Topics:Travel Dealing with tax debt tax debt facts Choosing a tax relief company Tax audits tax preparation financial planning business taxes Press Releases Tax Relief
By Ashley Lee
January 13th, 2022
Guest Post by Kristen Baker Every year, roughly one million Americans have unclaimed tax refunds from the IRS that are due to expire. In four of the last five years, these unclaimed returns have totaled more than $1 billion. With last year’s median tax return at $879, the annual median has risen for six consecutive years. Unfortunately, many people don’t even know that they may be owed money by the IRS. Luckily, the IRS releases the data every year in March, giving taxpayers just enough time to claim before Tax Day on April 15th. What could you do with an extra $500 or more? Below are steps to determine if you have an unclaimed tax return and how to claim it if you do. Key Takeaway: Pay attention to the details. You might be missing a refund because: You didn't earn enough to file. Your address was wrong. You qualified for an EITC. Best practices for filing: Submit your tax return electronically. Choose direct deposit as your refund method. Hold onto necessary financial documents for at least three years. Why your refund is missing Whether you’re young or old, wealthy or poor, anyone can be missing a tax refund. In some cases you may have made a mistake while filing and in others you may not even be aware. These are a few reasons why you may be missing a return: You didn’t earn enough to file. This is often the case with teenagers, part-time workers, and the self-employed. If you failed to meet the minimum earnings threshold for your filing status, you probably never filed a return. However, you could still be owed a tax refund. If taxes were taken out of your paycheck every week, you can file a return. Your address was wrong. The wrong address is always a risk when choosing a mailed refund, rather than direct deposit. If your refund was mailed to the wrong address and bounced back to the IRS, they are not required to notify you. You qualified for an EITC. Even if you didn’t earn enough to pay taxes, you could be eligible for a refund through the Earned Income Tax Credit (EITC). An EITC typically benefits low to moderate wage earners, especially those with children. The IRS website can help you determine if you are eligible. How to claim your return First, you should review your last several tax filings to see if any are missing. Even if they’re all there, however, that doesn’t mean that you can’t claim a larger refund. You can still file an amended tax return to claim deductions like the EITC and others. If you suspect that you have unclaimed tax money waiting for you, or even if you’re unsure, all you have to do is file a return for the specific year. Luckily, the IRS gives you a three-year period to file for any unclaimed returns. This year, you can go back as far as 2016. Best practices for filing Whether it’s filing for past years, or even this year and beyond, there are several best practices to make the process easier. Submit your tax return electronically. Filing your taxes with a paper form leaves the process more susceptible to mistakes—an e-file does all of the calculations for you. Another consideration is the time it takes for the IRS to process returns. E-files will be processed and returned much quicker. The average time for the IRS to process an e-file is only a few days, whereas a paper file may take a few weeks. Choose direct deposit as your refund method. Direct deposit is the quickest way to access your refund. The IRS returns 90 percent of e-files with direct deposit within three weeks of when they were filed, as opposed to at least twice that amount of time for a mailed return. Hold onto necessary financial documents for at least three years. To avoid future misfilings or rectify missing tax returns from the past, you’ll want to keep your financial documents organized. By properly tracking and storing your documents, you’ll have a point of reference and readily available information, making tax season less stressful. Not only will these documents be useful if you need to file for an unclaimed tax return, but they can provide important insights for your next return as well. Documents that you should save include past returns, any itemized deductions, and income statements. Tax season can be stressful as you begin to file your return. However, by taking the proper steps, you can prepare yourself for success. Make the most of your tax return this year and don’t forget to check for any unclaimed refunds from years past. Kristen Baker is a personal finance enthusiast and content creator. Outside of work, she thoroughly enjoys taking her dog to “Dogs Allowed” coffee shops, reading, and admiring art exhibitions.
Guest Post by Lee Reams, Sr. If you have a simple tax filing situation, like being a single renter who lives in a state with no income tax and whose only income comes from one job, doing your own taxes just seems to make sense. However, you never know when life is going to throw you a curveball. Circumstances could be a cause to celebrate like becoming a high earner, getting married and starting a family, or buying a home. Less fortunate circumstances like filing for bankruptcy or inheriting assets from a loved one who died can also drastically alter your tax situation. Hiring a tax professional is the best course of action when your finances become more complex. Over half of Americans who file taxes hire a professional tax preparer to handle their tax returns. While there are more self-preparation options out there than ever for taxpayers who still want to go the DIY route, here's why you should opt for a professional tax preparer. Key Takeaway: Trust the professionals. Tax professionals stay on top of numerous tax law changes, so you don't have to. If you move, find a tax professional who specializes in the area(s) you've spent time in. Tax professionals must provide due care to you while DIY solutions do not. Tax professionals can show you deductions and credits you might not have thought of. Professional assistance is not limited to the years that the tax professional prepared your return. Tax professionals stay on top of numerous tax law changes, so you don't have to The Tax Cuts and Jobs Act (TCJA), better known as the 2018 tax reform, was the largest change made to the federal tax code in 30 years. While it's been four years since the law's passage, many aspects of it did not go into effect until 2019 or will not until future tax years. Various amendments were also made to the TCJA since its initial passage concerning tax breaks like the new deduction for small business owners and freelancers, and the individual mandate for the Affordable Care Act. While the individual mandate penalty was repealed as of 2019, some states are beginning to institute their own, with California being the most recent. Tax professionals stay on top of these laws so that you can focus on your professional and personal life, and not have to devote entire weekends to tax research and legal interpretations you may or may not be navigating correctly. If you move, find a tax professional who specializes in the area(s) you've spent time in If you move, your tax situation can end up becoming more difficult as a result. Even if you're departing a high-tax state like New York or California for a state with no income tax like Florida, you can end up facing residency-based tax issues and may need professional assistance getting it sorted out. Because states and local governments can have so many nuances that could deviate from federal income tax norms, working with a tax professional who is highly familiar with your state and local matters is imperative. An incorrectly prepared state tax return can have even more dire consequences than a federal tax filing gone wrong, because states do not have to provide you with the same process granted by the IRS under the Taxpayer Bill of Rights (codified in the 1998 tax reform). Tax professionals must provide due care to you while DIY solutions do not Professional tax preparers like CPAs, Enrolled Agents, and tax attorneys must act with a duty of care in providing services to their clients. In addition to following through with the standards of practice set by the IRS, they may also be subject to state laws and the standards imposed by professional societies to which they belong. This entails carrying professional insurance for errors and omissions so that in the event you are billed for a discrepancy, it's on the tax professional and not you. Since the tax professional is only responsible for what you tell them, this only applies to mistakes made on their part and not your omission of an entire source of income or other significant facts. If the tax professional does not comply with federal or local laws on professional conduct, misuses your tax refund, or does anything else that could be worthy of disbarment, you can take it up with the IRS or state tax authority. If you make mistakes on your own tax return, you are responsible for them. The "TurboTax Defense" does not hold up in Tax Court or with IRS appeals. While tax software may offer a helpline or audit assistance, it is not the same as working with a licensed and experienced professional from the start. You can get better results with a tax preparer prioritizing both the big picture and finer details of your tax situation, rather than being placed in a queue to get an answer for one question about a line item. Tax professionals can show you deductions and credits you might not have thought of Your profession or lifestyle could entail various tax benefits that you might not have been aware of. Some of these tax credits are rarely claimed, such as the credit for the elderly and disabled, so they are not discussed much outside of tax professional circles. Inversely, there are several activities that people tend to think have an effect on their taxes, like paying medical bills or donating to charity, but actually end up not having an effect. This is especially true after the passage of the 2018 tax reform. Deductions are of particular importance to the self-employed because they add up quickly, and many bleed into personal expenses that are otherwise not deductible. However, you might be unaware which deductions require more substantiation than just proof of payment. The Internal Revenue Code is thousands of pages long, and it isn't getting any shorter. State tax codes are not much simpler and don't always align with federal tax items; so, what may be deductible on the state level is not deductible at the federal level and vice versa. Because tax professionals focus on these areas for a living, they can find all of the benefits you qualify for and help you plan for them for future tax years as well, making their fees all the more worth it. Professional assistance is not limited to the years that the tax professional prepared your return If you file on your own using tax software and call the help line listed on the back of the box, you can only get assistance for the current tax year. You may have been cumulatively making mistakes on prior tax returns and keep receiving notices from the IRS, including for this year's return. Licensed tax professionals who are held to a high professional standard can help you with tax matters from any year, not just the years that they prepared your tax returns. Some professionals focus on tax preparation while others focus primarily on tax resolution, audit defense, and resolving issues with the tax authorities. In either case, tax professionals can help you with issues from any tax year and even help you file amended returns if your own prior year returns were done incorrectly and/or you missed out on valuable tax benefits. With your prior year and currently open tax returns prepared correctly, a tax professional can help you get a better grip on your tax matters and save you even more money in the long run. Lee Reams Sr., BSME, EA is the Chief Technical Officer for ClientWhys, TaxBuzz, and CountingWorks. In addition to being an expert on taxation and a leading speaker on tax-related topics, Lee has experience in managing his own 700+ client tax practice.
