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Tips to Organize Your Tax Records- Creating order out of chaos

As important tax records start filling mailboxes, how can you make sure your tax preparation goes smoothly and efficiently this year? Here are some tips.

Keep it all in one place. It seems obvious, but how often have you found yourself going through piles of paper looking for that elusive 1099 tax form or charitable deduction receipt? If you only do one thing, this is it.

Time to sort. Now that everything is all together, best practice is to sort your information into the same buckets used in your tax return. At a minimum, sort the information into the basic categories below. If you have a lot of one category, sort that stack into the following sub-categories.

A. Income

  • Wages (W-2s)
  • Alimony
  • Business income (1099’s, K-1s)
  • Interest income (1000-INT)
  • Dividends (1099-DIV)
  • Winnings (W-2G, 1099-G)
  • Social Security
  • Investments (1099-B)
  • Other Income Items

B. Income Adjustments

  • Student loan interest
  • Tuition & fees deductions
  • Alimony paid
  • Educator expenses
  • Other education expenses
  • IRA contributions
  • HAS/MSA contributions

C. Itemized Deductions

  • Taxes paid
  • Charitable contributions
  • Interest expense (mortgages)
  • Medical/Dental expenses
  • Investor/Other expenses
  • Casualty/Theft losses

D. Credit Information

  • Child & dependent care expenses
  • Other credit-related expenses
  • Adoption expenses
  • Education expenses

E. Business/Rental

  • Sort income and expenses for each business activity or hobby activity or rental unit

Note: Remember this list is not all-inclusive, it is here to help you sort your information into a usable form to make tax filing easier.

Not sure bucket. There may be things you receive that you are not certain about needing for tax filing purposes. These items should be gathered in one place for review.

Sum it up. Once the information has been categorized, create a summary of the information. This summary can be a printed copy of an organizer or it could be a simple recap you create.

Is something missing? Pull out last year’s tax return and create a list of things you needed last year. Use this as a checklist against this year’s information. While this process will not identify new items, it will help identify missing items that qualified in prior years.

Finalize required documentation. Certain deductions require substantiation and/or logs to qualify your expense. Common areas that require this are: business mileage, charitable mileage, medical mileage, moving mileage, non-cash charitable contributions, and certain business expenses. These logs should be maintained throughout the year, but now is a good time to make sure they are complete and ready to go for tax filing.

It is very easy to overlook something given the lengthy list of taxable income items, deductions and credits. By following these tips you can greatly reduce that risk.

Tax Savings for Non-Itemizers- Can't itemize? There are still tax breaks for you

A common misconception in tax filing has been that if you use the Standard Deduction versus itemizing your deductions you now have few additional benefits available to reduce your tax bill. This is often not the case.

Standard or Itemize?

Every taxpayer can take the Standard Deduction to reduce their income. However, if your deductions are going to exceed the standard amount you may choose to itemize your deductions. The primary reason someone itemizes deductions is generally due to home ownership since mortgage interest and property taxes are deductible and are generally high enough to justify itemizing. But with higher Standard Deductions, fewer taxpayers are able to itemize.

Common sources of itemized deductions are: mortgage interest, property taxes, charitable giving, high medical expenses, and other miscellaneous deductions.

What is Available

So what opportunities to reduce your taxable income are available if you use the Standard Deduction? Here are some of the most common:

  • IRA Contributions (up to $6,000 or $7,000 if age 50 or over)
  • Student Loan Interest ( up to $2,500)
  • Educator Expense Deduction (up to $250)
  • Alimony Paid (for divorce decrees prior to 2019)
  • Health Savings Accounts (if you qualify)
  • Self-employed health insurance premiums
  • ½ of self-employment tax
  • Numerous education incentives like; Savings Bond Interest, Coverdell accounts, American Opportunity Credit and Lifetime Learning Credit
  • Plus numerous credits including; Earned Income Credit, Dependent Care Credit, Child Tax Credit, Retirement Savings, and Elderly Credit

Income limitations often apply to these tax reduction opportunities, but for those who qualify, the tax savings can be significant. This list is by no means complete. What should be remembered is to rely on a complete review of your situation prior to jumping to the conclusion that tax breaks are just for someone else. That someone else might just be you, the Standard Deduction taxpayer.

To Amend or Not Amend?- Is it always a good idea to amend your tax return if you find an error?

There’s usually an element of relief after your annual tax return has been filed. But what do you do if you find an error on your tax return? Should you always file an amended return? Here are some things to consider.

