Tax Preparation Deductions Under the TCJA

In the past, taxpayers were able to deduct fees and expenses related to preparing or having their tax returns professionally prepared, providing that they itemized their deductions. However, due to the recent changes to the Tax Cuts and Jobs Act (TCJA), most individuals are no longer able to claim this deduction.    

The key word there, though, is “most.” Some taxpayers may still be able to qualify.  

Self-Employed Taxpayers  

One group that may still be able to claim this deduction is the self-employed. If you work full or part-time on your own, you may qualify if you meet the following requirements:  

●       You filed as a sole proprietor with a Schedule C

●       You received income from a rental property and/or royalties, as reported on a Schedule E

●       You were a farmer who filed a Schedule F  

Statutory Employees  

If you were classed as a statutory employee and filed or will file a Schedule C, you may also be eligible for this deduction.  

This applies to:  

●       Drivers that distribute non-milk food and beverages or who pick up and/or deliver dry cleaning or laundry and who are paid on commission

●       Life insurance sales professionals

●       Full-time salespersons who do not have an alternate primary source of income.  

The Importance of Professional Tax Help  

If you fall into one of the categories described above, it may or may not be in your best interest to claim this deduction. There may be other ways for you to save money even without having this deduction, which, in most cases, is a fairly low deduction anyway.  

Furthermore, qualifying, even if you feel sure you meet the requirements, is more complex than it might sound. Thus, you should never just assume that you qualify without a careful and thorough understanding of the tax law and how it applies or does not apply to you.  

For this reason, if you have any doubt about whether or not you qualify for this or any other deduction, or if you have other questions or concerns, remember that it’s alway best to seek the help and expert advice that only a tax professional can provide.

How Long to Keep Tax Returns and Records

Most people know that their tax returns and tax records contain important, sensitive information. Does that mean, however, that you have to keep them forever? The answer is not necessarily. Instead, you should keep records for various amounts of time depending on the exact situation.  

The Magic 3

In most cases, you should keep all tax-related information for at least 3 years. Why is 3 the “magic” number? Well, it’s because the IRS always has 3 years to audit any return you file. After that time, providing your return wasn’t fraudulent, you’re in the clear and can dispose of the information.

Remember, though, to do so correctly. Careful shredding and disposal of paper materials is always advisable. And, you might want to keep a digital copy of the information just in case.  

If You Fail to File  

Sometimes, in life, things happen. And, sometimes, those things may keep you from filing your return. When that happens, absolutely do not dispose of your tax records until you have filed, even if you file late. Then, be sure to hold onto that information for at least three years from your filing date.  

Special Circumstances  

As is true with most things related to the IRS, there are some exceptions to the general tips above. For example, if you’ve filed a claim for a loss from worthless securities, the IRS recommends holding onto your records for 7 years. Similarly, if you have employment tax records, it recommends holding onto that information for 4 years.  

What if you have a special situation not detailed above? Or, maybe you already disposed of your records and need to find a way to access them again. In any case, you can always turn to a tax professional for advice and guidance. They tend to have the most direct line to the IRS and can help you to overcome just about any tax hurdle.

 

 

What to do About Dependents Income

When you have dependents, knowing how to handle them, in terms of taxes, can be a little tricky. Basically, you have two choices when it comes to dependents. You can either include them on your tax return or have them file their own returns.

 What you should do depends on a lot of different factors, but be aware that, in many cases, it’s easier and cheaper to simply include them on your return, which you are free to do providing that the dependent’s income doesn’t go above a certain amount.

Dependent Children                 

Children are the most commonly claimed dependents. They can typically be claimed as long as they are related to you in one of the following ways: child, step-child, brother, sister, brother or sister’s child, step-sibling, or foster child, or the descendant of one of these people.

In addition to falling into one of these categories, dependents must have lived in your residence for at least half a tax year, be under 19 or under 24 if enrolled in school full-time unless permanently disabled, and they must not have provided over half of their financial support in the year that they are claimed.

