The CARES Act and the more recent legislation (it doesn’t have a catchy name so I’ll call it CARES2) have created an above-the-line adjustment for certain charitable contributions. Pro-tip: If it’s “above the (AGI) line” it’s an adjustment to income; if it’s below the (AGI) line it is a deduction. If you are a #taxpro reading this it’s important to use the correct language. If you’re a taxpayer reading this the tax outcomes are largely the same but I like to use the right language.

For Tax Year 2020 taxpayers who take the standard deduction can make an above-the-line adjustment for cash contributions of up to $300 on their 1040s. There’s a marriage penalty here. The $300 for 2020 is on a per return, not a per taxpayer basis. So single filers can make a $300 adjustment and married taxpayers filing a joint return can make a $300 adjustment. The IRS has recently issued guidance (that contradicts the actual law) that says married taxpayers filing separately can only take a $150 adjustment. It’s incorrect but the tax savings are not worth the expense if the IRS decides to assess a penalty (more on that later).

In the more recently passed legislation the marriage penalty was removed. Each taxpayer may contribute up to $300 in cash to qualified charitable organizations. So for Tax Year 2021 it is possible to take an up to $600 above the line adjustment on a jointly filed return. Singles and Heads of Household still can take up to $300. Again, this is for taxpayers who do not itemize their deductions. Taxpayers who use Schedule A to itemize their deductions continue to deduct all of their qualified contributions on that schedule.

Now for the fine print. The IRS will be watching. The Service has stated that there will be a 50% penalty if you claim this adjustment without proper substantiation. What does that mean? It means receipts. Here’s a link to some information on proper recordkeeping for charitable contributions. In general, clients should always be maintaining the records necessary to substantiate their charitable contributions. But for this adjustment in particular it is even more important for the #taxpro to keep the receipts that substantiate this adjustment in the client’s tax file for the applicable years in case the IRS comes looking for them. Don’t be the client who tells your #taxpro “just take the max.” And if you are a #taxpro who “just takes the max” without proper substantiation then you aren’t really a #taxpro in my opinion. True tax professionals do not open their clients up to these types of penalties. They are too easily avoided. If you don’t have the proper documentation it’s going to cost you more in penalties than you saved in taxes by taking an unsubstantiated adjustment. Just don’t do it.

Remember, this adjustment has the following conditions:

  • The taxpayer must not be itemizing their deductions on the return.
  • The taxpayer must be able to substantiate the deduction.
  • The contribution must be made in cash or a cash equivalent (cash, check, credit card, etc.). In other words it can’t be taken for donated “stuff”.
  • The contribution must be made to a qualified charitable organization. Shorthand for that is that it must be made to a recognized 501(c)(3) organization.

See that last bit? It’s important to understand that not every tax exempt organization is a recognized 501(c)(3) organization.

I saw this sign as I was driving home a while ago and thought “Yikes!” Your neighborhood association dues, homeowners association dues, and many other payments or contributions to tax exempt organizations are not tax deductible. Raffle tickets and purchases of auction items are also not deductible, no matter how worthy the cause.* Neither are contributions made to individuals (via gofundme or other types of crowdfunding) or contributions made to charitable organizations outside the U.S. (again, to be deductible the organization must be a 501(c)(3)).

If you have questions about whether or not your contribution is deductible it’s always better to ask your #taxpro or to look to reliable sources for more information. Reliable sources include the tax team at Forbes.com, the IRS website, and (sometimes) the knowledge base provided by your DIY software vendor. Reliable sources do not include TikTok, Twitter, or YouTube unless the person providing the advice is recognized as an expert in the field (again, the IRS, Forbes, etc.).  And occasionally even trustworthy sources provide incorrect information. Right now information is changing so quickly what you are reading could already be obsolete. Be careful out there. Read the fine print and remember, if it sounds too good to be true it usually is.

#fullambo out

*If you paid substantially more than fair market value for an auction item you may be able to deduct the amount in excess of fair market value but be prepared to answer some questions and provide some proof to your tax professional.

Wow! That’s all I can say. This blog post is late because I have managed to string together three productive work days in a row and it feels like it’s gonna hold through the rest of the week!

So, where are we at? Unfortunately we are still in early to mid-March as far as return processing goes. That said, Cat is coming to pick up the last pile of returns for scanning this week and I am moving through the piles. I am still fiddling with some of the more complicated returns but I’m working on those in tandem with some of the more straightforward ones. The short version is, returns are getting finished.

This is the first time this year I have felt like tax season is working. The first time I have felt like it’s actually tax season and things are working the way they are supposed to—stacked up but moving.