Are you looking forward to a big tax refund this year? According to a recent survey by FinanceBuzz, the ideal situation for 79 percent of American taxpayers is receiving a tax refund, rather than owing money to the government or even breaking even on their taxes. And for the most part, it looks like they’re getting their wish: In 2019, about 72 percent of tax returns filed resulted in a tax refund, for an average amount of $2,729, according to the IRS. After all, who doesn’t like getting a check for nearly $3,000? But there are reasons to avoid getting a large tax refund. "A tax refund is not free money," says Alexa Serrano, Finder's Banking and Investment editor. "It just means that you overpaid your taxes throughout the year." Because when you receive a tax refund, "that’s your own money you’re getting back," says Pamela Yellen, founder of Bank on Yourself and a New York Times bestselling author. "You’re giving the government an interest-free loan, while getting a zero rate of return on your money." So what's a smart taxpayer to do? Key Takeaway: Understand your tax responsibilities. Keep more of your money throughout the tax year so you have more money to invest. Use last year's tax return as a road map for this year's taxes. If you receive a large refund, try increasing your allowances on your W-4. Minimize your tax liability as much as possible. Determine your tax strategy The best option is to break even — don't receive a tax refund or owe money to the IRS. Although it's nice to get a big chunk of change in the form of an income tax refund, you can put that money to better use if it's available to you throughout the year. For example, instead of receiving a large tax refund all at once, you could set aside that money throughout the year and invest it, deposit it in a high-yield savings account, or put it in your retirement account. That way, instead of loaning money to the government interest-free, your cash earns interest for you. On the other hand, although many experts advise against getting a large refund check, that's not one-size-fits-all advice. “Deciding whether you want to owe taxes or receive a tax refund comes down to your personal goals and financial lifestyle," Serrano explains. In an ideal world, we'd all regularly deposit money into savings or investment accounts, so it could yield interest over time. But the reality is that many of us struggle to save money if it's just sitting in our accounts, available to use at any time. If that sounds like you, it may be a better strategy to pay more to the IRS throughout the year. "If you don’t have it, you won’t spend it," notes Peter J. Greco, a CPA and founder of the CSI Group, LLP. "It is basically a forced savings account." But “if you consider yourself financially responsible, you might want to opt out of receiving a tax refund at the end of the year," Serrano advises. And if you can't break even, the next best option is to owe a small amount, according to many experts. Just remember that the key is "small." "If you owe too much, you might just have a penalty for failure to pay estimated taxes," warns Steven J. Weil, an enrolled agent and president of RMS Accounting. Josh Zimmelman, owner of Westwood Tax & Consulting, suggests putting extra money throughout the year toward your emergency savings fund. "Worst case scenario, if you still end up owing taxes next year, you’ll have that extra money saved to help pay it," Zimmelman points out. Estimate what you might owe next tax year Taking a look at last year's tax return is a good way to gauge what you might owe next year — or at least how much you should pay to avoid owing penalties to the IRS. Ben Watson, a CPA and personal finance expert from DollarSprout.com, offers a few suggestions: 1) Pay 100 percent of your tax liability from last year, or 110 percent if you're adjusted gross income is $150,000 or more and you're submitting your tax return as Married Filing Jointly. 2) Pay 90 percent of your tax liability for the current year. Re-examine your withholdings When was the last time you looked at Form W-4? Withholding is what ultimately determines the size of your refund. “If you withhold too much, you might get a big refund, but you’ll likely be short on cash all year," Zimmelman warns. "If you withhold too little, you might find yourself owing money in taxes again next April.” According to FinanceBuzz's survey, 89 percent of taxpayers are confident their withholdings are set correctly. But if you're receiving a large refund, that generally means you're not claiming enough withholdings. If you don't know where to start, try the IRS's online Tax Withholding Estimator. And then make sure to revisit Form W-4 at least annually. "If you typically receive a large refund, you’ll want to increase your allowances," Serrano says. "If you owe the IRS, you’ll want to decrease your allowances. You can submit a revised W-4 form to your employer at any time." Just make sure to proceed carefully — owing a large amount of taxes isn't an antidote to the large-refund problem. Re-evaluate throughout the year Depending on what's going on in your life, once a year may not be frequent enough to check your withholdings. If you experience a significant tax event, such as getting married or having a baby, you probably need to take another look at the W-4 form. You should probably also pay attention to changes in tax law that might affect you. Minimize your tax liability The goal in avoiding a large tax refund isn't to pay more money in taxes; it's to keep as much of your money for as long as possible. One part of that is to claim every tax credit and all the deductions you can on your tax return. "A lot of people don’t itemize their deductions anymore because the standard deduction has been increased, but there are still ways to lower your tax liability even if you don’t itemize," Zimmelman says. "There are a number of tax credits and exemptions." Expedite your tax refund If you are expecting a refund, make sure you get it as quickly as possible by using direct deposit. There are multiple benefits of getting your refund through direct deposit: You'll receive your refund faster than if you'd opted to receive a paper check. If you're using your refund as a "forced savings," you can have it deposited directly into a savings account. It saves taxpayer money — according to the IRS, every paper check issued costs taxpayers $1, while every direct deposit costs only 10 cents. You can receive your refund via direct deposit whether you're filing electronically or with a paper tax form; just select direct deposit as your refund method via your tax software, tax preparer, or Form 8888. Be ready to provide your bank account number and routing number. Talk to a tax expert for personalized advice It's hard to actually break even on your taxes; it's more likely you'll be able to ensure a small refund or a small amount of taxes owed. "Working with a financial professional, like a CPA, can help ensure that you are paying enough taxes to avoid a penalty without providing the government with an interest-free loan," says Dewey Martin, professor emeritus from Husson University's School of Accounting. “Don’t wait until next April to start your research," Zimmelman advises. "If you find it too confusing, hire a professional to help.”
