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Taxman
December 3, 2019

IRS Tax Tip 2019-169, December 3, 2019

The tax filing season is quickly approaching. With that in mind, taxpayers should remember there's still time to make an estimated or additional tax payment to ensure their tax withholding is still accurate.

Those who need to make an estimated tax payment for 2019 should remember that the fourth quarter payment is due Wednesday, January 15, 2020.

These taxpayers will want to check to see if their 2019 federal income tax withholding will unexpectedly fall short of their tax liability for the year. They can check this by using the Tax Withholding Estimator on IRS.gov.

All taxpayers can use the results from the Tax Withholding Estimator to determine if they should:

This tool helps employees avoid having too much or too little tax withheld from their wages. It also helps those working for themselves make accurate estimated tax payments. Having too little withheld can result in an unexpected tax bill or even a penalty at tax time in 2020. Having too much withheld results in less money in their pocket.

The Tax Withholding Estimator asks taxpayers to estimate:

  • Their 2019 income.
  • The number of children to be claimed for the Child Tax Credit and Earned Income Tax Credit.
  • Other items that will affect their 2019 taxes.

The IRS Withholding Estimator does not ask for personally-identifiable information, such as a name, Social Security number, address and bank account numbers. The IRS doesn't save or record the information entered in the Estimator.

Before using the Tax Withholding Estimator, taxpayers should gather their most recent pay stubs and income documents from all sources. They should gather documents related to pensions, annuities, Social Security benefits and self-employment income. They should also have a copy of their 2018 federal tax return. This will help estimate 2019 income and answer other questions asked during the process.

If a taxpayer follows the recommendations at the end of the Tax Withholding Estimator and changes their withholding for 2019, they should recheck their withholding at the start of 2020. A withholding change made in 2019 may have a different full-year impact in 2020. So, if a taxpayer does not file a new Form W-4 for 2020, their withholding might be higher or lower than they intend.

Taxpayers should remember that the Tax Withholding Estimator's results will only be as accurate as the information provided. People with more complex tax situations should use the instructions in Publication 505, Tax Withholding and Estimated Tax (PDF). This includes taxpayers who owe alternative minimum tax or certain other taxes, and people with long-term capital gains or qualified dividends.

How Much
December 3, 2019

States raise money through a variety of different taxes, fees and charges. They charge different rates for income, property, sales, fuel, wireless services and sins like alcohol and tobacco. This can make it hard to see how states compare to each other.

  • Wyoming is the most tax-friendly state in the country. It has zero state income tax and on average charges only $635 per $100,000 of property value.
  • Illinois is the most tax unfriendly state with a flat income tax of 4.95% with on average $2,408 in property taxes owed for every $100,000 of property value.
  • 6 out of the top 10 most tax-friendly states have zero income tax.
  • Tax levels vary substantially at the state level, with relatively heavy burdens in the Northeast and light tax levels across rural states like Alaska, Montana and North Dakota.

We performed a few different calculations to arrive at the data underlying our spider diagrams. First, we took tax rate information from Kiplinger and found the effective tax rate with a calculator from SmartAsset, using the median U.S. household income of $61,937. We assumed an average worker lived in the state capital with no dependents. Then, we weighted each category of taxation based on their contribution to total state taxes, including taxes on income, sales, fuel, property, wireless services and “sin” taxes like alcohol and tobacco. Finally, we used the summary of the weighted scores to create the ranking of most and least friendly states for taxation.

Top 10 Most Tax-Friendly States

1. Wyoming
2. Delaware
3. Alaska
4. Montana
5. Nevada
6. New Hampshire
7. Tennessee
8. Florida
9. North Dakota
10. Hawaii

The 10 Least Friendly States for Taxation

1. Illinois
2. New York
3. New Jersey
4. Connecticut
5. Pennsylvania
6. Nebraska
7.Ohio
8. Wisconsin
9. Kansas
10. Michigan

It shouldn’t come as a shock to anyone that Illinois is the least tax friendly state in the Union. For two years, the state couldn’t pass a budget, costing taxpayers an additional $1 billion in late payments and surcharges. In fact, the state is on track to reach a deficit of $3 billion this year. Illinois taxpayers are therefore on the hook for lots of new taxes and fees.