I will be working on returns the rest of this week and back in and working next week as well. I don’t have Cat available for data entry right now (she can’t do that from home) but if you’ve been with me any length of time you know how fast I type. I’ll get ’em done. Have a great week and enjoy the weekend.

#fullambo out

 

In case you missed the memo, NM Governor Michelle Lujan Grisham (a.k.a. Notorious MLG), has extended the stay-at-home order through May 15th. Cat and I are going to continue to honor that by Cat staying at home. That means no phone support for me. That means leave a message! I am usually at the office (although I will admit that “gardener’s hours” are starting to kick in) and I stop work to pick up phone messages a few times a day.

The backlog is slowly clearing. That means, for those of you whose returns still haven’t made it into the office, we will be ready to start accepting new paperwork soon. So here’s the plan—

Whether or not the stay-at-home is extended beyond May 15th, I will re-open the office for document drop offs by appointment only on Tuesday, May 19th. My 24th wedding anniversary is Monday the 18th so I’ll probably take that day off. If you wish to make an appointment to drop off your tax return documents or missing paperwork (K1s, corrected broker 1099s, etc.), please just call or e-mail and I or Cat will get back to you and will set you up!

I will probably re-open the office to new clients at the beginning of June. We will still be, to the greatest extent possible or required, limiting in-person visits to the office. Re-opening to new clients simply means that I will once again be accepting inquiries from new clients. So, if you know anyone who hasn’t filed but wants to, June is when I’ll be accepting referrals again. That should be plenty of time to meet the July 15th filing deadline.

Thanks to all of you for hanging in there through this chaotic tax season with me!

#fullambo out

I recently read that 95% of small businesses fail within the first 5 years due to either bad management, under capitalization, or some combination of the two. Tax issues for small business owners have the same roots. Bad record keeping is often a sign of bad management. Mileage is one of the most highly scrutinized and most common areas on which small businesses are examined (audited). If you are a small business owner who isn’t keeping good mileage records you may be leaving money on the table. Worse, if you are audited, legitimate business mileage expenses may be disallowed because of your failure to keep adequate records.

The Self Help tab of the Tax Therapy website (Get Organized and Get Answers) offers additional resources to help you track and substantiate your business mileage. In a nutshell, your business mileage log should be contemporaneous (done at about the same time or shortly after you make the drive) and should show the date of the trip, the business purpose of the trip, and the miles driven. It is really common for people to not record the business purpose of the trip on the mileage log. It’s a lot easier to do this when you record the miles than it is to try to re-build that from an appointment calendar!

Finally, a great way to record your starting and ending odometer readings for your annual mileage total is to take a picture of your odometer with your phone on January 1 and again on December 31. If you haven’t taken a picture of your odometer this year, it’s not too late. It won’t be perfect, but it will be close and it will help you get into a really good habit! I hope that one of your New Year’s Resolutions, if you are a small business owner, is to improve your record keeping! It’s easy to do once you make a habit of it. And it’s one of the simplest ways to make sure your start up stays up!

 

I mentioned in the last post and the one before that that during tax season we require a non-refundable deposit at the time of your intake appointment. Some of you may be wondering why we do that. The short answer is that one tax season I got burned by several “clients.” They came in during season to have their taxes prepared and when they didn’t like the results or didn’t like the amount of follow up and due diligence I was doing they decided to go elsewhere. This was after I had already done a lot of work on their returns. So 1) I was not paid for my time and 2) I was not able to take on clients who really did want to work with me. Lesson learned.

“Onboarding” makes the process sound super complicated, but it really isn’t. All paid preparers have to do a certain amount of due diligence for each tax client. At a minimum we have to check your ID to ensure you are who you say you are and collect the information necessary to prepare your tax returns. At a new client intake appointment (what happens when you get onboarded during tax season) we do the following:

  • ID Check for taxpayers and dependents
  • Engagement Letter & Privacy Policy Signed
  • Notice Assurance Program Opt In or Out
  • Client Interview & Question/Answer Session
  • Basic Review of Prior Year Returns
  • Collect your W2s, 1099s, and other information needed to prepare your return
  • Send you home with a list of missing items and information

During the off season I am happy to meet with potential clients and do an ID check, return review, and basic client interview for free. I am happy to spend some time discussing your needs and expectations.. We then send you a reminder at the beginning of tax season to request an organizer. In the meantime, if you have found someone else or have decided to do your own taxes and don’t call for the organizer, it’s not really a problem. We are sorry we didn’t earn your business, but we understand.

