Skip to main content Skip to search

individual income tax preparation

Preparing for tax audit

Reduce Your Chance for a Tax Audit

Everyone fears the dreaded tax audit – and with good reason. It means that the algorithm scoring formula used by the Internal Revenue Service (IRS) has found what it deems to be an irregularity on your tax return. Few audits turn out well for the individual or small business being questioned and the following are just a few of the ways that people can help mitigate the chance of being audited.

Hire a Professional

Nothing can compare to the personalized service and expertise available with a tax professional. It’s tempting to use online tax software. It’s easy and convenient, but the software may not be able to account for special circumstances and you may be leaving money on the table that could go in your pocket. Hire a professional if your tax return is complicated or complex in any way.

File on Time

Seeking an extension or filing an amended return can activate you for review by IRS systems, particularly for high-end earners. The same is true for those that file paper returns. It’s always best to e-file and makes sure they’re filed before the deadline.

Documentation

When dealing with the IRS, documentation is everything. If there’s a chance that the IRS may not understand expenses you’ve claimed or deductions, the onus will be on you to provide documentation to prove your right to make the claims. A professional tax preparer will know what documentation you’ll need.

Deductions

Another instance that will red-flag your tax return is the deduction-to-income-ratio. Deduction amounts that are unusually high compared to stated income may be a symptom of claiming the same deductions twice in the eyes of the IRS. Stay away from dubious deductions.

Exemptions

A high number of exemptions and dependents will bring unwarranted attention from the IRS. There are specific rules about what dependents are eligible for you to claim. For example, in some instances, a dependent may be required to file their own return, which means you can’t claim them.

Compliance

Remaining in compliance with your responsibilities in regard to withholding taxes, filing status, deductions, and exemptions will significantly reduce the potential for a tax audit. If you do get audited, having a professional file your tax return will ensure you have knowledgeable backup should you need it.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

What is a Sole Proprietorship?

A sole proprietorship is the business or an individual who has decided not to carry his business as a separate legal entity, such as a corporation, partnership, or limited liability company. This kind of business is not a separate entity. Any time a person regularly provides services for a fee, sells things at a flea market or engage in any business activity whose primary purpose is to make a profit, that person is a sole proprietor. If they carry on business activity to make profit or income, the IRS requires that you file a separate Schedule C “Profit or Loss From a Business” with your annual individual income tax return. Schedule C summarizes your income and expenses from your sole proprietorship business.

 

As the sold proprietor of a business, you have unlimited liability, meaning that if your business can’t pay all its liabilities, the creditors to whom your business owes money can come after your personal assets. Many part-time entrepreneurs may not know this, but it’s an enormous financial risk. If they are sued or can’t pay their bills, they are personally liable for the business’s liabilities.

 

A sole proprietorship has no other owners to prepare financial statements for, but the proprietor should still prepare these statements to know how his business is doing. Banks usually require financial statements from sole proprietors who apply for loans. A partnership needs to maintain a separate capital or ownership account for each partner. The total profit of the firm is allocated into these capital accounts, as spelled out in the partnership agreement. Although sole proprietors don’t have separate invested capital from retained earnings like corporations do, they still need to keep these two separate accounts for owners’ equity – not only to track the business, but for the benefit of any future buyers of the business.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

Tax Tips for Mortgage Holders

It’s that time of year again when numbers such as 1040, W-2 and INT-1099 become all too familiar to millions of people.  One of the benefits of holding a mortgage on your house is the ability to claim certain deductions that can assist you in offsetting some of your tax burden.  As you prepare to file your yearly taxes let’s look at a few areas where you can take advantage of tax deductions and keep a little more green in your pocket this tax season.

The most obvious deduction that many tax filers take advantage of is the interest paid on the mortgage for their primary residence.  For those of us with a mortgage balance of less than $1 million dollars (and hopefully that is the majority of us!) you can fill out Schedule A, also known as “itemized deductions”, and claim all the interest paid in the previous year on your mortgage.  Keep in mind this is for your primary residence (where you live) only and does not include other properties and houses you may own for rental purposes, etc.  If you paid off your mortgage this year and were slapped with a pre-payment penalty you can also use Schedule A to take a deduction on those fees as well.

Taxes paid to local governments, known as real estate or property taxes, are also tax deductible.  If your mortgage company pays your taxes for you through an escrow account you can find the deductible amount listed there – else check your assessment notice sent to you by your local taxing authority.

If you decided to spruce up your home and took out a home equity loan you may also be eligible to take a deduction for the interest of the home equity loan.  One thing to keep in mind though is if the home equity loan plus your mortgage amount puts you over the real value of your home in total amount owed there are limits to what you may deduct.

Points of all types are usually tax deductible as well.  If you refinanced in the past year any points you paid to buy down the mortgage rate can be written off proportionately over the life of the loan.  This means that if you have a 20 year mortgage, you get to deduct 1/20th of the points each year.  An added bonus comes if you refinanced in a prior year and then refinanced against in the past year and ended up paying off the first refinance.  Any points you had not deducted from that first loan now become eligible for write off in their entirety.

