Tax Tips

We’ve all thought it…  Sitting on the beach in a tropical place while attending a quick meeting via your laptop before hitting the waves in the afternoon sun.  Many people imagine that all they must do is get a work Visa, wave good-bye to family and friends and head to sunnier shores for a bit.  Before you jump ship, or hop a plane, there are important tax items to take into consideration.  The Internal Revenue Service will not ignore you just because you live in a remote village on a Fijian island.  United States citizens (and resident aliens) for the most part, are subject to federal income tax on all worldwide income.  There are a few ways to exclude some up to all of that income, depending on what you earn and how far you are willing to go to make that income not taxable to the federal government.

The first and easiest method is the  Foreign Earned Income Exclusion.  This allows a qualified individual to exclude up to $104,100 (in 2018) of previously taxable earned income.  Earned income is defined by the IRS as taxable wages and employee pay, certain disability or union benefits, and net earnings from self-employment.  This means that you cannot exclude income from interest and dividends, capital gains, retirement account distributions, Social Security, unemployment, passive rental income, alimony or child support.  This income will still be reportable and potentially taxed regardless of if you meant the Foreign Earned Income Exclusion requirements.

The first requirement for the Foreign Earned Income Exclusion is that you must reside and work outside of the United States.  Additionally you must also meet the Physical Presence Test or Bona Fide Residence Test.  The Physical Presence Test requirements are that you must be physically present in a foreign country for three-hundred-and-thirty non-consecutive full days (24 hours) during a twelve-month period.  You do not have to be in the same foreign country for the entire period.  However, international waters do not count.  It is also crucial to make sure you are fully out of United States airspace when you begin your twenty-four hour count.   One advantage is that because the twelve-month period can consist of any uninterrupted twelve-month period, it can overlap years.  This can bring on the extra challenge of filing for and planning for the Physical Presence Test at times.  The three-hundred-and-thirty-day requirement also greatly limits the number of days you can return to the States.  Some people have gone as far as to break as many ties as possible with the United States and their residency terms in order to show physical presence.  This can mean being as extreme as giving up your house, apartment and/or office, disposal of your vehicle and ceasing the use of any storage facility.  This creates room for the Bona Fide Residence Test.

The Bona Fide Residence Test states that you must be a resident of the foreign country for an uninterrupted period that is an entire tax year.  This is different than the Physical Presence Test in that in must be for a calendar year, thereby eliminating the ability to choose the twelve-month period that brings you the biggest chance for the exclusion.  Additionally, the term resident carries a different meaning than physical presence.  You must set up permanent housing in the foreign country, even if you intend to return to your home in the United States at some point in the future.  This does not mean that you must purchase a home in the foreign country, as a long-term lease also qualifies.  You must at no time during the year make any statement that you are not a resident of the foreign country, nor can you avoid paying taxes in that country if you qualify for their thresholds.  Many factors go into qualifying for the Bona Fide Residence Test, and often those are made at the time of the filing of your annual federal return.  Additionally, if you are married, moving the spouse or family there can often aid in your position, although it is not required.  And while you can travel on vacations, they must be short, and intentional.

If you meet the Physical Presence Test or the Bona Fide Residence Test, there is an additional component of possible tax savings called the Foreign Housing Exclusion.  This allows you to potentially deduct a portion of your housing costs related to your foreign residence.  The Foreign Housing Exclusion requires that you utilize employer-provided funds.  This does not mean that the employer must pay for the housing.  It simply means that the funds used must be traced back to the employer and not say a pre-established savings account.  Housing in this case includes rent, fair rental value of housing provided in kind by your employer, repairs, certain utilities, insurance, parking and other similar items.  It does not include extravagant items such as domestic labor, or improvements to the property, property taxes or interest.  The deductible portion of this is only the amount that is over and above the base housing amount.  The base housing amount is sixteen percent of the maximum foreign earned income exclusion for the year.  It is important to note that your foreign earned income will be reduced by your Foreign Housing Exclusion.  This means that there are times that the Foreign Housing Exclusion may not be beneficial, such as if your total foreign income is close to the sixteen percent non-deductible base housing amount.  There are also limits to how much of your housing may be deductible.  So this plays an important factor in the calculation of possible taxable income deductions.

