Beware: These Tax Return Red Flags Could Catch the Eye of the IRS

tax planning taxes Mar 03, 2021

Tax time can be one of the most hated times of the year. Just preparing the forms is enough to be an irritant, and if you owe the government money there’s a good chance that you’re downright annoyed. But neither of those things compare to the feeling that accompanies an envelope bearing an IRS return address, alerting you to the fact that your taxes are about to be audited.

The truth is that audits are relatively rare in the United States. As much as people fear them, the IRS reports that between 2010 and 2018 only 0.6% of individual tax returns resulted in an audit. That may make you feel better, but statistically speaking that still means that more than 250,000 taxpayers had to go through the process. In many cases the audit process could have been avoided had the taxpayers simply known what we’re about to spell out for you – that there are specific triggers that send up IRS red flags and frequently lead to an audit process.

The red flags include:

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IRS Offers New Identity Protection for Taxpayers

tax planning taxes Mar 01, 2021

Article Highlights:

  • IP PIN
  • Identity Verification
  • Opt-in Program
  • Application Process

In the past, the IRS has assigned verification numbers to victims of identity theft to file their tax returns, if requested by the victimized individual. These numbers are referred to as identity protection (IP) PINs. The IP PIN is a six-digit code known only to the taxpayer and the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayer’s personally identifiable information.

The IP PIN serves as the key to an individual’s tax account. Electronically filed returns that do not contain the correct IP PIN will be rejected, and paper returns will go through additional scrutiny for fraud.

The IRS launched the IP PIN program nearly a decade ago to protect confirmed identity theft victims from ongoing tax-related fraud. In recent years, the IRS has expanded the program to specific states where taxpayers can opt into the IP PIN program. Now, the voluntary...

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Charitable Contributions Deduction Liberalized for 2021

charity covid-19 taxes Feb 16, 2021

Article Highlights:

  • Charitable Contributions for Non-Itemizers
  • Penalties for Contribution Overstatement
  • Cash Contributions for Itemizers
  • Substantiation Requirements

As a means to stimulate charitable contributions during the COVID crisis, Congress made two notable changes for 2020—one allowing taxpayers that don’t itemize their deductions an above-the-line deduction for cash contributions of up to $300 and another for those itemizing their deductions to increase the maximum deduction for cash contributions to 100% of their adjusted gross income (AGI).   

The recent COVID-related tax relief act, passed late in December, extends and enhances those liberalized charitable contribution deduction provisions. Here is a rundown on these charitable contribution tax benefits for 2021:

  • Charitable Contributions for Non-Itemizers – The Taxpayer Certainty and Disaster Tax Relief Act allows those who don’t itemize their deductions a deduction of up to $300...
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Increased Business Meal Deductions for 2021 and 2022

Article Highlights:

  • Business Meals Under TCJA
  • 100% Deduction for 2021 and 2022
  • Qualifications

If you recall, the Tax Cuts and Jobs Act (TCJA), effective beginning in 2018, eliminated the business-related deduction for entertainment, amusement or recreation expenses. However, it did retain a deduction for business meals when the expense is ordinary and necessary for carrying on the trade or business and is not lavish or extravagant, along with some other requirements noted below.

Under TCJA, the business-meal deduction continues to be 50% of the actual expense. Also remember that business meals must be documented, including the amount, business purpose, date, time, place and names of the guests as well as their business relationship with you.

Great News – For 2021 and 2022 only, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 allows businesses to deduct 100% of business meal expenses under the following circumstances:

  • The food or beverages must be provided by a...
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What Are the Tax Advantages of Home Ownership?

home ownership taxes Jan 28, 2021

Article Highlights: 

  • Historically Low Interest Rates
  • Purchase Costs
  • Points
  • Mortgage Payments
  • Refinancing
  • Property Taxes
  • Inflation
  • Gain Exclusion
  • Renting Versus Owning
  • Worksheet to Analyze Costs

Housing is a big expense for everyone. The choice generally involves either renting or purchasing – and financing that purchase with a home loan. As of November 2020, the nationwide average for a 30-year fixed-rate mortgage was just under 3%, the lowest it has been in the last 50 years or even longer. Many individuals are taking advantage of the historically low rates to buy their first home, sell their existing home to move up to a more expensive one, or refinance their existing mortgage. Some who currently own their homes free and clear are even taking out loans to lock in the low interest rates. This article looks at the tax benefits and drawbacks of buying, financing, and owning a home.

