Tax Incentives for StudentsPosted on June 13th, 2018
Your education is an investment, but it can also be a heavy financial burden. Fortunately, the Federal Government does provide some relief in the form of tax incentives that will help offset the cost of higher education. Whether you are paying your way through school, or are the parent or guardian of a college student, here are some tax benefits that you should be aware of.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) allows you to take an annual credit of $2,500 per eligible student for qualified education expenses for the first four years of higher education. If the AOTC brings the amount of tax you owe to zero, you can keep 40% of the remaining credit, up to $1,000. This credit is available to individuals who earn less than $80,000 and couples (married filing jointly) who earn less than $160,000 annually.
Lifetime Learning Credit
Like the AOTC, the Lifetime Learning Credit (LLC) helps offset the cost of higher education. It can be used for qualified learning expenses, such as tuition and fees. A few notable differences between the AOTC and the LLC — the LLC is not refundable, so if the tax credit brings your tax liability down to zero, you will not get a refund. The LLC does not have a four-year limit, which means you can use it for professional development throughout your life. The income limits are a bit lower for the Lifetime Learning Credit — $65,000 for individuals and $131,000 if you’re married filing jointly.
Student Loan Interest Tax Deduction
If you paid student loan interest for higher education this year, you can deduct up to $2,500 of the amount you paid out. To qualify, you must be single or married filing jointly, and your income cannot exceed $80,000 for single taxpayers and $160,000 if you’re married. Loans offered by family, friends, or employers don’t qualify.
Tuition and Fees Deduction
The tuition and fees deduction can reduce your taxable income by up to $4,000. You can use it to deduct qualified education expenses for higher education that was used for yourself, your spouse, or your dependent. To qualify, you must be single or married filing jointly, and your modified adjusted gross income must be less than $80,000 for single taxpayers and $160,000 for married filing jointly. You cannot tax this deduction if you’ve claimed one of the education credits mentioned above.
Want to learn more about the tax implications of higher education? Our Seattle accounting firm can work with you to reduce your tax liability so you can keep more of your hard-earned money. Give Watson & McDonell PLLC a call to schedule a consultation.
Common Tax MistakesPosted on January 15th, 2018
With tax season approaching, it’s important to seek the assistance of experienced CPA’s to ensure the process is done smoothly. At our firm, we provide tax preparation and planning throughout the year so that you are better prepared for tax time. Whether you are a business owner or an individual tax payer, here are some common tax mistakes and tips when filing.
Inputting Correct Information
Many times, tax filing is done last minute and can be done without a thorough review. Important information such as Social Security Numbers and even names can be misspelled in the process, causing a red flag to the federal tax giant to place a notice on your return.
Separate Personal and Business Expenses
As a business owner, it’s important to separate personal and business bank accounts. Seeking the assistance of a trusted CPA can help separate these returns and ensure information is properly inputted. If you are a small business owner, you may put all these expenses into one account. But if you don’t want to claim them, keep them separated.
Start-up Cost Deductions
As a new business, any start-up costs such as the research in opening or starting a trade or business is a deductible capital expense. However, these expenses can be claimed only if these efforts lead to the formation of a successful business. It’s important to consider where you run your business as well. For example, there are certain deductions available only for individuals working out of a home office.
Payroll and Other Tax Obligations
Aside from federal taxes that must be accounted for, adhering to property, payroll, and local state taxes can be confusing for any new business owner. By outsourcing these tasks to a trusted CPA firm, you can focus on running your business.
Failing to File On Time
April 15th is the common tax deadline for majority of tax payers. However, if you fail to file or pay on time, the IRS adds interest and penalties on the taxes paid late. It is important to seek the help of a CPA when working with the IRS to resolve your tax debt. Most individuals who are unable to pay the full amount when do can set up a payment plan with the IRS if they are proactive.
Our company can help you year round to prepare for tax season, whether you’re a new business owner or filing a joint return. Avoid these common tax mistakes by allowing us to help you file and prepare your tax return. Contact our firm today to schedule a consultation!
Which Expenses are Deductible if You Work From HomePosted on November 8th, 2017
Working from home can be a great way to save money in the short and long term. In addition to preserving the cost that would normally be taken up by commuting and the costs of office space, there are a number of deductions available to those who work from home.
At Watson & McDonell, we provide tax support for individuals who work from home, and have created this guide to provide a better idea as to the deductions you are entitled to.
