Posted on January 2, 2017 by Jan Roberg

3 Numbers That Can Get You Audited!

Some numbers can cause the IRS to audit your tax return.

Certain numbers on your tax return can cause the IRS to be more interested in you than you might like.

Can just one number cause you to be audited by the IRS? Probably not. But there are some numbers that are just plain old suspicious, and once your return gets flagged for review, a suspicious number can move you from the “review” pile to “audit” pile.

Now, you can ask an IRS auditor why you’re being audited, and she’ll tell you it was just a random audit. And that’s usually a lie. Random audits account for a very small percentage of the actual audits. Usually, something makes the computer kick out your return for review – like unreported income. And that usually generates a simple IRS letter, “Hey, we noticed you missed something here….yada, yada, yada, please send us some more information.” That’s called a correspondence audit and they’re usually no big deal. The IRS sends you a letter, you send them a letter back with some explanation.

But if the computer kicks out your return and the reviewer sees a couple of anomalies, well, then you’ll more likely to be asked for a personal appearance. Let’s face it, you don’t want to make a personal appearance at the IRS office. You don’t even want to have a correspondence audit for that matter.

So what are the three nasty numbers?

The first one is $5,000. I often see this number for “non-cash charitable contributions”. $5,000 is the value you can donate without having a written appraisal. It goes on form 8283 which feeds to your Schedule A for itemized deductions. Here’s the thing – if you are claiming that you donated $5,000 worth of items to a charity, you’d better be able to substantiate it – even if you didn’t have an appraisal. First, you need to keep those receipts from Goodwill or Salvation Army. Also, you want to maintain a list of everything you donated. On that list you also want to write down what the item was worth at the time you donated it, and what you paid for it in the first place. Here’s a clue: if you bought a sofa for $1,000 and kept it in your house for 10 years – sitting on it, sleeping on it, letting the dog puke on it, etc., before donating it to charity– it’s not worth $5,000 now. Just being honest with you here.

Another nasty number is $10,000. For some reason, people who lie on their taxes like to lie with this number. I once had a woman call me because she was being audited. She was distraught because she had received a letter from the IRS about her charitable donation. I told her it was no problem, all she had to do was mail a copy of the donation receipt to the IRS. She said, “You don’t understand the problem, I don’t have a receipt!” I asked her how much the donation was for, she said, “$10,000.” I asked her who the donation was to, she said, “My college.” So I told her, “That’s not a problem! If your donated $10,000 to your college they will gladly you send you a copy of your receipt.” She told me, “You don’t understand the problem, I didn’t give no money to my college!” I now understood the problem completely and told her to write the IRS a check, I couldn’t help her.

Here’s the thing. Sadly, liars like to use the number 10,000. So if you have a real deduction that is for $10,000 – you really want to make sure that you’ve got your receipt.

My last nasty number is 20,000 – usually this is the number of miles claimed as a business expense. The average male driver puts 16,550 on his car per year, female drivers average 10,142 – and that’s total miles. So if you’re claiming 20,000 business miles it looks a little suspicious. Especially if you claim 20,000 miles even. Seriously? You drove 20,000 miles even? A round number like that is a lot suspicious. You should always have a mileage log to back up your auto expense deduction. You can get a blank copy here: mileage log.

Are you noticing a pattern here? Round numbers get extra scrutiny. It’s okay if you have deductions that are round numbers, but make sure you can back them up with receipts or logs.

Posted on December 1, 2016November 30, 2017 by Jan Roberg

Itemized Deductions 2017

The House and Senate Tax Plans call for eliminating many current tax deductions like state and local income taxes.

Is 2017 your last chance to itemize your deductions? It’s possible. The House and the Senate both have tax plans out and they both look like many things that we currently itemize will be on the chopping block for 2018.

That’s not all bad, the trade-off will be a larger standard deduction and for many people, lower tax brackets. This is not law yet, but it is looking likely something will pass.

Normally, I don’t like to do tax planning based upon speculation. But here’s my opinion–you know that you may claim itemized deductions for 2017. You don’t know if you can claim them for 2018. It seems to me, that it makes sense to stack as many of your deductible expenses on your 2017 return as you can so you won’t lose them if the law changes.

