Tag: Taxes

Red Flags for Tax Auditors

July 25, 2019
Taxes

No one wants to see an Internal Revenue Service (IRS) tax auditor show up at their door. In 2018, the IRS budget is roughly $1 billion less than it was 8 years ago, down from $12.1 billion in 2010 to $11.2 billion. And even though the number of audits has dropped 40 percent from 2010 to 2017, an IRS tax audit remains a fear for many individuals.[i]

The IRS can’t audit every American’s federal tax return, so it relies on guidelines to select the ones most deserving of its attention. Here are six flags that could make your tax return ripe for an IRS audit.

The chance of an audit rises with income. According to the IRS, less than 1% of all individual taxpayer returns are audited. However, the percent of audits rises to over 1.5% for those with incomes between $200,000 and $1 million who attach Schedule C and is over 4% for those making more than $1 million annually.[ii]

If this year’s 1040 deviates greatly from last year’s, that could raise a red flag. The IRS has a scoring system called the Discriminant Information Function (DIF) that is based on the deduction, credit, and exemption norms for taxpayers in each of the income brackets. The agency does not disclose its formula for identifying aberrations that trigger an audit, but it helps if your return data is within the range of other taxpayers with similar incomes.[iii]

If your business passes for a hobby, you could be scrutinized. Taxpayers who repeatedly report yearly business losses on Schedule C increase their audit risk. In order for the IRS not to consider your business as a hobby, it typically needs to have earned a profit in three of the last five years.²

Not fully reporting your income boosts the chances of an audit. The IRS receives copies of all of your 1099 and W-2 forms. Individuals who overlook reported income are easily identified and may provoke greater scrutiny.²

Alimony discrepancies between exes can raise eyebrows. When divorced spouses prepare individual tax returns, the IRS compares the separate submissions to identify instances where alimony payments are reported on one return, but alimony income goes unreported on the other party’s return.² Keep in mind that The Tax Cuts and Jobs Act repealed the alimony deduction after December 31, 2018.

If you claim rental losses, you had better be a real estate professional. Passive loss rules prevent deductions of losses on rental real estate, except in the event you are actively participating in a property’s management as a developer, broker, or landlord (the deduction is limited to $25,000 and begins to phase out when adjusted gross income exceeds $100,000) or you are devoting more than 50% of your working hours to this activity. This is a deduction to which the IRS pays keen attention.²

To learn more about CapSouth and the services we provide, call our office at 800.929.1001 or visit our website at www.capsouthwm.com

CapSouth Wealth Management – Dothan, AL, Atlanta, GA, McDonough, GA, Charlotte, NC

The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. This material has been prepared for planning purposes only and is not intended as specific tax or legal advice. Tax and legal laws are often complex and frequently change. Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

[i] https://www.washingtonpost.com/business/economy/your-chances-of-an-irs-audit-are-way-down-but-keep-it-on-the-up-and-up/2018/04/06/cb6c5794-3779-11e8-9c0a-85d477d9a226_story.html?utm_term=.77485a954004

[ii] https://www.kiplinger.com/slideshow/taxes/T056-S001-red-flags-for-irs-auditors/index.html

[iii] https://www.cpapracticeadvisor.com/news/12418908/how-to-prepare-your-clients-for-an-irs-tax-audit

IRA Withdrawals that Escape the 10% Penalty

March 26, 2019
Guidance, IRA, IRS

An IRA, or Individual Retirement Account, is a tax-advantaged account that is subject to special rules regarding contributions and withdrawals. One of the central rules of IRAs is that withdrawals prior to age 59½ are generally subject to a tax penalty.

Yet, policymakers acknowledged that extenuating circumstances might require access to these savings. In appreciation of this, the list of exceptions for waiving this penalty has grown over the years.