Errors in the IRS’s favor

Errors discovered that lead to an additional tax obligation are legally required to be fixed by filing an amended tax return. This is especially true if the discovered error is from missing information found on a Form 1099 or a Form W-2. Why? This information is being reported to the IRS and matching programs will typically catch the error. The sooner you amend your return and pay the tax the lower the possible interest and penalties.

Errors that result in a lower tax liability

If correcting the error or omission results in a large additional refund, the answer is usually obvious. File the amended return. But this is not always the case.

  1. The period of time during which the IRS can audit your tax return could be extended. Federal tax returns are typically subject to audit for three years after the original tax return due date OR the date the return was filed, whichever is later. If you file an amended tax return, the audit clock may change based on the amended return filing date and degree of change requested. It may trigger a request from the IRS to extend the audit review period. The refund also resets the IRS erroneous refund recovery statute, adding another two to five years during which a review by the IRS is possible based upon the date of the latest tax return refund.
  2. The amended return may become examined. Amending a tax return puts a spotlight on your tax return. The IRS has certain topics that trigger individual examination when amended returns are requested. Amended tax returns based on things like the Earned Income Tax Credit, Small Business Income and the Research Tax Credit for small businesses, could result in a visit from your local IRS examiner. Because of this, keep all the necessary records to substantiate your amended tax return close at hand.
  3. Amending one tax return may require amending several other returns. Making a minor change in one year may require you to make changes in other tax years. Is it worth it?
  4. Don’t forget other taxing authorities. Making a change on your federal tax return may require you to file an amended state or local tax return. Do not assume that an amendment in your favor at the federal level will necessarily also be in your favor at the state and local level.
  5. Don’t expect the refund to be timely. Amended tax returns can take a long period of time to be processed. There have been cases where the IRS has delayed initial review of an amended return for more than a year, then decided to examine the return. While not typical, the process could take up to 18 months to resolve.
  6. Timing is important. Remember there is also a time limit to request a change to your tax return and receive an additional refund. This is typically set at three years after the initial filing deadline of the tax return. Make sure you file these tax returns using certified mail. Should the IRS delay responding to your amended return, you may need to prove it was filed timely.
  7. You have a chip in your pocket. If the refund amount is not large enough to justify an amended tax return, still keep the documentation. Should you be chosen for an audit, you can often present your case at that time to offset any additional tax.

While finding an error or omission on your tax return can be unsettling, rest assured there are ways to fix the problem, but it is often worth taking a balanced approach to determine the best solution.

2021 Social Security Changes Announced

The Social Security Administration announced a 1.3 percent boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2021. The increase is based on the rise in the Consumer Price Index over the past 12 months ending in September 2020.

For those contributing to Social Security through wages, the potential maximum income subject to Social Security tax increases 3.7 percent this year, to $142,800. A recap of the key amounts is outlined here:

2021 Key Social Security Benefits

What does it mean for you?

  • Up to $142,800 in wages will be subject to Social Security taxes, up $5,100 from 2020. This amounts to $8,853.60 in maximum annual employee Social Security payments. Any excess amounts paid due to having multiple employers can be returned to you via a credit on your tax return.
  • For all retired workers receiving Social Security retirement benefits the estimated average monthly benefit will be $1,543 per month in 2021 – an average increase of $20 per month.
  • SSI is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married).
  • A full-time student who is blind or disabled can still receive SSI benefits as long as earned income does not exceed the monthly and annual student exclusion amounts listed above.

Social Security & Medicare Rates

The Social Security and Medicare tax rates do not change from 2020 to 2021.

Note: The above tax rates are a combination of 6.20 percent Social Security and 1.45 percent for Medicare. There is also 0.9 percent Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please note that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.

Avoid Name Mismatch Audits

If you were married, divorced, or changed your name for any reason during the past year, do not forget to file to change your name prior to preparing next year’s tax return. The IRS automatically conducts a name match on the first few letters of your last name.

The problem

If the name on your tax return does not match the name on file at the Social Security Administration for your Social Security number, here’s what could happen:

  • Your tax return might be rejected when you try and e-file
  • The IRS automatically accepts your income as taxable, but then disallows any deductions
  • You may receive a notice from the IRS with taxes owed and underpayment penalties

Here’s what you can do

  • Prior to filing your tax return, go to and download form SS-5. Fill the form with the name change and file it as soon as possible.
  • Also notify your employer. Double check the W-2 you receive to ensure the change was made correctly. If the change is made on your W-2, you must make sure it is also changed with the Social Security Administration.
  • If you are planning a major financial transaction in the near future, you may wish to adjust the timing of the transaction or the timing of your name change to avoid complications.
  • Don’t forget to also change your name on other important documents like auto titles, driver’s licenses, property titles, bank accounts, loan agreements, beneficiary documents and other accounts.

