Tax

It’s Not Too Late Check Paycheck Withholding

Did you know that the average tax refund was $2,729 for tax year 2018? While some taxpayers may find it advantageous to get a large tax refund, others may wish to have more of their money show up in their paychecks throughout the year. No matter which preference taxpayers choose, they should remember that they can make adjustments throughout the year that will influence the size of their refund when they file their tax return next spring.

Tax Reform Changes

The Tax Cuts and Jobs Act of 2017 made significant changes that affected almost every taxpayer. Most of these changes took effect in 2018 and were noticed on tax returns filed earlier this year. Many taxpayers ended up receiving refunds on their 2018 tax return that were smaller or larger than expected. Others found they owed additional tax when they filed. To avoid tax surprises like this, taxpayers may need to increase or reduce the amount of tax they have taken out of their pay and should check their paycheck withholding as soon as possible — even if they did one last year.

Typical Taxpayer Filing Scenarios

Simple returns. For taxpayers whose tax situation is less complex, the easiest way to check whether their withholding is correct is to use the IRS Withholding Calculator on IRS.gov, which is designed to help employees make changes based on their individual financial situation.

Complex returns. Taxpayers with more complex tax situations such as married couples who both work, higher-income earners, and those who take certain tax credits or itemize might need to revise their Form W-4, Employee’s Withholding Allowance Certificate, completely to ensure they have the right amount of withholding taken out of their pay. If you’ve been putting this off, it’s not too late to adjust your tax withholding. Please call the office and speak with a tax and accounting professional who will evaluate your particular tax situation and help you determine how much tax you should withhold from your paycheck.

Small business owners or sole proprietors. Taxpayers who owe self-employment tax, or individual taxpayers who need to pay the alternative minimum tax, or owe tax on unearned income from dependents, as well as people who have capital gains and dividends should contact the office and speak to a tax and accounting professional as well.

Life changes. Taxpayers should also check their withholding when there are life changes such as marriage or divorce, birth or adoption of a child, retirement, new job or loss of a job, purchase of home, or Chapter 11 bankruptcy.

Certain life changes might affect a taxpayer’s itemized deductions or tax credits. As such, taxpayers should check their withholding if they experience changes to the following:

• Medical expenses
• Taxes
• Interest expense
• Gifts to charity
• Dependent care expenses
• Education credit
• Child tax credit
• Earned income tax credit

Income not subject to withholding. Some taxable income is not subject to withholding. Taxpayers with taxable income not subject to withholding and who also have income from a job may want to adjust the amount of tax their employer withholds from their paycheck. Income that is generally not subject to withholding includes interest and dividends, capital gains, self-employment and gig economy income, and IRA distributions, including certain Roth IRAs.

Help is just a phone call away

If you have any questions about tax withholding, don’t hesitate to call and speak to an accounting professional who can help.

• By Leon Clinton
• September 10, 2019

Homeowner Records: What to Keep and How Long

Keeping full and accurate homeowner records is vital for determining not only your home deductions but also the basis or adjusted basis of your home. These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means.

You should also keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Here’s some examples:

• Putting an addition on your home
• Replacing an entire roof
• Paving your driveway
• Installing central air conditioning
• Rewiring your home
• Assessments for local improvements
• Amounts spent to restore damaged property

In addition, you should keep track of any decreases to the basis. Here’s some examples:

• Insurance or other reimbursement for casualty losses
• Deductible casualty loss not covered by insurance
• Payment received for easement or right-of-way granted
• Value of subsidy for energy conservation measure excluded from income
• Depreciation deduction if home is used for business or rental purposes

How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. And you must keep these records for as long as they are important for the federal tax law.

Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. (A period of limitations is the limited period of time after which no legal action can be brought.)

For assessment of tax, this is generally three years from the date you filed the return. For filing a claim for credit or refund, this is generally three years from the date you filed the original return or two years from the date you paid the tax, whichever is later. Returns filed before the due date are treated as filed on the due date.

You may need to keep records relating to the basis of property (discussed earlier) longer than the period of limitations.

Technically, basis is needed to determine gain on home sale (loss is not deductible). That need has diminished for most homeowners now that gain up to $250,000 ($500,000 in some sales by married couples) is tax-exempt.

Basis is still important, however, in figuring casualty loss, on conversion of the home to business use, or where there’s a gift of the home (in this case, important to the donee).

Keep those records as long as they are important in figuring the basis of the property. Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you.

If you have any questions as to what items are to be considered in determining basis, please call.

• By Leon Clinton
• September 7, 2019

Settling Tax Debt With an IRS Offer in Compromise

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed. That’s the good news. The bad news is that not everyone is eligible to use this option to settle tax debt. In fact, nearly 60 percent of taxpayer requested offers in compromise were rejected by the IRS. If you owe money to the IRS and are wondering if an IRS offer in compromise is the answer, here’s what you need to know.

Who is Eligible?

If you can’t pay your full tax liability or doing so creates a financial hardship, an offer in compromise may be a legitimate option. However, it is not for everyone, and taxpayers should explore all other payment options before submitting an offer in compromise to the IRS. Taxpayers who can fully pay the liabilities through an installment agreement or other means, generally won’t qualify for an OIC.

To qualify for an OIC, the taxpayer must have:

• Filed all tax returns.
• Made all required estimated tax payments for the current year.
• Made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

IRS Acceptance Criteria

Whether your offer in compromise is accepted depends on a number of factors; however, typically, an offer in compromise is accepted when the amount offered represents the most the IRS can expect to collect within a reasonable period of time. This is referred to as the reasonable collection potential (RCP). In most cases, the IRS won’t accept an OIC unless the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP), which is how the IRS measures the taxpayer’s ability to pay.

The RCP is defined as the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income minus certain amounts allowed for basic living expenses.

The IRS may accept an OIC based on one of the following criteria:

Doubt as to liability. An OIC meets this criterion only when there’s a genuine dispute as to the existence or amount of the correct tax debt under the law.

Doubt as to collectibility. This refers to whether there is doubt that the amount owed is fully collectible such as when the taxpayer’s assets and income are less than the full amount of the tax liability.

Effective tax administration. An offer in compromise may be accepted based on effective tax administration. This refers to cases where there is no doubt that the tax is legally owed and that the full amount owed can be collected but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

Application and Fees

When requesting an OIC from the IRS, use Form 656, Offer in Compromise, and also submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. If you are applying as a business, use Form 433-B (OIC), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must file additional forms as well.

A nonrefundable application fee, as well as an initial payment (also nonrefundable), is due when submitting an OIC. If the OIC is based on doubt as to liability, no application fee is required, however.

If the taxpayer is an individual (not a corporation, partnership, or other entity) who meets Low-Income Certification guidelines they do not have to submit an application fee or initial payment and will not need to make monthly installments during the evaluation of an offer in compromise.

The initial payment is based on which payment option you choose for your offer in compromise:

• Lump Sum Cash. Submit an initial payment of 20 percent of the total offer amount with your application. If your offer is accepted, you will receive written confirmation. Any remaining balance due on the offer is paid in five or fewer payments.
• Periodic Payment. Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.

If the IRS rejects your OIC, you will be notified by mail. The letter will explain why the IRS rejected the offer and will provide detailed instructions on how to appeal the decision. An appeal must be made within 30 days from the date of the letter.

Questions?

If you have any questions about the IRS Offer in Compromise program, don’t hesitate to contact the office for more information.

• By Leon Clinton
• September 4, 2019