Penalty-Free Withdrawals

Outlined below are the circumstances under which individuals may qualify to withdraw from an IRA prior to age 59½, without a tax penalty. Ordinary income tax, however, is generally due on such distributions.[i]

Death – If you die prior to age 59½, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into their IRA, they will forfeit this exception.[ii]

Disability – Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician.[iii]

Substantially Equal Periodic Payments – You are permitted to take a series of substantially equal periodic payments and avoid the tax penalty, provided they continue until you turn 59½ or for five years, whichever is later. The calculation of such payments is complicated, and individuals should consider speaking with a qualified tax professional.[iv]

Home Purchase – You may withdraw up to $10,000 toward the purchase of your first home ($20,000 for a married couple). You cannot have owned a home within the last two years.³

Unreimbursed Medical Expenses – This exception covers medical expenses in excess of 10% of your adjusted gross income.³

Health Insurance – After a job loss, there are rules in place that allow the purchasing of health insurance, without penalty.³

Higher-Education Expenses – Funds may be used to cover higher-education expenses, such as tuition, student fees, textbooks, supplies, and equipment. Only certain institutions and associated expenses are permitted.³

Active Duty Call-Up – Reservists who make an IRA withdrawal during a period of active duty of 180 days or longer do not have to pay a 10% early withdrawal penalty.³

As always, be sure to speak with a tax professional about your specific situation. Contact www.capsouthwm for more information.

[i] https://www.marketwatch.com/story/gearing-up-for-retirement-make-sure-you-understand-your-tax-obligations-2018-06-14

[ii] https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp

[iii] https://money.usnews.com/money/retirement/slideshows/ways-to-avoid-the-ira-early-withdrawal-penalty

[iv] https://www.investopedia.com/articles/retirement/02/112602.asp

Certain Uncertainties in Retirement

February 20, 2019
Budgeting, Financial Planning, Life, Retirement Planning, Taxes, Wisdom

The financial uncertainties we face in retirement may risk reducing our sense of confidence, potentially undermining our outlook during those years.

Indeed, according to the 2018 Retirement Confidence Survey by the Employee Benefits Research Institute, only 17% of pre-retirees said they are “very confident” about having enough assets to live comfortably in retirement. In addition, just 32% of retirees were “very confident” in their prospects for doing so.[i]

Today, retirees face two overarching uncertainties. While each one can lead even the best-laid strategies awry, it is important to remember that remaining flexible and responsive to changes in the financial landscape may help you meet the challenges posed by uncertainty in the years ahead.

An Uncertain Tax Structure

A mounting national debt and the growing liabilities of Social Security and Medicare are straining federal finances. How these challenges will be resolved remains unknown, but higher taxes – along with means-testing for Social Security and Medicare – are obvious possibilities for policymakers.

Whatever tax rates may be in the future, taxes can be a drag on your savings and may adversely impact your retirement security. Moreover, any reduction of Social Security or Medicare benefits has the potential to increase financial strain during your retirement.

Consequently, you will need to be ever mindful of a changing tax landscape and strategies to manage the impact of whatever changes occur.

Market Uncertainty

If you know someone who retired (or wanted to retire) in 2008, you know what market uncertainty can do to a retirement blueprint.

The uncertainties have not gone away. Are we at the cusp of a bond market bubble bursting? Will the eurozone find its footing? Will U.S. debt be a drag on our economic vitality?

Over a 30-year period, uncertainties may evaporate or resolve themselves, but new ones may also emerge. Solutions for one set of financial or economic circumstances may not be appropriate for a new set of circumstances.

Scottish philosopher Thomas Carlyle said, “He who could foresee affairs three days in advance would be rich for thousands of years.” Preparing for uncertainties is less about knowing what the future holds as it is being able to respond to changes as they unfold.[ii]

To read more about financial and estate planning, visit our website at capsouthwm.com/services/financial-estate-planning/

[i] https://www.ebri.org/docs/default-source/rcs/1_2018rcs_report_v5mgachecked.pdf?sfvrsn=e2e9302f_2

[ii] https://www.brainyquote.com/quotes/thomas_carlyle_118785

Tag: Taxes

Red Flags for Tax Auditors

IRA Withdrawals that Escape the 10% Penalty

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