Friday, April 29, 2016

Avoid the Social Security Tax Trap


No one likes a tax surprise, yet retirees may be subject to shockingly high marginal rates because of the complex manner in which Social Security income is taxed. Joint filers with $40,000 of total Social Security benefits and as little as $28,000 of other income can find themselves paying up to 185% of the normal marginal tax rate for their income level. IRA distributions and even supposedly tax-free municipal bonds are counted as income in these calculations.
Many baby boomers will confront this tax trap. Unlike previous generations, they are mostly two-wage earner couples, meaning they will collect higher total Social Security benefits. Affluent boomers have accumulated significant assets in IRAs and 401(k)s, which will produce substantial taxable distributions starting after age 70-1/2. Both factors will likely force many boomers firmly into the tax trap.
While it will be difficult for these clients to completely avoid the trap, there is a window of opportunity before they reach age 70-1/2 to mitigate some of the bite. This means considering strategies to shift taxable income off of future years as much as possible. Strategies include moving assets into tax-free accounts, tax-efficient investing and expense management.
Start with Social Security itself. If your clients are waffling about whether to delay the receipt of those benefits until 70, give them another compelling reason. Explain that delaying their filing for benefits may also help them minimize the impact of the tax trap in two marked ways.
If they delay, they may need to draw down some qualified savings as an income bridge between retirement and age 70. These early draw-downs will reduce future RMDs, thereby lowering future taxable income. Secondly, delaying their filing can provide a window to do some other tax planning.
Roth conversions are an obvious choice, especially before your clients reach age 70, when they would start collecting Social Security (presuming they delay) and begin taking forced RMDs. During their pre-70s years, clients may have significant space in the 15% federal tax bracket in which to work. If they have non-qualified assets with which to pay income taxes, they should consider Roth conversions potentially up to the 15% bracket limit of $75,300 for joint filers. This would lower RMDs and taxable income in future years. It would also generally give them greater tax-planning flexibility, since retirement saving would be spread more equitably between tax-deferred and tax-free accounts.
Clients should maximize contributions to Healthcare Spending Accounts (HSAs) if they are still working and using a high-deductible health plan, further moving assets into tax-free vehicles.
Tax-efficient management of nonqualified investments is also important, as it can lower future AGI and, by extension, combined income. This includes investment strategies that minimize capital gains, interest and dividend payments, and focuses more on growth. Staggering gains by consolidating them in some years, and minimizing in others, may also help.
Even municipal bond strategies should be re-evaluated. Municipal bonds could lose much of their tax-savings value as the bond income pushes Social Security income into the tax trap, effectively creating a tax on the muni bond income.
If the client is realizing profits from rental income, review the pros and cons of real-estate investments. There may be ways to shift more income into the pre-RMD years before age 70 or, conversely, plan income-lowering costs for repairs and the like after the client reaches 70-1/2.
Managing expenses may be another useful approach. Higher expenses naturally require more income. If that income must come from tax-deferred savings, this only pushes more income into the tax trap. Lowering expenses can help.
Mortgages are an obvious expense-lowering target, as they often represent the largest financial burden in retirement. Paying off a mortgage before starting Social Security would dramatically lower income needs and could reduce the requirement for additional taxable distributions in excess of RMDs.

