What Do We Need to Prepare Your Personal Tax Return?

The new year has begun, it is time to start gathering documents and information for your tax advisor. This can be an overwhelming and time-consuming task. One choice is that we can send you an organizer that will summarize data you have sent in the past.

To help manage the process, here are the items needed to prepare a personal tax return.

Income

  • W-2 – Wage & Income Statement
  • 1099-NEC – Non-Employee Compensation
  • 1099-Miscellaneous – Usually Rental Income
  • 1099-R – Retirement Statement
  • SSA-1099 – Social Security & Medicare Statement
  • K-1 for Partnerships, S-Corporations, or Trusts
  • 1099-INT – Interest Income
  • 1099-DIV (Dividend Income) and 1099-B (Capital Gains Income) which may come as a combined package from your brokerage
  • Any other income earned from a business, rental, royalties, or farm/ranch
  • Less common items
    • 1099-G for unemployment or state tax refunds
    • W-2G for gambling winnings
    • Amount of alimony received

Most income is considered taxable. It is better to send the information to your tax advisor so they can figure out taxability.

Expenses

  • Business expenses incurred that are ordinary and necessary
  • Large business purchases that may need to be depreciated
  • A W-3 showing wages paid to employees (unless we prepare this for you)

This will primarily relate to taxpayers with businesses, rentals, farms and ranches, as most other income sources will not have any tax-deductible expenses to offset the income.

A common question is whether you need to provide receipts to us. For day-to-day expenses, no receipts are needed for tax preparation. However, we highly recommend you keep records of those expenses. For large purchases that are out of the ordinary, please provide a receipt or invoice to your tax advisor.

If you are using software such as QuickBooks Desktop or QuickBooks online, remember to send us a copy of the file, software version and login information.

Tax Deductions

If you have more itemized deductions than the standard deduction – $25,900 married filing jointly for 2022, please provide the following:

  • Medical and dental expenses paid out of pocket, if it looks like they will be higher than 7.5% of your income
  • Real estate taxes
  • Sales tax on major purchases such as vehicles, boats, or home remodels
  • 1098 showing mortgage interest paid and mortgage insurance premiums, if any
  • Cash donations to qualified 501(c)(3) organizations – if a single donation is over $250, provide a receipt from the organization
  • Non-cash donations – if all donations total over $500, provide a receipt from the organization of the items donated and the fair-market-value of the items
  • Gambling losses (only if you have gambling income)

Other tax deductions are available without itemizing:

  • 1098-E for student loan interest paid
  • Eligible educators can deduct up to $300 worth of qualified expenses paid out of pocket
  • Alimony paid is still tax deductible in certain circumstances

Tax Credits

There are tax credits available that will dollar-for-dollar reduce your tax bill. It is imperative you provide information to determine if you qualify for these credits.

  • Childcare expenses –provider’s name, EIN or SSN, address, and total amount paid
  • 1098-T for tuition paid to higher education institutions for you or a dependent
  • Residential energy credits
  • Adoption credit

Miscellaneous Forms

  • 1095-A for marketplace insurance and premium tax credit
  • 5498-SA for health savings account (HSA) contributions
  • 1099-SA for distributions from HSA accounts

Other Important Information

  • Personal and dependent information including social security numbers, dates of birth, and current address
  • Contact information such as phone numbers and emails
  • Bank routing and account information for refund deposits and direct withdrawal of estimated payments and balance due
  • Details about any foreign bank accounts or assets, if any
  • Federal and state estimated tax payments made

The most efficient and secure way to send this information to us is electronically via our Client Portal found at www.ktllp.cpa. Simply click “Client Portal” on the home page then “Login to Client Portal.” On the next page, choose the recipient (your tax advisor) from a drop-down menu, drag the files onto the screen, and choose “Upload”. The recipient will receive a notification of the available documents.

Other ways to send us your information include emailing documents (keep in mind this is less secure), mailing them to our office, or dropping them off at our front desk or the drop box outside our building.

A question we often hear is, “When do you need my information?” The answer is there are multiple factors to consider. We understand that certain tax documents are simply available later in the year. However, the sooner you supply what information you do have, the more time your tax advisor will have to analyze it and determine the outcome of your return.

This is not meant to be a comprehensive list. Be certain to have a conversation with your tax advisor at Ketel Thorstenson to find out if there are more details that need to be included on your tax return.

January 19, 2023

How to Spot IRS Scams and Handle Them Safely

It can be daunting to be contacted by the IRS.  You may wonder if something was filed incorrectly or was missed, if there are financial consequences, and you may worry how to resolve the issue.  Because of this, scammers have started to impersonate the IRS to trick you out of your money. They are betting on the fact that you will be intimidated by IRS contact and will do anything to solve the problem. Scams skyrocket during tax season, but they can and do happen year-round.

