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Three Common Tax Penalties and How To Avoid Them
Did you know the IRS can penalize you for a variety of reasons? For instance, you can receive a tax penalty for not having health insurance, for filing what the IRS deems a frivolous tax return, and for a variety of retirement account inactions or actions. However, most taxpayers usually encounter 3 common offenses:
- Not paying what is owed
- Not filing an income tax return, at all
- Not paying enough tax through the year
If you don’t file a return or an extension by the April deadline then the penalty for not filing will start the very next day. The penalty will continue to grow at 5% per month of any tax balance that is due. The 5% penalty applies to any portion of the month and is not pro-rated.
However, the penalty does max out at 25% of your unpaid taxes. Still, 25% is a pretty hefty fee to pay.
A lot of taxpayers will avoid filing their return if they can’t afford to pay their tax liability. That’s not smart. The IRS considers not filing your return a more serious offense.
Those unpaid liabilities have a penalty, too. Even if you file your return or an extension, but do not pay what you owe in full then you’ll face a penalty of 0.5% of the amount due. Again, it’s added every month that your tax bill is not paid in full. It can grow until it reaches 25% of your tax liability.
Taxes are collected on a pay-as-you-earn system. So if you do not pay enough in as you earn it then will be hit with an underpayment penalty. Most Americans comply with this by having income tax withheld from their paychecks. But if you’re an independent contractor or have a side job to your regular employment then you’re responsible for covering the additional taxes due.
To avoid underpaying your taxes you can pay an estimated tax amount throughout the year.
If you have questions on avoiding the 3 common tax penalties, give us a call at 573-686-3053.
Need Help Remembering To Pay Your Bills? We Can Help!
We want to offer this service to you and to any of your loved ones who might need helping keeping up with paying bills or hate the frustration bill paying causes. We know life can get hectic and sometimes it's easy to forget to send in that payment on time. We hate to think of a company taking more of your money due to a late fee. That’s why we have created a way to take care of that headache for you.
If you’re interested or know someone who could benefit in setting up our Accounts Payable Service, give us a call at 573-686-3053 and we’ll be happy to setup a time with Megan to get it arranged.
As always, we love being able to reduce your stress by taking care of one more financial pain for you. If you have any questions, feel free to give our team a call.
Planning Ahead
Now that 2017 is coming to an end, it’s the perfect time to start thinking and planning for next year. By setting your goals now then you can have a plan to work towards and a focus for your business. The end of the year is a great time to ask yourself these questions:
How did this year go?
What was my break even point?
How many customers do I need to make a profit?
How am I attracting new customers?
Planning also means taking stock of where you currently are. Determine what you current numbers, profit, sales and etc. are and then starting planning for how you can increase or stay the same for next year.
What Does a Balance Sheet Say?
A balance sheet reports the dollar amounts of your business’ assets, liabilities and equity as of a specified date.
Assets include cash, inventory, investments, land, accounts receivable, buildings, equipment, goodwill and other intangible assets. Generally assets will be reported at costs or lower due to depreciation.
Liabilities include debts and other obligations of the company. These might look like loan amounts, accounts payable, warranty obligations and taxes due.
Equity or stockholder’s equity reports the amount of assets that are from the owners.
In the end, the balance sheet allows a company to determine the amount of working capital.
What is Goodwill?
Goodwill is an intangible asset that arises when a buyer acquires an existing business. Goodwill does not include any assets that are easily identifiable or are capable of being transferred or sold from the entity. Goodwill is recorded when a company purchases another company and the price is greater than the fair market value less than the liabilities assumed.
Outside of accounting, goodwill refers to the value that has developed as a result of outstanding customer service, management skills, teamwork and other intangible qualities.
If you have any questions or need help, give us a call at 573-686-3053.
What is Accounts Payable?
In a simple term, accounts payable is money owed to creditors. Accounts payable may refer to:
The accounting department that is responsible for processing invoices and other bills for goods and services that a company received.
The title of the account containing the amounts owed for invoices and other bills that have been approved but not yet paid.