Taxes are a part of life, no matter how old you are. If you’re receiving income, you’ll be paying taxes. Many seniors are retired and living on their savings and Social Security. While you’ll still pay taxes, it will work differently from how you paid W-2 taxes. If you’re looking for assistance with tax preparation or tax relief, check out these resources and tips from experts. Use the list below to navigate between sections by clicking on the titles most interesting to you. Tax preparation Tax preparation resources Tax relief Tax relief resources What to look for in a tax professional Bonus: top-rated tax relief companies on helping seniors Tax Relief Learn more about tax relief by looking at the top-rated companies and their offerings. See Companies Tax preparation Tax preparation as a senior will likely have some differences from how you’ve prepared taxes before. You’ll likely have received income from various sources and may also qualify for different deductions. As you age, you may have a harder time adjusting to changes in technology and changes to our complex tax code. Income You’ll start receiving Social Security and take required minimum distributions from your retirement savings. You may even have other kinds of income. “Many seniors have pensions, pre-death life insurance benefits, IRA or 401K savings, or other financial assets. This can make preparing and filing taxes more complicated,” says Jayson Mullin, Top Tax Defenders owner. You likely haven’t dealt with these kinds of income previously, so reporting this income and filing taxes can be an unfamiliar process. An accountant or IRS-certified tax preparer can help you understand and complete this process correctly. “Seniors have special tax issues including social security income, pension checks, retirement benefits, and spousal death that can complicate tax preparation and can increase the chance of an incorrect return. Knowing where to look for help can make tax time easier and less stressful,” adds Mullin. If you’re just starting to think about retirement, it can be a good idea to meet with a financial adviser or tax professional to discuss the best way to handle your retirement accounts and Social Security benefits before retiring and create a plan for making withdrawals. “Tax planning is another important area. Seniors, especially those who have retired but are not yet taking their RMDs (under 70.5 yrs), can rollover traditional IRA money into a Roth and reduce future taxes,” says Beth Logan, enrolled agent at Kozlog Tax Advisers. Deductions In addition to accounting for different sources of income, you may also be able to deduct other expenses, like medical and home improvement expenses. “Senior citizens often have higher medical expenses than other taxpayers. Luckily some of these expenses may be tax deductible. If you itemize your deductions, you might be able to deduct out-of-pocket medical expenses that exceed a percentage of your adjusted gross income,” says Josh Zimmelman, Westwood Tax & Consulting owner. You’ll also have a higher standard deduction, which helps lower your tax bill by lowering your taxable income. Once you turn 65, you may qualify for the Tax Credit for the Elderly or Disabled. This tax credit gives you credit on your tax liability between $3,750 and $7,500. Challenges You may also encounter new challenges as you age. These include becoming a target for scams, adjusting to changes in the tax code, and evolving technology. “Age isn’t the only factor that makes tax logistics so difficult for many seniors to manage. Changing technology, complex rules, and a lack of sufficient funds to hire a professional accountant or tax preparer can make even common tax issues seem like insurmountable problems,” says Mullin. Tax scams are also common, and seniors are often targeted. Knowing how the IRS communicates will help you keep yourself from becoming a scam victim. “In a phone scam, a caller will pose as an IRS agent and tell you that you owe money and threaten you with arrest (or other consequences) if you don’t pay it right away. The IRS will never directly contact you by phone unless you’re part of a specific group of taxpayers with longstanding debts. That means you’ll never get surprised by the news that you owe money. If you’ve been filing and paying taxes consistently (or know that you’re not required to file because of your income level) and have never received written notice from the IRS that something was missing, then you can be sure these calls are a scam,” says Zimmelman. You should also watch out for email scams. “Phishing is when someone tries to steal your information through a fake email or website. There is only one official website for the Internal Revenue Service (IRS.gov) and the IRS will never contact you via email. So if you get an email from the IRS asking you for personal or financial information, assume it’s a scam. You can forward any suspicious emails to [email protected],” advises Zimmelman. Knowing that you’ll receive a written notice first and being vigilant and talking with trusted friends and family members before taking any action based on scare tactics will help prevent you from falling for scams. Taking age, legal and technological changes, and scams into consideration, here’s a breakdown of what you should look for in a tax professional and what free resources are available to help with tax preparation. Back to Menu Tax preparation resources You can always file your taxes yourself or pay an accountant to take care of it for you. Depending on the complexity of your tax return, it may be best to pay an accountant to do it for you. “If a senior has trusts that require filing, businesses, rentals (more than one vacation home), complicated investments, etc., they would be better served by a professional regardless of income. The VITA volunteers are good but they are volunteers with limited training. If a senior needs more help, they should contact an Enrolled Agent (EA, https://taxexperts.naea.org) or a CPA,” advises Logan. However, if your tax returns are simple and you want assistance, check out these programs that can help you prepare your taxes: Volunteer Income Tax Assistance (VITA) Tax Counseling for the Elderly (TCE) AARP Foundation Tax-Aide Volunteer Income Tax Assistance (VITA) VITA is a tax preparation service from the IRS that trains volunteers to help people prepare their tax returns. “Generally, this service is offered to those who make $56,000 or less, persons with disabilities, and limited-English speaking taxpayers. Volunteers are provided training and must be certified by the IRS before helping provide tax-preparation services,” says Josh Trubow, MSFP, CFP®, advisor at Sensible Financial. Before setting up an appointment, check to see what services your local VITA site offers. VITA volunteers do not prepare all tax forms, so verify that they’ll help with the tax forms you need by looking at this document from the IRS. “Each location may have [its] own rules to qualify for this free service, so I recommend calling the closest location to confirm eligibility. Appointments are also highly recommended (and may be required, depending on location),” says Trubow. Be sure to go to the VITA site prepared with your ID and all relevant tax documents. VITA sites generally operate during tax season, starting in February and ending in April, though some may be active through October. Tax Counseling for the Elderly (TCE) TCE is another tax program run by the IRS. Unlike VITA, TCE is specifically for seniors. Organizations can apply to receive grant money from the IRS to reimburse its volunteers’ out-of-pocket expenses for meeting with seniors locally. TCE centers offer many of the same services that VITA sites do. Seniors interested in working with a TCE center should go prepared with identification and the necessary tax documents. Like IRS VITA sites, IRS TCE services are usually available February through April, while some areas may extend availability through October. AARP Foundation Tax-Aide The AARP Foundation Tax-Aide runs many TCE locations. Tax-Aide helps seniors prepare taxes regardless of AARP membership and age. Seniors who work with Tax-Aide receive assistance from IRS-certified volunteers. Back to Menu Tax relief Tax relief can be helpful if you owe more taxes than you can afford to pay right now and if you’ve started to deal with income garnishments and other consequences. Unfortunately, the IRS does not treat senior citizens differently from others. Tax debt accrues late payment penalties and interest over time, so you may owe more tax debt than you think. If you’re dealing with tax debt, you may also experience some financial consequences, including liens and levies. A lien means the IRS has first claim on funds resulting from the sale of property. A levy allows the IRS to seize your property and sell it to cover the tax debt. Levies can also be used for assets, like your income. If you’ve worked hard your whole life and have paid off your mortgage and saved for retirement, you especially do not want the government to seize your property. “Unlike younger adults, who tend to be income rich and asset poor, many seniors are asset rich and income poor – with homes paid off and retirement accounts fully available for use. This poses unique challenges, as the IRS will seek liquidation of retirement accounts and other more liquid investments to cover the tax liability,” says Michelle Kendall, attorney at Optima Tax Relief. Luckily, a skilled tax relief professional can help you deal with the IRS and protect your hard-earned savings and assets. “Assets are generally considered collectible property by the IRS, but with the right resolution plan and a skillful negotiator these assets can be excluded from collections consideration in an IRS resolution,” says Jessie Seaman, Community Tax, LLC Vice President of Servicing. Back to Menu Tax relief resources You can work directly with the IRS to work out payment agreements or settlements. However, it can be helpful to work with an experienced tax professional who will help you resolve your debt. Tax relief companies specialize in these services. Not only do their teams negotiate payment plans and settlements with the IRS, they also help remove penalties like liens and levies. Many tax relief companies employ tax attorneys, enrolled agents, and certified public accountants (CPAs). Enrolled agents are authorized to represent clients before the IRS and can help you negotiate payment with state government and the IRS. These solutions are Installment Agreements and Offers in Compromises. An Installment Agreement is a payment plan that you and the IRS agree on. Once you complete the installment payments, you will no longer owe the IRS. An Offer in Compromise is a settlement agreement between you and the IRS. If your Offer in Compromise is accepted by the IRS, you will make a one-time settlement payment and the rest of your debt will be forgiven. Tax relief companies can also help you remove penalties, like liens and levies. Unfortunately, the IRS does not remove interest or late fees from taxes owed. Best Company’s list of top-rated tax relief companies includes Tax Defense Network, Optima Tax Relief, and Community Tax, LLC. Back to Menu What to look for in a tax professional If you’re hiring an accountant, enrolled agent, or tax attorney to help you with tax relief or tax preparation, you’ll want to look for qualifications, experience, transparency, and trust. Qualifications Josh Zimmelman, Westwood Tax & Consulting owner“It is not required for