Tax Records: What to keep and how to keep it

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Why do I need to keep tax records?
In the event that you are audited, need to amend a return, have an issue with identity theft, or any number of similar issues, having complete tax records can be a huge help and sometimes even a solution. Tax records are required to apply for all loans and in case you are selected for an audit. You must keep tax records for yourself, the IRS and for the state(s) where tax returns are required to be filed.

If you have not been keeping proper records, you may request a free transcript from the IRS for the past three years that you have filed returns. Go to IRS.gov and use the “Get Transcript” tool to get started.

How long do I have to keep my tax records?
How long you keep your records really depends on what kind of return you file and what sort of tax records you are keeping. The standard duration of time the IRS suggests taxpayers to keep complete records of their tax returns is 3 years. However, there are circumstances that require records to be kept for longer. For example, New Jersey taxpayers must keep complete tax records for the previous four (4) years.

Further:
• Keep records for 7 years if you file a claim of loss from worthless securities or bad debt deduction
• Keep records for 6 years if you do not report income that should have been reported and it is more than 25% of the gross income on the filed return for the relevant year.
• Keep employment records for 4 years after the tax becomes due or is paid, whichever is later.
• Keep records for 3 years after the original return was filed or for 2 years after the tax was paid, whichever comes later, if you file a claim for a credit or a refund.
• Keep records indefinitely if you do not file a return or file a fraudulent return

What kind of documents do I need to ensure that my records are complete?
There are a few key documents that you ought to keep with your returns to ensure that your records are complete.

Income:
• W-2(s)
• 1099(s)
• Bank Statement(s)
• Brokerage Statement(s)
• Alimony Received *see our blog post on new alimony rules*
• K-1(s)
Expenses & Deductions:
• Receipts
• Invoices
• Alimony Paid *see our blog post on new alimony rules*
• Statement(s) from charities *see our blog post on new rules for charitable contribution documentation*
• Gambling losses
Home/Property:
• Closing Statement(s) from purchases and sales of real property
• Purchase and Sale Invoices
• Property Tax Assessment(s)
Retirement Account:
• Form 5498 (IRA Contributions)
• Form 8606 (Nondeductible IRA Contributions)
• 401(k) Statement(s)
• Distribution Records
• Annual Statement
Other Investments:
• Transaction Data (including individual purchase or sales receipts)
• Annual Statement

How do I store my records securely?
There is no standard or mandated way to store your tax records. It is totally up to you! However, there are ways to ensure the security of your records and limit the chance of identity theft and fraud. It is suggested that you scan paper tax returns and financial records digitally, encrypt or password protect them, and then download them onto a flash drive or other external device. As for paper copies, limit the amount of copies you keep and who has access to them. Any document with a social security number or employer identification number should be similarly protected.

You may keep your records on paper in file folders or in banker’s boxes, keep digital copies on a computer or tablet, a mixture between the two, or your own unique method. As long as your records are complete, easy to access, and secure, you can store them however you see fit.

How do I properly dispose of my records once I no longer need them?
Once their usefulness has expired, tax records must be properly disposed of to avoid any identity theft or fraud using your information. Shred all paper copies of returns and documents completely. All electronic copies should be deleted and the hard drive of the device used to store them should be overwritten or destroyed. Remember that computers, tablets, mobile devices, and back-up hard drives among other electronics store information in different places. You may forget to check or not know that sensitive data is being stored there. Be sure to remove any and all information from your devices before disposing of them. This may sometimes require you to use a special disk utility software.

Mazur & Associates CPAs and Business Advisors, PC is more than just an accounting firm. We are here to ensure your security as well as safeguard your tax returns and supporting documentation. We want to make sure that each of our clients keeps their records properly, completely, and securely for the duration they are stored. Please call us with any questions you may have about record keeping and we will assist you in any way we can! Our number is (732) 936-1230 and we are open Monday through Friday from 8 A.M. to 5:30 P.M.

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BREAKING NEWS — Murphy’s Minimum Wage: How $15 Dollars an Hour Will Affect You

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On Thursday, January 17, 2019, NJ Governor Philip Murphy and legislative leaders agreed on a plan to raise the New Jersey minimum wage from its current amount of $8.85 an hour to $15.00 an hour by January 1, 2024. The agreed upon plan is as follows:

• Increased to $10/hour by July 1, 2019
• Increased to $11/hour by January 2020
• Increased $1/hour every January 1st until $15/hour is reached by January 1, 2024

• Seasonal workers and small business employers with 5 employees or less will reach $15/hour by January 1, 2026

• Farm workers will reach $12.50/hour by January 1, 2024 and then a special committee will review the plan to raise the wage to $15/hour by 2027

• A tax credit will be given to those who hire farm workers with disabilities

New Jersey has joined a small number of states calling themselves the progressive “Fight for $15” minimum wage increase movement which also includes California, New York, Massachusetts and the District of Columbia. While some are very happy about this movement towards a higher minimum wage, small businesses are less enthused. A number of New Jersey small business owners and advocates are speaking out as a collective whole against this increase, claiming that hiring workers for entry level positions has become unaffordable for them. This wage increase has caused some owners to consider moving their business out of state, not hiring seasonal workers, laying off current workers or shutting down completely.

