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Blog - Tax Related

Wednesday, 15 December 2021 20:26

Medical Expense Deductions

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 Medical expenses are a financial burden that many of us face any given year. In fact, researchers found that between 2009 and 2020, medical expenses became the number one source of debt owed to collection agencies in the U.S. To help ease the burden, the IRS allows you to deduct most unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI) when filing a Schedule A. If your out-of-pocket medical expenses have consumed more than 7.5% of your AGI, pay attention! The following examples can help you get a clearer picture of what medical expenses you can deduct this tax year.

Add a little bit of body text 5.5 x 9.5 in

According to the IRS, “medical expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body.” This includes fees for doctors, surgeons, dentists, psychologists, and others, in-patient hospital care or residential nursing home care, payments for insulin, false teeth, reading or prescription glasses, hearing aids, and even insurance premiums. The full list of covered medical expenses can be found in the attached image to this post. Although medical expense deductions cover a broad spectrum of medical services, it still has its limitations. 

 What is, and is not deductible, can be hard to determine. For items that are not covered in this article, refer to this free IRS questionnaire that can help you figure out what you can deduct: https://www.irs.gov/help/ita/can-i-deduct-my-medical-and-dental-expenses For example, the IRS only allows medical deductions if the expenses were paid in the same year as the deduction. You must also reduce your total deductible expenses for the year by any reimbursement of deductible expenses, including medical insurance or if it is paid on behalf of your doctor, hospital, or other medical provider. The agency also notes that you may not deduct for funeral or burial expenses, nonprescription medicines, toiletries, cosmetics, trips or programs for your mental health, or most cosmetic surgeries. Although smoking-cessation programs can potentially be deductible if prescribed by your medical provider, nicotine gum and nicotine patches are not deductible since it is an over the counter treatment, and not medically prescribed by a physician. Generally, if a treatment is prescribed to you by your health provider, it is deductible.

 Of course, we are here to help. If you have any additional questions regarding medical deductions, please feel free to leave us a comment on this post or send us an email at This email address is being protected from spambots. You need JavaScript enabled to view it..

  Planning on going to GoodWill or Salvation Army to drop off your donations? On our itinerary next week, we will be talking about charitable contributions. This is a popular deduction that can help most of you save this tax season. You don’t want to miss out. 


Figuring out what is tax-deductible can be confusing for businesses. The requirements for meals deductions especially can be subjective, with broad specifications as to what is allowable and what is not. Luckily, in this article, we will be outlining how you and your business can make the most of the recent modifications to meals tax deductions. 

The way businesses handle meals and entertainment deductions hasn’t changed much since the 2017 Tax Cuts and the Jobs Act permanently disallowed entertainment write-offs.  However, as of 2020, the way businesses can write off meals has changed.  In previous years, only 50% of restaurant meals were deductible. Now, meals can be 100% deductible if met by certain, specific requirements. In response to the pandemic, the Consolidated Appropriations Act was signed into law in December 2020 in an effort to temporarily help the struggling restaurant industry. 

Now that deducting entertainment expenses is off the table, we should focus on what classifies a meal deduction. The IRS released Notice 2021-25 as guidance. Here is a quick summary of the notice:

  • The Notice is effective from Dec. 31, 2020 to January 1, 2023.
  • Food and beverages are 100% deductible if purchased from a restaurant within 2021 and 2022.
  • Entertainment is no longer deductible under Section 274(a).

As mentioned above, it can be difficult to classify which expenses are deductible. You may have questions such as, “What if I cater food for my business?”, or “What are the limitations to deducting meals?”. According to the notice, no deduction is allowed for the expense of meals unless:

  1. The expense is not lavish or extravagant under the circumstances; and
  2. The taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages.

Team building activities, according to the tax code are “expenses for recreational, social, or similar activities (including facilities therefore) primarily for the benefit of employees'. This includes, but is not limited to, holiday parties, annual picnics, company retreats, and summer outings. Activities that are not deductible include sporting event tickets, concert tickets, and golfing, amongst others. Rather, these types of events are categorized as ‘entertainment’ by the IRS. However, it is important to note that food and beverages purchased separately from these ‘entertainment’ activities are still deductible. 

