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Individual Taxpayers: Recap for 2020
As we close out the year and get ready for tax season, here's what individuals and families need to know about tax provisions for 2020.
Personal exemptions are eliminated for tax years 2018 through 2025.
The standard deduction for married couples filing a joint return in 2020 is $24,800. For singles and married individuals filing separately, it is $12,400, and for heads of household, the deduction is $18,650.
The additional standard deduction for blind people and senior citizens in 2020 is $1,300 for married individuals and $1,650 for singles and heads of household.
Income Tax Rates
In 2020 the top tax rate of 37 percent affects individuals whose income exceeds $518,400 ($625,050 for married taxpayers filing a joint return). Marginal tax rates for 2020 are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. As a reminder, while the tax rate structure remained similar to prior years under tax reform (i.e., with seven tax brackets), the tax-bracket thresholds increased significantly for each filing status.
Estate and Gift Taxes
In 2020 there is an exemption of $11.58 million per individual for estate, gift, and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $15,000.
Alternative Minimum Tax (AMT)
For 2020, exemption amounts increased to $72,900 for single and head of household filers, $113,400 for married people filing jointly and for qualifying widows or widowers, and $56,700 for married taxpayers filing separately.
Pease and PEP (Personal Exemption Phaseout)
Both Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) have been eliminated under TCJA.
Flexible Spending Account (FSA)
A Flexible Spending Account (FSA) is limited to $2,750 per year in 2020 (up from $2,700 in 2019) and applies only to salary reduction contributions under a health FSA. The term "taxable year" as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.
Long-Term Capital Gains
In 2020 tax rates on capital gains and dividends remain the same as 2019 rates (0%, 15%, and a top rate of 20%); however, taxpayers should be reminded that threshold amounts don't correspond to the tax bracket rate structure as they have in the past. For example, taxpayers whose income is below $40,000 for single filers and $80,000 for married filing jointly pay 0% capital gains tax. For individuals whose income is at or above $441,450 ($496,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Miscellaneous deductions that exceed 2 percent of AGI (adjusted gross income) are eliminated for tax years 2018 through 2025. As such, you can no longer deduct on Schedule A expenses related to tax preparation, moving (except for members of the Armed Forces on active duty who move because of a military order), job hunting, or unreimbursed employee expenses such as tools, supplies, required uniforms, travel, and mileage.
Business owners are not affected and can still deduct business-related expenses on Schedule C.
Individuals - Tax Credits
In 2020 a nonrefundable (i.e., only those with tax liability will benefit) credit of up to $14,300 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
The Child and Dependent Care Tax Credit was permanently extended for taxable years starting in 2013 and remained under tax reform. As such, if you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit and Credit for Other Dependents
For tax years 2018 through 2025, the Child Tax Credit increases to $2,000 per child. The refundable portion of the credit increases from $1,000 to $1,400 - 15 percent of earned income above $2,500, up to a maximum of $1,400 - so that even if taxpayers do not owe any tax, they can still claim the credit. Please note, however, that the refundable portion of the credit (also known as the additional child tax credit) applies higher-income when the taxpayer isn't able to fully use the $2,000 nonrefundable credit to offset their tax liability.
Under TCJA, a new tax credit - Credit for Other Dependents - is also available for dependents who do not qualify for the Child Tax Credit. The $500 credit is nonrefundable and covers children older than age 17 as well as parents or other qualifying relatives supported by a taxpayer.
Earned Income Tax Credit (EITC)
For tax year 2020, the maximum earned income tax credit (EITC) for low and moderate-income workers and working families increased to $6,660 (up from $6,557 in 2019). The maximum income limit for the EITC increased to $56,844 (up from $55,952 in 2019) for married filing jointly. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Individuals - Education Expenses
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2020. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.
American Opportunity Tax Credit
For 2020, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student. For 2020, the amount of your credit begins to phase out if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You cannot claim a credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2020, the modified adjusted gross income (MAGI) threshold at which the Lifetime Learning Credit begins to phase out is $118,000 for joint filers and $59,000 for singles and heads of household. The credit cannot be claimed if your MAGI is $69,000 or more ($138,000 for joint returns).
Employer-Provided Educational Assistance
As an employee in 2020, you can exclude up to $5,250 of qualifying postsecondary and graduate education expenses that are reimbursed by your employer.
Student Loan Interest
In 2020, you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $70,000 (single) or $140,000 (married filing jointly). The credit cannot be claimed if your modified adjusted gross income (MAGI) is more than $85,000 for single filers ($170,000 if married filing jointly).
Individuals - Retirement
For 2020, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is $19,500 ($19,000 in 2019). For persons age 50 or older in 2020, the limit is $26,000 ($6,500 catch-up contribution).
Retirement Savings Contributions Credit (Saver's Credit)
In 2020, the adjusted gross income limit for the saver's credit for low and moderate-income workers is $65,000 for married couples filing jointly, $48,750 for heads of household, and $32,500 for married individuals filing separately and for singles. The maximum credit amount is $2,000 ($4,000 if married filing jointly). As a reminder, starting in 2018, the Saver's Credit can be taken for your contributions to an ABLE (Achieving a Better Life Experience) account if you're the designated beneficiary. However, keep in mind that your eligible contributions may be reduced by any recent distributions you received from your ABLE account.
If you have any questions about these and other tax provisions that could affect your tax situation, don't hesitate to call.
Business Tax Provisions: The Year in Review
Here's what business owners need to know about tax changes for 2020.
Standard Mileage Rates
The standard mileage rate in 2020 is 57.5 cents per business mile driven.
Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000 (adjusted annually for inflation). This amount is $55,200 for 2020 returns.
In 2020 (as in 2014-2018), the tax credit is worth up to 50 percent of your contribution toward employees' premium costs (up to 35 percent for tax-exempt employers).
Section 179 Expensing and Depreciation
Under the Tax Cuts and Jobs Act of 2017, the Section 179 expense deduction increases to a maximum deduction of $1.04 million of the first $2.59 million of qualifying equipment placed in service during the current tax year. The deduction was indexed to inflation for tax years after 2018 and enhanced to include improvements to nonresidential qualified real property such as roofs, fire protection, and alarm systems and security systems, and heating, ventilation, and air-conditioning systems.
Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. The standard business depreciation amount is 27 cents per mile (up from 26 cents per mile in 2019).
Please call if you have any questions about Section 179 expensing and the bonus depreciation.
Work Opportunity Tax Credit (WOTC)
Extended through 2020 under the Further Consolidated Appropriations Act, 2020, the Work Opportunity Tax Credit can be used by employers who hire long-term unemployed individuals (unemployed for 27 weeks or more). It is generally equal to 40 percent of the first $6,000 of wages paid to a new hire. Please call if you have any questions about the Work Opportunity Tax Credit.
SIMPLE IRA Plan Contributions
Contribution limits for SIMPLE IRA plans increased to $13,500 for persons under age 50 and $16,500 for persons age 50 or older in 2020. The maximum compensation used to determine contributions is $285,000.
Please contact the office if you would like more information about these and other tax deductions and credits to which you are entitled.
Working Remotely Could Affect Your Taxes
When COVID-19 struck last March, employers quickly switched to a work-from-home model for their employees, many of whom began working in a state other than the one in which their office was located. While some workers have returned to their offices, many have not. If you're working remotely from a location in a different state (or country) from that of your office, then you may be wondering if you will have to pay income tax in multiple jurisdictions or whether you will need to file income tax returns in both states.
Generally, states can tax income whether you live there or work there. Whether a taxpayer must include taxable income while living or working in a particular jurisdiction depends on several factors, including nexus, domicile, and residency.
Many states - especially those with large metro areas where much of the workforce resides in surrounding states - have agreements in place that allow credits for tax due in another state so that you aren't taxed twice. In metro Washington, DC, for example, payroll tax withholding is based on the state of residency allowing people to work in another state without causing a tax headache. Other states such as Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania tax workers based on job location even if they reside in a different state.
Remote Working in Multiple Locations
Let's say you live in Florida. During the pandemic a mandatory office closure allows you to work remotely from your vacation home in North Carolina - a state that is not your domicile (i.e., your home). Next spring, you will need to file a nonresident income tax return on income earned in North Carolina (your remote work location, but not your domicile) in addition to your usual tax returns.
However, in all the pandemic confusion, it's likely that your employer may not have known you were working remotely from NC and did not withhold tax from your pay (income earned). If that's the case, then you may owe money.
If the tax rate in the remote location is higher than the taxpayer's home state or the home state doesn't impose income tax but the state they are working from does, the tax credit in the worker's home state may not be enough to offset all - or any - tax owed.
During the pandemic, 13 states have agreed not to tax workers who temporarily moved there because of the pandemic including Alabama, Georgia, Illinois, Indiana, Massachusetts, Maryland, Minnesota, Mississippi, Nebraska, New Jersey, Pennsylvania, Rhode Island, and South Carolina.
Keep in mind, however, that these waivers are temporary and in some cases may only in effect during a mandated government shutdown. South Carolina's waiver, for instance, expired on September 30, 2020, but was extended through December 31, 2020.
Necessity or Convenience
Another important factor to consider is whether a worker's remote work location is due to necessity or convenience. If there is a mandatory government shutdown, then it is a necessity. If the option to go back to the office exists, but the worker chooses not to because of health concerns, then the state could view it as convenience.
Keeping Good Records
Keeping good records is always important when it comes to your taxes, but even more so when there are so many unknowns. As such, it's a good idea to keep track of how many days were worked in each state and how much money was earned.
Help is Just a Phone Call Away
Tax laws are complex even during the best of times. If you've been working remotely during the pandemic in a different location than your office, then it pays to consult with a tax and accounting professional to figure out your tax liability and recommend a course of action to lower your tax bill such as changing your withholding.
Small Business: Deductions for Charitable Giving
Tax breaks for charitable giving aren't limited to individuals, your small business can benefit as well. If you own a small to medium-size business and are committed to giving back to the community through charitable giving, here's what you should know.
1. Verify that the Organization is a Qualified Charity
Once you've identified a charity, you'll need to make sure it is a qualified charitable organization under the IRS. Qualified organizations must meet specific requirements as well as IRS criteria and are often referred to as 501(c)(3) organizations. Note that not all tax-exempt organizations are 501(c)(3) status, however.
There are two ways to verify whether a charity is qualified:
- Use the IRS online search tool; or
- Ask the charity to send you a copy of their IRS determination letter confirming their exempt status.
2. Make Sure the Deduction is Eligible
Not all deductions are created equal. In order to take the deduction on a tax return, you need to make sure it qualifies. Charitable giving includes the following: cash donations, sponsorship of local charity events, in-kind contributions such as property such as inventory or equipment.
Lobbying. A 501(c)(3) organization may engage in some lobbying, but too much lobbying activity risks the loss of its tax-exempt status. As such, you cannot claim a charitable deduction (or business expense) for amounts paid to an organization if both of the following apply:
- The organization conducts lobbying activities on matters of direct financial interest to your business.
- A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses.
Further, if a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues.
3. Understand the Limitations
Sole proprietors, partners in a partnership, or shareholders in an S-corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Corporations (other than S-corporations) can deduct charitable contributions on their income tax returns, subject to limitations.
Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Likewise, if the payments are charitable contributions or gifts, you cannot deduct them as business expenses.
Sole Proprietorships. As a sole proprietor (or single-member LLC), you file your business taxes using Schedule C of individual tax form 1040. Your business does not make charitable contributions separately. Charitable contributions are deducted using Schedule A, and you must itemize in order to take the deductions.
Partnerships. Partnerships do not pay income taxes. Rather, the income and expenses (including deductions for charitable contributions) are passed on to the partners on each partner's individual Schedule K-1. If the partnership makes a charitable contribution, then each partner takes a percentage share of the deduction on his or her personal tax return. For example, if the partnership has four equal partners and donates a total of $2,000 to a qualified charitable organization in 2020, each partner can claim a $500 charitable deduction on their 2020 tax return.
A donation of cash or property reduces the value of the partnership. For example, if a partnership donates office equipment to a qualified charity, the office equipment is no longer owned by the partnership, and the total value of the partnership is reduced. Therefore, each partner's share of the total value of the partnership is reduced accordingly.
