The Importance Of Inheritance Tax Planning

How can I reduce my taxable income?

One of the excuses I had for not contributing more to my retirement was the thought that I couldn’t afford it. In fact, 47% of Americans feel the same way I felt. In all honesty, I just didn’t want to reduce the amount of my direct deposited check. I was comfortable seeing a certain amount and I didn’t want to lower it. I had bills to pay, money to spend and money to save.

Yup, I thought that the money I was saving in my savings account earning a measly 1% in interest was better saved there! Oh to be young and naive.

I just didn’t know any better.  I didn’t understand that the money I contributed to my retirement plan was not only being invested but I was also saving money. How you may ask? I would have been saving money by not paying taxes on that money AND as a result, my taxable income would have lower. Let’s get into this!

What is taxable income?

In simple terms, taxable income is the amount of your income on which you pay taxes also know as your post-tax income. I was surprised when I received my first paycheck at 14 to see that my back of the napkin math didn’t add up to my paycheck. I quickly learned that there were things like social security, Medicare and taxes. All of which was deducted from my earnings long before I got my paycheck. (Learn more about pre-tax vs. post-tax income and how much you really make).

Does my story sound familiar? It may feel like every dollar you earn is taxed, but due to our complicated and something called our “graduated tax” system (also known as progressive tax), not all income is taxed. Examples of income not taxed include child support payments, the money you contribute to certain types of retirement accounts and money that you put aside for childcare or medical expenses. This also includes money you put in an employer-sponsored account like a Health Savings Account or Flexible Spending Account.

 

Top Off Your Retirement Savings Plan

Money contributed to an employer-sponsored retirement plan, such as a traditional 401(k), isn’t included in your taxable income. In 2016, you can contribute up to $18,000 or $24,000 if you’re 50 or older, by the end of the year. If you haven’t maxed out, ask your employer if you can make an additional contribution before December 31.

If you have self-employment income from a side job, you can sock away even more. You can contribute up to 20% of your net self-employment income to a Simplified Employee Pension, up to a total contribution limit of $53,000 for 2016. (Unlike 401(k) contributions, there’s no December 31 deadline for SEP deposits. You can make 2016 deposits anytime before the due date of your tax return.)

Give to Charity

If you itemize, making charitable contributions before December 31 will reduce your taxable income. For cash contributions, hang on to your canceled check or credit-card statement as proof of your donation. If you contribute $250 or more, you’ll also need an acknowledgment from the charity. Donations made by credit card before December 31 are deductible on your 2016 tax return, even if you pay the credit-card bill in January.

Donating appreciated securities can also reduce your taxable income. When you donate appreciated securities you have owned more than one year to charity, you can deduct the full value of the securities on the date of the gift. You won’t have to pay taxes on capital gains, and the charity won’t have to pay them, either. Not all charities can accept donations of appreciated securities. If your favorite cause falls into that category, consider opening a donor-advised fund. The fund administrator will sell the securities for you and add the proceeds to your account. You can deduct the value of the securities on your 2016 tax return and decide later where you want to donate the money.

 

Take advantage of tax loss harvesting

If you have losing investments, selling them allows you to harvest your losses to offset taxes on investment gains or to reduce your taxable income by up to $3,000.

This strategy can be especially beneficial if your income is going to be higher than normal and you want to avoid being pushed into a higher tax bracket, or if you’re going to be selling investments that you’ll need to pay short-term capital gains on.

Keep track of your medical costs

If you incur substantial medical expenses, you may be able to take a deduction for the funds you spent.

In 2019, you can deduct unreimbursed allowable medical expenses only if they exceed 10% of your income — up from 7.5% in 2017 and 2018. You’ll need to itemize to claim this deduction — which doesn’t make sense for many tax payers due to the large standard deduction.

Still, you should keep the bills you incur throughout the year. If your costs are high enough to hit the threshold for deductibility, you want to be able to take advantage of the tax savings to offset some of your big care expenses.

 

Get organized.

First up, be organized. Don’t just deal with your taxes once a year, in April. Instead, dedicate a folder or box to tax-related documents, and fill it all year long — with receipts for deductible expenses, 1099 forms and other IRS forms that arrive in the mail, trade confirmations and end-of-year statements from bank and investment accounts that you may need to refer to, and so on. That way, when it’s time to start preparing your tax return — or to hand off needed information to a paid preparer — everything will already be in one place.

