9 Simple Easily-Overlooked Tax Secrets

If someone handed you a book about how to save money on your taxes and avoid IRS audits, you might imagine it would be the size of an encyclopedia. This may surprise you, but we’re offering a short, easy-to-read eBook about just that. Gone are the days of taxes proving to be unendingly frustrating; a local professional with the right expertise makes all the difference. 

Take a look at our FREE report, and let us know how we can help. We’re ready and waiting.

What should you be shooting for?

It's helpful to have a financial target at which to aim. But the problem is that there is just SO MUCH financial advice to be had on ye olde World Wide Web that cutting through the noise and finding simple targets is difficult.

So, that's what I'm here to provide today.

For those of my clients who are over age 50, this can be a guide to catching up ... or, well, it might be the perfect thing to send along to a friend of yours who is in their 40s who might be interested in a great tax professional. ;) [Referrals really are the lifeblood of our practice.]

And as the nation's eyes are on the Northern California fires, let's not forget that no matter where you might find yourself on the financial scale, there are ALWAYS things for which to be thankful. Recognizing this fact is the first step towards financial well-being, no matter your age.

Mike Mead's 
"Real World" Personal Strategy Note
Attainable Financial Targets by Age 50
"Change might not be fast and it isn't always easy. But with time and effort, almost any habit can be reshaped." - Charles Duhigg

Finances should be viewed as dispassionately as possible, don't you think?

Unfortunately, too many financial planners have their advice clouded by various financial incentives, and they often don't take a holistic view of every part of the financial picture.

As a tax professional, I get unique insight into financial health because I see so many tax returns ... and because I am not burdened with as many competing incentives.

So, that being the case, allow me to establish some landmarks for you on our map towards financial independence. It's great to know where you should be headed ... or, from what place you should be coming.

Here are five real-world financial targets to shoot for by age 50:

1) Your estate plan should be fully in place.

Of course, various assets are handled differently. This is the time to make a complete review of how your plan is put together, to ensure that EVERY asset (not just the tangible ones) are still handled properly.

Intangible assets can include such things as what you are passing down to your children in terms of "family ways" and values that you would like to see spreading down throughout your generations. This is an important step at midlife.

2) If college is paid for, consider dropping term insurance. 

At this stage of life, it becomes more costly to pay for this service. You are probably at the point where your children are nearing the completion of their education. 

Remember that you purchased "peace of mind" (term insurance is not an investment) so that if anything were to happen to you, your home and your children's education could be paid for. If those things are now moot, it may be time to reassess.

3) Evaluate where you are with your saving and investing.

You may not want to retire for quite some time yet. That's a wonderful place to be. But you should be considering whether you have saved up enough to match your desired lifestyle spending. It's a good rule of thumb that you should have saved about 8-10 times your annual lifestyle spending at this point.

If you haven't?

4) Catch up on your savings.

At age 50, the maximum savings limit in a 401(k) or 403(b) account increases from $18,500 (which is the 2018 limit under age 50) to $24,500 (it was $500 less for each amount in 2017). At age 50 or older, Roth contributions also increase from $5,500 a year to $6,500 with these "catch-up" provisions. If we don't have eight times our lifestyle spending saved, now is the time to press these limits.

Of course, saving well is half the battle; investing well is the other half.

That's a subject for another day.

5) Lastly, begin considering what you really want out of retirement.

Consider that living a life of purpose doesn't necessarily mean decades of simple recreation.

Reaching the place where you don't "have" to work is a wonderful marker of true financial success. But you can make the decision to view your retirement years as an opportunity to do new, meaningful work. Commit yourself to a nonprofit or a ministry endeavor. Find ways to strategically invest your time and energy into different work that matters (aside from your first-half career).

Although you can have that attitude at any age, it is especially powerful when redefining the second half of your life.

I do hope this helps,  and no matter where you find yourself, there is "no shame in our game", and we are in your corner.

Until next week, 

 
Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
www.afitonline.com

"AGE 55 RULE" FOR TAKING MONEY OUT OF A COMPANY RETIREMENT PLAN

If you participate in a company retirement plan, such as a 401(k), there's a way you can take a distribution and get out of paying the 10% early distribution penalty if you're under age 59 ½ at the time of the withdrawal. The rule is sometimes called the “age 55 rule.”

