Tax Tips for Individuals

4 income tax filing mistakes that could land you in tax trouble

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Thinking of preparing your own income tax return  this April? You might want to reconsider. Even the slightest oversights might mean hefty fines and penalties that could have been avoided. Watch out for these four mistakes before hitting the “submit” button.

#1 Neglecting to report all of your income.
Whether it’s your regular paycheck, a side gig, gains that you’ve made on the stock market or interest earned from deposits in the bank, you need to account for all of it in your tax return. If you don’t, the IRS may come knocking. Every time you make at least $600 in income working as an employee of any description, you get a 1099 form stating what you’ve made. Technically, you should also record smaller chunks of income for which you don’t get a 1099.

#2 Guessing what your deductions are.
Back up every attempt at a deduction with documentation like receipts or logs. If you attempt a rough estimate at what your deductions should be, you could trigger suspicion — especially if the sum you claim is high for your income level, or if it’s a convenient round figure.

#3 Automatically rejecting the idea of itemizing.
Most tax filers choose to take the standard deduction, rather than itemize. But, this doesn’t mean that you shouldn’t itemize — it really depends on your specific circumstances. If you have many legitimate deductions to make because you pay a great deal of mortgage interest, for example, itemizing may work in your favor.

#4 Procrastinating filing your return.
Preparing your taxes is a complex process. If you’re self-employed, or if you need to itemize, it man only get worse. Don’t rush through the process, as mistakes can be costly. Take the time to file your taxes well ahead of the deadline. If you need extra time, you can always file for an extension and avoid the late filing penalty, which can add up to a whopping 25% of the original tax amount.

Whatever you do, don’t skip filing altogether! At Magone & Company, we’re here to help. Give us a call at (973) 301-2300 for assistance in resolving any tax issues that come your way.

What is “Currently Not Collectible” status from the IRS?

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Big corporations are known for getting all sorts of breaks, but when average people fall behind, they rarely receive help. When you owe back taxes but can’t afford to pay them, you may qualify for a special tax status known as currently not collectible (CNC). In a nutshell, if the IRS agrees you can’t pay both your taxes and your reasonable living expenses, it may place your account in CNC status.

You can request CNC status by submitting the proper form and proof of your income and expenses, as well as documentation of your assets and loans. Be sure to gather copies of all your bills, your most recent pay stubs, and statements detailing other sources of income such as alimony, pensions or investments. If the IRS determines that your necessary expenses exceed your income, you will be notified of your status. And if you’re approved for CNC status, the IRS must not only cease its collection efforts, but can no longer garnish your wages or seize your property.

Not a permanent solution
Keep in mind, CNC status only applies to back taxes. You will still have to file tax returns, and are not exempt from paying current and future taxes. You will also continue to accumulate penalties and interest on your unpaid taxes. After a year or two, the IRS may review your status, and if you’re able to begin paying your back taxes, then you must do so.

Statute of limitations
The IRS can attempt to collect outstanding taxes for only 10 years from the date the taxes were assessed against you, which is usually the date you filed. If at the end of this 10-year period the IRS hasn’t collected, the taxes are no longer owed.

Advice you can trust
In difficult times, many individuals and businesses have trouble meeting their commitments. Reaching out to our firm for a confidential consultation may give you some peace of mind. Call the tax professionals at Magone & Company at (973) 301-2300 for a specific evaluation of your situation.

3 reasons you shouldn’t talk to the IRS yourself if you owe back taxes

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If you owe money to the IRS, it might sound like common sense to try to tackle your tax problem on your own. However, one of the worst things you could do is talk to the IRS directly without proper representation.

As an expert tax resolution firm, we encourage all readers facing a tax problem to contact us for a free consultation.

The IRS is not on your side and their primary goal is to collect the taxes they believe you owe. In this article, we give you 3 reasons why talking to the IRS directly could get you into deeper trouble.

1. You have rights.
Contrary to popular belief, you DO have rights as a taxpayer that you probably don’t even know exist. One is the right to representation. If an IRS revenue officer or revenue agent calls or “visits” you, did you know you are under no obligation to answer any of their (very intrusive and condescending) questions? Politely respond by asking for their contact information, explaining that you’re in the process of hiring a professional to represent you and that this person will contact them directly. A CPA or Enrolled Agent that deals with IRS problems for a living knows the “ins” and “outs” and how to deal with the IRS so that your rights are protected. A tax resolution specialist also knows how to get you the lowest possible settlement allowed by law. Generally, our clients never meet or speak with the IRS once we’re on the scene.

