Chuck Woodson | TaxConnections

30 Jan 2019

The 8 Most Common IRS Tax Penalties To Avoid In 2019

Chuck Woodson - 8 Most Common IRS Mistakes

You know the old line about the inevitability of death and taxes? It’s still true. What isn’t inevitable, however, is the need to pay penalties to the IRS. It happens, but it doesn’t have to, and the main reason that it does is because taxpayers don’t educate themselves about the rules. When you get hit with an IRS penalty, it adds on to a number that you already wish you didn’t have to pay.

To ensure that you get through tax season without unnecessary costs and aggravation, here’s a list of the tax penalties that the IRS most frequently assesses against taxpayers.

The 8 Most Common Tax Penalties Assessed

Penalty for underpaying estimated tax payments
Penalty for taking early withdrawals from tax-advantaged retirement accounts, including IRA accounts and 401(k) accounts
Penalty for taking nonqualified withdrawals from 529 plans, health savings accounts (HSAs), and similar tax-favored accounts
Penalty for failing to take required minimum distributions (RMDs) from tax-favored retirement accounts
Penalty for making excess contributions to IRAs and other tax-favored accounts
Penalty for failing to file, or for filing your required tax return after the designated due date
Penalty for failing to pay your taxes on time
Penalty for filing a substantially incorrect tax return or taking frivolous positions on a return

Written by Chuck Woodson | Posted in TaxConnections

29 Jan 2019

Sale Of Business Or Investment Property: Several Ways To Defer The Tax On Gains

Charles Woodson - How To Defer Tax On Gains

When a sale of a business or investment property results in a gain, the seller is typically taxed on that gain during the year of the sale, even when the gain was generated over many years. However, the tax code provides opportunities to spread this gain over several years, to postpone it by deferring the gain into another property, or to simply defer it for a specified period of time. These arrangements can be accomplished by selling the property in an installment sale, by exchanging the property for another, or by investing in a qualified opportunity fund. As with all tax strategies, these options have unique requirements. The following is an overview of what tax law says about these strategies.

Tax-Deferred Exchange – Many people refer to this arrangement as a “tax-free exchange,” but the gain is not actually tax-free; rather, it is deferred into another property. The gain will eventually be taxed when that property is sold (or will be deferred again in another exchange). These arrangements are also known as “1031 exchanges,” in reference to the tax code section that authorizes them: IRC Sec. 1031.

Written by Chuck Woodson | Posted in TaxConnections

24 Jan 2019

Rental Owners! Guidance Related To The 20% Pass-Through Deduction

Chuck Woodson- Rentals And Pass-through Deductions

Ever since tax reform was passed, over a year ago, taxpayers have been uncertain whether rental property will be classified as a trade or business for purposes of qualifying for the new IRC Sec 199A 20% pass-through deduction (commonly referred to as the 199A deduction).

Finally, on January 18, 2019, the IRS issued a notice which provided “safe harbor” conditions under which a rental real estate activity will be treated as a trade or business for purposes of the 199A deduction.

It’s important to note that this notice prescribes several conditions that must be met for a rental real estate enterprise (a tax term introduced by the IRS in this notice) to be deemed to be a trade or business and eligible for the section 199A 20% deduction. For purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties.

Written by Chuck Woodson | Posted in Pass-Through Deductions • Rental Owners

09 Jan 2019

Will Gifts Now Using The Temporarily Increased Gift-Estate Exclusion Harm Estates After 2025?

Individuals with large estates generally want to gift portions of their estate to beneficiaries while they are still living, to avoid or lessen the estate tax when they pass away. That can be done through annual gifts (up to the inflation-adjusted annual limit for each gift recipient each year – $15,000 for 2019) and/or by utilizing the unified gift-estate exclusion for gifts in excess of the annual exclusion amount. The tax reform virtually doubled the unified gift-estate exclusion for years 2018 through 2025, after which – unless further extended by Congress – it will return to its inflation-adjusted former amount. This has caused concerns related to what the tax consequences will be for post-2025 estates if the decedent, while alive, had made gifts during the 2018-through-2025 period utilizing the higher unified gift-estate exclusion. Would that cause a claw back due to the reduced exclusion?