Amounts owed, which do not involve a promissory note. If a promissory note is involved, the account Notes Payable will be used instead of Accounts Payable.
If you have any questions or would like to sit down with one of our Certified Public Accountants to discuss how we can help you, give us a call at 573-686-3053.
What is Payroll Accounting?
Payroll accounting applies to any business owner and involves recordkeeping of employees' compensation information, which includes:
Salaries, gross wages, commissions, bonuses, and any income earned by employees
Withholding of any payroll taxes, which include federal income taxes, Social Security, Medicare, and state income taxes, if applicable
Withholding for the employees' portion of health insurance premiums, contributions to savings plans, garnishments, etc.
Employer's expense for Social Security, Medicare, state and federal unemployment taxes
Employer's portion of benefits offered to employees. Such as health, vision, and dental insurance, paid holidays, pension and savings plan contributions, vacation and sick days, workers’ compensation insurance, etc.
If you have any questions on payroll accounting or would like assistance, please give our office a call at 573-686-3053.
Tax Record Tips
It’s time for some housekeeping for your tax records. A big myth is to keep every single piece of paper that comes your way just in case. Tax and organizational experts say that’s not necessarily correct.
What do you need to hang onto?
Keep records that will help identify income sources, track expenses, determine the value of property, prepared tax returns and their supporting documents.
A good rule of thumb is to hold onto records for 3 years after filing your return. That is typically when a chance of an audit from the IRS will pass; however, if the IRS suspects you underreported income by 25% or more then they can go back 6 years.
Most recommendations are for taxpayers to hold onto their tax documents for about 6-10 years.
If you use something to claim a deduction then hold onto it; however, if you don’t use it then shred it. For example, some taxpayers are unable to deduct their medical expenses.
Some items will eventually sell, such as specific assets. Pension plans, homeownership, stocks and more are such assets. Tax professional recommend hold onto those records for 3 years after you dispose of the asset.
Once you know which records to keep, and which not to keep then it’s time to pick a system. Any system will work, just find one that you like best. It doesn’t matter if it’s a filing cabinet, cardboard box, or computer program. Find a record-keeping system you’re comfortable with it and use it.
Your Marital Status on Your Income Tax Return
Using the correct filing status is important for your tax return. The marital status is used to determine which requirements you need, your standard deduction and eligibility for certain credits and other deductions. The IRS has five filing statuses:
Single – unmarried, legally divorced or separated according to State law
Married Filing Jointly – couples who are legally married or if your spouse died during the year and you did not remarry
Married Filing Separately – married couples who elect to file their own separate returns.
Head of Household – unmarried or surviving spouses who have paid more than half the cost of maintaining the home for you a qualifying person
Qualifying Widow (Surviving Spouse) with Dependent Child – applies if spouse died during the previous years and you have a dependent child, you have not remarried, and you meet other conditions
Each filing status will impact your income tax return. If you are unsure of which status to use, please contact one of our tax professionals at 573-686-3053.
Tax Fraud and Identity Theft – What You Need to Know
Some facts from the IRS about tax fraud:
- In 2015 the IRS reported 2.7 million taxpayers had identities stolen in the previous year.*
- In 2011 the IRS paid identity thieves 5.2 billion dollars.*
- Advances in technology have helped stop the payment of fraudulent money, and between 2011 and 2014 the IRS has stopped $63 billion worth of fraudulent tax refunds.*
Here’s what you need to know to protect yourself this year: Thieves steal your personal information before you even receive your W-2 from your employer. Thieves will then file a fake income tax return on your behalf before you get a chance to file a legitimate return. The thieves then sit back and collect the refund check. It seems to happen fairly fast, and with the IRS trying to issue refund checks within three weeks of receiving your return there really isn’t much time to catch the fraud.
Want to know the best way you can deter tax refund fraud? File early, and file electronically! The IRS will reject any tax returns with your Social Security Number that are filed after yours is received. By filing early and electronically you are ensuring your tax return is processed before any fraudulent ones can be received.
Have questions about how to prevent identity theft tax refund fraud for you? Give me a call at 573-686-3053 and I’ll be happy to sit down with you.
