Welcome to the Tax Blog

News, information, and opinions about:

  • Federal, State, and Virginia Beach Taxes
  • The Tax Preparation Business
  • Tax Planning

If you have a question or comment, please drop me a line. Paul @ PIM Tax.

17 June 2017

Virginia beach tax preparation avoiding penaltiesUsing tax-advantaged accounts (IRA, 401k, 403b, TSP, etc.) is a great way for most Americans to prepare for their retirement. You can either take a tax break now (traditional) or enjoy your tax break later (Roth). If you have a plan sponsored by an employer you may be able to receive some matching money from the company or agency you work for to increase your retirement savings. That can help you achieve the goals of your retirement plan even faster.

Unfortunately, life does not always cooperate with our plans. Some people find it necessary to tap into their retirement accounts to pay for things prior to retirement. Medical expenses, divorce, accidentally over-contributing to an account, college tuition – if you can think of an expense, someone has probably had to tap into their retirement account to pay for it.

Congress generally imposes a penalty for using retirement funds to pay for non-retirement expenses. Not only do you have to pay income taxes on your tax-deferred withdrawals as though they are regular income, but there is also a 10% penalty tax on top of that. I’ve seen firsthand how shockingly fast those taxes can add up. (There’s a reason I keep a box of tissues on my desk.)

Our government of the people, by the people, and for the people is not completely heartless, however. Congress has made exceptions to the 10% penalty for some pre-retirement withdrawals. But...in typical Congressional fashion, those rules are not uniform. They vary depending on the type of expenditure and the type of account the money comes from. I study taxes for a living and I have a difficult time keeping them straight. That’s why I made the chart below – so I can keep track of when a retirement account distribution is going to trigger a penalty tax.

The chart covers traditional retirement plans only. Roths are different, and more straightforward. The only difference is whether your Roth account is sponsored by your employer (Roth 401(k), Roth 403(b), Roth TSP) or if it is a Roth IRA. In both employer-sponsored Roths and Roth IRAs you receive no tax benefit for the money you contribute to the account. Therefore you can also take it out without paying taxes on it. It’s like putting money into your bank and then taking it out – you don’t pay tax on the deposit or the withdrawal. The catch is that you must have owned the account for at least 5 years before you make the withdrawal. While it works like a bank, the government does not want you using it like a bank. And remember – you can only take out your contributions tax free. Any earnings or profits withdrawn for non-retirement expenses are going to get you the 10% penalty tax.

This brings us to a difference between employer-sponsored Roths and Roth IRAs. With a Roth IRA you can stipulate that you are withdrawing only contributed money. With an employer-sponsored Roth you cannot. Your withdrawal will be part contribution and part earnings, and the earnings part will be subject to taxation if they are deemed not qualified.

For traditional retirement accounts refer to the chart below. I tried to keep it simple, but it is a complex problem that does not readily lend itself to simplification.


Your Situation

Employer Plans (401(k), 403(b), etc.)



You are at least 59 1/2 years old when you withdraw.

No Penalty

No Penalty


You were automatically enrolled in a plan and you didn't want to participate, so you withdrew your money

No Penalty

No Penalty for SIMPLE IRAs and SARSEPs


You contributed more than you were allowed to your account and you withdrew some before the deadline

No Penalty

No Penalty


Original account owner dies and you inherit it.

No Penalty

No Penalty


You have become totally and permanently disabled.

No Penalty

No Penalty


Money is withdrawn due to the property settlement of a divorce (Qualified Domestic Relations Order)

No Penalty

Not Applicable


You use the money to pay for college (or other qualified higher education)

10% Penalty

No Penalty


You establish and receive a "series of substantially equal periodic payments" from your account

No Penalty

No Penalty


Dividend pass through from an ESOP

No Penalty

Not Applicable


Up to $10,000 for Qualified First-time Homebuyers

10% Penalty

No Penalty


The IRS forces you to take a distribution to pay a tax bill (IRS Levy)

No Penalty

No Penalty


You used the money to pay unreimbursed (no insurance coverage) medical expenses that exceeded 10% of your AGI

No Penalty

No Penalty


You used the money to buy health insurance while you were unemployed.

10% Penalty

No Penalty


You were a military reservist called to active duty for more than 179 days and you made the withdrawal during the time you were called for active duty

No Penalty

No Penalty


You decide to withdraw your IRA contribution before the due date of the tax return

Not Applicable

No Penalty


You withdraw the EARNINGS on an IRA contribution

Not Applicable

10% Penalty

You withdrew the money and then contributed it to another qualified account as a qualified rollover within 60 days of the withdrawal.*

No Penalty

No Penalty


Employee takes withdrawals after he or she separates from service (quits/retires) during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan)

No Penalty

10% Penalty


Probably the most important thing I can tell you is that if you have questions – ask! And ask BEFORE you take money out of your retirement account. Once you make the withdrawal you nearly always have to live with the consequences. Give me a call if you have questions. 

