The Economy May Also Take a Hit from Smaller Tax Refunds

The Economy May Also Take a Hit from Smaller Tax Refunds

America is definitely feeling the impact from The Tax Cuts and Jobs Act (TCJA) . So far, data from the IRS has shown that the average tax refund is around 8% smaller this tax season and some taxpayers who are used to refunds are even getting bills! Working with the best CPA in Charlotte, NC can help keep that from happening! Even though the data is gloomy thus far, it’s not all because of the TCJA.

Can You Get a Tax Write Off on a Car Purchase?

Can You Get a Tax Write Off on a Car Purchase?

Are you thinking about writing off a new car purchase for your business? Have you done your homework? Does it meet the obscure Section 179 requirements to be fully deductible on your tax return? Maybe it only qualifies for a certain deduction percentage or is limited to how much can be deducted because of the type of vehicle.

Separate Your Piggy Banks: The Importance of Having Business vs. Personal Accounts

Separate Your Piggy Banks: The Importance of Having Business vs. Personal Accounts

When you run a business, you have a lot to manage. Sometimes things get overlooked in the beginning, like setting up a bank account dedicated solely to the business. Why would that be important? Well, for starters, it helps keep your business and personal transactions separated, which is a best practice. There are also the legal issues which can result if you do not take the time to separate the two types of transactions. Nowadays many banks offer free business checking accounts so there shouldn't be much holding you back.

Top 6 Life Events Your Accountant Must Know About

Top 6 Life Events Your Accountant Must Know About

It’s tax season again, which means it’s time to stuff all those old receipts into a shoebox and head to your accountant for your annual financial checkup. Just as you would tell your doctor about any important health matters during a checkup, you should also tell your accountant about any important financial matters at this time of year. We don’t need to know all your secrets, but we do need to know about any big changes in your life.

Cancelled Debt and How It May Affect You

Sometimes things happen in life that are outside of our control. Medical bills, job loss, and catastrophic uninsured damage to a home are just a few things that could happen to each and every one of us. When unwelcome events like these happen it may make paying bills harder and can ultimately lead to losing a car or house in exchange for debt forgiveness. Although you would be relieved of your obligation to pay back your debt, there is another party waiting in the distance to collect; the IRS.

What is Cancelled Debt and How is it Reported?

Cancellation of Debt "COD" income, as the IRS defines it, is any debt for which you are personally liable, which is forgiven or discharged for less than the full amount owed. The debt is considered canceled in whatever amount remains unpaid. Creditors are responsible for reporting cancelled debt to taxpayers for amounts $600 or greater on form 1099-C. Taxpayers who receive COD income (regardless of whether or not they receive a 1099-C) must report the cancelled debt on their income tax return and pay income tax for the amount forgiven.

What to Do if You Receive COD Income

Like anything else tax related, don’t ignore any tax forms you receive, including a 1099-C. Remember, anytime you receive a tax document from a third party, there is a very high likelihood that the IRS has also received a copy. The IRS is expecting that you will report all tax information, and if you don’t, they’ll correct your return for you and throw on some penalties & interest for their trouble. Even if you don’t receive a 1099-C, you are still responsible for claiming any COD income on your return.

There are however some exceptions and exclusions as to when COD income is taxable (listed below). Visit the IRS website for more information about each.

Exceptions (do not reduce tax attributes)
1) Gifts, Bequests, Devises, and Inheritances
2) Student Loans
3) Deductible Debt
4) Price Reduced After Purchase
5) Home Affordable Modification Program

Exclusions (may reduce tax attributes)
1) Bankruptcy
2) Insolvency
3) Qualified Farm Indebtedness
4) Qualified Real Property Business Indebtedness
5) Qualified Principal Residence Indebtedness

Before you get too excited, it’s important to understand that the exceptions and exclusions listed above exist in a very narrow set of circumstances and the rules have changed numerous times over the last decade. Discuss any tax ramifications with your tax advisor if you have any COD income. I will go into more detail on two of the most common types of COD income in the next section.

Mortgage Relief and Consumer Credit

The most common types of COD income include Qualified Principal Residence Indebtedness and consumer credit. For taxpayers whose primary homes are foreclosed or sold in a short sale, they are required to report COD income, but may not be responsible for paying income tax on the COD income they receive (effective through December 31, 2016 as of the time of this writing). This is thanks to the Mortgage Forgiveness Debt Relief Act of 2007. The good news here is that there is talk (as of the time of this writing) to extend the Qualified Principal Residence Indebtedness relief permanently for all future years.

For consumer credit (such as credit cards), taxpayers can almost always expect to pay income tax on any COD income they receive, unless one of the exceptions or exclusions from the above section apply. In instances where a car or boat is repossessed and a loan is forgiven there may also be tax consequence. These are common examples of when taxpayers are blindsided. Remember this if you ever need to negotiate with your credit card company to reduce an amount due.

One more note of caution. Although there are exceptions and exclusions at the federal level, some states may still require that income tax be paid on COD incomeregardless of the federal exclusion. Again, consult with your tax advisor to whether this pertains to your situation or not.

How Much Will I Owe?

If you find yourself faced with a situation where you know you’ll have to pay tax on COD income then it might be wise to plan ahead. COD income is taxed at your marginal income tax rate. So for example, a taxpayer with COD income of $10k in a 15% tax bracket (plus state) will face at least $1,500 in additional income tax related to the COD income. In a separate example, if you had a car with a $20k note on it and you returned the vehicle worth $18k and were forgiven for your debt, only the $2k difference would be taxable at your marginal tax rate. What these examples tell us is if you’re going to attempt to have debt cancelled or forgiven, it would be ideal to do it as early in the year as possible to afford you more time to save up to pay your tax bill.

