Here are the answers to some of the most Frequently Asked
Questions we receive. The information found here is general
in nature and may not apply to the reader's situation.
Therefore, the reader should not rely on the information on
this website alone. For specific advice, please
INDIVIDUAL TAX QUESTIONS
Q. What should I know about the new tax law signed by the President on December 22, 2017?
A. The new law is the most sweeping change to the tax system since 1986. While there have been many years with new laws and tweaks, this is a major overhaul. Tax brackets have dropped, The standard deduction has doubled for all filers, personal exemptions have been eliminated, reduces the medical expense threshold to 7.5% from 10%, caps mortgage interest to interest paid on the first $750,000 of mortgage balance, eliminates interest deduction on home equity loans, limits the itemized deduction for State and local income taxes to $10,000 per year, increases the child tax credit (subject to income limitation), and eliminates all miscellaneous itemized deductions that are subject to the 2% floor.
On the business side, it drops the top corporate tax rate from 35% to 21%, allows for a special 20% deduction from income for qualified "pass-through" entities such as S Corporations, partnerships, and LLC's. Certain service related businesses are excluded from this deduction and it is subject to limitations based on income and W-2 wages.
Q. I received an unsolicited telephone call from someone claiming to be an IRS agent and claimed that I owe them money. They said a sheriff would be coming to my house . Is this a legitimate call?
A. The IRS does not make telephone calls to advise people of debts. If you get one of these calls, you should report it to the firstname.lastname@example.org.
Q. Does the new health care law (PPACA) have any
tax provisions I should be aware of?
A. The PPACA does add or amend numerous provisions of the Internal Revenue Code. The individual mandate begins in calendar year 2014 and imposes "tax" penalties on individuals without coverage for 90 days per year. The tax penalty is $95 in 2014, $325 in 2015 and $695 in 2016 and subsequent years(adjusted for inflation). It also increases the medical deduction threshold to 10% for tax years beginning after December 31, 2012, meaning a lesser chance of taking this deduction for most taxpayers. Also starting in 2013, an additional 0.9% Medicare tax is imposed on wages and SE income of higher-income individuals and a Medicare tax on "unearned income" for higher income individuals over $200,000 for single taxpayers and $250,000 for married couples filing jointly. A home sale has the potential to generate this extra tax if your gain is over the allowable exemption of $250,000 single and $500,000 married filing joint. Employers are also exposed to penalties for not offering minimum coverage and a so-called "Cadillac Tax" on high benefit plans starting in 2018. There are also several health related provisions in the new law too numerous to mention here.
Q. What is a Health Savings Account (HSA)?
A. An HSA is a savings account that individuals can establish if they enroll in a specific qualified High Deductible Health Plan (HDHP) and meet eligibility requirements established by the Internal Revenue Service. They save money on a pre-tax basis, up to $3,350 single plan and 6,750 family plan, earn tax-free money on balances in the account, distribute money tax-free for eligible health related expenses and control and manage financial assets like other assets. The HDHP plan has mimimum amd maximum Out-of-Pocket deductibles, minimum $1,300 and $2,600 for single and family contracts and maximum $6,550 and $13,100 for single and family. The website www.hsainsider.com is a very useful source.
Q. What is the new ROTH 401(k)?
A. Starting January 1, 2006, employers will be allowed to offer a new 401(k) that acts like a ROTH IRA. Contributions will be made on an after-tax basis. No tax deduction will be taken in the current year but the entire distribution will be tax free upon withdrawal. Which plan will generate more after-tax dollars will depend on whether your tax rate rises or falls in your retirement years. The major difference will be the minimum distribution requirements of a traditional IRA at age 70 1/2. The new plan acts as a major breakthrough that puts ROTH 401 (k)'s on a similar footing as ROTH IRA's have with traditional IRA's. An analysis should be done to detemine which is best for you.
