Thursday, April 12, 2012

Last minute filing tips

In a couple days, tax returns for individuals, partnerships, trusts and estates are due.  This year it's April 17. Usually taxes are always due on April 15, but this year it falls on a Sunday.  So one would think they are due on Monday, the 16th.  However, that is Emancipation Day in the Washington, D.C., so the whole country gets to skip right on over to April 17 for tax day. So much for simplifying the tax code.

If you haven't filed your taxes yet, you are not alone.  Procrastination, vacations, family emergencies, hectic schedules all get in the way. The dog ate your W2? Call your employer and get a replacement. If you can't get to it in time, it may be the year to file an extension.

I haven't filed my tax returns yet.  By the time I get all my tax documents, so has everyone else. I get so overloaded with other tax returns I can't possibly get to it. So I do a rough estimate in January to see if I'm going to owe or not. My husband is self-employed, so we have quarterly estimates to pay as well.  I file an extension and include what I think I owe plus extra to cover the first quarter estimate.  When I file the taxes in May, I'll have the extra applied to 2012 and that (hopefully) will take care of the first quarterly payment.

If you haven't filed yet, here are my recommended priorities:
1) File your taxes
2) File an extension
3) Pay what you think you owe
4) If you can't pay the full amount, pay what you can and file and Installment Agreement Request

An extension is super-easy to file and it does not raise any kind of red flag whatsoever.  Form 4868 is available at  This form extends your due date to October 15. Keep in mind, the extension does not extend the due date of your balance due.  If you expect to owe, make sure you send a payment with your extension.  The Federal extension covers Ohio as well.  Most Ohio cities accept a copy of the extension when you eventually file that return.  However, if you live in Eastlake, know that they require a copy filed with them before April 17th.

If you know you are going to owe and you can't pay, DON'T IGNORE THE 17th.  That is the worst thing you can do.  The IRS has a hierarchy of penalties, and the most severe are the failure to file, then failure to pay. At least file an extension.

Similarly, if you have filed and you can't pay the whole amount, DON'T IGNORE THE 17th.  Pay something and fill out and Installment Agreement Request (Form 9465  With that you can choose how much you want to pay with the return, how much you can pay each month, the date each month you would like it to be due. The IRS charges $52 to set it up if you agree to have your payment automatically deducted from your bank account ($104 if you write a check each month). Interest and penalties will continue to accrue; however this is the lowest level of penalty.

PS. If you have a refund, there is no penalty for missing the April 17th filing deadline.  As a professional, I always recommend filing an extension even if you expect a refund - just in case.  It could turn out you owe on the Federal or Ohio unexpectedly. Think of it as a free insurance policy against those failure to file penalties.  

Friday, March 30, 2012

Health Savings Accounts or HSAs

In my last blog, I explained how and when medical expenses are deductible.  I didn't get to the Health Savings Account, or HSA.  HSAs are special accounts that get favorable tax treatment for these funds set aside for medical expenses.  My advice:  if you have an HSA, USE IT.  Fund it as much as you can, and take advantage of this great tax deduction.

In my experience, HSAs underused.  I think a lot of people don't really understand what they are and how much they can really benefit from them.

Why use an HSA?  All of the hurdles and pitfalls of deducting medical expenses are avoided if you have this account.  Basically, you get an above-the-line deduction for funding your HSA. You don't have to itemize. You don't have to meet any 7.5% floor.  You don't even have to be sick or have medical expenses. You get the deduction when you put the money into the account, not when you spend it. The only catch is that if you take a distribution NOT for medical expenses, that part of the distribution is subject to a 20% penalty. Keep good records in case the IRS questions you.

How do I get an HSA?  First, you must have a medical plan that allows an HSA. These must be high-deductible plans, with a minimum deductible of $1200 for single coverage and $2400 for family coverage. Check with your benefits provider to be sure your plan qualifies.  Then you can open your HSA at most banks; some plans may prefer a specific account holder.