Another story in our visual is how state income taxes in particular impact the overall tax burden that workers face. 9 states have zero income tax, 6 of which are in our top 10 list above (Wyoming, Alaska, Nevada, New Hampshire, Tennessee and Florida). Income taxes are a major factor in overall taxation because they’re progressive, meaning high-income earners pay higher marginal rates. Florida’s status as an income-tax free state is one reason why many people move to the Sunshine State in retirement.

Our visualization also demonstrates how states levy uneven taxes on workers, a fact that gets largely ignored as the media fixates on Trump’s tax cuts and Democrats’ wealth tax proposals. There are several states in the Northeast with extremely high tax burdens, like New York, New Jersey and Connecticut. By contrast, many rural states like Wyoming, Montana and North Dakota have very light tax levels. Congress and the President simply aren’t able to address these disparities.

There are lots of good reasons for different tax rates around the country. New York must raise revenue for infrastructure projects that other states simply don’t have. For example, the Gateway Program encompasses a major overhaul and renovation of the Northeast Corridor train network, which links together millions of people. And there are lots of rich people living in the area who can foot the bill.

What are the state tax rates where you live? Do you think the money is well spent, or is the state budget mismanaged? Let us know in the comments.

HowMuch.net is a cost information website 

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Taxbot
November 28, 2019

Part of the American dream has long been to own a home that you can call yours. If you have achieved that, then you are to be commended. At the same time, this is one of the biggest investments that you will ever make in your life. Paying for it will impact your individual and family finances for years to come. While you never want to lose your house because of an inability to make ends meet, there may be some very good reasons down the road that will lead you to refinance it. You might be wondering right now if this is a good option for you not. Here are a few guiding principles that should help make the right decision.

Lower Your Interest Rate and Monthly Payments

When you got your initial mortgage, there was a certain interest rate attached to it. This is often determined by prevailing market conditions, your credit rating, and a variety of other factors. Over time, the situation may change and you can end up getting a lower interest rate if you refinance the loan. Doing so may lower your monthly payments as well, giving you more money in your pocket.

Pay Off the Home More Quickly

You should also talk to a loan officer and a realtor to determine if refinancing your existing mortgage will allow you to pay off your home more quickly. If you can do this, then you will secure a brighter financial future for you that is free of monthly mortgage payments. You will want to look at refinancing if you are able to accomplish this. You’ll be amazed at the long-term savings that come with a lower interest rate.

Change from An Adjustable to a Fixed Rate Mortgage

Many people get into a home with an adjustable rate mortgage. This provides you with a lower initial monthly payment, but that can change over time as the rate increases. If you can switch to a fixed rate mortgage, then refinancing is a good option for you. This will help you to set a more stable monthly budget.

Get Cash to Pay Off Other Debts

You might also consider refinancing if you have other debt that has been incurred at a higher interest rate. There are some programs where you can get cash back in your pocket when you refinance due to the equity in your home. If so, then you can use that money to pay down your other debt.

These are all good reasons why refinancing might make sense for you. The key is to use refinancing as a way to improve your existing financial condition, while still preserving your existing home. If you can do that, then this is an option that you will certainly want to pursue.


Kara Masterson is a freelance writer from Utah. She enjoys Tennis and spending time with her family.

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Taxman
November 25, 2019

IRS Tax Tip 2019-165, November 25, 2019

It’s that time of year when taxpayers are thinking about how they want to give back, and many taxpayers will want to donate to a charity that means something to them. The IRS has a tool that may help them make sure their donations are as beneficial as possible.

Tax Exempt Organization Search on IRS.gov is a tool that allows users to search for tax-exempt charities. Taxpayers can use this tool to determine if donations they make to an organization are tax-deductible charitable contributions.

Here are some things to know about the TEOS tool:

  • It provides information about an organization’s federal tax status and filings.
  • It’s mobile device friendly.
  • Donors can use it to confirm that an organization is tax-exempt and eligible to receive tax-deductible charitable contributions.
  • Users can find out if an organization had its tax-exempt status revoked.
  • Organizations are listed under the legal name or a “doing business as” name on file with the IRS.
  • The search results are sortable by name, Employee Identification Number, state, and country.
  • Users may also download entire lists of organizations eligible to receive deductible contributions, auto-revoked organizations and e-Postcard filers.

