Plan for Tax Filing Season Changes

Coming changes calendar

In an effort to reduce the amount of money paid to identity thieves who file fraudulent returns, the IRS will be implementing changes in the timing and way they handle the processing of tax returns.

These steps will continue to evolve, but recent changes will impact millions who depend on receiving an early refund.

Bullet warning Earlier filing of form W-2s and 1099-MISC. The timing required to send these forms to employees and vendors remains the end of January. However, the extended deadline for filing the electronic version of these forms to the IRS and Social Security Administration is now a full month earlier. This is done to allow the IRS to match records with early filed tax returns. The prior timing gap was ideal for thieves to file fraudulent tax returns.
Bullet warning Earned Income Tax Credit and Additional Child Tax Credit. If you file a tax return that contains either of these credits, do not expect to receive an early refund. The IRS has been mandated to hold these refund payments until February 15th or later. Given the payment backlog this will create, it is still important to file early to get your refund in the queue.
Bullet warning Get Transcript changes. The IRS is now adding a second level of security to their online functions. The initial version of this change is in the recently re-launched Get Transcript online request. You will now need to have a valid email, mobile phone number, and a credit card or financial account number to log into the system. If you are not ready to provide this additional information to the IRS you can still request copies of your tax return using the mail.

Begin planning now to be prepared for these upcoming changes. Rest assured, we can all look forward to further changes as the IRS continues to address the multi-billion dollar identity theft problem plaguing the Agency.

As always, should you have any questions or concerns regarding your situation please feel free to call.

You Still May Wish to File a Tax Return

1040 form and IRS logo

Too many taxpayers fail to file a tax return under the false notion that one is not required to pay income tax. This assumption can cause problems. Here are some examples of when to file a tax return even when not required to do so.

Check mark Wish to qualify for Premium Tax Credit. This tax credit helps reduce the cost of health insurance for those who purchase their insurance through the new health insurance marketplace. Without a filed tax return you cannot have the Premium Health Credit applied towards your monthly premiums. In fact, non-filing could limit your ability to receive this credit in future tax years as the IRS continues to place controls on the payment of this credit.
Check mark Receive refundable tax credits. There are certain tax credits that will provide refunds even if you do not owe income tax. The most common of these is the Earned Income Tax Credit.
Check mark You wish to limit potential audits. The IRS typically has three years to audit a filed tax return. If no tax return is filed, this audit time limit never starts.
Check mark You are applying for financial aid or loans. Banks and colleges will often use tax return information to qualify you for loans and financial aid. Even if not required to file, it is nice to provide this information if requested.
Check mark You are filing a final tax return for a loved one. The IRS will eventually receive death information through the Social Security Administration. By filing a final tax return, you can put the breaks on unwanted communication from the IRS as they wait for this confirmation.
Check mark You want withholdings returned to you. Always file a tax return if an employer or other supplier withheld tax funds. It is the only way you will receive them back from the federal government.
Check mark You wish to protect against someone else filing a tax return. With the vast increase in identity theft from the IRS, filing a tax return can close the door on would-be thieves. Your filed tax return can block attempts by someone else who files a second tax return with fake information.

Want Federal Money for College?

FAFSA Student Aid
Prepare now for your FAFSA filing

The Free Application for Federal Student Aid (FAFSA) is often the starting point to help families finance the ever challenging cost of a student’s college education. The application is available starting January 1st. The earlier you file your application, the earlier you will receive aid packages from most participating schools. The application is used to receive grants (free money!), federal loans, and work study awards. Here are some hints to make sure the application process works in your favor.

 Mortarboard Bullet Point Create your signature PINs now. Both the student and parent will need to set up an electronic signature within the FAFSA system. You do not have to wait until January to set these up, so do it now. You cannot submit the FAFSA form without this.
Mortarboard Bullet Point File the FAFSA early! As soon as possible after January 1st, fill out and submit your FAFSA. You will start to see reminders in the press in late December, but November is a great time to estimate your year-end tax obligation. Filing early maximizes your chances of receiving aid. It also minimizes your chances of missing an unknown application deadline.
 Mortarboard Bullet Point Start organizing your tax records. You can fill out and submit the FAFSA form before you finalize your tax return. If you choose this route, you will estimate your tax figures for the FAFSA and then go back later and update your FAFSA with actual numbers. Start organizing your tax records now, so you are in a good position to estimate your tax return.
Mortarboard Bullet Point Let your advisor know. If you have a child ready to attend college, stay in touch with your financial advisor. Managing your assets to present a good financial picture starts before your student’s junior year in high school.
Mortarboard Bullet Point Collect needed information. To fill out a FAFSA you will need the following;

Arrow Student and parent Social Security Numbers
Arrow Drivers license
Arrow Federal tax information for the student and parent (actual or estimated) for current year and actual information from the prior year
Arrow Record of any untaxed income (excluding retirement account balances)
Arrow Information for balances of the following

  • Cash, savings and checking accounts
  • Investment asset balances
  • Other assets
Arrow FAFSA PIN
Mortarboard Bullet Point Involve your student. The FAFSA is a student application for assitance. Use this application process to help your student feel ownership of their educational journey.