While it is impossible to predict the outcome of this legislation, there are many opinions being voiced on both sides of the issue. Here at Mazur & Associates, Certified Public Accountants and Business Advisors, we are uniquely qualified to help your Company formulate a strategy to navigate its way through this new legislation. Please contact us at (732) 936-1230 or via email to steve@mazurcpas.com to set up a meeting with one of our experienced Certified Public Accountants and Business Advisors.

Classification of Workers Changed; Are you an employee or an independent contractor?

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In the past, independent contractors had to pay more taxes compared to those workers classified as employees, but this may no longer be the case. With the Tax Cuts and Jobs Act passed in 2017, claiming to be an independent contractor may be more beneficial when filing your returns.

Before you decide to jump into transitioning your classification, keep the following definitions in mind:

•  If the business has the right to tell you what, when, and how to do your job, you are an employee, not an independent contractor
•  If you are not in charge of the business aspects of your job and are not feeling the business stress and pressure that a business owner would feel, you are probably not an independent contractor.
•  If you are not free to work wherever you please and whatever hours you deem fit, you are not an independent contractor.

After reading those parameters if you think you might be an independent contractor, you should know that there is a new 20% income deduction available for business owners of S-Corporations, LLC’s and partnerships and also independent contractors filing Schedule C! The deduction is either 20% of qualified business income (QBI), net of business expenses, or 20% of the difference between taxable income prior to the deduction and any capital gains, whichever is less.

There are limitations to be aware of, however. If your taxable income before the 20% reduction is greater than $157,500 filing as an individual or $315,000 married filing, there are some income limitations applied such as wage and property limits and the service business limits. Professional service businesses such as lawyers, accountants, brokers, insurance firms, investment managers, etc. are subject to this taxable income limitation. Most other service businesses are not subject to this. The IRS recently issued clarification of which professions fall into this undesirable category.

For example, a W-2 employee who earns wages of $100,000 per year.  Compare this with an independent contractor whose contract is for $100,000 plus additional compensation for “gross up” of the social security and Medicare taxes on $100,000 of self-employment income ($100,000 plus $7,650 equals $106,750).

Gross income for the employee is $100,000, the self-employment tax deduction is $0, and the standard deduction is $12,000, which leaves the employee with $88,000. Because the employee is paid wages, the 20% pass-through deduction is $0, making his or her taxable income $88,000, resulting in income tax of $15,300.

For the independent contractor, his/her gross income is $107,650, the self-employment deduction is $7,605, and the standard deduction is $12,000, leaving the contactor with $88,045. Based on the 20% pass-through deduction of $17,609, the taxable income becomes $70,436 and federal income tax amounts to $11,435.

Now, for the employee, based on the above calculations gross income – Income Tax – Social Security & Medicare Tax = $77,050 of federal after-tax income.

For the independent contractor, based on the above calculations gross income – income tax – self-employment = $81,005 in after tax income (107,650-$15,210 self-employment tax-11,435 income tax).

As you can see, working as an independent contractor saves the filer $3,955 in after tax income!

However, there are consequences for classifying and filing incorrectly, including being held responsible for all back payments of both the federal and state payroll taxes, unemployment taxes, and employment benefits.

We at Mazur and Associates suggest that if this is something you are considering, you should have a written contract. The independent contractors should retain an attorney to review all documents, and if necessary, contact the IRS for help in choosing a filing status for form SS-8 (Determination of Workers Status for purpose of Federal Employment Taxes and Income Tax Withholding). But above all, we urge you to call our office and set up an appointment! We can thoroughly review your options, including the advantages and disadvantages of each compensation classification, and explore the best and most sensible options for your particular situation. We are available Monday through Friday at 8:30 AM to 5:30 PM at (732) 936-1230.

