Business Taxes

The Tax Considerations of Working Remotely: What You Don’t Know May Cost You

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Millions of employees went remote when the pandemic first hit in 2020. Many never returned to the office — and more and more workers continue to make the transition. According to a Future Workforce Report, the number of remote workers is expected to nearly double from pre-pandemic level in the next five years.

If you’re currently telecommuting, it’s important to get up to speed with the latest tax developments that can impact your 2021 tax return, especially if you’ve been working in a different state from your usual workplace. Consider the following questions:

  1. Did you change your state of residency? If you relocated to a new state while maintaining your remote employment, be sure to update HR with your new address ASAP, as this can change your tax withholdings. An employer can be penalized for not withholding when they should have. And depending on where you live, some states offer withholding credits if taxes are paid or withheld in other states.
  2. Where are you paying income tax? If you’re working from a different state than where your company is licensed, your state taxes may or may not be affected. Each state has its own set of rules. For example, states like New York and Connecticut tax remote workers based on the location of their employer’s office, regardless of where the work is completed. On the other hand, if your office is in New York, but you move to California while telecommuting, you risk both states taxing your income.
  3. Are you eligible for home office deductions? For tax years 2018 to 2025, the Tax Cuts and Jobs Act (TCJA) excluded W-2 employees from the home office deduction. The deduction is reserved for self-employed remote workers who use their home regularly and exclusively for business during the tax year. Your home office could be a single room, a portion of a room or a separate building on your property that’s solely used to conduct business. If you qualify, there are two methods for calculating the deduction. Under the actual method, calculate the potential deductible amount by prorating your expenses with your business use. If you prefer not to keep track of your home office expenses, you can deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

It’s a hot topic — and we can help you navigate it

Remote work offers many benefits, but also the responsibility to evaluate your new tax situation. As always, be sure to consult a trusted advisor for specifics on your individual circumstances before you file your 2021 return. Don’t hesitate to reach out to the professionals at Magone & Company for tax assistance. Give us a call today at (973) 301-2300.

 

Bigger Tax Savings in 2021: 4 Tips for the Self-Employed

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Being self-employed has its benefits, for sure. You can enjoy the freedom and flexibility of working from where you want, when you want. Plus, you can build your own client list and reap the profits from your hard work.

But there’s also a downside — and it has to do with self-employment taxes. If you had a rude awakening filing your 2020 return, here are some strategies that can help keep more hard-earned cash in your pocket next year.

  • Open a SEP-IRA. This is one of the simplest ways to shelter your self-employment income and save for the future. The SEP-IRA works just like a traditional IRA; the main difference is that this program is designed specifically for the self-employed.
  • Invest in a solo 401(k). The solo 401(k) is basically the self-employment equivalent of a traditional 401(k), but you control the money and how it’s invested. Best of all, the contribution limits for solo 401(k) plans are even higher than those for traditional 401(k) plans, and maxing it out could help reduce your taxable income.
  • Contribute to a health savings account (HSA). Many self-employed workers save on health insurance by purchasing a high-deductible plan. With such a plan, you may be able to reduce your taxes by pairing it with a health savings account, or HSA. An HSA lets you set aside some money, tax-free, to spend on care or care-related costs.
  • Push payments into the following year. If your clients are willing to go along with it, deferring payments until the next calendar year is one more way to reduce your taxable income. You will need to settle up with the IRS eventually, but this strategy can work well if you anticipate next year’s income to be significantly lower.

Achieve the best of both worlds
Working for yourself can be great, but it can also be quite taxing. That’s where tax planning comes into play. Ask your tax advisor or reach out to us for assistance.

The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your situation.

The Proposed Tax Hike’s Effect on Families: Even Those Not Considered “Rich”

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President Joe Biden’s address earlier this week confirmed many of the plans that were being laid out in the preceding months; specifically, as they relate to real estate, capital gains and estate taxes.

Although the proposals have a long way to go before becoming law, a Democratic majority in the House and a tie-breaking vote in the Senate held by Vice President Harris creates a scenario in which the proposal will pass — provided the Democrats are able to hold their members in line.

There are three provisions which affect real estate in the Biden administration’s tax proposal.

The first, which has been talked about extensively, is the increase in the capital gains rate from 20% to 39.6%. This proposal is directed toward households making over one million dollars.

In the northeast, it doesn’t take a lot to push households to this level given residential and commercial real estate prices. This could mean an individual could pay as much as 43.4% in federal taxes alone and possibly over 50% when factoring in state taxes.

The second is the proposed elimination of the 1031 tax-free exchange when gain on a property is greater than $500,000.

This tax break allows owners of investment and business real estate to defer the gain by enabling them to purchase like-kind property within 180 days of the sale of the original property. This has been an often used technique to allow property owners to defer the entire gain on the sale of their property.

Finally, included in the tax proposal is the elimination of the “step-up“ in cost basis for inherited property.

Although we’re speaking about real estate, this applies to all property such as stocks, bonds, etc. The concept of stepping up the original cost to the fair market value at the date of the death of the owner has been in the tax law for decades, and ensured that beneficiaries who sold inherited property paid little if any capital gains tax on the immediate sale of the inherited property. This substantially reduced the tax burden for beneficiaries upon sale of the property.

Based on the likely passing of the above in some form, if you are contemplating a sale of investment or business property, careful examination should be given to the tax effect.

In prior administrations, when the capital gains rate was changed there was a cut-off date established for gains subject to the new and old rules when passed in the same year. More importantly, review your current will to ensure it is tax efficient, and consider further planning to take advantage of current estate and gift laws prior to potential changes.

