Learning Center for Tax and Financial Insights

Article Highlights: Gift Tax Return Filing Requirements Lifetime Estate Exclusion Annual Gift Exclusion Tuition and Medical Exclusions Gift taxes were created to prevent wealthy taxpayers from transferring their estates to their beneficiaries via gifts and thus avoid estate taxes when they pass away. But that does not mean only wealthy taxpayers need to be concerned with the gift tax provisions as, under many circumstances, even lower-income taxpayers may find they are liable for filing a gift tax return. The government uses the gift tax return to keep a perpetual record of a taxpayer’s gifts during their lifetime, and gifts exceeding the amount that is annually exempt from the gift tax reduce the taxpayer’s lifetime estate tax exclusion, which is currently $11.18 million (nearly a two-fold increase from the 2017 exclusion as a result of the Tax Cuts and Jobs Act of 2017). So what does this have to do with me you ask, since your estate is significantly less than $11.18 million? Well, your estate may be less than $11.18 million now, but what will it be when you pass away? You never know. Another concern is that the IRS requires individuals to file gift tax returns if their gifts while living exceed the annual exemption amount. Annual Gift Tax Exemption - Under the gift tax rules, there is an annual amount that is exempt from the gift tax, which allows each taxpayer to give up to the specified amount each year to as many individuals as they would like without having to file a gift tax return or pay any gift tax. The annual amount is inflation adjusted, and for 2018 that amount is $15,000 (up from $14,000 in 2017). The recipients of the gifts do not need to be related to the person making the gift. Example 1: A taxpayer with four children can gift $15,000 to each child for a total of $60,000 without having to file a gift tax return. If the taxpayer is married, each spouse can gift $15,000 to each child, for a total for the couple of $120,000, without having to file a gift tax return. Example 2: A single taxpayer has one child, a son. In 2018, he gives the son $20,000 to use for a down payment on a home he is purchasing. Because the gift was more than $15,000, the taxpayer needs to file a gift tax return. As long as the amount of the cumulative gifts made by the taxpayer during his lifetime that have exceeded the annual gift tax exclusion amounts in the current and other gifting years is less than $11,180,000, the generous dad won’t be liable for any gift tax on his 2018 gift tax return.

Article Highlights: The general statute: 3 years Longer durations in some states Fraud, failure to file and other issues that extend the statute’s duration Keeping the actual return Ordering copies of previously filed returns This is a common question: How long must taxpayers keep copies of their tax returns and supporting documents? Generally, taxpayers should hold on to their tax records for at least 3 years after the due date of the return to which those records apply. However, if the original return was filed later than the due date, including if the taxpayer received an extension, the actual filing date is substituted for the due date. A few other circumstances can require taxpayers to keep these records for longer than 3 years. The statute of limitations in many states is 1 year longer than in the federal statute. This is because the IRS provides state tax authorities with federal audit results. The extra year gives the states adequate time to assess taxes based on any federal tax adjustments. In addition to the potential confusion caused by the state statutes, the federal 3-year rule has a number of exceptions that cloud the recordkeeping issue: The assessment period is extended to 6 years if a taxpayer omits more than 25% of his or her gross income on a tax return. The IRS can assess additional taxes without regard to time limits if a taxpayer (a) doesn’t file a return, (b) files a false or fraudulent return to evade taxation, or (c) deliberately tries to evade tax in any other manner. The IRS has unlimited time to assess additional tax when a taxpayer files an unsigned return. If none of these exceptions apply to you, then for federal purposes, you can probably discard most of your tax records that are more than 3 years old; however, you may need to add a year or more if you live in a state with a statute of longer duration. Examples: Susan filed her 2014 tax return before the due date of April 15, 2015. She will be thus able to safely dispose of most of her records after April 15, 2018. On the other hand, Don filed his 2014 return on June 1, 2015. He needs to keep his records at least until June 1, 2018. In both cases, the taxpayers may opt to keep their records a year or more beyond those dates if their states have statutes of limitations that are longer than 3 years. Important note: Although you can discard backup records, do not throw away the filed copies of any tax returns or W-2s. Often, these returns provide data that can be used in future tax-return calculations or to prove the amounts of property transactions, social security benefits, and so on. You should also keep certain records for longer than 3 years: Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least 4 years after selling the stock. The purchase data is needed to prove the amount of profit (or loss) that you had on the sale. Statements for stocks and mutual funds with reinvested dividends. Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. These reinvested amounts add to the basis of the property and reduce the gain when it is eventually sold. Keep these statements for at least 4 years after final sale. Tangible property purchase and improvement records. Keep records of home, investment, rental-property or business-property acquisitions, as well as all related capital improvements, for at least 4 years after the underlying property is sold. Tax return copies from prior years are also useful for the following: Verifying Income. Lenders require copies of past tax returns on loan applications. Validate Identity. Taxpayers who use tax-filing software products for the first time may need to provide their adjusted gross incomes from prior years’ tax returns to verify their identities. The IRS Can Provide Copies Of Prior-Year Returns - Taxpayers who have misplaced a copy of a prior year’s return can order a tax transcript from the IRS. This transcript summarizes the return information and includes AGI. This service is free and is available for the most current tax year once the IRS has processed the return. These transcripts are also available for the past 6 years’ returns. When ordering a transcript, always plan ahead, as online and phone orders typically take 5 to 10 days to fulfill. Mail orders of transcripts can take 30 days (75 days for full tax returns). There are three ways to order a transcript:

Article Highlights: Estate Tax Estate Tax Exemption Fair Market Value at Date of Death Step-up in Basis Community Property Deferred Untaxed Income A frequent question is whether inheritances are taxable. This is a frequently misunderstood question related to taxation and can be complicated. When someone passes away, all of their assets will be subject to inheritance taxation, and whatever is left over after paying the inheritance tax passes to the decedent’s beneficiaries. Sound bleak? Don’t worry, very few decedents’ estates ever pay any inheritance tax, primarily because the code exempts a liberal amount of the estate from taxation; thus, only very large estates are subject to inheritance tax. In fact, with the passage of the Tax Cuts & Jobs Act (tax reform), the estate tax deduction has been increased to $11,180,000* for 2018 and is inflation adjusted in future years. That generally means that estates valued at $11,180,000* or less will not pay any federal estate taxes and those in excess of the exemption amount only pay inheritance tax on amounts in excess of the exemption amount. Of interest, there are less than 10,000 deaths each year for which the decedent’s estate exceeds the exemption amount, so for most estates, there will be no estate tax and the beneficiaries will generally inherit the entire estate. * Note that, as with anything tax-related, the exemption is not always a fixed amount. It must be reduced by prior gifts in excess of the annual gift exemption, and it can be increased for a surviving spouse by the decedent’s unused exemption amount. Because the value of an estate is based upon the fair market value (FMV) of the assets owned by the decedent on the date of their death (or in some cases, an alternative valuation date six months after the decedent’s date of death, which is rarely used), the beneficiaries will generally receive the inherited assets, with a basis equal to the same FMV determined for the estate. What this means to a beneficiary is if they sell an inherited asset, they will measure their gain or loss from the inherited basis (FMV and date of death). Example #1: Joe inherits shares of XYZ Corporation from his father. Because XYZ Corporation is a publically traded stock, the FMV can be determined by what it is trading for on the stock market. Thus, if the inherited basis was $40 per share and the shares are later sold for $50 a share, the beneficiary will have a taxable gain of $10 ($50 - $40) per share. In addition, the gain will be a long-term capital gain, since all inherited assets are treated as being held long-term by the beneficiary. On the flip side, if the shares are sold for $35 a share, the beneficiary would have a loss of $5 per share. Example #2: Joe inherits his father’s home. Like other inherited property, Joe’s basis is the FMV of the home on the date of his father’s death. However, unlike the stock, whose FMV could be determined from the trading value, the home needs to be appraised to determine its FMV. It is highly recommended that a certified appraiser do the appraisal. This is something that is frequently overlooked and can cause some problems if the IRS challenges the amount used for the basis.