As long as the meals are provided by a restaurant, they are 100% deductible. This also includes catering. The IRS defines "restaurants as a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the businesses’ premises”. Meals that are de minimis fringe benefits, cooked, or prepackaged, are now 50% deductible. That means, if your business provides meals in an in-house cafeteria, or if you prepare a cooked meal in your hotel room while traveling, you are still able to deduct 50%. So if you plan on treating your best client to lunch and a game of golf at the country club, make sure to separate your receipts in order to claim the 100% deduction for your meals. 

100 Meals Deductions

Making sure you are up to date with your business’s record-keeping is going to be essential in itemizing your meal and entertainment deductibles. It is crucial that you accurately document and record your receipts. If not properly maintained, you may be faced with additional penalties and interest from the IRS in the event of an audit.

We understand that itemizing deductions isn’t always black and white. So, to help you distinguish what is, or is not deductible, we're including a free chart of examples found below. Sometimes, mistakes can happen when using even the best bookkeeping software. Consult your local tax advisor today to take advantage of this new, temporary tax rule.

RevisedMealDeductionChart

  Rumors of a new tax rule have spread over all major platforms this past week regarding additional taxation on third-party transactional apps. Social media users say peer-to-peer (P2P) platforms such as Zelle, PayPal, Venmo, and CashApp will face new tax reporting requirements when annual transactions exceed $600. But how accurate is this claim?

  Although there is some truth to the claim, it is not as daunting as it seems. The American Rescue Plan Act of 2021 proposes to lower IRS reporting requirements from $20,000 in aggregate payments to $600 effective January 1, 2022. The aim is to collect unreported income, which the IRS estimates to be nearly $166 billion every year. Before the bill, if a seller using a P2P app receives over $20,000 in over 200 aggregate payments over a year, platforms such as Venmo, CashApp, and Zelle, will send you a 1099k form. The new proposal’s threshold is decreased to $600 in aggregate payments, with no minimum transaction number. Note that states like Maryland, Virginia, and Vermont already have a $600 threshold enacted for P2P apps. 

   If you are a business owner, it’s likely that you already receive a 1099k each tax year from the IRS. The sale of goods or services is considered income, and in the eyes of the IRS, should be reported. However, it’s important to differentiate the difference between taxable income and other forms of payments. Payments made through P2P apps for living expenses such as rent or paying a friend to cover the dinner bill are not taxable income. Your family sending you rent money is also not considered taxable income. Paying your friend back for dinner is considered a reimbursement, while the latter is considered support from your family members. For payments to be considered inflows of income, they have to result from a sale of goods or services in exchange for compensation. Reimbursements for things such as rent is not considered income and therefore are not taxable.

   Let’s clarify what is considered taxable income with an example. Joe is a college student with a corporate job. On the weekends, Joe details cars for extra cash. All of his car detailing transactions occur on Venmo, totaling $2,300 a month in gross receipts. Even though he is working part-time as a W2 employee and is a freelancer on the side, he struggles to pay off his school and living expenses. So to help, his father sends him money through Venmo to help cover his bases. Once his grandparents heard of this, they also decided to contribute. Monthly, Joe’s father sends Joe $1,200 for his rent, and his grandparents send $1000 to cover books and other college expenses through Venmo. On top of that, Joe’s roommate sends his half of the rent also through Venmo. Collectively, Joe’s account is deposited $4,500 monthly through the platform.

   Since Joe meets the $600 threshold for the tax year, he is sent a 1099k form. Within the form, Joe must classify all of his transactions. Otherwise, he is subject to paying the taxes at the full amount. Out of the $4,500 he receives monthly, only his car detailing business proceeds are income and taxable after allowable expenses. The money he receives from his father and his grandparents is exempt from taxation, as it is a gift and not income. His roommate’s contribution to the rent is also not income. Instead of paying the taxes for the total $4,500 of earnings, Joe is only obligated to pay taxes on the income earned from providing car detailing services. 

In the event of an audit, the IRS can claim that the entire $4,500 per month is taxable income.   

     Of course, we now know that this claim is incorrect. Suppose Joe classified all of his transactions from Venmo correctly. In that case, he is only subject to paying taxes on the $2,300 per month earned, less his deductible expenses. Personal loans, gifts, and debt reimbursements have never been taxable, and even with this new proposal, that will not change. What will change, however, is the volume of people who receive a 1099k form. With the threshold dropping from $20,000 to only $600, most people who regularly use third-party transactional apps will receive one. 

