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Filing an Amended Return
What should you do if you already filed your federal tax return and then discover a mistake? First of all, don't worry. In most cases, all you have to do is file an amended tax return. But before you do that, here is what you should be aware of when filing an amended tax return.
Taxpayers should use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended (corrected) tax return.
You must file the corrected tax return on paper. An amended return cannot be e-filed. If you need to file another schedule or form, don't forget to attach it to the amended return.
An amended tax return should only be filed to correct errors or make changes to your original tax return. For example, you should amend your return if you need to change your filing status or correct your income, deductions or credits.
You normally do not need to file an amended return to correct math errors because the IRS automatically makes those changes for you. Also, do not file an amended return because you forgot to attach tax forms, such as W-2s or schedules. The IRS normally will mail you a request asking for those.
If you are amending more than one tax return, prepare a separate 1040X for each return and mail them to the IRS in separate envelopes. Note the tax year of the return you are amending at the top of Form 1040X. You will find the appropriate IRS address to mail your return to in the Form 1040X instructions.
If you are filing an amended tax return to claim an additional refund, wait until you have received your original tax refund before filing Form 1040X. Amended returns take up to 16 weeks to process. You may cash your original refund check while waiting for the additional refund.
If you owe additional taxes file Form 1040X and pay the tax as soon as possible to minimize interest and penalties. You can use IRS Direct Pay to pay your tax directly from your checking or savings account.
Generally, you must file Form 1040X within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. For example, the last day for most people to file a 2014 claim for a refund is April 17, 2018. Special rules may apply to certain claims. Please call the office if you would like more information about this topic.
You can track the status of your amended tax return for the current year three weeks after you file. You can also check the status of amended returns for up to three prior years. To use the "Where's My Amended Return" tool on the IRS website, just enter your taxpayer identification number (usually your Social Security number), date of birth and zip code. If you have filed amended returns for more than one year, you can select each year individually to check the status of each.
Don't hesitate to call if you need assistance filing an amended return or have any questions about Form 1040X.
Tax Planning for Small Business Owners
Tax planning is the process of looking at various tax options to determine when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability.
Many small business owners ignore tax planning and don't even think about their taxes until it's time to meet with their accountants once a year. But tax planning is an ongoing process and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits, and deductions that are legally available to you.
Although tax avoidance planning is legal, tax evasion - the reduction of tax through deceit, subterfuge, or concealment - is not. Frequently what sets tax evasion apart from tax avoidance is the IRS's finding that there was fraudulent intent on the part of the business owner. The following are four of the areas the IRS examiners commonly focus on as pointing to possible fraud:
Tax Planning Strategies
Countless tax planning strategies are available to small business owners. Some are aimed at the owner's individual tax situation and some at the business itself, but regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:
In order to plan effectively, you'll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the "right" tax plan made "wrong" by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.
The effort to come up with crystal-ball estimates may be difficult and by its very nature will be inexact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates are, the better the odds that your tax planning efforts will succeed.
Maximizing Business Entertainment Expenses
Entertainment expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines.
In order to qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not. Be careful of locations that include ongoing floor shows or other distracting events that inhibit business discussions. Prime distractions are theater locations, ski trips, golf courses, sports events, and hunting trips.
The IRS allows up to a 50 percent deduction on entertainment expenses, but you must keep good records and the business meal must be arranged with the purpose of conducting specific business. For more information on this topic see Deducting Travel and Entertainment Expenses, below.
Important Business Automobile Deductions
If you use your car for business such as visiting clients or going to business meetings away from your regular workplace you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses. The mileage reimbursement rate for 2017 is 53.5 cents per business mile.
If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions.
Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts. If you need assistance figuring out which method is best for your business, don't hesitate to contact the office.
Increase Your Bottom Line When You Work At Home
The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.
Try prominently displaying your home business phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.
Section 179 expensing for tax year 2017 allows you to immediately deduct, rather than depreciate over time, up to $510,000, with a cap of $2,030,000 worth of qualified business property that you purchase during the year. The key word is "purchase." Equipment can be new or used and includes certain software. Generally, depreciable equipment for a home office meets the qualification.
Some deductions can be taken whether or not you qualify for the home office deduction itself. It's never too early to meet with a tax professional to learn more about home office deductions. Call today to schedule a consultation.