Now is not the time to delay sales of property you may have been considered selling, especially real estate with a 1031 exchange.

The above is not tax advice. Please consult with your tax professional for guidance specific to your particular financial circumstances.

Self-Employed? Here’s What You Need to Know About Taxes

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The gig economy is booming. The COVID-19 pandemic has created a demand and an opportunity for workers to profit off their skillsets outside from traditional employment. In fact, country music star Dolly Parton even updated her classic hit “9 to 5” to speak to the growing number of entrepreneurs who are getting their side hustle on after clocking out of their day job. Now more than ever, people are working “5 to 9” and building a business from their own know-how.

Anyone who earns income directly from clients — as a contractor, freelancer or small business owner — and doesn’t have an employer that withholds money from their pay for tax purposes, is generally classified as a self-employed worker by the IRS. If you’re self-employed, it’s important to understand how taxes work, so you can avoid owing more than your fair share to the government. Being in business for yourself can lead to higher taxes and more complex tax returns than you bargained for.

The self-employed and tax withholdings
Self-employed workers are responsible for paying taxes through estimated tax payments. These estimated payments must be sent directly to the IRS on a quarterly basis — by April 15, June 15, September 15 and January 15 — if you expect to owe at least $1,000 in income tax at the end of the year. Failure to plan properly and pay enough estimated taxes during the year can result in a tax penalty and a large surprise tax bill. By paying at least 90% of the tax you owe or 100% of the total tax owed from the previous year, the IRS will typically not assess a penalty.

If your hustle isn’t very lucrative (yet), a net income of $400 or more from self-employment means you can expect to pay up on those earnings — even if you’re already paying taxes through your traditional job. For example, if you work as an employee year-round, but you take on small contract jobs on the side to make extra cash, that revenue must be reported as self-employment income when you file your tax return.

Traditional W-2 employees split the cost of paying into Social Security and Medicare with their employers, but self-employed workers must pay the full amount themselves. As a self-employed worker, you’re on the hook to pay the self-employment tax, which goes toward Social Security and Medicare, in addition to normal income tax. 

There’s no avoiding Uncle Sam
Preparing your annual return and calculating quarterly taxes as a self-employed worker can be tricky. That’s why the experienced CPAs at NJ accounting firm Magone & Company can help you navigate tax laws and ensure tax compliance. We’ll also help you maximize your return, saving on any tax write-offs you may be entitled to as an independent worker. Send us a message or call 973-301-2300.

Amending a Prior Tax Return is Easier Than You Think

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Tax returns can often be filed with incomplete or incorrect information, leading to more tax trouble than you bargained for. If you filed early in years past, you might’ve overlooked income from a temporary job or a side gig. Or you may eventually realize that you’re entitled to an extra deduction or exemption. Lucky for you, the IRS routinely processes a significant number of amended returns each year.

For errors beyond simple math
If you need to change your filing status, income, allowable deductions or credits, amending your return is essential. An increase in reported income, for example, is likely to result in more tax due, while an additional deduction or allowable tax credit could get you a larger refund. And who wants to miss out on money owed?

An amended return adds the corrections to the original return. Individual income tax returns filed with the IRS can be amended up to three years after the due date of the original return by filing IRS Form 1040X. A separate Form 1040X is necessary for each year being amended and must be mailed in its own envelope to the address provided in the instructions. A copy of the original return itself isn’t required, but any added IRS forms must be included, as well as any other supporting documents that can help substantiate the amendment.

It can take several weeks for the IRS to process an amended return. An amendment to a federal return might also require a change to your state return, especially if an increase in income is reported.

Ensure that a tax expert has your back
If your amended return results in asking for a large sum of money back or owed, it may be in your best interest to consult with a tax expert. At Magone & Company, our NJ CPAs specialize in tax resolution and can help navigate the tax amendment process. Give us a call today at (973) 846-8265  to schedule a no-obligation consultation.

The Procrastinator’s Guide to Surviving This Year’s Tax Season

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If you’re a procrastinator, tax filing season is probably the worst time of year. With deadlines looming, filling out all those complicated forms and making sense of the ever-changing tax code can seem like an overwhelming task.

But no matter how long you put it off, the April 15th tax filing deadline will arrive, and what you do to get ready will make all the difference. Here are three timely tips you can use to get a jump on tax filing season:

  1. Find last year’s return now. Go ahead, we’ll wait. It’s stressful to hunt for vital information at the last minute, so make sure you have it in hand well before you need it. Your previous return is required to verify your identity — an important step the IRS implemented in the face of growing identity theft and tax filing fraud.
  2. Touch base with your tax professional early. Don’t wait until March to call or email your CPA. Keep them in the loop of any changes since last year’s filing. Did you get married, have another child, sell a business interest, receive PPP funds or withdraw early from a retirement account? Make sure they have the most current filing information to stop easily avoidable errors.
  3. Gather tax forms as they arrive. Facing the tax deadline with a stack of papers is daunting — even for the non-procrastinator. Instead of waiting until everything is ready to go, gather documents as you receive them and save them in a dedicated folder on your computer.

Miss the deadline anyway?
Most often, a decision made deliberately and slowly is preferable to one made in haste. But as a procrastinator, you know things don’t always go as planned.

Last-minute snags may happen despite your best efforts, but you don’t want to mess with the IRS. Keep in mind that filing for an extension doesn’t absolve you of paying the amount you think you owe.

If you’ve missed filing in the past, the NJ CPAs at Magone & Company can help. To learn more about our tax resolution services, give us a call today at (973) 846-8265.