Do You Work From Home?
In order to take full advantage of the deductions available, it is essential that the IRS recognizes you as a person who works from home. The primary requirement for being considered an individual who works at home is that the primary location where you conduct business is also the place you regularly sleep, eat, and live. For many, this would be understood as the home office, though this is not the only way to qualify for work-from-home status.
Another major factor to working from home is whether you communicate with clients, patients, or consumers from this location. This must be the primary use of the space however, as a living room that occasionally serves as an entertainment space for clients will not qualify. Even if you spend a good amount of time away from home during the course of your work, you may still qualify if your home-office is essential for the work you perform.
Understand Your Available Deductions
If you qualify as an employee or business owner who primarily works from home, there are a number of deductions that are available to you. If you are an employee who works from home, you may deduct the expense of any supplies for your home office. This deduction does not apply if the office is not essential to your work and is kept for personal convenience. Home office deductions are not depreciable, but are only limited by gross business income.
Additional expenses that can be deducted for working from home include essential electronics, furniture, and other necessary supplies to keep your home-office functional. These deductions can be added to items such as business meals, vehicle and travel expenses, and entertainment expenses for the cost of seeing clients within your home. Other deductions commonly available to those who work at home include:
- Mortgage Interest
- Home Repairs
- Homeowners Insurance Premiums
Contact Watson & McDonell To Learn More
Working from home isn’t only convenient but can be highly cost effective. If you work from home and are looking to make the most of your home office, contact Watson & McDonell today. Our tax professionals are committed to effectively and ethically lowering your tax liability.
Do I Have to Pay U.S. Taxes While Living Abroad?Posted on October 3rd, 2016
The opportunity to live or work abroad can be exciting and can provide rewarding career and life experiences. However, if not handled properly, living abroad may also create tax issues that will complicate life and take away from an otherwise rewarding experience.
For U.S. citizens and permanent resident visa holders wondering if they must pay U.S. taxes while living abroad, the baseline answer is “Yes, and there is more.”
U.S. Tax Obligations Continue For Those Living Abroad
U.S. citizens and U.S. permanent resident visa holders living abroad, called expatriates or expats, face a maze of tax rules, with a different risk of overpaying taxes or incurring failure-to-file or failure-to-pay penalties around every corner. This risk arises because U.S. tax codes expose expats to taxation on their worldwide income, regardless of where generated.
The IRS requires substantially all its citizens and permanent resident visa holders to file annual U.S. tax returns to report income and other financial activities regardless of where they lived or earned income during the year. This umbrella requirement includes citizens who have never lived in the U.S. or who moved away when they were young.
Expats Risk Overpaying Taxes Across Multiple Jurisdictions
Consistent with the broad filing requirements, tax rules allow expatriates to legally avoid paying taxes to two countries on the same income; however, these provisions involve choosing among different alternatives and filing multiple forms. These options include:
● using Form 2555 to calculate the amount of foreign earned income and housing costs that may be excluded from taxes,
● using a Form 1116 to take a tax credit for taxes paid to another country, or
● deducting foreign tax payments on Form 1040’s Schedule A.
Each of these approaches has advantages and disadvantages and require careful evaluation to make choices which minimize taxes now and in the future.
Expats Face Reporting Requirements for More than Just Their Income
Besides the demand to report all income earned, U.S. citizens and permanent resident visa holders are required to report foreign bank and financial accounts, or FBAR. Moreover, expats must comply with state income tax laws which vary widely from state-to-state.
If you are planning to spend significant time abroad or are already doing so, it is important that you maintain tax compliance across multiple tax jurisdictions. Contact Watson & McDonell, PLLC in Seattle today to establish a relationship with a firm with the experience and expertise and to help you remain compliant with your U.S. tax filing obligations while overseas.
How Outsourcing Helps Small Business Owners and Not-for-Profit OrganizersPosted on September 1st, 2016
There is an old expression: “If you want something done right, you must do it yourself.” There is another expression in the modern lexicon: “How’s that working out for you?”
There is no arguing that a small business owner or not-for-profit organizer in any lifecycle stage must be versatile. These individuals have confidence in themselves and their abilities. However, it is rare for one person or organization to possess all the qualities needed to be successful. An effective outsourcing strategy helps these individuals focus their energies on their strengths and the activities which drive success for themselves and their organizations.