 * This is also known as an indirect rollover. You can only do 1 indirect rollover per 12-month period. If you do more than 1, then you are going to pay taxes and penalties on the subsequent withdrawals. 


virginia beach tax prep rental placed in service

03 June 2017

I see a lot of landlords during tax season. One of the things they frequently have trouble understanding is when their rental property is “placed in service” and/or “taken out of service”. I thought I would write a quick article to address this issue because using the wrong date is costing taxpayers money.

As a depreciable business asset a rental property is placed in service whenever it is placed in a state of readiness and availability for use in the taxpayer’s trade or business (Brown vs Commissioner, TC Memo 2009-171

Notice that the definition of placed in service does not include used in the trade or business in the definition. The property does not have to be rented to be in service, is just has to be ready and available. For residential rental properties this typically means the date the property was made available to be rented. You can use the date the property was first advertised for rent as the placed in service date. If you use a property manager you can use the date the property management company was contracted for service.

For example, Jimmy placed a ‘for rent’ sign on his property on May 1. On August 7 he signed a lease with, and received his first rent check from, his first tenant. Jimmy’s property was placed in service May 1.

I often see do-it-yourself tax preparers use the date the property was rented as the date it was placed in service. This is costing them money. If Jimmy was preparing his own taxes and he used August 7 as the date the property was placed in service he would have needlessly deprived himself of 3 months of rental property expense deductions for the tax year the house was placed in service.

The placed in service date is also important in determining the tax treatment of certain items of repair and upkeep. Repairs made before a property is placed in service are classified as ‘capital expenditures’. These must be added to the depreciable basis of the property and deducted as depreciation expenses over the lifetime of the property – 27.5 years. Repairs made after a property is placed in service are considered business expenses and can be deducted in the year they are accomplished.

Let’s look at two similar scenarios.

Mary bought a house and placed it in service on April 1. On April 15 she replaced one of the windows in the house. The window replacement cost $400. Because the window was replaced after the property was placed in service Mary can deduct the entire cost of the window on the tax return for the year the window was replaced.

Ed buys a house on April 1. He replaces one of the windows on April 5. The cost of the window replacement was $400. On April 15 Ed places his property in service as a rental property – meaning he made the unit available to be rented. Because the window was replaced before the house was placed in service the cost of the window must be capitalized and added to the depreciable basis of the property. Residential rental properties depreciate over a 27.5 year period. Ed can only deduct $10.30 for the window in the year he had it replaced (($400/27.5)(8.5/12)). The rest of the cost of replacing the window can be deducted over his next 27 tax returns.

Judging from the reactions of some of my clients, Ed is likely to find the tax treatment of his window replacement highly irritating. He is going to wish he had known to place his rental property in service prior to the replacing the window.

Don’t try to get fancy, though. You can’t buy a property, place it in service, and then gut the kitchen for a two-month remodeling project. Remember – part of the definition of placed in service means placed in a state of readiness. A house with no kitchen cannot reasonably be considered to be in a state of readiness.

Taking a property out of service follows a similar logic, but in reverse. When the property is no longer available or ready to be a rental property it is no longer in service. Often people will use the last date the property was actually rented as the last day the property was in service, which can cause them to short themselves on their tax return. Another example:

Terry and Tina have a residential rental property. The tenants move out on April 30. They advertise the property for rent, but they do not acquire new tenants. Frustrated with their experience as landlords, they sell the property on October 15.

The property was taken out of service the day it was sold, October 15. Even though Terry and Tina had the property for sale before that date they also had it available to rent. If they had acquired tenants before buyers they could have easily delisted the property for sale. If Terry and Tina had said the last day the property was in service was April 30 they would have missed the opportunity to claim the rental property deductions for 5.5 months of the year the property was sold. This could result in them paying more taxes than necessary.

There are significant tax benefits to owning residential rental property. There are also some ‘tips and tricks of the trade’ you should know to maximize the tax benefits available to you as a landlord. If you are unaware of those tips and tricks, please give me a call. I am always happy to discuss your situation.

Virginia beach tax prep military turbo tax28 May 2017

Flip Wilson was one of my favorite comedians of the 1970s. From 1970 - 1974 he hosted his own prime time comedy TV show. I used to beg my mother to let me stay up late enough to watch it. Each episode of the show consisted of several sketches featuring characters Wilson created and portrayed. One of his most popular characters was a sassy woman named Geraldine Jones, whose never seen boyfriend "Killer" was invariably in jail or at the pool hall.  It was always the Devil's fault for whatever predicament Geraldine found herself in - and she was always in some predicament. Geraldine saying "The Devil made me do it" became such a popular character and catch phrase that Flip Wilson released a comedy album as Geraldine Jones titled "The Devil Made Me Buy That Dress".