Every January, the www.fafsa.gov web site is heavy with activity as students start submitting their FAFSA forms. Please ask for assistance if you need help with any part of the FAFSA submission. The form can be a daunting task for the uninitiated, but by proper preparation you can get your form done in quick order.

Summer Child-Care Tax Opportunity

Summer Childcare

For millions of working parents the summer comes with the added challenge of finding care for their summer vacation bound kids. School hours need to be replaced with child-care hours.

With summer underway, you probably now have the child-care summer gap covered. There is a good chance this care could be tax deductible using the Child & Dependent Care Credit.

Qualifications for the credit

To take advantage of this tax savings opportunity you must meet the following qualifications.

Check You have: one or more dependent children under the age of 13
Check You have: earned income (wages, salary, tips or business income)
Check You are: single or married filing a joint tax return
Check You have: qualified day care expenses
Check You are: financially supporting and maintaining a home for your dependent child
What you should know

Most taxpayers that use this tax credit each year have their tax moves down. Those who use day care to bridge the summer gap could have a $3,000 to $6,000 tax credit if you organize now. To receive the credit:

Arrow The care must be provided so you can work. The care can also qualify if you are looking for work.
Arrow The care does not have to be at a facility. This means day camps, day care, and nanny care qualify. However, overnight camps or summer school costs do not qualify.
Arrow If married, both spouses need to work. There is some leeway if one spouse is a full-time student or is disabled.
Arrow You need to keep records. You need to have receipts for the care expense and you will have to report the caregiver’s tax information (name, address, and tax id/Social Security number) to receive the credit.
Arrow The care payment needs to qualify. You may not pay a dependent or your spouse to care for your children. But beyond this, who you pay is flexible.
The Child & Dependent Care Credit can allow you to deduct 20 – 35% of your summer child-care expense if you plan accordingly. Other details may apply so please call if you wish to discuss how this tax opportunity may work for you.

Know Someone Getting Married?

Tips for every bride and groom

Summer is a popular time to tie the knot. Planning for the event takes hundreds of hours and thousands of dollars. Often overlooked in the craziness of the event are important tax and financial topics. If you are planning to get married in the near future or know of someone who is, here are some things to consider.

Wedding proposalNotify Social Security. Notify the Social Security Administration (SSA) with any name changes. The IRS has a name match program with the SSA and will potentially reject deductions and joint filing status if the name change is not made timely. You do this by filing Form SS-5.

Selling a home? If selling one or two residences, review the impact of capital gain tax laws and how they apply to your situation. This is important if one of you has only been in a home for a short time or if the home has appreciated in value.

Update your address. Update your address with the IRS if either of you is moving. You do this with IRS form 8822. Also change your address at the postal service.

Notify your employers. Also change your name and addresses with your employer to ensure your W-2s are correctly stated. Recalculate your payroll withholdings and file a new Form W-4.

Beware the marriage penalty. If both newlyweds work, your combined income could put you into a higher tax bracket. This phenomenon is referred to as “the marriage penalty”. On the other hand, marriage could also reduce your tax burden. Because of this, now is a good time to conduct a tax forecast.

Review legal documents. Ensure legal titles are as you wish them after you are married. This includes bank accounts, titles on property, credit cards, insurance, and wills.

Beneficiary statement update. Also check any retirement savings plans like 401(k)s and IRAs. The beneficiaries on these accounts must also be updated.

Review employee benefits. Review your employee benefits and make the necessary changes in health care, insurance, employee retirement accounts, pensions, and tax-preferred spending accounts. Marriage is a qualified event for most employers to allow you to make mid-year changes.

Talk about it. If you have not already done so, spend some time talking about how you will be managing your financial affairs. Who will be paying the bills? Who will be managing retirement accounts and investments? How will spending be managed? What bills and debt exist? Developing a plan and understanding how this will be handled can help reduce misunderstandings and future disagreements.

Tax Breaks for Education

Education Tax BreaksStudies by the Government Accounting Office (GAO) show that many taxpayers who are eligible for education related tax relief don’t take advantage of it. The key reasons are:

There are too many programs. If one includes tax credits, expense deductions, and special savings programs, there are more than ten different tax breaks for education.

The rules vary. Each educational tax break comes with a different set of rules. Different qualifying income levels, the age of a student, the level of education, the timing of expenses and their interrelationship all make navigation of your options complex.

To help clarify your options here are three of the most popular educational tax breaks and some related tips.

One American Opportunity Tax Credit (AOTC). This is a maximum $2,500 credit for a student who could be you, a spouse, or a dependent of yours. The student must be enrolled at least half-time and the credit is available for up to four years of post-secondary education (college). This credit is a per student credit and may be refundable for up to 40% of the credit amount.
Income limit: $90,000 single; $180,000 married filing joint
One Lifetime Learning Credit (LLC). The LLC is a maximum annual per taxpayer credit of $2,000. It is available to a student who is you, your spouse or a dependent. It covers any stage of post-secondary education as long as the student is enrolled in courses that lead to a degree, certificate or credential. The credit applies to 20% of the first $10,000 in qualified expenses.
Income limit: $65,000 single; $130,000 married filing joint
One Tuition and Fees Deduction. This on again, off again tax benefit is still available for your 2014 tax return. While not currently available for 2015, this deduction has been extended so many times, that it may be extended once again. This deduction can cut as much as $4,000 off your taxable income.