Tuesday, April 26, 2016

You may be doing your taxes all wrong


After having just filed your 2015 return and possibly being shocked at how much you owed, you may be ready for some tax planning to reduce the pain from now on. While “tax planning” is a frequently used term, it’s not necessarily well-understood. Here’s the scoop:
What tax planning really means
Tax planning is the art of arranging your affairs in ways that postpone or avoid taxes. By employing effective tax planning strategies, you can have more money to save and invest or more money to spend. Or both!
Put another way, tax planning means deferring and flat-out avoiding taxes by taking advantage of beneficial tax-law provisions, increasing and accelerating tax deductions and tax credits, and generally making maximum use of all applicable breaks available to you under our beloved Internal Revenue Code.
While the federal income tax rules are now more complicated than ever, the benefits of tax planning are arguably more valuable than ever.
Of course, you should not change your financial behavior solely to avoid taxes. Truly effective tax planning strategies are those that permit you to do what you want while reducing your tax bills along the way.
Tax planning and financial planning are closely related
Financial planning is the art of implementing strategies that facilitate reaching your financial goals, be they short-term or long-term. Sounds pretty simple: However, if it actually was simple, there would be lots more rich folks out there (including yours truly).
Tax planning and financial planning are closely linked, because taxes are such a large expense item as you go through life. As your income goes up, taxes will probably be your single biggest expense over the long haul. So planning to reduce taxes is a critically important piece of the overall financial planning puzzle.
Horror stories when folks fail to make the connection
Over the years as a tax professional, I’ve been amazed at how many people fail to get the message about tax planning until they commit a grievous blunder that costs them a bundle in otherwise avoidable taxes. Then they finally get it. The trick is to make sure you don’t have to learn this lesson the hard way. To illustrate the point, consider the following example.
Example: Joe is a 45-year-old unmarried professional. He considers himself to be financially astute. However, he is not very knowledgeable about taxes. One day, Joe meets Joan, and they quickly decide to get married. Caught up in the excitement of a whole new life, Joe impulsively sells his home right before the marriage. The property is in a good area and has appreciated by $500,000 since he bought it 15 years ago. Joe and Joan intend to move into Joan’s home, which is, frankly, a dump. But Joe is an ace DIY remodeler, and he plans to work his magic on Joan’s property. Ignoring taxes, this a good plan.
Result without tax planning: For federal income tax purposes, Joe has a whopping $250,000 taxable gain on the sale of his home: $500,000 profit minus the $250,000 federal home sale gain exclusion allowed to an unmarried seller.
Result with tax planning: If Joe had kept his home and lived there with his new bride for two years before selling, he could have taken advantage of the more generous $500,000 home sale gain exclusion allowed to married couples. That way, he could have permanently avoided $250,000 of taxable gain. If necessary, the couple could have sold Joan’s home instead of Joe’s. Since her place is a dump, she could have sheltered any taxable gain with her separate $250,000 gain exclusion. Alternatively, the couple could keep Joan’s property and work on remodeling it while still living in Joe’s highly appreciated home for the requisite two years.
Moral of the story: By selling his home too soon without considering the tax-smart alternative, Joe cost himself $62,500 in taxes: completely avoidable $250,000 gain taxed at an assumed combined federal and state rate of 25%. In a higher tax bracket, the damage would be even worse. The whopping tax bill on the home sale is a permanent difference, not just a timing difference. The bill could have been zero. The point: You cannot ignore taxes when contemplating major transactions. If you do, bad things can happen, even with seemingly intelligent moves.
The last word
There are many other ways to commit expensive tax blunders. Examples include selling appreciated securities too soon when hanging on for just a little longer would have resulted in low-taxed long-term capital gain instead of high-taxed short-term gain, taking retirement account withdrawals before age 59½ and getting hit with the 10% early-withdrawal penalty tax, and failing to arrange for payments to an ex-spouse to qualify as deductible alimony. The list goes on and on.
The cure is to plan transactions with taxes in mind and avoid making impulsive moves. Seeking professional tax advice before pulling the trigger on significant transactions is usually money well spent. As the rest of this year unfolds, some of my future columns will focus on tax-planning strategies that many folks can benefit from. Hopefully, we can together do a better job of keeping your tax bill on the right side of reasonable from now on.

Monday, April 25, 2016

Filing may be complete, but tax planning is ongoing


The countdown for filing 2015 tax returns is finished, and the taxes are off to Washington. While some Americans have already cashed refund checks, other families had to grin and bear the burden of the marginal tax rate.
There are two tax systems at play in the U.S., and some politicians proclaim there is one system for the rich and another for the poor. But the reality is there is one tax code for the informed and one for the uninformed.
Start a conversation about taxes, and it quickly becomes clear that many people don’t understand their returns or how taxes work. Everyone with earned income (a job) pays into Social Security and Medicare. Those contributions are never returned nor deferred when you put money in a retirement plan like a 401(k) or IRA. This creates plenty of frustration when you hear that over half of Americans don’t pay any taxes. But that oft-quoted statement is wrong. What is true is that about half of U.S. tax returns use the marginal tax brackets.
Your tax return is similar to a symphony where instruments work in unison. Although I can’t tell you what musician is playing especially well, even my tone deaf ears can identify the instrument that is out of tune! Your tax return works the same way, in which one line works with the next. Just one bad financial decision during the year can create an input that creates negative consequences on the rest of your return.
Albert Einstein described insanity as doing the same thing over and over while expecting a different result. Every year individuals pick up their taxes from their CPA firms, and gasp at the amount owed. Then they complain, scribble their names on a check, file the return in a drawer and repeat the process the next year. Insanity!
Tax planning is a central part of financial planning and needs to be conducted before Dec. 31, not April of the following year. April is the season to tax report. The number of individuals who spend countless hours on investment statements but disregard their 1040 tax return is staggering. In my humble opinion, there is no entity that will separate most American families from their retirement more dramatically than the IRS. Markets go up and down but rarely does the IRS send a check back!
As we conduct financial planning in 2016, our objective is to be as tax savvy as possible. Pay attention to line 43 on your tax return and find out how much income was actually subject to taxation. Once you know that number, you can make some very important decisions including whether you should consider a Roth IRA or contribute to a college fund. The IRS provides us a rule book but it is our job to use those rules to create the best possible scenario during the year so that our accountants can provide savvy tax reporting next April.

