What is income?

It is tax time, and that means that it is time for me to start answering client questions about income. Generally speaking, if you received money, property, or services, you have income. Examples of income include wages and fringe benefits, investment income such as interest, dividends, or capital gains, business income, and income from bartering. In some cases, your income may be documented. For example, if you have wages, then your employer will give you a W-2. Interest and dividends are reported on 1099s. If you are self-employed you may receive 1099-MISCs if the amounts paid you by clients are above a certain amount.

Not all income is documented.

If you run a business, it is up to you to keep track of revenues and expenses. If you are self-employed, some of your income will come from clients that will not be required to send you a 1099. Please avoid the temptation to forget to include this undocumented income when you are getting your books ready for filing your tax returns. The IRS is pretty good at comparing expenses to revenues and figuring out when income is not reported. If you are caught you will end up paying the taxes plus penalties and interest.

Not everything is taxable.

Income can either be taxable or nontaxable. For example, if you receive a gift, that is not normally taxable income. Keep in mind that depending on the size of the gift, the giver may have to pay gift tax. Some income such as interest from some municipal bonds may also be nontaxable. Nontaxable interest, however should be reported on a tax return.

Don’t forget your basis!

If you sell investments or your home, you will receive a Form 1099 for the gross proceeds. Be sure to figure out your cost basis, or what you paid. For example, if you have a stock portfolio, and you sell stocks worth $1,000 then you will receive a 1099 for that amount. However, your net income is the proceeds less whatever you paid for the stock. Don’t forget any reinvested dividends. The same thing applies if you sell your home. Depending on the circumstances, you may be able to exclude a lot of the gain. Be sure to talk to your tax pro if you have sold a home. If you complete your own tax return, read the instructions carefully.

 

 

Charities and Thank You Notes

I’ve been looking over thank you notes that some charitable organizations have sent out. These notes serve several purposes. The most obvious is to say, “Thank you!” Aside from simple courtesy, saying thank you also helps strengthen the relationship between the donor and the organization.

Another important reason for the note is that it serves as a receipt. Donors, especially those that make larger gifts, need to have documentation for tax purposes. Sadly, many charities seem to think that this is the only reason for sending thank you notes. This has two unfortunate consequences. The first is that they only send thank you notes to large donors. But wait! Remember simple courtesy? Remember strengthening relationships with donors? Charities that only send thank you notes for donations above a certain threshold are sending an implied message to those that made smaller contributions that their efforts did not warrant a thank you. When deciding where to make their donations in the future, those donors will look to the organizations that acknowledged the gift.

The second unfortunate consequence is that the letters are lousy. If you are going to take the time to write a letter, don’t just say, “Thanks for the hundred bucks. Here’s your receipt.” Take the time to write a sincere letter that says why the contribution matters and how it will be used. Use that letter to strengthen your relationship with the donor.

I found a great blog post on the GuideStar Blog that does an excellent job of explaining donor thank you letters. The writer, Claire Axelrad, J.D., CFRE reviews nine common mistakes in thanking donors. Read the post and see if your not-for-profit is making any of those mistakes.

Tax Season Starts Today

In December, the IRS announced that Tax Season will begin January 23rd. That’s today. What the announcement means is that the IRS will begin accepting electronically filed, or e-filed, returns. If you happen to have all your documents, then you should be able to file a return today.

However, the first day of tax season is not like the first day of deer season or the fishing opener. You don’t have to do anything today. Instead, it makes sense to start preparing if you have not already done so. You should receive your W-2s or 1099s soon. You will want to gather up documentation for deductions, exemptions, and credits. If you are missing something, you have time to find it. Get everything together in one place and organized before you either take your documents to a professional or begin working on your return yourself.

The filing deadline is April 18 this year. Remember, the sooner you file, the sooner you will receive a refund if you overpaid your taxes. Taxpayers that claim Earned Income Tax Credits (EITC) or Additional Child Tax Credits (ACTC) will wait a little longer for their refunds because of anti-fraud provisions in legislation passed last year. Even so, the IRS expects to issue 90 percent of refunds within three weeks of receipt of the return.

This article on the IRS website contains more information about filing season.

Free Tax Filing?

It’s true. You can file your taxes for free. The IRS provides resources that allow most taxpayers to file their tax returns for free. If your income is less than $64,000, you can use Free File software that will enable you to file federal and state returns for free.

If your income is above $64,000 you can use Free File fillable forms. State returns are not available.

It may seem odd that a CPA firm is posting in a blog to tell potential clients that they can file their tax returns for free. It’s not. CPAs see themselves as trusted advisors. My firm, and the firms run by my CPA colleagues, focus on meeting client needs. That does not mean simply providing services for a fee. It means taking the time to work with clients to understand their needs. Most of us also work hard to make sure clients understand the reasons why things are done the way they are. That means taking the time to explain tax concepts. Seemingly simple terms such as income, deduction, exemption, or credit can be surprisingly complex. If your financial situation is very simple, you may find it advantageous to take advantage of free filing. On the other hand, your time has value, and you may want the peace of mind that working with a professional tax preparer such as a CPA can provide.