If you are 55 years old or older in the year you left your job and you need to take a distribution of your retirement plan funds immediately, you should leave the money in your company plan and take your withdrawals from there. The reason is because distributions from your company plan, when you leave the company in the year you turn age 55 or later, are not subject to the 10% early distribution penalty if you no longer work for that company (or what the tax code refers to as “separation from service”). Remember, though, that the distribution would still be subject to federal income taxes. 

It’s the year you turn age 55 that matters. For example, in one Tax Court case, the Court ruled that a person was liable for the 10% penalty for an early distribution made from her company retirement plan. Although her distribution took place after she turned age 55, she left her job when she was just age 53, which disqualified her from being eligible for the age 55 exception to the 10% penalty. It’s the year someone separates from service that matters, not the distribution date. To qualify for the penalty exception, separation from service must occur in the year the person turns age 55 or older.

Also, if you roll over company retirement plan money to an IRA, withdrawals before age 59 ½ are subject to the 10% early withdrawal penalty unless one of the other exceptions applies (such as disability). The age 55 exception does not apply to IRA distributions. So, if you meet the age 55 rule and need to spend some of your retirement money, don’t roll over the amount you need to an IRA. If you do, and then take a distribution from your IRA, you will be hit with the 10% penalty. Once you roll over company plan money to an IRA, the IRA rules kick in and you can’t go back and use the age 55 rule.

If you have questions regarding the Age 55 Rule contact the Blue Springs financial services firm of Alliance Financial & Income Tax today at 816-220-2001

Filing an Amended Return

What should you do if you already filed your federal tax return and then discover a mistake? First of all, don't worry. In most cases, all you have to do is file an amended tax return. But before you do that, here is what you should be aware of when filing an amended tax return.

Taxpayers should use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended (corrected) tax return.

An amended return cannot be e-filed. You must file the corrected tax return on paper. If you need to file another schedule or form, don't forget to attach it to the amended return.

An amended tax return should only be filed to correct errors or make changes to your original tax return. For example, you should amend your return if you need to change your filing status or correct your income, deductions or credits.

You normally do not need to file an amended return to correct math errors because the IRS automatically makes those changes for you. Also, do not file an amended return because you forgot to attach tax forms, 

such as W-2s or schedules. The IRS normally will mail you a request asking for those.

If you are amending more than one tax return, prepare a separate 1040X for each return and mail them to the IRS in separate envelopes. Note the tax year of the return you are amending at the top of Form 1040X. You will find the appropriate IRS address to mail your return to in the Form 1040X instructions.

If you are filing an amended tax return to claim an additional refund, wait until you have received your original tax refund before filing Form 1040X. Amended returns take up to 16 weeks to process. You may cash your original refund check while waiting for the additional refund.

If you owe additional taxes file Form 1040X and pay the tax as soon as possible to minimize interest and penalties. You can use IRS Direct Pay to pay your tax directly from your checking or savings account.

Generally, you must file Form 1040X within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. For example, the last day for most people to file a 2014 claim for a refund is April 17, 2018. Special rules may apply to certain claims. Please call the office if you would like more information about this topic.

You can track the status of your amended tax return for the current year three weeks after you file. You can also check the status of amended returns for up to three prior years. To use the "Where's My Amended Return" tool on the IRS website, just enter your taxpayer identification number (usually your Social Security number), date of birth and zip code. If you have filed amended returns for more than one year, you can select each year individually to check the status of each.

Don't hesitate to call if you need assistance filing an amended return or have any questions about Form 1040X.

Freelance Taxes 101

It’s no secret that freelance work is becoming the new norm for many Americans in today’s economy. Nearly half of all millennials freelance, and that percentage is predicted to grow in the coming years. In fact, freelancers are expected to make up the majority of the U.S. workforce within the next decade.(1)

And why not? As a freelancer, you choose your work hours, what projects to take on, and where you work. You get to call the shots!

