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.

Understanding the tax implications of out-of-state workers

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Here in the tri-state area, where it’s a relatively easy commute from Connecticut or New Jersey to Manhattan, for example, it’s quite common for Magone & Company clients to have employees who reside out of state. And with remote workers becoming more common, you may have more employees who live across the country rather than around the corner.

When your firm has employees who live in one state and work in another, tasks like employment taxes can get a bit tricky. Taxes are generally paid in the state where your team works, but you may run into issues if:

  • Your company is located near a state border
  • You have employees who travel to job sites in other states
  • You have employees who work remotely
  • You are expanding into new states

Having some basic understanding of how the system works will help you make the right decisions about classifying wages and avoiding penalties or amended filings. Both state unemployment and withholding taxes should generally be paid to the employee’s work state, but there are exceptions; the twist is that state laws are (literally) all over the map. Be sure to familiarize yourself with the state legislation that applies to your team. Here are the basics:

Reciprocity agreements
Some states that border each other have entered into agreements allowing employees, who live in one state but work in another, to have their withholding tax paid to the work state. For example, an employee who lives in Maryland but commutes to northern Virginia or D.C. for a job can have withholding tax paid to Maryland rather than the work state. This is also known as courtesy withholding, and it means the employee can file one tax return each year.

If you have an employee complete a non-residency certificate to excuse him/her from tax withholding in their work state, let your payroll provider know that your employee has an agreement in place. If there’s no reciprocal agreement, your employee will most likely have to pay both nonresident and resident state income tax. But luckily, most states grant a tax credit to cover the cost of being taxed twice.

The unemployment tax situation is usually straightforward. When an employee is working in multiple states or working remotely for a company based in another state, employers typically withhold state unemployment tax only in the state in which the employee is working.

 When it gets complicated
Today’s remote-work world means situations that were rare or unheard of a generation ago are now commonplace. For example, consider an employee who works from her cabin in upstate New York, but your company is located in Atlanta — you’ll have to pay all state taxes to New York because that’s where the work is actually being completed.

Or, at that same Atlanta company, you have an employee who needs to work in Maine temporarily for three months. For nine months, you pay taxes in Georgia, and for three months, you pay taxes in the Pine Tree State.

As always, there are exceptions and special circumstances which may also impact your firm’s tax situation, so be sure to consult your trusted tax advisor for specifics. Need help with your cross-border workforce? The professionals at Magone & Company can help you organize your tax system accordingly.

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.

Digital transformation: How AI will supplement (not supplant) the role of the CFO

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Artificial Intelligence (AI) continues to revolutionize the financial realm. And as a result, the role of the CFO is evolving, too.

AI is changing the organizational structure of how financial departments function. It’s allowing businesses to work smarter and faster, enabling their transformation into full digital organizations. But as technology fulfills core accounting jobs, what does that mean for the future of the CFO?

There are some shoes AI will never fill
The rise of AI is not likely to replace the CFO, but rather create a strategic partnership. Even as robots get smarter and more economical, they’re not equipped to take on every function.

According to a recent McKinsey report, the determining factor in whether a job is likely to be replaced is the type of work involved. The more predictable and repetitive the job, the more likely it is to be taken over by automation. So, it’s safe to say the core functions of a CFO will not be automated any time soon, and here’s why:

Decision-making skills are difficult to program. Not every question or business challenge can be broken down into quantifiable factors for AI to solve. AI isn’t capable of making judgment calls and tackling decisions that can impact an entire organization. There will always be unexpected problems to solve and machines will never replace human judgement.

Machines can’t easily adapt to the unexpected. Consider the self-checkout lines at big retailers. While they may help move lines faster and lessen crowds, they’re also susceptible to theft. It’s too easy for someone to input the wrong code and make off with a sizeable discount. What does that mean for more complicated machines? System flaws within AI are often unavoidable.

Humans prefer to deal with other humans. When it comes down it, people put more trust into the ideas and intuition of other people rather than machines. While robots are entrusted with smaller duties, it’s unlikely that any company would trust AI with taking over critical tasks.

The true value of AI is enabling CFOs to analyze data in more valuable ways. But this insight is worthless if you’re bogged down with daily accounting operations, like managing financial transactions and producing reports. With technology taking over the grunt work, you’ll be poised to lead change within your organization.

Working in tandem
Today’s CFO is responsible for contributing to company growth and increasing profits. AI provides the actionable information to support decision-making to reach organizational goals — but not take it over. Machine-learning algorithms lend the power to analyze, interpret and make predictions to improve operations and productivity. With AI, the CFO gains:

  • Increased efficiency. As low-priority responsibilities are automated, time is freed up to concentrate on more strategic and revenue-generating tasks.
  • Improve planning. Accurate and reliable data offers higher visibility to detect anomalies, pinpoint inefficiencies and make better planning and forecasting decisions.
  • Smarter fraud detection. The ability to verify information in real-time and ensure compliance can help mitigate risk and prevent fraudulent activity.
  • New ideas. AI can make sense of volumes of data, initiating new ideas and possibilities.
  • Internal reliability. Use data as proof points to build trust with stakeholders and justify key business decisions.

The bottom line
Al gives CFOs a huge advantage. By harnessing the power of data and automation to rise above tedious tasks, they can move into the future with more certainty and maximize their contributions to the success or their organization.