Debt forgiveness has more than just an income tax effect. It can also impact your credit score. Sometimes it may make more sense to get out from under a loan rather than try to endure the hardship of paying it back. In those cases, COD income and lower credit scores may be worth the trade-off. However, given all of the adverse consequences of debt forgiveness, taxpayers should consider debt forgiveness as a strategy only as a last resort.

I hope this was informative to readers. It’s not common that taxpayers receive COD income but it is a growing trend and more people are finding themselves faced with the issue. Feel free to leave comments or questions below!


When Reinvesting Profits in Your Business May Still be Taxable

Over the summer I have had several consultations with small business clients and a constant theme that I have come across is that these small business owners have been “reinvesting” their profits into their businesses. I thought it was time to dispel the “reinvestment” mantra. Whatever your passion or business pursuit, you’re likely going to want to grow your business as big as possible, but part of being a small business owners is knowing when you're investing and when you're spending. This week I’m going to attempt to break down the difference between an investment in a business and a straight-up expense. Note for the purposes of this blog, I am specifically excluding the rules related to C corporations, and will focus only on pass-through entities.

What is an Investment?

First, let’s talk about making the initial investment. To do this we’ll use an example. I’m going to assume that my fictitious entity is a newly minted consulting firm known as ConsultCo, LLC “CC”. It doesn’t really matter what kind of consulting services CC provides, just that it is taxed like every other disregarded LLC. The owner decides on day one that she wants to invest $10,000 into CC. So let’s break that $10k investment down a little further. If all she did was deposit the funds into the business’s checking account, then she would have done nothing more than make an investment in her business. Just because she opened a business and transferred her personal funds into a business bank account doesn’t mean that she gets to deduct that amount on her tax return. In fact, in this very simple example, there is no taxable event.

What is an Expense?

Every business has typical operating costs. Expenses for everything from postage & shipping, to business meals, are deductible. The list of deductible items is extensive so I won’t go into much detail but qualified expenses are truly tax-deductible items. Businesses usually also have start-up costs associated with forming the entity, which can be deducted in full (up to $5,000); after that the excess is capitalized over 15 years. But what about when the company starts gaining traction and the owner decides to “reinvest” the profits, how does that work

Reinvesting Profits

To understand how reinvestment works we have to understand a little more about how the math works. It's also important to understand that cash usually must change hands for a taxable event to occur. This is key. Even if a business owner has future plans for that cash, there typically has to be some movement of money to receive any tax benefit.

So let's work with another example. If the entity above, CC, provides services and earns $1,000 in consulting fees, and immediately uses those funds to purchase a new computer, then the profits have truly been reinvested. In this example, CC exchanged cash for an asset, and with the proper guidance on how to navigate her tax return efficiently, the owner can make that asset purchases fully deductible at the time of purchase. But if CC instead takes that money and decides to put it in the business bank account for future use, well then she has taxable income. You see, the profits were not actually used for anything else, but were instead set aside for future-use. In this case, the business owner would actually have to pay income taxes on the amount put in reserve. Even if the business owner used profits to purchase assets and not elect to fully deduct them at the time of purchase, that event would also likely create taxable income.

When it comes to taxes, it’s usually all about the cash…

Investment vs. Expense

Some owners find themselves continually feeding funds into their business accounts to keep their business afloat. In theory, as they do this, they should be incurring expenses, or at the very least purchasing business assets, both of which are deductible. But what about when the business becomes profitable, and the owner decides to withdraw cash? This is where it becomes important to track equity contributions and withdrawals, as well as revenues and expenses. It is only with this information that an accountant or CPA would be able to successfully determine to what extent there is truly net income vs. withdrawals and how much of each is taxable. In the majority of pass-through entities this irrelevant because all profits are taxable whether or not they remain in the business. But when it comes to tracking cash-flow (the only thing that really matters), a business owner will want to know how much out-of-pocket cash has gone into their operations and how much is coming out (before and after tax).

I hope you found this brief overview insightful. It’s great to reinvest your profits into your business but keep in mind that your net income is still taxable and setting enough cash aside to cover your year-end tax liability is critical. Just because you are leaving some money in the business does not mean you won’t have to pay taxes on the business net income so be mindful when planning your quarterly tax bills.

Have a question or comment? Feel free to post it below, I’d love to hear from you!

Is Your Small Business Failing on its Sales Tax Obligations?

This is a question I have been asked almost daily lately. Whether it’s a new business owner approaching me, or owners of existing businesses, I am regularly asked the simple, but sometimes complicated question, “should my business be collecting sales tax”? It may seem simple to answer, but in reality, there is no hard and fast answer anymore. Many factors dictate whether a business is required to collect. In this week’s post I’ll do my best to walk business owners through their responsibility and requirements when it comes to sales tax.

But first, a note to readers. Every state and local jurisdiction has different rules regarding sales tax. Rules can differ from amount to collect to how often a business owner must remit payment. I can’t stress enough the importance of consulting with a local expert or the taxing authorities directly for more information on requirements specific to where your business operates.

What is Sales Tax and Who Sets the Rates?

If you have ever bought anything you know the advertised price and the price you pay are never the same. The difference is most likely due to sales tax. Sales tax is considered a consumption based tax and is only imposed when goods are purchased by the end user. Taxing authorities often impose sales tax as a way to finance various projects such as public use facilities (think of public hospitals) or to cover operating costs of state and local governments as well as public services such as emergency services. In some cases, these taxes may also be used to expand roadways and public use streets. These are just a few examples of where sales tax revenues may be used. The tax rate itself is typically a combination of a state base rate plus a county rate, which may vary from county to county. The rates are consistent with the budgets established to meet the needs of the public

Who Must Pay Sales Tax?