an accountant to be a CPA (certified public accountant) but it doesn’t hurt! Preferably your accountant with hold an MBA or at the very least have taken several continuing education courses in tax preparation. A tax attorney should have an LL.M in Tax.” Experience Jayson Mullin, Top Tax Defenders owner“Seniors should look for preparers that specialize in working with seniors. You’ll want someone who has the right experience for your particular needs and can work at a price you can afford. You should expect your preparer to be skilled in tax preparation and to accurately file your income tax return. You should trust him or her with your most personal information.” Zimmelman“Preferably your tax accountant will have at least five years of experience handling a broad set of issues. You should look for an accountant who has experience handling your particular type of tax return. Someone familiar with your business or industry is the best fit.” Beth Logan, enrolled agent at Kozlog Tax Advisers“Consider more than tax preparation. Look for a tax professional that will do tax planning with [you]. There is always a concern as seniors age that they might get dementia. A preparer should work with [you] early to make sure there is a plan in case [you] cannot handle [your] own finances.”Michelle Kendall, Optima Tax Relief attorney“The most important thing to consider is the firm's reputation and experience in tax resolution services. Not all tax professionals are well versed in IRS collection procedures, and not all companies in this space are trustworthy. An incompetent professional or disreputable company can turn your IRS problem into an expensive nightmare. Look for credentials, such as having licensed tax attorneys on staff. You want to find a truly qualified firm that can resolve your tax issues and defend you against collections, legally and comprehensively.” Transparency Zimmelman“Some accountants will charge by the hour, others charge a flat rate based on how simple your tax return should be. Fees will vary, but you should know what you are getting into and ask your accountant if there is anything you can do to keep costs down. The more organized you are, the easier it will be for your accountant to sort out all of your transactions and receipts and save you money in the end. Accountants have to charge for their work obviously, but many will be willing to take a few minutes to review your past tax returns for free. Having some information on your finances is necessary for an accountant to know if they are comfortable preparing your current tax return. A good accountant will be honest about whether they’re not the right fit for your situation.” Trust Logan“Look for someone who explains [your] taxes to you. Some only prepare the return and then say 'sign it.' Preparers should go through the return and answer any questions.” Zimmelman“Is this someone I can trust and with whom I can feel comfortable? This question is one you really have to ask yourself. Do you know anyone who has worked with this accountant who can vouch for their professionalism and honesty? Do they have references they can provide? Do they talk down to you or treat you with respect? Trust your instincts. If you don’t feel right about someone, then don’t hire them, no matter what their credentials are.” Jessie Seaman, Community Tax, LLC Vice President of Servicing“When considering a tax relief company, seniors should start their search with companies that are highly rated on sites like Google or the Better Business Bureau. Quality tax relief companies should willingly review your case and provide service recommendations for resolving your case risk-free for a relatively low fee. Stay away from companies that charge thousands of dollars or promise a specific result up front. And like most services, always use your best judgement and remember to tell yourself that if it sounds too good to be true, it probably is.” Back to Menu Bonus: top-rated tax relief companies on helping seniors Optima Tax Relief Kendall“At Optima Tax Relief, we take our responsibilities very seriously, and take particular care when serving seniors. We’re acutely aware that seniors have worked a lifetime to achieve what they have, and that their assets cannot be easily replenished. When approaching a senior's case, we evaluate the entirety of their situation. Once we have a thorough understanding of their personal finances and their needs and goals, we can focus on protecting their assets in accordance with their priorities. We negotiate with the IRS on their behalf, working tirelessly until we’ve obtained the best possible resolution for them.” View Optima Tax Relief Reviews Community Tax, LLC Seaman“Seniors tend to have different sources of income than the general taxpayer population such as Social Security and pension income. Community Tax can obtain access to IRS information databases (with a signed information authorization form from the client) to pull information on these income sources and make preparation of back tax returns and financial statements as easy as possible.” View Community Tax, LLC Reviews Back to Menu
Guest Post by Peter Spano It is a well-established fact that recycling has a wide range of benefits on the environment, primarily by reducing our society’s dependence on natural resources. For example, the process of recycling aluminum — a common non-renewable resource — requires 95 percent less energy than creating new aluminum from raw materials. That’s why it’s important for modern-day businesses to maintain viable waste reduction programs; it’s just the sensible thing to do for our planet. But apart from the ethical considerations of managing waste properly, recycling also provides some practical bottom-line benefits for companies during tax season. A business that recycles its waste products in accordance with accepted procedures can qualify for one or more tax breaks. What follows is a partial list of tax breaks and related financial incentives that may be available to a business that follows sound recycling practices. Helping the environment and receiving tax breaks at the same time? It’s a win-win. IRS tax credits The Internal Revenue Service offers the following financial incentives connected to a business's compliance with recycling standards: Qualified reuse and recycling property allowance “Qualified reuse and recycling property” refers to any kind of equipment or machinery, along with any software used in conjunction with it, that is dedicated to collecting, distributing, or recycling certain recyclable materials. If your property has been depreciated under the guidelines of the Modified Accelerated Cost Recovery System (MACRS), and the property was initially used after August 31, 2008, then you may qualify for a 50 percent depreciation allowance. To learn more about this allowance, please see IRS Publication 946, How To Depreciate Property. Qualifying advanced energy project credit This is accessible to businesses that invest in a qualifying advanced energy project for their manufacturing facility that produces fuel cells, microturbines, electric grids, certain electric motor vehicles, or other materials of this nature. More information can be found on Form 3468, Investment Credit. State tax incentives Many tax credits and related incentives are available through state governments in addition to those that can be obtained from the IRS. The majority of U.S. states have tax incentive programs for businesses that adhere to accepted recycling practices. These programs can take the form of rebates, tax credits, sales tax exemptions, or another type of incentive. Although we don’t have the space here to examine all the programs in force at the state level, we can briefly touch on some state tax incentives currently on the books. California The state offers a partial exemption of sales and use tax on specified manufacturing equipment used for generating, producing, storing, or distributing electric power. In addition, Department of Resources Recycling and Recovery (CalRecycle) has a Recycling Market Development Zone Loan (RMDZ) program, which provides loans and free product marketing to businesses that agree to use waste-steam materials from one of the specified zones across California. More information about these and other programs can be viewed on the official CalRecycle website. Florida The state offers a sales tax exemption for the purchase of any "resource recovery equipment" used for a local government recycling program. Texas The state has a Tax Relief for Pollution Control Property Program for businesses that maintain property or equipment capable of sufficiently reducing the facility's environmental burden. Kentucky The state allows individuals and corporations to claim a 50 percent tax credit on any recycling or composting equipment. Recycling incentives at the state level tend to change frequently, so it’s a good idea to check your local government’s website on a periodic basis for updates. Department of Energy programs The Database of State Incentives for Renewables & Efficiency (DSIRE), funded by the U.S. Department of Energy and operated by the North Carolina Clean Energy Technology Center, has a vast number of energy-efficiency incentives and programs. Some of these programs may be of help in lowering your company’s tax burden. The official website lists a variety of loans, grants, rebates, energy audits, advisory services, discount programs, tax exemptions, and other incentives that are available at the city, county, or state level. All fifty states are represented here. Take the time to search through the DSIRE website — most states have literally dozens of opportunities listed, and it’s likely that you aren’t already aware of some of them. It's also worth pointing out that maintaining eco-friendly operational practices can lead to additional financial benefits that aren’t as easily quantifiable as tax credits. Modern consumers, by and large, support environmentally positive business practices. They will often go out of their way to patronize companies that demonstrate a dedication to minimizing their impact on the environment. In fact, one survey has found that 88 percent of consumers have a preference for brands that help them live in an eco-positive way. If your company is doing its part to aid the environment, don’t be shy about advertising that fact. Publicizing your recycling efforts can bolster your bottom line. How a waste consultant can help These days, staying environmentally conscious is undoubtedly a wise business policy, but it can be difficult for organizations to reach their sustainability goals. For that reason, many organizations turn to a waste consulting company that delivers advisory services to the business community. Waste consulting services like these can go a long way toward helping businesses manage their recycling needs. By thoroughly analyzing your facilities and its processes, your consulting company will be able to issue recommendations for improving your waste management procedures. In some cases, a waste management consultant can even sell or rent state-of-the-art recycling equipment such as balers and compactors. It’s an excellent money- and time-saving way to boost your recycling efforts. Peter Spano is the founder and CEO of Global Trash Solutions, a company dedicated to providing waste management services and products to the business community. He is the inventor of the GTS2000 trash compactor, which has been successfully used by McDonalds, Burger King, Starbucks, and many other major corporations.
