Taxes

Should you itemize this tax season? Some important things to keep in mind for 2020.

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Should you itemize this tax season? That is a common question for many taxpayers this season. Are you holding off seeing an accountant because you aren’t sure whether or not you will need to itemize?

I’m sorry to tell you, the only way you’ll truly know whether or not you should itemize is to ask a tax professional. But since (good) accountants charge by the hour, you might want to prepare the proper documentation before you step foot into an accountant’s office.

That’s understandable. We’ll help you navigate the big questions of deductions and whether or not you should itemize your tax return for the 2019 tax season. Then we’ll instruct you as to what types of documentation you’ll need to collect if you do decide to itemize.

Should you take the standard deduction? 

For the 2019 tax season, the standard deduction is up to $12,200 for a single person. This means most taxpayers are going to take the standard deduction.

Here is a chart breaking down both the standard deduction for the 2019 tax season (the taxes you’re currently prepping) and the 2020 tax season (next year’s tax return).

Status

2019

2020

Married Filing Jointly

$24,400

$24,800

Head of Household

$18,350

$18,650

Single

$12,200

$12,400

Married Filing Separately

$12,200

$12,400

If you’re wondering what makes this number change year to year, you can blame tax changes (the 2018 Tax Cuts & Jobs Act bumped the standard single person deduction from $6,000 to $12,000) and inflation.  Congress adjusts the amount of the standard deduction to accommodate inflation.

The big boost in the standard deduction means that anywhere between 85 and 95% of taxpayers won’t need to itemize. We’ll help you determine if you’re part of that approximately 13% that the IRS estimates will itemize for the 2019 tax season.

How do you know if you should itemize? 

You’ll have to add it up.

Check your filing status (and the filing status of a spouse or any dependents). Find out what the standard deduction is for your status. Then add up all your expenses and see if you come in under, close to, or over the standard deduction.

A good accountant would help you maximize what you can write off, but you can get a gist of what you’ll need if you prepare ahead of time.

Start by finding out if you can itemize these 4 major deductions:

  • Charitable contributions

  • Medical Expenses

  • Mortgage interest

  • State and local taxes (think property and sales tax)

Medical expenses and mortgage interest alone might be high enough to put you over the threshold.  If you haven’t made it over the approximate $12k yet, continue by assessing how much you can deduct from these expenses:

  • Casualty, disaster and theft losses

  • Business expenses

  • Tax preparation fees

  • Investment interest

  • Mileage on a vehicle

  • Home office deductions

This covers a lot of areas where you might commonly receive a deduction.  The business deduction point will be a particularly tricky one if you aren’t strict about your record-keeping.

Remember, you don’ t need to get an exact count, you just need to get a rough idea of what you’ll need. That way you spend less time in the accountant’s office and more time doing what you do best.

Who might want to itemize? 

If you aren’t into adding up all the numbers, here are some categories of person who might want to itemize:

  • You run your own business – You have to spend money to make money, which means you’re making less money than it looks like on paper.

  • You have a high-interest rate on your mortgage.

  • You had a lot of medical expenses in the past year.

  • You pay for your own healthcare out of pocket.

If you’re even questioning whether or not you meet the threshold to itemize, its time to schedule a meeting with an accountant. This post helped you determine whether or not your tax situation might warrant itemizing deductions, now talk to your local tax advisor to find out for certain.

 

9 Red Flags That Could Get You Audited By the IRS

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Getting audited is not common. In fact, the IRS only audited 1 in 160 individual tax returns in 2018. A decade ago, there was an audit rate of 1 in 90.  Every year, the number of taxpayers audited has been slowly dropping

Cuts at the IRS have resulted in fewer staff members, and, as a result, fewer audits.

The more money you make, the higher the likelihood of being audited. If you’re making north of a $1 million per year, there is a 1 in 25 chance of you being audited.

There’s only a .5 – .6 % chance that you will join the ranks of the audited. The odds are low, but you don’t want to fib or flub your tax return and risk an expensive and time-consuming audit process.  That percentage still puts about 1 million taxpayers on the hook each year. Here are 8 ways you could become one of them.

Claiming Home Office Deductions   

In order to claim home office deductions, you need to ensure that the area you’re dedicating is only used for business.

Claiming a home office deduction means you can prorate some of your household expenses like:

  • Utility bills

  • Homeowner’s association fees

  • And more

This is done on a fractional basis,  based on the percentage of your home that the home office space takes up.

It is also an area that is often abused, which is why claiming home office deductions can be risky business.

Giving a Lot to Charity  

If you’re giving too much to charity, then the IRS will question the validity of your donations. They know how much those who make the same amount you do and giving too much will often signal that something fishy is at play.

Be sure to keep all receipts and records for your charitable donations. It’s recommended to write checks for charitable donations, which are much harder to falsify than other forms of donation.