Who pays sales tax depends primarily on the purchaser’s intent of the goods being purchased. In most cases, the end user is responsible for paying sales tax. Business-to-business (B2B) transactions are more commonly sales tax exempt because businesses may or may not be the end user of a good. A business that is not the end user and is not responsible for paying sales tax may present a sales tax exemption certificate, a state provided certificate basically stating to the seller that they will not being using the goods, but instead selling them back to someone else who may be the end user.

Who Must Collect Sales Tax?

For every payer of sales tax there is a collector and the collection responsibility falls on business owners. If end users are required to pay sales tax, then business that sell to consumers (B2C) must collect sales tax. This seems pretty straight forward when you think about it but when we start to dissect what products and transactions are subject to sales tax it can become complicated. For example, in North Carolina, sales tax is not only collected on the sales of most goods, but is also collected on some labor performed. This recently enacted legislation has been a struggle for business owners to grasp given the unique nature of imposing sales tax on a service. Again, every state is different but it remains the responsibility of every business owner to determine which items and transactions are taxable and which are not. Business owners should also keep clear documentation for tax collected and not collected in case of an audit.

How Does Sales Tax Collection Work?

Once a business has successfully established itself as a legal operating entity and has determined it is indeed required to collect and remit sales tax it must first register with the appropriate state(s) for a sales tax withholding ID number. A withholding ID number is typically required in every state that a business has a liability in, although some states participate in the Streamlined Sales and Use Tax Agreement. As for collecting, that's quite simple; as sales are made, the final sales price is marked-up by the combined sales tax rates, which is collected and held by the business owner until they are required to make a payment to the taxing authorities. It’s important to track sales by state, county, and local levels (where applicable) to ensure appropriate allocation when remitting sales tax. Everyone is going to want their fair share.

Something to note here is that sales tax is a liability to every business and should not be deducted as an expense. I see this very often and have spent countless hours educating my clients about the difference between including it on the P&L versus the Balance Sheet. Regardless of where it is reported on the financial statements, the cash received for every sale related to sales tax should not be used by the business for operating purposes. Businesses that use cash from sales taxes they collect tend to find themselves in hot water pretty quickly because they are often short when it comes time to pay the taxing authorities or they become too cash-strapped to run their business. The proper accounting system established from the onset of business will dramatically reduce the likelihood of this from happening.

How Often Must a Business Make Sales Tax Payments?

How often a business is required to pay the taxing authorities is dependent on the rules set by each respective state. In most cases, states set the collection rules so rarely will you find an instance where a county requires monthly payments and the state requires quarterly payments or vice versa. The payment frequency is also usually provided by the state when a business applies for a sales tax withholding ID number. It’s best to follow the instructions provided by the taxing authorities for tax payments, especially if they change. Payments are also usually made to just one party for the full amount via a sales tax return,  which breaks-out payments by county and local levels so the taxing authorities know how to allocate the funds.

What Happens If a Business Fails to Collect or Pay?

If a business is required to collect and remit sales tax and fails to do either or both, the business could be in a world of trouble. Messing with state and county sales tax can get a business shut down. State revenue officials can easily come to your place of business and pull your license to operate. No matter who approaches me about this or their opinion on the matter, I always explain that it can single-handedly be what shuts a business down or temporarily halts operations. There is harsher enforcement that may be taken by but this is in the realm of worst case scenarios.

I covered a lot of technical material this week and it's only the tip of the iceberg. Given that this topic that has been red hot in my firm over the past couple of months I felt it was time to spread awareness. Contact me for a consult or follow-up with your state’s revenue department if you’re unsure of whether your business should be collecting and remitting sales tax. Whatever you do, don’t ignore the issue. It’s better to come clean and catch-up than to continue to disregard your responsibility as a business owner.

Have tips on how to ease the burden of collecting or paying sales tax, or maybe a story to share? Leave it in the comments below.

How to Handle Tax Notices

Now that summer is officially here taxpayers have likely started receiving notices from the IRS (and states) for regarding issues with their most recent tax year’s filings. Some of these notices include recalculation of tax bills, failure to file (and pay) notices, and even the dreaded audit notice! As alarming as these may seem, and some of them may be, a more common reason a taxpayer receives a notice is a request for additional information. Long story short, most inquiries can be handled easily with a written response to the notifying party through the mail.

What to Do

If you find yourself in a position of having received a notice there are a few things you should do. First off, do not ignore the notice! I can’t stress this enough. As with most things in life, by ignoring the notice, you’re just going to make the matter worse. Even if you don’t think you can resolve the issue on your own, you’re better off hiring a tax professional to act on your behalf. The right individual (or firm) will be able to explain the notice to you and prepare any supporting schedules or correspondence on your behalf. If necessary, you can even complete a Power of Attorney to grant them authority to speak and act on your behalf. If you ignore the notice though, penalties, fines, and interest (as well as levies) can accrue quickly. I have heard several cases recently of garnishments being imposed among taxpayers at both the federal and state levels; all because those taxpayers ignored the notices they received.

Regardless of if you choose to retain someone to help guide you or go it alone, you’ll need to locate the documentation regarding the tax year you received a notice for. Notices typically indicate the year, issue, any recalculations made, and a response due date, as well as directions on how to respond. Make note of the due date since missing it carries its own consequences.

Formally Respond

When reviewing your notice you will be presented with options. You usually have the opportunity to comply (and pay any difference due) or disagree and explain your side. In the event that you find the notice is correct and you owe more in tax, your best course is likely to pay the amount due and move on. If the amount is large and you can’t pay it in one lump sum you should be able to enter into an installment agreement to pay it over time. If you disagree though, then it is worth your time to review your supporting documentation and draft a well-written response stating the facts as you have them and citing why you feel your position is justified. When drafting your response it is best practice to indicate all of the header information from the original notice as reference for the receiving party. Be sure to include your social security number and sign your response. If you are married and filed jointly with your spouse then you should include your spouse’s social security number on the response and have them sign the notice as well. Note that any unsigned written correspondence will not be valid.