Q. Can I take a tax deduction for donating my vehicle?
A. Yes. You can take a deduction on Schedule A for the amount the charity receives on the sale of the vehicle. The charity must supply you with Form 1098-C within 30 days after the date of sale. You, in turn, must attach this form to your individual income tax return to verify and support the deduction.
Q. I am not ready to file. Can I get an extension?
A. An automatic extenion of time to file can be had by filing Form 4868 on or before April 15. This will give you until October 15 to file. Most states follow this same time frame but some use different dates. Remember that an extension of time to file does not extend the time to pay. Interest and penalties will apply to any unpaid taxes paid with the filing.
Q. Another year end is approaching, what can I do for tax planning now to minimize my tax burden?
A. First, take a look at your current and
projected income, expenses, withholding, and estimated
payments. Consider the timing of your income and expense
between now and year end. Take a look at your projected
situation for 2016. Deductible retirement contributions,
bunching of itemized deductions, college credits, and capital
gains and losses should be considered. The AMT has been
creeping into more taxpayers returns in recent years. If you
have any specific questions, please call me.
Q. I read recently that many firms are outsourcing tax preparation work to India. Does your firm do this?
Q. I have a Section 529 college savings account for my children and it has lost a substantial amount of value. Can I deduct the loss on my personal tax return?
A. Not unless you close all 529 plans that you own. These losses must be deducted as a miscellaneous itemized deduction subject to a 2 percent of adjusted gross income floor. If you are questioning the funds, you can consider a rollover. If your child is young, it may be best to hang in with the investment.
Q. Are there differences in tax treatments of alimony and child support?
A. Alimony consist of payments to your ex-spouse. These are deductible to the payer and taxable to the payee. Certain rules must be met to qualify as alimony. Child support consists of payment obligation for support of your children. These are not tax-deductible payments. I have assisted many clients with these complicated provisions.
Q. Is Long-Term Care Insurance tax deductible?
A. Yes. Long-Term Care Insurance is deductible as an itemized deduction on Schedule A. There are annual limitations based on your age. For 2016, the following apply: Under age 40-$390. Age 41-50, $730. Age 51-60, $1,460. Age 61-70, $3,900. Age 71 and up, $4,870. Benefits are generally tax free unless the amount received exceeds actual expenses. In that case, the excess would be taxable. Beyond the tax implications, the economics of long-term care insurance should be thoroughly analyzed before purchasing.
Q. What if I owe taxes but can not pay when filing? Can I pay by credit card?
A. You can request an installment agreement when filing your taxes. This agreement, when approved, allows you to make an agreed upon monthly payment over a set period of time. The unpaid balance will bear interest and penalties and the IRS will charge you a $105 administrative fee to set up the payment plan. You can pay by credit card using www.officialpayments.com or www.1888alltaxx.com. These companies will charge you a convenience fee and your credit card issuer may charge you a cash advance fee. You should ask about these fees before completing the transaction. We are not associated or affiliated with either of these companies.
Q. I need a copy of a prior year tax return and can not find it. How can I get a copy?
A. You can file IRS Form 4506 with a $50 check. It could take 60 days to obtain a photocopy. You will get a faster result by ordering a transcript that lists line items from your original return. You can get Form 4506 by calling (800) 829-3676 or at the website www.irs.gov/formspubs .
Q. What is a trust and do I need one?
A. A trust is a legal entity created to own property. They can be used by those with substantial assets as well as those with moderate means. They are generally used to protect your assets and provide for loved ones upon your death. An experienced attorney should be consulted to explain the legal ramifications of the type of trust you are setting up including the roles of the people involved, revocable vs. irrevocable options, and the specific language of the trust. In the past, trusts were a popular method of shifting income to lower tax brackets to benefit children, etc. Today, however, current tax law has reduced the previously available income shifting advantages.