Keep your tax-related records for a while, too. It’s smart to keep copies of your returns, at least for a minimum of three years and, to be more conservative, up to seven. You’ll likely be free from any chance of a tax audit by then.

Claim all the deductions you can.

As you know, a tax deduction shrinks your tax bill by shrinking your taxable income. If, for example, you earn $70,000 and take a $5,000 deduction, your taxable income will shrink by $5,000, letting you avoid being taxed on that $5,000. If you’re in a 24% tax bracket, that could save you $1,200.

It’s a little more complicated than that, though. You can choose to itemize and claim all your various deductions, or you can just take the “standard deduction” available to all taxpayers. That deduction has been roughly doubled in recent years, making it the smart (and easy!) move for most taxpayers.

Get the timing right

From a tax perspective, there’s a huge difference between doing something on Dec. 31 and doing it a day later. If you know an upcoming expense is going to be tax-deductible, think about whether you can pay for it this year rather than next year. Making January’s mortgage payment in December, for example, could give you an extra month’s worth of mortgage interest to deduct this year. Similarly, if you know you’re near the threshold for the medical-expenses deduction, moving that root canal up might make the pain more bearable if the cost suddenly becomes deductible, too.

 

Tweak your W-4

The W-4 is a form you give to your employer, instructing it on how much tax to withhold from each paycheck. If you got a huge tax bill this year and don’t want another surprise next year, raise your withholding so you owe less when it’s time to file your tax return. If you got a huge refund, do the opposite and reduce your withholding — otherwise, you could be needlessly living on less of your paycheck all year.

You can change your W-4 any time.

Stash money in your 401(k)

Less taxable income means less tax, and 401(k)s are a popular way to reduce tax bills. The IRS doesn’t tax what you divert directly from your paycheck into a 401(k). For 2020, you can funnel up to $19,500 per year into an account. If you’re 50 or older, you can contribute an extra $6,500 in 2020. These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s. And if your employer matches some or all of your contribution, you’ll get free money to boot.

Contribute to an IRA

There are two major types of individual retirement accounts: Roth IRAsand traditional IRAs.

You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make.

For the 2019 tax year, you may not be able to deduct your contributions if you’re covered by a retirement plan at work, you’re married and filing jointly, and your modified adjusted gross income was $123,000 or more. In 2020, that number rises to $124,000.

There are limits to how much you can put in an IRA, too:

For 2019 and 2020, the limits are $6,000 per year, or $7,000 for people 50 or older.

You have until the tax-filing deadline to fund your IRA for the previous tax year, which gives you extra time to take advantage of this strategy

What Should Be On Your Tax Preparation Checklist

Tempted to lie on your taxes? Here are 4 reasons you shouldn’t

The average tax refund is more than $3,000. When you hear that number and do your taxes, only to find out that your refund is much less — or worse, that you owe money — it can be tempting to fudge the numbers and increase your refund.

But misrepresenting your income on your return counts as tax fraud, and has serious consequences. Below, find out what happens if you lie on your taxes and what IRS penalties you could face.

You can get audited

Because the IRS gets all of the 1099s and W-2s you receive, they know if you do not report all of your income. Even if you accept unreported payments in cash or check, your financial activity can reveal red flags about what income you do not report, potentially triggering an audit.

An IRS audit is an extensive review of your taxes and financial records to ensure you reported everything accurately. Though most people have a less than 1% chance of being audited, it’s not worth the risk.

Tax fraud carries heavy penalties & fees

If the IRS does select you for audit and they find errors, the penalties and fines can be steep.fudging your taxes to reduce your tax bill or boost your refund can cost you more in the long run. If you don’t p ay your tax liability by the due date, the IRS will charge you a late payment penalty. Even if you file on time, you may still be charged a late payment penalty if you under report your income and the IRS finds out. And the penalty is just the start. The IRS can also charge you interest on the underpayment as well. If you’re found guilty of tax evasion or tax fraud, you might end up having to pay serious fines

Criminal charges are possible

Besides potentially owing thousands in IRS penalties, fees, and interest, you could also face criminal charges.

Tax fraud is a felony and punishable by up to five years in prison. Failing to report foreign bank and financial accounts might result in up to 10 years in prison.”

