Top 7 Tax Questions

Every year, our clients come to us with some common tax questions. Some of these tax questions have very complicated answers, but we’ve boiled the essentials down for you. Here are the top ten tax questions we get every year.

  1. Who can I claim as a dependent?
    IRS rules around who can be claimed as a dependent on your taxes reflects the abundance of family situations in the U.S. It can get complicated, but these are the most basic categories:
    1. A legal or foster child (or child of your child) who is under age 19 for the entire tax year and lives with you at least six months of the year qualifies as a dependent. (Exceptions to the residency requirement are made for divorced parents with shared custody or kids that temporarily leave home for school, military service, juvenile detention, or illness.)
    2. If a child older than age 19 meets all the other criteria in scenario A and attends some kind of college, university, K-12 school, or vocational program full-time for at least five months of the year, they are considered dependents until age 24.
    3. A person of any age with a permanent disability who lives with you for at least six months of the year and does not make more than $4,200 a year is considered a dependent. (Income earned at special vocational programs for people with disabilities is generally not considered part of the individual’s gross income.)
    4. If you provide more than half of a person’s financial support for the year, they can be considered a dependent. This often applies to individuals caring for elderly relatives. The relative may receive social security benefits, but if those benefits do not cover half the relative’s expenses and you provide the rest, you can likely claim your relative as a dependent.
  2. Am I missing any important tax deductions?
    1. Don’t forget to deduct state sales taxes if you live in a state that does not collect income tax. This can really add up if you made a large purchase (i.e., car, boat, home, major renovation).
    2. Deduct medical and dental expenses. A couple hundred dollars might not be worth it, but if you spend more than 7.5% of your income on medical visits, procedures, and supplies, you should be able to deduct some of them.
    3. Many people had to work from home in 2020. Remember to deduct costs related to setting up a home office.
    4. Make sure you deduct property taxes and mortgage insurance if you pay a mortgage. Many people also overlook the home mortgage points they have earned from prepaying their home mortgage interest.
  3. I am self-employed. What can I do to make sure I complete my taxes correctly?
    See our Top Tax Tips for the Self-Employed.
  4. I was misclassified by my employer as an independent contractor. What do I do?
    Independent contractors have to pay social security and Medicare taxes themselves, which can be quite costly. Employers can save costs by hiring individuals as independent contractors, but sometimes, independent contractors are treated more like employees than contractors. In those cases, you do have some recourse.
    1. Talk to your employer to see if they can reclassify you. If your company hires both employees and independent contracts, your misclassification could be a mistake.
    2. If your employer will not budge, you can file IRS form SS-8. The IRS will review your claim and contact your employer to determine your status. Your identity may be revealed to your employer, so keep that in mind.
    3. If the IRS determines you are an employee or you are awaiting a decision, you can file IRS form 8919, which will calculate the amount of social security and Medicare taxes you are and are not responsible for.
  5. How can I adjust my benefits at work to make the most of potential tax benefits?
    1. Contribute as much as you can to your retirement account (up to the IRS limits). This reduces your taxable income for the year while making more money available to you in a future year when you would not be taxed on your retirement payout.
    2. Start a health savings account (HSA), available as part of most high-deductible health plans. Money allocated to an HSA is not taxable.
  6. I’m retired. Do I have to pay taxes on my social security benefits?
    1. Whether your social security benefits are taxed depends on your total income. If social security is your only source of income, it probably won’t be taxed.
    2. If you are married, and your spouse is still earning a significant paycheck that brings your total income above $32,000 a year, you may have to pay taxes on 50% or even 85% of your social security benefits.
    3. The same tax limits apply if you are making money at another job. For a single person, if your income is over $25,000, social security benefits may be taxed.
    4. This is why it is important to consider putting off filing for social security benefits until you really need them. If you have an IRA, another job, or other sources of income, consider delaying social security for a few years.
  7. Do I qualify for the Earned Income Tax Credit?
    1. The Earned Income Tax Credit is for individuals and families who earned money during the tax year, but not very much. You do not have to have children to qualify, but the amount you can earn and still receive the credit depends on how many children you have.
    2. You must have earned at least $1 in a year to qualify.
    3. You cannot be married filing separately. Only those filing as single, head of household, or married filing jointly qualify.
    4. For tax year 2020, people with zero children filing as single or head of household have to make less than $15,820 to qualify. If filing jointly, they have to make less than $21,710.
    5. For tax year 2020, people with two children filing as single or head of household have to make less than $47,440 to qualify. If filing jointly, they have to make less than $53,330.
    6. To read the specific requirements and see more income requirements, visit the IRS website.