Business Tax Notices

If you are a business owner then the scope of notices you might receive is different. In addition to receiving a notice related to income taxes, you may also receive a notice regarding sales taxes or payroll withholding taxes. Most commonly, notices for either of these types of taxes arise out of a failure to file the correct forms. If that is the case, you should file any missing forms and remit the associated taxes immediately. Since sales taxes are controlled by the states, you are playing with fire if you fail to file and pay on time. The states have the authority to close your business until all back taxes have been paid. This is clearly not a problem you want to have. You can treat payroll taxes with the same urgency (if not as a higher priority) because those cases you will likely have the feds and state looking to be paid.

I hope you found this brief read helpful. It’s hard to give specific advice because all notices are different as is every taxpayer's situation. As unexciting of a topic as it is, the information is handy to have nonetheless. Taxpayers should take time to think through their options if they receive a notice, but they certainly should not wait too long to act or ignore them either. If you have questions you should reach out to a professional or contact the notifying party for guidance in resolving the matter. Individuals will find it hard to live their lives if garnishments and levies are imposed upon them, and similarly, business owners can have their operations halted if they do not comply with the notices.

Have a tale to tell? Leave your comments below!

Why It’s Important to File an Extension

With a little over a week to go for this tax season taxpayers are facing the critical decision to file an extension or work fast to get their returns filed by the deadline. If you need more time, it’s best to file for an extension. You’re better off taking a little extra time to complete your return accurately the first time around rather than risking a mistake and having to amend in the future.

What is an Extension?

An extension is exactly what it sounds like, an extension of time to file your tax return. Whether you are a taxpaying business or individual, the federal government (and states) allow for an extension of time to file your tax return. Extensions grant you six months from the original filing deadline to complete your return. For example, a calendar-year individual that files an extension by April 15th (typically the original due date) will be allowed an additional six months (until October 15th ) of that same year to file their return.

Not an Extension to Pay!

An extension to file a tax return is NOT an extension of time to actually pay your taxes. Most taxpayers think when they file an extension that they are also extending the time they have to pay their tax bill but that is not the case. At best, any ensuing penalties & interest may be reduced, but any taxpayer that files an extension without making an estimated payment will owe penalties & interest on the unpaid balance once they file.

Why You Should File an Extension (if you need one)

Filing an extension puts the government on notice that you are aware your return is due but that you have yet to prepare it. You don’t need to provide an explanation for extension; you just need to request one. Most everyone is granted an extension automatically at the federal level and almost every state honors the federal extension too. Bear in mind, the states usually follow the same practice as the fed and require an estimated payment at the time of filing or you’ll face penalties & interest. At the very least, you will be absolved of the “failure-to-file penalty” granted you file within the extension window.

How to File an Extension

There are several online services that will let you file for an extension for free. You should never pay to file for an extension. If a preparer requires a fee to file an extension make sure it will be treated as a deposit to your overall tax preparation fee before paying. If it’s not, consider seeking an alternative preparer or filing your own extension and hiring a preparer after you have done so to prepare your return.

Filing an extension requires basic information such as your name (and spouse’s name if married), address, social security number(s), and date(s) of birth. Some other general information may be required, especially if you are making an estimated payment with your extension. Although you have six months from the original deadline, once your extension is filed and approved, you should work diligently to prepare your return (or have it prepared) and file it as soon as possible. There is no need to wait until the extension deadline.

What if You Miss the Extended Deadline

If you miss the extended deadline then you will be in a tough spot, especially if you owe. You will be assessed penalties & interest all the way back to the original due date for any unpaid amounts. You would be better off filing and setting up a payment plan if you don’t have the resources to pay your bill immediately. Making an effort to rectify your tax bill is better than taking no action or ignoring your responsibility all together.

Are you going to be late to file this year? File an extension! Find a preparer that can help you or head over to the IRS website to access any of the online and desktop software vendors to do it yourself!

The Standard vs. Actual Deduction Methods (Vehicles)

Every year at tax time self-employed taxpayers are faced with a dilemma; how to deduct their business related vehicle expenses. The IRS allows for a choice between two methods, the standard & actual method. I’m writing to explain the difference and limitations between each method as they relate to business use of personal vehicles.

Vehicle Expenses

As mentioned, the IRS allows for a choice between two methods. The first method, the standard deduction, allows for a set rate per business mile driven of a personal vehicle. For tax year 2016 the rate was $0.54 per business mile driven and for tax year 2017 the rate is $0.535 per business mile driven. These rates change every year but are usually pretty close year-over-year.

Although the rate per mile under the standard method is generous, the rate was established to cover all of the maintenance on a personal vehicle (including but not limited to):

•    Fuel
•    Oil
•    Repairs & maintenance
•    Deprecation
•    License & registration fees
•    Parking fees & tolls*
•    Tires
•    Insurance
•    Vehicle cleaning expenses
•    Towing charges (for repairs only)
•    Auto club dues / roadside assistance service fees
•    Lease payments

Expenses can add up fast depending on the type of vehicle and how much it is used. For taxpayers that choose the actual method, they would be allowed to deduct the expenses incurred for each of the items above (plus any other vehicle-related expenses that might not be listed). Of course there is limitation to the extent the vehicle is used for business purposes. To easily determine the business-use portion of expenses, a taxpayer should track total miles and business miles driven to create a percentage allocation.

*Note that parking fees & tolls are deductible regardless of method used.

Which Should You Choose?

