Author Archives: c22511910

Mixing Business with Pleasure: What Travel Expenses Are Deductible?

Maicher CPA Pllc provides a full range of tax preparation services to help businesses and individuals succeed.   Reducing your tax bill by maximizing deductions is a primary objective at Maicher.  Many of us have upcoming travel plans this summer and certain expenses resulting from business are clearly deductible.  Deductions, however, get far more complicated when a couple days of hiking in the mountains mixes with days with your trip to meet a customer, or prospective customer?  Consider these suggestions to avoid trouble with the IRS.

  1. What’s the general rule about travel expenses deductibility?   Generally, “ordinary and necessary” travel expenses for business purposes are deductible as a business cost.   Also, “travel” in this context means a trip requiring you to leave your tax home for longer than a normal workday and with the intention of pursuing a business purpose like meeting with existing or prospective clients.  The business purpose should be documented and planned in advance with dates identifying the specific persons you intend to meet and for what purpose.  For example, to sell product, or to buy it?   Also, be aware that travel outside the U.S. can provide fatter deductions over domestic travel. For example, if you spend two days conducting business during a five-day international trip, you can deduct the airfare’s entire cost as a business expense—because two days out of five is equivalent to 40% of your time away.  
  2. What are common deductible expenses?  Examples of common deductible travel expenses incurred between your usual place of business and your destination are:  round trip travel to the departure airport, airfare (even the cost of first-class tickets particularly on longer trips, baggage fees, tips, cabs, and similar expenses.  At the destination, out-of-pocket expenses are broadly construed for “business days” and fully deductible.  The usual expenses like lodging, meals (up to 50%), and cab fare are deductible but even more obscures expenses like dry cleaning/laundry are covered. 
  3. When are expenses deductible when travel mixes business purposes with non-business purposes?  In these cases, the IRS used the “Primary Reason” test to determine deductibility.    Transportation costs to and from the location of the business activity may be entirely deductible if the trip’s primary reason is for business purposes other than for non-business purposes, like running a marathon or visiting an old friend who’s retired. college campus visit, for instance.  The number of days spent on business activities versus non-business activities is key to determine whether business is the primary reason for travel.   Be aware that travel days count as business days, as do weekends and holidays — if they fall between days devoted to business and it would be impractical to return home.  Generally, a trip’s primary reason is deemed to be for business if business activity days exceed non-business activity days.  As always, taxpayers have the burden to prove the trip’s business purpose and documentation like receipts, daily activity diaries and other materials identifying your business contact and the purpose of the meeting.

Take away:  Business travel can result in substantial deductions, including when it mixes with personal frolic subject to the above rules.  At Maicher, we provide effective tax advice and tax return preparation services minimizing tax bills for individuals and businesses.  Contact a professional at Maicher today to discuss how we can reduce your tax bill.   

Sources:

Publication 463 – Travel, Gift, and Car Expenses (IRS Pub. March 28, 2022).

Topic Number 511 – Business Travel Expenses (IRS Pub. February 17, 2022).

How to Respond to an IRS Audit Notice

An IRS audit is an examination of taxpayers’ returns to verify the accuracy of information such as deductions and the reported tax.  Selection can be random as well as by computer screening.  The audit process commences with an IRS notice to the taxpayer.  Audits are unwieldy for many taxpayers and a misstep can cause unproductive conflict with the IRS.  Maicher CPA Pllc uses its experience to represent business and individual clients in resolving audits.   Here are some key tips for responding to them.