S-Corporations. S-Corporations are similar to Partnerships, with each shareholder receiving a Schedule K-1 showing the amount of charitable contribution.
C-Corporations. Unlike sole proprietors, partnerships, and S-corporations, C-Corporations are separate entities from their owners. As such, a corporation can make charitable contributions and take deductions for those contributions.
4. Categorize Donations
Each category of donation has its own criteria with regard to whether it's deductible and to what extent. For example, mileage and travel expenses related to services performed for the charitable organization are deductible but the time spent on volunteering your services is not.
Here's another example: As a board member, your duties may include hosting fundraising events. While the time you spend as a board member is not deductible, expenses related to hosting the fundraiser such as stationery for invitations and telephone costs related to the event are deductible.
Generally, you can deduct up to 50 percent of adjusted gross income. Non-cash donations of more than $500 require completion of Form 8283, which is attached to your tax return. In addition, contributions are only deductible in the tax year in which they're made.
5. Keep Good Records
The types of records you must keep vary according to the type of donation (cash, non-cash, out of pocket expenses when donating your services) and the importance of keeping good records cannot be overstated.
Ask for - and make sure you receive - a letter from any organizations stating that said organization received a contribution from your business. You should also keep canceled checks, bank and credit card statements, and payroll deduction records as proof or your donation. Furthermore, the IRS requires proof of payment and an acknowledgment letter for donations of $250 or more.
Questions about charitable donations? Help is just a phone call away.
Applying for Tax-Exempt Status as a Nonprofit
If you're thinking of starting a nonprofit organization, there are a few things you should know before you get started. First, is understanding how nonprofits work under state and federal law. For example, two things you should understand is that state law governs nonprofit status. Nonprofit status is determined by an organization's articles of incorporation or trust documents while federal law governs tax-exempt status (i.e., exemption from federal income tax). Whether you're starting a charity, a social organization, or an association here are the steps you need to take before you can apply for tax-exempt status.
1. Determine the type of organization.
Before a charitable organization can apply for tax-exempt status, it must determine whether it is a trust, corporation or association. Here is how each one is generally defined:
- A trust is defined as a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another. It is formed under state law.
- A corporation is formed under state law by the filing of articles of incorporation with the state. The state must generally date-stamp the articles before they are effective.
- An association is a group of persons banded together for a specific purpose. To qualify under section 501(a) of the Code, the association must have a written document, such as articles of association, showing its creation. At least two persons must sign the document, which must be dated. The definition of an association can vary under state law.
2. Gather organization documents.
Each application for exemption - except Form 1023-EZ - must be accompanied by an exact copy of the organization's organizing document, which is generally one of the following:
- Articles of incorporation for a corporation
- Articles of organization for a limited liability company
- Articles of association or constitution for an association
- Trust agreement or declaration of trust for a trust
Organizations that do not have an organizing document will not qualify for exempt status. If the organization's name has been legally changed by an amendment to its organizing documents, they should also attach an exact copy of that amendment to the application. State law generally determines whether an organization is properly created and establishes the requirements for organizing documents.
3. Understand state registration requirements
Next, you will need to take a look at your state's registration requirements for nonprofits. State government websites have useful information for tax-exempt organizations such as tax information, registration requirements for charities, and information for employers.
4. Obtain Employer ID numbers.
Finally, once your organization is legally formed you will need to obtain employer id numbers (EINs) for your new organization. Organizations can apply for an EIN online, by fax, or by mail using Form SS-4, Application for Employer I.D. Number. International applicants may apply by phone.
Third parties can also receive an EIN on a client's behalf by completing the Third Party Designee section. Don't forget to have the client sign the form to avoid having to file a Form 2848, Power of Attorney, or Form 8821, Tax Information Authorization.
One final thing to note, is that nearly all organizations are subject to automatic revocation of their tax-exempt status if they fail to file a required return or notice for three consecutive years. Once an organization applies for an EIN, the IRS presumes the organization is legally formed and the clock starts running on this three-year period.
Questions about starting a nonprofit? Help is just a phone call away.
Retirement Contributions Limits Announced for 2021
Cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for 2021 are as follows:
401(k), 403(b), 457 plans, and Thrift Savings Plan. Contribution limits for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $19,500. The catch-up contribution limit for employees aged 50 and over remains unchanged at $6,500.
SIMPLE retirement accounts. Contribution limits for SIMPLE retirement accounts for self-employed persons remains unchanged in 2021 as well at $13,500.
Traditional IRAs. The limit on annual contributions to an IRA remains at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions; however, if during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If a retirement plan at work covers neither the taxpayer nor their spouse, the phase-out amounts of the deduction do not apply.
The phase-out ranges for 2021 are as follows:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000, up from $65,000 to $54,000.
- For married couples filing jointly, where a workplace retirement plan covers the spouse making the IRA contribution, the phase-out range is $105,000 to $125,000, up from $104,000 to $124,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $198,000 and $208,000, up from $196,000 and $206,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Roth IRAs. The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $139,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Saver's Credit. The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500.
If you have any questions about retirement plan contributions, don't hesitate to call.
Solar Technology Tax Credits Still Available for 2020
Certain energy-efficient home improvements can cut your energy bills and save you money at tax time. While many of these tax credits expired at the end of 2016, tax credits for residential and non-business energy-efficient solar technologies do not expire until December 31, 2021. Here are some key facts that you should know about these tax credits:
Residential Energy Efficient Property Credit
- This tax credit is 30 percent of the cost of alternative energy equipment installed on or in your home.
- Qualified equipment includes solar hot water heaters and solar electric equipment placed into service on or after January 1, 2006, and on or before December 31, 2021.
- There is no maximum credit for systems placed in service after 2008.
- The tax credit does not apply to solar water-heating property for swimming pools or hot tubs.
- If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year's tax return.
- At least half the energy used to heat the dwelling's water must be from solar in order for the solar water-heating property expenditures to be eligible.
- Solar water-heating equipment must be certified for performance by the Solar Rating Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed.
- The home must be in the U.S. It does not have to be your main home.
- Use Form 5695, Residential Energy Credits, to claim the credit.
