Learning Center for Tax and Financial Insights

The most recent data from the IRS on individual tax returns indicates that of 131 million returns filed, about 5 million were expected to be amended. This comes to less than 4 percent, but that projection still affects a significant number of taxpayers. Filing an amended tax return can be a hassle that you definitely want to avoid if possible. But there are some situations where you'll have to do so, and it's prudent to seek out the help of a tax advisor who can guide you through the process. Here's why you may need to file an amended tax return. 1. You made a math or data entry mistake and didn't realize it until after you submitted your tax return. For example, you added up your charitable deductions, and after filing your return, you realize you added them up incorrectly, and the difference was sizeable. Filing an amended return can correct that math error and get a refund. Perhaps you were entering your gross income from your self-employed business into your software while it was late and you were tired, and you inadvertently transposed the numbers and entered the gross income as $78,000 when it was really $87,000. You will need an amended return to correct that error. However, you would not usually amend a return if you incorrectly entered W-2 income since the IRS receives a copy of the W-2 and will compare it with what you reported and if there was an error, they will automatically make a correction and send you a bill or a refund as the case might be. The IRS website instructs taxpayers not to amend a return in such a situation. The statute of limitations for refunds is three years for the due date the tax return and if the IRS has not automatically made the correction and you have a refund coming don’t let the statute of limitations expire before filing an amended return. That holds true for any situation were an amended return will result in a refund. 2. You used an incorrect filing status. Single parents, caregivers of elderly parents, and recently married or divorced people often make the mistake of using “Single” status when it's the wrong one. “Heads of Household” miss out on crucial tax benefits, while married people will generally need to use “Married Filing Separately” if they don't wish to file a joint return with their spouse. Because filing status affects so many elements of your tax return, you need to file an amended return to pay additional taxes you owe or receive a refund once the correct one is used.

The Roth IRA Advantage Traditional IRAs are familiar to most taxpayers, providing a relatively simple method of saving for retirement AND deferring taxes in the process. But one drawback of the Traditional IRA is that once withdrawals from them begin, distributed earnings and contributions that were tax-deductible get taxed. In contrast, a Roth IRA allows no tax deduction of contributions. However, it does allow tax-free accumulation of the account’s earnings so that at retirement ALL distributions from a Roth IRA are tax-free, both contributions and earnings. Naturally, to get this tax-free treatment, certain conditions must be met. Predicting IRA GrowthThe question always arises as to the future value of an IRA and the retirement income that it will produce. The future value for Rollover IRAs is dependent on whether the IRA will contain only rollover funds or whether additional annual contributions will be made to the IRA. Two tables follow, one including the future value of a rolled over sum and the second illustrating the future value of a $1,000 annual contribution. By using the two tables and an assumed investment rate of return, it’s possible to predict the future value of an IRA account, whether it be traditional or Roth. Lump Sum Accumulation$1 Rolled Over “X” Years Example: A rollover contribution of $30,000 left to accumulate for 25 years at 6% will be worth $128,757 ($30,000 x 4.2919) at the end of the period. IRA Growth With $1000 ContributionFor larger contributions, extrapolate the results. Example: contribute $3,000 annually, simply triple the table results. Example: $2,000 annually contributed to an IRA earning 6% per annum would have a value of $109,730 (54,865 x 2) after 25 years. Based on the two examples above, a taxpayer who rolled $30,000 into an IRA and then continued to contribute $2,000 a year to that IRA would have $238,487 in the IRA account at the end of 25 years. How Much Can You Contribute?As with a Traditional IRA, to be eligible for a contribution to a Roth IRA, you (or your spouse, if you aren’t employed or self-employed) must have taxable compensation like wages, earnings from a self-employed business, or taxable alimony. The IRA contribution annual limit slowly rose over the years as a result of specified increases in the law, but has leveled off recently because of low inflation rates. In addition to normal contributions, taxpayers age 50 and older are allowed to make “catch-up” contributions, allowing them larger contributions in their later years to fund their approaching retirement needs. The table below illustrates the annual contribution limit applicable by age. The annual limit applies to all of your IRA contributions in a given year. So, you can contribute to a Traditional IRA and a Roth IRA as long as the combined total does not exceed the annual IRA limits and you meet all of the other requirements. Your income level can limit your Roth contributions. Contributions are gradually reduced (i.e., phased out) for married joint taxpayers with adjusted gross income (AGI) between $193,000 and $203,000, and for other taxpayers when the AGI is between $122,000 and $137,000. The contributions of married separate (MS) taxpayers who lived together at anytime during the year are reduced when the AGI is between $0 and $10,000. The phase out applies regardless of whether you (or spouse, if married) are an active participant in another plan. The amounts indicated are for 2019. Call this office for the rates for other years. Note: The income limitations for making Roth contributions can be circumvented by first making a traditional IRA contribution and then subsequently converting it to a Roth IRA. Please call this office for additional information. With Traditional IRAs, contributions cannot be made once you turn age 701/2. However, there is no such age limit for making contributions to Roth accounts. Handling Roth IRA DistributionsGenerally, distributions from a Roth IRA (unless due to a conversion from a Traditional IRA) are treated as coming first from contributions (principal) on which you have already paid the tax. Therefore, any distribution to the extent of the principal is tax-free. Distributions of earnings are also tax-free (qualified distributions) if: They are not made within the five-year tax period beginning with the first tax year in which you contributed to the Roth account, AND They meet one of the following conditions: They are made after your each age 591/2; OR They are made after your death; OR They are made on account of you becoming disabled; OR They are made so that you can pay up to $10,000 in expenses as a first-time homebuyer. Another big advantage of Roth IRAs over Traditional IRAs is that the former are not subject to the minimum required distribution rules at age 701/2. This means that if you don’t need to utilize your Roth IRA for retirement, you can leave it untapped for heirs (who would also get deferral on withdrawals, but would be subject to certain required distribution rules that apply to beneficiaries). Conversions of Traditional IRAs To Roth AccountsBecause of the tax-free nature of Roth accounts, Congress has provided taxable rollover provisions that allow you to convert your Traditional IRAs to Roth accounts. Once you convert, all future earnings in the new Roth account accumulate tax-free. The catch is that the tax on the Traditional IRA must be paid in the year the conversion is made to the Roth. Whether it is beneficial to elect this taxable rollover depends on a number of variables.