Identify What Activities Are Core to an Organization’s Strategy
The decision to outsource a business activity is a major strategic one for most organizations. It is a decision that requires weighing potential cost savings against a loss of control. Two questions are helpful in distinguishing between core, where maintaining control is crucial, and non-core activities, where control is less vital:
1. Is the activity a source of advantage over other organizations or competitors?
2. Does the activity have a significant impact on an organization’s operational performance?
In asking these questions, it is important to focus on the activity itself, not the outcome of the activity. Focusing on the strategic importance of the outcome instead of the activity results in organizational leaders keeping too many activities in house. The need for an excellently manufactured widget, a timely and accurate set of financial statements, or a well-maintained residential property is separate from whether the activity required to generate those results is a source of competitive advantage or a key determinant of operational performance.
Activities for which the answer to both of these questions is “Yes” are strategically important, are likely to be an organization’s core competence, and are best conducted in-house. Activities for which only one of the criteria is met make the best candidates for outsourcing.
Outsource Non-Core Activities to Save Cost, Improve Quality, and Focus on the Core
Once the non-core activities are identified, organizations must make an evaluation of whether outsourcing is cost-effective. A common mistake, however, is to underestimate the cost of conducting an activity in-house. Besides the tangible costs of labor, benefits, training, and capital investment, organizations must consider intangibles such as the risk of loss from not performing the activity well and the opportunity cost of devoting resources away from core activities.
Organizations typically find that activities can be cost-effectively outsourced when they involve either repetitive tasks where scale is important or specialized skills where technical ability is critical. Commonly outsourced activities include:
● Finance and accounting services, particularly tax preparation and payroll services.
● Contact center services, such as telemarketing, call center services and help desks
● Human resource services, such as recruitment processes or employee leasing
● Legal processes
● Facilities maintenance
Call the Seattle office of Watson & McDonell, PLLC today for more information about our services or to schedule a consultation. We are your Emerald City CPA firm, providing accounting services to businesses and not-for-profit organizations in West Seattle, Belltown, Ballard, SeaTac, Capitol Hill and beyond.
I Received an IRS Audit Notice. What Do I Do Now?Posted on July 11th, 2016
According to published reports, the IRS audited fewer than 1% of individual returns filed in 2015. That percentage is of little comfort, however, to those taxpayers who are selected for audit. Fortunately, there are a couple of guiding principles that have proven successful for other taxpayers in a similar situation—follow the instructions and get help from an experienced professional.
Read and Follow the Notice—Don’t Ignore It
Taxpayers selected for review will be notified either by mail or by telephone with a confirmation letter through the mail. The IRS does not email notifications to taxpayers.
When the IRS has selected a return for a further review, and the return indicates a refund is due to the taxpayer, the IRS will send a CP05 notice to alert the taxpayer that the refund will not be paid until the IRS’s review is complete. The taxpayer will see that there is no action required of them at the time. However, this form places the taxpayer on alert for further instructions.
In contrast to the CP05, where no action is required of the taxpayer, a CP05A or a CP2000 notice will specify that the return is under review and that additional information is needed from the taxpayer.
The notification from the IRS will identify the requested information and provide a time for response. Adherence to instructions is critical to bringing the examination to a conclusion. The most important point is not to ignore a notification from the IRS, as it will not just go away.
Know Your Rights as a Taxpayer and Get Help
An IRS examination is not something to be taken lightly, nor is it something to be feared. It is not personal. Instead, it is a structured, bureaucratic process. As with any such process, the taxpayer has rights, including the right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided. Taxpayers also have a right to representation, by oneself or an authorized representative.
The right to representation, including by an authorized representative such as a CPA or Enrolled Agent is an important right and one that taxpayers should not ignore. These professionals understand the bureaucratic process and know the steps to take and the documents to provide to navigate the process effectively. We encourage consultation with a CPA or Enrolled Agent for even the most benign IRS notice, and especially for one related to a tax return examination.
If you receive a notice from the IRS, you can have confidence that the tax professionals at Watson & McDonell, PLLC in Seattle know how to respond. We will review the notice, explain what it means, and map out an approach that will achieve the quickest resolution possible. You’ll probably never have to deal directly with the IRS.