Q. What is an "Offer-in-Compromise"?
A. An offer in compromise is a proposal by a taxpayer to settle his or her outstanding tax debts for some amount less than the actual outstanding balance. Detailed forms are completed and analyzed by IRS collection agents who determine the acceptability of the offer. The IRS uses this program to give taxpayers a "fresh start" when they believe the offer to be the best amount the government ever hopes to receive.
Q. I just moved my primary residence and changed jobs. Can I deduct moving expenses on my tax return?
A. Moving expenses are deductible within limits and when meeting certain tests. Your new job location and former home must be at least 50 miles more than the old job location and former home. You must remain in your new job for at least 39 weeks in the 12 month period following arrival. Deductible expenses include the cost of moving household goods and travel expenses for one trip. If your employer reimburses you for moving costs, they may be included on your W-2 and may complicate the calculation.
Q. Do I need estate planning?
A. Estate planning involves the orderly distribution of your assets at death. For deaths in 2016, there is no federal estate tax unless the estate is valued at $5,450,000 or higher. You can do some planning to reduce or eliminate any estate taxes that may be due. Things such as gifting and life insurance trusts are the simplest most effective methods. Other more involved plans can involve trusts and charitable endeavors. Many states, including Massachusetts at $1 million, have lower exemptions.
Q. I just refinanced my home mortgage. Can I write off the points and closing costs?
A. Points on a refinance must be amortized over the life of the loan. The only exception is when some or all of the new loan proceeds were used to renovate, improve, or add on to your existing house. In this case, a portion or all of the points can be deducted in the year of refinance. Other closing costs such as credit reports, appraisal fees, etc. must be added to the cost basis of your house.
Q. I inherited money as the beneficiary of a traditional IRA. Am I required to pay taxes when I file my return?
A. Yes and No. You will owe taxes on each distribution. Unless the IRA was from a spouse, you must take the money within five years or start taking minimum distributions during the year following death, if the owner was not 70 and 1/2 years old. If the IRA owner was taking distributions and over 70 and 1/2, your options are restricted. If you are the spouse of the deceased, you can roll the IRA over into your own IRA and take distributions annually.
Q. What is a section 529 plan ?
A. A section 529 plan is an educational incentive plan aimed at encouraging parents to save for their childrens' college education on a tax-advantaged basis. Investments in the accounts grow tax free until withdrawal and are considered to be the parents asset for college financial aid purposes. The new tax law will exempt distributions from federal income taxes, as long as the funds are used for qualified educational expenses, effective January 1, 2002.
Q. I just received a large sum of business income/capital gain. Will I be penalized for not making estimates payments?
A. It depends on your current earnings, tax bracket, and prior year's tax liability. The estimated tax penalties can be reduced or eliminated by paying money now or using the seasonal income method. You may also increase your withholdings as these are assumed to be made equally throughout the year.
Q. I heard I can write off my SUV against income. Is this true?
A. Yes, under certain circumstances and with restrictions. SUV's weighing over 6,000 pounds can be written off if the vehicle is used for business purposes. The cost of the vehicle, up to $25,000 multiplied by the business use percentage, can be written off against your business income or as an itemized Form 2106 expense if you are an employee.
Q. I just changed jobs and maxed out my 401k contributions for the year in my former job. Can I contribute to my new company 401k this year?
A. The maximum 401k contribution per taxpayer is $18,000 ($24,000 if age 50 or higher) per calender year. If you have hit the maximum before changing jobs, you have to wait until next year to contribute to your new 401k.
Q. I just discovered a mistake on a previous tax return. How do I correct it?
A. You will have to file an amended tax return Form 1040X to correct any discrepancy. This should be done immediately and must be filed within three years of the original due date. If you owe money, you will be charged interest. If you are due money, you will receive interest. In most cases, you will need to amend your state tax return as well.
