by Tony Blanchette | Nov 15, 2020 | Taxes
Tax Planning is the number one way to reduce your taxes.
Tax Evasion is the number one way to end up in jail.
And what the heck is Tax Avoidance?
Many people, like yourself, dread tax time, and you probably ignore your taxes until you need to file them, but this can actually cost you. Tax Avoidance is the act of avoiding paying any more in taxes than absolutely necessary by doing things like claiming more deductions or lowering your income bracket.
Now you may be asking us, “But isn’t this illegal?”. No, it’s not.
Tax avoidance and tax planning are different than tax evasion.
Tax Evasion
Tax Evasion is the intent to reduce your taxes through deceit, subterfuge, or concealment. This is 100% illegal.
Tax evasion includes things like:
- Purposely not reporting income
- Hiding income – like “paying” a child or a shell company – as a way to keep yourself or a shareholder in a lower tax bracket.
- Falsely claiming deductions for things that didn’t happen (ie: giving to a charity when you didn’t),
- Inflating deductions beyond their reality (ie: writing off an entire week-long vacation with your family as ‘business travel’ because you had an hour-long dinner with a client).
- Failing to keep accurate financial records / Discrepancies in financial records.
On this flip side of tax evasion is Tax Avoidance and Tax Planning.
Tax Avoidance
Tax Avoidance is reducing the amount of taxes you owe by carefully planning for them throughout the year – (a.k.a: Tax Planning) It is completely legal to take advantage of any legal reductions.
Some common methods of tax avoidance are:
- Reducing your amount of taxable income through legal channels
- Lowering your tax rate
- Controlling when you must pay taxes
- Claiming all your available tax credits and deductions
- Controlling the effects of the Alternative Minimum Tax
- Avoiding common tax deduction mistakes
Tax Planning
Tax Planning is a proactive approach to taxes – by planning for your taxes throughout the year you can avoid paying extra taxes at the end of it. In other words:
Tax Planning = Tax Avoidance.
Tax planning is the number one way to reduce your taxes, and the easiest way to set up a plan is to work with a CPA. CPA’s must maintain their certification through continuous education on current tax laws and changes. They will look at your specific needs and discuss all your different options with you. They then help you create a tax plan and will set up regular (usually quarterly) meetings to review your plan, as well as be there for you year-round when unexpected changes or life events alter your goals.
Tax Planning can involve things like:
- monthly reviews of your income and expenses
- quarterly meetings with your CPA to discuss what tax options are legally available to you.
- creating a plan of action based on your situation which will help you pay the lowest amount of taxes possible.
- Updating your plan when your needs or values change – like a new addition to your family or opening up a new store.
Tax planning won’t be the most fun part of running your own business, but when you owe fewer taxes at the end of the year, you will find tax planning and tax avoidance well worth it.
Especially if you can use that extra money on something you love, like spoiling your grandkids or taking a tropical beach vacation!
by Tony Blanchette | Oct 17, 2020 | Taxes
Congratulations on your new family member!
As you may know, there are tax breaks for having a child. The IRS makes no separation between biological and adopted children, however, there is an Adoption Tax Credit, with some additional deductions specifically for you adoptive parents.
The Adoption Tax Credit: What Are The Rules?
First, the Adoption Tax Credit doesn’t apply to adopting the child of your spouse. But non-married people, in states that allow domestic partners to adopt their partner’s children, do qualify.
The credit applies to legal adoptions of children under 18, or children who are mentally or physically unable to take care of themselves.
You can only claim credits on “Qualified Adoption Expenses”. What are Qualified Adoption Expenses? These are fees that are listed as:
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- Necessary and reasonable for the adoption to happen
- Court and lawyer fees related to the adoption
- Traveling expenses related to the adoption
- Any other expense directly related to the purpose of the adoption, even if you haven’t been matched with a child yet. (Example: You pay for your home study at the very beginning of your attempts to adopt)
No Refunds Allowed
If your Adoption Tax Credit is more than you owe in taxes, you can’t get a refund for the difference.
You are allowed to deduct this credit up to the amount of taxes you owe (bringing your taxes to zero) then roll over the rest of the credit amount to the next year. You can roll over your tax credit for up to 5 years or until it’s used up.
