Tax Frequently Asked Questions

1. How long should tax returns and supporting documents be retained?

We recommend that taxpayers keep copies of tax returns indefinitely. Supporting documents for returns must be kept until the statute of limitations for that return runs out.

The statute of limitations is the period in which the taxpayer can amend his/her return to claim a credit or refund or the IRS can assess additional tax.

IRS Publication 552, Recordkeeping for Individuals, contains the period of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period beginning after the return was filed. Returns filed before the due date are treated as being filed on the due date.

2. Is there any way to reduce taxes after the year is over?

Unfortunately, there are only a few post-December 31st planning opportunities available to individual taxpayers. The one significant deduction available through April 15th of the following calendar year is a $5,500 contribution to a traditional IRA account. Taxpayers over the age of 50 can contribute an additional $1,000. Even if you are covered by an employer plan, you may still make this contribution as long as your income level is below certain limits. We can assist you in determining if you qualify to make a deductible IRA contribution.
Also make sure you maximize your itemized deductions. Look through your receipts and take every deduction possible for the year. If you operate your business from home, make full use of all home office and business expenses.

A self-employed person may generate a deduction by adopting a retirement plan. There are many types of plans that allow you to put more money away than an IRA. Once established, you have the opportunity to make contributions after the end of the tax year.

For the future, it is important to keep in mind that most deductible expenses are an economic loss to you in that the average taxpayer has to spend around $3 to save $1 in taxes. Don't forget that it is not a good idea to incur expenses just to save taxes.

3. What is a Health Savings Account, and who is eligible to establish one?

A Health Savings Account (HSA) is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you can set aside money exclusively for future medical expenses. This account must be used in conjunction with a High Deductible Health Plan.
Benefits of the HSA include the following:
Earnings on the funds in the account are tax free
You can claim a tax deduction for the amount you put into the account
Distributions from the account are tax free if you use them to pay qualified medical expenses
Amounts not used for medical expenses can remain in the account to be used for medical expenses in a future year, or can be kept in the account until you retire
The funds stay with you even if you change employers or leave the work force
To be eligible to set up an HSA you must have a high deductible health plan, and you cannot have any other medical insurance or Medicare coverage. To qualify as a high deductible plan, the deductible amount must be at least $1,300 for a plan covering yourself only, or at least $2,600 for a plan that covers more than one person. These limits apply to 2015 and to 2016.
You can contribute up to $3,350 to an HSA for yourself - only, or up to $6,650 to an HSA for a family. Additionally, if you are over 55 by the end of the year, you can contribute an extra $1,000. Note that you can make contributions for the 2015 year up to April 15, 2016. For tax year 2016 the contribution limit remains at $3,350 for a plan that only covers yourself, and increases to $6,750 for a family plan. The additional contribution if over age 55 remains at $1,000.
Give us a call if you'd like more information about setting up an HSA.

4. In what year are income and deductions reported?

Individuals are pretty much limited to reporting income in the year it is actually received or available to you. This is also true of deductions. This is technically called the “cash” method of accounting. the rule is fairly simple: a transaction is deemed to occur in the year the payment(s) are made. One exception is in the case of charges on your bank credit card. you can claim a deduction in the year in which the charge is posted to your card, regardless of when you make your payment.

5. How can I take an expense for the business use of my vehicle?

A taxpayer who uses their car in their work or business has a choice on how these vehicle expenses may be deducted. First, the standard mileage rate may be used. For tax year 2015 the standard mileage rate is $.575 per business mile driven ($.54 per mile in 2016). Alternatively, the actual expenses for running the vehicle may be deducted. Depreciation expense is part of this actual expense total.

If you want to use the standard mileage rate, you need to use it from the time you started using your car in business, unless you claimed only straight-line depreciation during the years you claim actual expenses.. This is because under accelerated depreciation the depreciation deduction starts off high and then tapers off. The IRS doesn't allow you to take depreciation in the high years and then switch to the standard mileage rate when depreciation gets low.

In order to determine which method will generate higher deductions for you, we recommend that, in the first year of business use, you keep records of all costs of operating the vehicle including gas, oil, tires, insurance, repairs, car washes, etc.. When we prepare your return, we will assist you in selecting the expense method that is best in your situation. Regardless of which method you choose to use, you must keep track of both the business miles driven in the year and the total miles driven on the vehicle in the year for all purposes. When you sell a vehicle that has been used for business, you may be subject to income tax on all or part of any gain from the sale.
You can also claim a charitable contribution deduction for mile yo drive your car for charitable purposes. For example if you are a Boy Scout leader and you drive to training classes, you can claim a mileage deduction as part of your charitable contributions. The mileage deduction for charitable miles is $.14 per mile for 2015 and 2016.
If you use your vehicle to drive to medical appointments you can claim a mileage expense as part of your medical expenses. The deduction for miles driven for medical purposes is $.23 per mile in 2015. The rate decreases to $.19 per mile in 2016.