We know tax questions can be complicated, and we are here to help. It is always worthwhile to talk with a financial advisor or tax expert. At Crunch Consulting, we can answer tax questions about your specific situation and assist with your tax preparation. Tax preparation services are deductible, and the advice you receive from your preparer can change the way you treat your finances for life. We want to help you succeed and make tax filing as easy as possible. Contact us today.

What Expenses Can You Deduct While You Work from Home?

In response to the COVID-19 pandemic, many of us have left the office and are conducting business as usual from our homes. If that includes you, you’ve probably been adjusting to a lot of changes as you learn to navigate the new norm that remote work brings along. Not only have new safety regulations thrown a wrench in our everyday lives, but it has also redefined the beast we know as tax preparation. For those unsure how to define 2020 deductibles, we’ve compiled a list to help you map uncharted territory. 

For Employees

Until the 2018 tax year, employees who worked from home could deduct specific expenses related to their jobs. Unfortunately, this is no longer the case. The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, eliminated these deductions for anyone who works from home for an employer. So if your boss has instructed you to work from home for now, you may want to speak with an accountant to see how you can benefit from any tax deductions. 

For the Self-Employed

If you’re a contract worker, freelancer, or entrepreneur, your situation will be different when it comes to preparing your tax return. There are a number of expenses you may be able to deduct, including:

  1. Your home office 

Do you have a designated area in your home that you only use for work? The IRS considers that a  tax-deductible expense. Keep in mind, your home office is only eligible if it is used for your work and nothing else – for example, it can’t be a kitchen table that you share with your family. If you aren’t sure whether your home office counts, a tax preparation service can answer your questions.

If your workspace qualifies as a home office, there are two ways to claim it as a deductible expense:

  • The standard option. The standard way to claim a home office is to determine how much space in your home is occupied by your workspace. For example, let’s say you work in a room that’s 200 square feet, and your house is 2,500 square feet total. That means 8% of your home is used for work, so you can deduct 8% of expenses such as rent or mortgage payments, utilities, and renter’s or homeowner’s insurance. 
  • The simplified option. The simplified way to claim a home office deduction doesn’t require as much recordkeeping. You can simply deduct $5 per square foot of your workspace up to 300 square feet. It’s an easier option but may result in a smaller tax deduction.

So which option is preferable? That depends on several factors, including the size of your home office and how much your rent or mortgage payments are. A tax preparation service can help you crunch the numbers to see which option would save you more money. 

  1. Office supplies

Whenever you buy something you need for work, whether it’s a pack of pens or a new computer, make sure to keep the receipt on file. When it’s time to file your taxes, you’ll be able to claim these costs as business expenses. 

  1. Internet and phone use

The portion of your internet and phone use that’s directly related to your work can be a deductible expense. This means your entire bill is probably not deductible, but a percentage of it can be. For example, if you’re working for 50% of the time you’re online, 50% of your internet bill would count as a business expense. If you have a second phone line that you use exclusively for business, 100% of that phone bill counts as a business expense.

  1. Vehicle use

You may be staying home as much as possible due to the coronavirus, but maybe you need to get in your car occasionally. Any time you drive somewhere for business purposes, the cost of gas and other expenses are tax-deductible. If you’d like to claim this expense, it’s important to have careful records of each trip you took as well as any vehicle-related expenses you’ve paid, including registration fees and maintenance. 

  1. Advertising

Have you spent any money to promote your business or services online, in print, or anywhere else? Make sure you keep records of all of your advertising costs. You can claim them as a business expense when you’re working on tax preparation.

  1. Health insurance

If you pay your own health insurance premiums and aren’t eligible for coverage by a spouse’s insurance, your insurance may be a deductible expense. If you also pay premiums for a spouse or any children, those are deductible. 

Depending on the details of your business and finances, there are additional deductions you may be eligible for. When in doubt ask the professionals. 

Tax Preparation Support
Crunch Consulting provides financial services, including tax preparation, for individuals and businesses of all sizes. We strive to take the chore of taxes off your plate and help you get the most out of your taxes. Your first 40-minute consultation is completely free.

