Author: Eric Buechler

The end of the summer vacation break is in sight, and so are back-to-school sales. Minnesota parents will want to grab a different kind of break – a tax break — as they load up on school supplies for their young students.

Be sure to collect and save receipts for school-related purchases at the check-out lane. They probably will lower your state taxes on 2017 returns.

Expenses paid for pencils, pens, paper and notebooks, educational computer software, required gym clothes – almost anything used by your children in elementary or high school for education during the school day – at least can at least be subtracted from income.

Families with limited incomes often can qualify for a tax credit, which reduces taxes directly. In fact, they can claim a refund from the credit even if they normally would not owe taxes or have to file a return.  (One technical note. Tax returns with status “married filing separately” are not eligible.)

It’s a popular program. Minnesota Revenue says 199,000 families took advantage of the K-12 subtraction last year. Another 43,000 claimed the tax credit at an average savings of $242.

The tax break actually extends well beyond those shopping trip expenses. Fees for all-day kindergarten, private school tuition, individualized music lessons away from school, tutoring by qualified teachers (outside your family), summer school expenses and driver’s education (conducted within the normal school day only) also can qualify.

Many costs of a home computers are eligible, provided the computer is not used for business. The cap generally is $200 per family, but it could range up to $400 in specific circumstances.

By the way, home schoolers also can qualify for most of the expenses. But note that textbooks and other materials must be “non-religious” to qualify.

The tax break generally ends with the school day. Fees for extracurricular activities are excluded. For example, don’t try to claim the costs of band uniforms or sports gear, even if the teams are fielded by the school.

Want more details?  See Minnesota Fact Sheet 8 about the K-12 Education Subtraction and Credit, which is available online from Minnesota Revenue’s Web site, www.revenue.state.mn.us Likewise, Fact Sheet 8a goes into more detail about the education tax breaks for home-schooled students. Or, maybe you’d like to see videos. Minnesota Revenue offers a short video about both programs at https://www.youtube.com/watch?v=IN7v-cxdPkw. One specifically about the education tax credit, which has income limits, is at https://www.youtube.com/watch?v=lXpSNoLjluc&feature=youtu.be.

Finally, if you’re visiting the upcoming Minnesota State Fair, stop at the Minnesota Revenue booth in the Education Building. Agency reps are giving away free envelopes to hold those school supply receipts for a few months until they’re needed at tax time.

We at EricJohn Ltd. suggest another handy way to track those education expenses. Snap photos of receipts with a cell phone and store them in an electronic folder for easy reference at tax time.

 

Every once in a while, Minnesota’s tax system moves to catch up to the feds’. It now appears the latest catch-up is going to create refunds from 2015 returns for some state taxpayers.  Just as important, Minnesota Revenue promises NO additional taxes from the changes.

Here’s what has happened recently. In January, the Minnesota Legislature made its latest catch-up covering two tax years, 2015 and 2016. State authorities actually were able to build the changes into the latest tax forms, so 2016 returns were not affected. But the state does owe some taxpayers refunds from 2015 returns.

In general:

• If your 2015 Minnesota return included Schedule M1NC (called Federal Adjustments), you could well have a refund coming.
• If your 2015 return did not include a Schedule M1NC, you are not affected.
• Taxpayers who bought an out-of-box software package for their 2016 returns should check on any updates from the software company.

Minnesota Revenue recently said it began reviewing all 2015 returns with those “federal conformity adjustments” in mind. State taxpayers generally won’t have to take any action. In fact, Minnesota Revenue is so obliging that it will figure in any new deductions or exclusions automatically.

You’ll know if you have money coming. The tax agency will send an official letter and a refund. Some taxpayers might get a letter asking for more information on the way to a refund.

The agency says taxpayers will be required to amend their 2015 returns to get a refund only if Minnesota Revenue cannot complete the changes itself. If you need to amend, you’ll get a notice, the taxing agency announced.

Here’s the big picture on conformity. Minnesota’s policy generally is to “conform” – or coordinate – its income tax system with the federal tax codes. That’s why the Line 1 on your state tax return (Form M1) is “taxable income” from your federal return. Minnesota Revenue jumps off from that starting point to calculate your Minnesota income and then your state taxes.  Periodically, the state Legislature updates state tax codes to reflect the federal ingredients in adjusted gross income, which leads to taxable income.

As you know from our Web site, EricJohn Ltd. can help with a closer look at your taxes from both current and prior years.

http://www.revenue.state.mn.us/individuals/individ_income/Pages/Federal-Conformity_15-16.aspx

 

Who’s agitating for the taxpayer inside the Internal Revenue Service?  Meet Nina Olson, the National Taxpayer Advocate. While she works within the IRS, she reports by law only to Congress “with no prior review or comment from the (IRS) Commissioner . . . (or) Secretary of the Treasury.”