Foremost, never ignore the notice because delays can result in the waiver of your rights to object to adverse changes to your tax.   Forward the notice immediately to Maicher and in the meantime gather the documents the notice requests or likely involves, which may include, for example: bills, canceled checks, legal papers, divorce settlements, property acquisition, loan agreements, travel tickets, medical/dental records, capital improvement, appraisals, employment documents and other items. There are three types of audits: (a) Correspondence Audits (a/k/a Campus Examinations), the most frequent type of audit, requiring taxpayers to mail responsive records to the IRS, (b) Office Audits requiring taxpayers to personally meet at an IRS Office to review records and other information, and (c) Field Audits where IRS agents visit the taxpayers’ homes or businesses to review records and other information.  Audits result in three possible outcomes: no change to the return; agreement with the IRS’s proposed changes to the return; or disagreement with the IRS’s proposed changes.  Taxpayers disagreeing with the proposed changes have certain time-sensitive rights to challenge them.  Also, beware that you may receive what’s known as an IRS Letter P2000 notifying you that your return conflicts with financial data reported by third parties, and further identifies the discrepancies with a proposed resolution.  While this letter does not constitute an audit, it acts like one and it should be immediately sent to Maicher to prepare a response.  

Take-away:  An audit notice is not the end of the world for taxpayers and the risk of adverse outcomes are often reduced by promptly responding to and cooperating with requests. Never ignore a notice or represent yourself.  Call Maicher for further information concerning ways to avoid audits or for assistance if you receive an audit notice or a P2000 Letter.   

 

Sources:

“IRS Explains CP 2000 Letters Sent to Taxpayers When Tax Return Information Doesn’t Match Information from 3rd Parties,” IRS Publication, March 28, 2022.  

“IRS Audits,” IRS Publication, March 14, 2022. 

“What People Should and Should Not Do If They Get Mail from the IRS,” IRS Publication, February 24, 2022. 

“What Should You Do if the IRS Comes Knocking on Your Door?” Forbes, May 24, 2021.  

Red Flags Increasing the Audit Risk for Your 2021 Return

An IRS audit is a review/examination of taxpayers’ accounts and financial information to verify information is reported correctly and that the reported tax is correct.  Generally, the IRS can audit returns filed the last three years, or longer in some cases.  At Maicher CPA Pllc, we prepare tax returns designed to minimize taxes and your audit risk and related expense.  Unfortunately, the IRS recently added 2,500 auditors, possibly signaling more audits for 2021 returns.  However, at Maicher, we identify audit red flags and likely ways to resolve them.  Below are several examples:

  1. Major Changes in Income or Deductions Compared to the Prior Year.  These changes increase audit risk.  The risk can be reduced by documenting why these changes occurred, such as disability, lawsuits or a major industry changes.   
  2. You Are Claiming Home Office Expenses.  For the growing number of taxpayers working at home, the home office deduction is often beneficial because the related rent/ mortgage, utilities, and other expenses are deductible, provided your home office is regularly and exclusively used for business.  Thus, others must not use your home office and its square footage must be accurately measured.   
  3. Large Charitable Donations.   Large charitable donations are a red flag with “large” meaning donations disproportionate relative to past donations or gross income.   Always document the deduction (e.g. retain the canceled check) and other types of proof may be required depending on the donation size and form.  
  4. Consistently Not Showing Taxable Income.  Reporting a loss in more than a few years often gets IRS attention because it raises questions about how your living expenses are paid.  Show some income at least occasionally and pay some tax.
  5. Other Miscellaneous Red Flags.  Figures not adding up can trigger an audit.  To reduce errors, we use software and the skills of our tax professionals to best ensure your numbers add up. Similarly, all social security numbers must be correct, including a dependent child’s SSN.  Lastly, paperwork must conform, including your federal and state returns, along with your Form 1040 and your W-2/1099.  
  6. Avoid Late Filings.  Last but not least, filing late can trigger an audit.   We makes it easy to timely file your tax return by using e-file to avoid this trap. 

Take-away:  Audit risk can be minimized by our decades of experience and skill.  Call Maicher today for an appointment to get your 2021 returns completed and filed timely. 

 

Sources:

“Tax Break for Charitable Donations Packs Extra Incentive for Giving This Year,” USA Today (December 8, 2021)
“A Bipartisan Pact to Supersize the IRS,” Wall Street Journal (June 25, 2021).
“Audits,” IRS Publication (June 2, 2021).
“IRS Audit Rates Significantly Increase as Income Rises,” IRS Online Publication (November 9, 2020).
“Compliance Presence,” IRS Online Publication (October 22, 2020).
“10 Ways To (Mostly) Avoid A Tax Audit,” Forbes (February 23, 2017).