To find out the current amount of the Adoption Tax Credit call your CPA or go to Form 8839 on the IRS website
Domestic vs Foreign Adoption
You can claim expenses whether you adopt here or abroad, however, each has different time frames for deducting expenses. It’s complex and situational so you are going to want to talk to a CPA.
Special Needs Children
For the purpose of adoption, “special needs” refers to the likelihood of the child being adopted, not if they have a physical or mental disability.
No foreign child is considered “special needs”.
A domestic child with physical or mental disabilities may not be considered a “special needs” adoption, while a non-disabled child can be. The state determines if a child has “special needs” status. Adopting a special needs child may increase the amount of this credit you qualify for.
No Double Dipping
Some companies have an adoption assistance program. If your’s does, and reimburses you for specific expenses relating to your adoption, you can’t also claim those expenses on your Adoption Tax Credit.
The IRS loves you, but not that much.
Income Limits
Like most tax breaks, there are limits to the adoption credit based on your income. Once you hit the income threshold, the IRS reduces the credit available until you don’t qualify anymore. This income amount is based on your modified adjusted gross income and usually starts in the $200,000 range.
This is a very generalized overview of the Adoption Tax Credit. Since adoption is a very personal and individualized process, it’s impossible to give specific details. If you have, or plan to adopt, a child we recommend you consult an adoption lawyer and a CPA versed in adoptions.
And don’t forget that along with this Adoption Tax Credit, you also get the Child Tax Credit!
by Tony Blanchette | Oct 17, 2020 | Taxes
You don’t need to keep all your tax records forever. There is a statute of limitations imposed on the IRS’s ability to audit you. Once this statute of limitations has passed, the IRS is legally prohibited from even asking you questions about those year’s returns. In other words, you don’t have to keep your tax records forever.
But, once the statute of limitations has expired, and the IRS can’t go after you for additional taxes, you can’t go after the IRS for additional refunds either.
So what should you keep, hold for some time, or throw out?
Keep Indefinitely
Some of the following things may seem obvious to you, but it is still important to list them.
- Birth Certificates
- Death certificates
- Adoption papers
- Life insurance policies
- Records of paid mortgages
- Marriage certificates
- Divorce papers
- Custody agreements
- Wills and other estate planning documents
- Deeds to property
- List of your financial assets – which you should always keep current.
- Military records or record of any governmental employment
- List of previous employers
- Passports
- Photographic or video record of house and household contents – this is usually required by your insurance, but if not, it is a very good idea to have photographs saved on a cloud so you can prove your valuables in case of loss.
- Tax forms and records relating to nondeductible IRA contributions
Keep for a Period of Time
You need to keep different documents for differing amounts of minimum times. Your specific situation may require you to keep certain items longer. Use this only as a general guideline. A CPA can tell you exactly what you need to keep and what you can get rid of and when.
Also, remember that the IRS has the ability to audit you for:
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- 3 years after you file a tax return
- 6 years if you are self-employed or underreported your income by at least 25%
- Forever if you didn’t file a return or filed a fraudulent return.
So a lot of the following will be based on a “3 or 6 Year” rule (depending on if you are self-employed).
Things to keep for 3 years if employed, 6 years if self-employed:
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- Income tax returns
- Supporting tax documents (for income or deductions, ie: W2s, 1099s, mileage logs, receipts, everything you need when you filed your taxes)
- Bank Statements
- Canceled checks
- Credit Card Statements
- Utility bill payments
Everything except your tax returns you can get rid of after 1 year IF you did not use them on your tax returns (ie: receipts for purchases that weren’t used as deductions).
Things to keep for at least 3 years:
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- Records of selling a stock
- Medical bills
- Records of selling a house – Keep 3 years after it’s paid off
Things to keep for 6 years:
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- Receipts for home improvements – 6 years after you sell your home (except if it’s a “rollover” transaction)
- Property tax records and disputes – 6 years after you sell your home
Things to keep for 7 years:
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- Loan payoff paperwork or evidence of completion of a payoff agreement. DO NOT THROW THESE OUT FOR AT LEAST 7 YEARS.
- Contracts. All contracts.