But the most common reason people get into freelancing is the chance to earn some extra money and supplement their primary income.(2) And let’s be honest, who doesn’t want more cash in their pockets?

However, chances are, your side hustle will impact how you file your taxes. If you’re not careful, you could lose a large chunk of your freelance income to an enormous tax bill.

Tax Basics for Freelancers: What Is the Self-Employment Tax?

If you earn $400 or more from freelance work in any given year, you are responsible for paying the self-employment tax of 15.3%. This tax solely exists to cover your Social Security and Medicare taxes.(3)

Workers who are not self-employed have their Social Security and Medicare taxes taken out of their paychecks automatically—and their employers cover half of those taxes. As a freelancer, however, you’re considered both an employee and an employer. That’s why the IRS wants you to cover the whole 15.3%.

The Schedule SE tax form helps you calculate your self-employment tax, which you’ll then report on your standard Form 1040. You might also be able to deduct the employer-equivalent portion (50%) of your self-employment tax on your 1040.

Remember, the self-employment tax is in addition to your regular income tax rate. That’s why Dave recommends you save as you go by setting aside around 35–40% of every freelance check you receive in a separate savings account to cover your income and self-employment taxes so you don’t come up short at tax time.

Full-Time Versus Part-Time Freelancing: Calculating Estimated Taxes

Since taxes from your freelance income aren’t being withheld throughout the year, there’s a good chance you’ll need to estimate your taxes for the upcoming year and pay the IRS on a quarterly basis. This is estimated tax, which is typically paid every three months in four equal installments. So how do you know if you need to do this or not?

According to the IRS, you should pay taxes quarterly if you expect to owe at least $1,000 in taxes this year.(4) If you rely on freelance work for most or all of your income throughout the year, you are likely responsible for estimated tax payments.

If you are freelancing on the side in addition to a job that pays you a salary, whether or not you should make quarterly payments depends on how much you’ll make during the year. Nearly half of all freelancers make $2,000 or less each year in freelance income.(5) If you fall within that group, you can probably skip estimated tax payments and just report your freelance income when you file your tax return.

However, if it’s looking like you’ll owe $1,000 or more in taxes, Form 1040-ES can help you approximate how much you’ll make during the year and then determine your estimated taxes based on your projected earnings.

If you underpay your estimated tax—these are estimates, after all—you’ll have to pay the remaining taxes when you file your annual tax return. (And no, though you freelance, you don’t get a free pass. You still have to file your annual tax return by April 15 like everyone else.) On the other hand, if you overpay your estimated tax, you’ll receive the excess amount back in the form of a tax refund. 

For estimated taxes, the year is divided into four payment periods with a specific payment deadline for each period:

• January 1–March 31 (Deadline: April 15)
• April 1–May 31 (Deadline: June 16)
• June 1–August 31 (Deadline: September 15)
• September 1–December 31 (Deadline: January 15 of the following year)

Connect with a licensed, trustworthy tax professional to find out if you need to pay estimated taxes.

Keeping Track of Your Freelance Income

As a freelancer, you should receive a 1099-MISC form—which summarizes any miscellaneous income you earned during the tax year—from each client who paid you over $600.

However, many clients now pay freelancers and contractors through PayPal or other online payment systems. If that’s the case, then you will probably receive a 1099-K form from your clients instead. But this form comes with an important caveat: Clients are not required to send you a 1099-K unless they pay you more than $20,000 or more than 200 times.

But just because you didn’t receive a 1099 from a client doesn’t mean you’re off the hook. You still need to report your earnings to the IRS on a Schedule C form.

A Schedule C tax form serves as the hub for all of your freelance income and expenses. First, you’ll report all the freelance income you earned during the tax year in Part I. This includes amounts already reported on the 1099 forms you received from clients and amounts not yet reported for the clients who didn’t send a 1099.

After that, you’ll list your expenses in Parts II–V to see if you can claim any deductions. If you had $5,000 or less in business expenses, the more simplified Schedule C-EZ might be best for you.

You will want to connect with a tax pro to make sure you are filling out the right forms.