Some Key Tax Inflation Adjustments for Tax Year 2022

At Maicher CPA Pllc, we provide a full range of tax preparation services to help businesses and individuals succeed.  Each year, the IRS provides tax inflation adjustments for numerous tax provisions.  Below are inflation adjustments for tax year 2022 concerning several key tax provisions of concern to many of our clients at Maicher CPA Pllc.

  • The “marginal tax rate” is the tax rate incurred on each additional dollar of income.  It’s important to know this rate  because it will help you to properly adjust your W-2 withholding taxes, or your tax estimates if you’re self- employed.  The top tax rate is 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly). The other rates are:

35%, for incomes over $215,950 ($431,900 for married couples filing jointly)

32% for incomes over $170,050 ($340,100 for married couples filing jointly)

24% for incomes over $89,075 ($178,150 for married couples filing jointly)

22% for incomes over $41,775 ($83,550 for married couples filing jointly)

12% for incomes over $10,275 ($20,550 for married couples filing jointly)

  • The “standard deduction” is a specific dollar amount that reduces the amount of income which is taxed. Taxpayers may choose either the standard deduction or itemized deduction, discussed below,  but usually choose whichever results in the lesser amount of tax payable.  The standard deduction for: (a) married couples filing jointly is $25,900, (b) single taxpayers and married individuals filing separately is $12,950, and (c) heads of households is $19,400.
  • An “itemized deduction” is an expense that can be subtracted from adjusted gross income to reduce taxable income and to therefore lower the amount of taxes payable.  Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, retirement account contributions, gifts and other items.  Examples of adjustments in deductions for 2022, include: (a) contributions to 401(k), 403(b) and most 457 plans are increased to $20,500 and (b) the gift exclusion is increased to $16,000.

Takeaway:  Knowing the above tax rates and amounts allows better decisions about the proper amount of withholding taxes and estimated payments in your case as well as whether itemizing is better than claiming a standard deduction.  At Maicher, our accountants provide tax return services tailored to the unique needs of individuals and businesses.   Contact us today for an appointment to prepare your 2021 return and to plan your 2022 tax strategy.  

 

Sources:

IRS Publication – “IRS Provides Tax Inflation Adjustments for Tax Year 2022,” (Last Reviewed or Updated: 15-Dec-2021).

IRS Publication –  “Topic No. 551 Standard Deduction,” (Last Reviewed or Updated: 21-Jan-2022).

IRS Publication –  “Topic No. 501 Should I Itemize?” (Last Reviewed or Updated: 11-Jan-2022).

IRS Publication –  “IRS announces 401(k) limit increases to $20,500,” (Last Reviewed or Updated: 4-Nov-2021).

Some Top Tax Scams and Ways to Avoid Them

At Maicher CPA Pllc, we’re committed to helping individuals and businesses to avoid tax related scams.  What are some top scams?  What are some ways to avoid them?   

  1. Arrangements Promising Large Tax Deductions.  Beware of promises of large tax deductions particularly by promoters.  These promises often rely on abusive arrangements which will attract IRS scrutiny and won’t deliver lawful deductions despite promoters’ high fees.  Common examples of abusive arrangements are:  syndicated conservation easements and micro-captive arrangements (i.e. fictitious “insurance” policies covering implausible risks duplicating existing policies).  Before pulling the trigger on an arrangement promising large deductions, call Maicher so we can review the likely legitimacy of the deduction.  
  2. Scams To Steal Your Tax Payments, Tax Refunds Or Taxpayer Identity.   Beware of third-party scams to steal your tax payments, tax refunds or taxpayer identity. These scams include: (a) threatening phone calls typically demanding immediate payment of taxes under the threat of arrest or similar threats and (b) “phishing” schemes through fake emails, text messages, websites, and social media seeking to steal personal information like social security numbers or bank account numbers.   Do not be intimidated by calls threatening arrest or similar threats because the IRS doesn’t make such threats.  If you do get a call or other communication from the IRS about a tax bill, call us at Maicher because we can represent you in negotiations.   Concerning “phishing” schemes, do not provide personal information to third parties who are not personally known by you.
  3. Beware of “Ghost” Tax Preparers.   Don’t fall prey to income tax return preparers known as “ghosts,” who typically prepare returns but refuse to sign as a preparer and do not have a Preparer Tax Identification Number issued by the IRS.  These ghost preparers often require cash payment, invent income for tax credits, claim fake deductions, and may even divert client refunds to themselves.  To avoid these pitfalls, the IRS recommends taxpayers: (a) seek preparers available year-round, (b) verify the preparer has an IRS Preparer Tax Identification Number, (c) verify whether the preparer is an enrolled agent or certified public accountant, (d) check the preparer’s qualifications by using the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications, and (e) confirm that the preparer offers IRS e-file.  Lastly, review your return before signing it and don’t sign blank returns — be wary of preparers asking otherwise.   Significantly, Maicher satisfies these IRS recommendations.  