Equipment costs such as assembling or installing original systems, on-site labor costs, and costs related to wiring or piping solar technology systems are considered final when the installation is complete. For a new home, the placed-in-service date is the occupancy date.
The maximum allowable credit varies by the type of technology:
- 30% for systems placed in service by 12/31/2019
- 26% for systems placed in service after 12/31/2019 and before 01/01/2021
- 22% for systems placed in service after 12/31/2020 and before 01/01/2022
Solar water-heating property
- 30% for systems placed in service by 12/31/2019
- 26% for systems placed in service after 12/31/2019 and before 01/01/2021
- 22% for systems placed in service after 12/31/2020 and before 01/01/2022
If you would like more information about this topic please contact the office today.
Relief for Drought-Stricken Farmers and Ranchers
Farmers and ranchers who were forced to sell livestock due to drought may have an additional year to replace the livestock and defer tax on any gains from the forced sales. The relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, or poultry, are not eligible.
Here are seven facts about this to help farmers understand how the deferral works and if they are eligible.
1. The one-year extension gives eligible farmers and ranchers until the end of the tax year after the first drought-free year to replace the sold livestock.
2. To qualify for relief, the farm or ranch must be in an applicable region. This is a county or other jurisdiction designated as eligible for federal assistance plus counties contiguous to it.
3. This extension is granted to farms and ranches located in the applicable region that qualify for the four-year replacement period if any county that is included in the applicable region is listed as suffering exceptional, extreme or severe drought conditions as determined by the National Drought Mitigation Center. All or part of 46 states, plus the District of Columbia and four U.S. territories are listed in the notice.
4. The relief applies to farmers who were affected by drought that happened between September 1, 2019, and August 31, 2020.
5. This relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, or poultry are not eligible.
6. To qualify, the sales must be solely due to drought, flooding or other severe weather causing the region to be designated as eligible for federal assistance.
7. Farmers generally must replace the livestock within a four-year period, instead of the usual two-year period. As a result, qualified farmers and ranchers whose drought-sale replacement period was scheduled to expire at the end of this tax year, December 31, 2020, in most cases, now have until the end of their next tax year. Furthermore, because the normal drought sale replacement period is four years, this extension immediately impacts drought sales that occurred during 2016. But because of previous drought-related extensions affecting some of these areas, the replacement periods for some drought sales before 2016 are also affected.
For additional details or more information on reporting drought sales and other farm-related tax issues, please call.
Beware of Gift Card Tax Scams
There's never an off-season when it comes to scammers and thieves who want to trick people to scam them out of money, steal their personal information, or talk them into engaging in questionable behavior with their taxes. While scam attempts typically peak during tax season, taxpayers need to remain vigilant all year long.
For example, there are many reports of taxpayers being asked to pay a fake tax bill through the purchase of gift cards. While gift cards are a popular and convenient gift for all occasions, they are also a tool that scammers use to steal money from people.
Scammers often target taxpayers by asking them to pay a fake tax bill with gift cards. They may also use a compromised email account to send emails requesting gift card purchases for friends, family or co-workers. The IRS reminds taxpayers gift cards are for gifts, not for making tax payments.
The most common way scammers request gift cards is over the phone through a government impersonation scam. However, they will also request gift cards by sending a text message, email or through social media.
Here's a typical scenario:
A scammer posing as an IRS agent will call the taxpayer or leave a voicemail with a callback number informing the taxpayer that they are linked to some criminal activity. For example, the scammer will tell the taxpayer their identity has been stolen and used to open fake bank accounts.
Here's how the scam unfolds:
- The scammer will threaten or harass the taxpayer by telling them that they must pay a fictitious tax penalty.
- The scammer instructs the taxpayer to buy gift cards from various stores.
- Once the taxpayer buys the gift cards, the scammer will ask the taxpayer to provide the gift card number and PIN.
Scammers are continuously perfecting their tricks and sometimes it is difficult to determine whether it is really the IRS calling. Keep in mind that the IRS will never do the following:
- Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
- Demand that taxpayers pay taxes without the opportunity to question or appeal the amount they owe. All taxpayers should be aware of their rights.
- Threaten to bring in local police, immigration officers or other law-enforcement to have the taxpayer arrested for not paying.
- Threaten to revoke the taxpayer's driver's license, business licenses, or immigration status.
What to do if you think you've been targeted by a scammer
Anyone who believes they've been targeted by a scammer should contact the Treasury Inspector General for Tax Administration to report a phone scam. Use their IRS Impersonation Scam Reporting web page or call 800-366-4484.
Phone scams should also be reported to the Federal Trade Commission. Use the FTC Complaint Assistant on FTC.gov and make sure to add "IRS Telephone Scam" in the notes.
Unsolicited email claiming to be from the IRS, or an IRS-related component like the Electronic Federal Tax Payment System, should be reported to the IRS at email@example.com and be sure to add "IRS Phone Scam" to the subject line.
Remember, gift cards are for gifts, not for making tax payments.
Charitable Donation Deduction Could Lower Your Tax Bill
The Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted last spring, includes several temporary tax changes that help charitable organizations. One such provision allows taxpayers to deduct cash donations of up to $300 made before December 31, 2020.
Designed especially for people who choose to take the standard deduction, rather than itemize. In tax-year 2018, the most recent year for which complete figures are available, more than 134 million taxpayers claimed the standard deduction, just over 87 percent of all filers.
Under this new change, individual taxpayers can claim an "above-the-line" deduction of up to $300 for cash donations made to charity during 2020. This means the deduction lowers both adjusted gross income and taxable income – translating into tax savings for those making donations to qualifying tax-exempt organizations.
Before making a donation, however, taxpayers should use the special Tax Exempt Organization Search (TEOS) tool on IRS.gov to make sure the organization is eligible for tax-deductible donations.
Cash donations include those made by check, credit card, or debit card. They don't include securities, household items, or other property. Though cash contributions to most charitable organizations qualify, those made to supporting organizations and donor-advised funds do not.
Be sure to keep good records. By law, special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. Usually, this includes obtaining a receipt or acknowledgment letter from the charity, before filing a return, and retaining a canceled check or credit card receipt.
