Month: February 2023

You’d be hard-pressed to find someone who actually enjoys the process of filing taxes. Having said that, it’s absolutely something that you’re supposed to do like clockwork every single year.

Of course, there is a myriad of different reasons why you may have fallen behind. You could be going through something of a major life transition and simply were unable to meet the filing deadline. Maybe you filed for a much-needed extension and then other things got in the way (as they often do), causing you to fall behind even further.

Regardless of the reason, it’s important to take meaningful steps to get yourself back on track before it’s too late. Thankfully, this isn’t necessarily a difficult process – but it will require you to keep a number of important things in mind along the way.

The Consequences of Not Filing Your Taxes for Multiple Years

But first, it’s important to understand the actual consequences of what can happen if you don’t file your taxes for multiple years in a row – or even for ten years or more in some situations.

The most immediate impact you’re likely to experience will come by way of the IRS itself. If you have income that you haven’t reported on your taxes, you will be charged various penalties and fees on everything that you should have been paying up until now. These can and often do quickly add up to significant sums of money, which is why it is always important to get on track as soon as you’re able to.

Keep in mind that the IRS will charge you those fees and penalties on all taxable income, not taking into consideration any credits or deductions that you would have enjoyed had you filed taxes on time. They don’t have records pertaining to expenses like your rent or other things that you need for your job like essential equipment. Because of this, any fees will be assessed based on what they think you owe – not necessarily on what you actually owe.

If it is determined that you have been “willfully” failing to file taxes, you could potentially be punished with up to five years in prison. Likewise, you could get hit with a fine of up to $100,000 if your situation is considered to be “tax evasion.” These are all consequences that you would do well to avoid at all costs.

There are other consequences involved with not filing your taxes for a lengthy period of time, too. Sometimes when you file for a passport, for just one example, you may be asked to show your recent tax returns as a form of income verification. Obviously, you can’t do that if you haven’t been filing them. The same is true if you were planning on applying for a mortgage or car loan.

If retirement is coming up, it could also impact the types of benefits that you will receive like Social Security and Medicare. All of these are crucial aspects of life that you do not want to jeopardize, so you should get your taxes taken care of sooner rather than later.

Getting on Track With Your Taxes: A Plan of Action

The first thing you should do to get back on track with your taxes involves checking on the current status of your account with the IRS. At the very least, this will give you an indication of what the IRS thinks you owe. You can do so at the official website via irs.gov, or by calling 1-800-829-1040 to speak to a live representative.

At that point, you have two options available to you. The first involves paying what the IRS currently says you owe, along with both the original taxes and any fees or penalties that have accrued, to settle your account. If you can’t pay the full balance in one lump sum, you could always attempt to get on a payment plan.

The second involves gathering all the financial information you need to complete the tax forms you did not file. You’ll need to compile several important documents, including but not limited to things like:

• Any information pertaining to the income you made during the missing years, along with any expenses that you had so that you can claim deductions and credits that apply to you.
• Any supporting documentation like receipts and income statements that are necessary to complete the aforementioned financial records. This may require you to perform some forensic accounting so that you have the most complete picture to work from.

At that point, the next step is clear: you should file your missing tax returns at your earliest convenience. Thankfully, there is no time limit associated with filing those old tax returns. However, the sooner you do it, the better.

Oftentimes, this is absolutely the way to go as once all documents and other financial information have been properly recorded, you’ll likely end up owing less than the IRS thinks you do. You’ll still owe money, but you’ll save a bit in the long run.

Finally, you should pay your taxes as soon as you can. Again, you can do this either through a lump sum or get on some type of payment plan to bring your account up to date. You may also choose to look into a settlement agreement or any type of income tax forgiveness that may apply to you. You could even choose to make what is known as an “offer in compromise,” which allows you to pay something towards your balance to consider everything settled. The IRS would have to agree with whatever offer you make, of course.

At that point, you should prepare for future taxes so that you don’t find yourself in the same position down the road. If you need help doing precisely that, or if you have any additional questions about this process that you’d like to see answered, please don’t delay – contact us to speak to a tax professional today.