So what’s at stake here? Currently, the new tax proposals would eliminate the deductions for medical expenses, state and local income taxes, real estate taxes, and employee business expenses. (The current plan keeps the charitable donation and the mortgage interest deduction.)

So what does that mean? How would you “stack” your deduction? Let’s use state and local income taxes for an example. If you make estimated tax payments, your fourth quarter payment isn’t due until January 15th. That payment gets applied to your 2017 state tax return as tax paid, but if you pay the estimated payment on January 15th, you can’t claim it as a deduction on your federal return until you file your 2018 tax return. By making your estimated tax payment by December 31st, you move that deduction up to your 2017 federal 1040 return.

I live in St Louis and many of my clients have to pay City of St Louis income taxes. Almost everybody pays those taxes in April, when they file their tax return and then we claim the deduction on the next year’s taxes. But, you can actually make an estimated payment for the City of St Louis tax. By paying the tax in advance, you can also move that deduction to 2017 instead of losing it next year. Here’s a link to the City of St Louis Estimated Payment Voucher There are other cities and localities with taxes that this would apply to as well.

So does it really make a difference? Well yes it does! Let’s say your estimated tax payment is $500 and you’re in the 25% tax bracket. That would be a tax savings of $125. Now before, it would have been save $125 now, or $125 later – but if the GOP plan gets passed, there is no $125 later.

Medical expenses are another potential item on the chopping block. If you have enough medical expenses to itemize on your return, it might make sense to pay for any additional procedures, or buy your glasses, or refill prescriptions before the year ends.

If you claim employee business expenses (that includes job hunting costs) and you’re trying to decide if you should make a purchase now or later, it might be a good time to buy now so you can put it on your 2017 taxes.

And don’t forget to pay your real estate and personal property taxes before the end of the year if you want to claim them on this year’s taxes. Remember, you can only claim the deduction in the year you actually paid the tax!

I’ve got one important caveat here: if you have to pay the Alternative Minimum Tax (AMT) – moving up tax payments might not help you at all because with AMT you don’t get the use the state income tax deduction or the deduction for employee business expenses. If you’re a high income earner, you might want to run the numbers to see if you’ll actually benefit from moving any tax deductions up or not.

So like I said, the current House and Senate tax bills are not law yet. But given the political climate, it’s highly likely that it will pass and I’d hate to see you lose out on a deduction that you could easily be claiming. But even if it the new tax bill doesn’t pass, you’re just getting the tax benefit now rather than later.

Posted on December 6, 2013July 20, 2019 by Jan Roberg

What Business Gifts Can I Deduct on My Tax Return?

If your business is buying gifts for clients, remember that you can only deduct $25 per person that you buy a gift for.

If you give a gift as a part of your business it’s a deductible business expense. BUT! You can’t deduct more than $25 for gifts you give to a person during the tax year. This $25 limit has been in place for ages and hasn’t been adjusted for inflation for as long as I’ve been doing taxes. That makes keeping within the gift budget a little trickier every year.

I think some people do a lot of “fudging” on the gift expenses, but the IRS seems to be taking a closer look at everything these days so you need to know what you can and can’t deduct. And make sure you document everything and keep those gift receipts.

Here’s some real questions that people have asked me about deducting gifts on their tax returns.

What if I give two different gifts, like a birthday and a Christmas gift? Can I deduct $50 then?

No. Sadly, the $25 limit is on gifts for the entire year, not $25 per gift.

What if I give a $100 gift to my client’s family of four? Can I deduct the full expense?

No. Any gift you give to the customer’s family is considered to be an indirect gift to the customer. So unless you independently do business with each of the other family members, you may only deduct $25 for the gift.

My husband and I each own our own businesses and our businesses have some clients that overlap. Can we each deduct $25 for gifts to our overlapping clients? (Okay, nobody asked me this one, I saw it online and thought it was a good question.)

Surprisingly, No. Technically, a husband and wife are treated as one taxpayer and it doesn’t matter if you have separate businesses or separate employers. Partnership partners are also treated as one taxpayer when it comes to gifts as well.

I sent one of those holiday gift tins that cost $24.95. The extra Holiday message cost $1.95 and the shipping was $9.95 for a total of $36.85. Am I stuck only claiming the $25?

Actually, in your case, you can deduct the whole amount. The gift itself was under $25. You are allowed to deduct the incidental costs like shipping, wrapping or engraving on jewelry.