Taxpayers can also use the Interactive Tax Assistant, Can I Deduct my Charitable Contributions? to help determine if a charitable contribution is deductible.

Taxman
November 22, 2019

IRS Tax Tip 2019-164, November 21, 2019

A small business owner often wears many different hats. They might have to wear their boss hat one day, and the employee hat the next. When tax season comes around, it might be their tax hat.

They may think of doing their taxes as just another item to quickly cross off their to-do list. However, this approach could leave taxpayers open to mistakes when filing and paying taxes.

Accidentally failing to comply with tax laws, violating tax codes, or filling out forms incorrectly can leave taxpayers and their businesses open to possible penalties. Using IRS Free File or a certified public accountant is the easiest ways to avoid these kinds of errors.

Being aware of common mistakes can also help tame the stress of tax time. Here are a few mistakes small business owners should avoid:

Underpaying estimated taxes

Business owners should generally make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. If they don't pay enough tax through withholding and estimated tax payments, they may be charged a penalty.

Depositing employment taxes

Business owners with employees are expected to deposit taxes they withhold, plus the employer's share of those taxes, through electronic fund transfers. If those taxes are not deposited correctly and on time, the business owner may be charged a penalty.

Filing late

Just like individual returns, business tax returns must be filed in a timely manner. To avoid late filing penalties, taxpayers should be aware of all tax requirements for their type of business the filing deadlines.

Not separating business and personal expenses

It can be tempting to use one credit card for all expenses especially if the business is a sole proprietorship. Doing so can make it very hard to tell legitimate business expenses from personal ones. This could cause errors when claiming deductions and become a problem if the taxpayer or their business is ever audited.

More information:

Taxbot
November 22, 2019

What is a Solo 401K, you ask? Good question. Most people never heard of this. This allows you to put away more money than a typical SEP or other defined contribution plan. Here is the “skinny” on a solo 401K

With a normal defined contribution plan, you can put the lesser of 25% of your wages (or net income if you are self employed) or $56,000. In contrast, an employee participating in a traditional 401K plan can make an elective deferral contribution to the plan with the annual limits and the employer may patch part of the contribution, usually up to a single digit percentage of your salary.

A solo 401(k) offers even more. For 2019, you may defer up to $19,000 of compensation to your account, plus an extra catch-up contribution of $6,000 if you are age 50 or greater. This is the same as with elective deferrals for a normal 401(k). However, here is the kicker: Elective deferrals to a solo 401(k) don’t count towards the 25% cap. So you can combine an employer contribution with an employee contribution for greater savings.

Let’s take an example:

Let’s say that you are a sole employee of your company and under age 50 and you receive an annual wage of $125,000. The maximum deductible contribution to a SEP would be $31,250, which is the lesser of 25% of your salary or $56,000. If, however, you set up a solo 401(k), you can defer $19,000 to the account in addition to keeping the maximum $31,250, which would be the employer’s contribution. Thus, your total contribution would be in this case $50,250. Moreover, if you are the only employee of the company, you don’t have to worry about making contributions for anyone else. 

Note: If your business isn’t incorporated,such as being self employed, the 25% compensation cap is reduced to 20%. because of the way contributions are calculated for self employed. Thus, if your self employed net income is $125,000, you can stash away $49,000 which includes the $19,000 deferral plus another 20% of net income which is $30,000.

So what’s the catch? There is always some gotcha. First, if your business has any other employees, you may have to cover then under the plan. Secondly, you have to deal with the hassle and cost of running the plan. However, due to the increased number of business getting into managing these plans, such as Fidelity and Smith Barney, the cost of setup is only about $100 and the annual cost of administration is from $50-$250.

Bottom line: Very few people are aware of this new solo 401(k). It can be a great plan for self employed folks such as Realtors and owners of home based businesses and other independent contractors. Please pass it on to your friends and family.

By Sandy Botkin
Co-founder at Taxbot
Sandy is a CPA, Tax Attorney, and former IRS trainer. He has authored many helpful books on the subject of taxes

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Taxbot
November 12, 2019

You just got a notice from IRS or state taxing authority inviting you for a “chat.” What do you do?