Deductions Freelancers Can Claim: Using Tax Deductions to Cut Your Tax Bill

Tax deductions lower your taxable income, potentially reducing your tax bill and saving you hundreds of dollars in the process. And as a freelancer, you get to claim a bunch of them!

But many self-employed professionals aren’t taking advantage of tax deductions. In fact, 73% of freelancers don’t deduct any expenses at all.(6) That means some freelancers are paying more taxes than they have to!

As a freelancer, you can claim deductions on expenses that, according to the IRS, are "ordinary and necessary" for the operation of your 

business. But always keep in mind that when it comes to deducting expenses from your side hustle, you can’t mix business with pleasure! Your business expenses must be used exclusively for freelance work; trying to deduct travel expenses for your summer family vacation isn’t going to fly. (You may fly, but you won’t be deducting your flight costs on your taxes.)

Some of the most common deductions for freelancers include:

• Advertising and marketing
• Office supplies
• Computer equipment and software
• Travel and business meals
• Home office
• Utilities

Careful documentation and detailed bookkeeping–like saving all your original receipts and invoices—can help you prove that those expenses were vital to your business, which will save you money come tax season.

That might be easier said than done since one in four freelancers have trouble keeping track of expenses.(7) Don’t be one of these haphazard folks! Opening a separate checking account specifically for freelance work-related transactions is a good solution, helping you separate work expenses from personal ones.

There’s more good news for freelancers on the tax front. As a result of the recently passed tax reform legislation, most freelancers will get to deduct 20% from their freelance income—meaning they won’t pay taxes on that 20%. For example, if you made $5,000 from your photography side hustle this year, you can shave $1,000—or 20%—off your taxable income.

You might also want to check and see if you’re eligible for the Earned Income Tax Credit (or EITC/ETC)—a refundable credit that cuts taxes owed for workers with low to moderate income.

From Freelancer to Small Business Owner: Should I Incorporate My Side Hustle?

Is it time to upgrade your freelance work to a full-fledged business? That’s a question many freelancers ask, especially when their business starts gaining some serious momentum.

The truth is, there’s no tax advantage to incorporating. The only thing it will do is create a stand-alone entity that’s liable for its own actions. For example, if you have a lawn care side hustle that you incorporated into a small business and someone sues you for accidental damage caused during one of your jobs, they can’t come after your personal assets.

If you’re just starting out as a freelancer, you probably don’t need to worry about setting up a corporation. Dave says you only need to incorporate your side business or sole proprietorship if you meet one of the following conditions:

1. You are going into a business in which you are likely to be sued.
2. You have substantial personal assets you want to protect.
3. Your business has grown and is a target for lawsuits.

If you go that route, ask your tax advisor which business structure they would recommend. A qualified tax professional can help you make the right choice.

Find a Quality Tax Professional

Taxes are complicated enough as it is—and they only get more complex when you throw multiple streams of income into the mix. But the crazy thing is that only 20% of freelancers seek help from a tax professional for tax or bookkeeping advice.(8) One of the biggest mistakes you could make as a freelancer is to try and go it alone when tax season comes around.

Find a tax professional in your area today!

The content of this blog is from Dave Ramsey's July 2018 newsletter titled Freelance Taxes 101

TAX BENEFITS OF S-CORPORATIONS

As a small business owner, figuring out which form of business structure to use when you started was one of the most important decisions you had to make; however, it's always a good idea to periodically revisit that decision as your business grows. For example, as a sole proprietor, you must pay a self-employment tax rate of 15% in addition to your individual tax rate; however, if you were to revise your business structure to become a corporation and elect S-Corporation status you could take advantage of a lower tax rate.

WHAT IS AN S-CORPORATION?

An S-Corporation (or S-Corp) is a regular corporation whose owners elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax (and sometimes state) purposes. That is, an S-corporation is a corporation or a limited liability company that's made a Subchapter S election (so named after a chapter of the tax code). Rather than a business entity per se, it is a type of tax classification. Shareholders then report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates, which allows S-corporations to avoid double taxation on corporate income. S-corporations are, however, responsible for tax on certain built-in gains and passive income at the entity level.