It is also important to determine what the taxation rules are of the country you intent to reside in.  Generally, if you spend more than one-hundred-and eighty-three days in another country, you are considered to be a fiscal resident of that country.  If you are aiming to utilize the Physical Presence Test and move from country to country, the likelihood that you will fall into the fiscal residence category is fairly small.  However, if you intend to qualify under the Bona Fide Residence Test, things will get a bit harder.  Some countries have high tax rates while others have low rates and still other have no taxes at all.  Choosing a country with the best tax treatment may not always be possible or preferable.  Additionally, the rule of thumb surrounding the one-hundred-and-eighty-three-days does not hold true for all countries.  It is important to research each potential location prior to moving.  Seeking the advice of a tax professional prior to packing your bags with a one-way ticket in hand is also advisable.

As the IRS has noted in its alerts to the public, a variety of different tax scams continue to rob people of millions of dollars and trick them into handing over sensitive personal information. Scammers use the regular mail, telephone, fax or email to set up their victims. This article, based directly on a number of IRS publications, is an update to prior blog articles that look at different, new scams affecting individuals, businesses, and tax professionals and offer tips on what do if you if you spot a tax scam.

Scams Targeting Tax Professionals

The IRS notes the following:

These criminals – many of them sophisticated, organized syndicates - are redoubling their efforts to gather personal data to file fraudulent federal and state income tax returns. The Security Summit has a campaign aimed at increasing awareness among tax professionals: Protect Your Clients; Protect Yourself. The Security Summit created the “Protect Your Clients, Protect Yourself” campaign to raise awareness among tax professionals about their legal obligation to protect taxpayer data as well as highlight security threats they face from identity thieves.

Some of the recent scams that target the tax professional community include the following (though it should be noted that the tactics of the scammers continue to evolve rapidly and these tactics may change or become more sophisticated):

• Tax Professionals Warned of e-Services Scam.
• Tax Professionals Warned of New Scam to “Unlock” Tax Software Accounts.
• A phishing scheme mimicking software providers targets tax professionals.
• Criminals target tax professionals to steal data such as PTINs, EFINs or e-Service passwords.
• Also see this resource: IRS Warns Tax Preparers to Watch out for New Phishing Scam; Don’t Click on Strange Emails or Links Seeking Updated Information

Scams Targeting Taxpayers

In addition, scammers are targeting individual taxpayers directly through increasingly subtle, hard-to-spot methods, including the following as observed by the IRS.

• IRS Impersonation Telephone Scams: An aggressive and sophisticated phone scam targeting taxpayers, including recent immigrants, has been making the rounds throughout the country. Callers claim to be employees of the IRS, using fake names and bogus IRS identification badge numbers. They may know a lot about their targets, and they usually alter the caller ID to make it look like the IRS is calling. 
• Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. Victims may be threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting. Or, victims may be told they have a refund due to try to trick them into sharing private information. If the phone isn't answered, the scammers often leave an “urgent” callback request.
• For More Info Please See: Consumer Alert: Scammers Change Tactics, Once Again
• Soliciting Form W-2 Information From Payroll and Human Resources Professionals: The IRS has established a process that will allow businesses and payroll service providers to quickly report any data losses related to the W-2 scam currently making the rounds.
• See details at Form W2/SSN Data Theft: Information for Businesses and Payroll Service Providers.
• Also see: IRS, States and Tax Industry Renew Alert about Form W-2 Scam Targeting Payroll, Human Resource Departments
• IRS Alerts Payroll and HR Professionals to Phishing Scheme Involving W-2s
• Surge in Email, Phishing and Malware Schemes: When identity theft takes place over the web (email), it is called phishing. The IRS has issued several alerts about the fraudulent use of the IRS name or logo by scammers trying to gain access to consumers’ financial information to steal their identity and assets. 