  • Scream like a banshee or,
  • Take an extended vacation to Europe or,
  • Read the rest of this post.

Hopefully, you picked choice (3).

1Don’t handle the audit yourself!! Consider hiring a professional such as a CPA, lawyer, enrolled agent or other tax professional. The key is to use a practitioner who is familiar with the ins and outs of tax audit procedures, who knows about penalty abatement alternatives, and can assist you with filing an appeal, if necessary, before the IRS Appeals office if you disagree with the auditor’s findings.

2Be prepared in advance. Understand that you and not the IRS has the burden of proof. Gather your records to be sure you can support each deduction that IRS is questioning. Try to reconstruct any missing documentation. If you need extra time, call IRS for an extension of time. 

3Always have your tax professional represent you without your being there if you can get away with that. Many times, IRS agents might ask for something in which the representative can say, I don’t know the answer, but if you need it, I can get it in the future, which in many cases can be forgotten by the agent. If you are there, you might say things that you shouldn’t say.

4If you are attending the audit, BE ON TIME. In fact, I would be early. One hour before the audit, IRS examiners review the tax return to see what the problems are. If you are late, you are giving them more time.

5NEVER volunteer information: one reason that I emphasized avoiding coming to the audit is that you should not be volunteering information. If you do attend the audit, answer any questions as succinctly as possible. Don’t elaborate. 

6If the auditor questions a deduction that you or your tax pro thinks is correct, always ask for the tax law reference. 

7Don’t be alone with a “Special Agent.” Special Agents are the criminal investigation arm of the IRS., If you ever get a Special Agent show up at your door ask them if they are investigating you. If so, only say three things:

  • Serve any documents that you need to serve,
  • Give me your business card and,
  • If no warrant, leave my house or business till I get a lawyer.

Special Agents are promoted based on indictments. Anything that you tell them can be used against you. If they catch you lying, they can indict you for that. If you do incur a criminal investigation, always get a lawyer who specializes in this. Don’t ever be alone with a criminal investigator without a lawyer. 

Following my tips will certainly make your life less taxing.

By Sandy Botkin
Co-founder at Taxbot
Sandy is a CPA, Tax Attorney, and former IRS trainer. He has authored many helpful books on the subject of taxes

For additional postings by Taxbot, click HERE

Taxbot is also listed in the DIY Marketplace

WealthCare Connect may receive a referral fee from Taxbot for purchases through these links.

Website:  https://spendingtracker.isrefer.com/go/2019package_ns/wcc/

Taxbot
November 12, 2019

Since we are coming to the end of the year soon, filing tax returns will be on everyone’s mind. Will the audit rate is low for any one year, the chances of being audited in a twenty year period, especially if you have a business, is about one in three. Yes, it can be that high! The key is that your chances of “winning” the audit lottery escalate depending on various factors, including the complexity of your tax return, the amount of deductions and other tax breaks taken, your income and whether you happen to be in business. Thus, I thought I would do a multi-part series on audit red flags and things you should do if you do get audited.

Here are some factors that increase your chance of being invited for a chat with the IRS:

1Failing to report all your taxable income from wages, dividends, pensions, IRA distributions, Social Security benefits and other sources of income. IRS gets copies of all W-2s and forms 1099s. If your tax return doesn’t match what these forms show, IRS will investigate.

Note: Be sure to report any earned income even if you don’t get a form 1099 such as funds received for tutoring, driving for Uber, or selling items on Ebay.

2Claiming big deduction or other tax breaks is another “red flag.” Having higher than normal expenses will NOT automatically result in an audit; however, if these expenses are disproportionately large when compared to income, the audit risk goes up.

Note: If you have big ticket items, attach a schedule explaining the deduction by breaking it down to smaller amount with an explanation. Thus, if you simply put down $25,000 as a deduction for dental expenses, you will probably receive increased scrutiny. However, if you attach a schedule breaking down this expense showing that you incurred $16,000 for orthodonture for your children and $9000 for periodontal surgery for you and your spouse, IRS might feel that this is reasonable and not audit you. 

3Failing to sign tax returns or failure to include all schedules. Amazingly, one of biggest red flags , according to the IRS, is failure to sign tax returns or include the right schedules for everything. If you don’t know what you are doing regarding preparation of tax returns, use an expert. Don’t depend on Turbo Tax!! I can’t say this enough. 