Making sense of the new regulations for retirement plan hardship distributions

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Last month, the IRS issued its final regulations relating to hardship distributions from employee-sponsored retirement plans, including 401(k) and 403(b) plans. These regulations come in response to statutory changes affecting hardship distributions contained in the Bipartisan Budget Act of 2018. The objective: to provide one general standard for determining whether a distribution is necessary — thus simplifying the rules.

If your firm offers retirement benefits, here’s what you need to know:

According to the IRS, a hardship distribution is a withdrawal from an elective deferral account due to an immediate and substantial financial need, limited to the amount necessary to satisfy that need. The money is not paid back to the borrower’s account, but is taxed to the participant.

What constitutes financial need?
Under the new regulations, distribution is treated as necessary when the following requirements are satisfied:

  • The employee has obtained all other distributions available under the plan, as well as all deferred employer compensation plans
  • The employee has provided a written representation to prove insufficient funds to satisfy the need, and the plan administrator does not harbor any knowledge that conflicts with the representation
  • The distribution amount doesn’t exceed the amount required to satisfy the financial need, including any monies needed to cover taxes or penalties resulting from the distribution

What’s changed?
A distribution is not treated as necessary to meet an employee’s urgent financial need if the need may be relieved from another reasonably available resource, including a spouse’s assets. Hardship withdrawals can also be extended to the employee’s primary beneficiary for qualifying educational, medical and funeral expenses. Going forward, hardship withdrawals may also be made from an employee’s elective contributions, as well as the matching contributions from employers — including the earnings on the savings.

Hardship-related amendments in the legislation include:

  • Elimination of the six-month suspension requirement for employee elective deferrals following receipt of a hardship distribution
  • Elimination of the requirement that available retirement plan loans be taken before a hardship distribution is granted
  • Inclusion of employer-provided qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs) and their earnings — as well as any income on employee elective deferrals — in hardship distributions

What does this mean for your business?
Plan sponsors are now tasked with ensuring that retirement plan documents are in compliance with the newly-issued hardship distributions. Plans that currently allow hardship distributions will need to be amended to reflect the final regulations by December 31, 2021. Operational changes, however, must comply with the amendments by January 1, 2020.

 Questions? Reach out — we’re happy to discuss these changes and their impact in more detail.

Donor management best practices: Turning good data into a goldmine

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For nonprofits, donors are the lifeblood of your mission. After all, they’re the people funding it. So, it’s no surprise, according to NonProfitPRO’s 2019 Leadership Impact Study, that 82% of nonprofits are using technology to improve their donor relationships and 52% are using it for donor management.

When kept current and accurate, data can be leveraged to inform critical decision-making for the entire organization. That’s why most nonprofits rely on donor database software — also known as nonprofit constituent relationship management or CRM software. This type of software stores your donor data in one centralized location, helping you to better manage and make sense of all the information.

Because donations are just the tip of the iceberg
Even the most basic donor management platforms can track donations, donor details and more. Depending on your software, it may also have built-in features that are designed to help build on the data you already have. It may even come equipped with fundraising features, helping to automate cumbersome tasks. At the end of the day, your software should make information accessible and readable, so you can easily address donor challenges, streamline the solicitation process and develop a sound strategy for effective communication.

Try the following best practices to optimize your data management and build stronger supporter relationships:

Create comprehensive profiles
To best engage with your supporters, ensure that your donor profiles contain all the essentials — and more. You should already have their full name, email address, mailing address, phone number and birthday. But having a broader picture of who your donors are and how they can impact your mission can help you create better strategies to support them. That means collecting supplementary data such as:

  • Hobbies
  • General interests
  • Employment details
  • Social media profiles

Track supporter engagement styles
Pay attention to how your donors are interacting with your nonprofit. When you can pinpoint the areas of engagement, you can better nurture those relationships and develop future plans to engage. You should have separate strategies in place for how they’re involved:

  • Donors
  • Volunteers
  • Event sponsors
  • Event guests
  • Membership program participants
  • Peer-to-peer fundraisers
  • Social ambassadors

Roll out smarter fundraising appeals
A donor’s giving history can be invaluable when it comes to planning your next ask. When you’re armed with a donation amount, payment type and donation channel, you can use this information to:

  • Be realistic about the donation amount you’re soliciting
  • Share the impact of past gifts
  • Promote the gift-giving channels you know donors are likely to use
  • Inspire them to give more by showing how a small increase could make a huge impact

Tailor your outreach
You want to stay in touch often — even when your donors are not signing a check. But too much communication can be annoying. And messages may be overlooked altogether if they’re sent through the wrong channel. That’s why it’s critical to update your donor profiles with data such as:

  • Preferred communication channel
  • Communication frequency
  • Programs or opportunities of interest

Integrate online forms
The benefit of an integrated form-builder? The data will automatically flow through your database and update your donor profiles — so you can spend less time inputting data and more time putting it to use. These forms include:

  • Donation
  • Event registration
  • Volunteer sign-up
  • Membership applications

To connect with donors personally, fundraise successfully and expand your mission, you need a donor management strategy that maximizes your data, along with the technology to support that strategy. But remember, don’t opt for a shiny new toy without ensuring that it’s right for your organization in a way that supports your overall mission and your goals.

Learn more about how Magone & Company helps nonprofits find financial clarity and maximize support for their mission.