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KE & Associates

Tax tips

Guidance worth reading before you file.

General information, not advice for your situation. Every return is different — if something here applies to you, call and we'll talk it through properly.

For individuals

Tax incentives for higher education

The tax code provides a variety of tax incentives for families who are paying higher education costs or are repaying student loans. You may be able to claim an American Opportunity Credit (formerly called the Hope Credit) or Lifetime Learning Credit for the qualified tuition and related expenses of the students in your family — you, your spouse, or a dependent — who are enrolled in eligible educational institutions. Different rules apply to each credit, and the ability to claim the credit phases out at higher income levels.

You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income, so you do not have to itemize your deductions on Schedule A, Form 1040. However, this deduction is also phased out at higher income levels.

Forgiven debt is typically treated as taxable income, but if your student loan is forgiven, you may not have to include any amount in income.

Check withholding to avoid a tax surprise

Whether or not you owed taxes or received a refund last year, check your tax withholding to avoid having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year. On the other hand, if you have too much withheld and receive a large refund, you will have lost out on having the money in your pocket throughout the year. Changing jobs, getting married or divorced, buying a home or having children can all result in changes to your tax calculations.

The IRS withholding calculator on IRS.gov can help compute the proper tax withholding. The worksheets in Publication 505, Tax Withholding and Estimated Tax, can also be used. If the result suggests an adjustment is necessary, you can submit a new W-4, Withholding Allowance Certificate, to your employer.

Five tips for early preparation

Earlier is better when it comes to working on your taxes. Not only do you avoid the last-minute rush, early filers also get a faster refund.

  • Gather your records in advance. Make sure you have all the records you need, including W-2s and 1099s. Don't forget to save a copy for your files.
  • Get the right forms. They're available around the clock on IRS.gov in the Forms and Publications section.
  • Take your time. Rushing can mean making a mistake — and that can be expensive.
  • Double-check your math and Social Security number. These are among the most common errors on tax returns.
  • Get the fastest refund. When you file early, you get your refund faster. E-filing with direct deposit gets you a refund in half the time of paper filing.

Amended returns

You've discovered an error after your tax return has been filed. What should you do? You may need to amend your return.

The IRS usually corrects math errors or requests missing forms such as W-2s. In those instances, do not amend your return. However, do file an amended return if any of the following were reported incorrectly: your filing status, your total income, or your deductions or credits.

Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed paper or electronically filed Form 1040 return. Be sure to enter the year of the return you are amending at the top of Form 1040X. If you are amending more than one tax return, use a separate 1040X for each year and mail each in a separate envelope.

If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund. You generally must file Form 1040X to claim a refund within three years from the date you filed your original return, or within two years from the date you paid the tax, whichever is later. Please contact us for more.

Filing an extension

If you can't meet the filing deadline, you can get an automatic six-month extension of time to file from the IRS. The extension gives you extra time to get the paperwork in, but it does not extend the time you have to pay any tax due. You will owe interest on any amounts not paid by the April deadline, plus a late payment penalty if you have paid less than 90 percent of your total tax by that date.

You must make an accurate estimate of any tax due when you request an extension. To get the automatic extension, file Form 4868 with the IRS by the deadline, or make an extension-related electronic payment. The system will give you a confirmation number to verify that the request has been accepted — keep it for your records. This is our area of expertise; please contact us for detailed information on filing an extension properly.

Car donations

Specific rules apply for taking a tax deduction for donating cars to charities. If the claimed value of the donated motor vehicle, boat or plane exceeds $500, you can deduct the smaller of the vehicle's fair market value on the date of the contribution or the gross proceeds received from the sale of the vehicle.

Check that the organization is qualified. Taxpayers must make certain that they contribute their vehicle to an eligible organization, otherwise the donation will not be tax deductible. You can search the IRS Tax Exempt Organization Search, or call IRS Tax Exempt/Government Entities Customer Service at 1-877-829-5500. Churches, synagogues, temples, mosques and governments are not required to apply for this exemption in order to be qualified. Contact us if you're considering a car donation.

Charitable contributions

Your donations can add up to a nice tax deduction if you itemize deductions on IRS Form 1040, Schedule A.

You cannot deduct contributions made to specific individuals, political organizations and candidates, the value of your time or services, or the cost of raffles, bingo or other games of chance. To be deductible, contributions must be made to qualified organizations.

Organizations can tell you if they are qualified and if donations to them are deductible. You can also search the Tax Exempt Organization Search online tool, or call 1-877-829-5500. Be sure to have the organization's correct name and its headquarters location if possible.

Earned Income Tax Credit for certain workers

Millions of Americans forgo critical tax relief each year by failing to claim the Earned Income Tax Credit, a federal tax credit for individuals who work but do not earn high incomes. Taxpayers who qualify and claim the credit could pay less federal tax, pay no tax, or even get a tax refund.

