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Time for a Checkup- Are you withholding enough for your taxes?

As we enter mid-year, it’s a good time to check your tax withholdings to ensure you haven’t been paying too much or too little. This is especially true if your income was impacted by the pandemic or you have a change to your marital status, or number of dependents.

This quick checkup will ensure you are not surprised with a large tax bill when you file your income tax return.

Get a rough estimate

The IRS has an online tool that will help you calculate how much your current withholdings match what your final tax bill will be. In order to get an accurate reading, you need to have a copy of your latest paycheck or last quarterly estimated tax filing (Form 1040 ES). It may also help to have your last tax return on hand if you expect to take similar credits and deductions this year.

The IRS tool is here: IRS Withholding Calculator

Enter your data, including your filing status, dependents and any information about credits. Then refer to your last paycheck or withholding statement and enter in your total withholdings so far this year. Also enter what you expect to earn by year-end.

After you enter your information, the tool print a result and provide a estimate of your under or over withholding for tax. But remember, this tool is a rough estimate. If you are concerned about your situation it is always best to ask for help to get a better read or run through alternative scenarios.

How to fix a problem

Whether you’re paying too much or too little, you can fix it by filling out a new W-4 form and giving it to your employer. If you do so, you’ll have to file another W-4 at the start of 2022 to return your withholding schedule to normal. If you’re filing quarterly estimated taxes, you can adjust your next quarter’s estimate in a similar way.

Why a checkup is important

In a perfect world, you would not owe too much nor get too large a refund. Unfortunately, the federal government refunds more than $3,000 a year to the average taxpayer. Think of that money as an interest-free loan the government borrowed from you. Conversely, a shortfall means writing a large check when you file your tax return. That’s a surprise few of us need.

Borrowing Money from Your 401(k)- Good idea? …not so much

For years you have put away money from your pay into your employer provided 401(k) retirement savings account. Your employer may have even matched 50% of your contribution. Now you want to take some of this money out in the form of a loan to help pay your bills or to buy a car. Before you take action, here are some things to consider.

Loan versus withdrawal

If you withdraw funds from a 401(k) prior to age 59 ½ you may be in for a surprise at tax time. Withdrawals are subject to income tax and often are subject to a 10% early withdrawal penalty. A better option is to consider loaning yourself the money. 401(k) loans are available for up to 50% of your account balance.

The advantages

There are many advantages of borrowing money from your own retirement account.

No immediate tax. You do not pay income taxes on the funds lent to you. If you withdraw the funds, you must pay ordinary income taxes and a potential penalty on the withdrawal.

You repay the loan. This re-establishes your original retirement account contributions for use during retirement.

Your interest payment is to yourself. Your 401(k) loan payment includes interest. This interest provides you a return on your original contributions. It is better to pay yourself interest than to pay this interest to a bank.

The disadvantages

Repay or else. If you leave your current employer you will need to repay all outstanding 401(k) loans immediately. If you do not, your remaining loan balance turns into a withdrawal subject to income tax and a potential early withdrawal penalty.

Opportunity lost. Your 401(k) loan amount is no longer invested. While your interest payments provide a small return, it usually is much lower than those available through retirement account investment options.

Less take home pay. If you wish to continue contributing to your retirement savings at the same level as before you took out the loan, your take home pay will now be lower as you are making contributions AND paying off your 401(k) loan.

When making the tough decision to borrow your retirement savings, remember to first consider all your alternatives. But most important, understand if you leave your job you must repay the loan or face a potential tax hit!

The Household Employee Problem- Don't get caught by the nanny tax

This often overlooked bookkeeping and payroll tax requirement can cause a tangle of tax problems if not handled correctly. Could you be impacted? This is what you need to know.

Nanny tax explained

In an effort to capture income from household employees, the tax code requires you to obtain employee information, pay the related state and federal taxes, and withhold taxes for anyone you employ around the house. The requirement comes into play if you pay any one individual $2,300 or more (in 2021). You must then submit a W-2 for each of these household employees.

Who is covered?

The household workers typically covered by this law include:

  • babysitters
  • caretakers
  • house cleaners
  • domestic workers
  • drivers
  • health aides
  • housekeepers
  • maids
  • nannies
  • private nurses
  • yard workers

Employee or Not an Employee

Before you panic, first determine whether your help is an employee or not. If in the eyes of the tax code, your help is not an employee the nanny tax rules DO NOT apply. What does the IRS look for?

  1. Who controls how the work is done? If the worker clearly does, then the person is self-employed and not your employee.
  2. Whose tools are used? If the worker’s tools are used then they are more likely self employed and not your household employee.
  3. Work exclusively for you? If the worker has a number of customers then they are less likely to be your household employee.
  4. Does an agency supply the worker? If an agency supplies the worker and controls what work is done and how it is done, the worker is not your employee.
  5. Daycare services at an offsite location. If your childcare is conducted in the worker’s home, that worker is generally not your employee.