    The new proposal, if enacted, will likely affect most people using transactional apps such as Venmo, Zelle, CashApp, and PayPal. Although these platforms are already required to report their activity to the IRS, lowering the threshold requirement from $20,000 to $600 will complicate many people’s taxes. Those who file their own taxes are at risk of either over-reporting or under-reporting their taxes, likely with a heavier emphasis on the latter. Given the additional complexities of this upcoming tax season, it is important to seek the advice of a tax professional when preparing your taxes. For those who have a shared account for personal and business transactions, it’s important to separate the accounts to simplify the classification process during tax season. Such as opening a separate bank account for all business activity, including deposits. 

   A couple of months ago, we published an article entailing the repercussions of a $900 million increase in the IRS budget. The goal of the increased budget is to increase the auditing capacity of the IRS to ensure that the wealthy are paying their fair share of taxes. Make no mistake; however, the increase in audits will not just be directed towards the rich. The unfortunate reality is that everyone will have a greater chance of being audited. On top of the budget increase, this proposal to tax transactional apps will leave even more room for IRS audits. 

   If you are a user of third-party transactional apps, you will likely receive a 1099k form to classify your transactions, given that this proposal is enacted. With the exponential increase in potential audits, consulting your local tax advisor regarding your tax filings this tax season is more important than ever. With the help of a tax professional, you can put yourself in a better position in the event of an audit. Here at Mendoza & Company, we work in favor of you and not the government. Given the uncertainty and increased power of the IRS this tax season, it is pertinent to file your tax returns correctly and with certainty.

Many people don’t think twice about sending a check to the IRS to pay off their tax liability. They write the check, send it to the IRS, the check will clear, and they go about their day. That is until the IRS sends them a notice of intent to levy several months later, claiming that the debt was never paid off. The check could be cleared, the money could be taken out of your checking account, but the IRS can still claim that you owe a debt. But, this would be at no fault of your own. Sometimes the IRS will take payments and apply them to balances at their own discretion, even though you logically expect the payment to be applied to your debt. Now you are faced with additional penalties and interest, and the IRS is threatening to levy your property.

 

IRS CP161It’s a sticky situation to be in, but unfortunately, we see it happen often. Before you pay your debt, consider writing a check. Our recommendation is to avoid sending your payment through money orders, cashier's checks, or certified checks. In case something goes wrong and the IRS does not receive the payment, getting a canceled check from anything aside from a simple bank check can be a challenging and time-consuming ordeal. Money orders and cashiers checks require going to the post office or bank, requesting the check, and waiting several days or weeks to receive the canceled check in the mail. The IRS grants the recipient only 30 days to respond to a notice to levy. After 30 days, the IRS will begin to aggressively collect by threatening to garnish wages or assets. By the time you locate your canceled check, your time to respond to the notice has greatly diminished. If you use a personal check, getting a copy is as easy as logging into your bank account and printing the check.

 

Aside from online payment, using a regular check from your normal bank account is the most simple method for the IRS to locate your payment. Each canceled check comes with an endorsement stamp when it is processed by the IRS. The endorsement will include an IRS confirmation number and where the payment was deposited. A stamped endorsement on the check is essential if you come to find out whether the IRS has misallocated your payment. At times, the IRS can make a mistake and deposit the payment into accounts belonging to the wrong SSN entirely. IRS employees can accidentally mix up the numbers while entering them. Although unlikely, it is often due to simple human error. More common are the cases where the payments are applied to current tax liabilities instead of previous debts. Without specifying the tax year, the IRS will use their own discretion and often designate the payment to the most recent tax year. The older liability will continue to accrue penalties and interest during that time and the debt will continue to grow larger, unbeknownst to the taxpayer.

Designation IRS Letter

 

Here at MendozaCo, we formulated a reliable method of ensuring that your payment to the IRS goes to the right place. We went over the first step of the process: the importance of sending a check from your bank account. On the check, you should provide your SSN, the year of the liability in which you are paying, and the form you are addressing. We understand it can be uncomfortable to include sensitive details like your SSN on a check, but it is a crucial step in getting the check to the right place. For every check we send on behalf of our clients, we also attach a certified letter. The letter includes the name or person of reference, the purpose of the letter, the form, SSN, the year being paid, and a tax notice number if applicable. 

 

Not sure how to write your certified letter? No problem! We are giving out a complementary template letter free of charge. It’s simple- just click here: Designation Letter Template and fill in the blanks. Now you will have everything you need to securely pay your debt and avoid additional letters or fees from the IRS.