*Source: http://money.cnn.com/2015/06/02/technology/irs-hackers/
Who Needs Bookkeeping?
Last week we share what bookkeeping is and how it can help your business stay in compliance with State laws. This week we’re answering the question, “Who needs bookkeeping?”
It’s a question we get all the time from our business owners and it applies to a variety of business owners. We have come up with a list of questions that we like to ask business owners to see if they need bookkeeping.
Are you fearful of an audit from the IRS who typically operates on “guilty until proven innocent?”
Are you an owner that wants to ensure honest and clear records are being kept?
Are you worried about possible internal theft?
Are you afraid of paying more in taxes than you should due to missed deductible expenses?
Are you wanting to improve your business’ cash flow issues?
Are you concerned with timely and accurate filing of payroll tax, sales tax and use tax?
Are you wanting to avoid the year-end scramble and tax time stress?
If you answered yes to any of these questions, then you need bookkeeping for your business. Give us a call at 573-686-3053 to sit down with either of our CPAs, Dairel or Megan to discuss how we can help you. Next week we’ll talk about why you need bookkeeping and how to find the best team for you.
What is Bookkeeping?
Here at Denton & Associates we believe that your financials are the heartbeat of your company. So to make sure you have a strong and healthy heartbeat, you need to be handling your bookkeeping properly. A lot of new business owners aren’t always sure what bookkeeping is, who needs it and why you need it. That’s where we come in. We like to educate our clients to help them understand the benefits of bookkeeping and why it’s important to have a professional help you.
Today, we want to share with you what bookkeeping is. Stay tuned to next week’s post where we will go more in depth who needs bookkeeping.
What exactly is bookkeeping?
Bookkeeping is the recording, storing and retrieving of day-to-day financial transactions for your business. It helps provide financial reports and statements, monitors accounts receivable and records receipts from customers. Bookkeeping also simplifies paying invoices from suppliers on time and records depreciation for your business. In addition, bookkeeping processes employee payroll and payroll taxes to help keep your business legal.
Bookkeeping is vital to your business’ success. It computes and files all sales and use taxes for business owners on a monthly, quarterly or annual basis to ensure compliance with State laws.
Who needs bookkeeping? Well look for next week’s post and we’ll share what type of business owner actually needs bookkeeping. If you have any questions before then or would like to sit down with one of our CPAs, give us a call at 573-686-3053.
Tips for Year-End Gift Giving to Charity
The holiday season is upon us. Many of us find ourselves with too long of to-do lists, family get-togethers to plan and finding ourselves short on time to get it all done. However, the holiday season is also a busy time for giving to charity. With charity gift giving, there are factors you should keep in mind.
- It’s important that any charitable gifts must be received by December 31st to count on your 2016 tax return.
- All donations must be made to a qualified charity. If you are unsure if your charity is qualified, then you can use Select Check, which is a searchable online tool available through the IRS to ensure your charity of choice is qualified.
- Any contributions made through a credit card are deductible for 2016 if made prior to the end of the year, even if the credit card statement is paid in 2017.
- If possible, get a receipt for all donations made whether money or household items.
Rules for Charitable Contributions of Clothing and Household Items
Household items include furniture, furnishings, electronics, appliances and linens. Clothing and household items donated to charity generally must be in good used condition or better to be tax-deductible. Donors must get a written receipt or acknowledgement from the charity for gifts worth $250 or more. It must include a description of the items contributed.
Rules for Monetary Donations
Documentation must show charity’s name, the date of the contribution and the amount. Bank records will count as documentation, and they include canceled checks and statements.
Money donations cash, check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
Taxpayer must receive a receipt or acknowledgment for any donation that is $250 or more. However, one statement containing all of the required information may meet both requirements.
If you have any questions on charity gift giving, please give us a call at 573-686-3053.
Feeling Overwhelmed?
The holiday season is fast approaching. This time of year is notorious for feeling stressed over money. We have gifts, holiday travel, celebrations, dinners, time off work, and so much more creeping in on us. It’s no wonder so many people feel like their overwhelmed as they head into the holiday season.