As the IRS recommends, it is crucial to understand that the IRS does not initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information.

That just does not happen. If it is happening to you, it is fraudulent.

In addition, the IRS does not threaten taxpayers with lawsuits, imprisonment or other enforcement action. Recognizing these telltale signs of a phishing or tax scam could save you from becoming a victim.

Do not let the scammers care you into giving them your personal information, in other words.

In conclusion, we think it is prudent that you engage the services of a reputable professional such as an IT expert or system security specialist who can provide you with a risk assessment or “system audit” as to your vulnerability to attack by system scammers.

It’s also worth remembering the old adage that “you’re only as strong as your weakest link.” If one element in the chain of players in the business process falls short when implementing adequate security measures then all other dependent players in the chain are more susceptible to harm.

An adoption tax credit is a tax credit offered to adoptive parents to encourage adoption. Section 36C of the United States Internal Revenue code offers a credit for “qualified adoption expenses” paid or incurred by individual taxpayers.

The tax code provides an adoption credit of up to $13,570 of qualified expenses (in 2017) for each child adopted, whether via public foster care, domestic private adoption, or international adoption.

As the Tax Policy Center notes: 

The adoption credit is available to most adoptive parents, with some exceptions. The credit is not available to taxpayers whose income exceeds certain thresholds. In 2017 the credit begins to phase out at $203,540 of modified adjusted gross income and phases out entirely at income of $243,540. The credit also is not available for adoptions of stepchildren. The adoption tax credit is nonrefundable but can be carried forward for up to five years. The credit is thus of little or no value to low-income families who pay little or no income tax over a period of years. In fiscal year 2015, credit claims reduced tax liability by $300 million, according to the US Department of Treasury.

2017 Adoption Tax Credit-None Special Needs Adoption

As this report observes, the amount allowed in 2017 for the Adoption Tax Credit for non special-needs adoptions, both domestic and international, is $13,570 for “qualified adoption expenses.” The definition of what IRS considers a qualified adoption expense has not changed, and families must be able to document these expenses, if requested by the IRS. This amount is up slightly from 2016 ($13,460).

2017 Adoption Tax Credit-Special Needs Adoption

Families who adopt a child with special needs from US foster care are eligible to claim the Federal Adoption Tax Credit in 2017 of $13,570 whether or not they actually incurred any adoption expenses. A child is considered to have “special needs” if they receive an adoption assistance/subsidy benefits from the state. Children adopted internationally, even if they have diagnosed special needs, are not considered as a “special needs adoption” by the IRS and parents can only claim the credit for qualified adoption expenses.

Will the Adoption Tax Credit Be Refundable In 2017?

The Adoption Tax Credit for taxes filed in 2017 is not refundable. A refundable tax credit is one you get back regardless of what you owe or paid in taxes for the year. When the credit is not refundable, you receive only what you have in federal income tax liability.

Will Trump’s Tax Plan Repeal the Adoption Credit?

For thousands of families who are going through the process of adoption or who have recently finalized an adoption, Trump’s tax plan would have serious implications. Unfortunately, there’s a real chance it could go away. Because the Adoption Tax Credit is not a deduction, it’s not currently clear whether the adoption tax credit will get the axe under Trump’s plan. 

In order to take advantage of the Adoption Tax Credit, we strongly recommend that you consult with a tax professional to determine the extent of the tax credit available to you.

Do you feel overwhelmed around tax time when trying to select a qualified and suitable tax return preparer? The Internal Revenue Service has published the following Tax Topic 254 as a guide for taxpayers when selecting a tax return preparer.

If you choose to have someone prepare your tax return, choose that preparer wisely. A paid tax return preparer is primarily responsible for the overall substantive accuracy of your return and, by law, this person is required to sign the return and include their preparer tax identification number (PTIN) on it. Although the tax return preparer always signs the return, you are ultimately responsible for the accuracy of every item reported on your return. Anyone paid to prepare tax returns for others should have a thorough understanding of tax matters and is required to have a PTIN. You may want to ask friends, co-workers or your employer for help in selecting a competent tax return preparer.

