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18 posts from March 2015


Out-of-Pocket Expense Deductions

Taxpayers who are salaried company employees frequently overlook tax deductions for their out-of-pocket work-related expenses.  Many companies reimburse employees’ expenses; especially those incurred by sales representatives and executives.  But other workers may also have business-related expenses that are not reimbursed and may qualify as a tax deduction.

Empty pocket businessmanA work-related unreimbursed expense must be both “ordinary and necessary” to your job in order to qualify as a deduction.  An “ordinary” expense is something that is commonly accepted as needed to perform your job in your particular industry. A “necessary” expense is one that is appropriate and/or required to perform your job.

Some examples of unreimbursed expenses that may qualify as a tax deduction include a required uniform and/or work clothes, supplies and tools you use on the job, work-related education, business use of your personal vehicle, business use of your home, and business-related travel, meals and entertainment.  The same deductions may also apply to self-employed individuals and small business owners.

Other often overlooked qualifying expenses include depreciation on a computer your employer requires you to use, liability and malpractice insurance premiums, licenses and regulatory fees, dues to chambers of commerce and professional societies, passport fees and more.

You can deduct the amount of expenses that is more than 2% of your adjusted gross income.  For more information, see IRS Publication 529 with details on deductions and the forms you may need to list and figure the correct deduction amount.

Reminder:  make certain you have receipts and records to prove the expenses you deduct.  Keeping proper records is crucial in the event of an audit.  For more information on the records you should keep and for how long, click here.

Following filing requirements and submitting the proper forms to receive expense deductions can be complicated, but if done properly, can pay off in a notable tax savings.  If you have any questions, please contact one of our tax preparation experts at McRuer CPAs.


Tax Tips on Tips

Consumers debate about how much they should tip a server at a restaurant with the general understanding that an average 10% to 15% tip indicates the service was good and up to a 20% tip
indicates it was exemplary.  As the food and service bill total is tallied, they usually don’t consider that the employee will be paying taxes on the tips.

Waiter with tip jarIRS rules require restaurant employees to report their tips daily from both cash and credit or debit card payments. Restaurant employees and employers must both pay social security and Medicare taxes on the tips, and the employee must pay income taxes on them just like other wages.

Employers are required to ensure that the total tip income reported by employees is at least equal to 8% of total receipts collected during each pay period.  The rules generally apply to food or beverage establishments with 10 or more employees. So, when a restaurant customer leaves no tip for a server, it can cost that employee and the entire wait team more than embarrassment.


Income Taxes When You Sell Your Home

With so much debate over taxes on assets and capital gains, many taxpayers are confused about the tax rules on gains or losses when selling their personal home.

House soldIf you sold a home in the 2014 tax year, you may be able to exclude part or all of the profit from your income.  This tax rule generally applies if you’ve owned and used the property as your main home for at least two out of five years before the date of sale.

A capital gain or loss is measured against the “basis” of the property; that is, the price that you paid for it when you purchased it originally plus the amounts you paid for any improvements.  Note that you cannot add the value of your own labor.  You can use an IRS worksheet called Publication 523 to calculate the gain (or loss) on the sale.

You are allowed to exclude from your income up to $250,000 of capital gains from the sale of a personal residence ($500,000 on a joint return).  Additionally, to be clear, any gain on the sale of a personal residence is not subject to the new Net Investment Income Tax that was enacted in 2013.

If you can exclude all of the gain, you don’t need to report the sale of the home on your income tax return.  But, know that you can exclude a gain from the sale of only one main home per two-year period.  If you own more than one home, the “main” home is the one where you reside most of the time.  You must pay tax on the gain from selling any other home.

If you can’t exclude all of the gain on your home’s sale, you’ll need to report the home sale on your individual income tax return.  In that case, you will probably also receive a Form 1099-S indicating you have earned proceeds from a real estate transaction. You must submit that form with your income tax return.

If you sell your main home for which you received a first-time homebuyer credit, special rules may apply on any gains that may redirect the funds to repay the credit you previously received.

What if you sell your home at a loss?  If the money that you receive from selling your home is less than your cost basis, there is no tax benefit.  Even though it may be a loss, you cannot deduct the loss from your income.