But it doesn’t have to be this way.
We do not have to let money control us. You can choose how you deal with your money. What if you decided to hire a financial planner to help you create a realistic and do-able financial plan for 2016?
It would be a wonderful tool to have on your side. Being able to budget your money so the stress of taxes, holidays and bill paying doesn’t cause panic attacks.
Denton & Associates is a full-service accounting and financial planning firm. We love working with business owners and families of all ages. We enjoy helping people who want to learn how to manage their money in a whole new way. We work with you to create a comprehensive financial plan that will actually work for you – to help you achieve your dreams and goals.
Let us help you. Give us a call at 573-686-3053 to schedule your meeting with our knowledgeable staff. Let’s finish 2015 and start the New Year with clarity about our money.
Don’t Bite Off More Than You Can Chew
Goals are a great thing to have. Professionally and personally. I have many of them that fit both categories, and I’m constantly working at achieving them.
Many goals that we see are long-term, big-picture types. You know the ones – saving for retirement, buying a home, saving for your kids’ college education, and so on. It’s easy to get overwhelmed with the overall goals because there are so many big ones. It’s stressful to think about everything you have to do, how much you need to save and how long you have to do it.
So here’s my recommendation: Break up your big-picture goals into bite-sized ones. Create yearly, monthly, weekly or daily goals to achieve. Here’s the kicker – make sure those small goals line up with your life goals. By focusing on smaller, more quickly attained goals then you will create the momentum you need to move forward.
Let’s face it, it’s all about moving forward in life. We want to accomplish more and do more for our kids then we ever thought possible. Try not to get overwhelmed with the long-term goals, but set your sights for smaller ones.
If you need help trying to prioritize and set goals that best fit you, then give us a call at 573-686-3053. We’ll be happy to help.
Five Factors that Make Up Your Credit Score
Curious about what makes up your credit score? Well there are five factors to consider and understand. By understanding these then you will be better equipped to increase your credit score.
The higher the credit score you have then the more appealing you are to lenders. If you’re looking at purchasing a new car, buying a home or opening a credit card then you’re going to want a good credit score. There are five factors that go into your credit score and it’s important to understand so you can have a healthy credit score.
One way to check your credit score is by going to annualcreditreport.com. They have the three credit bureaus listed to look at your credit report. From there you will pay a nominal fee to see your credit score.
1) Payment history – making your payments on time and never missing a payment contributes to about 35% of your credit score.
2) Total amounts owed – how much balance you carry against the total credit limit, which is called the debt utilization ratio. This contributes to about 30% of your credit score.
3) Length of history – how long that particular credit has been open. So if you opened a credit card when you were 20 and still have that same card open at the age of 40 then you’d have 20 years of credit history with that one lender. It’s seen as a good thing because you will appear as a loyal client and trustworthy borrower. When you close an account you are basically ending that history with a longstanding borrower.
4) New credit – when you go to apply for a new loan then this appears as a credit inquiry and accounts for 10% of your credit score. So by continually apply for loans or credit cards that could have a negative effect on your credit score.
5) Types of credit you currently have – student loans, mortgage, car loans, personal loans, store credit, etc. This equates to about 10% of your credit score.
Now that you know the five factors that go into your credit score, it’s important to know where you should keep your credit score. Your credit score can range between 300-850. Ideally, you want to be 760 or greater.
Build Your Support Group
Today, I’m talking about building your support group. This is the fifth step in the 8 steps to becoming more financially sound series. Last time we talked about developing tax strategies to help you. This week, I want to share the importance of having a support group.
When you’re trying to make financial strides to better yourself, pay down debt, save for retirement or saving for a home it’s important to surround yourself with people that understand.
Talk with your spouse. Make sure you both are on the same page and want the same things. Working hard on paying down debt while having a spouse not understand can be difficult.
Let your close friends know what’s going on. It’s important to let those close to you know so they can cheer you on.
Get a financial expert. Make sure you have a financial expert that is there for you. Having someone that will listen to you and understands your goals is vital. Make sure you talk with your financial expert and let them know what you are wanting to accomplish. The two of you can develop a plan to help you reach your goals.