I gave my client two football tickets that cost $150 total. Am I stuck only claiming $25?

Before the Taxpayer and Jobs Act, anything that could have been considered as entertainment could be deducted as an entertainment expense–even if you didn’t go with the client. So prior to 2018, you could have deducted $75–half of the amount as an entertainment expense. But now, after the Taxpayer and Jobs Act, you can’t deduct entertainment at all. So no part of that gift would be considered to be deductible.

If bought my daughter an IPad for Christmas. Since she sometimes does some work for me, can I write that off as a deductible business expense? (And yes, this was a real question.)

Since she does supposedly works for you, you are issuing her a W2 for her wages right? If you don’t issue a W2–then claiming she works for you probably isn’t going to pass muster with the IRS.

But let’s be realistic. You’re either buying an IPad for the business, or you’re buying an IPad for your daughter. If you’re wrapping it up and putting it under the tree as a present from Daddy – that’s a gift. And it’s not a business gift. If you really want to call it a business gift, fine, but you only get to deduct $25.

If she really works for you and she needs an IPad to do her job, you buy her an IPad for her job and it goes on your business asset list. She might have some incidental personal use – that’s fine, but it’s a business asset not a gift.

Remember, small incidental gifts valued at less than $4 with your logo on it don’t count as a “gift” towards that $25 total. If you’ve been giving away mugs and pens for advertising, don’t worry–those are still 100% deductible.

Updated 7/20/2019

Posted on August 6, 2013May 31, 2016 by Jan Roberg

What is a Progressive Tax? What is a Flat Tax?

Photo by Images Money at Flickr.com

I see a lot of internet questions about flat taxes and progressive taxes. It seemed that since I do a tax blog, it was time to tackle those basic questions.

A flat tax is a tax that is the same for everyone, under all circumstances. A good example of a flat tax is the sales tax rate. It doesn’t matter whether you are rich or poor; everyone pays the same sales tax percentage. Some cities have a flat income tax. For example: The City of St Louis, Missouri has a 1% income tax on wages of people who live or work within the city limits. It doesn’t matter whether you make $15,000 a year or $150,000 a year; you still pay the 1% city tax.

A progressive tax increases as your income goes up. This is what our current federal tax code is like. For a single person, the first $9,750 isn’t even taxed. Then the next $8,700 is taxed at 10%, the next $26,650 is taxed at 15%, the next $50,300 at 25%, the next 93,300 at 28%, the next $209,699 at 33% and anything over $388,351 is taxed at 35%.

Those rates change if you’re married or filing as head of household. I’m not going to post all the tax rates here. If you want to look, check out the tax rate tables at the IRS website: http://www.irs.gov/pub/irs-pdf/i1040tt.pdf The tax rates are all listed on page 14.

Tax Incentives are tax rules that are intended to influence behavior. Things like the mortgage interest deduction which is designed to help people buy homes, or the charitable donation deduction which is designed to get people to donate to charity are examples of what would be considered tax incentives.

There’s been a lot of talk about changing the tax code. Right now, we have a progressive tax code with lots of tax incentives. Major changes to the tax code will be difficult to pass; there are many lobbyists and interest groups that all have their own agendas. There will be lots of pressure on our representatives to keep the tax loopholes. The whole concept of changing the code is so controversial that the Senate Finance Committee leaders have offered to keep Senator’s ideas secret for 50 years. http://www.businessweek.com/articles/2013-07-25/congress-will-keep-senators-tax-reform-wishes-secret-for-50-years

The tax code has nearly doubled in length over the past two years. If I had any say in the voting, I’d like to see the tax code made easier. Yes, a difficult tax code keeps me employed, but I can live with the consequences. I think a simplified tax code is good for the country.

What changes would you make? What deductions do we really need, if any? What needs to go? Post your answers, I’m curious. Your post won’t show up immediately. My site has a delay to screen for spam. You wouldn’t believe what kind of weird comments there’d be without it. But if you make a post, it will show up within a day or two. Thanks.

Update: I posted this blog on Tuesday morning, August 6. Tuesday evening I saw this segment on The Daily Show. I’m pretty sure that John Oliver doesn’t read my blog, but he’s at least on the same wave length. http://www.thedailyshow.com/watch/tue-august-6-2013/don-t-mess-with-taxes

Posted on November 13, 2012May 31, 2016 by Jan Roberg

Small Business Owners: Are You Claiming Too Many Deductions?