Some Suggestions

  • Have your help become incorporated. The reporting rule only applies to hired individuals. If your household help is in a LLC or Sub chapter S-Corporation, it is up to that company to employ the worker and pay their employment taxes.
  • Be aware of the annual limit. Make sure your total payments do not exceed the reporting threshold each year.
  • Determine if the hired help are truly employees or self-employed.
  • Rotate services. If you have help with yard work consider employing a number of helpers to make sure no one person is paid above the reporting threshold.
  • Make the determination now. If you think you may have a household employee, ask for a review. Waiting until the end of the year can create a reporting problem for tax payments due during the course of the year.
  • Follow the IRS checklist.If you know you are hiring a qualified household employee, here is a brief checklist provided by the IRS to help keep you out of harm’s way:
    • Find out if the person can legally work in the U.S. (form I-9)
    • Find out if you need to pay state taxes
    • Withhold social security and Medicare taxes
    • Withhold federal income tax if required
    • Determine if you are required to pay federal and/or state unemployment taxes
    • Determine the payment method and make tax payments
    • Get an employer identification number (EIN)
    • File W-2s each year and provide copies to your household employees
    • File household employment tax form with your annual tax return
    • Keep good records

Advance Child Tax Credit Payments Starting NOW!- What everyone should know

The American Rescue plan signed in March, 2021 requires the IRS to pay out ½ of enhanced Child Tax Credits (CTC) to eligible taxpayers beginning this month. A tall order, and one filled with land mines. If you have children or know of anyone who has children, here is how you can help:

What’s happening now

IRS web-sites. The IRS is establishing two web sites. One to help ensure you will get your Child Tax Credit if you are a non-filer and a second one to opt out of the monthly payments. Both can be accessed from the following IRS webpage;

IRS Child Tax Credit Update

The monthly payments are automatic. Beginning Mid-July you will begin receiving payments for ½ of your projected 2021 Child Tax Credit if:

  • You filed a 2019 or 2020 tax return and claimed the credit. OR
  • You gave information in 2020 to receive the Economic Impact Payment using the IRS non-filer tool. AND
  • The IRS thinks you are eligible. AND
  • You did not opt-out of the early payments.

The Opt-out option

Not everyone should look forward to receiving payments each month for ½ of their Child Tax Credit. Here’s why;

You do not qualify for the credit. The IRS is using past tax returns to estimate who should get advance payments of this credit. They are going to often be wrong. If your 2021 income is too high, you may need to pay back the advance payments when you file your tax return.

You need the large credit. If you use this credit to balance out your year-end tax bill, you may find yourself owing money at the end of the year. If the early payments are gone, this could create a tax bill hardship. For example:

With two kids you might be eligible for a $6,000 credit, with $3,000 paid to you in advance. When you file your tax return in April 2022, your unclaimed credit on the return will be $3,000 (you already received $3,000). Last year your tax return credit was $4,000. If you saved some of the advance payment, you will not have a problem. If it is spent, you now have $1,000 less of a credit to offset your other income on the return and may have to come up with some cash to pay your tax bill.

Your circumstances change. If your tax life changes, advance payments of the credit will complicate things. For example, if you are in the midst of a separation or divorce, the advanced payments could become a big conflict.

Action to take NOW!

Look for notices. The IRS is sending out notices in the mail to those they think should receive the Advance Child Tax Credit payments. If you have not received one, the IRS may not think you should receive payments. So follow-up to ensure you are on their radar by reviewing your most recent tax returns (2019 and 2020). But don’t fret, if you are owed the credit you will receive it when you file your tax 2021 tax return.

Opt-out. The Opt-Out portal is new and recently set up by the IRS. So if you do not want the early Child Tax Credit payments go to this site immediately and opt-out of the payments. No one is sure how efficient this will be, so you need to stay on top of this.

Keep track of payments. You will need to know how much you receive in advanced payments when you file your tax return next year. Do not assume the IRS is going to accurately keep track of this for you.

Forecast the impact. Moving from $2,000 to as much as $3,600 per child is a big change in most families’ tax bill. Know what the change does to yours and look to adjust withholdings to account for this change.

It is fully refundable. Finally, remember the Child Tax Credit is now a fully refundable credit. So if you know of anyone that does not pay income tax and has children, tell them. The new Child Tax Credit may be helpful to them.

Turning Your Hobby Into a Business

You’ve loved dogs all your life so you decide to start a dog training business. Turning your hobby into a business can provide tax benefits if you do it right. But it can create a big tax headache if you do it wrong.

One of the main benefits of turning your hobby into a business is that you can deduct all your qualified business expenses, even if it results in a loss. However, if you don’t properly transition your hobby into a business in the eyes of the IRS, you could be in line for an audit. The agency uses several criteria to distinguish whether an activity is a hobby or a business. Check the chart below to see how your activity measures up.

The business-versus-hobby test

If your dog training business (or any other activity) falls under any of the hobby categories on the right side of the chart, consider what you can do to meet the business-like criteria on the left side. The more your activity resembles the left side, the less likely you are to be challenged by the IRS.