Sunday, April 24, 2016

Prince's death sets off estate planning quagmire


The death of the virtuoso music artist Prince Thursday set off a countdown until the tax man takes a bite out of the star's estate.

Relevant parties must determine just how big Uncle Sam's bite will be. In the case of a musical superstar like Prince, though, such a task is a real challenge — borderline impossible, even, some say — and could spark a lengthy feud between the government and the estate. And the stakes are high, given that more than half the estate's value could be forfeited in tax.

Richard Behrendt, director of estate planning at Annex Wealth Management, calls it a “quirky valuation challenge” that is more art than science. The difficulty comes down to placing a value on intangible assets, such as future royalties the artist may earn from a body of work.
“You're trying to look at present value of a future income stream,” said Charlie Douglas, board member of the National Association of Estate Planners and Councils and an Atlanta-based wealth adviser.

Prince reportedly amassed a fortune worth around $300 million. Yet the divide between how the Internal Revenue Service and the Prince estate view the present value of future royalties could be huge, because with the death of a popular artist comes the likelihood of ballooning popularity and hence a ballooning valuation.

“For an artist, whether it's Picasso or Prince, death has an impact on their body of work. It's undeniable,” said Mr. Behrendt, who worked for 12 years at the IRS as an estate tax attorney. “The IRS will factor that in and say his death will blow the royalties off the charts, but his attorneys will say, 'You can't do that.'”

The estate of the late entertainer Michael Jackson understands this point all too well. It's currently locked in a court battle with the IRS, which valued Jackson's name and image upon death at more than $434 million. The estate's estimate: $2,015.

Anecdotally, Mr. Behrendt says the IRS feels it got “burned” in the case of Elvis Presley's estate, because it didn't anticipate the phenomenon of a pop icon's increasingly popular catalog after death. Elvis generated $55 million in 2015 alone, second only to Michael Jackson's $115 million, according to Forbes' list of top-earning dead celebrities.

“Now their eyes are open and they'll be putting their best people on these unique cases,” Mr. Behrendt said.

And, as a New York Times article indicates, a “trove of Prince's recordings remains unreleased,” so any potential value derived from that remains a mystery.

Details on Prince's will and who will be executing his estate haven't yet emerged, but if he didn't have a will designating an executor (which is unlikely, given his reputation as being a good businessman, Mr. Douglas said) it would likely pass to his sister, Tyka Nelson. (Prince divorced twice and didn't have any surviving children.)

The estate has 15 months to file a federal estate tax return (nine months plus a six-month extension). The estimated federal estate tax is due on the nine-month date, though. (Because Prince was unmarried at death, he can't take advantage of the unlimited marital deduction, which would pass the estate to a spouse tax-free.)

The federal government assesses a 40% estate tax on estate values over $5.45 million. Minnesota, Prince's state of residence, is one of about 20 states that has a state estate tax as well — its top rate is 16%, likely making Prince's estate tax rate a whopping 56% total when including the federal rate.

Muddying the valuation challenge even more, however, are state rules governing an “inheritable right of publicity,” which protects individuals' identities from being used without permission. While California, for example, is a state that offers protections for both the living and deceased in this respect, Minnesota doesn't appear to offer a post-mortem right.

“That would lessen the [estate] value, because you don't have enforceable rights of publicity,” Mr. Douglas said.

Ultimately, if the IRS determines the tax amount paid by the estate was undervalued after receiving the tax return, the IRS proposes a valuation increase, which parties could then attempt to negotiate, Mr. Behrendt said. If they can't agree, the issue goes the way of the Michael Jackson estate — that is, to tax court.

Saturday, April 23, 2016

Retirement Planning: Make a Plan for Your Contributions

Income tax returns were due April 18 this year — also the deadline to make IRA and many other retirement plan contributions for last year. So naturally, it’s too late to make any last-minute contributions for 2015 … but it’s a fine time to start planning for 2016.

You still have the better part of nine months to max out your 401k plan for the year, and nearly 12 months to max out your IRA, Roth IRA, SEP or HSA, among other vehicles. But the sooner you start, the more likely you are to actually meet your goals. What could be a very doable monthly savings goal if started today might be a lot less doable if you wait until the summer.
So with all of this said, let’s map out a game plan for maxing out your contribution.

Where Will Your Contributions Go?