The CARES Act also includes other temporary provisions designed to help charities. These include higher charitable contribution limits for corporations, individuals who itemize their deductions, and businesses that give food inventory to food banks and other eligible charities.
For more information about these and other Coronavirus-related tax relief provisions, don't hesitate to call the office and speak to a tax professional who can assist you.
Creating Price Levels in QuickBooks
You already know that when you create a product or service record in QuickBooks, you must assign a sale price to it. But did you know that QuickBooks gives you a great deal of flexibility when to comes to pricing items you sell? The software allows you to create one or more additional Price Levels that you can access in invoices, estimates, sales receipts, credit memos, and sales orders.
There are three ways you can use these. Once you've created them, they'll be available in a drop-down list in the Rate field. This means you can assign them manually to individual transactions. The second option is to assign them globally to specific customers or jobs. Once you've done so, that price will apply every time you create a transaction for one of them. Finally, you can create price levels for selected items.
Here's how it works. Let's say you want to be able to create a price level that's 15 percent below the actual price that you can use in individual transactions. You open the Lists menu and select Price Level List. Click the arrow in the lower left corner next to Price Level and select New. A window like this will open:
Figure 1: You can create price levels in QuickBooks and assign them to individual sales transactions.
Fill in the field next to Price Level Name, and then click the arrow next to Price Level Type. Select Fixed %. Select decrease from the drop-down list on the next line and enter your percentage number. Round up to the nearest is an optional field, Click OK when you're done. The next time you create a sales transaction, your new price level will be available as an option when you open the drop-down list in the Rate column.
When you need to edit or delete a price level, go to Lists | Price Level List again and click the arrow next to Price Level in the lower left corner. You have several options here. You can, for example, make a price level inactive so it doesn't appear on the list. The field next to Price Level is labeled Reports. Click on the arrow to see what's available there.
Customers and Jobs
You can also apply a price level you've created to a specific customer or job, perhaps to reward a customer for frequent purchases. When you do so, that rate will appear every time you enter a sales transaction for the customer or job you selected.
Open the Customers menu and select Customer Center. Double click on a customer or job's name to open the record. Click on the Payment Settings tab. Click the arrow in the field next to Price Level and select the right one, then click OK.
Figure 2: You can assign a Price Level to specific customers or jobs.
Per Item Price Levels
QuickBooks also allows you to set custom prices for specific items that are associated with preferred customers or jobs (this option is only available if you're using QuickBooks Premier or Enterprise). Let's say you want to give a 10 percent discount to specific customers who purchase your website development services. Go to Lists | Price Level List and click the arrow next to Price Level in the lower left corner again, then select New (you can also get to the New command by right-clicking anywhere in the window).
Give your price level a name (like Web Development 10 Off) , then select Per Item from the Price Level Type drop-down list. Click in front of the Item you want to include. The fields in the next line should read as pictured in the image below: 10% | lower | standard price. Click Adjust. You'll see your reduced prices in the Custom Price column in the table above.
Figure 3: You can establish a Price Level for specific items in QuickBooks.
Again, the rounding field is optional. When you're finished here, click OK. The next time you create a sales transaction for a customer who is eligible for the lower price, you'll select Web Development 10 Off from the drop-down list in the Rate column.
Feel like you're outgrowing your current version of QuickBooks, or is it several years old? Don't hesitate to call if you need additional support or are ready to upgrade your current QuickBooks software to help you run your business more efficiently and effectively as it grows.
Tax Due Dates for December 2020
Employees who work for tips - If you received $20 or more in tips during November, report them to your employer. You can use Form 4070.
Corporations - Deposit the fourth installment of estimated income tax for 2020. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers Social Security, Medicare, and withheld income tax - If the monthly deposit rule applies, deposit the tax for payments in November.
Employers Nonpayroll withholding - If the monthly deposit rule applies, deposit the tax for payments in November.
What is Financial Health?
Financial health refers to the overall state of your monetary affairs. It’s your ability to manage earnings, expenses, debts, wealth, and fiscal shocks. There are various ways to create financial health, including savings, retirement plans, and planning how you spend your income. If you can comfortably handle unexpected financial emergencies as well as short- and long-term needs, then your financial health is positive.
Good financial health has several benefits. According to the APA, a majority of stressed individuals mention money as the cause of their discomfort. Financial wellness reduces or eliminates stress and associated problems such as depression, weight gain, erratic sleep patterns, and heart disease. It significantly improves your personal and professional relationships. Other benefits include providing you with more lifestyle options, creating financial stability for your children, and allowing you to give back to your community.
Signs of Financial Health
The most trustworthy way to gauge financial health is to measure savings, debt, and net worth. Since they’re not constant, it’s advisable to do so regularly. A steady source of income increases the likelihood of financial wellness. Having multiple revenue streams reduces the impact of financial surprises and gives you room to create a comfortable budget.
Another sign of financial health is the ability to reduce or maintain the same level of expenses while increasing your income. More money means you can save more, as well as enjoy a higher quality of life in the future. One way of doing so is to focus on building your career, which results in better-paying positions and overall financial security.
Besides increasing contributions to your 401(k) and other retirement plans, you can also diversify your income. High return ideas include part-time freelancing or consulting, investing in real estate, re-selling, and affiliate marketing.
How to Improve
The first step to improving your financial health is to evaluate your current status. You should have a realistic view of your income, expenses, and debts. Follow these tips:
1. Create a budget
A budget is the most basic and valuable tool for financial discipline. Individuals, companies, and even countries use it to guide their spending. For it to be effective, you must consider your current financial habits before planning for the future. It gives you a clear picture of items you must spend on, including rent, taxes, groceries, and household maintenance. You can also do away with discretionary expenses such as vacations, fine dining, electronics, and subscriptions that you no longer need.
2. Have an Emergency Fund
Financial emergencies include job loss, illness, car trouble, natural calamities, and the death of a loved one. Although no one wishes for them, you must prepare for their eventuality. Your emergency fund should have enough money to cover living expenses for three to six months.
