qualify you must provide at least 50% support during the last year, the child must have lived with you 50% of the year, and generally you must claim your child as a dependent on your tax return. Also, to qualify the person who provides the child care cannot be your dependent or spouse]

Child Tax Credit (also called “Per-Child Credit”): Child must be under 17 years of age (16 years old or younger).

[The Child Tax credit is up to $2,000 per qualifying child and $500 per qualifying dependent. To qualify they must also be your own child, a step child or a foster child placed with you by a court or authorized agency. Also to qualify your modified AGI must be under $400,000 (married filing joint), $200,000 (everyone else), you must provide at least 50% support during the last year, the child must have lived with you 50%  of the year, and the child cannot file a joint return]

Qualifying Child for the Earned Income Tax Credit (EITC): Child must be under 19 years of age (18 years old or younger), OR a full-time student and under 24 years of age (23 years old or younger).

[The Earned Income Credit is $3,526 for one qualifying child, $5,828 for two qualifying children, $6,557 for three or more qualifying children. To qualify the AGI limit is $40,320 for 1 child, $45802 for 2 children, $49,194 for 3 or more children]

For both the Child Tax Credit and the Qualifying Child for EITC rule, the child must meet the age requirement at the end of the tax year (usually, December 31). However, for the Child and Dependent Care Credit, the child only has to be below the age limit when the care is provided.

If you will lose a tax credit this year due to a child surpassing the age limit, you may need to adjust your withholding to allow for the likely increase to your total tax for the year. A qualified tax advisor can help you determine whether an adjustment is needed.

Young Adult Health Insurance Coverage: Under current law you can add or keep children on your health insurance policy until they turn 26 years of age even if they are not financially dependent on you.

 

Teachers: Save Your Receipts for Educator Expense Deduction

During this back-to-school period when classroom expenses are most likely to occur, remember to save your receipts if you are educator.

If you are a teacher, principal, counselor, or classroom aide who works at least 900 hours a year in a state-accredited school (grades K-12), you may qualify for the Educator Expense Deduction. This IRS rule allows you to deduct up to $250 on your tax forms ($500 for joint filers who are both educators) for classroom supplies that you purchase at your own expense.

Allowed expenses include traditional school supplies like rulers and markers, along with specialty items like athletic gear for physical education classes. A qualified tax advisor can help you determine which of your expenses qualify for the deduction.

You do not have to itemize deductions in order to claim the Educator Expense Deduction, however, the IRS does require that you have written evidence for every expense

 

For Maryland State Tax Returns: 

Maryland offers teachers a $250 deduction on their state income tax return:

http://news.cchgroup.com/2018/05/10/maryland-enacts-classroom-supplies-deduction/news/state-tax-headlines/

 

In addition, Maryland offers a $1,500 CREDIT for teachers for the following:

https://taxes.marylandtaxes.gov/Individual_Taxes/General_Information/Tax_Credits_and_Deductions/Quality_Teacher_Incentive_Credit.shtml

September & October Tax Deadlines

The following are tax deadlines due in September and October:

September 16th is the deadline for the third quarter installment for individuals & corporations paying estimated taxes throughout the year.

September 16th is the deadline for Forms 1120S (S Corporations) & 1065 (Partnerships) for S Corporations and Partnerships that requested a 6-month extension on their returns. This is the deadline to file that return and provide each partner with a Schedule K-1.

October 15th is the deadline for individuals & corporations that requested a 6-month extension to file their 2018 tax returns.

October 15th is the deadline to make SEP IRA contributions if you filed for a request for an extension to file your return.

If you owe taxes and miss extension tax deadlines you will be charged failure to file and failure to pay penalties which are added to your account until you file your tax return.

If you miss a deadline and are due a refund, there is no penalty. The government will hold your money interest free. If you file 3 years past your filing deadline you will loose your refund (this is a statute of limitations rule).

 

 

September Tax Withholding Checkup

The best way to avoid an unpleasant IRS surprise next spring is to make sure that the correct amount of tax is being withheld from your paychecks. Here’s a simple way to do a September withholding checkup:

 

Step 1) On your pay stub for the pay period ending August 31 or September 1, find your year-to-date federal income tax withholding. If the stub does not have this information, you can request it from your employer’s payroll manager.

Step 2) Calculate two-thirds (66.67%) of the total federal income tax you paid for tax year 2018. Increase this percentage if you received a raise for (or during) 2019. For example, use 70% if you received a small raise, or 75-80% if you received a substantial raise.

 

The amount you found in step 1 should be greater than or equal to the amount you found in step 2. If it is not, you can obtain a new W-4 Form from your employer and request that an additional amount be withheld from your paychecks. The IRS also has a withholding calculator that can be found at: https://www.irs.gov/individuals/tax-withholding-estimator.

 

An experienced tax pro can help you determine what this amount should be. By adjusting your withholding now, you can spread out your tax payments over several months, instead of being stuck with one large, unexpected bill in April.