The first step is figure out what your options are. If you work for a company, the government or a non-profit, chances are very good that you have access to a 401k plan, 457b plan or 403b plan. For the vast majority of Americans, these are going to be the best options, and saving for them should be the No. 1 priority. So let’s dig into it.
The maximum salary deferral for all of these employer-provided options is $18,000*, or $24,000 for those 50 and older. For now, let’s just focus on the $18,000.
Let’s say you’ve been remiss and haven’t allocated a single dollar to your 401k plan yet for tax year 2016. You now have a little over eight months — or 16 paychecks — to get to $18,000. So, doing the math, you need to put save $2,250 per month, or $1,125 per paycheck, to max out your contribution for the year.
Now, that might sound like a lot, but it’s doable for most American families earning $80,000 or more. And if maxing out your 401k plan means that you have to dip into your regular savings account for a few months to pay your bills, that might be perfectly fine. It’s definitely worth it to take advantage of the tax savings and employer matching benefits.
In looking at some of the other retirement options, we have a little more timing flexibility, and the numbers get a lot smaller.
The contribution limits for IRAs and Roth IRAs this year are $5,500 for those younger than age 50, and $6,500 if you’re age 50 or older; you have until next April to contribute. Well, $5,500 spread out across 12 months is a very reasonable $458 per month, or less than many car payments these days. My monthly electric bills in Texas are higher than that, at least in the summer months. There is absolutely no justifiable reason why you cannot meet a contribution schedule like this. If you can’t save $458 per month, you need to take a long look in the mirror and an longer look at your monthly credit card statements and figure out what you’re doing wrong.
For the more ambitious savers, HSAs offer nice “spillover” savings options once you’ve already maxed out any employer retirement plans or IRAs that you qualify for. In 2016, you can contribute as much as $6,750 ($7,750 for those 55 and older) to an HSA investment account if you have a high-deductible health plan for your family.
The contributions are ostensibly for health expenses, but no one ever said you have to spend the funds on health expenses today. You can use HSA funds tax- and penalty-free at any time for health-related expenses. But you can also save the funds indefinitely and withdraw them penalty-free for non-health expenses once you reach age 65. (You’d pay taxes, of course, but you’d avoid the 20% penalty for non-health-related withdrawals.)
So, so long as you don’t plan on touching the funds until age 65, an HSA plan can be thought of as an extra, supplemental IRA. You have until the tax deadline to contribute, so maxing out the full $6,750 would amount to $562 per month. This is less of a priority than an IRA or your 401(k) plan. But if you’re an ambitious saver, it certainly makes the cut.

Thursday, April 21, 2016

Seriously, the best time to start on 2016 taxes is now


Now that tax year 2015 is in the rearview mirror, it's time to turn your attention to the return you'll be filing next year.
Experts say most consumers' efforts to minimize their bill are too little, too late.
"Tax planning is more about whittling over time than grand gestures at the last minute," said certified financial planner Lynn Ballou, a regional director with EP Wealth Advisors. "It's a very complicated dance."
By IRS estimates, the average Form 1040 filer spends just two hours per season on tax planning. To put this in perspective, they expect you'll spend four times that on record keeping (i.e., sorting through that shoebox full of receipts) and twice that to actually prepare and submit your return.
One of the first places to mine for tax moves is your latest return, said Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants. Start with the big picture – did you have an outsize refund or bill? Consider adjusting your tax withholding or estimated tax payments.
"The idea is to come close to breaking even," she said.
A more detailed line-by-line review on your own or with the help of your tax preparer can help highlight other action items, Ballou said. Maybe you didn't get the full value of certain credits or deductions, for example, or could have pushed yourself into a lower bracket by contributing a little more to your 401(k) plan.
Consumers subject to the alternative minimum tax might see red flags in retrospect, like high state and local taxes or capital gains that exceed your earned income, said Greg Rosica, contributing author to Ernst & Young's EY Tax Guide 2016. "If you're subject to it, make sure you understand why you're subject to it," he said – which can help you decide the best ways to avoid or minimize AMT impact in future years.
Once you've combed through last year's return, turn an eye to this year's possibilities. Many strategies take time to think through or are best acted on early.
"I would do [tax-loss harvesting] sooner rather than later," Ballou said.
Taxpayers can use that strategy to zero out any capital gains incurred, and can then deduct up to an additional $3,000 in capital losses against other income for that year. But it's better for your portfolio to start looking for and weeding out losers before the end of the year is looming, she said.
Early tracking of deductible expenses can help ensure you're making the most of certain tax breaks, especially those that have thresholds or are limited based on your adjusted gross income, said Rosica.
For example, knowing how close you are to the 10 percent threshold on medical and dental expenses (7.5 percent if you or your spouse is 65 or older) might influence whether you defer or accelerate treatments at the end of the year.
Pre-planning also allows for easier bunching of deductible expenses like charitable donations or real estate taxes. "That can bridge two different tax years," Rosica explained.
The net effect is that you could alternate claiming the standard deductions and itemized deductions, netting bigger breaks. Or if you are subject to the AMT, he said, bunching might mean you only have to face it every other year.
While you're thinking ahead to next year, cut some of your tax prep pain by getting more organized. "Have one spot for all of your tax records," said Labant. Make a note of deductible expenses, charitable donations and other relevant tax info so you aren't combing through receipts and credit card statements next year when the details aren't as fresh.