3. Reduce or Clear Your Debt
There are two effective debt reduction methods you can use. The first is the avalanche method, which gives priority to the debt with the highest interest rate. Once complete, pay off the next highest one until you clear it all. The second method is known as the snowball method, in which you pay off the smallest debt as fast as you can. Once done, move these payments to the next smallest debt until you are debt-free.
4. Automate Your Savings
Arrange for your bank to automatically split your paycheck every month, then move a fixed amount from your checking to a savings account. Utilize whatever remains to cover your monthly needs.
Tracking Your Progress
You can use spreadsheets to evaluate whether you’re meeting your financial goals. Create a category for each fund and ensure each entry is within your budget. If you find spreadsheets too time-consuming, there are several apps you can download on your mobile devices.
These apps can also track your FICO score through TransUnion, Experian, or Equifax. Other financial benchmarks to analyze are your net worth and savings rate. At the end of each month, quarter, or year, you’ll accurately see whether you’re on track to achieve your financial goals.
Learning to Maintain a Positive Financial Attitude
The tips outlined in this article don’t come naturally to most people. You have to dedicate a significant amount of time and effort before seeing positive results. Study the most effective money-saving strategies and implement the ones you find most suitable. Fine-tune them until you find a winning formula.
Find a mentor who’s enjoying success and let them guide you on improving your financial health. You’ll need the support of your family, friends, and the broader community to achieve your long-term objectives. It won’t be easy to enforce financial discipline without their encouragement. Over time, these collective actions will form a culture that future generations will find easier to maintain.
Do you have additional tips on improving financial health? Please share them in the comments section below.The post What is Financial Health? first appeared on www.financialhotspot.com.
What You Should Know About Virtual Accounting
Your accountant doesn’t have to be physically present for your business to benefit from their expertise. Modern technology makes virtual accounting an excellent alternative. It analyzes your accounts remotely and updates them appropriately.
Virtual accounting also works if there’s a significant distance between your preferred accountant and your business premises. Some individuals and companies choose this option because it’s more convenient. So long as you grant remote access to your server, financial documents, and accounting software, your virtual accountant can work quickly and efficiently.
Services Appropriate for Virtual Accountants
Professional virtual accountants are tech-savvy. They’re conversant with your accounting software, cloud computing applications, and associated teleworking tools. They also have excellent communication skills, making it easy to outline ideas, requirements, and deliverables in a remote setup. The best virtual accountants perform their duties without needing constant follow-ups. Their services include:
- Bookkeeping: It helps you manage your business better by categorizing your transactions and preparing the necessary financial statements.
- Account reconciliation: Your virtual accountant will make regular entries about your bank account into your accounting software. Other than reporting cash transactions, they’ll match your bank balances to financial statements. They’ll also reconcile checks, deposits, and cleared transactions.
- Payroll processing: You’ll receive accurate data to help your business calculate and administer employee remuneration.
- Financial analysis and statements: A virtual accountant can help you compile cash flow reports, trial balances, balance sheets, and other documents. These give you a snapshot of your company’s financial health.
- Accounts payable and receivable: As your business expands, it becomes harder to keep track of debtors and creditors. Virtual accounting identifies, organizes, and enters this data into your software system. This real-time information is accessible to you whenever you need it.
- Tax preparation: After consultation via video conferencing, you’ll complete a questionnaire providing more information on your tax status. When the relevant financial documents are uploaded, your virtual accountant will proceed with tax preparation. Once done, they’ll schedule another consultation before submitting your returns.
- Reporting: Accurate bookkeeping allows your virtual accountant to compile valuable weekly, monthly, quarterly, and annual reports. They include a summary of accounts payable and receivable, profit and loss statements, payroll reports, and bank transaction lists.
Is Virtual Accounting Secure?
As a businessperson, security is understandably one of your biggest concerns. Can someone access sensitive financial data without your knowledge? The good news is that virtual accounting solutions incorporate state-of-the-art cybersecurity features. The most dependable cloud accounting platforms have a secure sockets layer (SSL) certification.
Other than password protection, this technology utilizes firewall-protected servers as well as high-grade encryption standards. Additional security features are privacy protection and regular data backups across multiple locations. Compared to physical files, it’s harder for unauthorized entities to access your cloud-stored financial data.
Should You Choose Virtual or Traditional?
With traditional accounting, you hire an in-house accountant and give them an office or workstation. Other than a salary, you also have to cover associated expenses such as medical insurance. You might feel short-changed covering these costs, especially when the accountant is not busy. Virtual accounting solves this issue by outsourcing to a professional without the added burden. Its benefits include:
1. Reduced overheads
Most virtual accounting platforms charge a flat fee for their services. You avoid the costs associated with traditional accounting, such as recruitment costs, sick leave pay, payroll taxes, and employee benefits. These services are also available year round.
You can utilize virtual accounting only when you need it, such as during tax season and when applying for financing. This flexibility gives you the confidence to run your business without stress.
3. Greater efficiency
Other than lower costs, virtual accounting services use minimal paperwork. Electronic correspondence reduces bureaucracy, which saves time and improves overall organizational productivity.
4. Affordable access
You’ll enjoy the expertise of the most qualified accountants at a fraction of what you’d pay if you employ them in-house.
Because you can log into your virtual account any time you wish, you’ll always be up to date on the state of your business. You can use this data to make business decisions that will result in long-term growth.
The Future of Virtual Accounting
Although most people still prefer one-on-one relationships, the virtual economy keeps growing in popularity. More businesses are bound to adopt virtual accounting due to improved internet services, cybersecurity, cloud computing, and communications tools. As a business owner, your survival depends on increasing productivity, sales, and efficiency while reducing costs.
If virtual accounting gives you an edge over the competition, it’s advisable to make it one of your business management strategies. Are you utilizing virtual accounting or exploring it as an option? Please share your experience in the comments section.The post What You Should Know About Virtual Accounting first appeared on www.financialhotspot.com.
5 Advantages of Hiring a Business Consultant
As a business owner, you probably face intense demands on your time. In most cases, you will find yourself wearing several hats, including Head of HR, Director of Sales, VP of Finance, and IT Specialist. With so many roles to play, you can quickly run out of the bandwidth needed to complete all tasks efficiently.