Q. How do I avoid being audited?
A. While there are no guarantees, there are things that can reduce your odds. First, report all your income. Nothing raises the IRS "red flag" more than forgetting to report everything they know about. Other items to consider would be large entertainment expenses, estimating expenses using round numbers, and trying to claim "hobby losses". While you should claim anything you're entitled to, be careful if you do not have the proper documentation.
Q. Which is better, a traditional IRA or a ROTH IRA?
A. There is no definitive answer. Estimates need to be prepared using your current tax situation, potential earnings growth, and your estimated tax brackets in retirement. In addition, there are limitations on the availability of each option.
Q. What is the Alternative Minimum Tax, or AMT?
A. The Alternative Minimum Tax is a parallel tax system set up to ensure that all taxpayers pay some share of federal income tax. It is calculated by adding back certain tax preference items and deductions to arrive at the AMT taxable income. Unfortunately, more taxpayers have been affected by this provision the last few years. Talk continues about eliminating the provision but the cost may be too high.
Q. Should I pay off my mortgage or invest my cash?
A. You must determine your after-tax mortgage interest rate vs. the alternative use of the funds. For example, if you are paying 6% on your mortgage and are in the 25% federal tax bracket, your after-tax costs would be 4.5%. You must compare this to what you would earn on an after-tax basis from your investments. Also, you should remember that Massachusetts and many other states do not allow a home mortgage interest deduction but do tax interest and dividend earnings.
Q. What is this S179 deduction I keep hearing about?
A. The s179 deduction is an immediate current year deduction of an asset in the year of acquisition. For the year 2016, this amount is limited to $500,000. Items eligible for immediate write-off include tangible personal property such as equipment, machinery, furniture, vehicles in excess of 6,000 pounds GVW, and off-the-shelf computer software. Items generally have a useful life of five years or more. Property held for the production of income such as real estate are ineligible.
Q. Why is my friend getting a refund when I owe?
A. All taxpayers are unique. If your situations are similar, chances are the taxes withheld by your employer may have been too small. Your W-4 needs to be carefully calculated to ensure proper withholdings for your situation. Some taxpayers enjoy a large refund as a form of forced savings. Other taxpayers look at this practice as an interest free loan to the government and prefer to withhold closer to their actual tax liability.
Q. Should we file jointly or separately?
A. With the new tax law reducing the "marriage penalty", this problem should be reduced. However, each situation is different and should be examined on a case by case basis. It is wise to prepare your returns both ways to see which way minimizes your income taxes. Amended returns can be filed to change from married filing separate to married filing joint but not vice versa.
Q. When do I stop paying FICA taxes?
A. For the year 2016, wages subject to the 6.2% FICA rate are capped at $118,500 All wages and earned income are subject to the medicare tax of 1.45%. The cap for 2017 is $127,200.
Q. I have not filed my tax returns for multiple (2 or more years). What course of action should I take?
A. You need to gather any and all data from any unfiled years and get organized. The government is not very understanding unless you have a very justifiable cause. If you owe money, you will be subject to interest and penalties. I have helped many clients get organized from unfiled years and get back into the system.
Q. What is the "kiddie tax"?
A. This is a federal tax imposed on unearned income (interest, dividends, capital gains) of children under the age of 19 and dependent full-time students under 24. The first $1,050 is tax-free, the next $1,050 is taxed at the child's rate and all amounts over $2,100 are taxed at the child's parents tax rate. To avoid this tax, it is suggested that children under 19 own assets with little or no current interest and dividend payouts but rather hold assets with potential long-term appreciation.
Q. Should I sell my stock to take a gain or loss ?
A. If you have gains to absorb and believe the stock will never recover, make the sale. If you have losses for the year in excess of $3,000 and believe the stock has hit it's peak, make the sale. You must keep in mind the long-term versus short-term classifications as well.