If you sold a home, or are planning to sell your main home, and want to better understand the tax consequences, contact us at McRuer CPAs for an analysis.


New Tax Laws Affecting 2015 Income Taxes

What's new?As we complete and file our 2014 federal income tax returns, this is a good time to make adjustments as needed affecting our current-year 2015 income tax plan.  To help, the IRS has released its list of new income tax changes, rates and updates that are now in effect.

As a reminder, federal income tax is designed to be a pay-as-you-go tax.  You are obligated to pay taxes throughout the year as you earn or receive income, and you may be subject to penalties if you don’t.  You may pay through payroll withholding, or by paying estimated taxes.  

The new updates regarding deductions and exemptions may directly affect the tax you owe.  Consider our tax planning services to give you a year-round tax perspective so the annual tax preparation season will go smoother with fewer surprises.

Standard Mileage Rates:  For taxpayers claiming itemized deductions, including deducting the cost of operating your personal vehicle for business purposes, the standard mileage rate allowed for business miles driven is now 57.5 cents per mile, up from 56 cents in 2014.

The business standard mileage rate is based on a combination of annual averages of fixed and variable costs of operating a vehicle including not only gas and oil, but also depreciation, insurance, tires and average maintenance and repairs.  Some taxpayers may enjoy a greater tax benefit by itemizing their actual annual vehicle costs, but they must choose between the actual costs method and the standard mileage rate deduction.

If you will drive more than usual for medical expenses or because of a move this year, the rate has dropped to 23 cents per mile for this year, down a bit from 2014’s rate of 23.4 cents.  The mileage rate allowed for miles driven in service of a charitable organization remains at 14 cents per mile.

Personal Exemptions ChangesFor 2015, the personal exemption amount has increased for certain taxpayers.  It has increased to $4,000 for taxpayers with adjusted gross incomes at or below $309,900 if married filing jointly or if a qualifying widow(er), $284,050 if a head of household, $258,250 if single, or $154,950 if married filing separately. The allowed personal exemption amount for taxpayers with adjusted gross incomes above these thresholds has been reduced from 2014 and may be calculated using a new Personal Allowances Worksheet.

Itemized Deductions Limitation:  Now in 2015, the total amount allowed for itemized deductions is reduced for taxpayers with adjusted gross income above $309,900 if married filing jointly or a qualifying widow(er), $284,050 if head of household, $258,250 if single, and $154,950 if married filing separately.

Alternative Minimum Tax (AMT) Exemption: The AMT exemption amount is increased to $53,600 ($83,400 if married filing jointly or qualifying widow(er); $41,700 if married filing separately).

Lifetime Learning Credit Income Limits: In order to claim a Lifetime Learning Credit of up to $2,000, your Modified Adjusted Gross Income (MAGI) must be less than $55,000, that’s down considerably from $64,000 in 2014 ($110,000 if married filing jointly, down from $128,000).

Adoption Credit or Exclusion: The maximum adoption credit or exclusion for employer-provided adoption benefits has increased to $13,400.  In order to claim either the credit or exclusion, your MAGI must be less than $241,010.

Earned Income Credit (EIC): You may be able to claim the EIC in 2015 if: three or more children lived with you and you earned less than $47,747 ($53,267 if married filing jointly), two children lived with you and you earned less than $44,454 ($49,974 if married filing jointly), one child lived with you and you earned less than $39,131 ($44,651 if married filing jointly), or a child did not live with you and you earned less than $14,820 ($20,330 if married filing jointly).

To learn more about how the 2015 tax year will affect your income tax planning, contact us at McRuer CPAs.


Where's My Refund?

Tax-Refund (1)If you’re waiting on a federal income tax refund, there are quick ways to check on the status of your refund both online and on your mobile device.

Remember, the IRS has warned that refunds paid for this tax season (2014 federal income tax returns) may be delayed by several weeks due to budget cutbacks.  Read more in our blog: IRS Cuts Affect Tax Refunds and Audits.

The IRS provides an online service called “Where’s My Refund?” that links the taxpayer to information that is updated every 24 hours.  A taxpayer must submit their social security number, the exact amount of the expected refund and filing status.  The information is usually updated overnight.

Mobile devices may access the same information resource through the IRS2Go mobile app. Click here for more details about the IRS2Go mobile app.