Written by Chuck Woodson | Posted in Gift Estate Exclusion

02 Jan 2019

IRS 2019 Standard Mileage Rates Announced

The Internal Revenue Service (IRS) computes standard mileage rates for business, medical and moving each year, based on a number of factors, to determine the standard mileage rates for the following year.

As it does annually around the end of the year, the IRS has announced the 2019 optional standard mileage rates. Thus, beginning on Jan. 1, 2019, the standard mileage rates for the use of a car (or a van, pickup or panel truck) are:

58 cents per mile for business miles driven (including a 26-cent-per-mile allocation for depreciation). This is up from 54.5 cents in 2018;
20 cents per mile driven for medical or moving* purposes. This is up from 18 cents in 2018; and
14 cents per mile driven in service of charitable organizations.* For years 2018 through 2025, the deduction for moving is only allowed for members of the armed forces on active duty who move pursuant to a military order.

Written by Chuck Woodson | Posted in 2019 Standard Mileage Rates • Internal Revenue Service

14 Dec 2018

Want To Save Taxes On A Roth IRA Conversion?

If you engage the services of an individual (independent contractor) in your business, other than one who meets the definition of an employee, and you pay him or her $600 or more for the calendar year, then you are required to issue that person a Form 1099-MISC to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit. Payments to independent contractors are referred to as non-employee compensation (NEC).

Because so many fraudulent tax returns were being filed right after e-filing opened up in January and before the old 1099-MISC due date at the end of February, the IRS had no way of verifying NEC. That opened the door for the IRS to be scammed out of millions of dollars in erroneous earned income tax credit (EITC). To plug that hole, the IRS moved the filing date for NEC 1099-MISCs to January 31 and no longer releases refunds for returns that include EITC until the NEC amounts can be verified.

Written by Chuck Woodson | Posted in Roth IRA Conversion

12 Dec 2018

Tax Strategies That Can Be Utilized In The Last Minute

Charles Woodson- Last Minute Tax Strategies

Just a reminder that the last day you may make a tax-deductible purchase, pay a tax-deductible expense, take advantage of tax credits, or make tax-deductible charitable contributions for 2018 is Dec. 31. Every taxpayer’s situation is unique, and the suggestions offered here may not apply to you. The best way to ensure that you are putting yourself into the most tax-advantaged position is to seek tax-planning advice, usually earlier in the year. However, the following are some tax strategies that can be utilized at the last minute.

Maximize Education Tax Credits
If you qualify for either the American Opportunity or Lifetime Learning education credit, check to see how much you have already paid in qualified tuition and related expenses in 2018. If it is not the maximum allowed for computing the credits, you can prepay 2019 tuition as long as it is for an academic period beginning in the first three months of 2019. That will allow you to increase the credit for 2018.

Employer Health Flexible Spending Accounts
If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. As a reminder, you cannot set aside amounts to get tax-free reimbursements for over-the-counter drugs for which you don’t have a doctor’s prescription other than insulin, and the maximum contribution for 2018 is $2,500.

Written by Chuck Woodson | Posted in Last Minute Tax Strategies

11 Dec 2018

What Are The Penalties For Not Filing Your Tax Return?

Charles Woodson- Penalties For Not Filing A Tax Return

Everybody knows the old saying about death and taxes, yet a surprising number of people fail to file an income tax return. If you’re one of those people and you think you’ll be able to slide by, you need to reconsider your position. Even if you’re unable to pay your taxes, you need to file a return. Not doing so will eventually lead to a domino effect of negative consequences.