Tax Planning Helps You Save $$$ All planning involves looking ahead to reach a specific goal. People are inclined to make careful plans when they consider making a home purchase, accepting a new job, taking a dream vacation, or investing for retirement. But when it comes to taxes, they often leave matters to chance, perhaps not realizing the tax savings that can result. THE GOAL OF TAX PLANNING IS TO SAVE YOURSELF MONEY! One reason taxpayers may be hesitant to think about serious tax planning is a misconception that it is somehow unpatriotic. Yet even a well-known tax court judge made it clear that the issue goes beyond patriotism. He stated: “There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible…for nobody owes any public duty to pay more than the law demands; taxes are enforced extractions, not voluntary contributions.” Every taxpayer has the right AND the responsibility to lower his/her tax bill using a number of different legal methods. Tax planning is the tool that helps you evaluate your financial situation in light of current laws to make sure that you get the benefit of all deductions you’re entitled to. When to Begin?To gain the most benefit from your tax planning, you need to make it a consideration all year long. However, many taxpayers find that fall is the best planning season. By then, law changes and new tax rates are usually known, and there’s still enough time to make adjustments before year’s end. You should strongly consider tax planning if any of these items on your return are significantly more or less than last year: Income Deductions Income Tax Withholding Estimated Tax Payments Planning Stragegy - A Matter of TimingMost planning strategies involve questioning WHEN to complete transactions that affect taxes. EXAMPLE: Is NOW the BEST time to buy a car for my business, or should I wait until next year? Planning strategy is often built on two basic timing precepts: Rule 1 Payment of tax owed on income transactions should be postponed as long as possible (provided no penalty is incurred). When you postpone the payment of tax on a transaction (e.g., an installment sale), it’s almost like getting an interest-free loan from the government. You have the use of the money until the postponed tax must be paid. However, sale transactions can also produce hidden dangers from tax underpayment penalties. You will want to plan ahead carefully when you have a sale to be sure that you are covered as far as any penalty is concerned. Your tax advisor will be able to make the best suggestion. Rule 2 Year-to-year tax bracket changes should be considered when making decisions to pay deductible expenses or receive taxable income. Law change or fluctuations in your income and expenses may shift you to different tax brackets from year to year. As a general rule, it’s best to receive income in years your tax rates are low, and pay deductible expenses when they are high. Advantages of Tax Planning By planning ahead, you can adjust withholding and estimated tax payments to help eliminate or reduce tax penalties. Making adjustments may also help you postpone payment of tax (you’ll be taking advantage of Rule 1) or let you shift some income or deductions to different tax years to at least lower your taxes (in other words, you’ll be making use of Rule 2). If you have a casualty loss in a presidentially declared disaster area, shifting income from one year to another may allow you a greater loss deduction. In some cases, you can even choose in which year to claim the loss. Tax planning helps you evaluate whether a deduction will really benefit you. Many taxpayers like to make their last state estimated tax payment in December so they can get a federal deduction for it in the current year. This strategy is often a good one, but under certain circumstances, you gain nothing tax-wise. Planning can help you tell for sure! Buying and selling property create all kinds of tax planning opportunities. For example, if you expect to sell real property at a gain in the near future, your planning should question the timing of the sale closing AND whether it’s best to structure the sale so you report your gain all at once or over several tax years (i.e., an installment sale). Another tax break available for property dispositions is the so-called tax-deferred exchange. If you intend to buy another property similar to the one you sold, your plans should consider how an exchange could work for you. You might also consider investing the gain from a sale into a qualified opportunity fund which can defer the gains to as late as 2026 plus provide other tax benefits. Retirement decisions can cost a lot in extra tax dollars if you don’t take the time to develop a sound tax plan. BEGIN THE PLANNING WELL BEFORE YOU’RE SCHEDULED TO RETIRE TO MAKE SURE YOU COVER ALL THE OPTIONS. For example, say you’re an employee and your employer offers you a choice between getting your pension as an annuity or as a lump-sum payout. Your planning needs to include crunching numbers to determine the best way to go. You might be eligible for certain special averaging calculations that apply to pensions and can save a lot on taxes! Or perhaps a rollover to an IRA needs to come into the picture. Planning will help you find the best answer! The tax law provides special breaks for home sale gains, and planning can help make sure you qualify for them. Homeowners may exclude all (or a part) of a gain on a home if they meet certain occupancy and holding period requirements. Be sure to check before finalizing a sale to make sure you meet the necessary qualifications. Borrowing funds creates interesting tax planning opportunities. The interest on many loans is deductible. Right? NOT ALWAYS! Ensure you are able to deduct the interest, and do your planning homework before you sign on the dotted line! Tax planning is a must when there are property settlements due to divorce situations. Because of the manner in which the tax law handles transfers of property between spouses, what appears to be a fair split on the surface can turn into just the opposite in the long run. When it’s time to purchase business equipment, plan first. The tax law contains numerous options on how to deduct the costs, and has complicated rules about computing depreciation on business property purchased in the last quarter of the year. Timing of your purchases could be vital to ensure that you get the most from your expenditures.