Guest Post by Lee Reams As the end of 2021 approaches, it also means that the 2022 tax season is imminent. If your tax situation is pretty simple — for example, you don't take any deductions and your income only comes from one job — you may think that you don't need much financial planning in this department. But if you're a taxpayer who has more complex sources of income like freelance work or owning a business, or if you experienced a major life or career change in 2021, you'll want to get moving on your 2022 tax planning strategy right away. Even if your financial situation seems simple, understanding where your money is going can help you with both long- and short-term decision-making. How soon should I start the tax planning process? Now that December is upon us, you want to get started right away. Certain aspects of your personal finances can be handled up until mid-January or even later, like making a last-minute IRA contribution or an estimated tax payment, but for most of them, you will only have until December 31 to have them count for 2021. The holiday season can also be a busy and stressful time of year, and tax planning could be neglected as a result. Holiday credit card bills are tough enough to deal with in January, and the last thing you want is a higher tax bill that could have been prevented with proper foresight. What to prepare for in 2022 Retirement Have you contributed the maximum to your retirement assets yet? If not, are you financially able to? The maximum 401(k) contribution for 2021 is $20,500. If you are 50 or older, you can make extra catch-up contributions as well for a total of $27,000. The contribution limit for IRAs is $6,000 for 2021 ($7,000 if you are over 50), and you can make this contribution until April 2022 and have it count for the 2021 tax year. If you are self-employed and able to start saving significantly more than you used to, this could also be a good time to assess opening your own 401(k) or SEP account to take advantage of the significantly larger contribution caps compared to what IRAs offer. Marriage and divorce If you and your partner were planning your wedding in 2021, you should get a look at how your taxes would look as a married couple compared to filing as two single people. If there's a significant benefit, it could be worth going to City Hall at the last minute: You literally have until midnight on December 31 to be considered married for the entire year. (You can still have the wedding, but just be married in the eyes of the law and the IRS.) If this is your first tax year as a married couple, you may have some teething issues if you and/or your spouse have been used to the tax planning process while single. If you are more on the up and up with financial planning than your partner is or vice versa, end-of-year tax planning is a great time to start getting on the right track financially as a couple. Your taxes also may have changed, and this is a good time to review those changes and other bureaucratic hurdles, such as notifying the Social Security Administration if your name has changed due to marriage. The inverse is true for divorce as well. Divorce can be financially devastating for both former spouses, especially if you have children or are still having disputes over assets and prior tax problems. Regardless of the stage your divorce is in, year-end tax planning is when you need to determine how your tax situation is going to be different and how you can prepare. Withholding and estimated taxes Year-end tax planning is a good time to assess if you are having enough taxes taken out of your paycheck. It's not just federal taxes, but also state and local taxes. If you changed jobs, your employer changed payroll providers, or you moved, your tax withholding may have changed. Review all of your tax withholding and determine if you are having the correct amounts, and types, of income taxes deducted from your paychecks. If you start receiving other income like rent, a side hustle, or investment income, then you may need to increase your withholding. If you don't mind a smaller tax refund and would rather have more of your money every payday, you might want to reduce your withholding by increasing the number of allowances claimed. Fill out a new W-4 form, plus a state-level equivalent, and give it to your payroll department or provider. If you are self-employed and have to pay estimated taxes on your own, it's common to fall short every tax season. Take a closer look at your net earnings over each quarter and determine how you can stay on top of these payments so that you don't end up with a tax bill you can't pay. Automatic deductions into a savings account dedicated to taxes can help, or you can set reminders to pay estimated tax every month instead of every quarter. Starting a family If you adopted or had a child in 2021, this definitely changes tax planning for 2022 as well as your overall financial planning since your priorities completely change upon starting a family. It's important to track down records for your expenses pertaining to adoption and childcare because there are valuable tax credits for them. If you'd like to get a jump-start on saving for your child's higher education expenses, you can also open a tax-advantaged educational savings account like a 529 plan. You can contribute up to $15,000 for 2021, and although you don’t get a tax deduction for the contribution, the investment earnings accrue tax free in the account. In the future, the proceeds will be tax-free provided that they are used for qualified education expenses like tuition and books. What if I owe money? If your tax planning efforts determine that you will owe money when you go to file, this gives you time to discuss your options and tax reduction strategies with a tax professional. You may need to go on a payment plan or figure out a way to make more money before April 2022 so you can pay your tax bill without incurring interest, late fees, and other associated costs. If your total expected federal tax liability is less than $1,000, you won't be charged an underpayment penalty, so you can wait until you file your tax return to pay the whole balance. However, if it exceeds $1,000, you'll want to take advantage of that mid-January deadline to make one more estimated tax payment that counts for 2021 so you won't face an additional penalty on top of the taxes you owe. You want it to be at least be below $1,000 if you can't afford to front the whole amount at the moment. Another option: increase your year-end withholding. The further in advance you can get a jump on planning for 2022, the less stressed and broke you will be with another tax season on the horizon. When it comes to taxes, being proactive is the most important factor. Lee Reams Sr., BSME, EA is the Chief Technical Officer for ClientWhys, TaxBuzz, and CountingWorks. In addition to being an expert on taxation and a leading speaker on tax-related topics, Lee has experience in managing his own 600+ client tax practice.
Guest Post by Riley Adams You’ve worked hard to create a business worthy of being viewed favorably by someone else — if you’re lucky, multiple someones! The profit you’ve earned has paid off and now you have considered making a change in your circumstances. Quite often, a common exit path includes selling your small business. However, before proceeding, you will need to consider the tax implications involved. Like any other transaction which nets you a profit, the sale of a business qualifies as income and you must pay taxes on any gains recognized during the sale. The income received classifies either as a capital gain or ordinary income and applies whether you sold assets of a company or shares of a company’s stock. The type of company When selling your business, the tax consequences and liabilities you face depend on the type of sale and transaction structure you set in place with the buyer. Most sellers make the mistake of not consulting with a tax advisor and needlessly hand away tax payments to the government. When considering how much you might ask for in the sale of your business and how you will classify assets (e.g., Section 1231, 1245, or 1250 property, inventory, or another category), you should conduct some due diligence ahead of time and see if the type of company makes a difference. Specifically, you should understand the tax consequences involved when selling your business from different corporate organization structures like a limited liability corporation (LLC), sole proprietorship, partnership, C Corp, or S Corp. Knowing the corporate structure will guide your tax strategy when it comes to selling your business. For example, if you sell the assets held by an LLC and your transaction results in a gain, you will only pay capital gains taxes. In this instance, because the IRS treats LLCs and sole proprietorships as disregarded entities, you only have one taxable event, not a separate event on your personal income tax return and your commercial tax return. As an option, you can have any gains made from the sale of these capital assets only appear on your personal income tax return, often resulting in a lower tax burden because long-term capital gains are lower than short-term capital gains (also referred to as ordinary income). When you sell a business (LLC or S Corp), because you’ve likely held it for longer than a year, you usually prefer to have the capital gains treatment because the tax rates are lower and only occur once. Basket purchase vs. sale of stock A purchaser has two primary methods for acquiring a company: a basket purchase of the assets or outright purchase of the company stock. In the former, the underlying assets transfer from seller to buyer with the agreed-upon market price allocated to the assets. In other words, if an asset has a depreciated value of $50 but is sold for $60, this new value must be assigned to the asset at sale, which is then depreciated by the new owner. To formalize this price allocation in the eyes of the IRS, the buyer and seller both file a Form 8594: Asset Acquisition Statement with their tax returns. In the event of an all-stock sale (stock purchased instead of assets owned by the company), the seller will realize a capital gain just like they would on the sale of capital assets. The seller must also decide which entity is selling the stock: if the company sells the stock, then double taxation will occur (tax paid at the corporate rate and then the capital gains tax paid on a personal income tax return). If you sell assets through an S corporation or partnership, the individual owners (or shareholders) will each have a responsibility to pay capital gains taxes on their personal returns. Now, let’s take a closer look at the capital assets involved in a business change of ownership transaction. Capital assets Per IRS rules, capital assets categorize into one of three different groupings: Real property — Real estate property of the business, such as land and building structures. Sale of real property has tax levied as a separate capital asset unless the buyer chooses to purchase the entire entity. Depreciable property — Type of property which loses value over time with normal wear and tear. Such examples include equipment, hardware, computers, office furniture, etc. The IRS treats the sale of depreciable property as a gain or loss, based on current value. If you held the property for longer than a year, you will face a long-term capital gain or loss. You will use the current value versus the purchase price to decide the applicable tax rate for this depreciable property. Inventory property — As a going concern, most businesses hold inventory which it sells at a markup in the attempt to earn a profit. This inventory, when converted to sales, represents ordinary income and the IRS considers this as part of your normal business income. However, when the inventory counts as part of the business sale transaction, the IRS considers this as a capital gain (loss) instead. As mentioned above, in the case of owning and selling an S Corp or LLC, you will strongly prefer a long-term capital gain resulting from your sale. This results in single taxation on your personal income tax return and at lower long-term capital gains rates. How to sell a business without any tax implications If you want to have Uncle Sam left out of this transaction altogether, an alternative does exist in the form of a stock exchange. In the event you’d prefer having stock in exchange for your own company’s stock, as opposed to cash or other proceeds, you can avoid paying taxes on this stock-for-stock exchange. Certain provisions for avoiding taxation exist pertaining to this business reorganization; however, this method can avoid paying any taxes on the sale of your business. The IRS states the seller must receive between 50 percent and 100 percent of the buyer’s stock in order for the transaction to side step paying any taxes. Tax implications of selling a business Finding a buyer for your company is part of the natural lifecycle of a business. From founding, startup, scaling and maturation, selling to an interested buyer only amounts to the next phase of your business’s life. When deciding how to structure the transaction, make sure you plan ahead on how you will classify the various assets of the business as well as how you might be able to avoid paying taxes at all on the sale. Riley Adams, CPA, is a senior financial analyst working for a Fortune 500 company in New Orleans, Louisiana. He also runs the personal finance blog called "Young and the Invested," a site dedicated to helping young professionals find financial independence and live their best lives.
