Stephen Wallick April 25, 2018 No Comments

Everything You Need to Know About Estimated Quarterly Payments

The IRS expects to receive tax payments according to the income you are projected to earn in a given year. This is referred to as “pay as you go” system or estimated quarterly payments. These payments are estimated based on your total income from the previous year’s tax return. These quarterly payments help to ensure that you pay no unnecessary penalties at the end of the year for underpayment.

The estimated quarterly payment is a method to pay tax on the income which is not subjected to tax withholding. This can include the income from your business earnings, self-employment, interests, dividends, rent, and other sources.

If you are employed full or part-time, your taxes will be sent directly to the IRS as they are withheld from your paychecks. If you are self-employed or an independent contractor, you need to make tax payments in the form of estimated quarterly payments or estimated tax. Typically, the IRS requires the estimated tax to be paid quarterly, i.e. in 4 equal installments spread throughout the year. If you underpay your estimated quarterly payments, you will have to write a bigger check to the IRS when filing your tax return. If you overpay your estimated tax, you will receive the excess amount as a tax refund which is same as how withholding the tax works.

Here’s a look at who needs to make the estimated quarterly payments and how to make the quarterly payments:

Who Need to Make the Estimated Quarterly Payments?

There are many factors which determine whether you need to make the estimated quarterly payments. As a general rule is if your tax liability is $1,000 or above for the year then you are expected to make the estimated quarterly payments. If you owed more than $1,000 in taxes when you filed your tax return for the previous year then the IRS expects you will either have more tax withheld from your paychecks or that you will make the estimated tax payments the following year.

Generally, the following people are required to make the estimated tax payments:

  • Self-Employed Persons or Sole Proprietor Business Owners

Those who have income from their own business will need to make the estimated quarterly payments if their tax liability is expected to be over $1,000 for the year. This includes both part-time and the full-time enterprises.

  • Partners, Corporations and S Corporation Shareholders

Usually, the business ownership earnings will need estimated quarterly payments. In the case of corporations, the estimated quarterly payments must be made if the corporation is expected to have at least $500 in tax liability.

  • People Who Owed Taxes for the Previous Year

If you owed taxes at the end of previous year, it probably means that too little was withheld from your paychecks or you had other income which increased your tax liability. This is a flag to the IRS that you should be making the estimated quarterly payments.

How to Make Estimated Quarterly Payments?

The IRS Form 1040-ES (Estimated Tax for Individuals) is used for calculating and making the estimated quarterly payments. To determine how much you are required to pay for the estimated quarterly tax, you must compile your income, credits, deductions and the paid taxes- similar to filing a yearly tax return. Typically, you can look at your income/liability numbers from the previous year to gauge what you’ll owe the next year.

To make your estimated quarterly payments, the year is divided into 4 payment periods in which each period has a specific payment deadline. Failing to make the estimated quarterly payments on time can result in the IRS penalties:

  • 1st Quarter: January 1- March 31. Deadline: April 15.
  • 2nd Quarter: April 1-May 31. Deadline: June 16.
  • 3rd Quarter: June 1-August 31. Deadline: September 15.
  • 4th Quarter: September 1- December 31. Deadline: January 15 of the following year.

Note that it is important to make the estimated quarterly payments. Even if you have already missed a few installments of the estimated tax, you should still try making the estimated payments as soon as possible.

Contact me to setup your payment schedule and figure out how much you owe quarterly. 615-326-TAX9

Stephen Wallick April 19, 2018 No Comments

Investment Property Tax Deductions

Paying property taxes is a part of the American home-owning process. Luckily, the tax code has many rules allowing rental property owners to save money and reduce their taxes.

Investment properties have some great tax deductions that you can use to minimize your total taxes due. However, some of you may find these investment property tax deductions very confusing and it can be difficult to understand which tax deductions to claim.

Before claiming any deductions ensure to have detailed and thorough records to back them up. Track your expenses as you make them, this will make your tax prep much more manageable if you are organized throughout the year. The IRS scrutinizes these deductions and you need to be prepared to get audited. Failing to present appropriate receipts and validating the business necessity of each expense will result in paying the amount due with interest when you get audited.