I sometimes think about Geraldine Jones when I am reviewing the self-prepared tax returns of a new client. I will see something unusual - something I think may be wrong, so I will ask the new client why they claimed a deduction or credit for which they don't seem to qualify. Most common answer: Turbo Tax let me claim it.

I envision this person sitting in front of their computer screen, reading a question from the Turbo Tax interview, not really sure of the meaning. They read the question 3 or 4 times hoping the lightning bolt of clarity will magically strike. Getting bored and frustrated with both the question and the tax preparation process in general they decide on a meaning and plug in an answer. If Turbo Tax takes it they must be OK - right?

Many taxpayers mistakenly believe if the tax software (Turbo Tax being the most commonly used) allows you to claim a deduction, then it is OK to claim it. This belief is categorically NOT TRUE. Some even believe if the tax software allows it, then the tax software company is liable for any mistakes on the tax return. Again - NOT TRUE. The taxpayer is solely responsible for the contents of the tax return they file. (You may be able to purchase additional insurance from your tax software company, but that doesn't mean you aren't responsible for you tax return. It just means you can get compensated by the tax software company if you're being held responsible.)

The Tax Court has ruled on this issue many times, the most commonly cited case being Bunney vs Commissioner from April, 2000.  Mr. Bunney had taken early distributions from his IRAs, but had not reported them on his tax return. He also claimed deductions to which he was not entitled. He was assessed the tax, the 10% early withdrawal penalty tax, plus an additional 20% negligence accuracy-related error penalty. Mr. Bunney petitioned the court for relief from the 20% negligence accuracy-related penalty because he had a "complicated return" for which he used tax software. The court ruled against Mr. Bunney stating, "Tax preparation software is only as good as the information one inputs into it."

A more recent attempt (Bulatikes vs Commissioner, May 2017) ended with the same result. Mr. Bulatikes claimed deductions to which he was not entitled. To avoid the accuracy-related penalties he blamed Turbo Tax. He received the same result as Mr. Bunney - the court upheld the finding of the IRS that the use of tax software does not provide a reasonable basis for claiming deductions to which a taxpayer is not entitled.

I think the most common software-induced error I see locally is the deduction of vehicle registration fees on the federal tax return. The IRS allows you to deduct any taxes you paid on personal property that are based on the value of the property. In some states the cost of annual vehicle registration is based on the value of the vehicle being registered - making the cost of registration deductible on your federal tax return. Virginia IS NOT one of those states. In Virginia the cost of registration is determined by vehicle class, NOT vehicle value. Therefore, the vehicle registration fee paid to Virginia is not deductible on the federal return.

Several times this past season I was confronted by taxpayers who were certain their Virginia vehicle registration fees were deductible items on their federal tax return. In each of these cases I heard the argument "Turbo Tax has let me do it for years." The implication being if Turbo Tax allows it, then it has to be correct. Not true.

Turbo Tax allows it because in some states the vehicle registration can be deducted. Virginia just isn't one of those states.  It is the responsibility of the taxpayer to know whether or not the vehicle registration for their state meets the criteria for a federal deduction. A trained and experienced tax professional (such as an enrolled agent) can add significant value when you don't know all the answers yourself.

If you still want to tackle your taxes on your own, just remember - Turbo Tax made me do it will not get you off the hook with the IRS!



16 May 2017

virginia beach tax preparation errorI didn’t really “fire” the last CPA I used to prepare my taxes, but it was clear from our final conversation that he was not going to be rehired the next year. I had already determined I should be getting more for my $700 than access to someone I had to teach how to prepare my tax return.

He was a poor communicator, which made him a horrible fit for someone providing me a service. I tend to have a lot of questions about my money, and since my taxes are my money, I had a lot of questions. He didn’t want to talk to me at all. I don’t think it was just me. I don’t think he liked to see any of his clients. He had me upload my documents to a web portal early in the tax season. When I went to pick up my completed return (the first time) it was waiting for me with his receptionist. A big fat envelope with my tax return in it and the signature sheets (and my bill) stapled to the outside. The receptionist showed me where to sign and asked how I’d be paying. I wasn’t offered the opportunity to review the return. I wasn’t even offered a chair. Sign here. Pay up. Get out.

Not my style.

I opened the envelope and my eyes went straight for the bottom line. Right away I knew something was wrong. My income was similar to the previous year, but my tax bill was considerably higher. It took me about 2 minutes to find the error. I showed the receptionist, who was, of course, clueless. The CPA was too busy to see me then, so I left a note about the error and left everything with the receptionist.

