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Do I Need an Accountant This Year? 5 Signs the Answer Is Heck, Yes!

March 10, 2020

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“Do I need an accountant?” might be a question weighing on you as you prepare to file your taxes this year.

Given the 2018 Tax Cuts and Jobs Acts delivered the biggest overhaul to the tax code in decades, having an accountant help you navigate these new rules might be a smart investment. Still, your own personal circumstances should factor into this decision, too.

Basically, if you’re a W-2 wage earner with few assets who filed as a single last year, then you can probably do your own taxes this year as well.

“If you only have a W-2 and some bank interest with no life changes coming soon, then a DIY program may be fine for you,” says Beth Logan of MA’s Kozlog Tax Advisers and author of “Divorce and Taxes After Tax Reform.”

But if your financial life was a bit more complicated—think filing jointly and owning a home—then you’re a prime candidate to get some professional help. Plus: Accountants also know that certain expired provisions that are helpful for homeowners are back!

To help you decide whether you need an accountant, here are five instances where hiring one could save you a whole heap of headaches.

1. You bought or own a house

Many homeowner deductions—such as mortgage debt, property taxes, and home equity line of credit interest—have radically changed since the Tax Cuts and Jobs Act. Here’s quick rundown:

  • Mortgage debt: The new law limited deductible mortgage debt to $750,000 for homes bought after Dec. 15, 2017. (Homes bought before then are grandfathered in at a $1 million cap.)
  • Property taxes: State, city, and property taxes will be limited to a total deduction of $10,000.
  • Home equity debt: The chance to deduct up to $100,000 of HELOC interest is only for those who used the money to specifically to buy, build, or improve a property.

The big thing to look out for is whether itemizing the above is worth it now that the standard deduction has almost doubled—$12,000 if filing single and $24,000 if filing married. An accountant can help you figure that out.

2. You sold a house

If you sold a property in 2019, congrats! There are tons of write-offs available to you that a tax pro can make sure you’re taking advantage of.

For example, you can deduct any costs you racked up selling your home, including legal fees, escrow fees, home inspection fees, the cost of title insurance, and your real estate agent’s commission, says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre, NY.

And if you had to do any renovations in order to complete the sale—say, repairing a faulty furnace found during a home inspection—you can deduct those expenses as long as they were made within 90 days of the closing. You can also add your 2019 property taxes for the portion of the year that you still owned the home. (You’ll add these costs to your itemized list to see if it supersedes the standard deduction.)

Here’s another factor to sit and discuss with an accountant: capital gains, which could mean you owe taxes on the profits from your sale.

Under current tax law, homeowners can exclude up to $250,000 (single) or $500,000 (married) of the profits from a sale, but you’ll have to have lived in the home for at least two of the past five years.

3. You made energy-friendly home improvements

You may have heard that the Residential Energy Efficient Property Credit—a tax incentive for installing alternative energy equipment in a home—expired after December 2016. But not entirely: Accountants know that homeowners can still claim a 30% credit for solar electric and solar water equipment installed through Dec. 31, 2019.

And surprise! The recently enacted Secure Act retroactively reinstated certain deductions and credits for 2018 and 2019 that had expired at the end of 2017.

“These include nonbusiness energy credits for things such as exterior windows, doors, and insulation,” says Laura Fogel, a certified public accountant at Lillian Gonzalez & Associates in Massachusetts. The savings could add up to $500.

An accountant can help you see if it makes sense to amend your 2018 tax return to take advantage of these tax breaks.

4. You worked from home

If you’re self-employed with no other office to go to, you can take a home office deduction. Just remember, if you’re an employee with another office you can work from, this deduction no longer exists.

“This complicated deduction is for sure something I would certainly contact an accountant about,” says Ralph DiBugnara, vice president at Residential Home Funding.

By definition, you need to use a portion of your home exclusively for business to claim the deduction. But there are a few different ways you can qualify (you run a small business from your home) or be disqualified (your office doubles as a guest room).

5. You have private mortgage insurance

Another deduction that had expired—namely the one for private mortgage insurance—was also retroactively reinstated for tax year 2019 thanks to the Secure Act.

“The deduction for private mortgage insurance premiums is back on Schedule A,” says Fogel. “And just in time for the 2019 tax season, you can amend your 2018 tax return to take advantage of these tax breaks.”

So while you can’t deduct the cost of tax preparation help from your 2019 taxes (that deduction went away in 2018), here’s yet another reason to hire an accountant this year: “I can almost guarantee you alone are not doing everything you can to save on taxes in the 2019 year,” says Stacy Caprio, financial blogger at FiscalNerd.com. “So talking to an expert will be well worth the return on investment.”

The post Do I Need an Accountant This Year? 5 Signs the Answer Is Heck, Yes! appeared first on Real Estate News & Insights | realtor.com®.

I Survived An Audit (and It’s So Not What You’d Expect)

March 26, 2019

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It was just a regular day: I opened my mailbox, grabbed the pile of what I assumed was a combination of junk mail and bills, and then I saw it—an envelope from the IRS.

At first glance, it looked like a bill, a big one. But as I scrutinized the letter more carefully, I realized it was much worse: I was going to be audited by the IRS.