Here are top three investment property tax deductions you might be missing out on:

1) Loan Interest/Points

If there is a mortgage on the property then the loan interests will be probably your single largest deductible expense. Further, if you paid buy-down points on the property purchase or mortgage refinance then you’ll be able to deduct those as well.

  • Mortgage Interest (primary & secondary)
  • Credit card interest on items used for the property
  • HELOC Interest for loans used to repair or improve the property
  • Mortgage Points to purchase or refinance a rental property

Remember you’ll only be able to deduct the money which was actually spent on your rental business and you won’t be able to deduct the interest of a withdrawn line of credit which is sitting in your bank account.

2) Taxes

Usually, the real estate taxes are paid through the mortgage company, and so they show up on the Form 1098 which is sent from the bank. If the property is free and clear of any mortgage, then congratulations!! But in case you didn’t keep receipts of those payments then you will have to look up your tax records online. Other taxes such as business-related wage taxes, personal property taxes or permit fees are also allowed deductions:

  • Social Security Taxes for Employees
  • State, County and City Taxes
  • Medicare and Unemployment Taxes for Employees
  • Permit Fees/Inspection Fees
  • Personal Property Tax/Vehicle Tax

3) Depreciation of assets

Generally there are three types of costs that you need to capitalize and depreciate:

  • The value of improvements such as windows, appliances, countertops, carpet, etc.
  • The value of the structure and not the land
  • Computers/ Equipment/ Laptops

Remember that these expenditures cannot be deducted in a single year, but rather they must be depreciated over multiple years. Or else people would abuse the system claiming $100K for repairs in a single year in order to remove all the tax liability and then the next year they could sell the property to recoup their renovation ROI.

If you have any questions about investment property tax deductions, give me a call today at 615-326-TAX9.

Stephen Wallick April 11, 2018 No Comments

Deductions Every Real Estate Agent Can Claim on Their Taxes

Tax season is here and here are some ways all real estate agents can maximize deductions. Most real estate agents have various expenses and can confidently identify which expenses to use as deductions to help you keep more money in your pocket. Whether you are filing taxes on your own, or if you have an accountant, you need to take advantage of these deductions. No matter where you are in your career, understanding which expenses are allowed will help you to avoid overpaying on your quarterly as well as your year-end taxes.

1. Marketing and Advertising

Marketing and advertising costs such as flyers, business cards, ads, signs, and promos are all deductible. Production costs such as design and writing fees, whether the materials are produced by an agency or part-time hire are also deductible. Online and digital advertising costs include website design, search engine marketing, hosting fees, video production, pay-per-click advertising and any other IT-related costs and are quickly becoming the largest area of spending for real estate agents.

2. Vehicle Mileage or Expense

You spend your days driving between the appointments and properties. How do you determine whether to go with the standard mileage deduction or track all the auto-related expenses? For instance, if you drive 10,000 miles or more per year for your real estate business, it is likely that you’ll get the greatest tax benefit by taking the standard mileage deduction. If you are a lower mileage driver or have especially high car payments, then the actual cost method may yield a higher deduction come tax time.

For those of you who drive over 10K per year, the IRS needs you to keep a detailed log so that you can claim this deduction. Your records should include the time, date, purpose, and mileage of the trip. You can use an app which tracks and records your trips.

3. Home Office Deduction

Do you have a dedicated area of your home for work? If so,  you are eligible for a home office deduction even if you also have office space at your broker’s office (unless you are already deducting the desk fees). The home office deduction provides an option: a regular or a simplified method. Many self-employed people find that the simplified method maximizes their deduction. On the other hand, if you reside in a very high-cost region or have a particularly large home office, then the regular method in which you track the actual expense may yield the highest deduction.

4. Office Supplies and Equipments

Whether you are taking the home-office deductions or the desk fees, you can still claim other office-related expenses including the photocopies, stationery, and any other consumables required to run your business. Other huge purchases such as fax machines, furniture, computers, copiers or telephone, and the related bill can be fully expensed or depreciated over a period of years. You can deduct the full expense for a dedicated landline telephone for your business. If you use a cell phone, only then you are eligible to deduct the business percentage of that expense. Keep careful records of all receipts.