Is Free File for you? Only you can answer that. If your financial situation is simple, and you know what you are doing, Free File may be exactly what you need. Even if you choose to use Free File, you may still want to check with your trusted advisor.

Do you owe Use Tax?

We all know about sales tax. It is a tax paid whenever we purchase something. The tax is some percentage of the purchase price. Did you know there is another tax called use tax? Use tax applies whenever you buy, lease, or rent items without paying sales taxes. The tax is based on the price, and the rate is the same as the sales tax rate.

Did you make Internet purchases or buy something from an out-of-state mail order vendor? You may owe use tax. According to Minnesota Revenue:

  • The majority of businesses have a use tax liability.
  • The most frequent assessments made in audits involve unreported use tax.

The fact sheets below from Minnesota Revenue provide more information.

 

Did you donate to a worthy cause last year? Things you should know.

Many people are very generous. If you are someone who graciously gives time or money to charitable organizations, there are a few things that you should know. These things are especially important as you begin getting your documents ready to get started on your 2016 tax return.

One of the most common questions about charities that CPAs and tax preparers find themselves answering during tax season is, “How much can I deduct?” The easy answer is that for taxpayers that itemize, contributions up to 50 percent of adjusted gross income (AGI) are generally deductible. There are some contributions that are limited to 30 or 20 percent of AGI. Your CPA can help you figure this out. The unasked question concerns whether significant donations increase audit risk. Sorry. There is no magic number.

One common assumption is that any worthy cause is a tax-deductible charity. This is not the case. The only deductions that are deductible are those organizations covered under section 170(c) of the Internal Revenue Code. Many of the popular social media funding campaigns do not qualify as charities for tax purposes. You can check to see if an organization is eligible by using the IRS Exempt Organization Select Check tool. Keep in mind that there may be eligible organizations that are not listed in the database.

What’s deductible?

Most people understand that cash contributions are deductible. Confusion arises when donors receive something of value as a result of a contribution. The general rule to know what is deductible is to start with the amount of the contribution and deduct the value of anything received in return. For example, if a donor contributes $250 and in exchange attends a dinner worth $50, then the contribution is $250 less $50 or $200. There are exceptions when the things received in exchange for a donation are very small or “de minimis.”

Donations of goods are also confusing. It is generally the responsibility of the donor to ascertain the value of goods donated. It is not sufficient to simply claim that something is worth a certain amount. There must be a basis for the statement such as an appraisal or a catalog value. Documentation requirements are more stringent as the value of goods increase. For example, the value of clothing and miscellaneous household items donated to a charitable organization may not require as much documentation as an automobile, land, artwork, jewelry, or collectibles. There are special rules for accounting for the value of appreciated property.

One often overlooked item is mileage. If you drive as part of your efforts on behalf of a charity, you may be eligible to deduct mileage.

Documentation

Another important consideration is documentation. When preparing tax documents, it is always a good idea to document, and charitable contributions are no exception. Many charitable organization routinely send receipts to donors regardless of the amount of the donation. If you need a receipt from a charitable organization, do not hesitate to ask for one. If you donated goods, you will want to have documentation for the value claimed.

Resources

It is always a good idea to consult with a professional, particularly if your situation is complicated. Even so, it is also a good idea to have some understanding of the various rules affecting contributions. The IRS has several publications that go into great detail about all aspects of charitable giving.

Serving on a Not-For-Profit Board? Some things to think about.

Do you serve on the board of a not-for-profit? Have you thought about serving? Here are three things to think about from a post on AICPA Insights, a blog hosted by the American Institute of Certified Public Accountants.

  1. Listening skills are paramount and require constant improvement.
  2. Making organizational decisions requires a delicate balance of using your head and your heart.
  3. The amount of time spent preparing presentations is more than most would imagine.

Read the entire post at the link below.

3 Things You May Not Know About Not-for-Profit Board Leadership

The First IRS Form 1040

Take a look at the first 1040. The form and instructions are only four pages long.

The first Form 1040 was produced in 1913 after the 16th Amendment was ratified. The amendment said,

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

The 1913 Form 1040 was three pages long, and it was accompanied by one page of instructions. The normal tax rate was one percent.

The normal tax of 1 per cent shall be assessed on the total net income less the specific exemption of $3,000 or $4,000 as the case may be. (For the year 1913, the specific exemption allowable is $2,500 or $3,333.33, as the case may be.)

There was also an additional or super tax on taxable income above $20,000.

The IRS has announced new mileage rates for 2017

Beginning on Jan. 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 53.5 cents per mile for business miles driven, down from 54 cents for 2016
  • 17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016
  • 14 cents per mile driven in service of charitable organizations

https://www.irs.gov/uac/2017-standard-mileage-rates-for-business-and-medical-and-moving-announced