Take away:  Scams cost honest taxpayers money and may subject them to audit, or even more serious legal trouble.   Maicher provides tax-saving yet ethical tax services to individuals and businesses.   Call us today about preparing your return for 2021 and for some proactive tax strategies in 2022. 

 

Sources:

“IRS announces “Dirty Dozen” tax scams for 2021,” IRS Publication (November 1, 2021).

“IRS Wraps up its 2021 “Dirty Dozen” Scams List with Warning about Promoted Abusive Arrangements,” IRS Publication (November 1, 2021).

“The IRS Outlines Five of the Top Twelve Tax-Related Scams Of 2021,” Forbes (July 23, 2021).

A COVID-Related Development for 2020 Individual Tax Returns

At Maicher CPA Pllc, we provide a full range of tax services to help clients reduce taxes.  There is an important COVID-related development along with other developments affecting 2020 individual tax returns.

  1.   The IRS has extended the deadline for filing 2020 individual federal income tax returns to May 17, 2021.  This extension includes tax payments as well.  However, be aware that:
  • This extension does not apply to corporations or trusts.
  • This extension does not apply to first-quarter 2021 estimate payments for income.
  • For those owed refunds, refunds are only issued when you file your return.
  • Individuals do not need to file a form for this automatic extension.
  • Minnesota has similarly extended the deadline for individual returns and payments, but extension by other states require confirmation.    
  • Lastly, if you need an extension to file, you will need to file IRS Form 4668 by no later than May 17, 2021 to receive an automatic six-month extension but this filing extension does not extend your payment due date.  
  1. Income tax brackets increased in 2020 to account for inflation as follows:

  1. For 2020, the long-term capital gains rates for individuals are as follows:  (a) for unmarried individuals with taxable income of over $40,000, the rate is 15% and 20% for taxable income of over $441,450; (b) for married individuals filing joint returns, the rate is 15% for taxable income of over $80,000 and 20% for taxable income over $496,600; and (c) for heads of households, the rate is 15% for taxable income of over $53,600 and 20% for taxable income for over $496,050.  

Take-away:  Tax rules are in flux but the tax professionals at Maicher stays on top of these changes.   Call Maicher today for an appointment for your 2020 tax return.       

 

Sources:

IRS Publication – “Tax Day for individuals extended to May 17: Treasury, IRS extend filing and payment deadline.” (March 18, 2021).

IRS Publication (Topic No. 409) – “Capital Gains and Losses.”  (March 12, 2021).

IRS Publication – “IRS Provides Tax Inflation Adjustments for Tax Year 2020.”  (December 17, 2020).

Important Ways to Minimize Your Income Tax

At Maicher CPA Pllc, we provide a full range of tax services to help clients reduce taxes.  There are some key rules concerning deductions for the 2020 tax year which can save individual taxpayers big dollars.  Maicher guides you as to what deductions are best in your own situation and then will prepare and file your returns to claim them.   

What are some key rules for deductions on your 2020 Minnesota income tax return?