Five Things to know before Starting a Business
Starting a new business is an exciting, but busy time with so much to be done and so little time to do it in. And, if you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That's where a tax professional can help.
Employer Identification Number (EIN)
The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks and you can apply for one EIN per day.
State Withholding, Unemployment, and Sales Tax
Payroll Record Keeping
Form W-4 is completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.
Form I-9 must be completed by you, the employer, to verify that employees are legally permitted to work in the U.S.
If you need help setting up or completing any tax-related paperwork needed for your business, don't hesitate to call.
Deducting Travel and Entertainment Expenses
Tax law allows you to deduct two types of travel expenses related to your business, local and what the IRS calls "away from home."
Local Transportation Costs
The cost of local business transportation includes rail fare and bus fare, as well as costs associated with use and maintenance of an automobile used for business purposes. If your main place of business is your personal residence, then business trips from your home office and back are considered deductible transportation and not non-deductible commuting.
You generally cannot deduct lodging and meals unless you stay away from home overnight. Meals may be partially deductible as an entertainment expense.
Away From-Home Travel Expenses
You can deduct one-half of the cost of meals (50 percent) and all of the expenses of lodging incurred while traveling away from home. The IRS also allows you to deduct 100 percent of your transportation expenses--as long as business is the primary reason for your trip.
Here's a list of some deductible away-from-home travel expenses:
There are limits and restrictions on deducting meal and entertainment expenses. Most are deductible at 50 percent, but there are a few exceptions. Meals and entertainment must be "ordinary and necessary" and not "lavish or extravagant" and directly related to or associated with your business. They must also be substantiated (see below).
Your home is considered a place conducive to business. As such, entertaining at home may be deductible providing there was business intent and business was discussed. The amount of time that business was discussed does not matter.
Reasonable costs for food and refreshments for year-end parties for employees, as well as sales seminars and presentations held at your home, are 100 percent deductible.
If you rent a skybox or other private luxury box for more than one event, say for the season, at the same sports arena, you generally cannot deduct more than the price of a non-luxury box seat ticket. Count each game or other performance as one event. Deduction for those seats is then subject to the 50 percent entertainment expense limit.
If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. The amounts separately stated for food and beverages must be reasonable.
Deductions are disallowed for depreciation and upkeep of "entertainment facilities" such as yachts, hunting lodges, fishing camps, swimming pools, and tennis courts. Costs of entertainment provided at such facilities are deductible, subject to entertainment expense limitations.
Dues paid to country clubs or to social or golf and athletic clubs, however; are not deductible. Dues that you pay to professional and civic organizations are deductible as long as your membership has a business purpose. Such organizations include business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards.
Entertainment costs, taxes, tips, cover charges, room rentals, maids, and waiters are all subject to the 50 percent limit on entertainment deductions.
How Do You Prove Expenses Are Directly Related?
Expenses are directly related if you can show:
Record-keeping and Substantiation Requirements
Tax law requires you to keep records that will prove the business purpose and amounts of your business travel, entertainment, and local transportation costs. For example, each expense for lodging away from home that is $75 or more must be supported by receipts. The receipt must show the amount, date, place, and type of the expense.
The most frequent reason that the IRS disallows travel and entertainment expenses is failure to show the place and business purpose of an item. Therefore, pay special attention to these aspects of your record-keeping.
Keeping a diary or log book--and recording your business-related activities at or close to the time the expense is incurred--is one of the best ways to document your business expenses.
If you need help documenting business travel and entertainment expenses, don't hesitate to call.
Planning For Retirement: Withdrawals
Are you thinking of retiring soon, or changing jobs? You may face a major financial decision: what to do about the funds in your retirement plan.
Take a Partial Withdrawal
Partial withdrawals are withdrawals that aren't rollovers, annuities, or lump sums. Because they are partial, the amount not withdrawn continues its tax shelter (see below).
A partial withdrawal will usually leave open the option for other types of withdrawal (annuity, lump sum, rollover) of the balance left in the plan.
Tax Planning. A partial withdrawal is usually taxable and can be subject to the penalty tax on withdrawals before age 59-1/2 except under certain situations (see below) and when the distribution consists of after-tax contributions, such as nondeductible IRA contributions.