Common IRS Notices ExplainedPosted on July 1st, 2016
With peak tax return filing season behind them, U.S. individual taxpayers enter peak IRS-notice season. It’s the time when the IRS begins to generate thousands of notices to taxpayers based on those returns. Most IRS notices and letters fall into one of the following categories:
● A filed return has a balance due.
● The IRS has made a change to a filed return.
● The IRS requires more time to process the taxpayer’s return.
● The IRS has a question about a filed tax return or needs additional information.
● The IRS needs to verify the taxpayer’s identity.
A Filed Return Has a Balance Due—Notice CP14
When a return is filed, but a balance remains outstanding, the IRS sends a CP14 notice to define the outstanding balance. For example, a taxpayer who filed a return but did not include payment of an outstanding balance would receive a CP14 notice.
Alternatively, if there were other issues with a return that have now been settled and a balance remains due, the IRS will send the CP14 notice with what it considers the agreed upon balance. This notice may follow other notifications, which are described below, once the matters identified in those other notices have been resolved. This notice is noteworthy because it is the start of the IRS’s process to collect an outstanding balance.
The IRS Has Changed a Filed Return—Notices CP 11, CP 12, or CP 13
There are instances where a taxpayer will file a return and either make the payment or claim the refund indicated by the return, but the IRS’s systems identify an error. In most cases, such an error will stem from a W-2 or 1099 reported to the IRS that was either excluded from the return or entered for a different amount. The notice will say exactly what was changed, how it affected the tax return, and how the final tax liability or refund has changed. These notices often follow other notifications, which are described below, once the matters identified in those notifications have been resolved.
The IRS Requires More Time to Process the Taxpayer’s Return—Notice CP05
When the IRS has selected a return for a further review, and the return indicates a refund is due to the taxpayer, the IRS will send a CP05 notice to alert the taxpayer that the refund will not be paid until the IRS’s review is complete. This notice is only sent in cases where a refund has been requested. The taxpayer will see that there is no action required of them at the time. However, this form should put the taxpayer on alert for further instructions.
The IRS Has a Question or Needs Additional Information—Notices CP05A or CP2000
In contrast to the CP05, where no action is required of the taxpayer, a CP05A or a CP2000 notice will specify that the return is under review and that additional information is required of the taxpayer. These notices may be sent to taxpayers whether the return indicated a refund was due or that the taxpayer owed additional amounts.
The IRS needs to verify the taxpayer’s identity—5071C Letter, or CP01 Series Notices
Identity theft related to tax returns has become a more significant issue in recent years. A 5071C letter informs a taxpayer that a tax return with their name and/or social security number has been received and that the IRS needs to verify the taxpayer’s identity. The IRS will send one of a variety of CP01 notices when an issue has been raised either by the taxpayer or the IRS related to identity theft.
Correspondence from the Internal Revenue Service has the ability to unnerve its recipient like no other type of mail. If you receive a notice from the IRS, reach out to Watson & McDonell, PLLC in Seattle so we can help you decide which steps to take next.
Tax Credit vs. Tax DeductionPosted on June 20th, 2016
Making the most of available tax deductions and credits is a key component in any plan for minimizing tax liabilities. Both reduce a tax bill, but in different ways and subject to different requirements and limitations.
Deductions reduce the amount of income subject to taxes while credits reduce the amount of tax owed on a dollar-for-dollar basis. A deduction’s value depends on the taxpayer’s marginal tax rate, or highest applicable federal tax bracket. For example, in 2015 a married couple filing a joint return with $200,000 of income would have a 28% marginal tax rate. Therefore, a $1,000 deduction saves that couple $280. A $1,000 tax credit for that same couple would reduce their tax bill by $1,000.
Tax Deduction Basics
Most U.S. taxpayers are familiar with the standard deduction and the dependent deduction:
● The standard deduction is available to all taxpayers regardless of the amount of income subject to taxation. However, some analysis is necessary to determine whether it is better to skip the standard deduction and itemize instead. More on this below.
● The dependent deduction represents an amount a taxpayer may exclude from taxable income for each dependent. Although the dependent deduction begins to be reduced at higher income levels ($309,900 for a joint return in 2015), it is available whether or not a taxpayer itemizes deductions.
Taking the standard deduction or itemizing is an either/or election. For 2015 tax returns for married couples filing jointly, the standard deduction was $12,600. Taxpayers who spend meaningful sums on allowable deductions such as home mortgage interest, medical expenses, and charitable donations may be better off itemizing their deductions. Careful planning and review are necessary to ensure taxpayers meet IRS criteria for each type of itemized deduction.