During tax season we are less understanding. The preliminary work required to bring in a new client takes 30 minutes to an hour (sometimes more if the tax situation involves a business or complex investments). During tax season our work time is limited and much more valuable (it’s like surge pricing for Uber). So, if we are going to spend the time getting to know you and your situation we want to make sure that you are serious enough about having us prepare your tax returns that you get all the way through the e-filing process and that if you don’t we still get paid for the time spent processing your return.

I’ve said it before but it bears repeating. Tax Therapy is a small business and this is how I earn my living. I appreciate the opportunity to show you just how valuable a good #taxpro can be but to make my business work, I have to stick to the processes and policies that work for me. Right now we are still accepting new clients with a non-refundable deposit. If you are still looking for a #taxpro and would like to schedule an intake appointment please get in touch!

The IRS is opening e-filing for business returns soon and e-filing for individual returns will open a couple of weeks after that. Here at Tax Therapy we are about ready to open our season for new and existing clients. Existing clients will receive a reminder postcard and e-mail letting them know that they can call to request their annual tax organizer (engagement documents & client interview). New clients can call to get an organizer and set up a new client intake appointment. Please note that new clients coming in during tax season (as opposed to during the summer and fall) must pay a non-refundable deposit equal to the base price of a federal Form 1040 before we will accept their return for processing.

And it’s a doozy! Every year Kelly Phillips Erb (a.k.a. The Tax Girl) posts a list on Forbes.com of the Top 100 Must-Follow Tax Twitter Accounts. For 2020, I’m on it! Mostly this list is for tax professionals (nerds) rather than taxpayers but it is an honor to be included and as you can see, I’m really excited!

I’m also excited that tax season is basically here. I am still accepting new clients. Cat will be ready to send out preliminary paperwork starting the week of January 13th. I will start processing paperwork the following week. That is also the week I expect that the IRS will open e-filing for the 2020 tax season. So if you are looking for a #taxpro, please get in touch.

 

The raging started around the second week of February and it continues online and in the offices of #taxpros around the country right now. Many taxpayers are furious that they are not getting as much back on their income tax refund as they were expecting or worse—they have a balance due! Alas, this was not news to the people at the IRS who had been warning taxpayers via an extensive public information campaign to check their withholding. You see, the Tax Cuts and Jobs Act (TCJA) reduced income tax rates for everyone. But it also eliminated (well, suspended) personal and dependent exemptions and eliminated or capped some types of itemized deductions. And the IRS adjusted withholding tables (how much gets taken out of each paycheck to “put in the bank” towards your federal income tax) to (they thought) more closely align with the taxes that would be owed under the new law. Epic fail.

Epic fail in so many ways.

First, some people are actually paying higher taxes under the new law despite the lower tax rates and wider brackets. If you have a large family, the elimination of dependency exemptions often was not leveled out by the increased standard deduction and child tax credit—especially if your large family includes a couple of older teenagers. The new higher standard deduction doesn’t help much if you used to have itemized deductions that were close to the new amount. Combine the itemized v. standard issue with the suspension of exemptions and many people are getting some nasty surprises. They actually do owe more tax under the new law than they did under the old law. But even for taxpayers who are paying less in taxes, they have smaller refunds or a balance due. Why? Because of those adjusted withholding tables. They were getting more money back in their paychecks for most of the year instead of on their tax refund at the end of the year.

Here’s the thing—the people who made this law (who make all of the tax laws) simply do not, cannot, will not comprehend the day-to-day reality of most taxpayers. Their “conventional wisdom” is about the “time value of money” (yeah, google that stuff). They figure it’s a bad thing to loan your money interest free to the government for the better part of a year instead of having it in your bank account making money for you. The bits they miss are 1) according to the data most Americans don’t have enough money in savings to cover a $400 repair bill, so that extra in the paycheck is going towards necessities or niceties (depending on income, family size, etc.), not into the bank and 2) the interest rates on garden variety savings accounts are so close to zero right now that it really doesn’t matter if that extra withholding is being held by the government or put in a savings account (even in a savings account with upwards of $25K in it). Oh wait! Yes it does matter where that money goes. If the government is holding onto it, the taxpayer doesn’t have easy access to it. Tax withholding and the annual refund is actually an easy (if interest free) savings vehicle for many taxpayers. And one that taxpayers count on each year!

The IRS finally snapped to this and to the fact that the new withholding tables might have been, shall we say “a bit optimistic” about the overall effect of the tax cuts. Hence the public information campaign. Now, having my finger on the pulse of the IRS pretty much year round, I was well aware of this campaign and of the withholding calculator they were encouraging taxpayers to use to do a “paycheck checkup.” Nevertheless, since I have a few clients who were unaware of the most sweeping change to the tax code since 1986, I am not surprised at all that many of my clients and many more taxpayers were completely unaware of this big public information campaign.