5. Desk Fees

Your desk fees are deductible even if you are hanging your license under a national franchise or with an independent broker. However, note that you will not be able to claim the home office deduction if you are taking deduction fees for the brokerage desk fees.

If you are a real estate agent with specific questions on deductions for your business, contact me today at 615-326-TAX9 for a free consultation.

Stephen Wallick April 4, 2018 No Comments

What is a 1031 Real Estate Exchange?

The simplistic explanation of a 1031 real estate exchange is that you negotiate the sale of your property and transfer ownership to a “Qualified Intermediary”, a professional position just for these exchanges. Your Intermediary then sells the property and holds the proceeds on your behalf. You then identify new properties and negotiate a purchase. The Intermediary makes the purchase with the proceeds they held for you and transfer the ownership of the new property to you.

With the 1031 real estate exchange, the capital gains and recapture taxes you would have otherwise owed from the sale of the first property are deferred until you sell the new property. This can also be done in reverse by acquiring the new property before selling the old property, however the process is more complex.

Remember these nine extra rules while undergoing 1031 real estate exchange:

  1. Any property involving in a 1031 real estate exchange must be used for business or investment. You can’t sell or receive a home, land under development or property purchased for resale. Sometimes the secondary and vacation homes can be qualified as investments but only if personal use was quite limited.
  2. Property received must be of “like-kind” to the property sold. In case of real estate, nearly everything is of like-kind; undeveloped land is of like kind to corporate offices and apartment buildings.
  3. The Intermediary is a necessary legal buffer because if you receive any money before the exchange is finished completely, then the tax-deferred treatment of gain is broken and all taxes become due immediately.
  4. Due to the complexity of 1031 exchanges, you are not allowed to act as your own Intermediary, nor designate anybody else who has acted as your agent for the last two years including the real estate agents, accountants, investment brokers, employees, and attorneys, so there are a brand of professionals who are Qualified Intermediaries.
  5. From the day the property is sold, you have 45 calendar days to find the potential new properties and 180 days to complete the exchange. These windows are strict, and they count holidays and weekends which cannot be extended or run concurrently.
  6. Identification must be made in writing with a clear description of the new properties and must be delivered to and signed by the Intermediary or current owner of the new property.
  7. Purchasing a new property of equal or greater value than the one you sold is a good idea because any funds left over at the end or additional property received with the new real estate are counted as “boot” and immediately taxed as capital gains. When the newly acquired property is transferred back to you by the Intermediary along with any boot such as leftover funds or the additional property acquired then the exchange is completed. Fortunately, the boot and net gain due to the real estate exchange are taxed instantly in reality and they do not void the deferral of capital gain and recapture taxes that were rolled into the new property.
  8. The cost basis for the new property is equal to the basis of the old property. The new basis is decreased by the amount of any boot received and then increased by any gain which is taxed during the exchange.
  9. Last but not least; be cautious while engaging in this kind transaction with family members because the tax-deferred gains can be forced into recognition in an exchange between related parties if either party sells their property before two years pass.

The most beneficial use of the 1031 exchange rules is to keep exchanging the acquired property. The deferred taxes will roll into that property to be recognized on its sale. If the property is retained long enough, and the last acquired property is passed on to heirs, it will receive a step up in the cost basis at which point the taxes due vanish effectively. A 1031 exchange is tricky to manage but definitely worth investigating.

Stephen Wallick March 28, 2018 No Comments

Second Mortgage Interest Is No Longer Deductible

Generally, second mortgages on the same property do not carry any special income tax benefits. However, if you get a second mortgage on a new property then under the Tax Cuts and Jobs Act of 2017, you are able to deduct the interest on your first and second home as long as the loan total is less than $750,000. This $750,000 cap applies to a purhase of a new home or a second home which is taken after December 15, 2017, through 2025. If your home loan was taken under a binding contract before December 15, 2017, then you can deduct a higher dollar amount of home mortgage interest. (Up to $1 million of interest and an additional $100,000 of home equity debt.)

So what is a second mortgage?