By hiring an experienced business consultant, you can save time and boost growth by eliminating daily operations pressures. Consultants provide expertise and an objective eye to help guide your business through strategy and management, human resources, finances, operations, funding opportunities, IT, as well as sales and marketing.
Here are five ways a business consultant can benefit your business and take it to the next level!
1. A Fresh Point of View
Consultants provide a new perspective regarding your business challenges. They are not emotionally invested in your operations and can quickly identify and address challenges. A consultant’s objectivity can be essential in a family-run business, where organizational dynamics could be sensitive and major problems hard to discuss. A good consultant will provide objective opinions and tell you the truth, even if it is hard to swallow. Consultants have years of experience in different situations and can offer valuable insights.
2. Subject Matter Expertise
The central value of a consultant is their in-depth knowledge, expert skills, and positive influence. Because they work with various businesses, they have a broad range of skills and a detailed understanding of industry challenges, business trends, and new technologies and processes.
Consultants have skills you may be missing and access to resources you may be unaware of. This can save you the hassle of hiring and training extra employees. Consultants are also very effective at motivating your employees to achieve short term goals. They are expert encouragers and good at presenting challenges that employees believe are out of their wheelhouse. A consultant can prioritize schedules and see that the plans are accomplished by the deadline.
3. Saves Time You Can Spend Planning
Experienced consultants already know the best practices in your industry. For example, they can look at your manufacturing process and very quickly point out inefficiencies. With a consultant, there is no need for you to reinvent the wheel or lose valuable time doing something that an expert contractor can seamlessly accomplish.
If your managers are overwhelmed, they may have difficulty planning and executing projects on top of their other tasks. But with a business consultant, they dedicate their time to finding and presenting research and collecting data on costs and benefits. As a result, you have time to spend on creative tasks geared towards improving or expanding your business. Consultants can also set up opportunities for your company to address and achieve goals.
4. Customized Solutions
Business consultants don’t offer a one-size-fits-all solution. They learn your unique business and goals and tailor a strategy dedicated to the specific challenges that your business faces.
Customization means that the solutions are much more useful than generic advisory services. For example, a government grant consultant can help you select funding programs for which your organization is eligible and has a greater chance of success.
5. Leaders Can Learn
Consultants bring new strategies, methodologies, and trends that you and your top leaders can learn and take into the future. They specialize in multiple areas, including manufacturing, financial planning, proactive funding, etc. Your managers in various departments can gain immense knowledge from experienced consultants. That expertise can help you identify areas now and in the future where you are spending more time or resources than needed, improving efficiency and cutting costs.
Choosing the Right Consultant
Always select a consultant with a history of positive results. You might consider speaking to other business owners and managers in your circle to get a recommendation. Dig into the background of your potential consultant through their website and social media pages.
Here are a few features to look for when looking for the right business consultant:
- Proven track record
- Proven experience in business consultancy
- Recommended by others you trust
- Have a partnership approach
- Practice discretion about your operations
- Have a strong background in your industry
- Express understanding and empathy for your situation
Additionally, make sure they have both the technical and psychological skills needed. For example, an IT consultant should have extensive knowledge of hardware and software and excellent communication skills. A good consultant should also be able to evaluate the company culture and adapt their behavior and presentation.
Have you worked with a business consultant before? Feel free to share any tips or suggestions in the comments below!The post 5 Advantages of Hiring a Business Consultant first appeared on www.financialhotspot.com.
How to Create a Personal Budget
A personal budget is a great way to determine where your money is going every month. Whether you are using pen and paper, a spreadsheet, or an app, you need to understand money management and save for your short-term and long-term financial goals. The trick is to figure out a streamlined way to track your finances and spend less than you earn to build wealth and stay out of debt.
How a Budget Works
A personal budget is a strategic planning tool that tracks how much you spend or save every month. It also allows you to identify your spending habits so you can change them if needed. Creating a budget may not be the most exciting activity for many individuals. However, it is one of the best ways to keep your financial house in order.
Budgets give you control over your finances. If you reduce spending in one area, you can direct it to another. You can choose to save the money for a large purchase, increase your savings, build a “rainy day” fund, or even invest in building wealth.
However, a budget only works if you are willing to keep detailed and accurate information about your earnings and spending habits. It requires honesty, gathering accurate information, and facing facts. Ultimately, a working budget will show you exactly where your money is coming from, how much you have, and where it all goes each month.
Here are some simple steps to get you started on the right track:
Choose Your Method
Before you create a budget, find a suitable template you can use to accurately fill in the numbers for your income and expenses. While it is possible to use old-fashioned pen and paper to create a personal budget, it is much easier and more efficient to use a budget spreadsheet or a budgeting app.
These tools contain designated fields for your income and expenses in various categories. They also come with built-in formulas to help you figure your budget surpluses or shortfalls with minimal effort. No matter which method you choose, make sure it contains all the fields you need, as well as formulas.
Gather the Information
The more information you can collect, the better. It is good practice to gather several months’ worth of data and then figure out an average. Documentation that will help you get started include:
- W-2s and paystubs
- Utility bills
- Bank statements
- Credit card bills
- Three months’ worth of receipts
- Mortgage statements
- Loan statements
- Investment accounts
Calculate How Much You Make
The next step is to figure out how much money you earn each month. Be careful not to overestimate what you can afford to spend based on your gross income or total salary. Subtract your deductions such as Social Security, 401(k), flexible spending account allocations, and taxes when creating a budget worksheet. Your net income, which is your final take-home pay, is the number you should use when creating a personal budget.
Consider the amount from your lowest month over the past year as a conservative baseline if you have a variable income. Alternatively, you can average the last 6-12 months’ pay and use that number.
Determine Your Monthly Expenses
It’s essential to keep track of and categorize your monthly expenses, so you know where to adjust. It helps you identify what you are spending the most money on and areas you can cut back on.
Begin by listing all your fixed expenses, such as rent or mortgage, car payments, and utility bills. It’s unlikely you’ll be able to reduce these costs but knowing the portion of your monthly income they consume is helpful.
Next, list all your variable expenses (those that often change from month to month), such as gas, groceries, and entertainment. This category is where you will find the most opportunities to cut back. The best place to determine these expenses is your credit card and bank statements since they often itemize or categorize all your monthly expenditures.