To qualify for S-corporation status, the corporation must submit a Form 2553, Election by a Small Business Corporation to the IRS, signed by all the shareholders, and meet the following requirements:

• Be a domestic corporation
• Have only allowable shareholders. Shareholders may be individuals, certain trusts, and estates but may not be partnerships, corporations or non-resident alien shareholders.
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

WHAT ARE THE TAX ADVANTAGES OF AN S-CORP?

Personal Income and Employment Tax Savings

S-corporation owners can choose to receive both a salary and dividend payments from the corporation (i.e., distributions from earnings and profits that pass through the corporation to you as an owner, not as an employee in compensation for your services). Dividends are taxed at a lower rate than self-employment income, which lowers taxable income. S-corp owners also save on Social Security and Medicare taxes because their salary is less than it would be if they were operating a sole proprietorship, for instance.

The split between salary and dividends must be "reasonable" in the eyes of the IRS, however, e.g., paying self-employment tax on 50% or less of profits or a salary that is in line with similar businesses. Furthermore, some S-corp owners may be able to take advantage of the 20% deductions for pass-through entities as well, thanks to tax reform.

Losses are Deductible

As a corporation, profits and losses are allocated between the owners based on the percentage of ownership or number of shares held. If the S-corporation loses money, these losses are deductible on the shareholder's individual tax return. For example, if you and another person are the owners and the corporation's losses amount to $20,000, each shareholder is able to take $10,000 as a deduction on their tax return.

No Corporate Income Tax

Although S-corps are corporations, there is no corporate income tax because business income is passed through to the owners instead of being taxed at the corporate rate, thereby avoiding the double taxation issue, which occurs when dividend income is taxed at both the corporate level and at the shareholder level.

Less Risk of Audit

In 2014, S-corps faced an audit risk of just 0.42% compared to Schedule C filers with gross receipts of $100,000 who faced an audit rate of 2.3%. While still low, individuals filing Schedule C (Profit or Loss from Business) are at higher risk of being audited due to IRS concerns about small business owners underreporting income or taking deductions they shouldn't be.

HELP IS JUST A PHONE CALL AWAY.

Whether you keep your existing structure or decide to change it to a different one, keep in mind that your decision should always be based on the specific needs and practices of the business. If you have any questions about electing S-Corporation status or are wondering whether it's time to choose a different business entity altogether, don't hesitate to call. 816-220-2001

Tax Advice For Families and Small Businesses in the Jackson county, MO Area Looking for Someone to Trust

Dear Friend,

I hope you’ll forgive me for being blunt.. I realize that you may not be used to seeing a tax professional talk like this. It’s not my intention to offend (I’m actually being very careful with my words–I am a tax professional, after all).

But I think you’ll agree that the times we’re currently facing require a little straight talk.

Here’s a certain truth: the State and Federal Government would love to have more of your hard-earned money in their accounts. Sure, even though it’s painful, none of us begrudge paying our legal and fair share of taxes. But the problem is that regular taxpayers, like you, are missing out on legal and safe deductions, to the tune of hundreds of millions of dollars in unclaimed refunds every year!

As a tax professional, it truly breaks my heart, knowing that just a few thousand, or even a few hundred bucks for us “regular guys” out of that vast pool of overcharging could make a world of difference–and they are just sitting there, unclaimed! And with the economy we’re facing now…it’s essential that the “right” professional handles your taxes and other financial matters.

You see, all tax professionals are not the same. From the “discount” chains (notice the quotes) to classic accounting firms, most fly through tax season in a disorganized mess–bleary-eyed and hopped-up on caffeine. It’s no wonder that they treat you like a number and lapse into excuses and tax-talk. (I told you that I would be blunt.)

I’ve put more of my thoughts on these matters in a Free Report for Individuals: “How to Beat the IRS Legally – Seven, Often Overlooked, Tax Strategies”.” 

Feel free to poke around our site and discover why I’ve been called “The Most Trusted Tax Professional in the Jackson county, MO Area.”

Warmly,

Mike Mead, EA, CTC

Are you guilty of these wrong financial mindsets?