Task Force on Employee Misclassification Explained

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New Jersey Governor Phil Murphy recently signed an executive order that created the Task Force on Employee Misclassification in order to ensure that employers are classifying and filing for their employees properly. Misclassification is illegal and is a growing problem in New Jersey, both intentional and unintentional. Employers who do it intentionally are attempting to reduce or avoid labor and worker’s compensation related costs. Employers often unintentionally misclassify their workers as well, which leaves these individuals without workplace protection, fringe benefits (i.e. health insurance) and unemployment and disability benefits in the event of termination.

New Jersey has an “ABC” test to determine the proper classification of workers for employers and employees to use. This test assumes that a worker should be classified as an employee unless the test proves otherwise.

The test is based on three parameters:
• Whether the worker has been and continues to have freedom to direct their own performance of their work
•  Whether the work done is completed:
•  Outside what the business typically offers in services
•  Ex: A plumber’s services are typically outside of those offered by an accounting firm, even though a plumber may do repairs in an accounting firm.
OR
•  Offsite or at a different location besides the normal place of the company’s operations
• Whether the worker is normally working in an independent trade, job, profession, or business outside of the one that is up for classification evaluation.

If a worker falls into all three of these three parameters, they are an independent contractor rather than an employee. If a worker cannot apply their work to even one of these parameters, they are considered an employee rather than an independent contractor.

With this new task force in full swing, the Internal Revenue Service and New Jersey Department of Labor and Workforce Development have increased the amount of small and large business audits done and as a result, businesses found in violation of classification legislation have been assessed penalties, fines, and back taxes.

This new Task Force is comprised of at least 12 members and is charged with combatting employee misclassification by evaluating existing methods of misclassification enforcement, developing new and better practices of enforcement, providing recommendations on how to comply with the laws, creating educational programs for employers and employees alike about proper classification, and reviewing existing laws to create procedures on how to deal with misclassification.

With all of this new information about how problematic and potentially expensive misclassification can be, as employers and business owners, you should heed this signal from the State and reexamine whether your 1099 contractors are indeed independent contractors and not employees. Don’t risk the prospect of being audited and owing thousands of dollars in back taxes. We can evaluate whether your company is classifying workers correctly thereby meeting the criteria established by the State of New Jersey and Internal Revenue Service. Over the years, we at Mazur & Associates have become proficient in this area and have successfully resolved our clients’ issues with taxing authorities: Reach us at (732) 936-1230 and set up an appointment today!

UPDATE: Tax Cuts and Jobs Act – Divorce

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The Tax Cuts and Jobs Act (TCJA) has made some changes that directly affect those who are planning on getting a divorce. With the new TCJA changes, alimony will no longer be tax deductible or taxable. These changes apply to divorce and separation cases fully executed after December 31, 2018 and adjusted agreements changed on January 1, 2019 and after. These changes, unlike most of the other TCJA revisions, are a permanent part of the tax code and will continue to be effective after 2025.

To fully understand the changes that have been made, it is best to understand the previous set of rules. Before these changes were made, those who paid alimony to an ex-spouse were able to write off the entirety of qualified alimony payments on their federal returns, and recipients of alimony were required to report their alimony received as taxable income. However, child support payments among other types of payments were not tax deductible or taxable for either party.

Alimony that qualified as deductible had the following requirements:
• The parties involved could not file jointly with each other
• The payments were made in cash/check/money order
• The payment to the spouse or former spouse is regulated by a divorce or separation document/instrument
• The divorce or separation document does not specify that the payment is not alimony
• If the spouses are legally separated under a decree of divorce or separate maintenance, the spouses are not living in the same household when the payment is made
• The payments are not required to continue once the recipient passes away.
• The payment is not considered child support or property settlement.

Now that the TCJA changes are in effect, none of the previously listed requirements can make alimony deductible. Agreements finalized after December 31, 2018 and preexisting agreements edited on or after January 1, 2019 are affected by these changes. It is important to know that in some states there is a waiting period after divorce paperwork is finalized before the divorce officially takes effect. This waiting period determines the date of which a divorce or separation is official and what tax rules apply to it. In New Jersey, the wait period in a no-fault divorce is six months if both parties consent to it and 18 months if they do not, meaning that in a consenting no fault divorce, papers would need to be signed in late May or early June to guarantee that it would be finalized before December 31st 2018 and qualify to reap benefits under the old tax code.

These changes in the tax code will likely effect the way people go about renegotiating a divorce agreement. Since the payor will no longer be able to deduct alimony, they may not be willing to pay very much, but instead might agree to a lump-sum payment before 2019 so that the full sum would be deductible. The payee, on the other hand, may attempt to stall the process so that they can avoid being taxed on the alimony.