1. Standard Deductions.  In 2020, the standard deductions for the respective types of filers are as follows: 

  • Single: $12,400
  • Married Filing Joint, or Qualifying Widow(er): $24,800
  • Married Filing Separately: $12,400
  • Head of Household: $18,650

2. Itemized Deductions in General.  If the value of expenses that you can deduct is more than your standard deduction (see above), then you should consider itemizing your deductions on you Minnesota return.  Since tax year 2018, you may claim the Minnesota standard deduction or itemize deductions on your Minnesota return.   It is also important note that you may claim itemized deductions on your state return, even if you claimed the standard deduction on your federal income tax return.

3. Specific Itemized Deductions.   For tax year 2020, Minnesota enacted its own allowable itemized deductions.  Common itemized deductions include:

  • Medical and dental expenses with limits increasing based on the taxpayer’s age
  • Certain real estate taxes on non-business real estate and with other conditions
  • Certain amounts of home mortgage interest and tied to how interest deductions are reflected on your Federal return and further subject to the date of the underlying loan
  • Unreimbursed employee business expenses 
  • Charitable contributions

These itemized deductions are claimed by filing Schedule M1SA (Minnesota Itemized Deductions).  Be alert to unused deductions from past tax years due to their exceeding deductions because you may be able to apply them to your 2020 return.    

Take-away:  Do not miss important deductions on your 2020 Minnesota return.  Maicher is highly skilled in this area so call us today for an appointment.     

 

Sources:

2020 Schedule M1SA, Minnesota Itemized Deductions – Minnesota Department of Revenue Publication.

“Minnesota Itemized Deductions,” Minnesota Department of Revenue Publication (December 21, 2020 Update).

What Is Meant by the “Marginal Tax Rate?”

Maicher CPA Pllc provides a full range of tax preparation services to help businesses and individuals succeed.   There are some key tax terms everyone should know.  “Marginal Tax Rate” is one of them because it will help you to properly adjust your withholding taxes, or your tax estimates if you’re self- employed.

What Is Marginal Tax Rate?

Marginal tax rate is the tax rate incurred on each additional dollar of income. The marginal tax rate for an individual will increase as income rises. This method of taxation taxes people based upon their earnings, with low-income earners being taxed at a lower rate than higher income earners.  Under a marginal tax rate, taxpayers are usually divided into tax brackets or ranges, which determine the rate applied to the taxpayer’s taxable income — which means income after deductions and exemptions.  As income increases, what is earned will be taxed at a higher rate than the first dollar earned. 

What Are the Marginal Rates for the 2021 Tax Year?

For tax year 2021, the top tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are:

  • 35%, for incomes over $209,425 ($418,850 for married couples filing jointly)
  • 32% for incomes over $164,925 ($329,850 for married couples filing jointly)
  • 24% for incomes over $86,375 ($172,750 for married couples filing jointly)
  • 22% for incomes over $40,525 ($81,050 for married couples filing jointly)
  • 12% for incomes over $9,950 ($19,900 for married couples filing jointly).

The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).  

Takeaway:  Knowing your marginal rates helps you make better decisions about the amount of withholding taxes and estimated payments applicable to you.  At Maicher, we provide pro-active and effective tax return services to individuals and businesses.   Contact us today for an appointment to discuss your marginal rate and its impact on your tax planning.  

 

Sources:

IRS Publication – “IRS Provides Tax Inflation Adjustments for Tax Year 2021,” (Last Reviewed/Updated: 26-Oct-2020)

“Your First Look At 2021 Tax Rates: Projected Brackets, Standard Deductions & More,” Forbes (September 11, 2020)

 

How Identity Theft Threatens Your Tax Refunds

At Maicher CPA Pllc, we provide comprehensive tax services to help individuals and businesses reduce taxes and promptly receive tax refunds.  However, every year, the IRS pays out billions in refunds to identity thieves who file fake returns, including 3 million such returns for 2019.  Theft victims will wait several months for claim resolution – and the receipt of refunds. 

What is the scam?  How to minimize the risk of being victimized?  What to do if you are?  

Identity thieves steal social security numbers to file false tax returns to divert refund checks – usually early in the tax season to beat legitimate filings.  

Strategies for countering identity theft?