Photo by Herkie at Flickr.com

The short answer: probably not!

This is a sentence I hear at my tax desk every year, “I bought this for my business or I did that for my business but I’m not going to claim it because I have too many deductions!” Seriously? No you don’t.

I guess I should back track a little on this—if you’re claiming stuff you shouldn’t be claiming—that’s another story. But if you own a business and you have a legitimate business expense—then claim it.

Often times, small businesses, especially in the beginning, have losses. On your tax return it’s called a net operating loss or NOL. If you have an NOL, you carry that back two years and use it to offset income that you had two years ago. If you still have a loss, you can carry it forward for another 20 years!

Now sometimes you have an expense that gets limited if your business doesn’t have enough income—like a section 179 deduction or a home office expense. That doesn’t mean that you can’t claim these things, they just get carried forward to be used to offset your future income.

Don’t skip your deductions! I can’t stress this enough. Often, at the “big box” stores, they’ll skip your home office deduction because they’re “saving you money by not claiming it” since they charge you for each form. But it’s like that old expression, “pennywise and pound foolish.” Sure, you save a few bucks by not filing the 8829 form, but you just lost the carry-forward of a few hundred dollar deduction. This is especially important this year with taxes most likely going up next year. Even if your deductions won’t help your tax return right now—do not just leave them off. Otherwise, you would have to amend your prior returns to carryforward the deductions which will cost even more money in the end!

It’s still November, you have plenty of time to round up your receipts, review your mileage log, and make sure that you’re doing everything you need to be doing to maximize all of your deductions. Obviously you can’t claim stuff that’s not a real business expense. But you can claim everything that is a legitimate expense for your business. Not only can you claim it—it’s the right thing to do.

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For those of you who do not have a home office, these posts will help get you started:
http://robergtaxsolutions.com/tag/home-office-deduction/
http://robergtaxsolutions.com/2011/07/how-to-boost-your-home-office-deduction/

Posted on January 21, 2011December 3, 2016 by Jan Roberg

Missouri Health Insurance Deduction

Missouri has a tax deduction for health insurance premiums

When you live in a state that has an income tax, like Missouri, you need to be aware of the state’s little deductions that aren’t automatically on your federal tax return. One of these is the Health Insurance deduction.

It’s very difficult to claim any medical deductions on your federal income tax return because you have to meet the requirement that your medical expenses exceed 10% of your adjusted gross income. In Missouri, you don’t have that. If your health insurance isn’t already exempt from taxes, you can claim your health insurance as a deduction on your Missouri State income tax return.

You’ll find the deduction on line 12 of the Missouri schedule A. For most people, its just a straight, direct entry on the form. If you happen to have been able to claim your health insurance on your federal schedule A, or had medicare payments withheld from your Social Security, there’s a worksheet to determine just how much of a deduction you’ll get to claim on your Missouri return. (For some people, your computer software will automatically calculate the amount of medicare insurance you can deduct, but you need to watch out if you’re adding additional insurance payments that you don’t delete the medicare payments.)

The health insurance deduction is especially valuable to senior citizens who may qualify for the Missouri Property Tax Credit. It not only reduces their taxable Missouri income, but by reducing the income, it can increase the amount of property tax credit they receive. Many seniors who qualify for the property tax credit don’t have any Missouri taxable income so the preparers don’t bother to look for deductions and that’s a mistake.

If you’d like to take a look at the worksheet for the qualified health insurance deduction, click on this link:

Missouri Health Insurance Worksheet

Also, if you happen to be self employed, be sure to check my post about the Missouri Self-Employed Health Insurance Tax Credit. If you qualify for that, it’s even better for your taxes than the deduction.

Posted on January 19, 2011May 31, 2016 by Jan Roberg

Tax Tips for Gay Couples

Even if you're legally married, federal tax law doesn't recognize your marriage.

There’ve been a lot a changes this past year with some states legalizing gay marriage, some authorizing civil unions, and of course the end to “Don’t Ask Don’t Tell” in the military. But despite all these changes, US federal tax law still does not recognize gay relationships in tax law. Even if you’re in a state where your marriage rights are fully recognized, you’ll still be considered unmarried for federal tax purposes and social security benefits. These tips are for couples who are legally married, or would be legally married if they lived in a state that allows gay marriage.