How do I fund my HSA?  Just make a deposit!  Most of the HSA holders I see only have it because their employer set it up and contributes to it.  Employers can save so much on the premiums, they will contribute a small amount to the employee's HSA. These employees are perhaps not fully taking advantate of the HSA.  Even if your employer contributes, you can also contribute up to the limit ($6250 in 2012 for family coverage).  It's not a "use it or lose it" plan.  Any unused portion stays in the account earning interest, until you need it for medical expenses. This is a key difference from the old Flexible Spending Accounts many employers offer (which are very good plans if you can't have an HSA).

How do I get the money out of the HSA?  Your account is generally just a checking account.  Some plans/accounts will provide debit card to use for purchases. Any time you have a medical expense, use that account to pay.  But what happens if you don't have that checkbook with you?  Or if you have mixed purchases at a store; I may buy Clif Bars with my prescription at Target. Or I may want to use my credit card to pay the Cleveland Clinic so I can earn reward points. That's okay. What I do is keep track of all my expenses and periodically reimburse myself for the medical expenses I paid outside my HSA. I have all the receipts to justify every payment from the HSA.

How do I report the HSA on my tax return? Form 8889 is needed ( and instructions at  At tax time, you will receive a two statements; a 1099SA reporting your distributions from the HSA, and a 5498-SA, reporting how much went in to the HSA. Report the contributions in Part I and distributions in Part II.

for a list of qualified medical expenses.  You can use HSA funds for things not covered by your plan; co-pays, co-insurance, eye glasses, orthodontia, excess chiropractor visits, etc.

Tuesday, March 20, 2012

Medical expenses - what's deductible?

Medical expenses can be a confusing deduction for many taxpayers.  What exactly is deductible?  And why don't all my medical expenses help reduce my taxes?

Medical expenses only help if they exceed 7.5% of your Adjusted Gross Income (AGI). To give you a ballpark of how much that is, if your income is $50,000, you will need over $3,750 in medical expenses before they might reduce your taxes.  That is the first hurdle.

The second hurdle is the standard deduction.  Even though you may have over 7.5% in medical expenses, your other itemized deductions (mortgage interest, property taxes, charitable donations, etc) , may be less than the standard deduction.  For your 2011 taxes, the standard deduction for a single person is $5,800, and for married couple filing jointly it's $11,600.  For those over 65 it's even higher.  So if you don't normally itemize, the excess medical expenses might not help you on your Federal retun.

There is one thing to keep in mind even if you don't itemize.  The excess medical expenses (i.e., those over 7.5%) are one of the few deductions that you can use on your Ohio return.  This will reduce your Ohio tax even if you don't itemize on the Federal.

What medical expenses can be included?  Co-pays and co-insurance for doctors, dentists, hospitals, labs, prescriptions, as well as contacts and eye glasses. Even mileage to medical appointments can help, though at a lower rate than business miles.

Your health insurance premiums are deductible ONLY if they are not already a pre-tax deduction through your payroll.  Check your pay stub or your payroll department to find out for sure.  Medicare B and COBRA premiums are examples of premiums that are not already pre-tax.  Long term care insurance can be included as a medical expense.  If you are self-employed, your health insurance premiums are a medical expense, but they get a more favorable treatment as an adjustment to your income.

What isn't deductible?  Over-the-counter medications, like cold medicine and tylenol, and first-aid items like band-aids and neosporin.  Plastic surgery is not allowed as a deduction.  Vitamins and nutritional supplements are pretty much never deductible (unless prescribed by a physician).  Your health club membership?  Nice try, but not a medical expense - even if your doctor tells you to exercise more!

More next time on Health Savings Accounts.

Thursday, February 16, 2012

Education tax breaks - which one is best?

There are a lot of great tax breaks for folks in college.  But they can be confusing.  How do you know which one is best for you?  I'll try to run through the basics.