He emailed me later that day to tell me the tax return was correct – that the error I found was not an error. I emailed him back a link to the IRS pub explaining the IRS rules on the matter. He waited a day and then agreed the return needed to be corrected.

A few weeks later I went back to sign the corrected return. Once again it was waiting for me with the receptionist. I checked to be sure the error was corrected. It was, and the bottom line on my tax return looked like a reasonable number. I signed the e-file authorization forms and then looked at the bill. He had added $125 for fixing the error on my tax return.

I told the receptionist there was no way in H377 I was going to pay an additional fee for finding a mistake and having it corrected. She was again clueless. The CPA was again too busy to see me. I again left a note. I took the e-file forms with me and left everything else. He e-mailed me later to say he had subtracted the extra $125 from my bill. A few days later I went back and finished the signing-and-paying procedure. The CPA’s door was open this time, so I stuck my head in to make sure he knew exactly where our client-practitioner relationship stood.

That was many years ago, but that story came back to mind recently as I was reviewing a tax return with a client. A very nice seasoned citizen, she had had her taxes prepared by a CPA firm for many years.  She was looking for a change, and her financial planner recommended me. I was showing her how her adjusted gross income was calculated when she interrupted me:

Client: What you’re doing is remarkable.

Me: What’s that?

Client: Explaining my taxes to me. No one has ever done that before.

It was her use of the word remarkable that stuck in my head later. Remarkable? That indicates I was doing something out of the ordinary. A tax preparer explaining someone’s tax return to them before asking them to sign it ought to be altogether ordinary. The tax payer is responsible for the contents of the return no matter who prepared it. They need to at least be a little familiar with its contents.

I also like to review a tax return with a client because we make a formidable team when we go over a tax return together. I am an expert on taxes. You are an expert on you. Those two things merge on your tax return. Going back to my CPA story, I was able to see something was amiss with my tax return almost immediately the first time I reviewed it because I knew it was very different from my prior year return. That was knowledge the CPA lacked (although he had a copy of my prior year return).

Reviewing the return with the client also gives us the opportunity to discuss tax planning strategies for the coming year. Sometimes it even segues into a general financial planning discussion, allowing me the opportunity to recommend some additional services to the client.

Also – and I hate to admit this – clients make good proofreaders. I type thousands of social security numbers and birth dates each tax season. I have a process to catch my typos, but even so a few sneak by. I much prefer having them caught by the client when we review than to have a return bounced by the IRS because the data was entered incorrectly.

It got me wondering why a tax preparer would prefer not to review a tax return with the client. My only explanation is it’s a money issue. I read tax professional practice management articles, blogs, and forums online. Some tax pros are reporting staggeringly high numbers of tax returns completed in a season. They must forgo reviewing the return with the client in order to attain such a high volume of tax returns. That’s not how I want to operate, but if their clients are satisfied I suppose there is no harm being done. 

On the other hand, the client might just find it remarkable to have their tax return explained to them.


28 April 2017

Virginia Beach Tax Preparation military mistakesTax Season 2017 (during which we mostly prepare tax returns for 2016) is finished. I have a few clients on extension (or as Wandering Tax Pro Robert D. Flach calls them "GDEs". - the "E" stands for extension, you can figure out the "GD" for yourself.) I also have a few clients who need to amend previous tax years, but the pace has definitely slowed.

And what a pace it was for me! Virginia Beach continues to turn out and turn up at PIM Tax Services. My client base grew dramatically from the prior year. I was grinding pretty hard for 2 months straight, and I love it!  I hit quite a few of my business development milestones this year and it was very gratifying. Thank You Virginia Beach!

Last year I made a post about the most common tax errors I saw during tax prep season. I think I'll make that an annual tradition. Not because I want to make any of my clients feel ashamed for making mistakes, but I know a lot of DIYers search for help/knowledge on the internet and I don't mind letting them know what to watch out for. Just because you don't have me prepare your taxes doesn't mean I want you to overpay the government!

So without further ado - here are the top mistakes I saw during Tax Season 2017:

1. Not Treating a Rental Property as a Business. Virginia Beach is densely populated with military personnel. It’s fairly common for military members and couples to purchase a home and then receive PCS orders out of the area. For a variety of reasons many military members (and even some non-military members) decide to turn their home into a rental property. I call these “accidental” or “unintentional” landlords. They didn’t buy the house with the intention of making it a rental property, but it ended up being a rental property anyway.