Wednesday, April 20, 2016

Time to talk about end-of-life issues is now

They say the only two things in life that are certain are death and taxes.

So it’s fitting that National Healthcare Decisions Day, which was Saturday, falls the day after Tax Day.
Now in its ninth year, National Healthcare Decisions Day encourages the young and old to talk about their end-of-life wishes and put those wishes in writing.

An advance directive for health care is a document that outlines what life-prolonging treatments, if any, you desire in case you are unable to speak for yourself. These treatments may include cardiopulmonary resuscitation, artificial respirators, feeding tubes and intravenous rehydration.
The document also appoints someone you trust as your proxy to speak on your behalf if you are incapacitated. This person will be able to make health-care decisions based on how well they know you with regard to anything not covered in your advance directive. Further, you can nominate a person to be appointed your legal guardian should a court ever determine you are in need of one.

Advance directives also may address issues including organ donation, whole-body donation to medical schools, funeral and burial arrangements.

According to a recent article in the American Journal of Preventive Medicine, only 26 percent of people have advance directives for health care.

The study found that most people who did not have an advance directive did not know that they existed, which highlights the importance of National Healthcare Decisions Day. The study found that older people or people with chronic diseases were more likely to have an advance directive, which illustrates the tendency for people to consider this option as death approaches.

Another recent study published in the American Journal of Public Health found that more than 60 percent of individuals age 18 years and older want their end-of-life wishes to be respected. But only about a third of them had completed advance directives.

The study found that while people had given thought to the question of end-of-life care, a majority had not completed the forms. Similar to the study in the American Journal of Preventive Medicine, about a quarter of those who did not have advance directives said they did not know about them. Others felt they were too young or healthy to complete them.

However, as the theme of this year’s National Healthcare Decisions Day points out, "It always seems too early, until it’s too late." Death or an incapacitating illness is unpredictable and could come at any time.
Finally, we would like to highlight that some people in the American Journal of Public Health study did not have advance directives because they were concerned about the cost, complexity or time that might be required to create one. As with many things in life, the cost, complexity and time of not having an advance directive far outweigh the relatively little cost and time of setting one up.

A qualified estate-planning attorney can help you set up your own advance directive. These documents do not expire, but it is recommended that you update them every couple of years for peace of mind. You will want to make sure that the person whom you designated as your proxy is still the best choice, and your family will want to know that your directive still reflects your current wishes.

Tuesday, April 19, 2016

Health Savings Account Tax Trick


A health savings account is a powerful tax tool. If you have a high deductible health insurance plan, you can contribute to an HSA every year–up until the month you start Medicare. And a really handy feature lets you make contributions for the prior tax year (like with Individual Retirement Account contributions) up until tax day. That lets taxpayers tweak their 2015 income (and taxes) through today. When you see how it can help you (examples below), it should get you motivated to start planning early for 2016. That’s all the more important, now that taxes and healthcare are more entwined than ever.

The idea is that you contribute to a health savings account to lower your adjusted gross income and get other tax breaks. It’s a lot like making last minute retirement contributions. “You can still use it as a tax planning tool when you do your taxes,” says Laurie Ziegler, an enrolled agent in Saukville, Wisc.

Ziegler had one client make a $500 contribution to a traditional Individual Retirement Account to lower her AGI, and that saved her over $1,000. Her income was coming in at a level that she would have otherwise owed back the premium tax credit for health insurance she bought on the federal marketplace.
Here’s how HSA contributions can have a similar impact. Ziegler just advised a couple in their 60s to max out the husband’s health savings account for 2015 (he has contributed the maximum $6,650 for family coverage, plus a $1,000 catch-up contribution–that’s allowed if you’re 55 or older). His wife fell last year, and had outsized out-of-pocket hospital rehabilitation bills of over $10,000. The couple paid the bills out-of-pocket and made the HSA contributions for future medical expenses. The HSA contributions are deducted above-the-line, lowering their adjusted gross income. By maxing out the HSA, they were able to deduct more of their out-of-pocket medical expenses. (You can deduct medical expenses only to the extent they exceed 10% of your adjusted gross income; for taxpayers 65 and older, it’s a 7.5% floor through 2016. Here’s how to score the medical expenses deduction.)

The HSA contributions can help increase the amount of other Schedule A deductions as well like non-reimbursed employee expenses and investment and tax preparation fees.

A health savings account is not a use-it-or-lose-it account like a healthcare flexible spending account; rather, it’s yours to keep, even if you change employers. You get the tax break going in, the money you contribute grows tax-free, and you can withdraw it at any time to cover out-of-pocket medical expenses, including deductibles. It also includes COBRA, Medicare and long-term care premiums, so it’s a great way to build up triple tax-free savings for retirement healthcare needs.