The majority of taxpayers elect the standard deduction because it is simply easier and cuts down on the amount of recordkeeping. It may not always be the most favorable election though. If you don’t rack up miles throughout the year, drive an expensive vehicle, or drive one that has unusually high maintenance costs, you may benefit more from the actual method.

The only way to know which is more favorable is to track both methods each year and do the math. Typically, most taxpayers would find the calculations to be very close to one another. For those circumstances where one significantly outweighs the other, it might be worth changing methods. A pitfall here is that if you elect the actual method in the first year the vehicle is available for business use, then you are permanently locked in until that vehicle is retired. Choose wisely and consider electing the standard method in the first year so you can have the flexibility to switch back and forth between the methods (subject to some limitations).

Recordkeeping Requirements

When choosing the standard method, taxpayers will want to maintain a driving log of business-related miles they drove. This log should include the date, miles driven, the reason for the trip, individuals involved, and starting & ending addresses. Taxpayers can keep a paper written log in their vehicle for easy access and recording or they can create a spreadsheet to track trips. There are also apps such as MileIQ that will track miles automatically. This information will be necessary to accurately calculate business mileage at the end of the year and in case it is ever requested to support a mileage deduction.

If using the actual method, taxpayers should keep receipts for all vehicle expenses. This practice is consistent with that of any other business-related expense and can be tracked on the business’s books the same way. Since the majority of the receipts will be paper copy they can be scanned onto a computer or into the cloud for safe keeping and quick access if they are ever requested. Another idea is to keep them in a folder somewhere in the related vehicle for quick access. This is also beneficial for when the car is sold to prove maintenance history of the vehicle.

Leased Vehicles

A note about leased vehicles. Lease payments can only be deducted when using the actual method. Additionally, if a taxpayer chooses the standard method in the first year of the vehicle’s lease, they are locked into the standard method for the entire life of vehicle’s lease period (including extended terms). The type of vehicle and expected number of miles driven over the life of the lease will play a large part in choosing the most favorable method.

BONUS: Medical & Charitable Service

In addition to the standard mileage rate for business miles, the IRS also allows a standard rate (only) for medical purposes and charitable service. The rates are much lower for each ($0.17 for medical & $0.14 for charity in 2017), but are often overlooked by taxpayers and can add deductions for those that itemize. Note that charitable service includes the miles driven to deliver donated goods or perform services to benefit a 501(c)(3). This is only true if the entire trip is for charitable service only. Any personal stops along the way to or from could disallow the deductible miles in full for that trip.

I hope you enjoyed this write-up on vehicle expenses. They are common deductions that most self-employed taxpayers incur, but are still overlooked. Leave your comments or questions below!

The Top Reason Taxpayers With Multiple Jobs Owe On Their Taxes

Did you know that it’s very common for an individual with more than one job to actually owe when they file their income tax return? That’s right, they owe! It’s not a hard and fast rule but often times when taxpayers in this situation owe money it comes as a surprise because they believed they had completed the forms correctly when they started their jobs.

Therein lies the problem, the forms…

The Math

Let’s use a hypothetical example. Assume Jimbo worked three jobs in 2016 and earned $25k at each job for a total of $75k. Jimbo is single with no “above-the-line” deductions, itemized deductions, or dependents. He also elects no tax-deferred options offered by his employers and does not contribute to an IRA. He shows up to work, gets paid, and goes home. Nothing fancy.

When he was hired at each job he was asked to complete Form W-4 and in doing so he assumed one dependent (himself) and completed the form as such. It made sense to him in his head and for the most part it seems reasonable. That is, except for one minor detail; he didn’t earn $25k, he earned $75k. You see, his payroll was calculated separately at each job based on Jimbo earning $25k. Without any other variables in this example, I can tell you that Jimbo will owe.

What Could He Have Done?

As I mentioned above, Jimbo’s taxes are being withheld separately by each employer assuming he only works that one job earning $25k. Jimbo actually earns $75k per year and therefore he should have adjusted his payroll withholding from each employer once he took on the additional jobs. Sure, he would have received less in each of his paychecks but he also would be less likely to owe come tax time.

How to Make Changes

The instructions to Form W-4 include a calculation that individuals can use to determine their withholding. Unfortunately most taxpayers ignore it which is one reason why tax returns are even a thing. At any point during the year an individual can obtain a new Form W-4 from their employer and make changes to their withholding. Most employers will probably never ask employees to fill one out (aside from when they first hire someone) or help complete the form. This might be where it pays to ask a trusted tax advisor to look over the forms before submitting to an employer, especially when there is a life event or additional employment. My clients frequently reach out to me throughout the year and ask me what they should do when they have life events such as having children, buying a house, or starting a retirement fund.

Does It Really Matter?

Kind of. In most cases, if a taxpayer owes more than $1k to the federal government at the end of the year then there is a penalty that is assessed for underpayment of taxes. Although the penalty is usually insignificant, owing taxes can come as a surprise in itself. Having to pay hundreds or thousands of dollars all at once without being prepared can prove burdensome to most people.

Who Else Might This Impact?

This situation is also commonly found when individuals change jobs during the year or for those who have side jobs which they report on their taxes. When there are significant changes in income taxes that are not considered then there is an increased likelihood that taxpayers might owe when preparing their annual return. This is another great reason why it’s a good idea to work with a trusted tax professional to help you receive every deduction possible each year.

Do you need help with your withholding? Or maybe you have a cautionary tale you would like to share about working multiple jobs. I would love to hear from anyone willing to share. Postin the comments section below!

5 Myths About Tax Returns

If you follow me or have read any of my blogs in the past couple of months then you know I have been writing quite a bit about taxes. I want to share five myths I consistently hear about tax returns.