If you are unable to make the name change in a timely manner, use the name on file at the Social Security Administration AND with your employer when filing your taxes to avoid the automatic notification of a name mismatch.

Here is a link to the Social Security Administration’s website and Form SS-5 that walks through the name change process. Please be forewarned, this process is not as simple as it was in the past. You now need to provide proof of citizenship and submit documents that show the original and new names. Spend some time going over the name change process and plan accordingly.

The Lost Art of Tracking Home Improvements- How a tax law makes us sloppy and creates a tax risk

One of the more popular provisions in the tax code is the $250,000 capital gain exclusion ($500,000 for a married couple) of any profit made when selling your home. As long as you follow the rules, most home sales transactions are not a taxable event.

  • But what if the tax law is changed?
  • What if you rent out your home?
  • What if you cannot prove the cost of your home?

Your best defense to a potentially expensive tax surprise in your future is proper record retention.

The problem

The gain exclusion is so high, that many of us are no longer keeping track of the true cost of our home. This mistake can be costly. Remember, this gain exclusion still requires documentation to support the tax benefit.

The calculation

To calculate your home sale gain, take the sales price received for your home and subtract your basis. This basis is an IRS tax term that equals the original cost of your home including closing costs, adjusted by the cost of any improvements you have made in your home. You might also have a reduction in home value due to prior damage or casualty losses. As long as the home sold is owned by you as your principal residence in at least two of the last five years, you can usually take advantage of the capital gain exclusion on your tax return.

To keep the tax surprise away

Always keep documents that support calculating the true cost of your home. These documents should include:

  • Closing documents from the original home purchase
  • All legal documents
  • Canceled checks and invoices from any home improvements
  • Closing documents supporting the value when the home is sold

There are some cases when you should pay special attention to tracking your home’s value:

  • You have a home office. When a home office is involved, it can impact the calculation of the capital gain exclusion. This is especially true if you depreciated part of your home for business use.
  • You live in your home for a long time. Most homes will rise in value. The longer you stay in your home, the more likely the value of your home will rise over time. For example, a sizable gain can occur when an elderly single parent sells their home after living in it for over 50 years.
  • You live in a major metropolitan area. Certain areas of the country are known to have rapidly increasing property values.
  • You rent your home. Any time part of your home is depreciated, it can impact the calculation for available gain exclusion. Home rental also can impact the residency requirement calculation to receive the home gain tax exclusion.
  • You recently sold another home. The home sale gain exclusion can only be used once every two years. If you recently sold a home at a gain, keeping all documents related to your new home will be critical.

The best way to protect this tax code benefit is to keep all home-related documents that support calculating the cost of your property. Please call if you wish to discuss your situation.

Don’t Run the Risk of a High Tax Bill!- Know when you should ask for professional help.

All too often taxpayers take action that will cost them dearly when they file their tax return. With a little planning, however, the IRS can still receive its fair share but not a dollar more. Here’s what you need to know.

Is a Tax Time Bomb Lurking in Your Paycheck?

Did your paycheck seem a little higher? If so, it could be a tax time bomb.

Tax Shifting Ideas to Reduce Your Bill to Uncle Sam- Is there a taxable income reduction idea you can use?

Many tax experts talk about shifting your tax burden from one year to the next. While in theory it may make sense, how can you make it work for you in practice?

The concept

Since the tax code is complex in its construction, there are often opportunities to reduce your tax burden by controlling the amount of your taxable income. This is because:

  • Income tax rates vary from 0% to 37% depending on your income and filing status.
  • Many tax breaks have income limits.
  • Tax breaks have income phase-out ranges.
  • Incremental taxes like the alternative minimum tax are triggered by income level.

So if you can shift your income and expenses from one year to the next, you could create a net tax obligation for both years that might be lower than if you did nothing. Here are six great ideas to accomplish this.

Six great tax shifting ideas

Idea 1 – Know the rules. Identify whether you are a good candidate for using shifting as a tax planning strategy. For singles, the income tax rate increases 80% or more on earnings over $40,125. For married couples, that increase occurs with adjusted gross income over $80,250. But other tax benefits are lost at different income levels. Common tax breaks subject to income limits are child tax credits, earned income credits, educational credits, premium health care credits and many educational tax benefits.