When you choose a tax return preparer, choose one who is easy to contact in case the IRS examines your return and has questions regarding how your return was prepared. You can designate your paid tax return preparer or another third party to speak to the IRS concerning the preparation of your return, payment/refund issues, and mathematical errors. The third party authorization checkbox on IRS tax forms gives the designated party the authority to receive and inspect returns and return information for one year from the original due date of your return (without regard to extensions).

See Topic 312 for information on how to extend the authority to receive and inspect returns and return information to a third party using Form 8821 (PDF), Tax Information Authorization.

Steps You Should Take to Find a Tax Return Preparer

Most tax return preparers are professional, honest, and they provide excellent service to their clients. However, dishonest and unscrupulous tax return preparers who file false income tax returns do exist, unfortunately. You should always check your return for errors to avoid potential financial and legal problems.

The following points will assist you when selecting a tax return preparer:

• Be wary of tax return preparers who claim they can obtain larger refunds than others can.

• Avoid tax return preparers who base their fees on a percentage of the refund or who offer to deposit all or part of your refund into their financial accounts.

• Ensure you use a preparer with a preparer tax identification number (PTIN). Paid tax return preparers must have a preparer tax identification number to prepare all or substantially all of a tax return.

• Use a reputable tax professional who furnishes their PTIN, signs the tax return, and provides you a copy of the return (as required).

• Consider whether the individual or firm will be around for months or years after filing the return to answer questions about the preparation of the tax return.

• Check the person's credentials. Only attorneys, CPAs, and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collections, and appeals. Other tax return preparers may only represent taxpayers for audits of returns they actually prepared.

Additional Resources

To help you find a tax professional with credentials and select qualifications to prepare your tax return, refer to the following sources of additional information.  

• Directory of Federal Tax Return Preparers with Credentials and Select Qualifications, (https://irs.treasury.gov/rpo/rpo.jsf)

• Choosing a Tax Professional, (https://www.irs.gov/tax-professionals/choosing-a-tax-professional)

• IRS Tax Pro Association Partners,

• PTIN Requirements for Tax Return Preparers.

In our March 2014 newsletter, we provided a discussion entitled “What Are The Chances of Being Audited.” The article focused on the relative possibility of an audit given different levels of income. To more completely address the question of “What Are The Chances of Being Audited,” this article goes beyond income level and addresses the impact of different types of transactions and deductions on the relative chance for a tax audit.

Self Employed (Schedule C) Losses

Schedule C is the official IRS form for reporting items of income and expense as it pertains to taxpayers who are self-employed. Schedule C sources of income (“self-employment income”) are usually reported to the taxpayer filing self-employed status on Form 1099. W-2 income, on the other hand, is reported to the taxpayer on Form W-2 and not on Schedule C. Schedule C filers tend more to co-mingle business and personal expenses or to incorrectly treat personal expenses as business expenses in an attempt to hide taxable income. Tax Payer Resolution also notes that self-employed taxpayers generally fail to keep detailed, accurate, and complete accounting records that are required by law.

As explained in the Tax Payer Resolution article linked above: “The audits or examinations of self-employed taxpayers have a far greater degree of success by the IRS. The IRS’s National Research Program estimated that unreported business income by sole proprietors accounted for $68 billion (or 20 percent) of the $345 billion tax gap. The IRS estimates that as many of 70% of taxpayers who report net losses on a Schedule C have artificially inflated expenses to create losses.” Thus, taxpayers who file Schedule C tax returns reporting net losses have the attention of the Internal Revenue Service and are highly susceptible to being audited.   

Home Office Deduction

The home office deduction is available to certain taxpayers who meet strict guidelines, including a business purpose for the amount claimed, as promulgated by the IRS. So strict are the guidelines that merely filing a return based in part on the home office deduction appears to be enough of a flag to increase the risk of an audit.

