Category Archives: Taxes

Tax Incentives for 529 Plans

While it’s no secret that college costs have increased much faster than inflation, how to best pay for them is still a mystery to many, given the current student debt burden.

According to the College Board, the average four-year costs nationwide in 2014-2015 are $18,943 for an in-state public university and $42,419 for a private college. While costs may vary widely from state to state and depend on how much you actually plan to pay, the earlier you start saving, the better.

A 529 plan – Q&A allows you to save for college for an individual by investing in various funds with taxfree growth and tax-free withdrawals, as long as the funds are used for qualified higher education expenses. As an added benefit, 529 plan earnings aren’t subject to the 3.8% Investment Income Tax on a regular savings/investment account.

While you can choose any state 529 Plan, most states offer a tax advantage for their own state’s plan. Because you can easily change the beneficiary later, they can be great for multi-children families where not all the children may be planning on going to college. Accounts owned by other family members won’t effect the student’s federal aid and college aid, so grandparents, aunts and uncles can also fund a 529 account.

Because 529 plans allow for equal installments over five years, these are also great for estate planning. Up to $70,000 (single) or $140,000 (married) maximum is allowed for 2015.

Contact us with any further questions you may have. Make 2016 the year you setup a 529 plan or other savings vehicle to begin preparing for your child’s future.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, taxes (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Ways to Avoid the IRA Early Withdrawal Penalty

All these years you’ve been saving up, diligently funding your IRAs. But now you’ve got good reason to dip into those funds and are wondering whether it’s safe to do so. Distributions from traditional IRAs are taxable and if taken before reaching age 59 ½, they may also be subject to penalty. There are exceptions, however.

For example, if you’re a first-time homebuyer (meaning you didn’t own a principal residence at any time during the previous two years), up to $10,000 can be withdrawn without penalty. And your spouse can withdraw the same amount as well!

Paying for higher education is another common reason to withdraw IRA funds. When funds are used for tuition at an accredited college or vocational school, there’s no early withdrawal penalty, regardless of amount.

Distributions used to pay medical expenses aren’t subject to penalty either, but only the portion that exceeds 10% of your Adjusted Gross Income (AGI) is excluded. If you’re over age 65, the threshold is lowered to 7.5% of AGI.

Below are some other types of distributions from a traditional IRA not subject to an early withdrawal penalty:

  • Distributions to pay for health insurance while unemployed, for some taxpayers.
  • Distributions to military reservists on active duty for more than 179 days.
  • Distributions to an employee over age 55, after the employee no longer works for the employer.
  • Distributions made due to death.
  • Distributions made due to a total and permanent disability.
  • Distributions made due to an IRS levy being placed on the account, unless the funds were distributed to satisfy a different IRS levy on a different property.

There are other exceptions, so if you are contemplating taking an early distribution from your traditional IRA, contact us to see whether you qualify for an exception to the penalty.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, taxes (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Do you have a Capitalization Policy?

In an attempt to alleviate past confusion, the IRS issued new regulations clarifying which costs are classified as repairs and maintenance and deductible in the current year. This is versus those fixed asset expenditures that have to be capitalized and depreciated over a number of years.

General Rule: Taxpayer must capitalize and depreciate all costs that facilitate the acquisition or production of property. Improvements to property that better a unit of property, restore it, or adopt it to a new and different use must also be capitalized.

The regulations provide circumstances for when certain items can be expensed, rather than capitalized.

  1. De Minimis Safe Harbor: Supplies and Materials that are $200 or less per item, per invoice OR have a useful life of 12 months or less can be expensed in the current year.
  2. Routine Maintenance Safe Harbor: Repairs and maintenance that keep business property in ordinarily efficient operating condition, such as inspection, cleaning, testing, and replacement of worn or damaged part can be expensed.
  3. Per Building Safe Harbor for Small Businesses: Taxpayers with average annual gross receipts of $10 million or less in the three preceding tax years can deduct improvements made to a building with an unadjusted basis of $1 million or less. The deduction is limited to $10,000 or 2% of the building’s unadjusted basis. This election is made annually on a timely filed return and is on a building-by-building basis.

Exceptions to the General Rule:

  1. A Capitalization Policy establishes the threshold (minimum cost) for capitalization and depreciation of fixed assets. Taxpayers that have a written policy for accounting procedures in place by the beginning of the tax year can deduct up to $500 per item, per invoice (instead of $200). The $500 de minimis safe harbor election can be made by attaching a statement to a timely filed federal income tax return. This election is not considered a Change in Accounting Method and therefore Form 3115, Application for Change in Accounting Method, is not required. For businesses that had a written Capitalization Policy in place at 1/1/2014, the $500 threshold can be applied on the 2014 Federal return. For businesses that did NOT have a policy in place can still make the election for 2015 by establishing accounting procedures for the 2015 tax year before January 1st.
  2. The IRS has hinted at flexibility in the dollar ceilings where the taxpayer has the burden of showing that such treatment clearly reflects income. If you think your business model can support a higher de minimis threshold, consider filing Form 3115, Application for Change in Accounting Method, with the tax return for the year the change is to be effective.

These regulations are lengthy and complex, so contact your local Padgett office for assistance, as these new provisions will affect every business, even yours!

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

The Gift of Inventory – Maximize Your Tax Deduction

Donating excess or obsolete inventory can help small businesses avoid hefty storage fees and make room in their warehouse for the products which do sell. Small business owners could also receive a valuable tax deduction if the donation meets certain requirements.