Additionally, it is to be expected that many people will revisit their preexisting agreements in light of these changes effective January 1, 2019. For example, if an agreement was made based on the fact that the payor could fully deduct alimony, it is likely that a current divorce decree will be revisited and edited now that alimony payments will no longer be deductible. To ensure that these revisions to current alimony agreements beat the end of year deadline, the adjustments must be made before January 1, 2019 with any wait time taken into account.

Another important Tax Cuts and Jobs Act (TCJA) enactment effective immediately is the documentation now required for charitable contributions. The deduction limitation for cash contributions to public charities and some private foundations has increased from 50% to 60%. Contributions over 60% can be carried forward and deducted for up to five years based on the later year’s ceiling. However, the IRS is cracking down and getting stricter with charitable donation record keeping. Be sure to always keep proof and/or records of your charitable contributions, on the organizations letterhead if possible.

As of the latest IRS regulations set forth on 7/30/18, the following documentation is mandated:
• No chartable monetary gift is eligible for deduction unless the donor maintains records of the gift such as bank records or a written communication from the donee with the name of the donee, the date of contribution and the amount of the contribution, regardless of the amount of the donation.
– You can deduct travel costs if you are traveling to provide service as long as you are not compensated for it.
– You can deduct gifts that you receive a benefit from, but only the amount of the donation after the benefit is subtracted.
— EX: If you buy a charity dinner ticket for $50 dollars and the dinner is valued at $20, you can only deduct $30.
• Nonmonetary or property donations under $250 may be claimed for deduction only if the donor receives a receipt from the donee or keeps reliable records.
• If the contribution is at least $250 but less than $500, a contemporaneous written acknowledgment is required.
• For a donation that exceeds $500 but is no more than $5,000 the donor must have written acknowledgement and a completed Form 8283 (Section A) Noncash Charitable Contributions must be attached to the tax return.
• For Noncash contributions of $5,000 or more, in addition to a written acknowledgement the donor must have their contribution appraised by a qualified appraiser and complete and file either Section A or Section B of Form 8283.
• Noncash contributions of $500,000 or more require the same proof as a $5,000 or greater contribution and the qualified appraisal must be attached to the tax return.
– A qualified appraiser is an individual with a verified education and experience in valuating that item or property in question.
— A verifiable education means that the individual has successfully completed professional or college level coursework in evaluating the type of property and has two or more years of experience in valuating that kind of property or has earned a recognized appraiser designation.
— The new requirements for the appraisers apply only to contributions made on or after 1/1/19. All other new requirements are in effect as of 7/30/18.

We at Mazur and Associates know that separation and divorce is hard enough on everyone involved and that financial and tax planning is just an added stress. Also, the revised documentation for charitable contributions is more stringent beginning with 2018 tax returns. Let us help you get through it with as much confidence as possible. Call us and set up an appointment to discuss your options at (732) 936-1230!

Higher Education Doesn’t Have to Ruin Your Finances: Part Two

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In our last post, we promised to give you a list of things you SHOULD do when thinking about what to spend and how to save money with college in mind. The wait is over! Here they are:

Things you SHOULD DO:
Medical Plan
— It is recommended to keep your student on your medical plan while they go to college. Nothing is more expensive than a visit to the doctor that isn’t covered. Hopefully there will be no need for a hospital visit, but just in case, it is best to discuss which offices and doctors are covered with your student before they go to school.
Scholarships
— There are thousands upon thousands of scholarships available and not all of them are academic or athletic. Searching scholarships to apply for online can be very beneficial. Even small ones for a few hundred dollars can help offset the cost of books or general university fees. And if your student is granted a few small ones, the money really adds up!
Test Out
— Credits are expensive. If you are proficient in a topic or course material, explore options to test out and receive automatic credit. Why pay for college credits if you can test out of it easily while in High School?
Savings Account
— Open a savings account that gains interest. This is a good way to slowly make some money and to save money for an emergency or to pay off debt once you graduate. Credit unions are a good place to start because a lot of them have specific student accounts with special benefits.
Student Discounts
— Always ask if stores and shops have student discounts before you purchase something. Usually places near universities will have deals and discounts for students that can produce a valid school ID.
Pay Interest
— If you have to take student loans, it is best to start paying interest as soon as possible. Even putting $10 a month towards your loans will help lower your debt in the long run.
Tax Credits
— Discuss with your CPA and apply for the following tax credits to help offset college costs.
– American Opportunity Tax Credit: credit for up to $2,500 towards tuition, fees and course materials available for the first four years of education after high school.
– Refundable credit: reduces the amount of tax you owe on a dollar for dollar basis. If the amount of the credit granted is more than what you owe in taxes, the left over will be refunded to you in either 40% of the credit or $1,000 depending on the situation.
– Lifetime Learning Credit: credit for up to $2,000 a year to cover tuition and fees for all years of education after high school including courses to gain or improve job skills. This credit is also available for graduate school tuition and related expenses.
FAFSA
— Even if you think your income is too high to qualify for federal financial aid, it is still a good idea to fill out the Free Application for Federal Student Aid (FAFSA). This form is required to be considered for financial aid and to maximize your opportunities. It can be used to determine eligibility for other scholarships and grants as well as for low-interest student loans. File as early as possible because some states give out grants on a first come, first serve basis until the money is gone.
Budget/Plan
— Even with all of these tips on how to save money on college expenses, it is still important to create a financial plan or budget for your student. Sit down and discuss realistic spending habits and financial responsibilities with them to ensure that everyone is on the same page about how to manage their finances.