Being your own boss and calling the shots makes self-employment very appealing. However, self-employment also comes with additional responsibilities, like being fully responsible for your taxes. Before you start your self-employment adventure, understand how self-employment taxes work and make a plan to pay them. Here are five things tax experts suggest considering when becoming your own boss. Key Takeaway: Know your responsibilities. Understand your full tax liability Consider incorporating Pay taxes quarterly Know what the penalties are Keep good records Understand your full tax liability If you’re transitioning from being a W-2 worker to self-employment as a sole proprietor or in a partnership, your tax liability changes. You’ll also need to become familiar with Schedule C (Form 1040) to report on your business’s gains and losses. You’re still responsible for state, local, and federal taxes, including FICA taxes. FICA taxes are the Social Security and Medicare taxes that workers pay. “For those who are self-employed, they bear the entire tax burden of paying taxes into Medicare and Social Security. For those not self-employed, their employer is responsible for half of the FICA taxes due,” says Chane Steiner, CEO of Crediful. Since you’ll be responsible for your full FICA tax obligation instead of splitting it with your employer, you need to figure out how they’re determined. “There may be ways to see how you should handle FICA taxes because they’re are assessed on self-employment income, but not profits. Accordingly, if you were to incorporate your self-employed business and pay yourself a salary, any profits would not be subject to self-employment taxes, but the wages you pay yourself would be subject to self-employment taxes. You should contact a qualified CPA or attorney who may help you with this distinction,” advises Paul T. Joseph, attorney and CPA with Joseph & Joseph Tax & Payroll. It’s also important to keep a good financial record, especially if you haven’t incorporated. “They are not being paid a wage and instead, a self-employed individual must keep a set of books showing income and expenses associated with their self-employed business allowing them to determine taxable profits (or losses). While an employer and an employee each pay half of the FICA taxes due on an employee’s wages, the self-employed person pays 100 percent of these taxes — termed the self-employment tax (SE tax for short) — on their self-employment profit. If the individual has more than one self-employment activity, the net profits and losses from all the self-employed activities are combined to determine the amount of the SE tax,” says Lee Reams, Sr., BSME, EA and Chief Content Officer with TaxBuzz & CountingWorks. If both you and your spouse are self-employed, you are not allowed to combine your self-employment income when calculating taxes. “If married and both spouses have self-employment income, the couple cannot combine their SE incomes when figuring their individual SE tax,” says Reams. While ensuring that your federal tax obligations are met, it’s also important to understand what your tax obligations are for your state and in states you offer services to. “In addition to paying the federal government, business owners need to remember to pay estimated taxes to the states in which they do business. If the business provides goods and services to clients in multiple states, the business may need to pay estimated taxes to all of those states based on the revenue from each state,” says Beth Logan, EA, Kozlog Tax Advisers. Consider incorporating The amount you pay in taxes is calculated differently depending on whether you’ve formed a corporation or just operate as a sole proprietor. If self-employment is going to be your main source of income, it can be a good idea to form an S-corporation for tax purposes. An S-corporation is an entity that gives its total income, losses, deductions, and credits to its shareholders, which means that shareholders can report the income on their personal taxes to be taxed at their normal income rate. If you’re self-employed and form an S-corporation, the S-corporation would pay you a salary for the work you do. “Self-employed people should begin by setting up a company taxed as an S-corporation. By setting up this business entity, it allows self-employed to minimize their FICA taxes since income earned through an S-corporation is not subject to FICA taxes — only the salary they pay themselves (which must be reasonable) is subject to FICA. An S corporation, reported properly, will also minimize the chance of an IRS audit. Keeping good documentation, including receipts, for all income and deductions is essential as well,” advises Tom Wheelwright, CPA, CEO of WealthAbility and author of Tax-Free Wealth. When deciding whether or not to incorporate, it’s a good idea to meet with a tax professional to get advice specific to your situation. Pay taxes quarterly W-2 filers have their taxes withheld throughout the year and may only think about paying taxes when it’s filing time in April. “To manage their tax liability, self-employed should make estimated payments each quarter so they don’t get a big surprise in April. Most importantly, these individuals should hire a qualified tax advisor and an attorney to help them get everything set up properly and to minimize tax liabilities,” suggests Wheelwright. If you’re self-employed, you’re taking full responsibility for your taxes. Whether or not you’ve incorporated, you’ll need to make quarterly tax payments. “These estimated taxes are paid with an IRS Form 1040-ES and include the taxpayer’s income and SE taxes. In lieu of filing Form 1040-ES and sending a check to the U.S. Treasury, the payments can be made online through the IRS’s website or by using the government’s Electronic Federal Tax Payment System (EFTPS), which allows payments to be scheduled up to a year in advance, by having payments automatically withdrawn from the individual’s bank account at specified dates,” suggests Reams. Looking at the IRS’s schedule and deadlines for quarterly payments will help you make sure you’re paying on time. “Since self-employed taxpayers need to pay estimated taxes quarterly based upon their taxable profits for the quarter and, after the first quarter of the year, taking into account prior quarterly profits and estimated taxes already paid for the year,” says Reams. To make quarterly payments, you’ll need to estimate the taxes you owe. Be sure to include all of your income when making this estimate. “Remember tax pre-payments are not just based on the self-employment income and must factor in all other taxable income including investment income, retirement income, the self-employed individual’s wages from other work, and a spouse’s wages or self-employment income, as well as account for withholding from other sources,” adds Reams. How you calculate an estimate will vary depending on how you’re filing. Tiffany Powell, Sapphire Bookkeeping & Accounting Inc Owner, has tips for S-corp and Schedule C filers: “If you are self-employed filing as an S-corp, we want to make sure that the required salary is reasonable and has the necessary withholding to cover all the taxable income at year-end so that payments are made throughout the year in smaller payments. If a client is being taxed as a Schedule C, we plan using estimated tax payments or increasing a spouse's withholding to cover the taxes owed on the additional income. The state you are located in will determine what amount of money should be set aside for taxes. You always want to use your effective tax rate plus about 10 percent to cover the Self Employment tax for Social Security and Medicare after adjustment.” Working with a tax professional can help you navigate this process successfully. A tax professional can also give you advice tailored to your situation. You can also work through the process yourself. However, it’s important to be sure that you know what you’re doing because you want to make sure you’re paying your taxes correctly. “You can always fill out the tax form and pay by check. You can also use https://www.officialpayments.com or services like these to pay by credit card or bank transfer,” says Aalap Shah, 1o8 Founder and a former accountant. Know what the penalties are If you’re paying estimated taxes quarterly, it’s important to have good estimations to avoid penalties. “If a self-employed taxpayer pre-pays less than 90 percent of their current year’s tax liability, including Social Security and Medicare taxes for the year, they can be subject to a penalty which assesses interest on underpayments by the quarter,” says Reams. While it’s important to be aware of this penalty, it’s also important to realize when there are exceptions. “The underpayment penalty does not apply where the final amount due on an individual’s tax return is less than $1,000. The penalty also does not apply where a taxpayer, for a full 12-month year, did not have a prior year tax liability,” Reams continues. Self-employed taxpayers can make estimates based on the current year’s revenue or use safe harbor methods to avoid these penalties. Reams identifies two safe harbor methods: “100 percent of the prior year’s tax liability paid evenly for each quarter provided the prior year’s adjusted gross income was $150,000 or less ($75,000 if using the filing status married filing separate). 110 percent of the prior year’s tax liability paid evenly for each quarter if the prior year’s adjusted gross income was greater than $150,000 ($75,000 if filing married filing separate).” The safe harbor methods may make more sense in some situations and can be less advantageous in others. “One thing to consider when deciding whether or not to use the safe harbor method is that since the safe harbor estimates are not based on current year’s profits, a self-employed individual could be in for an unexpected substantial tax liability at tax time. Or, if their current year income is significantly less than it was in the prior year, they could be overpaying their current year tax and be eligible for a large refund when they file their current year return. If an overpayment results, all or part of it can be applied to the next year’s estimated taxes instead of receiving a refund payment,” says Reams. As you evaluate your self-employment income and projections for the current tax year, you’ll be better able to weigh your options and determine how you’re going to calculate your quarterly tax payments. If you have specific questions, it’s always worthwhile to talk to an accountant or attorney who specializes in taxes. Keep good records Taxpayers who are self-employed have a higher chance of getting audited, so it’s even more important to be sure you have good financial records if you’re self-employed. “We recommend keeping separate bank accounts for business and personal so that income and expenses are easily traceable. It is also recommended that you keep some kind of bookkeeping whether an app or by paper so that you can verify your income and expenses,” offers Powell. Shah has done this for his expenses: “The best and easiest way that I handle keeping track of my records is to use one credit card and bank account that records my income and expenses. I have connected it to Quickbooks for ease of record keeping and use my google calendar to record travel expenses or milage when the need arises. You can use Evernote to keep receipts and other docs on the go but I find that having limited options to spend and record income keeps everything centralized and easier to manage at tax time,” he suggests. Having good records and keeping your business expenses separate from your personal ones will help you be prepared in the event of an audit. Working with a tax professional and following these five tips will help ensure that you are meeting your tax obligations and are prepared in the event of an audit.