The IRS estimates that 25 percent of people who qualify don't claim the credit — and at the same time, millions of Americans have claimed the credit in error, many of whom simply don't understand the criteria.

EITC is based on the amount of your earned income and the number of qualifying children in your household. If you have children, they must meet the relationship, age and residency requirements. You must file a tax return to claim the credit. It's easier than ever to find out if you qualify using the online EITC Assistant. Please contact us for more information.

Are you eligible for any of these tax credits?

A tax credit is a dollar-for-dollar reduction of taxes owed. Some credits are refundable — taxes could be reduced to the point that a taxpayer would receive a refund rather than owing any taxes. Below are some of the credits taxpayers could be eligible to claim.

  • Earned Income Tax Credit. A refundable credit for low-income working individuals and families. Income and family size determine the amount. See IRS Publication 596.
  • Child Tax Credit. For people who have a qualifying child under age 17. Can be claimed in addition to the credit for child and dependent care expenses. See Publication 972.
  • Child and Dependent Care Credit. For expenses paid for the care of children under age 13, or for a disabled spouse or dependent, to enable the taxpayer to work. See Publication 503.
  • Adoption Credit. Adoptive parents can take a credit up to certain limits for qualifying expenses paid to adopt an eligible child. See Form 8839.
  • Credit for the Elderly and Disabled. Available to individuals who are either age 65 or older, or under 65 and retired on permanent and total disability. Income limitations apply. See Publication 524.
  • Education Credits. The American Opportunity Credit and the Lifetime Learning Credit, for people who pay higher education costs. A taxpayer cannot claim both credits for the same student in one year. See Publication 970.

Dollar amounts and eligibility thresholds change from year to year. Call us and we'll tell you what applies to your return this year.

Ayuda en español

If you need federal tax information, the IRS provides free Spanish language products and services. Pages on IRS.gov, tax topics, refund information, tax publications and toll-free telephone assistance are all available in Spanish. The Spanish-language pages include forms and publications, warnings about tax scams, and information on the Earned Income Credit, the child credit and various other tax credits.

For businesses

Organizational and start-up costs

Have you just started a new business? Expenses incurred before a business begins operations are not allowed as current deductions. Generally, these start-up costs must be amortized over a period of 180 months beginning in the month the business begins. However, you may elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred. The $5,000 deduction is reduced by any start-up or organizational costs which exceed $50,000.

If you want to deduct a larger portion of your start-up cost in the first year, a new business will want to begin operations as early as possible and hold off incurring some of those expenses until after business begins. Contact us to determine how you can maximize your deduction. For additional information on what costs constitute start-up or organizational expenses, refer to IRS Publication 535, Business Expenses.

Business or hobby?

A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take. You must include on your return income from an activity from which you do not expect to make a profit, and you cannot use a loss from the activity to offset other income.

The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts and S corporations. It does not apply to corporations other than S corporations. In determining whether you are carrying on an activity for profit, all the facts are taken into account and no one factor alone is decisive. Among the factors to consider are whether:

  • You carry on the activity in a business-like manner
  • The time and effort you put into the activity indicate you intend to make it profitable
  • You depend on income from the activity for your livelihood
  • Your losses are due to circumstances beyond your control, or are normal in the start-up phase of your type of business
  • You change your methods of operation in an attempt to improve profitability
  • You, or your advisors, have the knowledge needed to carry on the activity as a successful business
  • You were successful in making a profit in similar activities in the past
  • The activity makes a profit in some years
  • You can expect to make a future profit from the appreciation of the assets used in the activity

Deductible home offices

If you are self-employed and you use a portion of your home exclusively and regularly for business purposes, you may be able to take a home office deduction.

You can deduct certain expenses if your home office is the principal place where your trade or business is conducted, or where you meet and deal with clients or patients in the course of your business. If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.

Your home office will qualify as your principal place of business if you use it exclusively and regularly for the administrative or management activities associated with your trade or business, and there is no other fixed place where you conduct substantial administrative or management activities. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction will be limited if your gross income from your business is less than your total business expenses. Please contact us for more.

Filing deadline and payment options

If you're trying to beat the tax deadline, there are several options for last-minute help. If you find you need more time to finish your return, you can get a six-month extension of time to file using Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. And if you have trouble paying your tax bill, the IRS has several payment options available.

The extension gives you extra time to get the paperwork to the IRS, but it does not extend the time you have to pay any tax due. You have to make an accurate estimate of any tax due when you request an extension. You will owe interest on any amounts not paid by the original filing deadline, plus a late payment penalty if you have paid less than 90 percent of your total tax by that date.

Where's my refund?

If you file a complete and accurate paper tax return, your refund should be issued in about six to eight weeks from the date the IRS receives your return. If you file electronically, your refund should be issued in about half that time — faster still when you choose direct deposit.