Myth #1 – I Can Do It Myself

This is less of a myth and more of a question of one’s ability. Everyone is entitled to prepare their own tax return, that’s no secret. But there is much to consider when doing it yourself, primarily, the complexity of your return. That is where the “myth” comes in. There will come a time when you will have a complicated return and really shouldn't do it yourself.

I have seen self-prepared returns from the impoverished to multi-millionaires and I can tell you everyone makes mistakes. It's very rare that I do not find mistakes on self-prepared tax returns. Vendors like TurboTax and H&R Block Online do a great job with their products, but even I have had to cobble my way to the right answer when using their software. There are parts of the tax code that are highly subjective to interpretation, and unless you are well versed in everything tax, then you stand a fair chance of being wrong in your interpretation. This could mean you are leaving money on the table or might have to pay back some of your refund down the road. Know your limits and when it makes sense to bring in a CPA to assist you.

Myth #2 – I Always Get a Refund

Nobody is ever guaranteed a tax refund. Your tax return is an annual reconciliation between what you should have paid and what you actually paid throughout the previous year. If you paid too much then you get a refund, but if you didn’t pay enough, well, then you owe. Some taxpayers treat refunds like found money, but the reality is that it is money overpaid throughout the year. Yes there are credits available to certain taxpayers who meet specific criteria, but they are not available to everyone and a taxpayer’s situation can (and usually does) change each year. If you prepare your own taxes you may not even be aware at how much you are overpaying into the system each month. Again, this is why it’s important to consider working with someone that can explain the results to you each year.

Myth #3 – Tax Preparers are Responsible for the Return

Not true! If you are working with a reputable preparer then you should be receiving an engagement letter or agreement each year. Somewhere in that letter or agreement it should clearly state that the preparer is not responsible for the return and that they only used the information provided by the taxpayer to prepare the return. This is also clearly stated on your return.

What does this mean? Well, if you provide facts and circumstances that are inaccurate, you are on the hook for additional taxes as well as penalties and interest if you are ever audited. But if your return preparer misinterprets the law using accurate information you provided, then the liability might be shared. One thing I can assure you is that the IRS is indiscriminate with their notices and audit selection and it is usually unrelated to who prepared the return. Speaking of the IRS…

Myth #4 – I Received a Notice from the IRS, it’s my Preparer’s Fault

In most cases, you didn’t receive a notice because you changed who was preparing your tax return. More likely, you may have received a notice requesting additional information to validate a tax return line item. Typically it has something to do with earning significantly more or less money, or not paying enough taxes.

There is little correlation between who receives notices based on their tax return preparer. That being said, the IRS looks favorably upon CPAs and tax attorneys because they usually possess an advanced understanding of the tax code versus their peers. An IRS agent reviewing a return may choose to forego any further action if they see that a return has been prepared an individual with one of those designations.

Myth #5 – Tax Elimination Plans

This myth is by far my favorite because hands down it is a complete lie. I have heard industry experts claim they can eliminate your tax liability and I know how they do it. Rather than have you pay the government what is owed, they have you invest the money into a tax-deferred investment account such as an IRA (or SEP if you’re self-employed) so that you don’t have to pay taxes on that money today. Well, it’s true that you may not owe today, but your tax bill hasn’t actually been eliminated. Any tax due on the money you invested is just deferred until 70 1/2 when Required Minimum Distributions “RMDs” kick in. You're also still out of pocket that cash so you still have to come up with the money, you're just sending it elsewhere for the time being. The term tax elimination is misleading and if you ever encounter someone who tells you they can do it then you should be skeptical.

Share Your Thoughts!

I’m really interested to hear what other taxpayers (and preparers) think or have heard about taxes. As part of my service I try to educate my clients to understand how the system works so they are better informed for the future. Leave your comments in the section below.


Stock Wash Sales

Have you had a bad year in the stock market? Are you still holding on to losing investments in the hope that they will rebound and make you rich? Or maybe you just can’t bear to “take the loss” by selling them. I could make a case to hold, sell, or buy more, but I’m not writing about that this week. Instead, I’m writing to warn you about something called wash sales.

A wash sale occurs when you sell an investment at a loss, and then buy a substantially similar investment within 30 days after the sale. Notice the word substantially, a term not clearly defined by our friends over at the IRS, so I’ll do my best to explain. Wash sales can occur for investments other than stock, but for the purpose of this article, I will focus specifically on stock related wash sales.

Let me explain

Imagine it’s December 30, 2016 (the last trading day of 2016), you have some poorly performing investments, and you decide that “2017 will be a better year”, so you bite the bullet and dump your shares of fictitious entity, XYZ Corp. You know you’ll get a tax deduction for your losses (up to $3k) so you’re not 100% down and out. Until January 3, 2017 (the first trading day of 2017), when XYZ Corp announces a revolutionary breakthrough and suddenly their stock price surges. You could have been in good fortune if you had only held on to your shares, but because you sold, you’re stuck with that 2016 stock loss. You decide to buy back your shares and ride the upward trend.

Not so fast…

If you choose to buy back your shares, the tax loss you thought you would receive in 2016 will vanish. The IRS would prefer that taxpayers don’t game the system year-after-year by recognizing stock losses for tax benefits just to buy the shares back right after the New Year. This rule applies all year, not just at year-end (when this buy/sell strategy is more commonly found).

Substantially similar

In our example we used the same investment, which is blatantly a similar investment. But what if XYZ Corp is in the medical devices sector and competes directly with ABC Corp? You think the sector has potential, but maybe XYZ Corp has had some bad news in the press and is specifically not doing as well as its peers. You could stay invested in the sector by swapping your investment in companies and probably survive an IRS auditor. You couldn’t sell your XYZ Corp shares and pick up call options on XYZ Corp without risking a wash sale though. No one will stop you from actually placing the trades, and your broker may not catch the wash sale, but doing something like this is probably not going to pass under an audit or review. They are substantially the same.