 

**Note: All opinions discussed in this blog are for general informational purposes only. The contents of Mendoza & Company blog posts are not intended to, and shall not be construed as, provide specific legal, financial, or tax advice. The contents expressed by Mendoza & Company are from the personal research and experience of the owner of the site and are intended as educational material. We encourage you to seek professional advice on the complementary templates.

CP2000

Watch out for IRS CP2000 letters! It has come to our attention that we are receiving several calls regarding taxpayers receiving CP2000 letters from the IRS proposing corrections to their tax returns. If you have complicated tax returns, multiple streams of income, or you filed your taxes on your own, there is a chance you may receive a letter from the IRS claiming that you pay additional taxes. 

 

In 2019, before our client was engaged with us, our client filed her tax return using a free tax-filing software. There, she did as anyone else would: she input all of her revenue streams, calculated her taxes, and paid- all on time. She did as she was supposed to. What she didn’t realize, however, is that she forgot to include the sale of a stock that she had made earlier last year. During that time, the IRS was receiving her investment information from the financial institutions she had an activity with, and noticed that she did not report the stock sale. The discrepancy between the IRS tax calculations and her’s, prompted the IRS to send a CP2000 letter. Over two years later, in June of 2021, she finally receives the letter in the mail. 

 

CP2000 1Within the letter, the IRS stated that she had made an additional $27,000 of income that was not reported. It read, “We are proposing changes to your 2019 Form 1040 tax return” with a proposed amount due of $8,200. Since she was already engaged in our services for 2020 tax filing, she called us asking how to apply for an installment agreement. It’s common for us to see the IRS play up the urgency of the scenario and frighten people into believing that they owe them money. The CP2000 letter is a prime example of how the IRS can scare anyone into taking the proposal at face value. When someone is mailed a letter from the IRS, especially a CP2000 letter, it’s natural to assume that you are in serious trouble. 

 

After reviewing the letter with the client, we asked her to send us a copy of her 2019 Investment Activity Summary. The first thing we thought to ask was, “did the IRS include her cost basis in their calculation?”. As we came to find out, as eager as the IRS was to send her a proposed tax bill, they were not nearly as eager to check her 1099B form to account for the stock’s cost basis. Although the stock was sold for $27,000, she had purchased it for $2,000 more than what she had sold it for. The stock was sold at a loss. We promptly amended her 2019 tax return, and our client left with a refund of $407.00 plus a refund from Maryland. 

 

The key takeaway from this is in the event you receive a CP2000 letter, to have it reviewed by a tax professional. Sometimes, when using a free tax-filing software, mistakes can happen. The unfortunate fact is that there is more room for error, and you may end up paying more in taxes than you would if you had directly paid a tax professional to correctly file your taxes. If you have business income, foreign income, investments, capital gains income, rental income, or real estate income, consider Mendoza&Company, Inc. for your tax needs.   

 

Our results in response to IRS CP2000:  At the start the client owed the IRS $8251.00, but by the end, they left with $407.00 in their pocket. 

 

2019 Form 1040X page 1

2019 Form 1040X page 2

  President Biden is proposing to increase IRS funding by $80 billion over the next ten years to aid in collecting taxes from America’s wealthiest individuals and businesses. The proposal aims to increase audits for individuals earning $400,000 or more in order to “ensure that the wealthy are paying their fair share” of taxes. The goal with the increase in funding is to generate $700 billion in revenue by the end of the decade. On the outside, it sounds like a good way to help fund the trillion dollars being allocated toward the infrastructure project. But, how can we make sure that the average American won’t increase their chances of being audited?

  There is no debate that the IRS is severely underfunded, however. Even though counterintuitive, this can be a good thing from the perspective of our clients. From 2010 to 2020, the agency lost over 33,000 employees, with the number of millionaires nearly doubling during that same time period. With the increase in spending, the IRS will hire nearly 78,000 new employees over the next decade- with many delegated to tax enforcement and audit procedures. Although the goal of the agency is to decrease the levels of tax evasion among the wealthy Americans, there is no guarantee that the increase in spending will play out this way. The increase of new IRS employees will likely increase the cases of audits in Americans with an average income. With the additional employees, there will be an increase in audits overall, since new recruits have to gain experience in the audit field. In reality, the wealthier individuals and businesses have the resources for effective defense against audits, while the average citizen may not have the same resources to protect themselves from an audit- making the average American a likely target for upcoming audits. 