Child and Dependent Care Tax Credit

If you paid someone to care for a person in your household last year so that you could work or look for work, you may qualify for the Child and Dependent Care Tax Credit.

Child care giverGenerally, to be eligible you must have paid someone to care for your children under age 13, or a dependent or a spouse who is physically or mentally incapable of self-care. You must also have earned income and, if married, your spouse must also have earned income.

The credit is worth between 20% and 35% of your allowable expenses depending upon the amount of your income.  Your allowable expenses are limited to $3,000 if you paid for the care of one qualifying person or up to $6,000 if you paid for the care of two or more.

You must include the name, address and taxpayer identification number of your care provider on your tax return.  Click here to read more information about this tax credit.


Your Tax Filing Extension Option at Tax Deadline Time

The April 15th income tax filing deadline is rapidly approaching.  If you haven’t begun gathering your records and submitting your information to your tax preparer, you may be better off requesting an extension of time to file your return.

Regardless of your income, you may request an extension that will give you an additional six months to file a completed return.  An extension gives a taxpayer until October 15th to file a completed return.  However, the extension of time to file the return does not extend the time you have to pay the tax without a penalty.

Closeup deadline stop watchIf you request an extension (Form 4868) you must still estimate the income taxes you owe and must pay that estimated tax liability when you file the extension request.

Late-Filing Penalty: If you do not file your return by the April 15th tax deadline and do not request an extension, you face a late-filing penalty.  That penalty is usually 5% of the amount of the unpaid tax balance for each month your return is late.  The maximum penalty you may have to pay for filing late is 25% of your tax liability. 

If your return is more than 60 days late, the minimum penalty is $135 or the balance of the tax due on your return, whichever is smaller.  You might not owe the penalty if you have a reasonable explanation, which you must attach to your return when you do file.

Late Payment Penalty: Taxpayers should pay all the taxes they owe or as much as they can, when filing their return or requesting an extension.  Otherwise they face late payment penalties and interest charges. The IRS guidelines allow that any payment made with an extension request may help reduce or eliminate interest and late-payment penalties.

The interest rate on unpaid taxes is currently 3% per year, compounded daily. The late payment penalty is usually ½ of 1% of any tax (other than estimated tax) not paid by April 15th charged for each month or part of a month until all the tax owed is paid.  The maximum penalty is 25%.  The late payment penalty will not be charged if you can show reasonable cause for not paying on time.

Overseas and Military: Some taxpayers have more time to file without requesting an extension of time to file.  These include taxpayers who live and work abroad, as well as members of the military on duty outside the U.S.  Their tax payments are still due on April 15th, but they have until June 15th to file a completed return.

Members of the military and others serving in Afghanistan or other combat zones may wait to file their tax return up to 180 days after they leave the combat zone.

Victims of Natural Disasters: Individuals and businesses that reside or operate in areas that have been destroyed by natural disasters such as tornadoes, earthquakes or floods may also qualify for tax relief regarding both deadlines and taxes owed.  The affected area must be included in a federal disaster area declaration.

If you have any questions about whether you have time to file a completed return or should choose to request an extension, please contact us at McRuer CPAs and we’ll review your options and the cost of your choices with you.


April 1st Deadline - No Fooling!

IRA payThe IRS has issued a reminder to taxpayers who may have turned 70 1/2 years old in 2014.  April 1st is the deadline to begin receiving their retirement plan distributions from IRAs and work place related retirement plans.

Here is the actual release from the IRS with more information and with links to more information including videos and tax forms.  Please contact us online or call us at 816.741.7882 if you have any questions.

-------------IRS RELEASE March 19, 2015 -------------------

WASHINGTON — The Internal Revenue Service today reminded taxpayers who turned 70½ during 2014 that in most cases they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Wednesday, April 1, 2015.

The April 1 deadline applies to owners of traditional IRAs but not Roth IRAs. Normally, it also applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457 plans.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, a taxpayer who turned 70½ in 2014 and receives the first required payment on April 1, 2015, for example, must still receive the second RMD by Dec. 31, 2015. 