  • What can be donated? Obsolete inventory exists when the items are no longer in season/style, have expired, or are outdated for the purposes of your business. To qualify for a tax deduction, it must still retain some value and must be able to be used by the charitable organization. A computer is an example for which you can receive a tax deduction. However, the donation of a typewriter to a charitable organization will unlikely qualify for the tax deduction.
  • How much can you donate? The IRS encourages businesses to donate excess inventory to charity in quantities that can be used in the charitable organization’s normal course of business and help them to meet the stated mission of their organization. For example, a manufacturing business can’t receive a deduction for donating 200 widgets to the Salvation Army since they provide no benefit to the charity. However, a clothing store donating 200 coats to Salvation Army would receive a charitable deduction. What if there were 1,000 coats? To receive a deduction for all 1,000 coats, the Salvation Army would have to be able to sell these in the normal course of business, otherwise a deduction would be allowed for only a reasonable number of donated coats.
  • Who can you donate to? Only charitable organizations that are listed as 501(c)(3) organizations will qualify for the tax deduction. Schools, hospitals and churches are some examples of these types of organizations. If you’re in doubt, you can ask the charity about its status.
  • How much can you deduct? The amount you can deduct is the smaller of its fair market value on the day you contributed it or its basis. The basis of contributed inventory is any cost incurred for the inventory. You must remove the amount of your charitable contribution deduction from your opening inventory, as it is not part of the cost of goods sold. If the cost of donated inventory is not included in your opening inventory, the inventory’s basis is zero and you cannot claim a charitable contribution deduction.

If your small business has excess inventory, contact your local Padgett office to see how you may benefit from making a donation.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

News from the IRS – Scams and Email Phishing

Scam Phone Calls: The Internal Revenue Service issued a consumer alert providing taxpayers with tips to protect themselves from telephone scam artists calling and posing as the IRS. These callers may demand money or may say you have a refund due in hopes of tricking you into sharing private information.

Don’t be fooled, as these con artists can sound convincing and may know a lot about you. They usually alter the caller ID to make it look like the IRS is calling and use fake names and bogus IRS identification badge numbers. The IRS reminds people that identifying a fake IRS caller is relatively easy; below are five things the scammers often do but the IRS will never do:

  1. Call you about taxes you owe without first mailing you an official notice.
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount.
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  4. Ask for credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money, the IRS advises you to do the following:

  • If you know you owe taxes or think you might owe, call the IRS at 1.800.829.1040.
  • If you know you don’t owe taxes or have no reason to believe that you do, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1.800.366.4484 or at www.tigta.gov.
  • If you’ve been targeted by this scam, also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Email Phishing Scam: The IRS has been alerted to a new email phishing scam in which the email will appear to be from the IRS and include a link to a bogus website intended to mirror the official IRS website. These emails contain the direction “you are to update your IRS e-file immediately”. Although these emails may seem legitimate and mention USA.gov and IRS.gov, don’t get scammed! These emails are not coming from the IRS, as the IRS never initiates contact with taxpayers by email, texting, or any social media.

Taxpayers who get these messages should not respond to the email or click on the links. Instead, they should forward the scam emails to the IRS at phishing@irs.gov . For more information, visit the IRS’s Report Phishing web page.

IRS2Go Mobile App: The 2014 Version of the IRS2Go is now available! This new version has a brand new look and feel with new added features. The app is available in both English and Spanish and allows you to check the status of your federal income refund or request your tax return or account transcript through your smartphone. You can even use it to help you locate an IRS Volunteer Income Tax Assistance (VITA) site near your home. If you have an Apple iPhone, iPad, or iPod Touch, you can download the free IRS2Go app by visiting the iTunes app store. If you have an Android device, you can visit Google Play to download the free IRS2Go app.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

IRS Direct Pay is Now Available

On May 24th, the IRS announced the successful start of its new web-based system, known as IRS Direct Pay, on IRS.gov.

The system allows taxpayers to pay their tax bills or make tax payments directly from checking or savings accounts without any fees or pre-registration and offers a 30-day advance payment scheduling, rescheduling or cancellations, as well as a payment status search.

IRS Direct Pay simplifies the payment process by allowing taxpayers to establish an account with no waiting period and receive instant confirmation of their payment on a system that is available 24 hours a day, seven days a week.

Currently, IRS Direct Pay accepts only 1040 series return payments, including estimated tax payments, proposed tax assessments, extension payments, and amended return payments spanning from tax years 1993-2014.

To use this program, the IRS must first verify the taxpayer’s name, address, filing status, social security number and date of birth from a prior year tax return. Contact your local Padgett office to see how this new system can simplify your life!

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Know Your Rights as a Taxpayer

On June 10th, the Internal Revenue Service adopted a “Taxpayer Bill of Rights” to help the public understand their rights when dealing with the IRS. These rights have been grouped into ten categories as follows:

  1. The Right to Be Informed: Taxpayers have the right to know what they need to do to comply with the tax laws and are entitled to clear explanations of IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts.
  2. The Right to Quality Service: Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.
  3. The Right to Pay No More than the Correct Amount of Tax: Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly.
  4. The Right to Challenge the IRS’s Position and Be Heard: Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position.
  5. The Right to Appeal an IRS Decision in an Independent Forum: Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court.
  6. The Right to Finality: Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.
  7. The Right to Privacy: Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing.
  8. The Right to Confidentiality: Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.
  9. The Right to Retain Representation: Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.

10. The Right to a Fair and Just Tax System: Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.