What are the differences between real IRS contact and a scam?

There are two main ways scammers try to contact you: electronically and by telephone. Scammers will use electronic communication such as emails, texts, or even social media to infiltrate your computer or phone to steal your identity. They can spoof legitimate IRS phone numbers and will give you information they find online to convince you that you are speaking to a real IRS agent.  The intent is to create a sense of urgency and make you believe that if you don’t act immediately to clear up this bogus debt, there will be serious and damaging consequences. They will use threats, intimidation, and bullying to achieve their goal.

In general, if the IRS is trying to communicate with you, the first contact occurs via written correspondence sent through the U.S. Postal Service. You may receive follow-up correspondence by phone or even an in-person visit, but the first communication will never occur via phone, email, text message, or social media.  In fact, the IRS will never text you or use social media to reach you about a tax issue.  However, some scammers are sending fake documents through the mail so if you receive correspondence that says it’s from the IRS, scrutinize it closely. 

How can I tell if something is suspicious?

One of the most important things to pay attention to is if they ask you to use a form of payment such as a wire transfer, prepaid debit card, or a gift card and if they ask you to pay anyone else besides the US Treasury. Again, they want to create a sense of urgency, so they will make threats to arrest or deport you or suspend your driver’s license. They will even fraudulently file a tax return using the taxpayer’s actual bank account and call the taxpayer to demand the funds be transferred to a scammer. The IRS will never threaten arrest, demand payment without an opportunity to question or appeal the amount owed, ask for your debit or credit card numbers over the phone, or call you about an unexpected refund.

The hallmarks of a scam email are numerous like, spelling errors, capitalized words in the middle of the sentence, and odd phrasing.  The subject line won’t always make sense, and the email address isn’t quite right. For example, it won’t end in “.gov”.  It will end in “.com,” which is a quick way to know it is a scam.  They will almost always have an attachment or instructions to click a link because that is how they access your computer or phone and compromise your personal information.

What if I receive suspicious electronic communication?

When receiving a suspicious electronic communication, be sure not to react right away. Do not reply, open any attachments, or click any links.  Forward the email to [email protected].  If it is a text message, forward the text to 202-552-1226, and, if you can, create a new text message to this number and tell them the phone number that contacted you.  Finally, delete the email or text permanently.  It is also recommended to block the email address and phone number. 

What if I receive a suspicious phone call?

If you receive a call from a suspected scammer that fits the criteria outlined in this article, do not give them any information, and do not confirm anything they ask you.  Hang up immediately.  Report the call to the Treasury Inspector General for Tax Administration at 800-366-4484 or on their website https://www.treasury.gov/tigta/reportcrime_misconduct.shtml.  Report it to the Federal Trade Commission on their website https://reportfraud.ftc.gov/#/?orgcode=IRS.  The best course of action at this point is to call the IRS directly at 1-800-829-1040 so you can be sure you are speaking with an actual IRS agent, and they can advise you if any of the information was accurate and if any action is needed.

Remain vigilant and informed

The scammers will never go away.  They are continuously becoming more clever in how they present themselves, so it is important to arm yourself with information before it happens.  Understand what to look for, how to control your reaction since they are trying hard to upset you into action, and how to contact the IRS yourself.  If the person calling you says, “This is your only chance.” or “We cannot help you if you hang up now,” they are scamming you.  If you can, always report these scam attempts to the agencies above. 

June 8, 2022

TCJA: Changes to Alimony Reporting Requirements

Divorce is never an easy situation to endure and the IRS has complicated matters by changing how alimony is treated on your taxes.  Historically, the spouse ordered to pay alimony was able to claim a deduction on their taxes while the recipient was required to include alimony on their tax return subject to income taxes.  That is no longer the case with a few caveats. 

Divorce decrees and separation agreements that include alimony payments and were finalized prior to January 1, 2019 are still deducted from gross income for the payer and reported as taxable income for the recipient.  To claim the deduction, the payer will need to report the Tax Identification Number (TIN) of the recipient.  To be in compliance, the recipient also needs to report the TIN of the payer as this is how the IRS verifies alimony paid matches alimony claimed as income. 

Alimony is deducted as an “above the line” deduction meaning the amount is deducted regardless of whether the payer is itemizing.  It is an advantageous situation for the payer because they are generally the one with a higher tax bracket compared to the recipient and are now able to reduce the amount of income subject to that higher tax rate.  It does mean the recipient is subject to income tax on that amount but based on the assumption they are in a lower tax bracket, it works out better overall. 