All of us dream of one day being able to retire – to finally be able to relax and enjoy the lifestyle we worked so hard for. However, you’ll need a significant amount of money to do it, which is where a lot of Americans begin to worry.

Saving for retirement is a constant fear for many out there, especially during periods when the economy is hurting. The good news is that not everyone needs to save the same amount for retirement. By performing a few simple calculations now, you can help get yourself on the right path to financial success later on.

Calculating Your Retirement Needs: Breaking Things Down

First, you need to sit down and ask yourself several important questions that are specific to your situation. These include:

• How much money will you need to spend in retirement in order to maintain the lifestyle you see for yourself?
• Between now and retirement, how much money do you expect to earn from things like your savings and other potential income sources? How much do you plan on bringing in via Social Security?
• If you don’t have enough money in your savings at that time, what are you going to do?

To answer the first question accurately, make a list of the two types of expenses: both essential and discretionary. Essential, as the term implies, are those things that you absolutely cannot live without. Things like food, shelter, health insurance, etc. Discretionary expenses are things like entertainment and travel.

One simple theory is that after you retire, you’ll need between 75% and 80% of your current income to maintain the lifestyle you enjoy today. So, if you made $90,000 per year right now, you would need to earn between $67,500 and $72,000 to continue on as you are as far as spending is concerned.

Another theory is that you should simply take what you are currently earning and subtract the amount of money that you are currently saving towards retirement to arrive at that ideal spending number. So if you’re currently making that same $90,000 and you’re saving $8,000 per year, you would need to make $72,000 to maintain your current lifestyle.

In this example, they happened to provide similar estimates. But that won’t always be the case, so try both formulas out and see which one makes the most sense for you and your goals.

Next, you’ll want to help shed even more light on the subject by figuring out how much non-portfolio income you can expect to earn during your retirement years. For the sake of example, let’s say that you want to earn $80,000 per year during retirement. If you can expect to receive about $20,000 per year from non-portfolio situations like Social Security, then you would need to make up $60,000 from elsewhere – meaning from your retirement portfolio.

So how does all of this relate back to the amount of money you should be saving right now? Many rely on what is referred to in the industry as the “25x Rule.” It simply states that if you want to get $60,000 from your retirement portfolio every year, and you assume that you are going to live an estimated 25 years beyond retirement age, then that would mean that the value of your retirement portfolio needs to be $1.5 million or more.

If you’ve performed these calculations and realize that you aren’t near your current goals yet, there are a few key steps you can take. First, it’s never too late to start contributing more money to your 401(k). You could also invest in an IRA if you haven’t already done so, contribute to a SEP-IRA (which is used by people who are self-employed), and more.

You also always have the option of simply working longer to help preserve your savings, but if you don’t necessarily want to do that you don’t have to. You might want to consider at least working until you’re eligible for Medicare, as this can help cut down on your essential expenses because you wouldn’t need private health insurance coverage.

In the end, saving for retirement is something that a lot of people worry about so if you’re among them, rest easy knowing that there are many, many others. It can be a challenging process, but by following best practices like those outlined above you can help make sure you’re on the right path. You should also consult with a financial professional to help come up with a specific plan that makes the most sense for you.

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 a 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 reasonable compensation for the services they provide, some out of unfamiliarity with the requirements, and some purposely to avoid the payroll taxes.

The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.

If the S corporation does not pay it’s working stockholders a reasonable compensation for their services, then the IRS generally will treat a portion of the S corporation’s distributions as wages and impose Social Security taxes on the deemed wages.

There is no specific method for determining what constitutes reasonable compensation, and it is based on facts and circumstances. Generally, it is an amount that unrelated employers would pay for comparable services under like circumstances and based upon the cost of living in the area where the business is located. The following are just some of the many factors that would be considered in making this determination:

• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business
• Dividend history
• Payments to non-shareholder employees
• Timing and manner of paying bonuses to key people
• What comparable businesses pay for similar services
• Compensation agreements
• The use of a formula to determine compensation

The problem here, of course, is that it is easy for the IRS to list contributing factors used by the courts in determining reasonable compensation and leave it to the corporation to quantify these factors into a reasonable salary but still can challenge the selected amount later if an auditor, off the top of their head, decides the compensation is unreasonable.