Every #taxpro I know (including me) made clients aware of the potential issues during tax season last year and during the summer. I offered (and always have offered) my clients a mid-year withholding checkup where I do a “back of the envelope” calculation based on last year’s information, current year information, and any changes to the big tax picture that may have occurred or are expected to occur before the end of the tax year. Some #taxpros charge for this, others do not. I don’t typically charge for a basic checkup, I will charge for more extensive calculations or tax planning. In any case, non-DIY taxpayers probably had one or more opportunities to address the potential issues with their withholding. Many chose not to, some with unfortunate results.

But what about the DIY people? Well, if they missed the public awareness campaign then they probably got surprised. But what if they were aware and what if they tried to use the withholding calculator? You know what? I tried it. I thought it might be faster and easier than my usual hand calculations. It wasn’t. To use the withholding calculator you practically had to do a half year tax return. You also had to know a lot of tax language (AGI, dependency exemptions, tax credits, itemized v. standard). And here is, again, where the people making the laws and creating these tools have a disconnect with taxpayers. Most taxpayers, even if they do their own returns using commercial software, really don’t understand the process—they only understand the end result: refund or no refund. I have high earning, highly sophisticated taxpayer clients who barely grasp it—not because they are dumb (they most certainly are not) but because there is a lot of specialized language and a lot of moving parts and this is not what they do all the time. If I threw up my hands in frustration trying to use the IRS tool, I can only imagine what a “regular” taxpayer was feeling.

Situations like these are where a good #taxpro adds value. It’s why we cost more than DIY software. We understand the big picture (and often the history) for each client. And we can do calculations by hand faster than you can do them with software and, because of that big picture knowledge, we are often more accurate. I dial my clients into whatever type of refund they want. I have some clients who don’t mind getting big tax bills when they file their returns (they are the clients whose money is making them a lot of money). I have others who like to break even; they want the most take home pay they can manage and don’t mind a small refund or balance due. I have others who want those big refunds. They do use their federal income tax withholding as a no interest savings account. And you know what? That works for them and that’s OK with me!

The bottom line is that a lot of the rage is coming from people who think they are paying higher taxes because their refunds are lower (or not there). Not true. Some rage is coming from people for whom the tax cut actually was not a tax cut. Definitely and depends greatly on individual facts and circumstances. When you hire a #taxpro to “do your taxes” the good ones do more than put numbers in boxes. They help you meet your financial goals and prepare for the effects of tax law changes such as these. So if you decide to “go pro”—choose wisely, choose well.

Today’s post is brought to you by the brainiacs over at the Procedurally Taxing Blog. Specifically, it was this post on a taxpayer winning damages from an employer who both misclassified him as an independent contractor (he got a 1099-MISC instead of a W2) and who reported more on the 1099-MISC than the employee (he was not a contractor) actually got paid. For taxpayers in New Mexico, the federal income tax issues that result from this type of misclassification are often only one part of their problem.

One of the most common issues that brings a DIY taxpayer to my office for representation services is getting an audit notice from the state—for NM State Gross Receipts Tax. Unlike most other states, New Mexico charges gross receipts tax on the sale of goods and services. That’s why NM-GRT is included on my local clients’ invoices. When you are self-employed in New Mexico, you are “in business” in New Mexico with all that implies. Sometimes clients know they are self-employed, but for one reason or another (for example they have come from a state that does not charge gross receipts tax on services) they are unaware of the NM-GRT compliance issue. That’s why it’s usually the first question I ask self-employed potential clients and one of the things I remind current clients who are considering starting “side hustles.”

Unfortunately what also often occurs is that a client’s employer puts that client “into business” in New Mexico by misclassifying an employee worker as an independent contractor  (IC). Sometimes the employer is upfront about this—sort of. Typically the employer tells the worker all the “benefits” of being an IC (deducting certain expenses, etc.) but fails to mention the drawbacks—maintaining income and expense records and mileage logs, self employment taxes (paying into Social Security and Medicare), and here in New Mexico, NM-GRT. The taxpayer thinks they are getting a good deal until they do their own tax return and get audited or get told by their #taxpro that not only do they owe income and self-employment taxes to the IRS, they owe income and gross receipts taxes to the state.

It’s important to remember that “not caught” is not the same as “accurately filed” (or in the case of NM-GRT not filed!). The computer matching used by the state (and the IRS) is only getting more sophisticated. If you aren’t sure about your requirements, it’s best to consult a #taxpro before you get the notice and it’s definitely best to consult one if you get a notice. True #taxpros offer much more than return preparation and audit representation; they manage the process for you and provide peace of mind.

