All posts by Derland Bahr CPA, Inc

Blog, Tax Topics

IRS Letter or Notice

IRS Letter or Notice

When you receive an IRS letter or notice . . .

What to do? What not to do?

This video will share what to do (and not do) when you get an IRS letter or notice:

First of all, here are some things not to do when you get an IRS letter or notice:

  • Hide them in your desk and pretend they are not there.

I remember when I first started public accounting in 2007, a client came in with 10 or 15 unopened IRS letters. She was afraid, and did not know what to do so she hid them in a desk

  • Just send them the amount on the letter, even if you don’t understand.

Just because they say you owe, does not mean you owe. Make sure you read and understand before agreeing and sending money.

 Should I respond if I get an IRS letter or notice?

Yes, you should respond.

Why to respond sooner than later?

  • Get rid of unneeded stress.
  • Oftentimes, it turns out to be nothing or something with an easy fix. Deal with it today and get rid of the stress hanging over you.
  • The IRS is more likely to work with you if they hear from you.
  • Avoid any additional penalties and interest on amounts you may owe.

Common reasons for an IRS letter or notice:

  • Stock sales that were not recorded

IRS assumes there is no basis, unless you record the sales. Many times you may have a loss which means no additional tax.

  • An IRA or Retirement rollover that was coded wrong.

Basically, we just need documentation to go with a letter to show that it was indeed a rollover.

  • Unreported W-2 or 1099
  • Misinformation on their side.

Sometimes they can be wrong.

(Obviously, this is not an exhaustive list!)

What to do should you get an IRS letter or notice:

  • Read the letter.

If you read, understand, and agree with the letter then you can just do what they ask in the letter.

  • Consider getting professional consultation

Many people have no idea what the letters are saying or what they are talking about. Get a free consultation if available to have someone look at the letter

When Clients come to us, sometimes a free consultation is all it takes. Other times, a letter will resolve the matter.

  • We may have to amend a return.
  • It may require additional information.

Free Consultation

Many times an IRS letter or notice is just informative and nothing needs to be done. If that is the case, we explain the letter and wish you a good day (no charges).

Writing a Letter

Most issues can be handled with a simple letter or call on our behalf.

In this case, we will get you to sign a IRS power of attorney, Form 2848. That way we can draft a letter or call on your behalf. Many issues are easily handled with a letter and perhaps some documentation that verifies what we are saying.

(Note: Form 2848 specifies the year(s) and the forms involved.   It is very specific and just for dealing with the IRS.)

Amending a Return

Occasionally, we may have to amend a prior year return or prior year forms. This is often sent with a letter.

If stock sales were not reported, we may have to amend a return showing both the sales and your cost. They may have been sold at a loss, which means you will not owe anything and may get something back.

Additional Information

Occasionally, we need additional information either from you or the IRS to help you resolve the matter.

We may request IRS transcripts for tax returns that were not filed.

We may need you to track down some information before we can deal   with the IRS side of things.

Summary

  • Don’t ignore the letter.
  • It is always best to open the letter and respond. Even if you don’t have money right now.
  • Seek professional help.
  • Oftentimes, it helps to talk to a professional to see exactly what is needed.
  • Respond – Most letters are dealt with through a letter or phone call. We would be happy to do it on your behalf.

For a Free Consultation, call to set up an appointment today (254-432-5724), and we will be happy to discuss how to handle your IRS letter or notice.

Blog, Tax Topics

Income Tax Itemized Deductions

Income Tax Itemized Deductions

Will itemized deductions benefit me?

To Itemize or Not, that is the question.

The video below will help explain whether or not income tax itemized deductions are better for you than the standard deduction.

One of the questions we sometimes get is whether or not a person should itemize deductions. Or we might have someone ask, “I have taken all this stuff to goodwill, why doesn’t that reduce my taxes?” And the answer is, it may or it may not.

When you file the return, you have the choice on whether to take itemized or standard deductions. Most tax software automatically takes whichever is largest based on what you filled in.

The standard deduction for 2024 for a married couple will be $29,200. That means that if you are married and file jointly, you probably will not itemize if Mortgage Interest plus Real Estate Taxes plus charitable contributions add up to less than $29,000. Also, keep in mind medical deductions may not be deductible at all.