If you would like to sit down and talk about your goals to create a plan, give me a call at 573-686-3053. I’d be happy to have a conversation.
Don't let the IRS become your pen pal
Getting a letter or notice from the IRS can be upsetting, confusing, and unnecessary. The IRS sends taxpayers notices to request payment for taxes, to notify them of a change to their account, or to request additional information. Attention to the following details will reduce the likelihood that you will become pen pals with the IRS.
Never send a payment to the IRS without designating what it is for. Otherwise the IRS may apply it in any manner they want. Every payment should include your name, your taxpayer identification number (social security number), the type of tax you are paying, and the period the tax payment is for.
Make sure the name and social security number on your tax return agree with the Social Security Administration's records. If you change your surname, notify the Social Security Administration and request a new social security card.
Don't claim a tax exemption for your child unless you are entitled to do so. Special rules apply to divorced parents. If both parents claim the child as a dependent, both returns will be subject to further IRS review.
Respond promptly to any notice you receive from the IRS, even if you think the notice is incorrect. If the IRS doesn't hear from you within the time specified on their notice, you may lose the right to protest any changes made to your return.
Send a change of address form (Form 8822) to the IRS when your address changes. If you fail to provide the IRS with your current mailing address, you may not receive a refund check or a notice if there are problems or adjustments to your return. And even if the IRS can't find you, penalties and interest will continue to accumulate on any tax due.
Send your income tax return and any other correspondence to the IRS by certified mail, return receipt requested. The receipt provides evidence that you filed on time. That proof will be valuable in the event the IRS or Postal Service loses your paperwork and the IRS threatens to assess late-filing and late-payment penalties.
If you have any questions or need clarification on any letters your receive, give us a call at 573-686-3053.
Act fast or you'll lose your refund
If you didn't file a tax return for the year 2011, you're not necessarily in trouble. In fact, you could be about to lose out on a nice refund check. The IRS reports that it is holding an astonishing one billion dollars in refunds from the year 2011. Here's how the situation arose.
Nearly one million filers, many of them students and retirees, had taxes withheld from their earnings that year but didn't bother to file a return. That was quite legal if they didn't earn enough to reach the minimum income for required filing. And in many cases they forgot that taxes had been withheld and that they were eligible for a refund. For example, a student might have worked at a summer job, gone back to school in the fall, and not given taxes a second thought.
If you think you are due a refund for 2011, it's worth filing a return. The IRS estimates that around half those who are eligible would receive refunds of over $1,000. In some cases, you could find you're eligible for even more than the refund. If you were a low-income worker that year, you might also have qualified for the earned income tax credit. But you'll need to act fast. Unless you file a year-2011 return by April 15, 2015, the statute of limitations will have run out and you'll be too late to claim your refund.
Be aware that the IRS won't issue a 2011 refund check unless you've also filed returns for years 2012 and 2013. And if you owe taxes for those years, they'll deduct that from the amount of the 2011 refund.
Contact our office at 573-686-3053 as soon as possible if you think you might be due a 2011 refund.
Details Matter in Divorce Negotiations
Divorce can be an emotionally draining process.
If you are in the middle of one, you probably just want it to be over. But be careful. Divorce has serious tax implications, and the choices you make now may affect you for many years. Consider the following:
* Alimony and child support. Alimony is tax-deductible if you pay it and taxable income if you receive it. Child support, on the other hand, is neither tax-deductible nor taxable as income.
* Exemptions. If you are awarded physical custody of your child, you will usually be entitled to the tax benefits related to that child. Special rules may apply if you share custody. In addition to a $4,000 dependency tax deduction, tax benefits may include the dependent care credit, the child tax credit, the earned income credit, and education tax credits. You can transfer your right to claim your child to your former spouse each year, for tax purposes, by signing a special IRS form.
* Retirement accounts and IRAs. Your former spouse may be awarded part of your retirement account or IRA. If your ex-spouse receives the benefits, he or she will generally be responsible for the taxes. But unless the accounts are divided and transferred in just the right way, you could end up paying the tax.