2. Answering questions can dig you into a deeper hole.
If you are being audited or about to be, the IRS will ask you about 50 very intrusive questions in your initial interview. How you answer these questions will dictate the fate of your case.  Having a tax resolution specialist conduct these meetings WITHOUT you is the best course of action we can recommend. Half of the referrals to the IRS’s criminal investigation division come from that “nice” auditor sitting across the table at the audit.

3. They won’t tell you about all your settlement programs and options. The just want their money.
If you owe between $10,000-$25,000+, the IRS has many NEW flexible programs under their Fresh Start Initiative available to taxpayers. These include Offer in Compromise, Partial Pay Installment Agreements, Payment Plans, Penalty Reduction, and Currently Not Collectible Status to name a few. Each carries with it its own unique process, procedures and qualifications.  Having an experienced tax pro in your corner ensures you are taking advantage of the best options available to you.

One last thing….

Ask yourself this question: Would you go to court without a lawyer?

If you answered “yes” hopefully you know the law inside and out concerning your case, but if representing yourself doesn’t seem like a great idea it’s best to hire somebody who is well versed in the subject matter. Well, it’s the same thing with the IRS. Having someone who knows how to negotiate the IRS’s maze of rules, regulations and the 74,000 pages of the Tax Code and deal with the IRS may be the best money you’ve ever spent.

If you want the help of an expert tax resolution professional who navigates the IRS maze for a living, reach out to our firm at (973) 301-2300. We’re happy to schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem.

Choosing the right entity for your small business

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If you’re thinking of starting a business, kudos to you! Starting a business can be an overwhelming experience in the beginning, but well worth it in the end.

Of all the decisions you’re going to make, one of the most important decisions that should not be taken lightly, will be the type of legal structure you will choose for your company, whether it may be a sole proprietorship, partnership, or corporate entity. This decision will definitely have an impact on your tax obligations, it will affect the amount of paperwork your business will be required to complete and process. It also has ramifications for your personal liability.

Before we get into the various business types, there are some considerations which lead to one business form over another regardless of tax advantages. For example, do you have foreign partners or investors, will you operate in various states, will you seek venture capital (if so, how soon)? These are but a handful of considerations that need to be considered. Let’s now look at the various business forms.

Types of business entities

Sole proprietorship is the most common form of business organization and easiest to operate. It is very simple to form often requiring only registering a Doing Business As (DBA) with the county courthouse. A mistake many owners make since this form of business is so easy to form and operate is they are lax in maintaining adequate books and records and frequently commingle business and personal expenses in the checkbook.

Tip – Open a separate checking account and pay yourself a draw. Pay business expenses from the business account and personal expenses from your personal checkbook.

Another consideration is this type of entity makes the owner personally liable for any and all financial obligations pertaining to the business. Think bankruptcy or liability from acts of your employees, such as an auto accident. I’m not referring to professional liability such as doctors, professionals are always held personally liable. Thought must be given to the nature of your business and potential for liability before selecting this form of entity.

Finally, adequate and accurate books and records are required, but the owner does not take a salary. The owner takes a draw and pays the federal, social security and state taxes assuming no employees via quarterly estimated tax payments. Keep in mind your draw is your “gross” pay check. This means you’ll need to estimate a reserve for income and social security taxes from each draw, no different than you would withhold taxes for an employee.

Tip –Establish a separate bank account for your tax liability and transfer the estimated amount for taxes to this account to establish a delineation between funds available for operations versus those earmarked for taxes.

A partnership consists of two or more people who agree to share in the profits and losses of a business. Similar to a sole proprietor, partners do not take salaries, but rather take guaranteed payments. The guaranteed payments are deducted from the net income, but included as partner’s compensation and subject to income and social security taxes.

Depending on whether a partner is a general partner or a limited partner, they may be held personally liable for the financial obligations of the business, absent personal guarantees. Many individuals form partnerships to avoid double taxation such as is the case with C-Corporations. Partnership tax law is one of the most complex areas of the tax code due to the flow-through nature of income, expenses, gains and losses. However, it’s useful when partners want flexibility in partner sharing percentages for income and losses.

Tip –Make sure you have a partnership agreement in place from the start. This can help you avoid heartache and expensive litigation if the partnership ever goes sour.

A corporation is a legal entity incorporated within a state. Many corporations are formed in Delaware, since most attorneys are trained in Delaware law and the law of their home state. The corporation is a separate entity, subject to federal and state taxation. Like a person, the corporation can be taxed and can be held legally liable for its actions.

Most venture capitalists require a corporate structure to facilitate investment and eventual sale, or public offering. In addition, there is the possibility certain officer fringe benefits and those of other shareholders will not be subject to tax as is the case with partnerships or S-corporations.