If you took out your mortgage in the past year, any points that you paid on the purchase are fully deductible if the mortgage was for your primary residence and you paid an amount down at least equal to the points you were charged.  This one can be tricky, so be sure to consult your tax prepared for more information.

This tax season make sure you are taking advantage of every deduction you can; part of owning a home and having a mortgage means that you get to reap some of the benefits of that ownership through the tax system.  Don’t let the IRS keep the money that you can use to help pay off that mortgage faster!

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

7 Ways to Minimize Your Income Taxes

Are you paying too much in income taxes?  Are you getting all the credits and deductions you are entitled to?  Here are 7 tips to help you minimize taxes and keep more in your pocket:

 

  1. Participate in company retirement plans. Every dollar you contribute will reduce your taxable income and thus your income taxes.  Similarly, enroll in your company’s flexible spending account.  You can set aside money for medical expenses and day care expenses.  This money is “use it or lose it” so make sure you estimate well!

 

  1. Make sure you pay in enough taxes to avoid penalties. Uncle Sam charges interest and penalties if you don’t pay in at least 90% of your current year taxes or 100% of last year’s tax liability.

 

  1. Buy a house. The mortgage interest and real estate taxes are deductible, and may allow you to itemize other deductions such as property taxes and charitable donations.

 

  1. Keep your house for at least two years. One of the best tax breaks available today is the home sale exclusion, which allows you to exclude up to $250,000 ($500,000 for joint filers) of profit on the sale of your home from your income.  However, you must have owned and lived in your home for at least two years to qualify for the exclusion.

 

  1. Time your investment sales. If your income is higher than expected, sell some of your losers to reduce taxable income.  If you will be selling a mutual fund, sell before the year-end distributions to avoid taxes on the upcoming dividend or capital gain.   Also, you should allocate tax efficient investments to your taxable accounts and non-efficient investments to your retirement accounts, to reduce the tax you pay on interest, dividends and capital gains.

 

  1. If you’re retired, plan your retirement plan distributions carefully. If a retirement plan distribution will push you into a higher tax bracket, consider taking money out of taxable investments to keep you in the lower tax bracket.  Also, pay attention to the 59-½ age limit.  Withdrawals taken before this age can result in penalties in addition to income taxes.

 

  1. Bunch your expenses. Certain expenses must exceed a minimum before you can deduct them (medical expenses must exceed 7.5% of your adjusted gross income and miscellaneous expenses such as tax preparation fees must exceed 2% of your AGI).  In order to deduct these expenses, you may need to bunch these types of expenses into a single year to get above the minimum.  To achieve this, you might prepay medical and miscellaneous expenses on December 31 to get above the minimum amount.

 

The most important thing is to be aware of the tax deductions and credits that apply to you and to plan for taxable events.  And don’t be afraid to ask for help.  The benefits from consulting an experienced tax professional far outweigh the cost to hire that professional.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more
Preparing for tax audit

Why it’s a Good Idea to Hire a CPA

CPAs, or Certified Public Accountants, can help you in your individual or business accounting and tax preparation in many ways.  With the laws surrounding accountancy such as generally accepted accounting practices for businesses, and tax laws that change every year for individuals, hiring a CPA to perform your accounting services needs is the best way to ensure that your accounting is error free in case of IRS or other audit.

Having a CPA prepare your business or individual income tax return is a great way to avoid errors, not to mention the prying eyes of the IRS and an audit.  A CPA must undergo continuing education as accounting and tax laws change from year to year.  Therefore, only a CPA can ensure that your tax return is completely accurate.  Not only is accuracy important to the IRS and in case of an audit, but it is important to your immediate financial future as well.  Because a CPA has intimate knowledge of tax laws and available exemptions, a CPA can make sure you get the largest refund possible.

In the case that you are chosen for audit by the IRS, your best bet to come through the audit cleanly is to have a CPA by your side.  A CPA is as familiar with tax law as the IRS representative performing the audit.  Because of this, the CPA can negotiate a lower penalty, help you avoid penalties, and help you claim the deductions you deserve.  You should contact a CPA as soon as you have received an audit notice from the IRS, because the CPA can help you prepare for your audit and gather the necessary information.  Then, the CPA can walk into the audit interview by your side, completely in charge and confident of the outcome of your audit.

If you own a small business, a CPA can also help you determine what business taxes are required by your local, state, and federal government.  In addition, the CPA can help you set up a double entry accounting system that includes a journal and ledger.  The CPA can also help you to set up a standard chart of accounts for use with your ledger.  All of these tools will help you stay organized and ready for tax time and any possible audits.  The CPA can also use the information from these tools to create financial statements for your business, which will then help you to make business decisions, make comparisons with competitors, discover industry and company financial trends, and prepare financial reports and business plans for purposes of investors and bank loans.

Whatever the financial service required, a CPA is your best bet.  With a CPA, you have the security of a licensed, monitored professional along with the peace of mind that all of your accounting is accurate and ready for any possible

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more