* Property settlements. You are allowed to transfer property (house, cars, investments, etc.) to your ex-spouse without triggering income tax, if it's part of your settlement agreement. But whoever ends up with your marital assets may owe taxes when the assets are sold. Take future taxes into consideration during your negotiations, or you might end up with large and unexpected tax liabilities.
Call us early in the divorce process, and let us help you and your attorney make informed choices. Give us a call at (573)686-3053 to sit down with one of our Certified Public Accounts.
Sticking to Budgets and Diets
Budgets, like diets, are short lived for most of us. You do a proper job of planning by looking over the past and determining where you need to make changes to meet your goals. And, you live by your plan for a few days, maybe even a few weeks. But, then all the detail of keeping track of what comes and goes gets to be more than you are willing to put up with.
If you can plan a budget and live with it, more power to you. This should put you with the 5% of people who can retire without financial assistance from family or the government.
For those of us who can't live with the detail of tracking budget numbers, here is a simple way to make sure you don't retire totally broke. Take a fixed percentage of every dollar that comes into the household and set it aside for retirement investing. Say, for example, that you decide to save 10% of your $100,000 income. Here are some rough numbers for those aged 35 who would like to retire in 30 years. $10,000 invested each year will accumulate to $697,000 in 30 years at a 5% annual return. The earlier you start, the greater the retirement benefits. If you started at age 25, the accumulated value at age 65 would be over $1,268,000.
You may think it is impossible to save 10% of your current income. Let's assume that you lose your current job. The next job you find pays 10% less than your current job. The chances are that you will figure out where to cut the spending to make it work. So, why not discipline yourself and your family in order to make your current income provide both a current living and an investment in your retirement.
If you would like some help preparing your budget, give us a call at (573)686-3053. We'll be happy to take a look at your expenses with you.
Every new business needs a record system
Many small start-up businesses are off and running before any record system has been set up. There is money deposited into the new business checking account, some from invested funds and some from sales. Money has been paid out for equipment and supplies, some by check and some by cash out of pocket or from sales receipts.
This informal method of cash receipts and disbursements needs to be formalized. The bookkeeping system does not need to be complicated. In most cases, you can continue to operate much as you have. You just need to do it in a way that leaves a few more tracks.
For example, make all purchases by check. The small miscellaneous cash paid-outs from your pocket (or the petty cash box) are reimbursed by a check with a listing of the expense codes. All your cash receipts are deposited into the bank. No more taking cash from the till for lunches, supplies, etc.
If all the money received by the business is deposited into the bank and all expenses are paid by a company check, the proper journal entries are easy to create from the bank statement.
If you are starting a new business, don't wait until the end of the year and surprise your accountant with a box of miscellaneous receipts. That is the most expensive and least effective use of your accounting information. In addition to setting up the proper record system, your accountant will provide you with guidance on other business, tax, and financial matters.
Want to talk to a CPA to help you with your record system? Give me a call at 573-686-3053, I'd be happy to sit down with you.
Does your business make use of your financial statements?
Many small business owners pay too little attention to their financial statements. This is due in part to not understanding just what the statements have to offer. In fact, many may not be able to tell you the difference between a Balance Sheet and an Income Statement.
Think of them this way. The Balance Sheet is like a still picture. It shows where your company is at on a specific date, at month-end, or at year-end. It is a listing of your assets and debts on a given date. So Balance Sheets that are a year apart show your financial position at the end of year one versus the end of year two. Showing how you got from position one to position two is the job of the Income Statement.
Suppose I took a photo of you sitting behind your desk on December 31, 2013. And on December 31, 2014, I took a photo of you sitting on the other side of your desk. We know for a fact that you have moved from one side to the other. What we don't know is how you got there. Did you just jump over the desk or did you run all the way around the building to do it? The Income Statement tells us how you did it. It shows how many sales and how much expense was involved to accomplish the move.