The tax code is blind to your intention in this regard. The IRS does not care WHY you bought your house. The minute it becomes a rental property it is a business property, and it gets the same treatment as every other residential rental property. If the IRS is treating your property like a business, you should, too. There are significant tax advantages to doing so, and significant disadvantages for not doing so. If you don’t know what they are, then you ought to get a tax professional involved from the onset. So many people wait a few years, realize they’ve made a mess, and then come looking for help to sort it out. It’s so much easier (and cost effective) to get it right the first time.

I have written this many times, and it is still true - I have found costly mistakes on 100% of the self-prepared Schedule Es I have reviewed.

2. Not Responding Immediately to an IRS (or State) Tax Notice. The IRS scares people. There are good reasons to have a healthy respect for their authority, but some people get really rattled when they see a letter from the IRS. Sometimes they set it aside for a while, afraid to open it. Sometimes they open it, read it, and set it aside to respond to later. DON’T DO THAT! IRS notices age like bread, not wine. The longer they sit the worse they get. Not to mention independent research has shown that two-thirds of IRS notices are INCORRECT.

The IRS has a system called the Automated Under Reporting (AUR) program. The AUR system spits out IRS notices to taxpayers based on an algorithmic review of a tax return, and they are not reviewed by any person at the IRS before they are sent. Most of them are wrong, but they all have a deadline by which you must respond or further IRS action will be taken. Don’t sit on them, take action immediately.

3. Sloppy Record Keeping. I’ve written about this a few times, but it bears repeating: Tax records are for YOUR benefit. Here’s why – the courts interpret the internal revenue code to mean that ALL your income is taxable. Any adjustments, deductions, or tax credits you might receive are bestowed upon you through legislative grace. It is the taxpayer’s responsibility to prove they are entitled to any adjustment, deduction, or credit.

May people seem to believe it is the other way around – that they are entitled to claim adjustments, deductions, and credits and the IRS must prove they are not entitled to claim them. It absolutely does not work that way. If you are audited and you cannot document your qualification for a deduction or credit the IRS will disallow it and charge you additional taxes, interest, and possibly penalties. Keep good records!

4. Planning Too Late. Every year I am contacted in April and asked what can be done about reducing someone’s tax burden for the prior year. While there may be a couple of options available, the best opportunities have come and gone. You plan by looking out the windshield at where you are going, not looking in the rear view mirror at where you’ve been. If you want to do some tax planning – and I think everyone should – then call me in April about THIS year, not last year!

5. Those Damn Charity Receipts. Pardon my French, but you’ve seen them. They are everywhere. Goodwill, CHKD, DAV, Eggleston, Vietnam Veterans, etc. they all offer the same deal. You drop off items you no longer want, they hand you a blank receipt for it. Then 8 months later you hand that blank receipt to me to prove you made a charitable donation because you (rightfully) want the deduction from your taxes. The problem is I wasn’t there when you made the donation. I don’t know if you gave them one old sock or an oak bedroom suite.

YOU have to fill out the rest of that receipt. The charity you gave the items to isn’t allowed to fill it out – YOU have to do it. You have to write down what you gave them, what its value was, and how you determined that value. (hint: it’s usually “Thrift Store Value”.)

Like I wrote above – it’s up to you to prove your right to every adjustment, deduction, and credit. That extends to the charitable deduction as well. A blank receipt is not proof that you donated anything. Fill them out!

Overall I had a great tax season. PIM Tax Services continues to grow and I find it very exciting. I made a lot of new friends/clients this season and – even more fantastic – nearly all of my 2016 clients returned in 2017. I’m always looking for ways to improve and become more efficient. Helping people head off their tax issues before they come to see me is one way I hope to accomplish the delivery of affordable tax planning and preparation services to as many people as possible.

If you have any questions, please contact me.

24 January 2017

I bought a new gizmo the other day and I was hoping to find a manual in the box. I'm old school. I like a book when I can get it. The kind with pages and such. Unfortunately, those are quite rare these days and my new gizmo was no exception. There was a Quickstart Guide - that 1 or 2 page graphically intensive sheet with basic instructions on how to not break your new gizmo before you get online to find the actual documentation you need to learn how to work it.

It occurred to me taxes have become the same thing. We used to go down to the library or post office to pick up tax forms and instructions. No longer. Now all of the instruction manuals are online. The only thing missing is the Quickstart Guide. There isn't a Quickstart Guide for taxes. I started to contemplate what one might look like. Then I decide, what the heck - I'll make one. And just for fun I'll throw in my analogy about taxes being membership dues owed to Club America.

Behold, my friends - the completely unofficial federal tax Quickstart Guide. I hope you find it useful.




02 January 2017

accounting headachesI am not an accountant, but I will tell you without hesitation that accounting is important. If you are self-employed or starting a small business it is more than important – it is essential. You might get away with having your personal financial records in disarray, but if you are self-employed or starting a small business and you aren’t keeping your books properly you are begging for trouble.