Face the Music
Once you have documented all your income and spending, you will see where you have money left over or where you can slightly cut back to have some to put towards your saving goals.
Want-to-have expenses should be the first area to look for spending cuts. For example, you can skip movie nights in favor of watching movies at home or reduce the number of restaurant dinners and cook more at home. Try adjusting the numbers to see how much money you can free up. Next, you could reevaluate your spending on needs. For instance, having internet connectivity at home is vital, but do you need to spend more on the fastest available connection?
Lastly, if the numbers still don’t add up, you could look at adjusting your fixed expenditures. However, such decisions often come with huge trade-offs, so you need to weigh your options carefully. The final goal is to have more income than expenses so you can start saving for emergencies and the future.
Track & Monitor
It is necessary to continue tracking and monitoring your budget regularly to ensure you are staying on target. Few elements of your budget are set in stone. Over time, you may get a pay raise, your expenses may gradually increase, or you may have surpassed your goal and want to plan for a new level. Whatever the reason, keep reviewing your budget and adjusting accordingly.
Recording your income and expenses can help prevent overspending and identify unnecessary costs or destructive patterns in spending. Take time each day or week and update your entries or look for an expense tracking or budgeting app. If you can, automate your bills to ensure you don’t incur late fees due to simple forgetfulness.
Budgeting can help you achieve your goals faster and reduce financial stress. Identify your short-and long-term goals and write them down somewhere you can see them, so you always have the purpose in mind. Short-term goals usually take no longer than a year to accomplish. Long-term goals, such as saving for your retirement or your kid’s education, may take several years to reach.
No matter how often you need to change your budget, you should always have one. If you find it challenging to hold yourself accountable, partner with someone who can help you reach your goals.
Do you have any personal budgeting tips? Feel free to share in the comments below!The post How to Create a Personal Budget first appeared on www.financialhotspot.com.
What Are My Tax Resolution Options?
Tax resolution and tax relief are professional services designed to help address the complicated financial hardships resulting from IRS debt. Many taxpayers tend to ignore the problem and only seek help when the IRS has lost all patience and decided to recover their unpaid taxes forcibly.
More often, forced recovery takes the form of a bank levy or tax lien on your property. Fortunately, there are many tax resolution methods that you can use to settle your debt at the state, local, and federal levels. Review these options to discover which one applies to your situation, then ask a professional CPA for more information.
Under an installment agreement, you formally agree to pay the entire amount of your debt in flexible monthly installments for up to six years. This method allows you to pay in small, manageable amounts so that the debt is not overwhelming. Once you have fully settled the tax debt, the IRS will lift any federal tax liens filed before the agreement.
Partial Pay Installment Agreement
A partial pay installment agreement works in the same manner as a regular installment agreement. However, it allows you to pay much lower monthly installments than you would in a standard installment agreement.
If your financial situation does not change, then you will continue to pay reduced monthly installments until the expiration of the statute of limitations (often after ten years). Once you qualify for the partial pay installment agreement, you will be subject to a rigorous financial review every two years. Based on the IRS findings, it has the discretion to increase your installment amounts if you have had some increase in income.
Currently Not Collectible Status
As a taxpayer, you can have all collection activities halted if you are under CNC (Currently Not Collectible) status. The IRS only triggers this status if your expenses exceed your income. They look at national standards to determine whether you can afford your necessary living expenses. Your status will be reviewed periodically, but if you remain compliant, you can avoid levies and stay in CNC until the balance you owe expires.
Innocent Spouse Relief
With innocent spouse relief, you are relieved of any tax debt incurred due to your spouse or ex-spouse neglecting to pay their joint IRS tax debt. The IRS will determine if you are eligible however, innocent spouse relief is often one of the most challenging solutions to qualify for. Proving your innocence in the tax debt requires documented proof, which can be hard to acquire. Getting a tax attorney’s assistance can make the process smoother, depending on your circumstances.
Offer in Compromise
An offer in compromise (OIC) allows you to pay a lesser amount to fulfill the entire tax debt. During the approval process, the IRS investigates your financial situation and compares your total debt to your current financial status. If the IRS accepts you into the OIC program, you will be subject to continuous review of your financial situation to ensure that you cannot afford to make larger tax payments.
Filing for bankruptcy is a viable option if you need to discharge your tax debts fully. However, this is only possible if your debts qualify for discharge and you are eligible for Chapter 7 bankruptcy.
You can wipe out tax debts for federal income taxes under Chapter 7 bankruptcy only if you meet all the following conditions:
- The taxes owed are income taxes
- The debt is at least three years old
- You filed a tax return
- Your debt is reviewed by the IRS 240 days before filing
Additional Points to Consider
Here are some extra tax resolution options you could consider:
- Statute of limitations: The statute of limitations for the IRS to collect your past-due tax is ten years after they have assessed your tax liability. However, this method is rarely effective since the IRS will likely collect unpaid taxes through a tax lien or levy. It can only work if you have no assets, property, or wages that the IRS can go after for the entire period of 10 years.
- Penalty abatement: The IRS and some state agencies often allow penalty abatement pleas for fines imposed on your tax debt. Many penalties can grow to staggering amounts, so the tax agency can occasionally reduce or remove such penalties for a good cause.
- Appeals: The office of appeals is a separate, independent IRS office where you can direct your disagreements concerning the application of tax laws for a fair resolution. Appeals can resolve tax disagreements without a formal trial or having to go to court.
- Filing Past Due Returns: You can settle your tax debt by submitting your past due returns. The IRS usually imposes interests and penalties on tax due from missing returns, so you must submit penalty abatement. It is also possible that you might be eligible for a refund that you missed out on due to missing returns. The only way to find out is by gathering your financial documents for the missed year and filing past due returns.
Enlist the Help of a Professional
Although this list is not exhaustive, it covers the key tax resolution options that tax professionals implement to help taxpayers settle their tax debts. By working with an experienced tax professional, you can receive the best tax resolution possible and get out of trouble with the IRS.
Do you have first-hand experience with tax resolution options? Feel free to share your thoughts in the comments below!The post What Are My Tax Resolution Options? first appeared on www.financialhotspot.com.
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