6. Is all Home Mortgage Interest deductible?

There are two types of deductible home mortgage interest. One type is called “acquisition indebtedness” which is a mortgage to either purchase the home or substantially improve the home. The mortgage interest on this type of loan is deductible on the first $1,000,000 of indebtedness. The $1,000,000 limit applies to all home mortgages including primary and secondary homes.

The other type of loan on which a taxpayer may deduct mortgage interest is the “home equity loan”. Home equity loans may be used for any purpose, but must be secured by the equity in the home. The deduction is limited to the interest expense on the first $100.000 of indebtedness. These dollar amounts are cut in half if you are married and file a separate return. Note: if you are subject to the alternative minimum tax you lose the benefit of the deduction for interest on home equity loans that aren’t used for home purchase or improvements.

For either of these loan types to qualify for the home mortgage interest deduction, the loan must be secured by a mortgage. It is not enough to say that the loan is secured; all the formalities of creating a mortgage must be followed. This includes filing of the mortgage with the recorder of deeds.

7. My child received a scholarship that is paying for a portion of college expenses. Are there any tax implications?

Qualified scholarship amounts that are received by a degree candidate are generally excluded from income to the extent that they are used to pay for tuition, required enrollment fees, books, supplies, and equipment that are required for the course by the educational institution. If the amount of scholarship funds received is more than the above expenses, the excess must be included in the student’s income. This commonly occurs in the case of a “full ride” scholarship where the scholarship amount includes payment of room and board expenses.

8. How much can I set aside toward my retirement each year?

If you have a plan available through your employment, you should check with your employer to find out how much of your salary you can set aside on a pretax basis toward your retirement. There are many different types of retirement plans that can be offered by employers, with varying limits on the amount you can set aside from your wages. In many plans your employer will match a portion of the amount you set aside toward your retirement. In addition to retirement contributions you make through your job, you may be able to put money to an IRA.

For tax year 2015, a taxpayer who is covered by an employer retirement plan can also deduct up to $5,500 of additional money contributed to an individual retirement account (IRA), unless the income of a single taxpayer exceeds $61,000 or $98,000 in the case of a married couple. If your income exceeds these amounts, the amount of deductible contributions decreases. If total income exceeds $71,000 for a single taxpayer or $118,000 for a married couple, no deduction is allowed for an IRA contribution if you are covered under your employer's plan. If you are over the age of 50, you can contribute an additional $1,000 to your IRA, subject to the same phaseout on contributions as the regular IRA contribution..

If you have no employer retirement plan coverage available, either because your employer does not offer a retirement plan, or because you are not currently employed, you may make a deductible contribution of up to $5,500 in 2015 assuming either you, or your spouse on a joint return, has at least $5,500 of total earned income. The amount contributed to your IRA account(s) cannot exceed the earned income reported on the tax return. When you retire and become eligible to withdraw the funds from your IRA you will be taxed on the money as you take withdrawals.

Another option to set aside money toward your retirement is the Roth IRA. For 2015 you can contribute up to $5,500 per year. Even if you have an employer sponsored retirement plan, you can still contribute up to $5,500 to a Roth IRA, as long as your 2015 income (from all sources) does not exceed $116,000 for a single taxpayer, or $183,000 for married taxpayers. If your income is above these amounts, you make qualify to make a partial contribution. Although you don't get a tax deduction when you contribute to your Roth IRA, you will see a benefit when you withdraw the funds from the Roth IRA upon retirement,. None of the withdrawal is taxable. Therefore, the earnings on the Roth IRA are tax-free.

The maximum that any taxpayer can contribute to any IRA in one tax year is $5,500 for 2015 and 2016, whether it is to a deductible IRA, or a Roth IRA, or a combination of both. Taxpayers over the age of 50 can contribute an additional $1,000 per year to their IRA, making their maximum annual contribution $6,500 for 2015 and 2016.

9. What is the best way to plan for payment of the current years income taxes?

If your income and deductions are fairly predictable or consistent, you can complete tax planning for the year in question to figure out the estimated amount of total tax due. You may pay this tax as you go either through withholding or estimated tax payments. Withholding is usually done if you earn your money as an employee, estimated tax if you don’t.

If the underpayment of tax is $1,000 or less the IRS will not charge you interest and penalties if you pay the tax by April 15th. This is also the case if you at least match last year’s tax liability (or pay in equal to 110% of last year’s taxes in the case of high income taxpayers), or pay 90 percent of the current year’s liability. This creates some slack in the system. You can take advantage of this slack by arranging your withholding or estimated tax payments to hit the minimum. This way you will be paying on the day due rather than getting a refund. This is the IRS’s interest-free loan to you.
We will be glad to help you with planning for taxes for the current year. Many clients engage our services to project their tax liabilities for the year in the Fall so they can maximize tax benefits before the end of the year.

10. What tax strategies are available to provide opportunities to plan for my children's education?

The Education Savings Account (ESA)is a trust established to pay qualified education expenses for a designated beneficiary. Although the contributions to the account are nondeductible, all distributions from the account are tax-free if used for qualified education expenses. Therefore, the earnings on the invested funds are not taxed. The maximum amount that can be contributed to all ESA’s set up for any one beneficiary is $2,000 per year. The contributions can be made by any individual, subject to income limitations of the donor. Qualified education expenses include elementary and secondary education expenses as well as higher education expenses. Contributions may be made up to April 15th for the prior year.