Top Tax Tips for the Self-Employed

If you own a business or making money off a hobby like knitting or crafts, you are probably racking your brain trying to fully understand what that means tax-wise. Some people are entirely self-employed, and others are juggling between a passion project or working multiple jobs. This can make it especially difficult to figure out how to properly manage personal and self-employed taxes.

For all of the go-getters who are self-employed, side hustlers and everything in-between, we’ve compiled answers to the most frequently asked tax questions so you can focus on what really matters – your business. 

1.     Does my hobby count as a business?

  1. The biggest factor is whether or not you make a profit. In general, if you make more than $400 a year doing your hobby, it may be considered a business.
  2. There are other factors to be considered, though. The IRS lists out their criteria, which include whether you depend on the activity for your livelihood and whether the activity has made a profit in the past or appears likely to make a profit in the future.
  3.  If your hobby is not a business, some of your hobby expenses may still be deductible.

2.     I am self-employed. Should I pay my taxes quarterly or annually?

  1. The quarterly system requires you to estimate your tax payments and do a little more paperwork but ultimately can help you bypass the anxiety of tax season sneaking up on you. It also will help you manage your savings so that will tax season rolls around, you know you have enough on hand to cover your taxes.
  2. You have to file quarterly if you as an individual expect to owe at least $1,000 in taxes for the year or owed more than $1,000 the year before.
  3. If you do not think you will owe at least $1,000 in taxes and you did not owe more than $1,000 last year, filing quarterly optional. If you trust yourself to set money aside all year for your taxes or if you have another job where you are withholding enough of your income to cover your self-employment tax, it might be easier for you to file annually.

3.     I just started my business. How do I manage my taxes?

  1. Keep track of anything you buy to get your business going This can include:
    • Office Supplies
    • Equipment
    • Employee lunches
    • Vehicle expenses
    In short, keep any receipts from any of your start-up expenses. The first year you start your business is potentially your biggest opportunity for tax savings.
  2. To deduct home office expenses, you must have a space that is solely dedicated to your work. Keep that space separate from your personal computer or hobby space.
  3. Include any fees associated with doing market research or consulting with attorneys or financial experts. Think about all the activities you do to set up your business.
  4. Keep track of vehicle maintenance expenses in addition to mileage. Maintenance and alterations to your vehicle (like advertising) associated with your business can be deducted.

4.     Are there any tax deductions self-employed people often miss?

  1. A lot of new businesses do not know that many advertising expenses can be deducted. The advertising or promotions must be related to your business, but special events, business cards, TV ads, and promotional flyers may all be deducted.
  2.  Any food served at a promotional event can be fully deducted. It is not subject to the 50% limit for other business-related food costs.
  3. You can deduct 50% of food costs related to meals you have while traveling or meeting with others for business purposes.
  4.  You do not have to have an internet or phone line solely dedicated to your business to deduct some of the costs. If you use your internet or phone line for both personal and business activities, you can calculate the percentage of time online or on the phone spent on business tasks and deduct that portion on your taxes.
  5.  Any training costs related to your self-employment (e.g., certifications, re-certifications, workshops) can be deducted.

5.     Can I deduct my health insurance premiums if I am self-employed?

  1. You can deduct health insurance premiums if you were not eligible to participate in a health plan through another employer or through your spouse’s employer. If you provided coverage to your spouse or dependents under age 27, you can deduct premiums for them as well.

6.     What else can I do to be financially smart as a self-employed person?

  1. One of the biggest things you can do to help yourself out for this tax year and in the future is to start a self-employed retirement plan. Contributions to your retirement plan are deductible, which reduces the taxes you will owe this year and build up investment dollars for the future. Be aware of IRS contribution limits first, though.

Starting and growing a business is an exciting adventure, but too many people let tax season get the best of them. Be sure you sock some money away to cover your taxes or get familiar with the quarterly estimated tax system now.

If you are just starting a business or are seeing a lot of new growth, now is the perfect time to meet with a financial advisor in person. Even if you only meet once a year, expert advice is invaluable for the future of business. Taxes and other financials can be confusing and an advisor can help you find the smartest deductions and biggest tax-savers for you. Not to mention, the cost of tax preparation services is deductible. 

At Crunch Consulting, we want to help you realize your dreams by laying a firm foundation for you to achieve them. Speak with one of our consultants today for a free 30-minute consultation.