To see why a third kind of financial statement called a Funds Flow Statement is useful, follow this case. A printer has started a new printing business. He invested $20,000 of his own cash and borrowed $50,000 from the bank to buy new equipment. After a year of operation, he has managed to pay off the bank loan. He now owns the equipment free and clear. When he is told his net profit is $50,000, he can't believe it. He might tell you that he took nothing out of the business and lived off his wife's wages for the year. And since there is no cash in the bank, just where is the profit? The Funds Flow Statement will show the income as a "source of funds" and the increase in equipment is an "application of funds." The Funds Statement is even more useful when you have several assets to which funds can be applied and several sources of funds such as bank loans, vendor payables, and business profit or loss.
Don't be afraid to ask your accountant questions about your financial statements. The more questions you get answered, the more useful you will find your financial statements. Accounting is sort of a foreign language. Learn to speak a little of it.
If you have any questions, please give me a call at 573-686-3053.
Self-employeds get tax breaks
When it comes to taxes, being self-employed has some advantages. Whether you work for yourself on a full-time basis or just do a little moonlighting on the side, the government has provided you with a variety of attractive tax breaks.
* Save for retirement. When you're self-employed, you're allowed to set up a retirement plan for your business. Remember, contributing to a retirement plan is one of the best tax shelters available to you during your working years.
Take a look at the SIMPLE IRA, SEP IRA, or Solo 401(k), and determine which plan works best for you.
* Hire your kids. If your business is unincorporated, employing your child under the age of 18 might make sense. That's because your child's earnings are exempt from social security, Medicare, and federal unemployment taxes. This year, your son or daughter can earn as much as $6,200 and owe no income taxes. You get to deduct the wages paid as a business expense.
* Deduct health insurance. Are you paying your own medical or dental insurance? How about long-term care insurance? As a self-employed individual, you may be able to deduct 100% of the cost of these premiums as an "above the line" deduction, subject to certain restrictions.
* Take business-use deductions. Self-employed individuals can also deduct "mixed-use" items directly against their business income. Use your car for business and you can deduct 56¢ per business mile driven. The business-use portion of your computer purchases, Internet access, and wireless phone bills is also allowable. And if you meet the strict requirements, claiming the home office deduction makes a portion of your home expenses tax-deductible.
Please give me a call at 573-686-3053 to find out more about the tax breaks available to self-employed individuals.
Four tips for organizing your finances
In our busy lives, it's sometimes tough to corral our financial records. Bills, paycheck stubs, tax returns, and bank statements can disappear into dusty attic corners and bulging desk drawers. Important insurance policies can hide out beneath bins of holiday ornaments and electrical supplies. Mortgage documents can sneak into old books or ensconce themselves in nooks and crannies throughout the house.
Take the time now to coax those papers out of hiding. Here are four suggestions for getting organized.
- Find a system that works for you. Many people use a computer program such as Intuit's Quicken or Microsoft's Money to track everyday spending and bank accounts. Others use pencil, paper, and a shoebox. Some people use hanging file folders, labeled for various expenses and accounts; others scan documents into a computer; others use storage bins. The key is to use whatever system makes sense to you and helps you maintain your finances with a reasonable amount of effort.
- Dedicate a space and a time. To ensure that bills are paid on time, bank statements are reconciled, and important documents are properly filed, set aside a specific location in your home for financial tasks. It may be a place where you keep a computer or filing cabinets or shoeboxes. Once that area's set aside, pick a time each week (or each day, if you're really zealous) to pay bills, enter financial information into check registers, and organize documents.
- Keep the important stuff in a safe. Don't leave your only copies of wills, tax returns, stock certificates, or emergency contacts in a pile on the desk. Such documents should be tucked away in a safe deposit box or home safe. Ask your attorney or financial advisor to store the signed copy of your will in a secure location.
- Don't keep documents forever. Many papers (such as regular household bills) can be shredded soon after receipt. Other documents, such as those supporting the cost of investments and real estate, should be retained longer for tax purposes. A good general rule for tax returns (and documents that support the returns) is seven years. When it's time to discard those old pieces of paper, fire up the shredder.
If you'd like additional guidance in organizing your finances, give me a call at 573-686-3053.