We understand that college is expensive, and the cost is only climbing. At Mazur & Associates, Certified Public Accountants and Business Advisors, we have “been there” and our CPAs have successfully navigated through the trials and tribulations of our children’s college years. Take advantage of our experience and contact us to discuss some financial planning ideas that your family may consider before your student goes off to college. Schedule an appointment today by telephoning us at (732) 936-1230. And good luck to you and your student!

Higher Education Doesn’t Have to Ruin Your Finances: Part One

The following are some budgeting, planning, and money saving tips for college students and their parents/financial supporters.

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Things you DO NOT NEED:
•  To Drain Your Retirement Fund
•  Parents with college age children are usually in their 40’s to 50’s, the prime years for them to be adding as much as possible to their retirement. Sure, you might not want your child to drown in student loans, but that is a debt that can be paid off over time. Taking out a loan to cover retirement costs is a much worse loan to pay off because it will more likely than not result in needing a job to supplement your savings or make big retirement budget cuts. Look for low-interest student loans or less expensive colleges.
•  New Textbooks
•  Students spend an average of $579 on school books for the 2016-2017 academic year. You can avoid being one of those people by buying used books or even renting them. E-books and library check outs are cheaper options, too. Make sure to shop around on major online retail and book rental sites for the best deals. Another tip is to keep your books in good condition so you can sell them back to the vendor or a friend when you’re finished using them. Finally, be sure to only buy the REQUIRED books for your classes. Some professors have optional books listed as well.
•  Car
•  People spend around $8,558 per year on their car according to AAA. Think about all of the expenses that come with owning a vehicle: gas, insurance, depreciation, maintenance, repair, licensing fees, registration fees, taxes, loans/leases, etc. Add a parking pass to all of that and you’re looking at a hefty sum that can be avoided by using a bike or public transportation.
•  Meal Plan
•  Well, you might need one, but probably not the most expensive one. Talk about and make a budget for food, look for roll over meal dollar options, and for options to add onto the plan later on if possible. If that is an option, buy a basic plan and add on as needed. If those are not options for you, be sure to buy the plan that makes sense for you and your personal eating habits. Usually, the most expensive plan is too big for one person to fully use.
•  (New) Technology
•  The biggest expense as far as unnecessary technology goes is printers. There is the printer itself, the paper, and the ink. They are not always needed either. Today, most assignments can be submitted online and paperless. Additionally, most campuses have printers on site to be used by students for a few cents per page or even free. Do some research and see if it’s really necessary.
•  Almost every student needs a laptop to do homework, research, etc. However, the most expensive model is not always justified by the extra cost. Before you purchase a computer, know what you will use it for. If your student will use it for basic things like word processing and checking emails, a basic model will suffice.
•  Some majors, such as coding or computer sciences, require a student to have certain software or extra hardware on their computers to complete their courses. These extras can be pricy, but the college will usually offer free instillation or instillation at a cheaper price than major providers.
•  Credit Card
•  It is a good idea to start building credit, but it is typical of college students to get themselves into serious credit card debt that they cannot pay off. Unless your student has a job and will be able to keep up with payments on time, it is best to avoid credit cards. They do not NEED one. They can use a prepaid debit card or cash to make purchases.

Now that you know what to avoid, you need to know what to do. Do you or don’t you fill out the FASFA? Do you keep your student on your medical plan? Do you open any type of bank account at all? All of these questions and more will be answered in our next blog post to be posted in three weeks! Stay tuned to get more advice on how to be smart about your plans for college spending. Can’t wait? Call us at (732) 936-1230 to set up an appointment to discuss budgeting options! At Mazur & Associates we are always happy to help.