Also available are Qualified Tuition Programs (QTP), often referred to as 529 plans. These programs are maintained by individual states. There are two types of plans: prepaid programs whereby contributions are used to prepay the tuition of a designated student, and savings account programs whereby contributions are made to an account established to pay the qualified higher education expenses of a student. In the savings account program money is invested by the state, or state agency, you have chosen to use for your plan. The amount that can be contributed to a QTP is limited to the amount necessary to provide for qualified expenses for the beneficiary. If a contributor makes contributions of more than $14,000 in a year, there could be possible gift tax implications, unless a special tax election is made. As in the ESA, you do not claim a deduction for the amounts contributed. The only exception is if you are an Oregon resident and you participate in Oregon's 529 plan, you are entitled to deduct up to $2,300 on your 2014 Oregon return ($4,600 on a joint return). When the funds are withdrawn from the account by the student, none of the distribution is subject to tax as long as the funds are used to pay qualified expenses. For this program qualified expenses include tuition, fees, book supplies, equipment and room and board (limited to “reasonable expenses”) for students enrolled at least half-time in a degree program.

Another option is to establish a custodial account in the child's name to which you deposit funds. A child can have interest or dividend income of up to $1,050 per year before needing to pay tax or file a tax return. However, in a custodial account, the funds are generally fully available to the child upon reaching the age of 18 and can be withdrawn by them for any purpose at that time.

11. What is the Alternative Minimum Tax (AMT) System?

The AMT is a peculiar concept. To put it simply, the AMT exists because some higher income taxpayers were not paying enough in taxes. Prior to the AMT system it was possible to invest money in such a way that deductions exceeded income.

To alleviate this problem, a new top-to-bottom method of computing taxes was set up, the AMT system. A number of deductions, called “preferences”, were either disallowed or reduced and different tax rates were established. In theory, you compute your taxes under both the regular method and the AMT method and pay the higher amount.

In practice, for most people, the regular tax is significantly higher than the AMT. One little irony about the AMT is that it comes close to being the flat tax that politicians have been talking about for years. If you look at the AMT alone, there are few deductions and two basic tax rates, 26 and 28 percent.

12. I have a child in college. What tax breaks might be available to me?

If it is necessary for you to withdraw funds from your IRA to help pay for your child’s post secondary education, you will not be subject to the 10% penalty for early withdrawal. However, the amount withdrawn from the account will be taxable as income in the year of withdrawal (unless the funds are withdrawn from a Roth IRA)

You may be able to deduct up to $2,500 of interest on qualified education loans as an adjustment to income (therefore available even if you do not itemize). The ability to claim the deduction phases out for single taxpayers with an income over $65,000, and for married taxpayers with income over $130,000. Additional requirements that must be met to qualify for deductions of the interest include:

  • The qualified loan must have been used to pay for education expenses, including tuition, fees, room and board, books, equipment and transportation for attendance at an eligible educational institution.
  • The student must have been enrolled on at least a half-time basis
  • The deduction can only be claimed by the individual who has the primary obligation to repay the loan, and in order to claim the deduction, that person must be the one who actually paid the interest. If the loan was taken out by your child in his/her name, only the child can claim the interest deduction.
  • The deduction is not available to any taxpayer who is claimed as a dependent on another persons return.

You may also be able to deduct up to $4,000 of qualified tuition and related expenses for your dependent as an adjustment to income (therefore available even if you don't itemize) as long as your income is under $65,000 (under $130,000 if married). The deduction is reduced to $2,000 for taxpayers with income between $65,000-$80,000 (or $130,000-$160,000 married). If income is above those limits, no deduction is allowed.
There are two tax credits available regarding the costs of post-secondary education. In both cases, the credit may be claimed only on the tax return where the student is claimed as a dependent. The availability of both credits phase out as income exceeds specified limits. Note that you can claim the deduction explained above, or one of the two credits below, but cannot utilize more than one of these deductions/credits in the same tax year.

The American Opportunity Credit is equal to 100% of the first $2,000 and 25% of the second $2,000 spent in the year for tuition, fees and course materials of a student enrolled on at least a half time basis in the first for years of an undergraduate program. The maximum credit is $2,500 in a year, and may be claimed in four tax years. Taxpayers qualify for the credit if income is less than $80,000 for a single taxpayer ($160,000 for married taxpayers). Partial credit is available if income exceeds these amounts and phases out completely when income exceeds $90,000 for a single taxpayer and $180,000 for married taxpayers.

The Life Time Learning Credit is equal to 20% of the first $10,000 of qualified tuition and fees paid during the year for post-secondary education. There is no limit on the number of years the credit may be claimed. Taxpayers qualify for this credit in 2015 if income is less than $55,000 for a single taxpayer ($110,000 for married taxpayers). Partial credit is available if income exceeds these amounts and phases out completely when income exceeds $65,000 for single taxpayers and $130,000 for married taxpayers.