A second mortgage is a loan that uses your home as collateral. Often, a second mortgage is an additional mortgage on a house or other property where the original mortgage is still in effect. In such situations, the term “second mortgage” refers to the loan’s priority. If you were to default (if you foreclose on the home and it is sold to pay off the loans) then the proceeds will go towards paying the original mortgage before the second mortgage is being paid.

When do people get second mortgages?

Most people take out a second mortgage in order to pay for expenditures which are too difficult to cover with other means of payment such as credit cards. A new car, add-ons to a home or other home improvement projects, a boat, and college tuition are just a few examples. Some people also use the second mortgages to consolidate other, more expensive debt.

When is the interest on Second Mortgage Payments Deductible?

Usually, you can deduct the interest you paid on second mortgages that were taken out after October 1987. The number of second mortgages taken out before this date will be factored into your total acquisition indebtedness (the debt incurred while acquiring, constructing or substantially improving a qualified residence).

Beginning in the year 2018 through 2025, the Tax Cuts and Jobs Act of 2017 has suspended the tax deduction for the interest paid on the home equity loans and lines of credit, unless you use the proceeds to buy, build, or substantially improve the home which secures the loan. If you use proceeds of the equity debt to make home improvements, then the first mortgage balance plus the HELOC remain deductible, as long as the total doesn’t exceed the $750,000 dollar cap. However, the interest cannot be deducted at all if the HELOC is used to pay off the car loan or other personal expenses.

Advantages of a Second Mortgage

There may be other advantages to using a second mortgage. For example, the interest rate may be lower than the rate of personal loans or credit cards. Nonetheless, a second mortgage may be an easy way to borrow a large sum of money, still, it can be risky since you are using your home to secure it. Ensure you speak to a qualified tax professional in your region before moving forward with a second mortgage as we will be able to assist you to make the best financial decision for your particular situation.

If you are considering taking out a second mortgage and want to prepare financially, contact me today at 615-326-TAX9 for a free consultation.

Stephen Wallick March 21, 2018 No Comments

It just got more expensive to owe the IRS money.

April 15th is approaching, and the IRS just announced that the interest rates it charges on past-due taxes will be increasing. Nobody likes to owe the IRS money, but it’s not an uncommon situation — even if you don’t realize it until you fill out your tax return. For these reasons, now is a good time to quickly review what interest and penalties could mean for you if you owe the IRS money.

IRS interest rates are going up

The IRS, which determines its interest rates quarterly, just announced a rate hike for the second quarter of 2018, beginning on April 1. The rate for underpayments and overpayments for individuals will be 5% annually compounded daily.  Rates for corporations are also going up.  If you owe the IRS $10,000, you can now expect to pay about $1.37 per day in interest charges while your debt is outstanding.

This is in addition to penalties you might owe

Keep in mind that the interest charged by the IRS is in addition to any penalties you are assessed for paying or filing late.

The penalty for paying your taxes late is 0.5% of the past-due balance per month or partial month, up to a maximum penalty of 25%.

On the other hand, the failure-to-file penalty is much worse — 10 times worse, to be specific. For each month or partial month you file your tax return after the deadline, you’ll be assessed a 5% penalty, up to the same 25% maximum.

An extension won’t help you avoid interest

As the April 17, 2018, tax deadline is approaching, it’s also important to mention that filing a tax extension does not excuse you from paying your entire tax liability by April 17th. . An extension simply gives you an additional six months to file your return — it does nothing to extend your payment deadline.

So, while a tax extension buys you more time to file your return, keep in mind that interest is charged retroactively to the April 17 tax deadline if it turns out that you owe the IRS money.

If you owe the IRS and have not filed back taxes, Give us a call.  We are Middle Tennessee’s Tax Resolution Experts.

615-326-TAX9

Stephen Wallick March 8, 2018 No Comments

How federal tax liens affect your ability to get a mortgage

There are many different types of debt that can show up on your credit report. Perhaps the worst debt to show up when you are applying for a mortgage is a federal tax lien.

When the IRS has put a lien on your home, it means that they have the first rights to the proceeds of your home; the mortgage lender does not. This puts your mortgage lender in 2nd place when it comes to having the debt paid off. This is not the situation that any lender wants to be in, which makes them very unlikely to provide a mortgage to anyone with a federal tax lien whether for a purchase or refinance.