Medical deductions have what is called a 7.5% floor . That means if a couple has a $80,000 adjusted gross income, their first $6000 in out of pocket medical expenses are not deductible . If all people have is copays and prescription copays, they will rarely be deductible. So the general rule is unless out of pocket medical is really high, do not waste the time tracking medical expenses.

Thus, the biggest itemized deductions are Mortgage Interest, RE Taxes, Sales Tax (or State Income Tax), and charitable contributions. Most people who don’t own their own home do not itemize unless they have very high charitable contributions.  Similarly, those who have their house almost paid off rarely itemize.

Normally, I can tell pretty fast whether or not someone will benefit from itemizing or whether it will be close. I have worked for a firm that made me go tally up shoe boxes full of receipts for copays, when I knew all along they would not have enough medical expenses to itemize. Of course, they would charge the client the extra time to do that. Another firm was smart enough to let us move on and not waste time or the clients money when the answer was obvious.

Obviously, I will total things up if the client wants me to. However, I will tell them up front if it looks clear they don’t have enough to itemize. They can then make the decision whether they want to pay me to pursue it further.

Single filers, especially those who own their own home, are more likely to itemize, as their standard deduction is half of those filing as married filing jointly.

If you’re wondering about income tax itemized deductions, contact Derland Bahr, CPA at 254-432-5724.

2014 Health Care Law, Blog

Premium Assistance Tax Credit

Health Care Premium Assistance and 2014 Tax Returns

“Premium Assistance Tax Credit” and Tax Returns

Note:  This was originally written in 2015, but dates, etc.,  have been updated on the written version only in November 2024.

This is a hot topic as more people become aware of how the health care premium assistance will affect their income tax return.

Watch the video below to learn more about how the premium assistance tax credit may affect you:

For those who purchased insurance through a state exchange or through Healthcare.gov, many received some sort of health care premium assistance.

When you signed up for insurance, you had the option whether to receive an advanced premium assistance on a monthly basis and thus reduce your monthly payments on health insurance or to wait and receive it all at the end of the year when you file your tax return. (Some refer to this a “premium assistance tax credit.”) Obviously, most people chose to receive it ahead of time and reduce your monthly payments.

What many may not have realized is that all of this will be handled and reconciled through the year-end tax return. For most people who signed up, their income level was determined based upon their 2022 tax return and other information they provided. This was used to help determine what their 2024 AGI would be and to help determine the amount of credit that they qualified for.

However, and this is key, your actual credit is dependent upon your 2024 AGI when you file your 2024 return in early 2025. If you received an advanced premium assistance tax credit to reduce monthly insurance premiums throughout 2024, you will have to reconcile the amounts you actually received with the amounts your should have received based upon your 2024 tax return. For instance, if your income was higher than you anticipated, you will likely have to pay some of the advanced credit back. On the other hand, if your income was lower than you projected when you applied for health care on healthcare.gov, you will probably receive an additional credit and thus get a larger refund (or owe less tax).

Note: We have seen some people who cashed out a retirement plan or sold a rental property ending up having to repay the entire advanced premium credit, since it made their income significantly higher.  Be aware, all income received in the year affects the potential repayment of the premium credit.

The key is that the advanced premium credit that you received on a monthly basis was an estimate. And it was based on 2022 information and other information you provided when you signed up for health insurance. The estimate is only as accurate as the information you provided to the exchange. Your actual credit will be determined when you file your 2024 return, and some may have to repay some of the credit while others may get more. Hopefully, in most cases the estimate and the actual will be pretty close.

For more information, please feel free to call to discuss how the premium assistance tax credit will affect your 2024 tax return. 254-432-5724.

Blog, Tax Topics

Federal Tax Deductions List

federal tax deductions list

Looking for a federal tax deductions list for small businesses?

Many small business owners ask, “What deductions can I take as a small business?” The video below shares a federal tax deductions list of items allowed on small business tax returns.

One common question of business owners is what can I deduct?