Criminal investigations and charges start when an IRS auditor detects possible fraud during their audit of your returns. Courts convict approximately 3,000 people every year of tax fraud, signaling how serious the IRS takes lying on your taxes.

The odds of the IRS charging you for fraud is relatively small — if you’re investigated, the chances are less than 20 percent that you’ll face a criminal charge — but the potential consequences are severe. It’s not worth the risk to get a little extra money in your refund.

You may miss out on a mortgage or loan

Finally, not reporting all of your income can have serious ramifications when it comes to buying a car or a home.

When mortgage companies and banks review your application, they request copies of your tax returns to check your total income. If you lied about your income to lower your tax liability, your full income won’t be on the return. That means you may be denied for the loan you need, hurting your financial future.

 

The Fresh Start Program

These options do exist and are most commonly utilized when people want to have what they owe entirely forgiven. However, the criteria for getting a debt entirely erased can be stringent and time-consuming. When you want to settle what you owe in a more timely manner, you may select an option that exists under the IRS’ Fresh Start Program.
The Partial Payment Installment Agreement option is the most commonly utilized under this program. The PPIA allows you to make affordable payments on your account until it is paid off in full or you have paid on the debt for 10 years, whichever comes first.
You also could pursue an Offer in Compromise. This option allows you to settle your debt. You could be granted an OIC if you:

  • Are in full compliance with the IRS
  • Owe a new debt
  • Have no plans or cannot file for Chapter 7 bankruptcy
  • Have not been turned down for an OIC in the past

You can file for an OIC on the IRS website or allow a tax professional to guide you through the process.
With more than one million people owing it money, the IRS realizes that it cannot collect on every delinquent account. You can have your own account settled or eliminated by exploring these debt relief options.

 

Can I Sue A Tax Preparer?

Suing a tax preparer is often the last resort since the taxpayer would have to incur significant legal fees. However, if the amount in question is substantial, taking the matter to the court may provide relief from undue taxes and fees. Moreover, if the tax preparer is not registered by the IRS or state-licensed, the only recourse is legal action

You can file a standard professional malpractice complaint with the state court in your jurisdiction.

To avoid dealing with these problems, it is best to research the candidates and find one that suits your needs. For example, if you’re dealing with complex financial situations, you may need regular consultations. IRS has a website where you can find professionals with valid credentials who are up to the task

 

Fooled by the hope of large refunds

Fraudulent tax preparers will try to lure clients by promising huge refunds.

Those scam artists, who are highlighted year after year in the IRS “dirty dozen” list of most prominent tax scams, often target unsuspecting elderly and low-income taxpayers.

One sign that a tax preparer will inflate your return: They are getting paid based on a percentage of the refund.

“That would be an automatic stop sign for me,”, an enrolled agent and financial advisor based in Cheshire, Connecticut. “It’s in their best interest to get you a larger refund whether it’s real or not.”

Those so-called tax professionals will often beef up your returns by attempting to cheat the system.

That could include using money paid for your commute to work or your business clothes as a deduction.

“They’re not deductions” for most individuals, “I’ve seen people who put down 16,000 miles driving to work as an unreimbursed employee expense on the tax return, and that’s just wrong,” Armstrong said. “It is going to get the taxpayer in trouble upon audit.”

Other traps can range from exaggerations regarding charitable contributions or medical expenses to outright lies regarding marital status or the number of children you have.

“If you have the guts and no ethics, there’s so many ways you can cheat on your tax return in the short run,” But in the long run, you could face steep IRS penalties, even if it was the tax preparer who made the errors.

 

If your tax preparer does make a mistake on your return, what can you do? Here are five suggestions.

  1. Contact your preparer

If the IRS sends you a letter claiming that there are mistakes on your taxes, call your tax preparer for an explanation. Tax preparers who do make mistakes might offer to pay any fees, penalties, or interest charges for you. This might not restore your confidence in their abilities, but it will help save your budget.

  1. Pay the penalties

If the IRS is charging you a penalty for a tax mistake, even if that mistake was made by your preparer, pay it. You might be battling it out with your tax preparer in the hope of getting this professional to pay the penalty on your behalf, but the IRS doesn’t care. If it doesn’t receive its payment, you are the one who will face additional financial penalties.