HSAs make sense no matter your age. Children can be covered under their parents’ health plan until age 26. If your adult child is covered but not your tax dependent, she can open her own HSA (with single, or if married, family coverage). For 2016, the maximum contribution for single coverage is $3,350 and for family coverage, it’s $6,750.

Monday, April 18, 2016

Tax Tip: Filing Late And Filing An Extension

Failure to File Penalty
This penalty may apply if you missed the filing deadline (there are some exceptions). If so, you should send as much of the tax due as possible to lessen your penalty and subsequent interest. The penalty for filing late is 5% of the unpaid taxes per month or part of each month that the tax return is late. The maximum penalty is 25% of your unpaid taxes.

Interest Penalty
The interest penalty for failure to file on time is 1/2 of 1% of your unpaid taxes. This penalty starts the day after the filing deadline and continues for each month, or part of each month that you are late.

Filing Extension Safe Harbor
If you filed an on-time extension and paid at least 90% of the taxes you owe, you may not be subject to a failure to file penalty. However, if you file your return more than 60 days after the original due date or the extension due date, the minimum penalty is the lesser of $135 or 100% of the unpaid tax.

Exceptions For Not Filing
As mentioned, there are certain exceptions for not filing on time, but unfortunately, they are best summarized by the phrase, “reasonable cause.” In other words, if you can show the IRS that you did not file and the reason is deemed to be “reasonable,” you may be able to avoid the penalties.

Sunday, April 17, 2016

Tax Deadline Creeps Closer

They say there are two certain things in life, death and taxes and while there's no avoiding them, the tax season got a little longer this year.
Many of us think of April 15th as tax day, but this year it is April 18th.
April 15th is actually a government holiday this year and with it being the weekend, there's an extension to file federal taxes until Monday.
Many out there in the Northland are taking advantage of the three extra days and some are trying to wrap everything up today.
One in three taxpayers actually waits until April to file their taxes.
There's still plenty of time. If people are thinking that they're just not going to be able to get it together before the 18th, they really need to file something because the penalties for not filing are ten times that of just not paying your balance in full.
For many taxpayers out there, some habits die hard and many find themselves filing the same time each and every year.
In both Wisconsin and Minnesota, the state deadline is also Monday.
New this year with the affordable care act, everyone had to file some sort of 1095.
Many tax professionals have extended their hours over the weekend.

Saturday, April 16, 2016

Still Need More Time? How to File a Tax Extension

Procrastinators rejoice: tax day is a bit later this year and if you still can't make that, there's still time to file for an extension.
The IRS traditionally requires that taxes be filed each year on April 15, but because that falls on Emancipation Day this year, the deadline was extended to April 18. And taxpayers in Maine and Massachusetts, where Patriots' Day is observed on the 18th, have until the 19th to file.
If that's still not enough time, the IRS makes it fairly easy to get an extension. So if you are running a bit late this year, here are a few things to know:
DON'T PANIC: Seriously. Taxpayers who need more time to complete their return can easily request an automatic six-month extension from the IRS.
Don't get too excited, though: An extension provides more time to file a tax return, but no extra time to pay what you owe.
FREE FILE: The IRS says the fastest and easiest option is through the "Free File" link on its website at Anyone, regardless of income, can use this free service to electronically request an extension by completing Form 4868. This gives taxpayers until Oct. 17 to file a return. To get the extension, taxpayers must estimate their tax liability and pay any amount due.
ELECTRONIC PAYMENT: Another option is to make an electronic payment, such as through IRS Direct Pay, and select Form 4868 to indicate it is for an extension. Payments can also be made through the Electronic Federal Tax Payment System, or paying by credit or debit card online or by phone.
TAX PREPARER: Taxpayers can also request an extension through a paid tax preparer or buy using tax-preparation software. They can also fill out a paper version of Form 4868, which can be downloaded at
AUTOMATIC EXTENSION: Some taxpayers get more time to file returns without having to ask for an extension. This includes taxpayers who live and work abroad, military on duty outside the U.S.; those serving in combat zones and people in areas affected by natural disasters.
Whatever method you chose, the IRS reminds taxpayers to file their return even if they cannot pay the full amount. By filing either a regular return or requesting an extension, they will avoid the late-filing penalty, which can be ten times as costly as the penalty for not paying.
Taxpayers who pay as much as they can by the due date can also reduce the overall amount that would be subject to penalty and interest charges. If you cannot make your payment, contact the IRS about setting up a repayment plan.

Friday, April 15, 2016

Tax Season Procrastination Gets Even Worse


With only a week to go until T-Day, it’s countdown time—and about one-third of U.S. income tax returns had yet to be filed as of April 1. Following last year’s abysmal mix of poor customer service, massive identity theft, and refund fraud, a healthy dose of tax filing dread seems to have set in.
Such fears may be overblown this season. In response to the terrible trifecta of 2015, Congress relented on its six-year streak of IRS budget cuts. In fact, in December the agency got an additional $290 million to improve customer service, expand efforts to combat identity theft, and beef up cybersecurity. The IRS allocated about $177 million for taxpayer services, $108 million for operations support, and $4.9 million for enforcement.
Still, the number of returns received is down 1.4 percent from last year. So here’s a look at how that new money is being used—and how this tax season is shaping up before the April 18 deadline. It’s not quite as ugly as you might expect.

