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
call.
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 phishing@irs.gov.
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 a 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 72. 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 determine 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 extension 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 2020. 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?
A. No. All of our tax and other accounting work is done here
in our office or at your office. We take client privacy
seriously and maintenance of records and personal information
is a top priority. See our privacy policy.
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. Alimony is only deductible on divorce agreements in effect before 12/31/18.
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 2020, the following apply: Under age
40-$430. Age 41-50, $810. Age 51-60, $1,630. Age 61-70,
$4,350. Age 71 and up, $5,430. 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 no longer deductible under the new law passed in 2017. Exception is made for active military members only.
Q. Do I need estate
planning?
A. Estate planning involves the orderly
distribution of your assets at death. For deaths in 2020 under the new law,
there is no federal estate tax unless the estate is valued at $11,580,000 or higher for a single person and $23,160,000 for married couples. 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 $19,500 ($26,000 if age 50 or higher) per
calendar 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 2020, 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 2020, wages subject to the 6.2% FICA rate are
capped at $137,700 All wages and earned income are subject to
the medicaire tax of 1.45%. The cap for 2021 is
$142,800.
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 2020 is 57.5 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. Starting in 2018, this amount is $15,000 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 $30,000 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 applies 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
medicaire 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 66. If you start collecting at age 62, your
monthly benefits would be reduced by approximately 25%%. If you wait until FRA age
66, it would take approximately 12 years to make up what you
would have earned between age 62 and age 66. You must also
consider income taxes in your decision. There are also employment earnings
limitations between ages 62 and 66 which if exceeded would require a payback. These amounts are
approximately $18,240 earned in a year before full retirement age of 66.
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 8 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.