Accounting is the language of business. It allows anyone to look at your books and understand where your business stands financially. Who might want to do this?

  • The bank if you need a loan.

  • The tax man (federal or state)

  • Someone thinking about buying (or buying into) your business

  • Anyone – like you – who is making decisions for the business

Roughly 40% of small business owners say that accounting is the worst part about running a business. You can put me in that category. I just wanted to help people with their taxes and financial planning. Keeping track of receipts for office supplies and internet service wasn’t supposed to be so darn time consuming! But I do it because it is important for PIM to succeed. More than half of small business startups in the United States fail. How many wouldn’t have if they had kept better track of their accounting?

Now that I have stressed the importance of accounting, let me take a step back and suggest something my accountant friends might find radical. (Possibly even alarming.)

Not everyone needs full strength accounting.

If you’re just starting up and/or self-employed you might not be considering a bank loan for your business. You might not be thinking about selling your business or bringing in a partner. You might just be doing your thing on the side and enjoying the extra cash flow when it happens. If this is the case, you might not need monthly/quarterly cash flow and income statements. You might not need to be able to produce a balance sheet on short notice. You might not need full strength accounting.

But you do need some accounting. You can’t escape the tax man. He will have his due. However, you may be able to satisfy him with some simple tax basis record keeping – and keep the tax man (and your tax preparer) satisfied when it is time to file (and pay) your taxes.

Tax basis record keeping is performed with the end result in mind. The end result is your tax return.  You must have sufficient records to file a correct tax return. So, what does the tax man want to know?

The tax man wants to know how much you made, because that’s what you pay taxes on. Therefore, you have to have some records showing how much money you earned – how much revenue you generated. You need to keep track of the cash that is coming into your business.

Does the tax man also want to know your business expenses? Not really. Your business expenses are deducted from your revenue, and that reduces the amount the tax man can tax. The tax man is perfectly content for you to pay taxes on all of your revenue. He doesn’t care whether you have any business expenses or not – but YOU do. You need those business expenses to reduce the amount of taxes you pay.

What the tax man cares about is whether or not you can properly document your business expenses. You are allowed to take the legitimate business expenses that you can prove. Therefore, proper record keeping of expenses is in your best interests.

For many self-employed people or small startup businesses, tracking your income and expenses is all the accounting you need. You can get a fancy program or hire an accountant for that, but I’m not sure why you would. A simple spreadsheet will do, and you can get simple spreadsheets for free with a Gmail account. (Google Sheets)

It will be helpful if you group your expenses in roughly the same manner the IRS does on schedule C (lines 8-27). You’ll be glad you did when it comes time file your tax return. Don’t lose a lot of sleep trying to figure out the difference between “supplies” (line 22) and “office expenses” (line 18) (or any of the several other poorly-defined categories on schedule C). Just pick one and do your best to be consistent. You’re not going to lose an audit for calling a commission (line 10) a professional service (line 17). They all get totaled on line 28, so no matter which category you chose it’s going to end up on line 28 sooner or later. Do your best and if you have questions, call me.

Slimmed down tax basis accounting can be a time (and money) saver if you don’t need full strength accounting. Just make sure you don’t need full strength accounting before you decide to cut some corners you actually shouldn’t be cutting. If you have a capital intensive business, need to borrow to expand, have employees and payroll, or thinking about selling your business one day you are going to need a balance sheet and cash flow statements. You will need full strength accounting.

But...if you’re driving for Uber, being a weekend photographer, walking dogs in the afternoon, or baking cupcakes in your home – you can probably just use a spreadsheet to keep track of your income and business expenses with a little tax basis accounting and be fine.



08 December 2016

6 useful tax tips virginia beachWith the election of Donald Trump as President and the return of a Republican Congress to Washington the press is jumping with speculation about changes to U.S. tax laws. I suspect some tax law changes are coming in 2017, but I won’t try to speculate about what the final outcome is going to be. I don’t have a working crystal ball, and if I did I wouldn’t be giving away its secrets for free on the internet. As I’ve said elsewhere, if I could predict the future you probably couldn't afford me.

Instead, let’s focus on what we actually know for sure. There are some known tax changes on the way. Some are already here and some are coming. Knowing them can help you prepare your taxes this year and plan for the future. That is valuable information. Far more valuable than me guessing about what President-elect Trump is going to do.

Issues Impacting 2016 Taxes.

1. The standard deduction increased for Head of Household filers in 2016. (Everyone else stayed the same.) The 2016 standard deduction amounts are in the table below.