Idea 2 – Load up your contributions. If you itemize your deductions, consider loading up your cash and non-cash contributions into the year that lowers more highly-taxed income. For example, you could shift next year’s donations to your church into this year. This bunching of itemized deductions into one year makes even more sense with the higher standard deductions introduced in 2018.

Idea 3 – Leverage the cash basis concept. You can take a deduction when you pay for it. A credit card receipt is good on the date you run the transaction and not when you pay your monthly bill to the credit card company. Knowing this, you could pay a property tax statement or a house payment either a little early or a little late to change whether that deduction occurs in this year or next.

Idea 4 – Stop working. There are many cases when this technique is an important tax shifting tool. The most common example applies to those who are under the full retirement age and receiving Social Security benefits. If this applies to you, consider actively managing your part-time work or you could end up paying taxes on some of your Social Security benefits or even losing some of them. Work can also hurt your tax situation when a dependent’s wages put you over the earnings threshold to receive the Health Insurance Premium Tax Credit. It may make sense to stop working or arrange to get your last paycheck delayed into the following year.

Idea 5 – Manage retirement plan distributions. Those over age 59½ can use distributions from pre-tax retirement plans to tightly control their taxable income. Your withdrawal calculation should include evaluating how to maximize the tax efficiency of your income. An analysis may indicate it is better to take out a little more this year to get these retirement earnings taxed at a lower rate than if you waited until next year.

Idea 6 – Manage your stock and investment sales. You have up to $3,000 in investment losses that can offset your higher-taxed ordinary income. Use this to your advantage when deciding whether to take a stock loss this year or next. If done correctly, you can match your stock loss against ordinary income which is taxed at a higher rate.

By shifting your taxable income to the right level, you can often reduce your tax bill. Please call if you wish to have a review of your situation.

A Gift of Stock- Information is key when using this tax planning strategy

You own some stock that has increased in value. To avoid a possible taxable gain by selling the stock, you wish to give it directly to a child or grandchild. This simple idea has some interesting tax consequences to consider.

Value of the gift

When you gift stock there are not one, but two values to consider.

  1. Gift value. This is the market value of the stock at the time of your gift. Since there is a possible gift tax to you if the value of all gifts given by you to a person during the year is $15,000 or over ($30,000 for a married couple) you will need to calculate this value prior to finalizing your decision to provide the gift.
  2. Value (basis) of the stock. You will need to determine the cost to you when you originally purchased the shares. This includes any brokerage or other fees. Provide the date(s) you purchased the stock and these costs to the person who will be receiving the gift.

Provide important information

Basis is key. Those receiving your direct gift of stock are not required to sell it. But when they do, they will need to know:

  • The original cost of the stock and when it was purchased.
  • The date and fair market value of the stock when it was given.
  • If the giver paid any gift tax.

Timing is important. If the recipient of your gift sells the stock right away, the tax rate applied will depend on the length of time the stocks were owned by you. A gain on a stock held one year or less is considered ordinary income. More than one year is a long-term capital gain. The time-frame of this calculation usually goes all the way back to your purchase records.

The benefits

No taxes. Gifts of stock allow you to avoid paying capital gains tax on the ownership transfer. As long as annual gift amounts to one person are less than $15,000 ($30,000 for a married couple) there is no tax consequence.

Lower taxes. In addition, the future sale of the stock could result in lower taxes. This is because long-term capital gains tax rates can be as low as 0% or as high 20%. Short-term capital gains tax rates can be as high as 37%*. Assuming your child or grandchild has lower income than you, the resulting sale creates a potential tax savings. Care must be taken if the gain is high as Kiddie Tax rules could create a tax bite at the parents’ tax rate.

Kiddie Tax benefit. If the gift stock pays dividends, future dividend income can potentially be taxed at your recipient’s lower tax rate. This technique can be used to provide dividend income without a child having to pay any taxes up to the Kiddie Tax annual limit of $1,100 of unearned income.

Gift to anyone. Your gift can be provided to anyone you wish, not just a relative. These gift rules also apply to other investments like mutual funds, land and other property.

Some wrinkles

If your stock has a loss it is usually a better idea to sell the stock and take the tax benefit of the loss. If the stock you gift has a fair market value less than your cost, providing the information noted here to the recipient of your gift is even more important.

Please ask for help if you are considering a gift of stock or property. If handled incorrectly, your gift could create unforeseen tax consequences. But used in conjunction with other contribution techniques it can be a powerful tax planning tool.

* An additional 3.8% Medicare Tax or Net Investment Income Tax may also apply.