More Calls Are Being Answered …
The IRS added about 1,000 temporary employees to help improve customer phone service this filing season. The agency said that as of late March it had answered more than 8 million calls from taxpayers.
One of the primary measures of customer experience the IRS uses is “level of service,” or what percentage of callers actually get through to a live representative. That number jumped significantly from 2015. (Granted, having a phone call answered by a human doesn’t mean you didn’t have a long wait time—or that you got a helpful answer.)
… After Spending a Lot Less Time on Hold 
The phone wait time for taxpayers as of Feb. 13 was nine minutes, or 70 percent less than the 28-minute stretch taxpayers endured this time a year ago, according to a U.S. Government Accountability Office report. For the IRS’s full fiscal year, its projection for average wait time on the helplines that most taxpayers call is about 26 minutes. (Phone waits will lengthen when those 1,000 temporary employees are gone.)
If that still sounds bad, try being a tax practitioner. Their helpline had an average wait of 47.6 minutes last year, according to a “Tax Day 2016 by the Numbers” report from Wallet Hub. And that was actually a 23 percent improvement from the average wait time in 2014.
Use of the IRS Website Rises 
More people are going to, with visits reaching 276.3 million as of April 1, compared with 258.5 million this time last year. That’s a rise of almost 7 percent. The IRS views increased visits to its website as a good thing, in part because it’s a much cheaper way to assist customers. IRS Commissioner John Koskinen has said that helping a taxpayer online costs $1, compared with as much as $60 for in-person assistance.
As of March 29 the IRS’s “Where’s My Refund?” tool was accessed more than 231 million times, up almost 35 percent from the same time a year ago. Last year’s 234 million visits to the tool was also a record, increasing 24 percent from 2014.
The Best News: The Average Refund Keeps Inching Up
Identity theft—and subsequent refund fraud—continues to flourish, but the IRS has put in more filters to tag potentially fraudulent returns. The number has risen from 11 filters in 2012 to 183 filters now in use. There are no hard figures yet on the level of refund fraud attempts this year.
As of April 1 more than 76 million refunds had been issued, totaling $215.3 billion. And if you’re still procrastinating, here’s a little motivation: The average refund check so far this year is $2,832, up 0.6 percent from the $2,815 average a year ago. That’s $17 you could probably use.

Thursday, April 14, 2016

Last Minute Tax Tips for Procrastinators

The tax deadline for filing your 2015 income tax return is April 18. We have been given an extra four days to prepare and send in our tax returns this year. You’re thinking that me, the tax and therefore, math expert, can’t add, right? You’re guessing it’s three days but don’t forget, this is a leap year. February 29 gave us all one extra day.
If you haven’t made an appointment with your tax pro by now, I’d say tax tip number one is to NOT even try -- unless you’re in the mood for hearing scornful laughter. Almost all tax pros are up to their proverbial ears in alligators and will likely not have time to sort through your paperwork. Perhaps they will allow a drop off of your tax data to be pursued if time slows down and I’m sure they will be happy to file an extension for you.
Which brings me to tax tip number two: file an extension.  If you are expecting a refund, you will not be required to pay anything with the extension form. You can file the extension for free by going to the IRS website and selecting IRS Free File from the homepage. Follow the prompts. This will buy you time until October 17, 2016.
Bear in mind that an extension is only an extension of time to file, not an extension of time to pay. If you anticipate owing taxes on April 15, you will want to make a payment of your full anticipated tax liability. Therefore you should complete IRS Form 4868, attach a check or money order and mail it to the IRS address indicated on the form’s instructions by April 18. It must be post marked that day, otherwise it will be considered late and subject to penalties and interest. I recommend you send it certified mail. Be sure to put your Social Security number, the tax year, and ‘Form 1040’ on the memo line of the check to ensure that it is credited properly to your tax account.
To be on the safe side, rather than sending a check, make an extension-related electronic credit card payment. See the instructions on Form 4868 to find out how to do this. You can also choose to pay any expected balance due by authorizing an electronic funds withdrawal from a checking or savings account. You will need the appropriate bank routing and account numbers.  For information about these and other methods of payment, visit theIRS website  or call 800-TAX-1040 (800-829-1040).
You can reduce your tax liability by making a contribution to your IRA or Health Savings Account. Be sure to let the plan manager know that you want this contribution credited to the 2015 tax year.
If you are required to make estimated tax payments, your first payment for 2016 taxes is also due on April 18. Use Form 1040-ES to make the payment.
My third tax tip involves timing. Make an appointment to see your tax professional sometime in May or June to finalize your tax return. Creating this deadline might whip you into shape to get the deed done. Remember that IRS penalties accrue dramatically. If you wait until October and you owe money, you will likely pay a 25% penalty plus interest. Penalties accrue at 5% per month and max out at 25%. This can get real expensive, real fast. It’s far cheaper to pay now – even if you have to use a credit card to do so.
Besides, in May or June your tax professional will be back from an extended vacation, refreshed and ready to tackle your tax return. She won’t be hard pressed like she was during tax season or in the last minute onslaught of the final October deadline.
If you prepare your own tax return, you can do so for free if your income was less than $62,000 by going to the IRS website and using the IRS Free File software. Or you can purchase tax preparation software which also allows electronic filing.