Q. Will I owe taxes on the sale of my residence?
A. If you are single-you owe no taxes on the first $250,000 of gain. If you are married filing joint, you owe no taxes on the first $500,000 of gain. Both situations require you to have lived in the house for two of the last five years. If you lived in the house less than 24 months, the gain can be prorated based on the ratio of time resided as a percentage of the 24 months under certain IRS allowed hardships. If the home was partially used for business as a home office, there are some additional items to calculate which may make some of the gain taxable.
Q. Can I avoid the 10% penalty on early IRA payments?
A. Yes, if one of the following applies. 1. Disability of the IRA holder. 2. Death of the IRA holder. 3. Annuity like payments for 5 years or until age 59 1/2, whichever comes later. 4. Medical expenses for deductible medical expenses in excess of 7.5% of adjusted gross income. 5. Financing a qualified home purchase up to $10,000. (lifetime) 6. Qualified College expenses. 7. Health premiums during unemployment. 8. Payments to an employee attaining age 55.
Q. Can I take a tax credit for college costs?
A. Yes-you may be entitled to the American Opportunity Credit credit up to $2,500 per year or a LIfetime Learning Credit up to $2,000 per year. Eligibility phases out gradually for joint filers between $160,000 and $180,000 and for single/head of household filers between $80,000 and $90,000 for the AOC and $100,000-$120,000 and $60,000 for the LLC.
Q. How long should I hold my records?
A. In general, taxing agencies have a 3 year statute of limitations in which to audit your returns and ask for substantiation. This period starts on the due date of your tax returns, including extension requests. However, if the statute of frauds is proven, the statute is extended to 6 years. I recommend that the actual tax returns be maintained permanently. For a complete record retention guide, please send me an email with your name and address.
Q. What is the mileage rate for business auto use?
A. The mileage rate for 2016 is 54 cents per mile. This rate can be used in lieu of using actual expenses multiplied by the business percentage of auto use. The rate is adjusted on an annual basis, depending on current costs of operating an automobile.
Q. How much can I gift per year and is it deductible?
A. This amount is $14,000 per year per recipient. This is a commonly used estate planning technique to reduce one's estate as he or she gets older. The gift is not deductible by the donor nor is it taxable to the recipient. A married couple will often gift $26,000 per year to a recipient, commonly a son or daughter.
Q. What is an "Education IRA"?
A. The Education IRA is used to help fund college costs. Payments are currently limited to $2,000 per year, per child under age 18 and are not deductible. Additions are allowed for single filers with AGI below $110,000 and joint filers with AGI below $220,000 Earnings grow tax free and are taken out tax free when they are used to pay the child's college, high school, middle school, and elementary school costs. The new tax law allows simultaneous additions to a 529 plan, effective 1/1/2002.
Q. Should I pay estimated taxes?
A. If you are a wage earner and file a proper W-4 with little or no self-employment, interest or capital gains income, chances are you do not. However, if you are self employed, have significant interest. dividend or capital gains income, then you must calculate a current year estimate and pay 90% of the current year or 100% of the prior year's tax liability, whichever is less. A special provision applied to incomes over $150,000 where a taxpayer must pay 110% of the prior years tax liability.
Q. Can interest paid to family members for loans be deducted?
A. It depends on the use of the borrowed funds. If you borrow to buy a home, rental, or for business use, the interest can be deducted. If the loan is used for personal use such as an auto or to pay off credit cards, then the interest would not be deductible.
Q. I recently moved-how do I notify the IRS of my new address?
A. You need to file a Form 8822-Change of Address with the IRS as soon as possible after you move. You should also file with your resident state. If a taxing agency sends a notice of any sort to you and is not forwarded to your new address, it can develop into big problems.
Q. Are my scholarships considered taxable income?
A. Scholarships and grants for tuition expenses are non-taxable to degree candidates. Work-study payments are taxable to the student. Student loans are non-taxable as are tuition reduction plans for college employees and their families. Tuition reduction plans are limited to undergraduates and can not discriminate in favor of highly compensated employees.