This is how I earn my living. I work pretty much full time, pretty much year round. Even when I’m not doing tax returns, I’m doing representation work (helping people who are being audited or who are in IRS collections), I’m working on the business side of my small business, or I am reading. I am always reading. I’m not a “pop up” tax shop. I’m not seasonal. And this business is definitely not a hobby for me. So please treat me as you would any other professional. If you aren’t sure what that means, here are five tips on how to treat your tax professional (or any professional)…

Tip #1: If it’s work related, please call the office or e-mail my work address.

Sometimes friends become clients. Sometimes clients become friends. Sometimes we are colleagues with businesses that are similarly aligned. If your doctor was a family friend, would you call her on her personal cell to book an appointment? No? Please do the same for me. My home/work boundaries help keep me sane, not to mention being necessary for my professional liability insurance. If it’s office stuff, let’s take care of it during office hours, using office resources. When I’m out socializing, especially during tax season, I am getting some rare “outside the office” time. I do not want to be on duty (and again, my professional liability insurance also does not want me to be on duty—especially if it’s happy hour). I don’t mind giving out a business card or taking your card for a callback, but I will not discuss specifics outside the office.

Tip #2: If it’s administrative (non tax) work, please reach out to the admin assistant first.

It’s a small office and when Cat isn’t here I am the admin assistant. But that means I am working at her workstation, monitoring her e-mail accounts, and doing work that is typically hers when she is on duty. Again, if you have a doctor or an attorney do you call them with questions about office hours, booking appointments, what to bring to your appointment? Not usually. They have staff for that and during the busy part of tax season, so do I. Please respect the professional boundaries and contact the office and speak to the admin and let her do her job (including determining when a question needs my intervention).

Tip #3: I can explain it to you, I can’t understand it for you.

I want my clients to understand their tax returns and have a good big picture view of their tax situation. I work hard to explain what is going on with each tax return to each client each year. That service is part of what you pay for when you hire a #taxpro as opposed to doing your own returns. But I cannot magically transfer my years of training, education, and experience into your head. I can give you the big picture. I am typically not willing to explain anything in the level of detail that is provided in a training class for tax professionals to non tax professionals—no matter how smart you are or how much I like you and/or value your business. I’m pretty smart. Actually, I’m really smart. But I’m also smart enough to know I’m not going to learn how to design a bridge by asking an engineer to explain it to me. I’m not even going to learn how to design a bridge by asking an engineer to explain it to me in excruciating detail. Again, I want you to understand what is on your tax returns—what you are filing and paying and why. But I cannot train you to do my job at your review and signature appointment so please don’t expect me to.

Tip #4: Your mad search skillz are no substitute for my years of experience and training.

They just aren’t. I’m not saying what you Googled is incorrect. It may be correct. But it also may not be correct and knowing why it is or is not correct is a big part of what you get when you hire a professional. The tax code is huge. Huge. And it has a lot of interconnected parts. Knowing how those parts all work together is what I do. When you Google (or even sometimes when you are using DIY tax software) you often don’t know what you don’t know and you could be missing information that is critical to the big picture. Garbage in, garbage out. I’ve spent years learning how to ask the right questions and to question what on the surface may seem like the right answers. I don’t mind answering questions. I do mind when you stand in my office and challenge my answers based on your search results or what your non-taxpro friends have told you.

Tip #5: Don’t expect me to work for free.

Again, this is how I earn a living. If you are a client, don’t call with questions about your friends’ or family members’ returns. If you are a prospective client, do not call expecting to “pick my brain” on what you are supposed to do to prepare a tax return. Do not expect me to tell you which forms need to be filed or if items are reportable income or are legally deductible. Do not ask if I will review your self-prepared return—I won’t. Do not call to ask me for tips or strategies or “quick questions” if you are not a client. My clients pay for that information. If you want it, then become a client. You would be surprised at how often I have to tell casual friends at group dinners “No, I don’t answer ‘quick questions’ from non-clients when I am at social events.” You would probably be more surprised to know how many calls Cat and I field during the height of tax season from non-clients expecting free information. Imagine trying to install a dishwasher yourself and calling a plumber while you are in the process and saying “Well, I’ve got the dishwasher out and I’ve been talking to my contractor friends and watching YouTube videos and googling for tips and I just want you to kind of walk me through this to be sure I’m getting it right.” And expecting them to 1) do it and 2) do it for free. Not gonna happen with them and not gonna happen here either.

Perhaps the simplest guideline is that if you wouldn’t act this way with a doctor or an attorney, don’t act that way with me. My name is Amber. I am a tax professional.