  It’s a common occurrence for the IRS to abuse their power and coerce individuals into paying more taxes than they owe. As a tax resolution firm, we see this very often. We often see audits where a client’s deductions are disputed, and the client ends up with a multi-thousand dollar bill. The occurrence of these scenarios don’t exclusively affect the ultra-wealthy. Individuals, and especially businesses, who do not have the means to have a bookkeeper or an accountant, face an increased chance of losing audits. In general, having proper documentation and representation to dispute audit allegations increases the likelihood of winning the audit. Hence why individuals and businesses with greater means are less likely to lose an audit. Newly hired IRS auditors, which will represent nearly half of IRS staff, likely won’t be handling these types of audits.  

  An increase in workers is going to increase the overall occurrence of audits- all around. Regardless of how much you or your business makes, you will have an increased chance of getting audited. So what should you do if you get a “notice of discrepancy” letter in the mail from the IRS? Don’t accept the proposal by simply paying the bill- no matter how small. If you are in compliance, provide the proper documentation, and dispute against the discrepancy. Otherwise, there will be a possibility of further investigations into previous years. That means more audits, and a larger bill. What might be a small proposal of discrepancy, can possibly grow into multiple years of audits. 

 Take for example our client, who had her business deductions dismissed by the IRS. In March 2019, she received the CP2000 letter claiming that she had a tax discrepancy of $11,000 from December 2016. With penalties and interest accumulating over the three years, the bill grew to $15,000. She is a classic example of the IRS chasing after regular Americans, not the ultra-wealthy. Our client only had a combined AGI of $90,000 with her husband. Her story is similar to what we see all the time: a new IRS agent conducted the audit, and misappropriated her rightful deductions, and now the taxpayer is faced with an inflated bill. After coming to us, we settled with the IRS and the agent conducting the audit, provided documentation, and eventually eliminated her proposed tax liability altogether. Not only did she win the audit, but she is also spared from any additional audits for previous years. With some help, she stopped the audit abuse at the hands of the IRS.

  With the increase in IRS spending, please make sure that you or your business are in compliance with the agency. If you own a business, it is important that your business finances are well organized in the event of an audit. We recommend hiring a bookkeeper or accountant to help keep your business in compliance and increase your chances of success in winning an audit, if one were to ever occur. If you find yourself with a CP2000 letter, or notice of discrepancy letter, do not hesitate to reach out to your local tax professional. No matter how small the amount, it is important that you understand your rights. 

Wednesday, 21 April 2021 15:54

Reasonable Compensation

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       Attention all S corporation shareholder-employees: be aware of upcoming IRS audits! If you own and perform business under an S corporation, you may already know to compensate yourself as an employee. Failing to provide yourself with compensation or providing too little compensation can get you into a problematic audit with the IRS. With IRS operations slowly going back to normal, expect an increase in audits.

2021 IRS Ltr 385C       This morning while getting the mail, I noticed a letter from the IRS. The letter reminded us that our company was elected under an S corporation, which we had established nearly twenty years ago in 2001. What would be the motivation behind the IRS sending a friendly reminder? Without explicitly saying it, what the IRS means is ‘hey, we’re doing our due diligence by reminding you that you must pay payroll taxes on the compensation you received from your s corporation. Be prepared for the possibility of an audit.’ If you do not compensate for a ‘reasonable’ salary, the IRS can target you.

It can be difficult to determine what a reasonable salary is, so let’s tie everything together with a simple example:

       Joe owns a plumbing company. He has eight employees, all under W2’s, and he pays them about $600,000 as a part of payroll. He also pays himself a ‘reasonable’ salary of $65,000, which is approximately the average salary for a plumber in his area. 

 

       He pays his employees and collects payroll taxes from them, relaying the tax amount to the government. Joe is in compliance. In the event of an audit, he is in good shape.

       Mike, too, owns a plumbing company in the same state as Joe. He also has eight workers, but he classifies them under 1099-NEC even though they all work for him 40 hours a week and depend on him financially. According to the IRS, these are not workers; they are employees. Employees are paid under W2’s, similar to Joe’s employees. On top of that, Mike doesn’t pay himself a salary but instead withdraws the business’ profits into his account. He is not paying the payroll taxes from all workers, including Mike’s withdraw. Mike was sent the same friendly reminder but decided to take his chances and ignore the letter. A year later, the IRS knocks on his door and audits his plumbing business. 