A few generalities with education credits.  All tuition must be for an accredited college.  The student can't have been convicted of a felony for possession or distribution of a controlled substance (I guess first degree murder felony would be okay, though).  There are some income limitations, as noted below. Lastly, if you are married, you must file jointly to claim any education credits or deductions.

You only can claim one tax break for dollars spent - that means you can't get both a credit and a deduction for the same tuition or the student.  Similarly, you can't get a credit or deduction for tuition that was covered by a grant or scholarship, or that was paid from a 529 or other college savings plan. However, you can claim a credit for tuition paid for with student loans. You can also claim a credit for tuition paid for by a friend or relative - the tax break goes to the taxpayer who is the student, spouse or who claims the student as a dependent.

American Opportunity Credit - this is the best credit by far.  It's up to a $2,500 credit, which means it goes directly in your pocket (or reduces what you owe dollar for dollar). The student must be in their first four years of college (i.e., not grad school) and they have to be a full-time student.  It's 100% of the first $2,000 of qualified tuition and 25% of the next $2,000.  That means you only have to spend $4,000 to get the maximum credit.  It's the only education credit that is partially refundable.  That means if your tax liability is reduced to zero, you can still receive a refund of up to $1,000 from this credit. And it's the only credit that allows you to use your book expenses as part of your qualified expenses. Most college tuition is more than $4,000, so the book expenses don't always help you.  But if you have some grants or scholarships that are covering your tuition, you may benefit by including those book expenses. This credit phases out if your income is above $90K single and $180K married.  It's just a fantastic credit.

Once you have four years of college under your belt, or if you are no longer a full-time student, the following education tax breaks may suit you.

Lifetime Learning Credit.  This credit is generally for the part-time college student or grad student in the 15% or lower tax bracket.  The credit is 20% of qualified tuition (not books) up to $2,000 maximum credit. If you or your dependent are just taking a class or two at a time, this is the credit for you. This credit phases out earlier than the other two breaks:  at income above $60K single and $120K married.

Tuition and Fees Deduction.  This is an above-the-line deduction, meaning it lowers your taxable income.   The maximum deduction is $4,000, but the dollar amount of the benefit to you depends on your tax bracket.  The above-the-line piece means you don't have to itemized to take it and it also lowers your Ohio income, thus saving some tax dollars there.  This deduction can be used by virtually any college student, full or part-time, undergraduate or graduate school.  This credit phases out if your income is above $80K single and $160K married.

The above should be considered a summary of the rules for each education tax break and is not meant to be all-inclusive.  That would be a really boring blog. Please consult the IRS Publication 970 or other sources for all the rules regarding the various education tax breaks.

Many tax software programs will optimize the education credit that's right for you, factoring in what you qualify for and your income level.  Most are not sophisticated enough to include the Ohio savings on the tuition deduction, so you might have to factor that in by hand.  The bottom line is that education tax breaks are generous and plentiful.  Did you take the right one this year?

Friday, January 27, 2012

What will you do with your refund?

Many people think tax preparers are boring accountants, mired in numbers from dawn 'til dusk.  While that may be true for some, I think there is a large human component as well.  We meet so many people, from all walks of life, with all sorts of occupations and family situations, that you never know who you'll meet next.

One of my favorite things during tax season is asking what someone will do with their refund. Whether it's their usual refund amount, or an unexpected windfall, most people have a plan for at least part of it.

Many people use their refund for a home improvement. Some have the philosophy is that since the refund is largely due to the house and related deductions, the refund goes back into the house. Either a necessary repair or some type of improvement, they now have a chunk of funding for their project. I've heard about a lot of plans and they run the gamut from building a dream man cave to just keeping the water out. The least exciting repair has to be the new garage door, followed closely by a new roof. The most fun are the plans for a kitchen or bathroom remodel. Even new appliances are fun to think about.