Of course a major deduction for many businesses is cost of goods sold.  This includes inventory sold during the year and labor directly related to the product/service.
Mileage expense – any miles you put on your car for business are deductible (67 cents per mile for 2024 – 10,000 miles = $6,700).  This is a major business expense for those who use their vehicle a lot in their business (realtors, chimney sweeps, etc).  Keep in mind, commuting is not deductible (mileage to and from your main office).  However, if you work out of your home, then any business related travel away from home is deductible.

One big thing is to deduct mileage you need to keep a contemporary mileage log.  Today, most people use apps such as mileage IQ to track their mileage.  If you get audited, this is what the IRS will look for.  They do not like unsupported estimates.

It should be noted you can opt to deduct actual expenses instead of the standard mileage rate.  That goes beyond the scope of what we are talking about here.  If you think you might be better off deducting actual expenses, please consult us or your local tax professional.

Advertising and promotion
Advertising is a common expense for small businesses.
Examples include yellow page ads, flyers, internet marketing, ads in papers, etc.  Basically, this includes any expenses you have to promote your business.

Contract labor – If you hire someone to do work for you (not an employee), then you can list it under contract labor.  Please note, if you pay them over $600 you must issue them a 1099.  Also, only include it under contract labor if it is not recorded under cost of goods sold.

Depreciation – Large assets/purchases should be capitalized  (E.g., a new computer or new desk).  Record date of purchase, description of property, and total cost including taxes and installation.  Some of these assets can be expensed through special depreciation or the Section 179 deduction.  For more info, talk to a tax professional

Insurance – In general, insurance you have for your business is deductible (General liability, etc.).  However, life insurance you purchase through your business is generally not a deductible expense.  Self employed health insurance is deductible on page one of the 1040 (line 29 for 2014).

Meals and entertainment –  For meals and entertainment to qualify, you must have a business purpose.  (Entertaining Clients, discussing business with employees, etc.)  However, only 50% of Meals and Entertainment is deductible.   There are a couple of reasons for this.  For one thing, meals and entertainment expense is easily abused.  Some people want to deduct everything as a business expense.  Secondly, it does more than just serve a business purpose.  For instance, you have to eat anyway.  Or you might enjoy the Spurs’ game as well as trying to land a new client

Interest – Interest on Loans, etc. taken out to maintain cash flows for your business are deductible.
Legal and professional services –  This includes any fees you pay your accountant for bookkeeping, payroll, or tax preparation.  It also includes any amounts paid to an attorney for business purposes.

Office expense
Paper
Calendars
Pens, Ink Cartridges, etc.
Any office related supplies or equipment that is too small to be capitalized (i.e., depreciated)
Rent
Rent for an office space
Rent for machinery or equipment
Repairs and maintenance
Any repairs or maintenance to keep the office and/or equipment up and running

Supplies
This is supplies not included in office expenses or as part of cost of goods sold. It can include small tools, if you don’t have enough for a separate category for small tools.

Taxes and licenses
Any taxes or licenses you have to pay for your business.
Real estate tax on a business property.
Sales taxes are normally excluded from Sales and expense, but if you included them as part of sales then you can deduct them as an expense

Travel
You can take per diem rates for travel and meals while away from home.   Visit IRS.gov for per diem rates.
Conversely, you can take actual expenses.
Either way, you are limited to 50% deduction on your meals expense as noted previously.

Utilities
Electricity
Gas
Water
Television – if it is a legitimate business expense
Phone and Internet
Landlines
Cell phones –  need to allocate based on business use percentage
Internet in the office is deductible
Internet in a home office should be allocated based on business use.

Other common expenses

Continuing education
Dues and Subscriptions
Profession certification expenses
Etc., all businesses are different.  Any legitimate business expense can be deducted.  You may have a category that is unique to your type of business.  You can just list it under other expenses.

Overview: Common business deductions
Advertising
Mileage expenses
Supplies
Office
Legal and professional
Phone
Meals
Insurance
Rent
Depreciation.
Etc.

Contact a professional tax preparer for more details or for more specific questions.

If you’re in the Central Texas area, call Derland G. Bahr, CPA – 254-432-5724 or email us at derland@dbahrcpa.com to learn more about the federal tax deductions list.