On June 28, Olson sent her mid-year 2017 report about the tax-collecting agency to Congress. It gives her view of the recent 2017 filing season for taxes and singles out issues for her Taxpayer Advocate Service to take on during the coming year.  We can’t cover it all, but here are some highlights of the 2018 Objectives Report to Congress:

2017 Filing Season

• Most taxpayers who filed returns without contacting IRS had no problems. But results were “mixed” for taxpayers who had to phone or write in for help.
• IRS answered 79 percent of calls for assistance filing returns. Taxpayers typically spent 6.5 minutes on hold, an improvement from 11.1 minutes the prior year. (IRS receives more than 100 million toll-free calls.) Olson found that increased performance praiseworthy.
• But IRS answered only 40 percent of calls to the compliance lines, which arrange installment payments, etc. Taxpayers who did get through had to wait a “staggering” 47 minutes, the report said.
• IRS processed 130 million returns; 90 percent of them were filed electronically. Seventy-five percent yielded refunds, with the average at $2,763.
• Olson criticized a new IRS requirement for appointments at its 376 Taxpayer Assistance Centers. The centers used to be open for “walk-in” clients but now are “appointment only.”

Selected Priority Issues

• Scrounging up delinquent taxes: The IRS began using private agencies to collect overdue taxes beginning this spring. After reviewing collections so far, Olson’s office wants the IRS to stop referring low- income taxpayers receiving Social Security to those private collection agencies instead of working with the accounts through more lenient IRS channels.
• Passport denials: By law, the IRS must certify that passport applicants don’t owe substantial amounts of delinquent taxes to the government. The Taxpayer Advocate wants the IRS to send advance notice to applicants if the agency intends to reject the certification, which effectively could deny a passport.  That’s not done now.
• Advantages and disadvantages of IRS emphasis on online taxpayer accounts
• IRS policies regarding tax levies made on retirement accounts.
• Taxpayer problems in reporting insurance under requirements of the Affordable Care Act. The IRS has “made progress” but the ACA and its premium tax credits remain troublesome for Olson.

Last year, the National Taxpayer Advocate made 93 recommendations in its year-end report. The IRS agreed to 35 of them, or 38 percent, according to an agency release.

We know. Those fat file folders of tax forms are stuffed into your cabinets– or cluttering up your hard drive — long after April’s tax payments have gone to various governments. That’s actually appropriate, to some extent. But sooner or later, many taxpayers are left wondering what to keep and what to toss, what to save and what to delete. When can we clean out some of this paperwork?

The short answer is: Not for at least three years after the due date, which typically is April 15. The Internal Revenue Service advises holding on to the tax forms plus any documents supporting them (W-2 slips, dividend statements, receipts for stock sales, etc.) that long. The federal agency can collect more tax and, taxpayers can amend their returns during that period.

But, as the Kiplinger Tax Letter suggests, don’t just send everything to the shredder after three years. There are important exceptions. The IRS offers these sweeping guidelines:
• Retain those returns for six years if you did not report some income and the amount totals more than 25 percent of the gross income that was declared.
• Hang on to records for seven years when claiming certain losses, such as worthless securities or bad debts.
• There is no limit for returns that were not filed at all or that involve fraud.
• Employers should keep employment and payroll tax records for at least four years after the due date for taxes.
• Keep health insurance coverages for all family members. They now are part of tax returns.

Some types of records also should linger for as long as decades because they verify important financial events. Real estate records are a good example. Homeowners will have to figure the original value plus costs of other additions (adjusted basis) when they sell their houses. Keep the records for at least three years after selling the property.

Ditto for records of other types of property, such as stock investments and traditional Individual Retirement Arrangements (IRAs), which both can involve tax liability. Keep details of inheritances of property to report in the tax year when they are sold; they are valued when received on the date of death of the donor.

Whether or not it’s required, filing away some tax records helps to paint a picture of your financial life, and that recordkeeping can be valuable by itself.

If you’re a client, EricJohn Ltd. also has kept your financial records in secure form electronically since 2009, owner Eric Buechler says. For more detailed information about recordkeeping, contact EricJohn Ltd. or check into IRS Publication 552 (Recordkeeping for Individuals).

Furiously figuring your income taxes to beat this year’s tax filing deadline? If you’re still sorting receipts and penciling in numbers, it might be time to start thinking about an extension!

We say “might” because procrastinators still have the weekend plus two more days to wrap things up. The Internal Revenue Service will accept 2016 returns filed electronically or postmarked in the mail through the end of the day on Tuesday, April 18. (The extra time has to do with a holiday in Washington, D.C.)

