The Christmas decorations are down. You just finished ringing in the New Year. You have a feeling of dread and anxiety about what’s on the horizon….tax time!
You certainly are not alone when it comes to having a strong disdain for tax season. I quickly become the most popular guy among my friends this time of year, receiving floods of texts and calls with questions and hypotheticals. They usually start with “Can I deduct my ___?“ and “What will the IRS think if I ___?”. I’m always, well almost always, happy to help with these questions, and I really can’t blame them for looking for advice from a CPA.
Many areas of the tax code sound like they were written in riddle, and ultimately still leave many answers up for interpretation. However, if you don’t have a trusted tax advisor or a helpful CPA friend in your phone contacts, I have a few items you may find helpful for this 2020 tax season.
Part of the “dread” people feel during tax time is the required work to get the right information together to complete the tax return. The goals for our clients are to make this process as simple as possible and to alleviate any unnecessary work on their part. Before scouring through your information to dig up every receipt you can find, make sure it will make a difference in your tax situation.
For example, reporting medical expense deductions rarely provide a tax benefit. This is because taxpayers are only allowed to deduct the amount of out-of-pocket medical costs that are more than 10% of their adjusted gross income (AGI).For example, you can only deduct $100 if your total gross income is $100,000 and you incurred $10,100 of out-of-pocket medical expenses.
One new item to note when gathering information relates to the new laws about miscellaneous itemized deductions. After the passing of the TCJA (Tax Cuts and Jobs Act of 2017), miscellaneous itemized deductions were no longer allowed in 2018 as a Federal deduction, but still qualified for Iowa purposes. However, starting in 2019, miscellaneous itemized deductions are no longer allowed for Iowa tax returns. So, there is no Federal or Iowa benefit for keeping track of any out-of-pocket business costs related to a W-2 job, professional dues, tax preparation fees, safe deposit box rental, etc.
There are few things worse than owing a large, unexpected tax bill once your return is completed. Of course, the best way to prevent this is to talk to your CPA before the end of December to review all financial events that have occurred in the year. However, since we are already rolling into 2020, I will point out a few of the more common items that may cause “surprise” tax burdens.
One big culprit of “surprise” taxes are investments in a flow-through entity. This is an investment that reports a K-1 to its investors at the end of the year (Partnerships, S corporations, and Trusts). Estimating income from these can be tricky, since the taxpayer does not always see the cash in the same year that the income or gain is incurred. If financial reports/correspondence regarding the investment’s activities are not sent out on a regular basis, then the taxpayer is forced to guess what the estimated income is.
Another common source of “surprise” income is from investments in non-qualified brokerage accounts, particularly, realized gains from the sale of securities. Brokerage statements and reports can be difficult to understand. Unless the taxpayer knows exactly what they are looking at, and has easy access to a realized gain/(loss) schedule for the year, income recognized may be a surprise to them. As a Corporate Partner of Syverson Strege, I am aware that Syverson Strege helps their clients review year-end tax situations and avoid surprise tax burdens.
Each year, the IRS releases information about the number of tax returns that are examined compared to the number of tax returns filed. The IRS really drills down on these percentages by providing statistics for the gross income level, type of tax return, and even specific tax forms included in the filing.
If you find yourself with a free Saturday night, feel free to turn the music up, put up a disco ball above your computer, and look over these spreadsheets from the IRS government website - https://www.irs.gov/statistics/enforcement-examinations! If this doesn’t sound like an appealing way to spend your weekend, here is a summary. In 2018, individual taxpayers with an adjusted gross income (AGI) of under $500,000 have had about 0.5% of the overall returns filed examined. This steadily increases as the AGI increases until a taxpayer has $10,000,000+. At this income level, 6.66% of individual tax returns filed were examined. Based on these percentages, the chances are pretty low you’ll be audited, unless you are one of the lucky few with $10 million of AGI. Do keep in mind, the IRS selects returns to examine based on a computer program that assigns a “score” to each return, representative of the likelihood additional taxes could be found during an examination. So, 0.5% of taxpayers with <$500,000 may have been examined, but this 0.5% was comprised of those returns that the IRS determined were most likely to have additional tax adjustments.
As long as taxes continue to be complex, taxpayers will still have uneasy feelings during tax time. Hiring a tax professional to help navigate your tax situation will definitely help reduce these feelings. Of course, Google does a decent job in answering tax questions…but there’s a good reason every one of their answers ends with “Please consult your tax advisor.”
Good luck during this tax season!
Mark Vroman, CPA
The Vroman Group, LLP