Dependent Relatives

Dependents are not always children. In fact, anyone whom you live with and support financially or who is related to you and whom you support qualifies as a dependent. The relative cannot be a qualifying child, as mentioned above, and must not receive more than $3,950 in yearly income and must receive over half of his or her financial support from you.

Claiming Rules

As you can see, there are some pretty strict but clear rules on dependents put in place by the IRS. Other rules that you must abide include the following:

l  You may not claim dependents who are not 65 or older or blind if their income is above $6,100

l  Do not file a dependent’s earned income on your taxes

l  Dependents who have unearned income typically have to file their own tax returns, although, in some cases, a parent may be able to claim a child’s unearned income.

As you can see, as you get deeper into tax code, the dependent rules start to get a little trickier. If you’ve got a complex situation or are afraid of making a mistake when it comes to claiming dependents, remember that it’s always smart to ask a tax professional for help. #Taxes #DependentsIncome #Naperville

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Recordkeeping for Tax Purposes

Which records should you keep? You should keep information that you and the IRS need to determine your correct tax. Everyone should keep the following records.

Copies of tax returns. Keep copies of your tax returns as part of your tax records.

Your tax returns can help you prepare future returns and amended returns.

After you die, copies of your tax returns and other records can be helpful to your survivors or the executor or administrator of your estate.

Proof of income and expenses.   

Income Form(s) W-2, 1099, and K-1

Bank and brokerage statements

Business and hobby income records

Records relating to sale of business property

Expenses	Sales slips, invoices, receipts Cancelled checks or other proof of payment
Donations	Details of cash and noncash contributions Written communications from qualified charities
Your Home	Closing statements, including any refinance documents Purchase and sales invoices Receipts for improvements Insurance records
Investments	Brokerage statements Mutual fund statements Form(s) 1099 and 2439 Other basis documentation
IRAs	• Forms 1099-R, 5498, and 8606 for each year until all IRA funds have been distributed.

Records for Special Situations

Some items require specific records, in addition to the basic records of income and expenses.

Alimony. If you pay or receive alimony, keep a copy of your written separation agreement or the divorce, separate maintenance, or support decree. If you pay alimony, you need to know your former spouse’s Social Security number.

Business use of your home. Keep records that show which part of your home is used for business and the expenses related to that use. Child care providers should also keep track of hours open for business, as well as hours spent in preparation and clean up.

Gambling. Keep an accurate diary of winnings and losses. Required information includes:

Date and type of gambling activity. Gambling establishment name and address, and names of persons present with you. – Amount you won or lost.

Tax credits. Each tax credit includes special record requirements. Examples include:

Provider’s name, address, and taxpayer ID number for the Child Tax Credit.

Physician’s certification for the Credit for the Elderly or the Disabled.

School records for the education credits.

Vehicle records. If you use your own car for business, medical transportation, or qualifying volunteer work, keep a mileage log that includes the date, destination, and purpose of each trip. You also need to know how many miles you drove for other purposes, such as commuting and personal use. Your vehicle records should include purchase or lease papers and loan records. You may receive a larger deduction if you keep records of gas purchases, maintenance costs, etc., in addition to mileage.

What is Proof of Payment?

The records you keep provide the documentation to support the deductions and expenses claimed on your tax return. You must always keep documentation of the reason for the payment. Other documents, such as statements and receipts, will help establish that the item is allowable on your tax return.

Account statements. Account statements from your financial institution are acceptable as proof if they provide the information shown above.

Pay statements. You may have deductible expenses withheld from your wages, such as union dues, medical insurance premiums, and charitable contributions. Keep year-end or final pay statements to prove payment of these items.

Mortgage interest. Form 1098, Mortgage Interest Statement, documents interest you paid. Be sure to verify that the amount is correct.

How Long Should You Keep Tax Records?

The IRS says you must keep your records for as long as they may be needed for the administration of any provision of the Internal Revenue Code, which means you must keep records of items shown on your return until the period of limitations for that return expires. The period of limitations is the time during which you can amend your return, claim a credit, or be assessed additional tax by the IRS.