Article Highlights: Written Leave Policy Variable Credit Qualifying Employee Qualifying Leave Time Limits General Business Credit The Tax Cuts and Jobs Act that was passed last year included a new tax credit for employers that allows them to claim a credit based on wages paid to qualifying employees while they are on family and medical leave. To qualify for the credit, an employer must have a written policy that provides at least two weeks of paid family and medical leave annually to all qualifying employees who work full time, which can be prorated for part-time. The wages paid during the leave period cannot be less than 50 percent of what the employee is normally paid. The credit is variable. It begins at 12.5% and increases by 0.25%, up to a maximum of 25%, for each percentage point that the rate of payment exceeds 50% of the employee’s normal pay. Example: ABC, Inc. has qualifying written policy to pay an employee 70% of their normal wage while on family or medical leave. The rate of 70% is 20 percentage points above the 50% credit threshold. Thus the credit is increased by 5% (.25 x 20), which when added to the base credit of 12.5% results in a credit percentage of 17.5% (12.5% plus 5%). Assuming the total leave wages paid for the year were $15,000, the credit would be $2,625 (.175 x $15,000). A qualifying employee for this credit is any employee who has been employed for one year or more and who had compensation that did not exceed a specified amount for the preceding year. For 2018, the employee must not have earned more than $72,000 in 2017. Thus leave benefits for higher income taxpayers will not qualify for this credit. For the purposes of this credit, “family and medical leave” is leave for one or more of the following reasons: Birth of an employee’s child and to care for the newborn. Placement of a child with the employee for adoption or foster care. Care for the employee’s spouse, child or parent who has a serious health condition. A serious health condition that makes the employee unable to perform the functions of his or her position. Any qualifying event due to an employee’s spouse, child or parent being on covered active duty – or being called to duty – in the Armed Forces. Care for a service member who is the employee’s spouse, child, parent or next of kin.

With the 2018 filing season currently behind us, notices have started to appear in mailboxes. While the IRS letterhead strikes fear into the hearts of most Americans, a vast majority of those notices are nothing to fear, since most of them are computer-generated and referring to outstanding tax bills you haven’t paid yet or errors on your tax return that can be easily addressed. Simply getting an IRS notice is not indicative of an audit. With the numbers in for 2016 tax returns per the release of the IRS’s 2017 data book, fewer than 1 percent of individual tax returns were selected for a field or correspondence audit, which gives most people a 1-in-160 chance. But the Taxpayer Advocate Service watchdog group says that it’s actually 6.2 percent of tax returns, or a 1-in-16 chance of being audited. While audits demand back-up material and examining your past tax returns opposed to simply fixing errors or paying your unpaid tax bills, some of those computer-generated notices are more pernicious in their documentation requests and count in that 6.2 percent. “Audit flags” that don’t merit a full tax return audit but a partial one also count. An incredibly minute amount of the hundreds of millions of individual tax returns that get filed every year will be audited. But if you want to know why you’re under audit or what the risk factors are that increase the likelihood of being audited, here’s what you need to know about the IRS audit process. 1. You were incredibly unlucky and got randomly selected. In 2017, only 934,000 tax returns were audited, with 71 percent of them being done by mail, opposed to field audits (those intimidating series of face-to-face meetings you see in movies). Of this number, a microscopic portion were randomly selected. The IRS always audits an incredibly tiny sample of tax returns, but the likelihood is still extremely low given that the incidence of random selection was reduced under the sequestration in 2013 and remained low even after the IRS petitioned for more funding. But if you are low or middle income with a relatively simple tax filing situation and wondering why you’ve been audited, you were part of that tiny random selection. 2. Your tax return has a common audit flag. Even if you have legitimate deductions, credits and income substantiation, there are certain lines on your tax return that are rife with errors and fraud across the board. These include the charitable contribution deduction, home office deduction and adoption tax credit. Specific tax benefits prone to error and fraud like the Earned Income Tax Credit have their own separate due diligence process. But the above three items are the most common triggers for an audit, even just partial audits, given the vast propensity people have in underestimating these items and not having them properly documented. People tend to overestimate the value of non-cash charitable contributions and frequently lack the substantiation for these deductions. Adoption is an incredibly long and expensive process, and even though it is a legitimate tax benefit in which the adoptive parents will have substantiation, it also equates to a tax credit that can spread out over numerous years and result in paying little or no tax. Because of this, the IRS flags these tax returns frequently. The home office deduction is another area where people tend to overestimate both eligible expenses and the percentage or square footage of the home being used for the deduction. This deduction can also generate a business loss, resulting in paying little or no taxes. Because of this, the IRS is likely to flag tax returns that have suspiciously large home office deductions. 3. Someone tipped off the IRS that you could be cheating on your taxes. The IRS has a whistleblower program that awards up to 30 percent of the taxes collected and resultant penalties. If your ex-spouse suspects that you fudged your Goodwill donations or that co-worker who doesn’t like you overheard you say, “They never check!” with respect to that side hustle you didn’t report, it’s possible they could’ve anonymously tipped you off to get a quick payday. 4. If you’re a small business owner or freelancer and someone with whom you do business was audited, you have an increased likelihood of being audited. Even if your client, supplier or other business associate was not committing tax fraud or malfeasance but simply got audited, people and companies that they paid or received money from are likely to be next. If they didn’t correctly report payments made, the IRS will want to see how the payers’ or recipients’ tax returns also match up. While random selection has a low probability, most audit flags are beyond your control. Always have proper substantiation in case you get that information request. Our tax relief experts are available to be your dedicated resource to take the stress out of resolving your IRS notice in the shortest amount of time possible.