4Lost returns: It is astonishing how many tax returns get lost when sent to the IRS. My dad has a friend who sent his return with a $15,000 check. The return and check got lost in the mail and my dad’s friend had to resend the return and was hit with $11,000 of additional interest and penalties.

Key: Always send in your tax return either electronically or using a tracking services such as Fed Ex or UPS particularly if you owe money. 

By Sandy Botkin
Co-founder at Taxbot
Sandy is a CPA, Tax Attorney, and former IRS trainer. He has authored many helpful books on the subject of taxes

For additional postings by Taxbot, click HERE

Taxbot is also listed in the DIY Marketplace

WealthCare Connect may receive a referral fee from Taxbot for purchases through these links.

Website:  https://spendingtracker.isrefer.com/go/2019package_ns/wcc/

Taxman
November 6, 2019

Tax Tip 2019-156, November 6, 2019

The home office deduction can help small business owners save money on their taxes. Taxpayers can take this deduction when they file their taxes if they use a portion of their home exclusively, and on a regular basis, for any of the following:

  • As the taxpayer's main place of business.
  • As a place of business where the taxpayer meets patients, clients or customers. The taxpayer must meet these people in the normal course of business.
  • If it is a separate structure that is not attached to the taxpayer's home. The taxpayer must use this structure in connection with their business
  • A place where the taxpayer stores inventory or samples. This place must be the sole, fixed location of their business.
  • Under certain circumstances, the structure where the taxpayer provides day care services.

Deductible expenses for business use of a home include:

  • Real estate taxes
  • Mortgage interest
  • Rent
  • Casualty losses
  • Utilities
  • Insurance
  • Depreciation
  • Repairs and Maintenance

Certain expenses are limited to the net income of the business. These are known as allocable expenses. They include things such as utilities, insurance, and depreciation. While allocable expenses cannot create a business loss, they can be carried forward to the next year. If the taxpayer carries them forward, the expenses are subject to the same limitation rules.

There are two options for figuring and claiming the home office deduction.

  • Regular method: This method requires dividing the above expenses of operating the home between personal and business use. Self-employed taxpayers file Form 1040, Schedule C, and compute this deduction on Form 8829.
  • Simplified method: The simplified method reduces the paperwork and recordkeeping for small businesses. The simplified method has a set rate that is capped at $1,500 per year, based on $5 a square foot for up to 300 square feet. 

There are special rules for certain business owners:

Taxman
October 28, 2019

IRS Tax Tip 2019-150, October 28, 2019

Taxpayers may discover an error after filing their tax return. They shouldn’t panic, they just need to correct it by filing an amended tax return.

Here are some common reasons to file an amended return:

  • Using the wrong filing status
  • Entering income incorrectly
  • Not claiming credits for which they’re eligible
  • Claiming deductions incorrectly

The IRS may correct math or clerical errors on a return and may accept returns without certain required forms or schedules. In these instances, there's no need for taxpayers to amend the return.

Taxpayers who do need to amend their tax return might have questions about how to do so. Here are some things they should know. The taxpayer should:

  • Complete paper Form 1040-X, Amended U.S. Individual Income Tax Return. Taxpayers must file an amended return on paper even if they filed the original return electronically.
  • Mail the Form 1040-X to the IRS address listed in the form’s instructions (PDF) under Where to File. Taxpayers filing Form 1040-X in response to an IRS notice should mail it to the IRS address indicated on the notice.
  • Attach copies of any forms or schedules affected by the change.
  • File a separate Form 1040-X for each tax year. Mail each tax year in a separate envelope and enter the year of the original return being amended at the top of Form 1040-X.
  • Wait – if expecting a refund – for the original tax return to be processed before filing an amended return.
  • Pay additional tax owed as soon as possible to limit interest and penalty charges.
  • File Form 1040-X to claim a refund within three years from the date they timely filed their original tax return or within two years from the date the person pays the tax – usually April 15 – whichever is later.
  • Track the status of an amended return three weeks after mailing using Where’s My Amended Return? It can take up to 16 weeks for the IRS to process an amended tax return.