Asset Records

Keep records of acquisition date and cost basis for each business or investment asset until the period of limitations expires for the year in which you dispose of the asset. For example, suppose you sold a piece of business equipment in 2010 and you meet condition (1) above. You must then keep records of that asset until at least April 15, 2014 (three years after the due date for your 2010 tax return).

Electronic Records

Paper records take up a lot of space, and they can fade or be damaged. Many people prefer to keep electronic records instead of paper records.

All requirements that apply to hard copy records apply to electronic records, including record retention periods.

If you scan or otherwise transfer your tax records to an electronic format, you must be able to store, preserve, retrieve, and reproduce the records in a legible, readable format.

Death of a Taxpayer Part 2

Decedent’s Tax Returns

The personal representative is responsible for the following returns when required.

Form 1040, Final return for year of death (gross income of a decedent from January 1 until the date of death is reported on the decedent’s final income tax return).   

-Form 1041, Income tax returns for the probate estate (required if income greater than $600 is received after death by the decedent’s estate).

-Form 706, Estate tax return (required if decedent’s estate exceeds the estate tax exclusion ($5,250,000 in 2013) or if portability election is made.

-Form 709, Gift tax for year of death (required if the decedent gave more than the annual exclusion ($14,000 for 2013) to any one person in the year of death or failed to file any prior year gift tax returns).

-Returns not filed by decedent for prior years—Form 1040, Form 1040X, Form 709.

-State income tax and estate tax returns. Some states do not have an estate tax, but several states have annual estate tax exclusions that are significantly less than the federal exclusion.

A personal representative may be personally liable for unpaid tax if he or she distributed assets, the estate is insolvent as a result, and the personal representative had notice of the tax claim.

Application for Employer Identification Number (EIN)

An executor should obtain an EIN for the probate estate as soon as possible. The identification number must be included on estate returns, statements, and other documents. The executor can obtain an EIN immediately by phone at 800-829-4933 or at www.irs.gov by searching “EIN online.”

Note: The processing time for an EIN application by mail is four weeks.

Notice of Fiduciary Relationship

The personal representative must notify the IRS of the fiduciary relationship. Form 56 can be used for this purpose. File separate forms for the decedent and estate. Form 56 can also be used to notify the IRS of a change in fiduciary or termination of fiduciary relationship.

Prompt Assessment

Form 4810 can be filed to shorten the statute of limitations for tax returns from three years to 18 months. File Form 4810 separately after the returns are filed. Prompt assessment can be requested for Forms 1041 and Form 1040, including returns filed by the decedent. Prompt assessment cannot be requested for federal estate tax.

Discharge From Personal Liability

Personal representatives can request discharge from personal liability for estate, gift, and income tax after returns are filed. The personal representative is discharged from personal liability nine months after receipt of the request by the IRS, unless notified of unpaid tax.

Fees

All personal representatives must include in their gross income any fees paid to them from an estate. Generally, a taxpayer is not in the trade or business of being an executor and will report these fees on Form 1040, line 21.

Income in the Year of Death

Report income actually or constructively received by the decedent before death on the final Form 1040. Report income received after death on the return of the recipient.

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Why You Need an Accountant

Moser Tower along the Riverwalk park complex in Naperville, Illinois, USA. Moser Tower contains the city's Millennium Carillon. (Photo credit: Wikipedia)

Many people make the mistake of thinking that accountants are only for the rich or for those who have very complex financial needs. In truth, though, absolutely anyone can benefit from having a personal accountant whom he or she can trust.

 Accountants are especially beneficial around tax time, which is going on right now, because they can help their clients to file their tax returns in such a way so that the returns will have the most beneficial outcome possible for the filer. Some people end up getting back much more in income taxes than they would have otherwise thanks to the help of an accountant, and even if you don’t get a lot of money back, you can still reduce the amount of taxes you’ll have to pay by filing correctly and in a timely manner, something that’s a whole lot easier to do with a knowledgeable accountant by your side.

For help with your own taxes and/or with other financial matters, find your accountant today at Susan S. Lewis, Ltd. of Naperville.

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