There is a lot to consider when planning for retirement. To take full advantage of investing, it’s a good idea to start early. It’s also important to think about inflation and that health care expenses will likely increase the older you get. Here are what experts say you should think about as you save for retirement: Determine how much you’ll need Josh Zimmelman, Westwood Tax & Consulting Owner“You need to look at your savings and figure out when you can actually afford to retire and how much longer you need to continue working. Be realistic. Better to push your retirement back a few years, than realize too late that you didn’t save enough. Think about how much you’ll likely spend on different necessities during retirement. Some of your expenses will probably go down, but others will go up. Add about 3 percent per year for inflation.” Mike Scott, Independent Bank Senior Mortgage Loan Originator“One thing to keep in mind is what the expected level of retirement income is, relative to the individual’s current income. If they expect to have $50,000 per year from retirement income sources, but are currently making $80,000 per year, then it makes more sense to make contributions to a traditional IRA or 401K, thus reducing the current tax burden since they are in a higher tax bracket. If they expect the retirement income level to be in an upper income bracket, it may behoove them to contribute to a ROTH IRA or a ROTH 401K rather than a traditional IRA or 401K, particularly since they would then be locked into the current tax levels. Given the deficit that the government is running on, I expect our tax obligations to rise over the next decade or two. Given that the current three upper level tax brackets are based on income of $160,725 (single), $321,450 (married) and go up from there, the decision would need to be made based on those levels, which are always going to be subject to change. At those levels, the tax rate jumps from 24 percent to 32 percent, then rises from there to 37 percent for income levels of $510,300 for an individual and $612,350 for a married couple.” Consider diversifying for tax purposes Brandon Renfro, Ph.D.“Young people can really set themselves up for success by thinking about retirement taxes ahead of time. You’ll probably receive retirement income from a few different sources, so think about how those integrate with each other. For example, a larger portion of your Social Security benefit is taxable as your combined income increases. You can lower your total tax bill by planning ahead to make that combined income figure lower without necessarily lowering your actual income, since not all income counts in the combined income calculation.” Alex Caswell, CFA, CFP ®, Wealth Planner at RHS Financial“Young people should consider having three types of investment accounts. They should have a Roth IRA or 401k, a regular IRA, and a taxable account. Just like diversifying investments, someone should diversify their tax structures. Just like we don't know what will happen to the stock market, we don't know what will happen to the tax code. Right now capital gain tax is the lowest it has been historically, but that won't always hold true. By having multiple types of accounts, a person retiring can have the flexibility to navigate the tax code.” Patrick Ford, CPWA ® Director of Wealth Management of Brown Wealth Management“Having a taxable and a tax-free source of funds in retirement can greatly help a retiree make the most of our progressive tax system. In retirement, you might withdraw from your traditional IRA until you find yourself close to a higher tax bracket. Any additional income you need in that particular year could be withdrawn, tax-free, from your Roth IRA.” Jason B. Ball, Ball Comprehensive Planning, LLC Founder“As the years have gone on, I tend to prefer a tax bouquet that being some in tax-deferred accounts, some in already taxed accounts like a Roth IRA, and some in non-taxable accounts. This gives some tax flexibility if changes are made to the tax code.” Plan for health care expenses Josh Zimmelman, Westwood Tax & Consulting Owner“Get a head start on Medicare and Social Security. There are a lot of complicated rules so make sure you understand everything you need to know before you need it. Apply for social security and set up your pensions and retirement withdrawals. (And set aside some cash reserves in case you hit any unexpected delays.)” Shobin Uralil, Cofounder and COO of Lively"There are many demographics, particularly young working Americans, where a high-deductible health plan could make sense. For example, if you rarely go to the doctor, why pay high premiums for a service you may not use. Rather, take the savings and put it into an HSA. Because of this, we’re seeing growth in HSAs as a vehicle not only for health savings in the near term, but for anticipated health costs in retirement as well. These new contribution limits will help increase the value of HSAs to individuals and families throughout their lives. We’d encourage users to max out their contributions throughout the year to not only take advantage of the tax savings, but also to ensure that they are putting themselves in a position to better afford their future healthcare expenses. We also encourage employers to do their part by extending HSA contributions as a benefit to their employees.” Make decisions based on current finances and long-term financial goals Jason B. Ball, Founder of Ball Comprehensive Planning, LLC“The goal is typically to lower the marginal tax rate that you pay on your taxes. What I mean by this is that on each next dollar you earn, there is a marginal tax rate that is applied. Your goal is to reduce this marginal tax rate and to have your overall effective tax rate be lower. So, it really is a decision to either accelerate to pay taxes now or decelerate to pay taxes in the future. There is software to help strategize individual tax situations and we strongly recommend working with a CFP(R) or CPA in this area do to some of the complexities.” Josh Zimmelman, Westwood Tax & Consulting Owner“Make sure you’re contributing as much as you can afford to your retirement savings account/s. After age 50, you can make additional 'catch-up' contributions to your retirement savings. If you have multiple accounts, considering consolidating all your 401(k) and IRA plans as you get closer to retirement. Pay off your debt before you retire. Try to get rid of any outstanding debts as quickly as possible, so they don’t drain your retirement funds. Think about getting a part-time job. Retirement doesn’t mean you have to completely stop working. It might be an opportunity to shift to a low stress part time gig. Starting a brand new career can be difficult at an advanced but there are a lot of opportunities for project-based jobs where you can use your current experience in a new way.” Check out Best Company's Retirement Taxes Guide for more information and tips.