  • Opt-in for multi-factor authentication on all accounts and for your online tax application, use your username, password and a third item like a phone number.
  • Provide your social security number and other financial information only after verifying the requester and be extra cautious about telephone inquiries.    
  • Regularly check credit reports for suspicious activity.   
  • And remember the obvious: filing your taxes early often prevents identity theft because the IRS allows only one tax return per social security number per year.

Maicher urges clients to be alert to these signs of tax identity theft, among others: 

  • An IRS inquiry about a tax return which you didn’t file.
  • Inability to e-file your tax return (which signals prior use of a social security number).
  • Receipt of a tax transcript you didn’t request.
  • An IRS notice about the creation or activity of an online account you didn’t create.   

What if you are a victim of identity theft? 

  • Respond immediately to any IRS notice by calling the number provided.
  • If your e-filed return is rejected because of a duplicate filing under your Social Security number, or if the IRS instructs you to do so, complete IRS Form 14039.
  • Visit IdentityTheft.gov for steps to protect yourself and your financial accounts.

Take-away:  Taxpayer identity theft strikes millions of victims but filing tax returns early is a powerful precaution.  Call Maicher today so we can get started on your return.     

 

Sources:
“How to Protect Yourself From The ‘Dirty Dozen’ Tax Scams,” Forbes (July 16, 2020).
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION – “Results of the 2019 Filing Season January 22, 2020” (3 million fake returns were reported through April of 2019).
“IRS Launches Identity Theft Central – Focuses on Needs Of Taxpayers, Tax Professionals and Businesses,” (February 3, 2020).
“What the IRS Isn’t Telling You About Identity Theft,” – USA Today (January 30, 2016).

MONEY SAVING TIPS FOR 2020 TAX PREPARATION

At  Maicher CPA Pllc, we help clients reduce taxes.   The end of the 2020 tax year is upon us   Want to minimize taxable income, maximize deductions, avoid amended tax returns, and speed up a refund?  Here are some useful tips: 

  1. Make Sure Your W-2s and 1099s Are Accurate.   By the end of January, most W-2/1099s should be delivered to employees and contractors.  These documents can have inaccuracies like overstated wages or inflated payments which will increase your tax liability.   Review these reports upon receipt so the payroll/payable department can make corrections long before your return is due in April.   Reminder:  1099s are also issued by investment firms and the same need for prompt review for errors applies.
     
  2. Gather/Review Documents for Common Deductible Expenses. Be sure to keep documents showing your payment of mortgage interest.  For 2020, couples filing jointly may deduct interest payments on $750,000 of qualified home loans.  However, if your mortgage arose before December 15, 2017, you can deduct the interest paid on a qualifying loan amount up to $1 million.   Concerning IRAs in 2020, taxpayers under 50 may contribute $6,000 per person and those 50 and over may contribute $7,000.  Proof of these payments include documents showing the contribution such as cancelled checks or mortgage/brokerage statements.

  3. Charitable Donations. Deductions apply for qualifying charitable donations.   Provide accurate receipts to your accountant to ensure deductions are taken and defend against ay IRS challenges down the road.

  4. Children Born in 2020. New additions to your family in 2020?  Provide your accountant at Maicher with the social security number of such children as proof for tax credits.

  5. Business Receipts.   If you purchased items required to perform your job and your employer did not reimburse the expense, then the item is generally deductible. For the self-employed, many items used to conduct your business may be deductible as well.  Examples of such items include, among others: computers, office furniture, marketing/advertising expenses and business mileage (57.5 cents/mile in 2020).

Take-away:  Prompt and diligent attention to the above issues will give you the best chance of not overpaying taxes in 2020.  Call Maicher today to schedule a meeting to discuss other possible ways to reduce your 2020 taxes and the preparation of your returns.  

 

Sources:

IRS Publication: Standard Mileage Rates (December 3, 2020).

IRS Publication: IRA FAQs (November 12, 2020).

“4 Tax Deductions That Are Amazing For Homeowners,” Forbes (May 17, 2020).

“How To Maximize Your Mortgage Interest Deduction,” Forbes (June 25, 2020).