Good news, the IRS has made efforts to help taxpayers with changes to their lien process.  The announcement in relation to mortgage financing is that the IRS is willing to withdraw tax liens for taxpayers who owe $25,000 or less in tax liability, if a Direct Deposit Installment Agreement (DDIA) is set up.  This means you can start one now, convert your existing installment agreement into a direct debit one, or if you are already in one then just call up and make a request to withdraw the tax lien.  Of course it’s not instant in all situations as the IRS wants to make sure that payments will be honored so there is an initial probationary period.

In practicality, this means someone who has an IRS tax lien can improve their creditworthiness to a mortgage lender by opting to go into the DDIA and eventually having the IRS withdraw their tax lien.  It doesn’t guarantee that someone who couldn’t get approved before will now be approved, but it is a huge step in the right direction.

If you have any questions or need help removing a lien, please feel free to give me a call, 615-326-TAX9.

Stephen Wallick February 28, 2018 No Comments

IRS now has the power to revoke your passport

The passport provision is now officially law. The title of the new section is “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.” The idea goes back to 2012, when the Government Accountability Office reported on the potential for using the issuance of passports to collect taxes.

The law says the State Department can revoke, deny or limit passports for anyone the IRS certifies as having a seriously delinquent tax debt in an amount in excess of $50,000. Administrative details are scant. It could mean no new passport and no renewal. It could even mean the State Department will rescind existing passports.

The State Department will evidently act when the IRS tells them, and that upsets some people. We think of passports when traveling internationally, but they are being used domestically in many cases too. The list of affected taxpayers will be compiled by the IRS. The IRS will use a threshold of $50,000 of unpaid federal taxes. But this $50,000 figure includes penalties and interest. And as everyone knows, interest and penalties can add up fast.

You would still be able to travel if your tax debt is being paid in a timely manner, as under a signed installment agreement. The rules are not limited to criminal tax cases or where the government thinks you are fleeing a tax debt.

In fact, you could have your passport revoked merely because you owe more than $50,000 and the IRS has filed a notice of lien. A $50,000 tax debt including interest and penalties is common, and the IRS files tax liens routinely. It’s the IRS way of putting creditors on notice. The IRS can file a Notice of Federal Tax Lien after the IRS assesses the liability, sends a Notice and Demand for Payment, and you fail to pay in full within 10 days.

Stephen Wallick February 21, 2018 No Comments

Itemized Deductions under the Donald Trump Presidency

When you file your taxes each year, you have the choice of taking the standard deduction or itemizing your deductions. The standard deduction is a preset amount that you are allowed to deduct from your taxable income each year. This amount will vary according to your tax filing status and is adjusted annually. But often, it is more beneficial to itemize your deductions. To get the biggest bang out of your buck, read on to learn when to itemize your deductions and when to stick with the standard deduction.

In President Trump’s new tax outline, itemized deductions are virtually going away except for a few, such as mortgage payments and charitable donations. In the place of itemized deductions, the standard deduction is proposed to double. The intention is to maximize tax savings and simplify the tax code. Good idea, right? Below is an overview of the current rules for itemized deductions.

The Purpose and Nature of Itemized Deductions

Itemized deductions fall into a different category than “above-the-line” deductions, such as self-employment expenses and student loan interest; they are “below-the-line” deductions, or deductions from adjusted gross income. They are computed on the IRS’s Schedule A, and the total is then carried to your 1040 form. Once itemized deductions have been subtracted from your income, the remainder is your actual taxable income. Itemized deductions were created as a social-engineering tool by the government to provide economic incentives for taxpayers to do certain things, such as buy real estate and make charitable donations.

Which Deductions Can Be Itemized?

Schedule A is broken down into different sections that specify each type of itemized deduction. The following is a brief overview of the scope and limits of each category:

Unreimbursed Medical and Dental Expenses 

This deduction is the most difficult to qualify for. Taxpayers who incur qualified out-of-pocket medical and/or dental expenses that are not covered by insurance can deduct expenses that exceed 10% of their adjusted gross income.

Interest Expenses 

Homeowners can deduct the interest that they pay on their mortgages and home equity lines of credit.