They’re watching

The wash sale rule can dramatically reduce your allowable tax loss from stock sales. Your broker is required to designate wash sales on broker statements issued each year, so yes, the IRS knows about each wash sale that occurs in your account. Even if you open two separate brokerage accounts and buy & sell the same securities in each, the wash sale rule still applies. The two brokers would not know you are doing this and thus not report it, but that doesn’t make it any less of a violation of the rule.

Although the wash sale rule is in place, losses that are disallowed are rolled into the basis of the re-purchased investment until that investment remains sold for longer than 30 days. This means you don’t outright lose the tax benefit of stock losses, but you do not get to recognize the benefit until the appropriate amount of time has passed.


This is a sticky area of the tax code, especially when you get outside of stock related wash sales. There is no definitive ruling in place about what constitutes a substantially similar investment; so much is left to judgment. Obvious violations of the rule will be caught and enforced. Work with your broker to understand what will be flagged as a stock wash sale so you don’t lose expected tax losses at year-end.

Do you have a strategy for the end of the year to avoid wash sales? Feel free to share or comment below.

Independent Contractors: A Definition and Some Tax Insight

I’m excited to write about a subject that I come across far too often – the independent contractor status and the tax impact of being one.

Many people may associate the term independent contractor with that of someone who works on a house (think of a plumber, an electrician, or handyman). Although these individuals may fall into this category, the reality is that anyone can be an independent contractor. The IRS has pretty clear guidance on how to determine if an individual is an independent contractor. Simply stated, an individual is considered an independent contractor if the payer has the right to control or direct only the result of the work, and not what will be done, or how it will be done.

What does this mean?

Well, let’s use an example. Let’s say I hire someone to help me with my social media. She is hired with the understanding that she has full access to my social media accounts using her own devices (computer, smartphone, or tablet) and all that I have explained to her is that I want her to respond to questions and actively market my firm. How, when, and from where (geographically) she does this is up to her. We establish some rules such as no profanity or bias, but other than the rules we set, it’s all within her control. She gives me daily reports of her work but that’s about it. She’s likely considered an independent contractor for tax purposes. I control only the results of her efforts (responding to questions and actively marketing my firm), but how she does it or by what means is out of my hands. Of course, if I don’t like how she does her job I can always terminate our agreement.

What about employees?

But what if we changed a few things. Instead of working with her own devices she instead agrees to meet me at my office a few hours per week and uses my firm’s computers to access my social media accounts. She can only do her work from my office, no remote access is allowed. In addition, I establish a standard set of guidelines for marketing my firm including how, when, and about what to post. I give her the exact words I want used on my social media accounts. She’s really only there to go through the process of posting on my accounts. Since she’s at my office though, I also have her answer the phone, prepare client deliverables, and even reply to my e-mail. She’s working under my direction, having been told what to do, and how to perform tasks. She is now more likely considered an employee for tax purposes.

Why is this a big deal?

The tax difference between an employee and an independent contractor could be significant. At the time of this writing, employers are responsible for 50% of the FICA tax which is 7.65% (Social Security tax of 6.2% plus Medicare tax of 1.45%) on each employee's first $118,500 of salary and wages. The employee covers the other half. You may never even notice this if you receive a steady paycheck because it’s all taken care of through the payroll processor.

On the other hand, if you’re an independent contractor, you’re on the hook for the whole amount of 15.3% (Social Security tax of 12.4% plus Medicare tax of 2.9%). It may not sound like much but on $10,000 in earnings one would owe $1,530 just in Social Security & Medicare taxes, not to mention the federal and state (if applicable) income taxes to be paid. The payer has no responsibility to assist independent contractors with withholding. What’s worse is that inexperienced individuals who are considered independent contractors don’t know they have been classified as one until they receive a 1099-MISC at tax time. By then it’s too late to file estimated taxes on the income and the taxpayer receives a crushing year-end tax bill that they may not be prepared for. Luckily you can write-off expenses against income earned as an independent contractor, but there are rules and limitations around that too and poor planning may mean lost deductions or hours of work to recreate expense statements.

Ask questions.

Whenever you agree to work for someone you should always ask if the position is contract or employment. Some telltale signs are if you are asked to complete a W-4 or a W-9. A W-4 is typically requested for employees and a W-9 for independent contractors. Your social security number is required for your employer to file the necessary forms for tax reporting purposes. Don’t provide any information or sign anything until you understand the consequences of what you’re getting into. If you are signing on as an independent contractor, it’s best to begin the habit of paying estimated income taxes. Check back soon for a post on filing estimated income taxes.

Confused? Have an opinion? Leave a comment below or give me a call.

Trump's Tax Plan

With the 2016 presidential election behind us I thought it would be a good idea to address the sudden 800lb gorilla in the room; Trump’s tax plan. Trump has released an aggressive tax plan that his administration believes will stimulate economic growth in the United States. Although the question remains whether part, or all, of the proposed changes will be passed into law, it’s best to be prepared and understand the consequences.

Given the number of changes in the proposal, I am only highlighting those that could have an impact on the average taxpayer and business owner.

This article is a good read but it does get a bit technical at points so brace yourself.


Tax Bracket Changes
There are currently seven income tax brackets starting at 10% and topping out at 39.6%. Trump’s plan condenses those seven brackets into three; 10%, 20%, and 25%.

Deductions & Personal Exemptions
Trump’s plan would increase the standard deduction from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for joint filers. This would result in fewer taxpayers itemizing their deductions. For those able to itemize, single filers would be capped at $100,000 in itemized deductions and joint filers would be capped at $200,000. An allowance for personal exemptions and the head-of-household filing status would also be eliminated as a result of the plan.