Tip –The key benefit of corporate status is the avoidance of personal liability, so long as the corporate veil is not pierced. Bes sure to work with a knowledgeable advisor to make sure you have the right documents and processes in place to take full advantage of corporate status.

The primary disadvantage is the cost to form a corporation and the extensive record-keeping (minutes, resolutions, etc). While double taxation is sometimes mentioned as a drawback to incorporation, the S corporation (or Subchapter S-corporation, a popular variation of the regular C-corporation) avoids this situation by allowing income or losses to be passed through on individual tax returns, similar to a partnership. Similar to the partnership tax laws, those applying to the Subchapter S-corporation are often quite complicated due to the flow-through nature of the income and expenses.

A hybrid form of partnership, the limited liability company (LLC), is very popular among new business owners and the legal community. LLCs offer personal liability protection for the owners, but for income tax purposes they are treated as a sole proprietorship if there is one owner or a partnership if more than one.

Tip –An LLC can elect to be treated as a corporation, but this is seldom done unless there are extenuating circumstances, for example foreign owners.

The foregoing is meant to provide a broad overview of the types of business entities a new business owner may choose. Each choice carries with it its own advantages and disadvantages based on your goals, so be sure to consult your CPA or other  trusted business advisor before making any decisions.

Need help talking through your options? Magone & Co. CPAs can help you make the decision that’s right for your needs and goals.

Tax Reform Update: Alimony

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Under the current rules, an individual who pays alimony or separate maintenance may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction. (An “above-the-line” deduction, i.e., a deduction that a taxpayer need not itemize deductions to claim, is generally more valuable for the taxpayer than an itemized deduction.) And, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse (includible in that spouse’s gross income).

However, new rules are coming soon
Under the Tax Cuts and Jobs Act rules, there is no deduction for alimony for the payer. Furthermore, alimony is not gross income to the recipient. So for divorces and legal separations that are executed (i.e., that come into legal existence due to a court order) after 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse won’t include them in gross income or pay federal income tax on them.

These new rules don’t apply to existing divorces and separations
It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as to divorces and separations that are executed before 2019.

Some taxpayers may want the Tax Cuts and Jobs Act rules to apply to their existing divorce or separation. Under a special provision, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified after Dec. 31, 2018, the new rules apply to that modified decree if the modification expressly so provides.

There may be situations where applying these new rules voluntarily is beneficial for the taxpayers, such as a change in the income levels of the alimony payer or the alimony recipient.

To discuss the impact of these rules on your particular situation, please call us at (973) 301-2300.

How will federal tax law changes impact your NJ business?

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The federal Tax Cuts and Jobs Act, which represents the first major U.S. tax code overhaul in 30 years, seems to provide small businesses everywhere with a break on their taxes. For NJ business owners and managers, it’s critical to understand how the new mandates will affect your organization.

Pass-through business deduction
Pass-through companies account for 95 percent of all U.S. businesses. These entities allocate corporate income among the owners, rather than paying income taxes at the corporate level. Effective this year, pass-through companies will receive a 20 percent tax deduction. This deduction lowers a business’s taxable income by 20 percent, providing small business owners with more financial breathing room and freeing up money for hiring new workers and expanding operations.

There is one limitation: Married individuals who own service-based businesses (e.g. law firms or doctor’s offices) can only claim the deduction if their annual income is below $315,000 ($157,500 if single).

First-year bonus depreciation
This depreciation deduction is increasing from 50 to 100 percent. This allows businesses to deduct the full amount of eligible equipment and property purchases, rather than writing off a portion. Lawmakers hope this change will encourage business owners to put more money back into their companies — increasing R&D, expanding staff or branching out into new geographic markets.

Net operating loss window
Previously, net operating losses (NOL) — when a business’s tax deductions are greater than its taxable income — could be carried back for two years. Now, they can be applied for an indefinite amount of time. Net operating losses occur when a business’s tax deductions are greater than its taxable income. While this can only be applied to 80 percent of taxable income, it can help businesses to take risks and spend more money, essentially lowering the cost of failure.

Elimination of transportation fringe benefits
Businesses must now do without the transportation fringe benefits and entertainment expense deduction — tax-free employee commuter plans and reduced-rate entertainment plans. These perks can still be provided by employers, but can’t be written off as business expenses.

Lower corporate tax rate
The corporate tax rate is decreasing from 35 to 21 percent. That means corporations may be more inclined to set up shop and stay put, and less likely to move overseas. The new tax rate gives companies an opportunity to make more money, and can give the U.S. a competitive edge on a global level.

Keep in mind, this is just a general summary of new tax laws and should not be considered financial or legal advice. Be sure to consult with your CPA or tax advisor for advice specific to your business.