No, you're probably not saving enough
How much money did you save last year? If you didn't save at least 10% of your earnings, you didn't save enough. If your savings in 2013 fell short, the only solution is to take charge of your financial future right now and start saving more money.
Saving money doesn't have to be hard work. In fact, many successful savers have found simple ways to cut spending and increase their savings. Here are some tips to help you get started and stay on track.
* Set goals. To give your savings purpose, set specific financial goals. For example, it's advisable to have an emergency fund of approximately six months' worth of living expenses to cover any cash outlays that may catch you by surprise. Nothing can derail your financial plans faster than a series of mishaps that force you to take drastic financial measures. Other saving goals may include a college savings fund, vacation fund, or a fund for major purchases.
* Treat your savings as your most important monthly bill. Write a check to savings first, or have your savings automatically deducted from your checking account or paycheck.
* Tax-deferred retirement accounts offer a smart way for you to save money for retirement. If your employer offers a 401(k) or SIMPLE retirement plan, contribute the maximum amount allowed. If your employer offers no plan, contribute to an individual retirement account (IRA). The money you contribute to a retirement account can reduce your taxable income and grow tax-free until withdrawn.
* Another way to maximize savings is to track your expenses for a few months. This is a great way to spot unnecessary or wasteful spending; it doesn't take much work to see potential cutbacks.
* When it comes to saving, think "control." For example, control the use of your credit cards. The amount you pay each month in finance charges could go to savings instead. Also, control the use of your ATM card. Get in the habit of giving yourself a regular cash allowance, and try to live with it.
You should be saving at least 10% of your earnings. Seem impossible? If you took a new job at 10% less pay, you would get by. For help in setting financial goals and developing a savings plan, call me at 573-686-3053.
Oops! You forgot something on your tax return. Now what?
Whew! The rush is over once your personal income tax return is done for another year - or so you thought, right up until the moment you discover information you forgot to include.
Now what?
The action you take depends on the type of information you forgot. For instance, say you reported all your income on the return you mailed to the IRS. But now you realize you neglected to attach a copy of your wage statement.
In this case, doing nothing is the best option. You'll eventually get a notice from the IRS requesting the missing form.
Other mistakes, such as omitting income or deductions, or deciding you're eligible for a credit you didn't claim may require amending your return.
To do this, you'll need to complete Form 1040X. Explain any changes and mail the form to the IRS after your original return has been processed. At present, e-filing isn't available for Form 1040X, so you'll have to use a paper return, even if you submitted the original electronically.
As a general rule, Form 1040X has no set due date. But if the information you left off increases the amount of tax you owe, filing promptly can help reduce interest and penalties.
When the correction results in less tax, you'll
need to file before the time for claiming your refund expires (usually three
years from the due date of the original return).
Please contact me at 573-686-3053 if you find additional
information after filing your federal and state tax returns. I'll be glad to
help you make any necessary changes.
GRANDPARENTS CAN HELP WITH COLLEGE COSTS
Welcome to Megan's Corner. Each month we discuss tax and accounting topics that might be of interest to you. This month we're talking about helping your grandchildren with the expense of college.
Are you a grandparent who wants to help pay for a grandchild's college education? You'll find several ways to do this, each with its own limitations and tax consequences.
GIFTS. The simplest way is to make an outright cash gift to your grandchild each year. In 2014, you can give up to $14,000 without any gift tax liability. If your spouse joins in the gift, you can jointly give each grandchild up to $28,000 each year.
DIRECT PAYMENTS. You can give unlimited amounts without gift tax consequences if you make the payments directly to a qualified education institution on behalf of your grandchild. Payments can only be for tuition, not for dorm fees, meals, books, etc.
EDUCATION ACCOUNTS. You could set up a Coverdell education savings account or a Section 529 plan for your grandchild. These plans offer tax-free growth of amounts you contribute to them. Age, income, and contribution limits apply, however.
To discuss the options best suited to your circumstances, contact me at the office at 573-686-3053 or by e-mail at [email protected]. I would be happy to take a look with you and create a plan that will fit your needs.
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