However, when the Tax Cuts & Jobs Act (TCJA) was enacted, the alimony deduction and income reporting requirement was changed.  For divorce decrees and separation agreements finalized on or after January 1, 2019, alimony is not reported as income for recipient and not claimed as deduction for payer.  The harm in this occurs to the payer who is paying taxes in a higher tax bracket on money they have paid to another person who won’t be paying any taxes on the funds.  By doing this, the IRS is hoping to see a projected increase in income tax revenue of $6.9 billion over the next 10 years.    

A pre-2019 decree or separation agreement can be amended so that it will then be subject to the new law.  To accomplish this, the amendment must very clearly state that the new TCJA treatment will now apply.  This would need to be evaluated on a case-by-case basis as it would not provide a benefit to the payer but would be favorable for the recipient.  Moreover, if either party seeks a modification to the terms of the agreement such as a reduction in the amount of alimony ordered due to a change in circumstances, this would nullify the favorable existing tax treatment.  According to the IRS, this is because technically a new order exists that was established after January 1, 2019.

In a divorce, balancing between the property settlement and alimony payments is a very delicate matter for the parties and their lawyers to negotiate.  A strategy to lessen the burden of the alimony tax law change is by funding a tax-free property settlement with a transfer of funds from the payer’s IRA to the recipient spouse IRA. The recipient will not pay tax on such a property tax settlement until distributions from the IRA begin, and the payer avoids income tax altogether.  However, if the recipient is in a significantly lower tax bracket than the payer, then it is an advantageous situation for the couple in the long run, as the US Treasury is effectively funding part of the divorce. We can assist in these calculations.

If you find yourself in the situation of paying or receiving alimony and are unsure of the tax implications, don’t hesitate to contact your KTLLP advisor for guidance.

January 13, 2020

What is a Health Savings Account and How Can it Benefit Me?

You may have heard of the term HSA before but aren’t sure what it really means and if you should be using one.  A health savings account (HSA) is essentially a savings account for medical expenses.  These accounts are available to anyone who is employed, self-employed, or even unemployed (think stay at home parent or college student).  To qualify to use an HSA, you must meet a few requirements.  First, you must be enrolled in a high deductible health plan (HDHP) which is available through an employer or through the Marketplace.  Until the time the deductible is met, this type of plan will only cover preventative services. Second, the HDHP must be your only form of health insurance coverage.  Third, you must be under the age of 65 and not eligible for Medicare.  Last, you cannot be claimed as a dependent on someone else’s taxes.  This also means you cannot set-up and contribute to an HSA for your children or grandchildren.

Contributions to an HSA are made on a pre-tax basis, which means they are deductible and reduce your taxable income.  Contributions can be made through payroll deductions, direct contributions by you, or employer contributions on your behalf.  If your HDHP only covers yourself, you can contribute up to $3,500 in 2019 and if the plan covers you and your family, you can contribute up to $7,000.  Keep in mind the contributions employers make on behalf of the employee count towards the annual limit.  The annual contribution limit is set for inflation and is not limited by income.  Moreover, if you are 55 or older, you can make an additional “catch-up” contribution of $1,000 but your total family annual contribution cannot exceed $9,000. 

Many financial institutions offer HSAs and the accounts can earn interest or can be invested in mutual funds.   As an added benefit, these earnings are tax-free if withdrawn for qualified medical expenses.

Distributions from the HSA account must be used to pay for qualified medical expenses.  These include deductibles, copayments, coinsurance, and many other medical expenses such as prescriptions and vision or dental care.  You can consult IRS Publication 969 to see a full list of qualified expenses.  However, HSA funds cannot be used to pay the premiums for your HDHP.  Distributions which are not used for qualified medical expenses must be added to taxable income on your tax return and will be subject to a whopping 20% penalty!  Generally, you will receive either checks or a debit card for the HSA account that you can use to pay for medical expenses.  For example, if you see your doctor and have a co-pay of $25, you can use the HSA debit card to pay.  Alternatively, you can choose to pay with your personal funds and turn in the receipt to your HSA administrator to receive reimbursement.

