Listed below are a few of the kinds of general questions that Julie has answered for her clients through the years.
If you have any questions feel free to contact us.
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Q: What do I do if an IRS agent calls?
A: IRS agents are required to notify you in writing if your tax return is to be examined. It seems, however, that some agents are telephoning taxpayers selected for audit prior to sending a written notice. If you recieve this type of call from and agent, DO NOT get into any discussion with the caller because:
- You have no way of knowing if the caller is really an IRS agent;
- You may inadvertently divulge information that the agent is not entitled to;
- You may make an offhand comment that might be misrepresented by the agent, causing him to adopt a position that will take considerable time and effort to overcome.
Tip: If someone claiming to be an IRS agent calls, saying your return is selected for audit (or for any other reason), ask for written notification. If you receive it, talk to your tax advisor before proceeding further.
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Q: Do I receive any benefit by hiring my own child to work in my business?
A: Yes, you do. Reduced payroll taxes! If your child is under the age of 18 and you are a sole proprietor, you do not have to pay any of the payroll taxes. Under federal law, you do not have to withhold the 7.65% of FICA and Medicare taxes nor do you have to pay the matching employer’s share of those taxes. In addition, the FUTA taxes are not paid on your child’s wages. However, you may still need to withhold income taxes depending on the total wages paid to your child.
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Q: What is the difference between a Roth IRA and a Traditional IRA?
A: A major advantage of a traditional IRA over a Roth IRA is that the contributions to a traditional IRA are often deductible while contributions to a Roth IRA are never deductible. On the other hand, the distributions from a Roth IRA are non-taxable if held in the account for five years and not distributed prematurely. This means that all of the earnings that accumulate in the account will also be non-taxable.
Premature distributions from both Roth IRAs and Traditional IRAs are taxable and subject to a 10% penalty. Distributions are generally treated as premature if made before you reach age 59 1/2. However, such distributions from a Roth IRA offer a certain advantage. They are treated, in most cases, as coming first from contributions, and therefore are neither taxable nor subject to a penalty.
In addition, you do not have to take minimum distributions at age 70 1/2 from a Roth IRA. You can let them accumulate, continuing their tax-free growth. Traditional IRAs, on the other hand, do require that distributions begin when you reach age 70 1/2.
Your particular situation and needs will determine which IRA works best for you.
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Q: How long should I keep my tax return?
A: Keep copies of your tax returns indefinitely. The IRS may not care whether you have them past seven years, but you may want to use them to make long-term financial plans.
Keep supporting documents for six years. These include W-2 forms, 1099s, receipts for child care and charitable contributions, mortgage interest statements, alimony payments or receipts, retirement plan contributions and withdrawals, receipts for medical expenses, professional dues and anything else that you declare on your return.
The law says you only have to keep supporting documents for three years, but if the IRS thinks you underreported your income by 25% or more they can go back six years. If they make that claim aginst you, you will be glad you kept them to prove you paid exactly what was required.
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Q: Is it better to have a tax credit or a tax deduction?
A: Many taxpayers are uncertain as to the difference between a tax credit and a tax deduction. Basically, a credit reduces your tax while a deduction only reduces the income that is subject to tax. The credit generally puts more money back in your pocket than a deduction of an equal amount.
Deductions are generally more valuable to high-bracket taxpayers than to low-bracket taxpayers. On the other hand, credits are more valuable to low-bracket taxpayers, since they make up a larger portion of the tax owed.
Example: Taxpayers in the 35% tax bracket would save $350 in taxes if they made a $1,000 charitable contribution (a deduction), while taxpayers in the 15% bracket would save only $150. (This assumes that their itemized deductions are more than the standard deduction, thus making it worthwhile to itemize deductions—a pre-requisite for benefiting from most deductions.) If instead they have a $1,000 credit, both taxpayers would save $1,000.
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Q: Any tips to manage the cash for my business?
A: Cash is the lifeblood of any small business. Here are some tips to help ensure that your business maintains a sufficient cash flow to meet its financial goals and keep running efficiently:
- Toughen up your credit policies. Review the payment terms you offer to customers, and tighten them up if slow payment is a problem area for your business.
- Consider requiring advance payments--at least in part--for new customers.
- Perform a routine credit check before a sales or service transaction is entered into with a new customer.
- Prepare a budget—and stick to it. A budget can be extremely effective in helping you keep track of whether cost- and revenue-related goals are being met.
- Consider increasing the intervals at which customers are billed--e.g., from three months to one month or from one month to two weeks.
- Review your accounts receivable weekly or even daily to make sure slow payers are not allowed to slide.