Exceptions for early distributions from IRAs and other qualified retirement plans include direct rollovers to a new retirement account, you were permanently or totally disabled, you were unemployed and paid for health insurance premiums, you paid for college expenses for yourself or a dependent, you bought a house (certain criteria must be met), or you paid for medical expenses exceeding 10 percent of your adjusted gross income. In addition, there are several less common situations where you might be exempt from paying taxes and early withdrawal penalties. Please call us if you would like more information.
Preserving the Tax Shelter. Your funds grow sheltered from tax while they are in the retirement plan. This means that the longer you can prolong the distribution - or the smaller the amount you must withdraw - the more your assets grow. Some people choose to defer withdrawals for as long as the law allows to maximize assets and shelter them for the next generation.
Withdrawal Before You Reach Age 70-1/2
Until you reach 70-1/2, you do not need to take money out of your retirement account - unless your employer's plan requires it. In fact, there will usually be a 10% early-withdrawal penalty if you make withdrawals before age 59 1/2. This is on top of the regular income tax you owe - at any age - on amounts you withdraw (though there's no tax on after-tax contributions you made, as discussed above).
Once You Reach Age 70-1/2
Once you hit 70-1/2, withdrawals must begin. Technically they can be postponed until April 1 of the year following the year you reach 70-1/2 - say April 1, 2018, if you reach 70-1/2 in 2017. But waiting until April 1 means you must withdraw for two years - 2017 and 2018 - in 2018. To avoid this income bunching and a possible higher marginal tax rate, we may suggest withdrawing in the year you reach 70-1/2. Please call if you need assistance evaluating your particular situation.
The rules allow you to spread your withdrawals over a period substantially longer than your life expectancy. Under these rules, the taxpayer (say, an IRA owner) first determines how much he's saved as of the end of the preceding year. Then he consults a (unisex) IRS table to find the number for his age. The number corresponds to how long he may spread out the withdrawals. The owner then divides that number into the retirement asset total. The result is the minimum amount he must withdraw for the year.
The number in the IRS table assumes distribution over a period based on your life expectancy, plus that of a beneficiary 10 years younger than you. If your designated beneficiary is a spouse more than 10 years younger than you, his or her actual life expectancy is used to figure the withdrawal period during your lifetime.
The IRS requires that you withdraw at least a minimum amount - known as a Required Minimum Distribution - from your retirement accounts annually, starting the year you turn age 70-1/2. Determining how much you are required to withdraw is an important issue in retirement planning.
Contact the office now if you'd like assistance figuring out how much your withdrawal should be because getting those numbers right can make a big difference in the quality of your retirement.
Tax Tips for the Sharing Economy
If taxpayers use one of the many online platforms to rent a spare bedroom, provide car rides or a number of other goods or services, they may be part of what is called the sharing economy.
Here are several key points taxpayers should know about the sharing economy:
1. Taxes. Sharing economy activity is generally taxable. It does not matter whether it is only part time or a sideline business, if payments are in cash or if an information return like a Form 1099 or Form W2 is issued. The activity is taxable.
2. Deductions. There are some simplified options available for deducting many business expenses for those who qualify. For example, a taxpayer who uses his or her car for business often qualifies to claim the standard mileage rate, which is 53.5 cents per mile for 2017.
3. Rentals. If a taxpayer rents out his home, apartment or other dwelling but also lives in it during the year, special rules generally apply. For more about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Taxpayers can use the Interactive Tax Assistant Tool, Is My Residential Rental Income Taxable and/or Are My Expenses Deductible? to determine if their residential rental income is taxable.
4. Estimated Payments. The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year to cover their tax obligation. These payments are due on April 18, June 15, Sept. 15 and Jan. 16 (2018). Use Form 1040-ES to figure these payments.
5. Payment Options. The fastest and easiest way to make estimated tax payments is through IRS Direct Pay. Or use the Treasury Department's Electronic Federal Tax Payment System (EFTPS).
6. Withholding. Taxpayers involved in the sharing economy who are employees at another job can often avoid making estimated tax payments by having more tax withheld from their paychecks. File Form W-4 with the employer to request additional withholding. Use the Withholding Calculator on IRS.gov.
Questions about the sharing economy and your taxes? Help is just a phone call away.
What to do if you get a Letter from the IRS
Each year, the IRS mails millions of notices and letters to taxpayers for a variety of reasons. If you receive correspondence from the IRS here's what to do:
Don't panic. You can usually deal with a notice simply by responding to it. Most IRS notices are about federal tax returns or tax accounts.