According to TaxBrain.com, some taxpayers have included their entire home for the deduction. However, your home office must be exclusively used for business purposes and not for other activities. The guidelines contained within IRS Publication 587 should be adhered to in order to ensure you qualify for the home office deduction.

Meals, Travel and Entertainment

In order to qualify as deductible expenditures for meals, travel, and entertainment, the expenditures must satisfy strict substantiation guidelines. The IRS recognizes that the substantiation process is a tedious process prone to “short-cutting” and therefore more susceptible to error or fraud.

IRS Publication 463 governs the deductibility of meals, travel, and entertainment. The evidentiary framework that is illustrated at Table 1-1, Table 2-1, Table 5-1, and Table 5-2 at the IRS.gov page, if complied with, will satisfy the substantiation requirements for deducting meals, travel, and entertainment. If not complied with, the deductibility of these items is at risk.

Gambling Winnings & Losses

Just when you thought that the “winner takes all” in your mega-gambling haul, you receive a wakeup call in the middle of the night from the IRS. The IRS insists on getting, and is entitled to receive, its share of your gambling winnings in the form of federal income tax. Making matters worse, you could also be in a state that taxes gambling winnings.

The following tips come from IRS Topic 419 “Gambling Income and Losses,” and are applicable to casual, not professional, gamblers.

• Gambling winnings are fully taxable and you must report them on your tax return.

• A payer is required to issue you a Form W-2G, Certain Gambling Winnings, if you receive certain gambling winnings or if you have any gambling winnings subject to federal income tax withholding.

• You must report all gambling winnings on your Form 1040 as "Other Income"

• You may deduct gambling losses only if you itemize deductions. However, the amount of losses you deduct may not be more than the amount of gambling income reported on your return.

• Claim your gambling losses on Form 1040 Schedule A as an "Other Miscellaneous Deduction" that is not subject to the 2% limit.

• It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses.

Hobby Losses

When determining a “hobby loss,” it depends on whether the activity that produces the loss is a “for-profit trade or business activity” (not a hobby) or a “not for profit non-trade or business activity” (is a hobby). If the activity is deemed to be a for-profit trade or business activity, then the loss generated by the for-profit activity is properly treated as a fully deductible loss without limitation.

However, if the loss is deemed to flow out of a true hobby activity (not for profit scenario), then the hobby loss is deductible subject to strict limitations.

Internal Revenue Code Section 183 governs the deductibility of hobby losses. Under this code section, “an activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).”

Furthermore, under Code Section 183, “if an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.”

Labor Day signifies the end of summer and comes with a three-day weekend; maybe a trip to the beach, the lake, or the the cabin, and a barbecue.  

Labor Day became a federal holiday in 1894, but it was first celebrated as a holiday in the United States on February 21, 1887. Of course, Labor Day is dedicated to the social and economic achievements of workers, but who wants to think about work on a federal holiday?

This Labor Day might be a good time to think about how you can use your travel as a tax deduction to offset some of the expense.

The most important thing to remember in the case of any tax write off is to keep organized receipts and diligently track your expenses. Those receipts along with itineraries, agendas, and other documentation of your expenses will come in handy if the IRS ever comes knocking.

In general, for domestic travel, if over 50 percent of the time you spend on your trip is for business, the expenses can be deducted. International travel requires 75 percent of your trip to be business.

If you do your homework, like reading IRS Publication 463, and speaking with your financial advisers, you can help offset travel and vacation expenses by combining business and leisure.

Whether you just spent the entire summer paying for child care and are happy to know that you now have a safe place to drop off your children Monday through Friday or you are wondering where your kids are going to be between the end of the school day and the end of your work day, child care is something that parents are all thinking about and trying to find solutions for at this time of year.  In either case you need to know that your child care expenses are often tax deductible, however there are rules to consider, preparations to be made, and documents to save.

The care must be provided for qualifying persons, children age 12 or younger,  and for the purpose of you (or you and your spouse if filing jointly) working or looking for work.

You must identify the care providers on your tax return and they may not be your spouse, someone you claim as a dependent, or your child who will not be aged 19 or older by the end of the year even if he/ she is not your dependent.