Most small business owners are an expert in their field, but not necessarily in the accounting aspects of building a business. And, with this comes a few common mistakes. Yet, even simple small business accounting mistakes can prove to be financially limiting and costly down the road. With the help of an accounting professional, it is possible to overcome at least some of these mistakes. Take a look at some of the most common mistakes and how to avoid them. #1: Choosing the Right Accounting Software for My Business You’ve purchased small business accounting software. You assume it will be ideally matched to your business and easy enough to jump into. It’s not. The problem is, each business requires a carefully selected and even customized accounting method. There are always risks related to regulatory compliance when the wrong accounting software is used or information is overlooked. To resolve this, work with a professional that listens to your needs, learns about your business, and modifies your bookkeeping methods to meet your goals. #2: Your Business Has Poor Organization and Recordkeeping It’s quite common for small business owners to lack the time and skills to effectively manage small business recordkeeping and bookkeeping. There’s much to do and it takes time away from your business. And, there are dozens of apps and cloud accounting options present. Which do you use? The good news is all of those options are a good thing. It means there are no longer excuses for not getting your business organized. With a bit of help, it is possible to set up a system that streamlines your business operations. #3: Cash Flow Versus Profit-Loss Statement Many small businesses are making money on paper, but they end up going under if their float to getting paid is too long. This is financially limiting and stunts your growth as well. It’s important to understand how this impacts your business. Cash flow is a critical component of any business operation — it determines how much you end up borrowing and paying for, too. Learn the best methods for managing cash flow. #4: Not Understanding Standard Accounting Procedures and Terminology Many small business owners don’t understand key business accounting terms and procedures. What does setting up controls mean? What about bank reconciliation? What are your balance sheets and when are they updated? Profit and loss statements are filled with very specific terminology you need to get right. It’s possible to learn these terms and methods on your own. There’s plenty of information available. However, it takes time to learn it all. More importantly, you may find applying specific procedures and tax laws to your business challenging. To overcome this, work with a tax professional you can depend on. #5: The Small Business Budget A budget provides financial insight. It offers guidance to you about where your business is right now and what your goals are. That’s because a budget — which many small business owners lack — creates key goals for your company to manage. Flying blind, on the other hand, is a common small business mistake. Creating a budget takes some time and a good amount of dedication. Once it is in place, it can be modified each month to meet current needs. Software is available to help with this, but an accounting professional is also an option. #6: Too Much DIY To be frank, one of the biggest mistakes small business owners make is simply trying to save money by doing it themselves. Yes, it is true this will cut your accounting costs, but it also creates a scenario in which you have absolutely no control over “what you don’t know.” In other words, just because you can enter it doesn’t mean you should. Working with a bookkeeping and accounting service capable of handling these tasks for you is the best option. In nearly every situation, these services will work to save you money, far overlapping any DIY savings you are creating. #7: Lack of Tax Planning Taxes are not something you should do just one time a year. Year-long tax planning for small businesses is necessary. It’s not just important to pay your taxes, but also to plan for them and plan for savings options. If you lack a tax planning strategy, work to improve this by simply working with a tax professional. Create a plan for ways you can invest and cut your tax burden. #8: Lack of Modernization Are you still balancing your books using pen and paper? It is no longer considered ideal to do so. Yet, many small business owners see the investment in modernization and cloud accounting to be too costly. In fact, moving to a digital accounting system is likely to save you time and money. It doesn’t have to be challenging to implement this system either. #9: Not Realizing True Profit and Loss You may have a profit and loss sheet, but you may not have a lot of insight into what each line means. More so, you may not know enough about methods for reducing costs or viewing profit potential. The investment in an accounting service can alleviate this. We are happy to talk to you about methods to save you money or boost your profit margins with simple changes to your methods. Most small business accounting mistakes come from a lack of insight into the industry. The good news is solutions are available to help you overcome nearly all of them.