Some people will use their refunds for vacation. I love to hear about travel plans.  One client had been going through some really tough times, raising three children on her own. An unexpected refund of several thousand dollars practically brought her to tears.  She had always wanted to take her kids to Disney World. But things were very uncertain and she didn't know what would happen from one day to the next. She decided to hold off, and if she still had the money at Christmas, she would surprise her kids with the trip then. And she did it. She told me about it the next tax season. What an inspiration. She held on to the refund for almost a whole year and made a wonderful family memory.

There are always a some folks who will wisely save their refund, either in an IRA or for emergencies.  Many people will pay off bills, pay down credit cards or a car loan, or even just make rent for that month. More and more folks mention some type of gambling adventure as part of their plans.

The worst refund story (and you know who you are) has to be a young lady working her way through college.  She got an unexpected refund of over $1000.  When I asked her plans for it, she said she could now afford to get her wisdom teeth removed.  Her insurance didn't cover it, but she need to get it done. Yikes! While any refund is a good refund, wisdom tooth removal has to be about the worst thing I could think of to do with my refund.

What will you do with yours?

Monday, January 23, 2012

Oh, the funny questions...

We get a lot of questions at the tax office at this time of year.

Some are specific: I took money out of my 401(k), am I still going to get a refund? What's this 1099A I just received? Do I have to report that? Will I still get a refund? We had a baby this year - how much more refund will we get? By the way, there are no easy answers to refund questions. We can explain the general trend, but to get specific, we have to run the numbers.

Some are sad:  My son's in jail, can I claim his little girl?

Some are frustrating:  I don't have my W2 but I have my last paystub and I really need my refund now. Can't you prepare my taxes?  Answer: NO!  By law, we can't prepare a return based on only a paystub, we have to have the W2.   I believe H&R Block used to allow their clients to bring in a pay stub and advance a refund based on that. But that was not a tax return, nor was it a refund, it was an advance, a loan. Now if your employer has skipped town and didn't issue any W2s, you can file after February 15 using the paystub figures and Form 4852.

One of the funniest questions we've had is the guy who received a $7000 bonus. He didn't tell his wife about it.  He's afraid if she knew about it she'll just go spend it.  So he wanted to hide it. He had several ideas and schemes for how to hide it from his wife.  He had no problem reporting it and paying his fair share of taxes, but just didn't want her to see it.  Other than filing separately, which would not be to his benefit taxwise, there was nothing he could do, except hope she didn't notice it when she signed the returns.

Don't be afraid to ask questions of your tax preparer.  I'm sure we've heard them all before!

Tuesday, January 17, 2012

New Requirements for Tax Preparers

Beginning last year the IRS required all paid tax preparers register with the IRS (and pay $64.25 for the privilege.) As part of the registration process, they checked to make sure tax preparers were current on their own taxes.  They now have an exam that all preparers must pass by the end of 2013, as well as continuing education requirements. Background checks and fingerprinting are planned but have not yet been implemented.  They want to ensure a "basic competency" in the profession - which is great. There are some preparers out there who just shouldn't be doing taxes. Now perhaps they will either get the knowledge they need or get out of the business.

I have difficulty with the next step in the process - making the tax preparer comply with due diligence requirements and stiffly penalizing them if they do not. Tax preparers will have to start asking some potentially prying questions of their clients.

In case you weren't aware, there is a big "tax gap" out there.  Latest release from the IRS (IR-2012-4, January 6, 2012 at,,id=252038,00.html?portlet=107) estimates the tax gap at $385 billion.  That's what the IRS thinks should be paid in taxes if everyone fully and accurately reported all of their income and expenses. Essentially, it's what they think cheaters cost the government. People who use someone else's child as their own so they can claim the kid. Businesses that don't report all of their income or exaggerate their expenses. Or even people who bump up their charitable contributions. The IRS also estimates that these cheaters make up about 16.9% of us (i.e., about 83.1% of us are in compliance with tax laws.) The IRS has struggled for years trying to reduce this tax gap.  They have a new approach now.  Make tax preparers find it.