If you still can’t make that deadline, it’s time to join the multitudes of taxpayers asking the Internal Revenue Service some extra days on Form 4868, named or “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” The extension generally is automatic. For a copy of the form, see https://www.irs.gov/pub/irs-pdf/f4868.pdf.

The extension is automatic in most cases and adds another six months to the normal deadline. The IRS won’t ask you why you need it. BUT – and it can be a big “but” – the IRS still expects you to estimate income and pay any taxes due by the normal deadline.

The clock is ticking with this. Whether you’re sending it electronically or by “snail mail,” the extension form and any payments must be recorded or postmarked by the end of the day on April 18 to avoid penalties. The IRS notes special deadline rules can apply if you are in the military and served in a combat zone of if you are living outside the United States.

Finally, don’t forget any state taxes you owe. In Minnesota, you don’t have to file an extension form. BUT – just as with the federal return – you must pay an estimate of taxes due to avoid penalties. Minnesota Department of Revenue accepts tax payments through its Web site.

We at EricJohn Ltd. wish you easy and accurate filings for your 2016 tax return!

It’s now less than 3 weeks to the April 15th Tax Deadline, and we’ve got three letters to pass along to procrastinating taxpayers: IRA.

A contribution to your individual retirement arrangement is about the only new tactic available at this late date to shave some income off a 2016 return. Taxpayers can add money to their accounts or start a new IRA until their returns are due on April 18.

Most taxpayers can put as much as $5,500 into their accounts, and those over age 50 can bump that up to $6,500. On the standard Form 1040, look at Line 32, which is where IRA deductions take place.

There’s also a sweetener for many low and middle-income families. Any additions to various retirement accounts make them eligible for the Retirement Savings Contributions Credit, a relatively new tax credit based on IRAs. Check Line 51 on the Form 1040. The credit applies to marrieds with up to $61,500 in adjusted gross income and to singles making to $30,750.

For minimizing taxes, we’re mostly talking about the traditional IRA. Your yearly contribution goes into the account tax-free, but you pay federal tax on it and any gains when you withdraw money during retirement.

Taxpayers also can add to their Roth IRAs until April 18, but a contribution now won’t help to cut back income for 2016. That’s because Roth money never gets a tax break going into the account. However, contributions plus any gains are tax-free on the way out during retirement.

Here’s one little-noticed deadline that is important for baby boomers who turned age 70½ during 2016. The IRS deadline for starting required withdrawals from their traditional IRAs – and most other retirement-related plans – is April 1. They’ll have to work fast.

Let’s leave more details, such as income limits for contributions, etc., to the financial folks. If you have enough energy to go solo, they also are covered in IRS Publication 590-A. But don’t forget, too, that Eric Buechler, owner of EricJohn Ltd., can help taxpayers deploy those IRA contributions expertly in these last weeks of the tax season.

If your business pushes dirt around with machines or perhaps runs generators and power equipment at construction sites, sift back through your fuel receipts at tax time. You might dig up a write-off for your return!

Most farmers probably know that the diesel fuel running through their tractor is exempt from federal fuel excise taxes. But, many other small businesses, such as landscapers and building contractors, also can take advantage of the tax break given for off-highway use of gasoline and other fuels, EricJohn Ltd. owner Eric Buechler says. By the way, for 2016, those “other” fuels also include alternative mixtures, such as biodiesel and compressed natural gas.

Now, if you like to go off-roading for pleasure, enjoy yourself but don’t try this tax dodge. It’s only available for doing business, the Internal Revenue Service says. So, you generally can’t claim fuel for snowmobiles, all-terrain vehicles, chain saws, riding lawn mowers, etc. that are for personal use. Vehicles that must be licensed for highway use, such as pick-up trucks, also don’t qualify.

But landscape businesses can take tax credits for fuel used in bulldozers, digging equipment or even lawn mowers at job sites. (The amount varies with the type of fuel.) Likewise, construction contractors can write off part of the cost of gas or other fuel to power forklifts, compressors, power saws and machinery used in building.

To make the claim, you’ll have to declare gallons and types of fuel bought, and you (or your business) must be the “ultimate purchaser.” That’s done on IRS Form 4136, a four-page form showing fuels and deductible rates.

EricJohn Ltd. can guide small business owners through the ruts of the off-highway credit that are bogging them down.

As spring approaches, you might also want to know about one activity that does not work for fuel tax credits. In instructions for the IRS form, the tax collectors specifically say that “processing maple sap into maple syrup or maple sugar” is not considered farming, so it is not eligible for the tax break.