Taxes

Tax Scams: Don’t be fooled

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Tax Advocate

Scam Awareness

Don’t be fooled by scammers pretending to be the IRS. Scammers target taxpayers and tax professionals each year in growing numbers. Oftentimes a scammer will contact you by telephone and alter the caller identification to make it look like the IRS or another official agency is calling. The IRS will not call you if you owe taxes without first sending you a notice in the mail.

Scammers may also use a scheme called “Phishing” to falsely lure you into telling them your personal information such as your social security number, bank information, credit card accounts, and more. Scammers will “Phish” for your information by asking you to verify specific details.

Don’t fall for these scams. The IRS provides tips and resources to help taxpayers and tax professionals learn how to spot a scam and what to do if you are a victim of a scam. Learn more about tax scams and how to recognize the signs of phishing and tax scams. It could save you from becoming a victim.

You should report all unsolicited email claiming to be from the IRS or an IRS-related function to phishing@irs.gov.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Beware the costly, complicated AMT, or alternative minimum tax

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

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The alternative minimum tax, or AMT, is widely unpopular and has been a perennial punching bag whenever tax reform is discussed. President Donald Trump has vowed to kill the AMT, which cost him $31 million on his 2005 tax return.

This parallel tax calculation method has been around since 1969 to ensure that wealthy taxpayers didn’t use loopholes to escape paying their fair share of taxes. The original target was 155 filers with the then-exorbitant income of $200,000 who avoided paying any federal taxes.

For many decades the AMT wasn’t indexed for inflation, so more and more middle-income taxpayers were subject to the tax. A 2013 law fixed that, so the AMT is now adjusted each year to reflect inflation.

What exactly is the alternative minimum tax?

The alternative minimum tax, commonly referred to as the AMT, has its own set of rates (26 percent and 28 percent) and requires a separate computation that could substantially boost your tax bill.

Basically, it’s the difference between your regular tax bill, figured using ordinary income tax rates, and your AMT bill, figured by filling out more IRS paperwork. When there’s a difference, you must pay that amount, the AMT, in addition to your regular tax.

Common tax breaks disallowed

The AMT rejects or reduces many common tax breaks used every year by individual taxpayers to lower their IRS bills.

For example, under the AMT:

  • You cannot deduct state and local taxes.
  • If you are 65 or older, have lots of itemized medical deductions and fall into the AMT, you’ll lose some of those write-offs.
  • Miscellaneous itemized deductions, which must exceed 2 percent of your adjusted gross income under the regular tax system, are disallowed under the AMT.
  • Personal exemptions may be disqualified.
  • While mortgage interest on your main and second home is still AMT-deductible, home equity loan interest is restricted. It can’t be deducted unless the money is used solely to pay for home improvements.
  • Real estate property taxes also are disallowed as deductions under the AMT.
  • Some tax credits that reduce your regular tax liability do not reduce what you owe under the AMT. Once you add back these disallowed credits and run the numbers, you might be subject to a bigger IRS bill if your taxable income exceeds the annual AMT exemption amount for your filing status.

herman blog

Many of the tax breaks not allowed under the AMT system do affect predominantly wealthy individuals or businesses with complicated tax circumstances. These include:

  • Incentive stock options.
  • Intangible drilling costs.
  • Tax-exempt interest from certain private activity bonds.
  • Depletion and accelerated depreciation on certain leased personal or real property.

Considering making a real estate investment?

Do more to pay more

To help sort through the AMT mess, some taxpayers turn to computer software packages, most of which include AMT computation, or hire professional help.

For the past couple of years, the IRS has provided some free AMT calculation assistance. AMT Assistant is an online tool that helps taxpayers determine whether they owe the tax. You just answer a few questions about entries on your draft 1040 and the system does the rest. Based on your entries, the calculator will tell you that either you do not owe the AMT or that you must go further by filling out Form 6251 to find out how much you owe.

But the IRS plans to retire the tool after the close of this filing season. Fewer people need it since it’s easy to figure out whether you owe the tax by using tax preparation software, including through the IRS’ Free File, which automatically calculates any tax owed.

If you find you must pay the AMT, the extra money you owe is never welcome. But dealing with it now is better than the alternative: letting the IRS discover that you should have paid it. Then you’ll owe interest and penalties, too.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Tax lesson for teachers: Educator expenses can be written off

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

tax deductions for teachers

Teachers on average spend $530 of their own money during the school year to pay for supplies, snacks for students and other classroom items.

Teachers and other educators can get a tax deduction of up to $250 for some of those costs as well as continuing education expenses.

Even better, they don’t have to itemize to get the tax break. Educator expenses are one of the so-called above-the-line deductions claimed directly on a Form 1040 or via tax software.

Educator expenses deduction enhanced

Congress made the tax break for educators a permanent part of the tax code in 2015.

Lawmakers also indexed the $250 maximum deduction amount for inflation. It didn’t change for the 2016 tax year, because of low inflation, but it could increase in future years.

What items are deductible?

Besides teachers, counselors, principals and aides can take the deduction if, for the tax year, they were employed at a state-approved public or private school system from kindergarten through grade 12, and worked at least 900 hours during the school year.

Educators can write off unreimbursed costs for:

  • Books
  • Supplies
  • Computer and other equipment (including software and services)
  • Supplementary materials used in the classroom
  • Professional development programs

The IRS also applies its “ordinary and necessary” rule here. An item purchased for your classroom must be considered ordinary:  something that is common and accepted in the education profession.

It also must be necessary: defined as helpful and appropriate, though maybe not required.

So buying a recording of “Death of a Salesman” to help drive home Arthur Miller’s points to your students would likely meet tax muster. But purchasing a new HD television, instead of watching on your school’s working-but-old set, may raise some IRS eyebrows.

Couples who share education careers could get a double break if they file jointly. However, each spouse is limited to $250 of qualified expenses.

What about home schooling? Sorry, but the tax law specifically states that costs for this type of instruction don’t count toward the educator expenses deduction.

Circumstances could limit expenses

In addition to the eligibility requirements on expenses, the IRS has set some other restrictions on what’s deductible.

The tax agency says when an educator uses any tax-favored funds to pay for his or her own schooling, those amounts must be subtracted from the total the teacher claims under the educator expenses deduction.

Take for example Joe Jones, a high school English teacher who is working toward his master’s degree in literature during school breaks. He cashed in savings bonds to pay his tuition and excluded the bonds’ $150 interest from tax. He also spent $200 for books on Shakespeare to distribute to his 11th-grade students. He must subtract the $150 in tax-free interest from the $200 for the books, leaving him only $50 to claim under the educator expenses deduction.

The same rule applies to nontaxable earnings a teacher gets from qualified state tuition programs or tax-free withdrawals from a Coverdell education savings account.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

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.