Filing Status 2016 Standard Deduction (2015 value)
Single $6,300
Married Filing Jointly $12,600
Head of Household $9,300 ($9,250)
Married Filing Separately $6,300
Qualified Widow(er) $12,600

2. The personal exemption for each person claimed on your 2016 tax return increases to $4,050 (from $4,000 in 2015). This amount gets adjusted for inflation every year, and is always rounded to the nearest $50.

3. Due Diligence forms for the AOC and CTC tax credits. This is new and annoying. The American Opportunity Tax Credit (AOC) and the Child Tax Credit (CTC) are partially refundable. That means you can have a zero ($0) tax liability to the IRS and still collect a ‘refund’. Free money from the government attracts fraud, and the IRS solution is to turn tax preparers into Tax Cops. They do this by forcing tax preparers to interview tax clients and record their responses on a special form that gets submitted with your tax return. If you are eligible to receive either of these credits I will be asking you several seemingly silly questions designed to prove that your children are your children and they are really going to college as you claim. I apologize in advance – it wasn’t my idea. 

4. ACA Penalty Increases. The shared responsibility payment (a.k.a Obamacare Penalty) for not having health insurance is now $695 per uninsured adult and $347.50 per uninsured child OR 2.5% of your AGI – whichever is GREATER. (I have seen predictions the ACA will be repealed, but as of this writing it remains the law of the land.)

5. HSA contribution limit increased if you have family coverage. In 2016 you can contribute up to $6,750 if you have family health insurance coverage on a high deductible health care plan (up from $6,650 in 2015). If you have individual coverage you can contribute up to $3,350 (same as 2015). HSA contribution limits include money your employer contributes as well as your own contributed money. You can contribute to your HSA up until the tax filing deadline (April 18, 2017) and still take the deduction on your 2016 tax return.

6. IRS Launches More Online Tools. The IRS is attempting to move more customer service features online to allow taxpayers to resolve tax issues without involving an actual agent. These new tools allow a taxpayer to see if they owe a balance to the IRS and integrate with existing payment options to allow taxpayers to “take care of their tax obligations in a fast and secure manner”.  Given the significant difficulties the IRS has had with existing online toolsI suspect there may be some growing pains. I’ll be standing by to see if/how this works.

For Planning Purposes Going Forward.

47 provisions of the tax code will automatically expire at the end of 2016. Most of them you’ve never heard of, and will have no impact on you (unless you were looking for accelerated depreciation of your race horse, or a tax credit for mine rescue training…). There are a few, however, worth discussing. 

  • Mortgage Insurance Premium Deduction. Some taxpayers were able to deduct their mortgage insurance premiums on their tax return. 2016 will be the last year this deduction is allowed. (Another reason to get out of paying for mortgage insurance as soon as possible.)
  • Home Energy Improvement Credit. 2016 will be the last year to claim a tax credit of up to $500 for certain energy efficiency improvements to your home.
  • Credit for power production no longer covers wind turbines, fuel cells, and geothermal. After 2016 you will no longer get tax credits for using any alternative energy sources at your residence except solar. The tax credit for solar is currently good through 2021.
  • Medical Expense deduction threshold for those over 65 remains at 7.5%. This is a strange one, because it’s a double negative that turns out to be a positive. One of the provisions of the Affordable Care Act was to raise the threshold for deducting medical expenses from 7.5% to 10% of AGI. There was an exception for taxpayers over age 65 – they were to remain at 7.5%. There was an extender that was going to raise that threshold to 10% just like everyone else. The way the law was worded, when this particular tax extender expires the medical expense deduction for taxpayers over 65 will remain at 7.5%.

Taxes are complicated, that’s why some tax firms charge ridiculous fees for their service. While we can’t do too much with speculation on where the tax code is going to be next year, there is a lot we can do with the hard information we have about changes that have already happened or are about to happen. As always, if you have any questions, please contact me.



22 November 2016

virginia beach tax prep cancelled debt 1099cYou borrowed $25,000, quit paying on the loan, and then the lender decides to cancel your debt. Sounds good, right? You don’t have to pay it back. Your credit score probably took a beating, but at least that creditor will quit blowing up your phone and making you dread the trip to the mailbox. This seems like a very good thing. You might even do a little happy dance.

Then in February you receive a form 1099-C in the mail. It says “Cancellation of Debt” in big letters on it. This looks suspiciously like a tax form. What does this mean? Tax forms are almost never welcome news. Did you do your happy dance too soon?

You may have. You received that form because the tax code considers cancelled debt to be income, and income is taxable. It may need to be included as income on your tax return. You might have succeeded in getting one creditor off your back, but if you can’t pay your taxes on the cancelled debt you may have only traded one creditor for another one. The most relentless and capable creditor on the planet – the IRS.