The credit can be up to 35% of your qualifying expenses, depending on your income.

More information is available on the IRS website and you should discuss child care deductions with your accountant.

Being a sole proprietor has its tax advantages. Find out how you can benefit.

A sole proprietor business structure is the most simple type of business one can establish. By being a sole proprietor, it means that you and only you own your company and that you are also personally responsible for its assets and liabilities — ‘personally’ meaning you can be sued for personal assets due to a business incident. However, there are great advantages to being a Sole Proprietor and it makes the most sense for many businesses.

You have direct discretion on expenses and revenue. As a result, you have more leeway with your tax situation by being strategic with income and expenses.

Your tax preparation is easier. This is because you can continue to file form 1040 and attach a Schedule C. S & C Corporations have more complex tax filings.

You can hire your family. You can continue to be considered a Sole Proprietor and have your spouse as an employee of the business as long as they’re truly an employee. Also you can hire your kids without having to pay into Social Security and Medicare. This typically saves you up to almost 8% versus having an employee that is not in your immediate family. Also, if you’re not paying them more than $6200 in a given tax year, they do not have to file federal taxes.

Let us help you determine the best business structure for your specific tax situation.

See if your moving expenses qualify for a deduction.

If you moved as a result of a job change or to start a new business, your expenses are more than likely eligible for a tax deduction.

Moving Expenses Tax Deduction Eligibility Requirements

• Your move must be in close relation to both the place and time of the start of your work at your new location. You can include moving expenses accumulated within 1 year from the date you started to work at the new location. A move usually relates closely in place when the distance from your new living quarters to your new job’s locale is not more than the distance from the last place you lived to your new job’s location.

• Your new place of business has to be at least 50 miles greater from where you used to live than your former workplace location was from your former home. If you had no previous job, your new place of business’s location must be at least 50 miles from your former residence.

• If you work for someone else, you have to have worked full-time for at least 39 weeks during the first 12 months right after your arrival in the general area of your new employer’s location.

• If you work for yourself, you have to have worked full-time for at least 39 weeks during the first 12 months and for a sum of at minimum 78 weeks during the first 24 months right after your arrival in the general area of your new work location.

There are exceptions to these requirements in the event of death, disability and involuntary separation, among other things. Also, if you are in the military and had to move, you do not have to meet the requirements to be eligible.

What You Can Deduct

• Moving Truck Rental

• Moving Company Costs

• Moving equipment such as boxes, hand trucks, etc

• Gas for moving truck

• Lodging if you had to drive overnight

• You cannot expense meals

• You cannot expense any moving expense that’s reimbursable by an employer

Use Form 3903 to figure your moving expenses.

Forgot or put off your tax return? Here’s what you need to know.

It’s going to be ok. Or at least if you take care of it now, it’s going to be better than it will be if you keep avoiding filing your return.

There are penalties if you fail to file and pay by April 15th. There are also penalties for failing to pay by the April 15th deadline. The penalties can start out somewhat minor but they can quickly escalate into very costly penalties once several penalties accumulate. Also, if you do not respond to the IRS’s attempts to collect on what you owe, they can take out a lien which negatively impacts your credit. You can also have your wages garnished.

So to avoid the above mentioned penalties, here’s what you need to do to get this handled.

Act now!
There is a 5% interest rate that gets tacked on per month for failing to file your return and that caps out at 25%. That’s a lot of money to unnecessarily pay when filing can be rather painless in comparison to the cost of the penalty.  

Failing to pay your amount owed is .05% per month and that caps out (although slower) at 25%.

However, if you exceed 60 days in filing, the penalty is no less than $135 or 100% of the balance due—whichever one is less.

File even if you can’t pay now.
The penalty for filing is much greater than the penalty for not paying right away. A payment arrangement can be set up with the IRS for paying taxes you owe.
 
Use a tax professional.
Using a tax professional like us can find ways to bring down your taxable income in ways you may not know about. This will help take the bite out of the penalties.