One great benefit of an HSA account is the funds never expire, and they essentially rollover from year to year.  This is different from a Flexible Spending Account in which funds not used by the end of the year will be forfeited.  An HSA account is entirely yours and it goes where you go and it can be moved to a different HSA account without penalty.  What happens if you start contributing to an HSA account before retirement and have funds saved up after you retire?  Since there are no expiration dates on HSA funds, they can be used for qualified medical expenses incurred after age 65 as a tax-free and penalty-free distribution.  Also, medicare premiums become a qualified medical expense.  Funds could also be withdrawn for nonqualified expenses and be subject to only your income tax rate as the penalty is abated after age 65.  As such, unused HSA funds act exactly like another IRA account. However, remember you can no longer contribute funds to an HSA after age 65 if you are covered under Medicare.  An HSA can also be used as a type of retirement account.  You can contribute into the HSA every year you are eligible and keep the receipts of qualified medical expenses you incur during those years and not turn them into the HSA administrator.  During this time the account can grow tax-free.  Then after retirement you can turn in all your receipts that were kept throughout the years and get reimbursed at that time.  You are not required to turn in the receipts in the year you incur them. 

If you find yourself in the position of enrolling in a HDHP, consider opening an HSA account as it is a tax-free way to pay for the medical expenses that occur with a HDHP. However, be sure you are meeting the requirements of an HSA account so contributions aren’t disqualified.  If you have questions, don’t hesitate to contact your KT Advisor.

September 30, 2019

Suspension of 2% Miscellaneous Deductions on Schedule A: How to Claim Unreimbursed Employee Expenses

The Tax Cuts and Jobs Act (TCJA), passed in November of 2017, made a number of changes to itemized deductions.  One that may have drastic impact on you is the elimination of all miscellaneous itemized deductions subject to 2% of the adjusted gross income. This includes unreimbursed employee expenses, non-business tax preparation fees, and other expenses such as legal fees, broker fees, and safe deposit boxes.  Previously, if an employee was not reimbursed for ordinary and necessary business expenses, they could be claimed on Schedule A.  For some taxpayers, the out-of-pocket expenses spent as an employee can be significant and this change will cause a substantial increase in the taxpayer’s tax bill if steps are not taken.

It should be noted that certain business expenses of reservists, performing artists, and fee-basis government officials that are claimed on line 24 of 1040 are not affected by this change.

There are now three ways to either have the company pay for expenses or to claim the expenses other than on Schedule A.

The first option is for employers to pay directly or reimburse for the business expenses.  The goal of the TCJA was to push employers into adopting accountable and nonaccountable plans.  An accountable plan would be when an employee incurs expenses and submits receipts to the employer who then reimburses the employee.  These reimbursements are non-taxable and the expenses are not then claimed as deductions by the employee.  A plan is nonaccountable when an employer provides an allowance or advance to the employee to use for business expenses.  Any unused allowance should be returned to the employer otherwise it is considered taxable income to the employee on a W-2.  Accountable plans are not required of employers. The second option is to switch to an independent contractor and be issued a 1099 instead of being treated as a W-2 employee.  The income would then be treated as self-employment income and reported on a Schedule C.  This would allow for the expenses to be claimed against the income. This is not an ideal solution as many overhead costs that are incurred by an employer would now fall completely on the taxpayer’s shoulders.  This option is not automatic and comes with IRS scrutiny.  Carefully consider this with your tax preparer.

The third option for certain types of employees is to be classified as a statutory employee.  A statutory employee is defined by the IRS as an independent contractor under common law rules who may be treated as employee by statute for certain employment tax purposes.  Their status is indicated on a W-2 by marking the statutory employee box.  There is no harm to employers to mark this box; therefore, if an employee should be considered statutory and is incurring expenses that are not reimbursed, they should request a W-2 from their employer with this designation.

A statutory employee falls into four categories:

  1. A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission
  2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company
  3. An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done
  4. A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation.  The work performed for you must be the salesperson’s principal business activity.

Additionally, they must be able to show that most or all of the duties performed are done personally by the employee, that they do not have a substantial investment in the equipment or property used in performing their duties, and that the duties and services are performed on a continuing basis for the employer.

Being classified as a statutory employee means the employee can carry the W-2 income to Schedule C.  Now the disallowed 2% miscellaneous unreimbursed employee expenses can be claimed.  This is especially advantageous because the employee still gets the benefit of having half of Social Security and Medicare taxes paid by the employer as well as accessing any benefits the employer provides including liability protection.  Additionally, the expenses are no longer subject to the 2% floor of AGI and can be claimed at 100%.

However, the taxpayer needs to be aware that federal income tax is not withheld on the W-2 once statutory employee is noted so you should work with your tax preparer to ensure that timely estimated payments are made or risk penalties being assessed.

While on the face this seemed like a small change, you can quickly see how this might impact you and your tax situation.  If you have further questions, don’t hesitate to contact your KTLLP tax professional.

January 14, 2019