The 4 Best Tax Questions from this Tax Season

Tax season has been extended.

Federal returns are due on July 15 instead of April 15 because of the covid-19 crisis. That being said, PWR has already wrapped up most of our returns this year and kept track of the best questions we received.

Is my state tax refund from last year taxable?

It depends. State tax refunds are taxable if you received a tax benefit for deducting state taxes last year. In other words, if you took the standard deduction last year, your state tax refund will not be taxable this year. Even if you itemized using the Schedule A and listed your state taxes paid, the refund still may not be taxable because of the $10,000 limit imposed by the TC&JA of 2017. In other words, if your itemized deduction last year would have been the same if you paid in the exact amount of state tax owed, the state refund won't be taxable.

How should my Roth conversion be reflected on my tax return?

You will receive a 1099R showing the amount distributed from a Traditional IRA. Enter that amount as you would with any 1099R. Then report the Roth conversion on Form 8606, Part II. This will help you compute the taxable amount of the conversion that will flow through to the 1040.

When do I owe the underpayment tax penalty?

The IRS imposes an underpayment penalty if you do not withhold 90% of the tax due for the current year or 100% of the tax due for the previous year. That 100% becomes 110% if your adjusted gross income (AGI) is over $150,000. There are special rules and exceptions and you can request a waiver with form 2210 if you have a valid reason, such as if you live or work in a federally declared disaster area.

Will the stimulus check be taxable?

No - if you are eligible for the stimulus check, it will be tax-free. Checks will be issued for $1,200 to each taxpayer and $500 per child. Single filers that earn $75K or less ($150K for married filing jointly) will receive the entire check. Then there is a phase-out, with the benefit being eliminated completely for those with adjusted gross incomes (AGI) of $99K for single ($198K married filing jointly).

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.

Tax Season 2016 FAQ's

Every year, I compile a list of the FAQ's I get during tax season to share in the hopes it answers somebody else's question.  This is not a substitute for tax advice.  Please check with your tax professional for questions specific to your situation.

I have a taxable account, but I did not receive a 1099-INT form for it.  I looked online and I earned $7 of interest in 2015.  Do I need to claim this interest income on my tax return?

Yes - claim the interest income.  Banks are only required to issue 1099-INT forms on accounts with income greater than $10 for the year.  Regardless, all income is taxable (even if it is below the reporting requirements).

What is the 1095 form I received this year?

This form proves that you had health insurance for the entire year in 2015.  The majority will only need to check a box on their tax return attesting to coverage.  Those who purchased insurance on the Marketplace will get a 1095-A form and will need to fill out more information to see if their advance premium credit was accurate.  The 1095-B and 1095-C are purely informational, but still need to be kept with your other tax documents in case you get audited.

I am considering installing solar panels this year.  What tax benefit do I receive from this, if any?

You can claim 30% of the cost to install qualified solar systems as a federal tax credit. 

Is unemployment income taxable?

Yes.

I started a business.  Can I deduct expenses related to my home office?

Yes, but only if the area for your home office is exclusively and regularly used for your business.  It cannot be used for personal as well as business reasons.  See the other requirements and details here.

Can I deduct the cost of my child's summer camp? 

You may be eligible for the dependent care tax credit if the child is your dependent, under age 13, and sending him or her to camp allows you to work.  Check out IRS Publication 503 for more information.

How do I value my non-cash charitable contributions?

Use TurboTax's Its Deductible tool.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.

Tax Basics: Employed vs Self-Employed

As more and more clients are starting businesses, picking up side consulting gigs or selling crafts online, this post focuses on the tax differences between being an employee vs being self-employed.

1) You are in charge of tracking your income and expenses when you are self-employed.

All income is taxable, absent a specific exclusion in the IRS code.  You don't need to track your income when you are an employee because you receive a W-2 from your employer summarizing your taxable income.

When you are self-employed, you are responsible for tracking your income and expenses.  I recommend using an accounting software like Quickbooks Online, but some people choose to just use an Excel spreadsheet.  Depending on what goods & services you are selling, you may get a summary of income earned at the end of the year.  For example, if you are providing consulting services, your clients need to send you a 1099-MISC form at the end of the year if they paid you $600 or more.  If you earned less than $600 from a given client, and don't receive a 1099-MISC, you still need to report the income.  The annual tax forms you are required to file depend on the type of entity you choose for your business.  The majority of my clients are sole proprietors or single-member LLC's which requires them to complete the Form Schedule C for federal tax purposes.  I recommend touching base with an accountant, at least in the beginning, to make sure you choose the best entity for your situation and get set up correctly.

2)  You need to pay taxes as you go, regardless of how you get paid.

The IRS requires us to pay a certain amount of tax throughout the year rather than everything at once at tax time.  This is very easy to do as an employee because you can have your employer withhold taxes from your wages with each paycheck.

The self-employed, on the other hand, likely need to pay quarterly estimated tax payments.  If you also have a job as an employee, in addition to your self-employment earnings, you can choose to withhold additional taxes to cover your required amount due for the self-employment income.  Likewise, if you are married and filing jointly with a spouse who is an employee, you can withhold more taxes from your spouse's earnings.  An accountant can help you figure out how much you are on track to owe and make sure you are doing it correctly.

3)  Now may be the time to pay for a professional tax preparer.

If you don't already have a tax preparer, consider getting one if you are starting to earn self-employment income.  My experience has been that the tax preparer can help save you time and money by doing it right the first time.  Tax preparers deal with the tax code everyday, know the ins and outs on what you can deduct, and have survived IRS audits.  I am always trying to meet new tax preparers in San Diego to use as referrals for my clients.  If you have a tax preparer you love who is taking new clients, please share their info!  linda@planningwithinreach.com

This article is for general informational purposes and shouldn't be taken as a substitute for tax advice.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.

Are you eligible for the American Opportunity Tax Credit?

If you paid for higher education costs in 2013, be sure to speak with your tax preparer to see if you may benefit from this credit.

What is it?

The American Opportunity Tax Credit (AOTC) modifies the Hope Tax Credit. It allows you to take a tax credit for qualified higher education costs including tuition, certain fees and course materials. See IRS Publication 970 for a complete list. It does not include room & board.

How much is it?

The credit amount is 100% on the first $2,000 of expenses and 25% of the next $2,000, so $2,500 max per year.

How long can I use it?

For four years! This is better than the Hope credit that could be used only for two years.

What exactly is a tax credit?

A tax credit reduces your tax liability dollar for dollar. It is preferable to a “deduction” which reduces your taxable income.

Can anyone claim it for higher education costs for themselves or a dependent?

If you are filing singly, your modified Adjusted Gross Income (AGI) has to be less than or equal to $80,000. For married folks filing jointly, the number is $160,000. After these income levels, the credit starts to phase out until it is no longer available.

How do I claim the credit?

Complete form 8863 and attach it to the 1040 when you file your tax return.

What if I only used 529 plan money for education expenses?

You can’t double dip. That is why I recommend that my clients use their own funds for the first $4K to make sure they can take advantage of the credit, then 529 funds after that.

Source: http://www.irs.gov/uac/American-Opportunity-Tax-Credit:-Questions-and-Answers

http://www.bankrate.com/finance/college-finance/3-ways-make-529-plan-work-1.aspx

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.