Retirement is the dream. It’s about being financially independent, finishing work, and having more free time to spend with friends and family. Unfortunately, taxes don’t go away. “Many recent retirees are surprised to owe income tax time, because they are frequently not withholding on major sources of retirement income such as IRA distributions and Social Security benefits. You have to make withholding elections yourselves, with your planner or brokerage firm holding your IRA account, and by filling out Form W4-V to withhold from social security benefits. The typical working taxpayer has withholding taken care of by their employer, so they don’t expect to have to do this on their own come retirement,” says Bennett Stein, CPA and Investment Advisor Representative with Arbor Wealth Management, LLC. Since you’ll be taking on a more active role in making sure your taxes are paid, it’s important to understand how retirement taxes work. It’s also worthwhile to understand retirement taxes when you’re young because it can help inform how you prepare your finances for retirement. What taxes do you pay in retirement? While you no longer have to pay FICA taxes, which are taxes withheld for Medicare and Social Security, you still have to pay income taxes on all of your income. The only exceptions are Health Savings Accounts and Roth IRAs. Health Savings Accounts remain tax-free as long as the funds are used for medical expenses. However, the penalty for using the funds for other expenses goes away at age 65. Withdrawals for other expenses are considered taxable income. Roth IRAs are tax-free in retirement because the funds in those accounts are taxed before going into the account. Everything else — investment income, retirement account withdrawals, pensions, annuities, and even Social Security Benefits — are taxed. And, you still have to pay income taxes if you live abroad. “America is one of two countries that enforces citizen-based taxation, so retirees will still need to submit the annual 1040s while sipping on cocktails on an island. Many retirees are unaware of this filing retirement. Retirees should look to see the Tax Treaty between their new home and the U.S. to see which country has the taxing rights on their U.S. Social Security benefits and other foreign pension income. If the tax treaty states that the U.S. still holds taxing rights, then overseas retirees need to plan their money wisely, since they most likely be giving a portion of it back to the IRS every April 15th,” says Nathalie Goldstein, CEO of MyExpatTaxes. How much tax do you pay in retirement? Income tax during retirement is not just based on the total amount of income you withdraw each year. Instead, each kind of retirement income is taxed differently. State taxes on retirement income also vary state to state. For more information on how income tax is applied in your state, check out this state-by-state guide. “Once you hit the retirement age the heavily taxed monthly salary stops trickling in but you get to unlock several retirement income plans. These include savings, pensions, and investments and they too are taxed — but at more friendly rates. The rates are primarily dependent on the income source and the best approach to paying the taxes starts with understanding the different classification of your retirement incomes. Go through the IRA guidelines to check whether your incomes are taxable, partially-taxable, or tax-free and separate them accordingly as well as penalties and fines on early withdrawals,” says Edith Muthoni, Chief Editor of learnbonds.com. Understanding how each stream of retirement income is taxed will help you better manage your retirement funds to make them last and get the most out of your funds. How is investment income taxed? Investment income is also taxed differently depending on how the income is classified and your total taxable income. For some income levels, qualified dividends are not taxed. At others, qualified dividends have a tax rate of 15 or 20 percent. Qualified dividends are for funds and fund shares that have been owned by you for over 60 days. Non-qualified dividends are taxed based on your income tax bracket’s normal rate. People earn capital gains when the value of their investments rises. Capital gains are only taxable when they are realized from a sale. The taxes due on capital gains vary depending on how much long you’ve had the investment. If you’ve had the investment for less than one year, the capital gains are subject to your usual income tax rate. These are called short-term capital gains. If you’ve had an investment longer, the profits are called long-term capital gains. Long-term capital gains are taxed the same way as qualified dividends. Interest is also taxed. Interest comes from bonds and some kinds of bank accounts, like savings accounts. All interest, even from mutual funds and bonds, is taxed as income. How are retirement accounts taxed? Taxation of retirement accounts works differently. 401(k)s and traditional IRAs give people immediate tax breaks for contributing to their retirement account. The funds can grow tax deferred indefinitely. When withdrawals are made, the taxes must be paid at this point. These distributions are taxed as income. In contrast, Roth IRAs do not offer immediate tax breaks on income. Instead, people pay taxes on the money they add to their Roth IRA. When they withdraw money later, they do not have to pay taxes on that income as long as the account is five years or older or a special exemption applies. Penalties and taxes apply for early withdrawals from retirement accounts. Early withdrawals occur before age 59 and a half. For Roth IRAs, the penalties and taxes depend on the amount you withdraw. Expert tips for planning retirement account distributions Tracey Lawrence, Founder of Grand Family Planning, LLC“Many people facing retirement don’t realize that when they turn 70.5, they MUST start taking Required Minimum Distributions from their retirement accounts whether they need to or not. Why? Because they have been growing their money, tax deferred. The IRS wants to start taking their cut. If they DON’T start receiving the RMDs on time, the retiree will be penalized 50 percent. So you might think, okay, I’ll just take the RMD at 70.5 and avoid the penalty. Here’s what most people don’t realize: the amount of the RMD may have a significant impact on their income. Their income has an impact on the premium they will pay on Medicare. How can they control how all of these interdependent mechanisms impact the cost of living in retirement? By working with professionals who understand how all of this works, who will look at the finances holistically BEFORE they turn 70.5. Many professionals are unaware of these issues, choosing to focus only on growing assets. While that may be desirable when we’re younger, understanding how to best distribute earnings later in life can keep people comfortable longer. And with people living longer, and health care costs continuing to rise, that’s extremely important.” Edith Muthoni, Chief Editor of learnbonds.com“You can also lower the impact of taxes on your retirement incomes by adhering to income access and withdrawal guidelines. For instance, avoid withdrawing from your 401K after changing jobs or before hitting 59.5 years as these attract early withdrawal penalties. Similarly, withdraw from both your IRA and 401K accounts before 70.5 years to avoid higher interest plus the possibility of losing up to 50 percent of these savings.” How are Health Savings Accounts (HSAs) taxed? HSAs are not taxed as long as the funds are used for medical expenses. In terms of retirement, HSAs start working like Roth IRAs at age 65. However, if the funds in the HSA are used for health expenses, they remain tax-free. How are pensions taxed? Pensions are similar to 401(k) and traditional IRA retirement accounts. The funds go into the accounts tax-deferred, so taxes are paid when distributions are made. Pension distributions are taxed as normal income. How are annuities taxed? With annuities, the value of the original principal is usually not taxable because they’re often bought after taxes. However, all the interest and value that accrues over time is taxed as income. If the annuity is purchased with tax-deferred dollars, the full annuity is taxed as income. How are Social Security benefits taxed? The taxes you pay on Social Security benefits are determined based on how much other income you receive. In some cases, Social Security is tax-free. However, most people will have to pay tax on 50 or 85 percent of their Social Security benefits. Experts weigh in: What's the best way to pay taxes in retirement? Denise J. Nostrom, ChFC, CLU Financial Advisor at Diversified Financial Solutions“Paying taxes on retirement income really depends on the type of income you are receiving. For most people, it makes sense to withhold federal and state taxes (if applicable) right from the income source. These income sources can include, but are not limited to the following: Social Security, Pension and Traditional IRAs. Before retirement, when you received your paycheck from your job, you had federal, and state taxes withheld plus Social Security, Medicare and perhaps other items withheld from your gross income. You should follow this same system in retirement.” Nancy D. Butler, CFP ® , CDFA ™, CLTC and owner of Above All Else, Success in Life and Business ®“I strongly suggest all retirees do not pay quarterly income tax payments. One of the main concerns we all have as we age is how we can maintain our independence and happiness as long as possible. One way to assist with that is how you manage paying your income taxes. If you are paying quarterly estimated federal and/or state income taxes, it may not be necessary. As we age, remembering how much to pay, when to pay it, where to send payment, and how much postage costs is an issue you most likely do not have to deal with. Contact your tax advisor and have him or her calculate how much to have withheld from your pension, Social Security, or qualified plan assets so you no longer have to file quarterly estimated income tax returns. Each year when you have your income taxes prepared, your tax advisor will need to let you know if you need to adjust the amount for the coming year. This will enable you to have your taxes paid automatically to better assure they are paid in the correct amounts and on time. This will be one less thing you will have to address.” Patrick Ford, CPWA ® Director of Wealth Management of Brown Wealth Management“Other retirement income sources can get a bit tricky. Withholdings might not be appropriate, so you may need to pay estimated taxes to the IRS on a quarterly basis. A non-retirement account may contain a variety of securities which can generate capital gains, losses, dividends, tax-free income, taxable income, etc. Because withdrawals from these accounts are not taxed as income, retirees with non-retirement accounts typically estimate their tax bill and make payments on a quarterly basis to the IRS. It’s the activity within these accounts that matters for tax purposes.”