Using Digital Currencies 

This one is a little newer. The government is looking for those that aren’t reporting income from cryptocurrencies.

Sure, it’s not the US dollar, but the government still wants to know what you’re making from it. Failure to report crypto income could result in worse than an audit, it could lead to a large fine ($250,000) or prison time.

Not Reporting Taxable Income  

This one is simple. Be sure to provide the IRS with every 1099 and W-2 from every job you’ve had this year.

Just because you don’t send one in, doesn’t mean that the IRS doesn’t know about them. A copy of all your tax forms are sent to the IRS, so you can’t just pretend certain jobs didn’t exist.

They’re looking for those participating in businesses that operate in large amounts of cash and those working in the gig economy.

Deducting Entertainment, Meal, and Travel Costs  

You can’t claim entertainment costs on your taxes anymore, so don’t try. You can still deduct travel and meal costs, but you need to be very clear with your records in order to stay in the clear with the IRS. We recommend recording:

  • Amount spent

  • Location

  • A list of those that attended

  • The business purpose of the meeting

Keep receipts for any meal or travel costs that are over $75.

Claiming Losses   

Claiming losses of any kind on your tax ups the chances that you’ll get audited.

Some types of losses include:

  • A business that reports losses for 3 years – this makes the IRS view your business as a hobby

  • Rental losses – Find a tenant that stays and pays

  • Stock market losses

Claiming these types of losses and others could be a red flag that gets your business audited.

Filing a Form 5213  

This form basically tells the IRS to not audit you for the first 5 years of your businesses’ life. It can help you transition from a hobby to a business, but once the 5 year period is up, you’re now under the microscope.

Be aware of this if you have already filed this form or are considering it.

Having Bank Accounts in Other Countries 

It’s not a crime to have bank accounts in other countries, but it is a common tactic for those attempting to hide income from the IRS.

Don’t do it.

If you have foreign bank accounts, be sure to report any that combined have an excess of $10,000+ anytime in the prior year. You can do this electronically or with an IRS Form 8938 if you have an account with far more than $10,000 in them.

Falsifying Tax Form or Making Errors  

If you file your taxes with a preparer that the IRS knows has falsified taxes, you might be on the hook instead of the CPA you hired.

Additionally, basic math errors are another type of issue that could draw the attention of an IRS agent. Use a tax preparing software or a trust tax preparer to negate any of those sorts of issues.

Your chances of being audited are low. But why take the risk? Some of the red flags on this list are unavoidable if you’re filing your taxes properly. Others are completely avoidable.

To cover yourself, hire a tax professional that will not only ensure that your taxes are done properly, but also will represent you if you are one of the million taxpayers that are audited each year.

4 Ways to Pay Less Taxes on Your Investments

If you’re considering jumping into investing (or have already started), you need to know the tactics to avoid paying massive amounts of taxes on them. We’ve compiled a list of tax tips for investors. Check them out.

by Austin Distel

Hold investments for longer than a year

Whenever you make money off your investments (aka capital gains) you are taxed on that income. However, the length of time you held the investment dictates the rate you’ll be taxed at.

These taxes, called capital gains taxes, change at the year mark. If you hold your investments for a year or less, you’ll be taxed at the short term capital gains rate, which is the same rate as income tax.

But if you hold your investments for a year and a day, you’ll get taxed at a more manageable long-term capital gains rate.

This rate can get as high as 20% for big earners, but it’s more likely you’ll pay somewhere between 0 and 15%.

Buy Municipal Bonds  

Buying bonds means you get to collect interest on those bonds, which is a great source of passive income if you buy enough.

But unless you buy municipal bonds, the IRS is entitled to a share of that interest. When you buy either city, state, or county bonds, you are exempt from paying federal income tax on those bonds. If you buy municipal bonds in your home state, you’ll be exempt from state and local taxes as well.

One thing to note is that if you sell your municipal bonds for a profit, you’ll have to pay taxes on the gain.

Sell Losing Investments   

If you’re losing money on a particular investment, you might want to consider selling it off.  Investment losses offset capital gains, so if you make $2,000 and lose the same amount, you won’t have to pay on the amount you’ve lost.

In addition, if your investment losses exceed your gains, you can use them to offset up to $3,000 in taxable income.

Put Your Money in Tax Sheltered Accounts  

Putting your investment money into tax-sheltered accounts is a great way to defer paying taxes on various investments.

Accounts like 401(k)s, 403(b)s, and certain IRA plans aren’t tax-free, but you won’t have to worry about paying taxes until you start making withdrawals. By the time you do that (barring some emergency), you’ll likely be in a lower tax bracket anyway.

 

Have more questions about investments and taxes? Shoot us an email or give us a call.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.