IRS audits are the stuff of nightmares, but I’m here to tell you that I survived. In fact, although I was terrified at the time, the process wasn’t nearly as frightening as I thought it would be. In an effort to help demystify this process, here’s a reality check on all things auditing-related, from who gets audited to how to cope if it happens to you.

The good news about audits

Here’s the good news: “Audits, in general, have been going down year over year,” says Mike Savage, CPA and CEO of 1-800Accountant in New York City. “They don’t happen as much as people think they do, and the full-blown audit is something of the past.”

“[The number of audits] is below 1%,” says Francine Lipman, a tax law expert and professor at the University of Nevada, Las Vegas.

Tax audits may drop even more in the coming year. The Tax Cuts and Jobs Act of 2017, which went into effect for the 2018 tax year, significantly increased the standard deduction. This means that most homeowners are going to take it rather than itemize. According to Lipman, this lowers the chances of being audited, since the standard deduction is the same for all who take it, rather than being calculated based on your expenses.

What triggers an audit?

Certain red flags on a tax return may prompt the IRS to take a closer look. Here are some of the most common.

The home office deduction

When it comes to the home office deduction, “the rules are complicated and strict,” says Savage. “Most people mess them up. Your [home] office has to be 100% for business. You can’t even share the computer with your kids or use that space for anything at all other than your business.” So if you take this deduction, do so with care—and here are some suggestions for avoiding the mistakes people often make.

Tax credits

This is one of the areas most scrutinized by the IRS. “About one-third of all audits are on the earned-income tax credit,” says Lipman.

Tax credits are a powerful way to reduce your tax bill. Unlike tax deductions, which lower the amount of income on which you will be taxed, tax credits are deducted from the amount of tax that you owe.

For example, if you owe the IRS $5,000 for a given tax year, and you qualify for a $4,000 tax credit, your tax bill will be reduced to $1,000.  Some common tax credits include the child tax credit, which could offer a tax credit of up to $2,000 per child, the child and dependent tax credit, which is a credit based on day care expenses, and the earned-income tax credit, which is a tax credit of up to $6,000.

When it comes to tax credits, the burden of proof is on the taxpayer. This means that if the IRS isn’t sure whether you qualify, it’s up to you to provide the proof.

Proceeds from a home sale

If you purchased your home for $200,000 and you later sold it for $250,000, that $50,000 profit would be subject to capital gains tax. Many home sellers qualify to exclude those proceeds from their taxes, but watch out—once again, the burden of proof is on you.

“You can exclude a significant amount of gain on the sale of your residence,” says Lipman, “but you have the responsibility of proving that you qualified for that exclusion.”

You can exclude up to $250,000 of capital gains on real estate if you’re single, and up to $500,000 of capital gains if you’re married and filing jointly, provided that you meet the IRS requirements, which include:

  • Having owned the home for at least two of the five years before the date of the sale.
  • Having used the home as your primary residence for at least two of the five years before the date of the home sale.
  • Not having used this exclusion for another home sale within two years of the sale date.

Rental property

When it comes to rental property, it can qualify as either an investment or a business for tax purposes. If it qualifies as a business, you can take advantage of the many tax deductions associated with this, including what you spend on advertising, maintaining the property, and insurance.

According to Lipman, for your rental property to qualify as a trade or business, you need to spend 250 hours or more on the property. A hands-on, multiunit property may qualify as a trade or business, but renting out a single-family home may not, so make sure you know where you fall.

Not passing the ‘smell test’

According to Lipman, the “smell test” is whether your tax return makes sense. For example, if you’re a sole proprietor and you have significant losses and no other income, how are you paying your bills? Charitable donations should also line up with your income. According to Michael Raanan, president of Landmark Tax Group and an enrolled agent in Irvine, CA, taxpayers tend to claim about 3% of their income on average as charitable donations.

These aren’t the only triggers, of course. Ultimately, it comes down to the secret formula that the IRS uses to screen tax returns for discrepancies.

If you get an IRS audit notice, how should you respond?

The first step in dealing with an IRS notice: Don’t panic. The notices may give the impression that the IRS has already come to a conclusion. It may look like a bill, but that doesn’t mean you should just pay it.

For example, I carefully read through my audit notice. It looked as if there was a discrepancy with my business expenses as a freelance writer, and the IRS felt that I owed more (a lot more).

For the tax year I was being audited for, I had prepared my own taxes using software. I wasn’t going to deal with the IRS alone, though. So I scoured the internet to find a certified personal accountant who not only had stellar ratings and reviews, but was an “enrolled agent”—meaning that they’ve passed an IRS-administered test about tax laws and regulations.

When I met with her, she was no-nonsense and didn’t seem fazed at all by the IRS notice. She got right down to business and had me gather all my tax documentation, including receipts. I printed out my bank account statements for anything I didn’t have a receipt for and highlighted the relevant expenses.

Once I’d gathered all the right paperwork, my CPA submitted an amended return on my behalf that addressed the issue in question. At the end of the day, I still owed the IRS, but it was a three-figure bill rather than the heart-stopping five-figure one I’d received initially.

And while some audits still involve a visit to your place of residence or work, I was able to handle mine through the mail. It wasn’t the scary, interrogation-room scene I had been expecting.

The post I Survived An Audit (and It’s So Not What You’d Expect) appeared first on Real Estate News & Insights | realtor.com®.