If your tax preparer refuses to pay for its mistake, send a check to the IRS. Then continue your fight against the preparer.

  1. Know your rights

Check any contract you signed with your tax preparer. There might be language in the contract stating what your tax preparer will do in the event of a mistake. Some tax preparers will pay the interest and penalties that result from a mistake, but not any extra taxes you might owe.

Some tax preparation firms, especially the big ones, might offer insurance that you can purchase for an extra fee. If you’ve bought this insurance, your tax preparer might be obligated to pay any interest, fees, or extra taxes you owe because of their mistakes.

Be aware that tax preparers won’t pay any penalties on your behalf, even if you’ve purchased extra insurance, if the mistakes they’ve made are because you provided them with inaccurate information.

  1. Check the statute of limitations

If your tax preparer made a mistake that caused you to overpay on your taxes, you have three years to request a refund from the IRS. You must provide documentation to back up your claim that you overpaid.

This statute of limitations works in reverse, too. If you underpaid your taxes because of a preparer mistake, the IRS has three years in which they can come after you for the money you owe. If your tax preparer made a substantial error, however (such as omitting 25 percent or more of your gross income), the IRS can go back up to six years. It’s recommended to keep your records for at least this long. Be aware there is no statute of limitations for those who knowingly file fraudulent returns, evade taxes, or fail to file altogether.

  1. File a complaint

If you discover that your preparer made an intentional mistake, perhaps to boost your return, make an official complaint with the Office of Responsibility at the IRS. If your preparer is a member of the American Institute of Certified Public Accountants, National Association of Enrolled Agents, or a state law association, you can also file a complaint with these organizations. Such complaints could cause tax preparers to face fines or lose their licenses.

Reduce The Cost Of College Thru Proper Tax Planning

Tax Planning for Beginners: Tax Strategy Concepts to Know

Tax planning is the analysis and arrangement of a person’s financial situation in order to maximize tax breaks and minimize tax liabilities in a legal and efficient manner.

You can’t really plan for the future if you don’t know where you are today. So the first tax planning tip is get a grip on what federal tax bracket you’re in.

The United States has a progressive tax system. That means people with higher taxable incomes are subject to higher tax rates. People with lower taxable incomes are subject to lower tax rates.

There are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

No matter which bracket you’re in, you probably won’t pay that rate on your entire income

For example, let’s say you’re a single filer with $32,000 in taxable income. That puts you in the 12% tax bracket for the 2019 tax year. But do you pay 12% on all $32,000? No. Actually, you pay 10% on the first $9,700; then you pay 12% on the rest.  If you had $50,000 of taxable income, you’d pay 10% on that first $9,700 and 12% on the chunk of income between $9,701 and $39,475. And then you’d pay 22% on the rest.

The difference between tax deductions and tax credits

Tax deductions and tax credits may be the best part of preparing your tax return. Both reduce your tax bill, but in very different ways. Knowing the difference can create some very effective tax strategies that reduce your tax bill.

What is the standard deduction?

Basically, it’s a flat-dollar, no-questions-asked tax deduction. Taking the standard deduction makes tax prep go a lot faster, which is probably a big reason why many taxpayers do it instead of itemizing.

 

How to Choose Your Tax Adviser or Accountant

Do I need a tax adviser or an accountant?

More often than not people will actually require both an accountant and a tax adviser, however, it is important to establish why you need them – do you need someone to manage your accounts and help you with your tax return? Or someone to give you sound advice that will legally save you money?

What does an accountant do?

Your accountant can manage your accounts, provide compliance work and some may even do tax planning.

What does a tax adviser do?

Tax advisers tend to focus solely on tax planning. They spend significant amounts of time keeping up-to-date with the latest tax legislation and tax cases to help make sure they provide their clients with great strategies that will help to reduce or eliminate tax – some of which your accountant may not even be aware of

Example of the difference between an accountant and tax adviser

If we compare the accountancy profession with medicine, an accountant is the equivalent of a GP, and most of the time a GP is all you need for routine health care, but if you get seriously ill (compare with a dispute with HM Revenue and Customs) or you need surgery (tax planning), then you need a specialist consultant (a Tax Adviser).

What qualifications should my Tax Adviser / Accountant have?