On the other hand, if you determine that you’re really engaged in a hobby, there are still some tax benefits to be had. You can treat hobby expenses as a miscellaneous itemized deduction on a tax return, but generally not more than hobby income. They can be used to reduce taxable income if they and other miscellaneous expenses surpass 2 percent of your adjusted gross income.

If you need help to ensure you meet the IRS’s criteria for businesslike activity, reach out to schedule an appointment.

Reminder: Second Quarter Estimated Taxes Are Due- Now is the time to make your estimated tax payment

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The second quarter due date is now here.

Due date: Tuesday, June 15, 2021

You are required to withhold at least 90 percent of your 2021 tax obligation or 100 percent of your 2020 tax obligation.* A quick look at your 2020 tax return and a projection of your 2021 tax obligation can help determine if a payment is necessary. Here are some other things to consider:

  • Avoid an underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year.
  • W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.
  • Self-employed workers need to account for FICA taxes. Remember to account for your Social Security and Medicare taxes, as well as your income taxes. Creating and funding a savings account for this purpose can help avoid a possible cash flow hit each quarter when you pay your estimated taxes.
  • Don’t forget state obligations. With the exception of a few states, you are often also required to make estimated state tax payments if you’re required to do so for your federal taxes. Consider conducting a review of your state obligations to ensure you also comply with these quarterly estimated tax payments.

* If your income is over $150,000 ($75,000 if married filing separate), you must pay 110 percent of your 2020 tax obligation to avoid an underpayment penalty.

Don't Lose Your Refund!

The tax filing due date often brings a sigh of relief to most taxpayers. Unfortunately, every tax day also closes the window on the ability to claim a refund. According to the IRS, in 2017 up to 1.4 million individuals representing $1.35 billion in unclaimed refunds had this money turned over to the U.S. Treasury this past tax day.

As unlikely as this sounds, losing a refund could happen to you or someone you know.

The Causes

You may be due a refund beyond your tax liability. While most tax credits can be used to reduce your tax liability down to zero, there are a few credits that allow you to receive money beyond the amount of your tax liability. The most common examples of these refundable credits are the Earned Income Tax Credit, the American Opportunity Tax Credit and the Child Tax Credit. Taxpayers often fail to take advantage of these refundable credits because they assume since they owe no tax they are not entitled to a refund.

Part-time workers often lose refunds. Students and part-time workers are often the innocent victims of employer payroll systems. Payroll systems might assume you are working full-time and withhold pay from your wages at too high a rate. While some part-time workers may owe no tax, these excess withholdings are only returned to you in the form of a refund when you file a tax return.

Seniors can also be victims. The same situation happens to seniors that have money withheld from their retirement fund disbursements and Social Security checks. Their income is often low enough to not require filing a tax return. When withholdings are involved, the non-filing of a tax return could lead to a lost refund.

Death and disability create tax-filing confusion. When the person who normally organizes and files taxes for the family becomes disabled or passes away, there’s a possibility that timely filing of tax returns gets missed.

I need to be perfect. A number of taxpayers do not file on time because they are missing a piece of information. The dilemma of needing to be 100% accurate before filing your tax return can be debilitating. This concern often creates non-filed tax returns and lost refunds.

Economic impact payment confusion. With multiple rounds of stimulus checks approved by Congress, it can be difficult to keep track of them to ensure you receive your payments and that the payment amounts are correct. This is especially true if you do not normally have to file a tax return.

What you can do

You have three years. You have the later of three years from the original filing due date or two years from the time you paid any tax to claim your refund or file an amended tax return. This timeline is strictly enforced by the IRS. If you miss the deadline by even one day, you could be out of luck. For most of us this means tax years 2018, 2019, and 2020 are still open for refund requests by filing a tax return or amending a tax return filed in error.

Non-filer double check. If you did not file a tax return because you did not think it was necessary, conduct a review of your W-2’s, 1099’s and other documentation. If there is money withheld, ask for assistance to see if a refund is possible.

Check out the Recovery Rebate Credit. If you did not receive economic impact payments, and did not file a tax return, the IRS offers free options to prepare and file information to receive payment on how to file at

Thankfully, there are a few exceptions to these deadlines for bad debt, worthless securities, and for those unable to manage their financial affairs. But do not count on this as a fall back. If you had money withheld or if your tax return filing is not current, you could possibly be a victim of lost refunds. Now is the time to take action for 2018 thru 2020.

A Letter from the IRS!- What steps you should take

You got a letter from the IRS! Pulses quicken, there is a slight hesitation prior to opening the envelope, and stress levels go up. But is the letter always right?

Forced to Withdraw from Retirement Accounts?!?!?- What you need to know

Required minimum distributions are back in play. Here is what you need to know well before you reach retirement age.

Who Pays What?

With all the chatter about who is paying what in federal income taxes, wouldn’t it be nice to know what the IRS statistics say they collect? Here are the facts.