Under Trump’s plan, taxpayers would be entitled to an above-the-line deduction for children under the age of 13 for childcare expenses, but the proposed deduction would be capped at the state average for the age of each child. For example, if a taxpayer lived in NC and the average cost for childcare were determined to be $4,000 for a 10-year-old child in NC, a taxpayer with a 10-year-old child would be entitled to a deduction up to that amount. Any excess costs would presumably not be deductible. The childcare exclusion would not be available to single filers with total income over $250,000 or joint filers with total income over $500,000, and would be limited to four children per taxpayer per year. Additionally, any deduction for an eldercare dependent would be capped at $5,000 per year.

Something interesting to note is that this proposal would also be provided to taxpayers who use stay-at-home parents or grandparents as caregivers (as well as those who use paid caregivers).


Tax Rate
Under President-elect Trump’s plan, the current corporate tax rate of 35% would be reduced to 15%, and the corporate alternative minimum tax rate would be eliminated. As a result, most business deductions would be eliminated. This rate would become available to all businesses, regardless of size, primarily to encourage them to retain profits within their business (and in theory stimulate more spending within the business).

Perhaps the biggest change to corporate tax rates would be for LLCs, partnerships, and S corporations, commonly known as “pass-through” entities. The proposal would make the pass-through portion of income taxable at the new corporate rate of 15% as well. This could have a huge impact on business owners depending on their income bracket.

There has been some discussion in the tax community about Trump’s proposal to eliminate depreciation, but I’m skeptical. Such a revolutionary change to a long-standing accounting principle seems unlikely. There is, however, a proposal in his plan, which would allow manufacturing firms to expense capital investments entirely in the year of purchase, but at the same time forgoing a deduction for interest expense on the same asset(s). Essentially, you would not be able to finance an asset, deduct the entire asset in the year of purchase, and continue to receive an interest expense deduction for the same asset.

How things shake out on the subject of depreciation will be interesting for sure.

On-site Childcare
If your business offers on-site childcare then you are aware of the tax credit that currently provides your business up to $150,000 for a portion of the costs associated with providing the childcare. Trump’s proposal would raise this credit to $500,000. Amounts paid to employees for childcare would still be considered business deductions, but would not be used to calculate this credit.

Concluding Remarks
I hope readers have found this article insightful. Tax changes are never easy to navigate or understand but my goal was to make readers aware of some of the changes that could potentially be coming to us in the near future. There will undoubtedly be tax changes, which will have an impact on individuals and businesses beginning in 2017.

Confused? Concerned? Unsure? Feel free to comment below or send me a message to keep the conversation going.

Why You NEED a Budget

I have a client I met about 5 years ago, and at that time she was broke. Worse then that, she was in a bad relationship, and without her other half she would not have been able to pay her bills.

The first thing I noticed when we met to talk about her finances, aside from her lack of funds, was that she had no budget or system to create one. So we put one together.


The budget was simple. We started by setting up a spreadsheet (think Google Sheets) using her weekly paycheck amount and her average weekly grocery and gas bill. Then came her average monthly expenses: cellphone, TV & Internet, mortgage payment (which included escrowed expenses for property taxes and insurance), car insurance, and utility bills. She went through her bank statements to get actual amounts so we knew we had real information to work with. What good is a budget if the amounts aren’t accurate?

It turns out she was earning barely enough to cover her necessary expenses.

and Wants...

Then we covered the less critical expenses such as dining out, movies, clothes (for her and her two school-aged children), and pet expenses for her dog. Forget vacations, she hadn't traveled in years and knew it wasn't in the cards. But she did admit to buying herself new clothes about once a month (the kids more so when they needed them). She also had a relatively healthy dog that only needed an annual visit to the vet so his expense was minimal (aside from food which was also negligible).

Once we added her wants and needs into her budget, it was clear she could not afford everything on her own. However, with the extra support of her not-so-great boyfriend, she could more than afford her current lifestyle.

But she wanted out of the relationship.

Small Potatoes

After we put it all together, I was able to step in and do what I do best; analyze. The first thing to go was her monthly habit of clothes shopping. We agreed she would need new clothes from time to time, but not every month. By cutting this monthly habit she was able to save money and also became more aware of seasonal sales to get really good deals (Black Friday anyone?).

Dining out and going to the movies were also off the table. For the cost of taking her kids to the movies every month, she could sign up for Hulu and Netflix and have endless content choices for less. She also cut her TV package down to internet-only because she now had Hulu and Netflix for TV & movies. Some might argue the lack of content choices so we added a few bucks per month for a weekly visit to her nearby Redbox.

Big Ticket Items

Despite these cutbacks, we still hadn't made the progress she needed. So next, we reviewed her insurance policies. Guess what? She hadn't thought to combine her home & auto policy. As soon as she did (and changed insurers) she started seeing big savings.

Where it gets better is on the mortgage. She had been paying pre-recession interest rates (think 6.5%) but during our meeting (circa 2011), rates were at about 3%. We worked with a local bank to refinance her mortgage and dropped her payment hundreds per month. We even cut the mortgage from a 30-year term to 15-year term and the payment was still less with the added benefit that her house would be paid-off much faster.

Make It Happen

Not soon after her mortgage was refinanced she was able to give Mr. Not-so-Wonderful the boot. Even without him she was able to pay her bills and save a little for emergencies. The greatest part of this experience was that she was able to declare her personal and financial independence by changing some of her habits implementing a budget. Today she is doing very well; she has established college funds for both of her children and has built up a nice emergency fund. She has even been able to re-introduce some of her wants back into her lifestyle and is less stressed out about finances because she now uses a budget to plan.

What are some methods you use to budget and stay in the habit of budgeting? Add them in the comments section.