Which is right for you?

Determining which program is right for you takes tax planning. Remember you may not double dip expenses OR programs. This means you may not use the same qualified educational expense for multiple programs (including applying the expense to any scholarship or other benefit). However, if you have more than one student, you can apply different programs to different students. Other considerations;

Check The LLC is per taxpayer while the AOTC is per student.
Check The income limitations are highest for AOTC.
Check If considering graduate studies, you may wish to first use the AOTC as it is limited to four years of post-secondary studies.
Check The LLC and AOTC are almost always a better option than the Tuition and Fees deduction. This is because a tax “credit” directly reduces tax, while the deduction reduces income.
Check Remember there are other educational tax benefits. Some of these other programs include student loan interest deductions, using Coverdell Savings or 529 Savings programs, employer educational assistance, and special deductibility of certain US savings bonds.

Use Them or Lose Them

With the massive tax changes made at the beginning of 2013, it is hard to believe that many tax laws are still set to expire at the end of the year unless Congress acts. As the year winds down, now is a good time to review some of the key expiring tax provisions and take action if you wish to benefit from them.Creative Summer Jobs

Button Right Federal tax credit for energy-saving home improvements. This credit for qualified energy-saving home improvements expires in 2013.

right arrowBenefit: $500 credit (this is a lifetime credit, not annual) for energy saving purchases. The limit is $200 for windows and skylights.

Button Right Optional itemized deduction of sales tax in lieu of state income taxes. In low or no income tax states, you may use a sales tax itemized deduction instead of a state income tax deduction.

right arrowBenefit: If you made major purchases or live in a state with no/low income taxes your itemized deductions could be much higher.

Button Right Itemized deduction of qualified mortgage insurance premiums. Through 2013 you can continue to deduct your qualified mortgage insurance premiums as an itemized deduction.

right arrowBenefit: A meaningful increase in your itemized deductions.

Button Right Qualified higher-education tuition and expense deduction. You can offset the tuition and expense of qualified education using the tuition and fees deduction through 2013.

right arrowBenefit: Up to a $4,000 income deduction. Planning is required as this deduction may not be used in conjunction with many other educational tax benefits.

Button Right Numerous small business tax incentives. Many small business tax credits and accelerated depreciation incentives are also scheduled to expire after 2013. These range from bonus depreciation to the expiration of the research and development credit. If your business anticipates using any credits this year, it is best to review your situation.

Understanding Tax Terms: Fair Market Value

A dozen tax planning triggersIn the thousands of pages of U.S. Tax Code, there is a collection of terms used by the IRS that is unique to federal income taxes. One of the more important to understand is the phrase: Fair Market Value or FMV.

“Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”

Source: IRS Publication 561

This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes.

When is it Used?

FMV is used whenever an item that is bought, sold, exchanged, or donated has tax consequences. The most common examples are:

Circle Buying or selling your home or other real estate
Circle Buying or selling personal property
Circle Buying or selling business property
Circle Establishing values of other business assets like inventory
Circle Valuing donations of personal goods and property like automobiles
Circle Valuing bartered services
Circle Valuing transfer of business ownership
Circle Valuing the assets in an estate of a deceased taxpayer

Sound simple? As you can imagine FMV can be open to wide interpretation and disagreements with the IRS that have led to some very high-profile tax cases. For instance, the IRS believes the FMV of the estate of pop icon Michael Jackson is over $900 million while the representatives of the estate think its FMV is $7 million. This difference could lead to additional taxes and penalties of over $700 million!

What you need to know

While you don’t probably own anything close to the value of Michael Jackson’s estate, properly documenting FMV can help you defend against any potential IRS challenges. Here are some suggestions to help you defend your FMV determinations.

Check Properly document donations. Charitable donations of non-cash items are a big area that FMV is challenged by the IRS. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt (confirmation) of your donations.
Check Donate capital items like automobiles to the correct places. You may use the FMV of a donated automobile but only if the charity you donate the item to will use it themselves, or will provide it to someone who will use it. Websites like Kelley Blue Book (kbb.com) can help establish the value of your vehicle when you donate it. Otherwise, the FMV of the donated vehicle will be limited to the amount the charity receives when they re-sell it.
Check Get an appraisal. If you sell a small business, collection, art, or capital asset make sure you have an independent appraisal of the property prior to selling it. While still open to interpretation by the IRS, this appraisal can be a solid basis for defending any differences between your valuation and the IRS.
Check Keep copies of similar item transactions. This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar item to the one you bartered or sold, it can readily support your FMV claim.
Check Take photos. The condition of an item is often a key determinate in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount.
Check Keep good records. Keep copies of invoices for major purchases. Retain bills for any improvements. Make sure your sale of property includes a dated bill of sale that clearly states transfer of ownership and amount paid for the item.

With proper planning, establishing the fair market value of an item sold or donated can be done in a reasonably defendable way.