Debts for which you are personally liable (responsible) are known as recourse debts. If a recourse debt is forgiven or discharged for less than the full amount owed, the unpaid amount is considered to be income to you. That amount will be on the form 1099-C issued to you by the lender. A copy of that 1099-C also goes to the IRS, and they will be looking for you to include that amount as income when you file your next tax return.

That is...unless you qualify for one of the exceptions or exclusions.

There are certain situations in which that cancelled debt does NOT have to be included as income. If you have cancelled debt you will want to investigate these to see if you qualify for one of the exceptions or exclusions. If you do, maybe you can get your happy dance back.

Exceptions exempt you from paying taxes on the cancelled debt due to the nature of the cancelled debt. There are several exceptions, but I am only going to cover the two most common ones.

Gifts and Inheritances. You borrowed money from your parents to purchase your first home and you’ve been paying them back on terms you have agreed to. Then, at Christmas they decide to forgive the remainder of the debt as a gift to you. You do not have to include this cancelled debt as income. (It would be pretty weird if your parents issued you a 1099-C in this situation, but hopefully you get the point of the example.)

Likewise, if someone forgives your debt in their will, you don’t have to include that debt forgiveness as income.

Student Loans. Student loans issued by government and/or non-profit organizations can be forgiven if the person receiving the loan works in a specified – usually some type of public service - profession. (There are too many professions and nuances for me to list here, but Student Loan Hero does a good job of tracking them.) 

If your loan and your work qualify for student loan forgiveness, you do not have to count that cancelled debt as income.

Exclusions exempt you from paying taxes on the debt because of your particular circumstances when the debt was cancelled. There are several exclusions, but I am only going to cover the top three.

Bankruptcy. If your debts were cancelled as part of a chapter 11 bankruptcy judgement, you do not have to include them as income. Your bankruptcy judgement must be final before you can claim this exclusion. The IRS does not consider matters pending before a court to be evidence of qualifying for the exclusion.

Insolvency (this is The Big One). Most people don’t just get up one morning and decide to stop paying on their debts. In most cases, they stop paying on their debts because they don’t have enough money to make the payments. In this situation, you may be what is known as insolvent. If you can prove you were insolvent immediately before the debt was cancelled, you do not have to include that debt (to the extent of your insolvency) as income on your taxes.
Of course, the IRS makes you prove you were insolvent (and the extent to which you were insolvent). You do this by filing form 982 with your tax return. On form 982 you list the assets and liabilities you had right before the debt was cancelled. You do not have to list any assets that are beyond the reach of your creditors (such as a retirement savings account) on form 982. If your liabilities exceed your assets, you are insolvent. The amount your liabilities are greater than your assets is the extent of your insolvency. Let’s look at some examples.

1. You had $10,000 of debt cancelled by the lender. Immediately prior to the cancellation of debt you had $80,000 of assets and $100,000 of liabilities. The extent of your insolvency is $20,000. The extent of your insolvency is greater than the amount of your cancelled debt, so you do not have to include any of the cancelled debt as income.

2. You had $10,000 of debt cancelled by the lender. Immediately prior to the cancellation of debt you had $80,000 of assets and $84,000 of liabilities. The extent of your insolvency is $4,000. In this case, only $4,000 of the cancelled debt can be excluded. $6,000 of the cancelled debt must be included as income.

Qualified Principle Residence. If the cancelled debt was used to purchase your main home, then it is excluded from income. The IRS defines your main home as the one in which you live the most. You can only have one main home. If you refinanced your home only the amount of the loan that covered the principal of the original loan is qualified principle residence debt. Let’s look at an example.

Your original mortgage in 2005 was $200,000. In 2008 the principal on that loan was $180,000 and you refinanced for $280,000. You used the extra $100,000 to fund your son’s college education. Only the amount of the original mortgage principal ($180,000) secured by the refinancing loan is excludable as qualified principle residence debt.

There are some additional rules on qualified principle residence debt regarding money spent to make improvements and additions to the home that I don’t want to try to explain here. I just mention them so you are aware they exist if you have mortgage debt cancelled. If that is your situation, contact me and we can dig into the details.

Having a debt cancelled can be a good first step in getting your finances reorganized. Just be aware that the lender will issue you (and the IRS) a 1099-C reporting this as income to you. If that happens, contact me and we will see if there is a way for you to legally exempt your cancelled debt from your income.




Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a founding member of the Military Financial Advisors Association, as well as a member of the National Association of Enrolled Agents, the National Association of Tax Professionals, the Financial Planning Association of Hampton Roads, the National Association of Personal Financial Advisors (NAPFA), and the XY Planning Network. Paul is the Director of the CFP Board-Registered Program at The Regent University School of Law where he also teaches the Capstone Course in Financial Planning. You can read more about Paul's background here.


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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)


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