Each notice has specific instructions, so read your notice carefully because it will tell you what you need to do.
Your notice will likely be about changes to your account, taxes you owe or a payment request. However, your notice may ask you for more information about a specific issue.
If your notice says that the IRS changed or corrected your tax return, review the information and compare it with your original return. If you agree with the notice, you usually don't need to reply unless it gives you other instructions or you need to make a payment.
If you don't agree with the notice, you need to respond. Write a letter that explains why you disagree and include information and documents you want the IRS to consider. Mail your response with the contact stub at the bottom of the notice to the address on the contact stub. Allow at least 30 days for a response.
For most notices, there is no need to call or visit a walk-in center. If you have questions, call the phone number in the upper right-hand corner of the notice. Be sure to have a copy of your tax return and the notice with you when you call. If you need assistance understanding an IRS Notice or letter, don't hesitate to call the office.
Always keep copies of any notices you receive with your tax records.
Be alert for tax scams. The IRS sends letters and notices by mail and does NOT contact people by email or social media to ask for personal or financial information. If you owe tax, please call to find out what your options are.
Tax Tips for Students with a Summer Job
Is your child a student with a summer job? Here's what you should know about the income your child earns over the summer.
A summer work schedule is sometimes a patchwork of odd jobs, which makes for confusion come tax time. Contact the office if you have any questions at all about income your child earned this summer season.
10 Tips for Deducting Losses from a Disaster
National Hurricane Season is officially in progress. If you suffer damage to your home or personal property, you may be able to deduct the losses you incur on your federal income tax return. Here are ten tips you should know about deducting casualty losses:
1. Casualty loss. You may be able to deduct losses based on the damage done to your property during a disaster. A casualty is a sudden, unexpected or unusual event. This may include natural disasters like hurricanes, tornadoes, floods and earthquakes. It can also include losses from fires, accidents, thefts or vandalism.
2. Normal wear and tear. A casualty loss does not include losses from normal wear and tear. It does not include progressive deterioration from age or termite damage.
3. Covered by insurance. If you insured your property, you must file a timely claim for reimbursement of your loss. If you don't, you cannot deduct the loss as a casualty or theft. You must reduce your loss by the amount of the reimbursement you received or expect to receive.
4. When to deduct. As a general rule, you must deduct a casualty loss in the year it occurred. However, if you have a loss from a federally declared disaster area, you may have a choice of when to deduct the loss. You can choose to deduct the loss on your return for the year the loss occurred or on an amended return for the immediately preceding tax year. Claiming a disaster loss on the prior year's return may result in a lower tax for that year, often producing a refund.
5. Amount of loss. You figure the amount of your loss using the following steps:
6. The $100 rule. After you have figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It does not matter how many pieces of property are involved in an event.
7. The 10 percent rule. You must reduce the total of all your casualty or theft losses on personal-use property for the year by 10 percent of your adjusted gross income.
8. Future income. Do not consider the loss of future profits or income due to the casualty as you figure your loss.
9. Form 4684. Complete Form 4684, Casualties and Thefts, to report your casualty loss on your federal tax return. You claim the deductible amount on Schedule A, Itemized Deductions.
10. Business or income property. Some of the casualty loss rules for business or income property are different than the rules for property held for personal use.
If you have any questions or need assistance, don't hesitate to call.
Tips on Tips: Are your Tips Taxable?
Do you work at a hair salon, barber shop, casino, golf course, hotel, or restaurant, or do you drive a taxicab? The tip income you receive as an employee from those services is taxable income.
Here are some tips about tips:
Tips can be tricky. Don't hesitate to contact the office if you have questions.
Tax Due Dates for June 2017
Employees who work for tips - If you received $20 or more in tips during May, report them to your employer. You can use Form 4070.
Individuals - If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due. (U.S. citizens living in the U.S. should have paid their taxes on April 18.) If you want additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then file Form 1040 by October 16. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline.
Individuals - Make a payment of your 2017 estimated tax if you are not paying your income tax for the year through withholding (or will not pay enough tax that way). Use Form 1040-ES. This is the second installment date for estimated tax in 2017.
Corporations - Deposit the second installment of estimated income tax for 2017. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in May.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in May.
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