Wednesday, April 13, 2016

Estimated Tax Payments: Q & A

Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

How do I know if I need to file quarterly individual estimated tax payments?
If you owed additional tax for the prior tax year, you may have to make estimated tax payments for the current tax year. The first estimated payment for 2016 is due April 18, 2016.
If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.
If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.
If you had a tax liability for the prior year, you may have to pay estimated tax for the current year; however, if you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings.
Note: There are special rules for farmers, fishermen, certain household employers, and certain higher taxpayers.
Who Does Not Have To Pay Estimated Tax
You do not have to pay estimated tax for the current year if you meet all three of the following conditions:
  • You had no tax liability for the prior year
  • You were a U.S. citizen or resident for the whole year
  • Your prior tax year covered a 12-month period
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.
You had no tax liability for the prior year if your total tax was zero or you did not have to file an income tax return.

How Do I Figure Estimated Tax?
To figure your estimated tax, you must figure out your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. If you estimated your earnings too high, simply complete another Form 1040-ES,Estimated Tax for Individuals worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter.
Try to estimate your income as accurately as you can to avoid penalties due to underpayment. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90 percent of the tax for the current year, or 100 percent of the tax shown on the return for the prior year, whichever is smaller.
Tip: When figuring your estimated tax for the current year, it may be helpful to use your income, deductions, and credits for the prior year as a starting point. Use your prior year's federal tax return as a guide and use the worksheet in Form 1040-ES to figure your estimated tax.
You must make adjustments both for changes in your own situation and for recent changes in the tax law.

When Do I Pay Estimated Taxes?
For estimated tax purposes, the year is divided into four payment periods and each period has a specific payment due date. For the 2016 tax year, these dates are April 18, September 15, June 15, and January 17, 2017. You do not have to pay estimated taxes in January if you file your 2016 tax return by January 31, 2017, and pay the entire balance due with your return.
Note: If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.
The easiest way for individuals as well as businesses to pay their estimated federal taxes is to use the Electronic Federal Tax Payment System (EFTPS). Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using EFTPS. If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.
Please call if you are not sure whether you need to make an estimated tax payment or need assistance setting up EFTPS.

Tuesday, April 12, 2016

Last Minute Filing Tips for 2015 Tax Returns

Are you one of the millions of Americans who hasn't filed (or even started) your taxes yet? With the April 18 tax filing deadline quickly approaching, here is some last minute tax advice for you.
1. Stop Procrastinating. Resist the temptation to put off your taxes until the very last minute. It takes time to prepare accurate returns and additional information may be needed from you to complete your tax return.
2. Include All Income. If you had a side job in addition to a regular job, you might have received a Form 1099-MISC. Make sure you include that income when you file your tax return because you may owe additional taxes on it. If you forget to include it you may be liable for penalties and interest on the unreported income.
3. File on Time or Request an Extension. This year's tax deadline is April 18 (April 19, in Maine and Massachusetts). If the clock runs out, you can get an automatic six-month extension, bringing the filing date to October 17, 2016. You should keep in mind, however, that filing the extension itself does not give you more time to pay any taxes due. You will still owe interest on any amount not paid by the April deadline, plus a late-payment penalty if you have not paid at least 90 percent of your total tax by that date.
Call the office if you need to file an extension or file for late-filing penalty relief.
4. Don't Panic If You Can't Pay. If you can't immediately pay the taxes you owe, there are several alternatives. You can apply for an IRS installment agreement, suggesting your own monthly payment amount and due date, and getting a reduced late payment penalty rate. You also have various options for charging your balance on a credit card. There is no IRS fee for credit card payments, but processing companies generally charge a convenience fee. Electronic filers with a balance due can file early and authorize the government's financial agent to take the money directly from their checking or savings account on the April due date, with no fee.
5. Sign and Double Check Your Return. The IRS will not process tax returns that aren't signed, so make sure that you sign and date your return. You should also double check your social security number, as well as any electronic payment or direct deposit numbers, and finally, make sure that your filing status is correct