As a client you want to be assured that your tax adviser / accountant is acting in both your best interest and within the law, which is why it is important to know what qualifications your tax adviser or accountant has, and when they were achieved and if they are relevant to you. Check that the qualifications they have cover the area of taxation or accounting that you require assistance with.

 

How to Find a Good Tax Adviser

Many unlicensed tax preparers with questionable credentials set up shop during income-tax season. Some disappear after the April 15 filing date, leaving you to deal with the IRS if there’s a problem with your return. The IRS recently cracked down on such rogue tax preparers by, among other things, contacting those whose returns have frequently shown to have errors. Plus, it is instituting stricter rules for anyone who charges a fee to prepare a tax return. See the IRS’s fact sheets about the new requirements for tax-return preparers. Most of the new rules do not take effect until the 2011 tax season, so taxpayers still need to be vigilant when hiring a tax preparer or adviser this year.

One good approach is to look for an enrolled agent. Enrolled agents are tax experts who must pass a rigorous test, meet annual continuing-education requirements, and who are licensed to represent clients in front of the IRS. Enrolled agents can prepare your income-tax return, and some provide tax-planning advice. You can also contact an enrolled agent if you need help after receiving a penalty letter from the IRS.

Enrolled agents work in a variety of settings: Some have their own firms, some work for tax-preparation chains, and some are also certified public accountants or certified financial planners. You can find an enrolled agent through the National Association of Enrolled Agents

If you’re looking for help with financial planning as well as taxes, CPAs who are also personal financial specialists (CPA/PFS) can help integrate tax planning with investing, retirement-planning and estate issues. You can find a CPA/PFS

 

Tax Planning: The Good, the Bad, and the Ugly

When your clients come to you and wonder what they can do to save money when it comes to paying taxes, you can recommend tax planning services. Many taxpayers aren’t aware of how impactful tax planning can be.

Wise taxpayers plan out their upcoming tax year instead of hoping you can do something amazing for them once the year is over. Those that plan ahead have more control over their tax situation and increase their chances of reducing their tax obligations. It’s the first step toward a better financial future.

The Good: In-Person Tax Planning with a Professional

The best way for taxpayers to implement a workable tax plan is to meet with a professional. Like a doctor, tax preparers who offer tax planning services take time to look at their client’s financial health, then diagnose any areas where mistakes and poor planning actually cost them. It’s also a good way to look for any missed opportunities that the taxpayer may use in the future.

The Bad: Generic Tax Planning Software

If a client is not convinced that hiring you for formal tax planning is something they want to do, they might at least consider some do-it-yourself tax planning using specialized tax software. From data management software like Microsoft Excel to programs and apps designed to help individuals and small businesses with tax planning, using available tools is better than no tax planning at all.

The Ugly: Ineffective or Nonexistent Planning

The worst thing that an individual or small business can do with tax planning is not having a plan at all. These are the kinds of clients that keep paper receipts in shoe boxes or files in no real order. Even if you’ve explained to them how much they would benefit from tax planning, they still insist on a pen and paper method of managing their finances and fail to plan for the immediate future or any long-term goals.

 

Tips for Choosing a Tax Preparer

It’s the time of the year when many taxpayers choose a tax preparer to help file a tax return. These taxpayers should choose their tax return preparer wisely.  This is because taxpayers are responsible for all the information on their income tax return. That’s true no matter who prepares the return.

Check the Preparer’s Qualifications. Use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This tool helps taxpayers find a tax return preparer with specific qualifications. The directory is a searchable and sortable listing of preparers.

Check the Preparer’s History. Ask the Better Business Bureau about the preparer. Check for disciplinary actions and the license status for credentialed preparers. For CPAs, check with the State Board of Accountancy. For attorneys, check with the State Bar Association. For Enrolled Agents, go to the verify enrolled agent status page on IRS.gov or check the directory.

Ask about Service Fees. Avoid preparers who base fees on a percentage of the refund or who boast bigger refunds than their competition. When asking about a preparer’s services and fees, don’t give them tax documents, Social Security numbers or other information.

Ask to E-File. Taxpayers should make sure their preparer offers IRS e-file. The quickest way for taxpayers to get their refund is to electronically file their federal tax return and use direct deposit.

Make Sure the Preparer is Available. Taxpayers may want to contact their preparer after this year’s April 17 due date. Avoid fly-by-night preparers.