Affected taxpayers who turned 70½ during 2014 must figure the RMD for the first year using the life expectancy as of their birthday in 2014 and their account balance on Dec. 31, 2013. The trustee reports the year-end account value to the IRA owner on Form 5498  in Box 5. Worksheets and life expectancy tables for making this computation can be found in the Appendices to Publication 590-B.

Most taxpayers use Table III  (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2014 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary.

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation inPublication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

The IRS encourages taxpayers to begin planning now for any distributions required during 2015. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2015 RMD, this amount would be on the 2014 Form 5498 that is normally issued in January 2015.

More information on RMDs, including answers to frequently asked questions, can be found on IRS.gov.


Divorce, Death, Benefits and Taxes

The emotional stress and damage of divorce can have even more lasting consequences if personal finances and assets are not updated to reflect your changed situation.

It’s particularly important to address what will happen after your death, when certain assets and benefits may unintentionally be passed to your former spouse or his or her family.

Divorce-money-fightFor example, a current New York court case involving the assets of a woman who died at age 43 has now reached that state’s appellate court.  The woman’s family is battling her former in-laws who stand to inherit her home that her family has owned for generations, all because she did not update her will.  New York divorce laws automatically prevent her ex-husband from inheriting the property, but her secondary beneficiaries remain her ex-in-laws; so they are fighting over the property now.

It may be emotionally difficult to address your financial assets in the midst of divorce, but if you are going through a divorce or have even been divorced several years, it will pay off in the long run for you and your family to review and update your financial documents.

Be sure you have updated your estate plans, check insurance and other beneficiary designations and beneficiary deeds.  Also provide your loved ones with copies of the updated documents, or let them know where to find them.  Divorcing couples should also consider individually seeking a new financial adviser to avoid any conflicts of interest. 

Make certain your will clearly states your intentions, and that your powers of attorney, health-care proxy, and beneficiary designations on IRAs, insurance policies, bank accounts, brokerage accounts, and annuities name the people that you wish.  Remember, no matter what a will says, these financial accounts and policies will pass to the individuals named on them, so having updated directives for each account is extremely important.

As we have detailed in our blog IRAs Need Updated Beneficiary Forms, changes in beneficiaries for annuities and IRAs must be submitted in writing and require a signed and dated document be sent to the financial institution handling the account or policy.

For some accounts, the original financial agreements stipulate the ex-spouse cannot be removed as a beneficiary, so the beneficiary may want to take steps to clarify the arrangements to ensure his or her name remains on the account.

When a divorce is final, the final divorce decree may be sent to the plan administrator directing how money in IRA accounts should be divided and transferred into separate accounts.  Company-sponsored qualified retirement plans will need additional steps.  In those cases, the court must issue a Qualified Domestic Relations Order (QDRO) properly apportioning retirement plan assets between the former spouses.

However you wish to change your beneficiary status or account information, it’s also a good idea to request a written confirmation notice from your insurance company, financial planner and/or banker confirming they have received and acted on your changes.  Then, keep all the updated documents in a secure location that can be found in the event that you may become incapacitated or die.

Divorce may also affect a person’s current and future income tax obligation, and may affect future taxes owed on assets and retirement accounts.  Receiving or paying alimony payments or child support may also have tax consequences.

Divorce is painful.  Planning your next steps both personally and financially can help ease concerns as time passes.

Consider meeting with a McRuer CPAs expert who will help you identify and act upon the best financial strategy to help you now and in the years ahead.  Contact us online or call 816.741.7882 for a consultation.


Mortgage Interest Deduction Tip

House graphic with sunMillions of taxpayers have been reporting their qualifying home mortgage interest deduction on their federal income tax return for years.  The most common error that causes this deduction to trigger an IRS correspondence audit is an incorrect Form 1098.

When you own a home with your spouse, you receive a Form 1098 annually from your lender that provides the amount of mortgage interest you paid during that tax year.

That form may only include the name and social security number of one spouse.  Should there be a divorce or that spouse pass away, the remaining home owner should request the lender to update the name and social security number on the 1098 before filing.

If there is no time for that update to be made before the April 15th deadline, it may be best to file for an extension and submit the tax return when the amended 1098 is ready to avoid triggering an automatic audit.

Please contact us at McRuer CPAs online or call us at 816.741.7882 if you have any questions about your mortgage interest deduction or other questions about tax deductions and credits.

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