Other time frames for paperwork:
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- Keep pay stubs until you receive your W2s, 1099s, social security unemployment, etc statements and you’ve confirmed the forms match with your payment records.
- Keep owners manuals, warranty receipts, vehicle titles, records of repairs and maintenance, etc, until the item is sold, tossed, or the warranty expires.
- Keep savings bonds until you cash them in. Keep the paperwork you receive when cashing them in as you would any other income tax document).
- Purchase slips for stocks and mutual funds should be kept until they are sold.
- Insurance paperwork should be kept until the policy is renewed OR for 4 years after the policy is canceled or expires.
- Business records are a totally different ball game played with a totally different set of rules. You need to talk with a CPA about what business records to keep and for how long.
Things You Don’t Need To Save
- Warranties, manuals, or receipts for items like appliances, electronics, or cars that you don’t own anymore
- Receipts for smaller items that aren’t tax-deductible and don’t have warranties.
- ATM receipts (you only need them until you reconcile your monthly bank statements)
As stated before, this is only a general guideline for how long you need to keep paperwork. Your specific circumstances may require you to hold on to some documents longer. It is also a good idea to have digital copies of everything stored somewhere safe in case of fire or theft.
A word of advice is: “When in doubt, don’t throw it out!”
by Tony Blanchette | Oct 15, 2020 | Taxes
Oh no! You found a mistake on your tax return!
Maybe you missed including some income. Maybe you forgot to write off a deduction. Maybe you used the wrong filing status.
Whatever the reason, don’t panic. All you must do is file an amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return.
Luckily, starting with 2019’s tax returns, you can file amendments electronically.
Unluckily, pre-2019 tax returns still can’t be amended online. You need to print them out and snail-mail them in. If you’re mailing them, make sure to attach any supplemental forms and documents (ie: forgotten W2s, updated itemized deductions, etc) to the 1040X. If you’re amending multiple years’ returns at once, file a separate 1040X for each year. If the IRS requests you file an amended tax return, there should be a mailing address on the notice.
Here are some tips about filing amended tax returns:
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- You normally don’t need to amend a return for math errors. The IRS makes these changes for you.
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- Don’t file an amendment because you forgot to add documents (like W2s). Wait until you get a letter from the IRS requesting them.
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- If you need to fix your return to get more of a refund, WAIT UNTIL YOU GET THE ORIGINAL REFUND FIRST. Amended returns take up to 16 weeks to process and you can cash your original check while you’re waiting on the additional amount.
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- If you owe money, PAY ASAP! Still file your 1040X, but if you have to mail in your amendment, pay what you owe electronically using IRS Direct Pay. Paying electronically is faster which will minimize any interest and penalties you’ll owe.
by Tony Blanchette | Oct 14, 2020 | Taxes
2020 is a year.
You, along with millions of other US citizens, may have suddenly found yourself out of work and on unemployment. You may or may not have opted to have taxes taken out of your unemployment, but if you didn’t, what does this mean?
Unemployment is taxable!
You must report all unemployment when you file your taxes. All of the unemployment add-ons ( the CARES Act $600 unemployment bump, PUA, PPP, etc) are also taxable and must be claimed.
Withholding taxes from unemployment is voluntary and it’s sometimes very easy to overlook the area you need to fill out to do it (for some states, it’s just a box you need to check). Also, the taxes UI withholds is a flat 10%, so you are likely going to still owe more come tax time.
What If I Didn’t Withhold Taxes?
If you didn’t opt to have any taxes taken out, or you missed where to do it when you filed, you can attempt to contact unemployment to have them fix it, or cancel and refile your claim – but with the mess that is unemployment in many states, this isn’t recommended.
Your best course of action is to take out that same percent yourself (or preferably more) and put it into a savings account specifically for paying taxes. You can also make estimated tax payments instead. There are quarterly deadlines each year (2020’s have already passed), but you can start making payments now at https://www.irs.gov/payments.
For more information, including some helpful worksheets and a Tax Estimator, see Form 1040-ES and Publication 505, available on IRS.gov. You can also contact your CPA and discuss your best course of action with them. Remember:
Tax Planning is the best way to avoid paying too much in taxes.