Although the deadline for filing 2016 tax returns is several months away, it is not too early to start planning, especially for those whose itemized deductions do not exceed the standard deduction by significant amounts. By concentrating deductions in a specific year, taxpayers may be able to itemize deductions in one year and take the standard allowance in the next. Charitable contributions are one example of deductions which taxpayers have control over when they decide on spending that will generate tax deductions.
Tax Credit Basics
As with deductions, taking certain tax credits requires meeting certain qualifications. Many credits phase out as taxable income rises above certain levels. Some tax credits are nonrefundable, meaning they are valuable only to the extent there is a tax obligation against which they can be offset. Other credits, however, are refundable, meaning they will create a tax refund greater than amounts already paid in taxes.
Common non-refundable tax credits include those to help cover costs adopt a child, care for a dependent, or improve a home. Common refundable tax credits include the Earned Income Tax Credit, the Health Coverage Tax Credit, the Child Tax Credit and the Additional Child Tax Credit. As with tax deductions, the IRS defines specific criteria which must be met to qualify and careful planning and review are necessary to ensure those criteria are met.
Contact Watson & McDonell, PLLC today to discuss how you can take advantage of tax deductions and credits to legally reduce your tax liability. We are a full-service Seattle CPA firm with a reputation for going beyond tax compliance to proactively recommend opportunities to maximize your after-tax income.
Tax Problems and PenaltiesPosted on June 14th, 2016
Even when you have all the information you need and the resources to pay any amounts you owe, preparing a tax return can be stressful. That stress level increases exponentially, however, when there are problems, whether in completing and filing the return, or later when an IRS notice appears in the mail.
Dealing with these problems in a timely fashion is important to avoid costly interest and penalties. Below are several common tax problems and practical ways of handling them.
I cannot file my tax return on time, or I cannot afford to pay my taxes
If you have not filed a return because you do not have the time or haven’t kept up your bookkeeping, the IRS offers extensions to provide additional time to gather information and file a return. Extensions are not a valid means of delaying the payment of taxes, so you must make an estimate of whether additional taxes are due. That calculation does not need to be precise, however, only enough to avoid underpayment penalties.
The IRS also offers installment plans and various other payment options. The key is to file the return and then stick to the payment plan, so you remain in good standing with the IRS.
The IRS has sent me a notice
Receiving an IRS notice can be disconcerting. The overarching principle when dealings with tax notices is not to ignore them. In most cases, the IRS is notifying you of an adjustment they have already made. In such instances, taxpayers who ignore the notice are forgoing their rights by implicitly agreeing to the IRS change and exposing themselves to additional tax obligations. In other cases, the IRS is requesting additional information. If they do not receive a response, they will either pursue the information more aggressively, or make an adjustment without the benefit of factual data, and you can be assured they will err in their favor.
The reality is the IRS is not going away and the passage of time makes things worse, not better. Unattended tax notices can lead to interest, penalties, wage garnishments, asset seizures, and more. Consulting with a CPA or Enrolled Agent is a best practice for even the most benign IRS notice.
The IRS is auditing a tax return I filed
Fewer than 1% of the individual tax returns filed each year are audited by the IRS. Of course, the rarity of such reviews is of little comfort to those taxpayers selected.
The right to representation is an important right and one that taxpayers should not ignore. Professionals such as a CPA or Enrolled Agent understand the bureaucratic process and know the steps to take and the documents to provide to navigate the process effectively.
My spouse left me with a tax debt I do not owe and cannot pay
When tax obligations are involved, the IRS pursues both parties in a joint return. Often one spouse cannot be found or is deliberately avoiding tax and other debts, leaving the IRS to focus its attention on the remaining spouse.
The tax code also contains provisions to protect an innocent spouse who did not know and couldn’t have known about undeclared income or bogus deductions, and who did not enjoy the financial benefit of the unpaid tax. There are also general provisions for when it would be “inequitable” to hold the innocent spouse liable for the debt.
If you have past due tax returns, have received a notice from the IRS, or have other tax problems, contact Watson & McDonell, PLLC today to discuss your situation. We are a full-service Seattle CPA firm with a reputation for tax service excellence.