The IRS has a long history of examining S corporation tax returns to ensure that reasonable compensation is being paid, particularly if no compensation is shown being paid to employee-stockholders.

Reasonable Compensation in the Spotlight – With the passage of tax reform, reasonable compensation will be in the spotlight because of the new deduction for 20% of pass-through income. This new Sec. 199A deduction is equal to 20% of qualified business income (QBI) and will figure into the shareholder’s income tax return. The QBI for the stockholder of an S-corporation is the amount of net income passed through to the stockholder and designated as QBI on the K-1, but the stockholder may not include the reasonable compensation (wages) he or she was paid as QBI. Thus, wages paid to stockholders reduce the QBI because the S corporation deducts the wages as a business expense, therefore reducing the corporation’s net income and QBI. But that does not mean wages can be arbitrarily adjusted to maximize the Sec. 199A deduction.

IRC Sec. 199A Deduction – Here are some details about how the 199A deduction works and the impact of reasonable compensation wages on the Sec. 199A deduction.

• The S corporation’s employee-stockholder’s wages are NOT included in qualified business income (QBI) when computing the 199A deduction. Thus, the larger the wages, the smaller the K-1 flow-through income (QBI) and thus the smaller the 199A deduction, which is 20% of QBI. In this case, an S corporation would tend to pay the stockholder a smaller salary to maximize the flow-through income and, as a result, the 199A deduction.
• If married taxpayers filing a joint return have taxable income that exceeds $364,200 ($182,100 for other filing statuses), the 199A deduction begins to be subject to a wage limitation, and once the taxable income for married taxpayers filing a joint return exceeds $464,200 ($232,100 for other filing statuses), the 199A deduction becomes the lesser of 20% of the QBI or the wage limitation. For these high-income taxpayers, an S corporation will tend to pay stockholders less wage income for them to benefit from the Sec. 199A deduction.
• If an S corporation is a specified service trade or business, the Sec. 199A deduction phases out for married taxpayers filing a joint return with taxable income between $364,200 and $464,200 (between ($182,100 and ($232,100 for other filing statuses). And although the wage limitation is used in computing the phase-out, once the taxpayer’s taxable income exceeds $464,200 ($232,100 for other filing statuses), the taxpayer will receive no benefit from the wage limitation and therefore would again want to minimize their reasonable compensation to minimize FICA taxes. Specified service trades or businesses (SSTBs) include those in the fields of health, law, accounting, actuarial science, performing arts, athletics, consulting, and financial services (for more information on what constitutes an SSTB, please call).

Of course, taxpayers cannot pick and choose a reasonable level of compensation to minimize taxes or maximize deductions. Therein lies a trap for taxpayers who do not consider the factors related to reasonable compensation. There are commercial firms that have the data necessary to determine reasonable compensation and specialize in doing so. These firms can be found by searching the Internet for “reasonable compensation.” Even the IRS has employed these firms to provide reasonable compensation data in tax court cases.

If you want additional information related to reasonable compensation, please give our office a call.

With tax season upon us, documents reporting income, sales and other items needed for your 2022 tax return should have arrived or will be arriving soon. Be on the lookout for them and be careful not to accidently discard any. Here are some of the common tax forms you need to be watching for depending upon your particular circumstances. 

Form W-2 – If you were employed in 2022, you will receive a W-2 from each of your employers. Not only does this form report your wages, but also the income tax that was withheld from your paychecks and which will be a credit against your tax liability.

Form W-2G – If you had gambling income more than the IRS gambling winning reporting thresholds, you will receive one or more Form W-2Gs. In fact you may have already received one from the gambling entity at the time you won.