Purchase Costs – Purchasing a home includes costs related to escrow, attorney fees...

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How to Address Rising Tax Problems During COVID-19 

COVID-19 has caused the death of over 300,000 people. There have been nearly 19 million reported cases in the United States. COVID-19 has touched nearly every aspect of the lives of every American.

It has even affected finances for most Americans as well, creating waves of economic stress. It will have some tax implications that many people have not considered. For some, it can mean simply reporting income or expenses differently. For others, it may mean having to pay additional income taxes that they had not planned.

Regardless of the situation, this year might be the year that you need to bring in a tax professional to help address some of the tax challenges that COVID-19 has caused.

Examples of Tax Complications Due to COVID-19: Unemployment and Retirement Plan Withdrawals

As individuals are losing their jobs or had to decrease work because of COVID-19, they are turning to other sources of income such as unemployment benefits and dipping into their retirement savings plans.

For...

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Saver’s Credit Can Help You Save for Retirement

retirement taxes Jan 06, 2021

Article Highlights:

  • Benefits
  • Eligible Taxpayers
  • Rules for Students, Dependents of Others and Individuals Under the Age of 18
  • Due Date for Contributions  

Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit. 

The saver’s credit, also called the retirement savings credit, helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth individual retirement arrangements (IRAs), SIMPLE IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. The saver’s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans.

Credits for 2020 and 2021 are determined from the tables shown below and are based upon both filing status and income (AGI).

 

2020 PHASE-OUTS

Modified...

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IRA Withdrawal Planning Can Save on Taxes

ira retirement taxes Dec 28, 2020

Article Highlights:

  • Early Distributions
  • Distributions After Age 59½
  • Minimum Required Distributions After Age 72
  • Excess Accumulation Penalty
  • Estate Tax Issues

Advance planning can, in many cases, minimize or even avoid taxes on IRA distributions and other qualified plan distributions. When contemplating future retirement and when to begin tapping taxable IRA and other qualified retirement accounts, taxpayers need to consider a number of important issues. 

Early Distributions (before 59½) - If funds are withdrawn before the taxpayer reaches age 59½, the distribution is subject to a 10% early withdrawal penalty (and state penalties, if applicable) in addition to income taxes, unless what is referred to as the substantially equal payment exemption is utilized.  Under this exception, an early retiree can begin taking substantially equal payments at least once a year over their projected lifetime or the joint lives of themself and a designated...

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Didn’t Get Your Economic Impact Payment? You Can Claim It on Your 2020 Return

covid-19 stimulus taxes Dec 22, 2020

Article Highlights:

  • Economic Impact Payments
  • High-Income Taxpayer Phaseout
  • Using the 2018 and 2019 Returns
  • Who Qualified for a Rebate?
  • Deceased Individuals
  • Tax Return Non-filers
  • Reconciliation on the 2020 Return

One of the more tax-troubling issues this year has been the distribution of what Congress referred to as the recovery rebates. You may know these payments as the Economic Impact Payments (EIPs) or stimulus payments, names that the IRS took the liberty of creating. These payments were meant to provide financial assistance to individuals and families struggling during the initial outbreak of the COVID-19 pandemic.

Congress authorized the payment amounts in late March 2020, in the CARES Act, to be $1,200 for each filer ($2,400 if married and filing a joint return) and $500 per dependent child under age 17. Congress mandated that the IRS get these payments out as quickly as possible. However, the payments were phased out for higher-income taxpayers at a rate of 5% of the...

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Sold or Thinking of Selling Your Home?

covid-19 home sale taxes Dec 17, 2020

Article Highlights: 

  • Home Sale Exclusion
  • 2 out of 5 Rule
  • Business Use of the Home
  • Gain or Loss from a Sale
  • Previous Use as a Rental
  • Form 1099-S IRS Matching
  • Records

In spite of (or in some cases, because of) the COVID-19 pandemic, and with near-record-low home mortgage interest rates, the housing market has been booming. September 2020 existing home sales were up 9.4% from August 2020 and 20.9% from 2019, according to the National Association of Realtors. If you sold your home this year or are thinking about selling it, there are many tax-related issues that could apply to that sale. To help you prepare for reporting the sale you may have already made or make you aware of what issues you may face if you are in the “thinking about” stage, this article covers the tax basics and some special situations related to home sales and the home-sale gain exclusion.

Home Sale Exclusion – For decades, Congress has encouraged home ownership, including by providing a tax...

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