Amending your tax return can be a cumbersome process. Contact us to assist you with filing amended returns that can eliminate the headaches that come with the process.

With so much confusion regarding tax reform, we put together a side by side comparison of the old and new law. Feel free to embed this tax reform infographic on your website. The embed code is loaded at the button of this image. (Click the image to increase size)

Article Highlights: $250 Above-the-Line Teachers’ Deduction Eligibility for the $250 Deduction Tax Benefit Deduction Option Charitable Option It is quite common for teachers to spend their own money on classroom supplies – so common, in fact, that a few years back, Congress created a special deduction that allowed teachers to deduct up to $250 above-the-line for classroom supplies. “Above-the-line” means the deduction can be claimed whether or not the taxpayer itemizes their deductions. Although the $250 amount is subject to an inflation adjustment, there has been no increase to the limit, at least through 2018. Eligible educators are those who work in a school as teachers of kindergarten through grade 12, instructors, counselors, principals, or aides for at least 900 hours during a school year. Because of the 900-hour requirement, many substitute teachers do not qualify for this above-the-line deduction. But $250 is not much, and even if the teacher is in a tax bracket as high as 24% (most are in lower brackets), the deduction will only net them a tax savings of $60. A $60 tax savings is nothing to write home about, and the $250 special deduction was nothing more than a token gesture by Congress. Many conscientious teachers spend far more than $250 for classroom supplies every year. There were two other ways that teachers could deduct classroom supplies. One was to deduct their costs as an employee business expense, as part of miscellaneous itemized deductions, provided the teacher had enough other deductions to itemize, as opposed to taking the standard deduction. Even so, the miscellaneous deductions category into which employee business expenses fall had to be reduced by 2% of the teacher’s adjusted gross income, which reduced the amount of expenses that could be deducted. For example, a teacher with an AGI of $50,000 would lose the first $1,000 (2% of $50,000) of his or her deduction. But that no longer makes any difference, since the tax reform prohibits the deduction for employee business expenses though 2025, eliminating this option for teachers as of 2018. The third option is to treat the classroom supplies as a charitable contribution. Tax law specifies the term “charitable contribution” as including a contribution or gift to or for the use of a state, a possession of the United States, or any political subdivision of any of the foregoing, the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes. This option as a way to deduct classroom supplies is limited to public school teachers, since public schools are part of a political subdivision of a state government, which is not true of private schools. But even though tax law permits a charitable contribution for classroom supplies, getting the required substantiation from the school or the school district may be the biggest hurdle of all. School policies more than likely require teachers to be reimbursed for ordinary and necessary supplies used in the school, and the school’s legal counsel may advise them not to provide any substantiation out of fear of lawsuits seeking reimbursement for the classroom supplies.