Taxes Paid 

Taxpayers who itemize are able to deduct two types of taxes on a Schedule A: Personal property taxes (such as real estate taxes)  and state or local taxes that were assessed for the previous year. However, any refund received by the taxpayer from the state in the previous year must be counted as income if the taxpayer itemized deductions that previous year.

Charitable Donations 

Any donation made to a qualified charity is deductible (within certain limitations). Cash contributions that exceed 50% of the taxpayer’s adjusted gross income (AGI) must be carried over to the next year, as well as non-cash contributions that exceed 30% of AGI.

Casualty and Theft Losses 

Any loss incurred because of a casualty or theft can be reported on a Schedule A; however, only losses in excess of 10% of the taxpayer’s AGI are actually deductible. Also, if a taxpayer incurs a loss in one year and deducts it on taxes, any reimbursement that is received in later years must be counted as income.

Unreimbursed Job-Related Expenses and Certain Miscellaneous Deductions

W-2 employees who incur work-related expenses can deduct the expenses that exceed 2% of their AGI. Work-related expenses include items such as: equipment and supplies, protective clothing, expenses for maintaining a home office, vehicle expenses, dues to professional organizations and professional subscriptions. Certain other miscellaneous deductions are listed in this section as well, such as income tax preparation and audit fees, and any expenses related to maintaining investments or income-producing property. These fees include such items as IRA or other account-maintenance fees, legal and accounting fees, and margin interest.

Other Miscellaneous Deductions

This category of itemized deductions includes items such as: gambling losses to the extent of gambling winnings, losses from partnerships or subchapter S-corporations, estate taxes on income in respect of a decedent, and certain other expenses.

Income Limitations for Itemized Deductions 

Itemized deductions for taxpayers with an AGI above a certain level may be reduced. These levels depend on your filing status. If you’re above this level, you’ll need to complete an Itemized Deductions Worksheet to determine the amount to enter on line 29 of the Schedule A.

Remember to Aggregate 

There are times when the additional deduction from excess medical or job-related expenses will allow itemized deductions to exceed the standard deduction. Do not  assume that you cannot deduct miscellaneous expenses or that you cannot itemize deductions if your itemizable deductions are insufficient, by themselves, for you to qualify.

The Bottom Line 

There are many rules concerning itemized deductions that are beyond the scope of this article. Working with an experienced tax professional can help to ensure those rules are applied to your tax return in your best interest. The Trump Presidency may bring about big changes, but that remains to be seen.

Stephen Wallick February 14, 2018 No Comments

5 Tax Tips for New Families

More and more Millennials are beginning to get married and have children. No one enjoys tax season, and I bet they don’t either. But here are some tax tips for new families that will help navigate you through the tax process.

1. Make Sure You Have All Your Tax Documents

Some of your tax documents will come via mail, and some may be found online.  Gather them together and keep track of them! Tax documents include: Health Care Statements (1095-A, 1095-B, 1095-C), needed to verify health insurance coverage; and Income/Deduction Statements (W-2, 1098 Forms, 1099 Forms).

2. There Are Many Great Tax Deductions 

There are opportunities to reduce your taxable income. These allow you to reduce your tax liability. Deductions can include the number of children you have (even one born on December 31), day care expenses, property taxes and car registration fees and charitable deductions.

3. Attention, New parents 

Don’t forget about the $1,000 Child Tax credit. This directly reduces your tax bill by $1,000.  This is different than the deduction mentioned above, as it directly reduces your tax bill dollar-for-dollar.

4. Contribute to an IRA or HSA Account

When you contribute to an IRA for retirement or a health savings account for healthcare expenses, you may be eligible for certain tax deductions based on the amount of your contribution and your income level.  When you contribute to an IRA you are preparing for your future, and an HSA account sets aside tax-free money for medical expenses. 

5. Don’t Be Afraid to Ask for Help

If you are in doubt, make sure you contact a tax professional for guidance. It pays to use a knowledgeable tax professional, as they may find credits and deductions that you don’t know you qualify for.

This year, be proactive about your taxes and start now. If you haven’t started organizing your tax documents, it’s better to start early than waiting until the last minute. There are many resources that can help you find the best option.  Call us at 615-326-TAX9 for a free consultation.