I've always been of the philosophy that a taxpayer is responsible for their own tax return.  I will prepare the return based on what they tell me.  I can get all the numbers on the right forms and lines and help them find legal deductions and credits. If the client says they made $10,000 in their landscaping business, that is what I'll report.  I will gently educate about keeping good business records, mileage logs, etc., but I will not audit their records.  The IRS due diligence requirement now says that if I know, or have reason to know, that a client's information is incorrect, inconsistent, or incomplete, I have to ask and document additional questions.  For example my landscaper, who's only income is the $10,000 (an awfully round number, isn't it?), is driving a brand new truck and has four children, I have to ask how they are paying for their living expenses. If I don't ask, I can be penalized up to $5000 for negligence.

This is a big change for many tax preparers.  This will be a big change for some taxpayers (perhaps that 16.9%).  If you don't want your tax preparer asking prying questions, make sure you have good records and your information is complete and consistent. Don't say anything in front of your tax preparer that could be misleading.  Just like you can't joke around at the airport about having a gun, you can no longer joke about your Swiss bank account at the tax office.

I would like everyone to be honest on their tax return, and most are.  I pay every dime I owe and recognize that if some are cheating, the rest of us are paying their way. I'll do what I reasonably can to eliminate cheaters.  I just hope the IRS doesn't take this due diligence thing too far against honest tax preparers.  I'd much rather spend my time with clients finding legal tax savings. That's what's fun about doing taxes!

Wednesday, January 11, 2012

Don't ignore the IRS

No one likes to get a letter from the IRS, unless it's with their refund check. But if you do happen to get a letter, what should you do?

Basically there are three types of taxpayers. When Taxpayer A receives a letter from the IRS, he can't imagine why, so he opens the letter, reads it, and takes appropriate action. Now Taxpayer B knows he's done something wrong, or knows he owes taxes or penalties. He immediately tosses the IRS letter aside when it arrives. Taxpayer C receives his letter, can't imagine why, so he opens it.  He reads the letter, but it doesn't make any sense, so he just tosses it aside.  Which taxpayer are you?

We all know we should behave like Taxpayer A. But what if it doesn't make any sense?  Or when the IRS says you owe $90,000, and there are 14 encrypted pages of small print?  That just can't be.  Maybe if I just ignore it, it will go away. Maybe we intend to investigate later, but the days keep passing us by and we never get to it. It happens.

I had a client who received a letter from the IRS stating they thought she owed them $89,000+.  Imagine getting that in the mail! She didn't ignore it. She brought it in and we figured out why they thought she owed that much. She had sold some bonds and other securities and did not report them on her return. IRS doesn't know what she paid for the bonds and securities (cost basis). Since you only have to pay tax on your gain on sales of securities, we figured that out, and reduced her $89,000 bill to a couple thousand dollars. I've seen other cases, particularly in this economy, when the sale is actually for a loss, and the taxpayer ends up getting a refund!

You should address any correspondence from the IRS  They will not go away.  It will just get worse and more difficult to resolve. Follow the steps below.
Step 1 - Open the letter.
Step 2 - Read it.
Step 3 - If it makes sense, take appropriate action.  Generally this will either be to send them information or money.
Step 4 - If it doesn't make sense, investigate. Call the IRS and ask them to explain. Yes, you will have to wade through various menus to get to an actual person. If it still doesn't make sense, contact a professional. They should be able to tell you exactly what the IRS is looking for.
Step 5 - If you owe, pay it.
Step 6 - If you can't pay it, set up an installment plan. This is a crucial step! The IRS actually does have some sympathy for you when your chips are down. Call them. Depending on your situation, they might put your account on hold and stop bugging you for a while.  

A last note on installment agreements. Your penalties and interest continue to accumulate while you have a balance due, but the IRS has different rates depending on your error. The lowest penalties are for those who set up an installment agreement.  If you don't want to pay at all, why would you pay more than you have to? Set up the installment agreement, select an amount to pay that you can pay every month, and stick to it. It takes a phone call.