Form 1099-G – This form is used for reporting income and refunds from several sources including:

If you received a state income tax refund in 2022 from your 2021 return, the state will issue a Form 1099-G reporting the refund amount, which may or may not be taxable income on your 2022 federal return. If you itemized your deductions on your 2021 federal return, the state refund will most likely be taxable for federal.

You will also receive a Form 1099-G showing the amount of any unemployment benefits you may have received in 2022, which are taxable for federal purposes. Some states also tax these payments.

Form 1099-MISC – You may receive a Form 1099-MISC for miscellaneous income received during 2022. This income will need to be reported on your tax return, but in some cases expenses may be deductible against this income.

Form 1099-DIV – If you have stocks or mutual funds that pay dividends, they are typically reported on Form 1099-DIV.

Form 1099-INT – If you received interest income in 2022, typically from bank savings accounts, or other investments, you will receive a 1099-INT showing the taxable amount of interest you earned. Although banks and other financial institutions aren’t required to issue a 1099-INT form if the interest you earned is less than $10 for the year, you are still required to report the interest income on your tax return.

You may receive a 1099-INT reporting interest paid to you by the IRS because of a delay in their processing your 2021 tax return. This interest is taxable on both your federal and state returns.

If you cashed in U.S. savings bonds during 2022 through an account with the government’s TreasuryDirect, you will need to retrieve your 1099-INT from your TreasuryDirect online account since the government is not sending paper 1099-INT forms for these redemptions. This interest is taxable on your federal return but not your state return.

Form 1099-B – Where you sold securities during 2022 you should receive a 1099-B providing all the details of your sales for the year.

NOTE: If your investments are with a brokerage firm, you will generally receive a substitute reporting form, listing all the stock and security sales, interest, dividends, and other investment information needed for your 1040 preparation.

Form 1099-S – If you sold your home during the year, you may receive a Form 1099-S showing the sales price. Sometimes the escrow company issues the 1099-S at the closing of the sale, so check your closing documents to see if you already have the form.

Form SSA-1099 – If you received social security benefits during 2022, you will be receiving a Form SSA-1099 showing the amount received, any social security benefit adjustments, and the amount of Medicare insurance premiums withheld from your monthly benefits.

Form RRB-1099 – Is the equivalent of Form SSA-1099 for railroad retirement benefits.

Form 1099-R – Reports retirement plan benefits you received, including IRA distributions. Generally, the taxable amount is also included on the Form 1099-R.

Form 1098-T – If you paid college tuition for yourself or a dependent, you will generally need the Form 1098-T that will be sent to you by the educational institution to claim an education credit.

Form 1095-A – If you obtained your health insurance through a government marketplace, you should receive a Form 1095-A that is needed to reconcile your advance premium tax credit, and used to reduce your 2022 premiums.

Form 1099-NEC – If you were self-employed in 2022, businesses that paid you $600 or more will be issuing you a Form 1099-NEC, some even if the amount they paid you is less than $600.

Form 1099-K – If your business accepts credit cards, debit cards, as well as PayPal or other third-party payments, you may receive a Form 1099-K showing those sales for the year. Even if you don’t have a business, you may receive a 1099-K, if you received income through one of these or similar sources, such as when you sold items online or the income was reimbursement for personal expenditures or a gift to you from a friend or relative. These non-business-related payments may need to be reported on your return, but may not be taxable or may be only partly taxable.

Schedule K-1 – If you are a partner in a partnership, shareholder in an S-Corporation, or a beneficiary of a trust, you will also receive a Schedule K-1 from the entity, showing information from the entity that will be needed to prepare your personal return. You may also receive Schedules K-2 and K-3. These forms may be delayed, since they won’t be available until after the partnership, S-Corporation, or trust’s tax return has been prepared.   

The IRS also receives copies of these documents. If the information on these documents is not reported correctly on your tax return, you will hear from the IRS at a later date.

If you don’t receive an income-reporting Form 1099 or schedule that you were expecting, you should check to see if it is available from the payer online. Even if you don’t receive the form, you are still required to report on your tax return the income that you received from that payer or business.

Please call this office if we can be of assistance.