There are two main issues here that you have to deal with. The first is working to reduce your current tax liability and the second is to ensure that you’ve got sufficient coverage for both of your retirements. To that end, you need a tax professional and a financial advisor that can sit down with you and your partner to develop some long term and short term strategies. Right now, if you’re thinking, “I’d never even tell my tax guy I’m gay,” then it’s time to hire a new advisor.

Couples where both partners earn wages and have similar incomes: are pretty straight forward for tax purposes. You can both take advantage of IRA contributions, you’ll both receive equal social security benefits from your wage earning, you won’t lose any tax benefits from the married filing separately status, and your tax rates will be fairly comparable to folks filing as married. In this situation, many couples just split everything evenly and that’s a pretty fair arrangement. But, it may make sense to load all of the deductions onto one partner and let the other partner take the standard deduction.

For example: let’s say that Jen and Gina together would have itemized deductions of $13,000 a little more than the $11,400 they would claim as a standard deduction if they could file as married. Filing as single they can each claim a standard deduction of $5,700. If they’re splitting the itemized deductions, they can each claim a deduction of $6,500. But, if we load all of the deductions onto Jen and have Gina claim the standard deduction, then together they’d have a combined deduction of $18,700 and that would save them a substantial amount of money.

Now, remember, it’s not that perfectly even. In most cases, part of the $13,000 would be state income tax, you can’t load that onto your partner’s return, but with planning, you can put your mortgage, real estate tax, and charitable contribution deductions all on one person and enjoy a substantial tax savings.

Couples where there is self employment income: The biggest tax issue facing sole proprietors is paying the self employment tax. If you’re already in the 25% income tax bracket, and you add that 15% self employment tax to that, then you’re paying 40% tax on your income. Anything you can do to reduce your self employment tax is a good thing.

One possibility is to hire your partner as an employee. This in itself doesn’t really eliminate your self employment tax as you’re just shifting it to your partner and paying the employer’s share. But, hire your partner and provide health care benefits and now you’ve got something. For example: let’s say Jack and Dean have been together for 10 years. Jack has modest income from a part time job but spends a lot of time helping Dean with his small business as a professional entertainer. Dean is fairly successful and averages about $100,000 a year in income. Jack books appointments for Dean and makes sure that Dean is where he needs to be at all times. If Dean were to have to hire someone to do Jack’s job, he estimates that it would easily cost him $15,000 or more. So instead, he hires Jack as an employee. Instead of taking a salary of $15,000, Jack chooses a smaller wage but wants health insurance benefits. Because Jack would be Dean’s only employee, Dean can afford to have his employee package include health insurance benefits. And, more importantly, Dean could provide a health care plan that covered Jack’s partner (which happens to be Dean.) Now Jack and Dean have just excluded all of their health care costs from self employment tax.

Here’s why: Health care benefits reduce the employer’s taxable income. Health care benefits are not included in the employee’s taxable income. It’s a win/win situation for both of them.

Everyone’s tax situation is unique and the laws keep changing so you have to stay on top of things. Right now though, with the tax laws as they are, doesn’t it make sense to take advantage of them instead of letting them take advantage of you?

Posted on December 10, 2010May 31, 2016 by Jan Roberg

Last Minute Tax Tip: Hire Your Kids

Reduce your taxes, hire your kids to work for you!

Do you own your own small business as a sole proprietorship? Do you have kids? If so, did you know that you can pay your kids to work in your business and they won’t be subject to social security and Medicare taxes? Now if you pay them more than their standard deduction, they could be subject to income tax withholding but even so, not having to pay the employment tax is a big savings. You also don’t have to pay Federal Unemployment taxes either.

Why is this good to know? Well if you pay your kids wages from your business, it’s a business deduction and that’s money you’re keeping in the family and not paying self employment taxes on. It’s important to keep the wages commensurate with work that the kids actually perform. The IRS isn’t going to buy the idea that your 4 year old is earning $50,000 a year doing statistical analysis for your company. But what can your kids actually do?

My first job was handling all of the scut work that the secretaries in the office wouldn’t do. I cleaned the white board in the meeting room, made the coffee, made photocopies and ran errands. I was happy because I was getting paid, the secretaries were happy because they didn’t have to do those jobs any more, and the boss was happy because his staff was happy. I was 15 at the time, but frankly a much younger kid could have handled that job.