BUSINESS TAX QUESTIONS
Q. What is the best retirement plan option for me and my business?
A. If you are an employee, your best option is probably a 401k plan, assuming your employer offers one. If you are an employer, there are several options including SEP's, 401k's, SIMPLE-IRA's. and defined benefit plans. None are ideal for all situations and each should be analyzed to determine which is best suited to your particular needs.
Q. I am thinking about incorporating. Should I retain you or use an attorney to do this service?
A. I will guide you through the income tax implications of incorporating, including the tax treatment of income and expenses. I will also assist you in filing for federal and state ID numbers and where applicable, filing an "S" Corporation election. However, incorporation of a business should also take legal considerations into account, especially if there are multiple shareholders requiring proper legal language on stock buy-backs and cross purchase agreements. If you do not have a relationship with an attorney, I can refer you to a highly qualified attorney to assist you.
Q. I am planning to hire some help for my business. Should I hire people as employees or independent contractors?
A. This has been a thorny issue for several years. The IRS uses a 20 question test to determine if someone is truly an employee or an independent contractor. The major questions revolve around supervision of work and whether the person performs these services for others as well as you. You would do yourself well by reviewing the 20 questions before hiring anyone as an independent contractor.
Q. Are there tax benefits to having my spouse and children on my payroll?
A. Yes. Shifting income to your spouse will increase his/her social security earnings and allow for retirement contributions. Having your child(ren) work for you can reduce your taxable income and your social security tax. If your business is a sole proprietorship and your child(ren) is under 18, the wages are exempt from social security and medicare taxes. Any wages paid should be for actual work done and should be a reasonable amount.
FINANCIAL PLANNING QUESTIONS
Q. Should I buy a home or rent?
A. Generally, buying a home is one of the best financial moves you can make in your life. Historically, homes appreciate in value over the long term despite short term bumps along the way. In addition, the tax benefits of deducting annual mortgage interest and real estate taxes add to the overall savings you generate when buying instead of renting. Upon selling a primary residence, current tax law allows tax free gains up to $250,000 for a single filer and $500,000 for joint filers. Home prices have taken a hit over the last few years and have been a major factor in the current economic situation.
Q. Should I start taking social security at age 62 ?
A. In general, social security reduces your monthly benefits by 1/2 of 1 percent for each month you opt to collect before the age of 65. If you start collecting at age 62, your monthly benefits would be reduced by 20-25%%, depending on your full retirement age. If you wait until age 65, it would take approximately 12 years to make up what you would have earned between age 62 and age 65. You must also consider income taxes in your decision. Many baby boomers can not start collecting full retirement benefits until age 65-1/2 and higher. There are also employment earnings limitations between ages 62 and 65 or 66 if your start date is later based on your birthdate. These amounts are approximately $15,720 before retirement and up to approximately $38,000 if you turn age 66 in 2012.
Q. Should I consider tax-free investments?
A. Depending on your tax bracket, tax-free investments may be worthwhile. Compare your after-tax percentage return to the current market return of a tax-free investment. For a conservative investor in a 40% plus tax bracket, tax-free investments are probably a good idea. Consideration should be given to individual bonds or tax-free mutual funds.
Q. How much life insurance should I have?
A. This depends on who is relying on your income. If you have a spouse and children relying on you, a general rule of thumb is 6 to 10 times your annual salary. This will allow your family to carry on a similar lifestyle. If you are a non-wage earning spouse, you should consider a smaller policy. If you have no dependents, you probably do not need any life insurance. If your life insurance and other assets exceed $5,450,000, you may consider setting up an irrevocable life insurance trust.
Q. Is disability insurance a good idea?
A. Yes. Disability insurance will cover you for short and/or long-term disabilities you may incur during your working years. A good rule of thumb is to maintain approximately 60-70% of your gross monthly income. If the premiums are paid by you with after-tax dollars, any proceeds from a disability policy will be tax-free. You should also consider how much you may receive from social security if you were to become permanently disabled.