Direct deposit into a bank account is more secure because there is no check to get lost, and it takes the U.S. Treasury less time than issuing a paper check. Incorrect routing or account numbers can cause your refund to be misdirected or delayed.

A refund can be delayed for a variety of reasons. A name or identification number and Social Security number listed on the return may not match IRS records; you may have failed to sign the return or to include a necessary attachment such as Form W-2; or math errors may require extra time for the IRS to correct.

Your appeal rights

Are you in the middle of a disagreement with the IRS? One of the guaranteed rights for all taxpayers is the right to appeal. If you disagree with the IRS about the amount of your tax liability or about proposed collection actions, you have the right to ask the IRS Appeals Office to review your case.

IRS Publication 1, Your Rights as a Taxpayer, explains some of your most important taxpayer rights. In addition to examinations, you can appeal many other things, including collection actions such as liens, levies, seizures, installment agreement terminations and rejected offers-in-compromise; penalties and interest; and employment tax adjustments and the trust fund recovery penalty.

Appeals conferences are informal meetings. The local Appeals Office, which is independent of the IRS office that proposed the disputed action, can sometimes resolve an appeal by telephone or through correspondence. The IRS also offers Fast Track Mediation, during which an appeals or settlement officer attempts to help you and the IRS reach a mutually satisfactory solution. You may withdraw from the mediation process at any time.

For your personal finances

Tax saving techniques

Following are some generally recognized financial planning tools that may help you reduce your tax bill.

  • Charitable giving. Instead of selling your appreciated long-term securities, donate the stock and avoid paying tax on the unrealized gain while still getting a charitable tax deduction for the full fair market value.
  • Health Savings Accounts. If you have a high-deductible medical plan you can open an HSA and make tax deductible contributions to pay for medical expenses. Unlike flexible spending arrangements, the contributions can carry over for medical expenses in future years.
  • Roth IRAs. Contributions are not tax deductible, but qualified distributions, including earnings, are tax-free.
  • Municipal bonds. Interest earned on these types of investments is tax-exempt.
  • Retirement plans. Participate in your employer-sponsored retirement plan, especially if there is a matching component. Contributions are generally pre-tax and the tax-deferred compounding can add up to a large retirement savings.

Deducting mortgage interest

If you own a home and you itemize your deductions on Schedule A, you can claim a deduction for the interest paid. To be deductible, the interest you pay must be on a loan secured by your main home or a second home — including a second home that is also rented out for part of the year, so long as the personal use requirement is met. The loan can be a first or second mortgage, or a home improvement loan, and the proceeds must be used to buy, build or substantially improve your home.

The interest deduction for home acquisition debt taken out after December 15, 2017 is limited to debt of $750,000, or $375,000 if married filing separately. For home acquisition indebtedness incurred prior to December 16, 2017, the debt limit is $1 million, or $500,000 if married filing separately. In addition to the deduction for mortgage interest, points paid on the original purchase of your residence are also generally deductible. See IRS Publication 936.

Capital gains and losses

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. When you sell a capital asset such as stock, the difference between the amount you sell it for and your basis — usually what you paid for it — is a capital gain or a capital loss.

While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property. A “paper loss” — a drop in an investment's value below its purchase price — does not qualify for the deduction. The loss must be realized through the asset's sale or exchange.

Capital gains and losses are classified as long-term or short-term depending on how long you hold the property before you sell it. If you hold it more than one year, the gain or loss is long-term. If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000, or $1,500 if married filing separately. Unused capital losses can be carried over indefinitely to future years, but the annual limit still applies.

Accounting and planning for the sale and purchase of capital assets is usually a complicated matter, so please contact us so that you receive the professional advice you deserve.

Coverdell education savings accounts

A Coverdell ESA is a savings account created as an incentive to help parents and students save for education expenses.

The total contributions for the beneficiary — who is under age 18, or is a special needs beneficiary — cannot be more than $2,000 in any year, no matter how many accounts have been established. The beneficiary will not owe tax on the distributions if, for a year, the distributions from an account are not more than the beneficiary's qualified education expenses at an eligible education institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.

Individual retirement accounts

You may be able to take a tax deduction for contributions to a traditional IRA, depending on whether you or your spouse, if filing jointly, are covered by an employer's retirement plan and how much total income you have. Funds in the account grow tax-deferred, and you pay tax when you take distributions. Conversely, you cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Generally, as long as you have enough earned income, you can contribute up to the annual limit plus an additional catch-up contribution if you are age 50 or older. You can fund a traditional IRA, a Roth IRA or both, but your total contributions cannot be more than these annual limits. Roth IRAs are also subject to income-based contribution limits.

You can contribute until the April due date for filing your tax return, but be sure to tell the IRA trustee that the contribution is for last year. Otherwise the trustee may report the contribution as being for this year.

Ask us about your situation