My son’s in college now, but he used to be my IT guy. For the cost of a Chucky Cheese pizza and some tokens, he’d take care of any computer problems I had. After he left for school, I had to hire a professional to help me. The freelance IT person I hire costs me $99 per hour. I had no idea how valuable my son was as an employee until he went away. I had never paid him a wage. (Granted, I’m paying through the nose for tuition but that’s another story.) What I should have done was pay him a wage and let him buy his own pizza. That would have reduced my self-employment taxes.

So what about your kids, do they help you with your business? Can they? Would they? If the answer is yes, then you might want to consider putting them on the payroll.

Who’s allowed to do this? There are only two categories of businesses where you can put your children on the payroll without paying employment taxes. One is sole proprietors; that’s businesses that file a schedule C with their 1040 tax return. The other is partnerships where both of the partners are the parents of the children working. If there is even one partner who is not a parent of the child, then you must pay the payroll taxes. Also, if you own a corporation of any kind, you must pay employment taxes on your child’s wages.

With the year end fast approaching, and winter break heading this way, now might be a perfect time to test the waters for hiring your kids. The money you pay them now will reduce your taxable income for 2010.

Posted on December 7, 2010May 31, 2016 by Jan Roberg

Last Minute Tax Tip: Deductions for High Income Earners

The idea of tax deductions for high income earners must sound preposterous, especially if you’re a high income earner. You know how it goes, you try donating money to charity or taking advantage of any of the other tax deductions only to find that your deduction is “limited due to your income.” So what’s the point?

Well this year, there is a point. Itemized deductions and exemptions aren’t phased out for high income taxpayers for 2010. Last year, if you earned over $166,800 you started to lose out on your deductions. The higher your income, the less valuable your deductions were. Only for 2010 are you allowed all of your itemized deductions. You also get 100% of your exemptions also.

But what about the Alternative Minimum Tax or AMT? Won’t that get us anyway? Well, yeah. AMT is a problem for high income earners. But, and this is important, charitable deductions aren’t eliminated in the AMT calculation. AMT dings you for your state tax payments, miscellaneous deductions (like employee business expenses), and some types of mortgage payments. Your charitable contributions still count as a deduction in the AMT calculation. Even if you’re stuck paying AMT, you’re still better off having that charity deduction on your tax return.

Bottom line: If you are a high income earner, there has never been a better time for you to make a charitable contribution.

Posted on December 3, 2010May 31, 2016 by Jan Roberg

Last Minute Tax Tip: Pay Up Your Alimony Now

Let’s face it, divorce sucks and paying alimony is even worse. But if you have an arrangement where you are supposed to be paying alimony (and I mean alimony, not child support) it’s to your advantage to pay up for the year before December 31. Here’s why:

Money that is paid out as alimony is a tax deduction for you. (And, if it’s any consolation, it’s taxable to your ex.) Child support, on the other hand, gives you no tax deduction and your ex pays no income tax on it.

Alimony is considered to be an “above the line” deduction. That means it lowers your adjusted gross income. Now that sounds like a lot of accounting jibberish, but on your tax return, it’s valuable. It can make the difference between whether or not you qualify for other deductions or tax credits. Made simple: above the line deductions are good.

Now here is the really important part: if you pay both alimony and child support, and you’ve missed some payments, then whatever payments you have made get counted as being child support first, and alimony second. Okay, in plain English: Let’s say you’re supposed to pay $100 a month for alimony and $200 a month for child support. $300 a month total. (Okay, that must sound like a fantasy but I like easy numbers.) Anyway, suppose you were good all the way up through September at paying $300 a month but then something happened and you didn’t make any payments from October through December.

For those first nine months you paid a total of $2,700. In your mind you paid $900 in alimony and $1800 in child support, right? Except that’s not how the IRS sees it. To them you paid $2,400 in child support and $300 in alimony, because for tax purposes you pay the child support first. So with the money that you did pay, you don’t get your full deduction. And let’s be real here, we’re probably talking about bigger numbers in real life. This tax deduction can really make a difference.

Bottom line: if you want to claim your full alimony deduction, all of your alimony and child support for the year must be paid in full by December 31st.