No matter how many people have told you that it’s no big deal, or that the IRS has “bigger fish to fry” than you, the employees of the Internal Revenue Service have a job to do and a process that they follow. Even if no legal action is taken against you, failure to file a return will end up working against you. Let’s take a look at the rules regarding filing your taxes and the various outcomes that you risk:

Written by Chuck Woodson | Posted in TaxConnections

07 Dec 2018

Are You An S Corporation Stockholder? Are You Taking Reasonable Compensation In The Form Of Wages?

Charles Woodson-S Corporation Reasonable Compensation

S corporation compensation requirements are often misunderstood and abused by owner-shareholders. An S corporation is a type of business structure in which the business does not pay income tax at the corporate level and instead distributes (passes through) the income, gains, losses, and deductions to the shareholders for inclusion on their income tax returns. If there are gains, these distributions are considered return on investment and therefore are not subject to self-employment taxes.

However, if stockholders also work in the business, they are supposed to take reasonable compensation for their services in the form of wages, and of course, wages are subject to FICA (Social Security and Medicare) and other payroll taxes. This is where some owner-shareholders err by not paying themselves a reasonable compensation for the services they provide, some out of unfamiliarity with the requirements and some purposely to avoid the payroll taxes.

Written by Chuck Woodson | Posted in S-Corp

05 Dec 2018

Holiday Gifts With Tax Benefits

Some holiday gifts you provide to members of your family, employees and others may also yield tax benefits. Here are some examples:

Electric Car Credit – If you purchase an electric car as a holiday gift for your spouse or even yourself, you will find that most come with a tax credit of up to $7,500. To qualify to claim the credit on your 2018 tax return, the car will have to be “placed in service” by December 31, 2018. So merely ordering the vehicle, even if payment for it is made at the time when the order is placed, won’t be enough – you will need to receive the car and start using it before New Year’s Day. But before you leap, you should know that the credit is non-refundable, meaning it can only offset your actual tax liability and that any excess credit over your tax liability will be lost. There is, however, an exception when the electric vehicle is used partially for business, in which case the portion of the credit allocated to the business use will become a general business credit that is carried back one year and then carried forward.

Written by Chuck Woodson | Posted in Holiday Gifts With Tax Benefits

30 Nov 2018

If You Are A Recreational Gambler, Here Are Some Tax Issues You Need to Know

Charles Woodson- Gambling Winnings And Taxes

Gambling takes many forms: casino games, horse racing, sports book betting, lotto tickets, scratchers, bingo, etc. For virtually everyone, gambling is a recreational activity and, as such, is done for fun. For most gamblers, their losses for the year will exceed their winnings, and since losses in excess of winnings are not deductible, most gamblers don’t bother to report either, which isn’t in line with the tax law’s filing requirements. If your winnings at one time hit certain levels, the government requires the gambling establishment to collect your Social Security number and report your winnings to Uncle Sam on a Form W-2G. Gambling establishments will issue a Form W-2G if you:
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Written by Chuck Woodson | Posted in TaxConnections

16 Nov 2018

Don’t Overlook Tax Credits And The Benefits

Charles Woodson- Tax Credits And Incentives

Tax credits are a tax benefit that offsets your actual tax liability, as opposed to a tax deduction, which reduces your income. Congress provides tax credits to individual taxpayers for a number of reasons, including as a form of assistance for lower-income taxpayers, to stimulate employment, and to stimulate certain investments, among other things.

Tax credits come in two types: non-refundable and refundable. A non-refundable credit can only reduce your tax liability to zero; any excess is either carried forward or is simply lost. In the case of a refundable credit, if there is excess after reducing your tax liability to zero, the excess is refundable. The following is a summary of some of the tax credits available to individual taxpayers:

Childcare Credit – Parents who work or are looking for work often must arrange for care of their children during working hours or while searching for work. If this describes your situation and your children requiring care are under 13 years of age, you may qualify for a childcare tax credit.

Written by Chuck Woodson | Posted in TaxConnections