       The IRS audit causes a ripple effect. His 2018 tax year gets audited, then the 2017 year, and the 2016, and the 2015 tax year. Mike gets audited for six years, and as a result, the IRS also reclassifies the workers as employees. The next thing he knows, his business owes $750,000, and he personally owes $480,000 in payroll taxes to the IRS. Mike will need to reclassify all of his employees and pay off his debt. If he can’t afford to pay off his personal debt, the IRS will threaten to levy his personal assets. 

       Luckily, Mike should not lose hope. Here at MendozaCo, we handle these kinds of situations often. The key in Mike’s scenario, like most scenarios with the IRS, is that he needs to get into compliance. Without compliance, negotiating with the IRS is near impossible, and penalties will continue to accrue. If Mike’s situation sounds similar to yours, please don’t hesitate to call us. We can take care of your IRS tax problems, as well as keep you in compliance by managing your payroll for you. 

   Hundreds of thousands of people filed for state-led unemployment benefits as unemployment reached record numbers over the last year. Chances are you or someone you know has filed for some form of assistance. Under Maryland's new RELIEF Act, individuals will be exempt from state and local income taxes on unemployment benefits from 2020 and 2021 tax years. The exemption is estimated to save Maryland taxpayers more than $400 million and help people get more tax refunds during the tax season over the next two years.

   The same income tax exemption is available at a federal level, as well. In other words: if you received Maryland unemployment benefits, income tax exemptions could apply to you at a local, state, and national level. According to the IRS, you don't have to pay federal taxes on your employment benefits up to $10,200- as long as your adjusted gross income is less than $150,000 for joint filers ($75,000 single filer). If you are married, each spouse receiving unemployment doesn’t have to pay taxes for up to $10,200 of the compensation received.

   It’s important to note that you must request this exemption in your state and federal tax returns in order to receive the exemption. Unfortunately, it is not enough to simply be eligible for relief. The last year has been complicated enough- don’t hesitate to reach out to us at Mendoza&Co or a trusted tax advisor to maximize your return this tax season. 

Monday, 29 March 2021 18:38

Updated Tax Filing Date 2021

       In response to the pandemic, the IRS pushed the 2020 federal tax filing deadline. The Treasury moved the deadline from the expected date of April 15th to the following month, May 17th, 2021, to accommodate the “most vulnerable individuals” this tax season. For our DMV locals, Washington, D.C, Maryland, and Virginia have also adopted the filing day of May 17th.

       There is significant confusion between the new filing deadline of May 17th and the first 2021 estimated quarterly tax deposit, which remains unchanged as April 15, 2021. Although the date to file has changed, the due date for estimated quarterly tax deposits has not. The 2021 estimated tax deposit applies to individuals owing more than $1,000 for income taxes for the year.  For business owners, this means that the first-quarter estimated tax payments are still subject to the original estimated deposit date. Indeed, this can create some confusion.

 

       Our recommendation at MendozaCo is to file the 2020 tax returns as soon as possible, and as for the 2021 estimated quarterly tax deposits to apply one of the “Safe Harbor” tests:

  • 90% of the tax shown on the individual’s tax return for the current year (2021), or;
  • 100% of the tax shown on the prior year’s return (2019) for adjusted gross income (AGI) less than $150,000 for married filing jointly (AGI less than $75,000 for single individuals) or;
  • 110% if your previous year’s adjusted gross income was more than $150,000.

 

If you satisfy one of the three tests, you won’t have to pay the estimated tax penalty.

       This tax season may be the most complicated yet. The unforeseen circumstances of the COVID-19 pandemic have brought both leniencies and more confusion into the equation. Starting sooner than later is the best way to avoid facing penalties or overpaying for your taxes- don’t wait until the last minute to file! Call MendozaCo to schedule an appointment today.

  Have you withdrawn a portion of your retirement funds due to COVID-19 and are now stuck with paying the 10% early withdrawal penalty? As we know, the pandemic left millions of Americans in economic despair- so it seems unfair that people are still required to pay these penalties when the transfer was made out of necessity. Many people have found themselves in financial hardship and have resorted to taking out some of their retirement funds to stay afloat. Luckily, the IRS has released some recent guidance.

    In the recent publishing of IRS Notice 2020-50, the IRS addressed coronavirus-related distributions within the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Here is the basic rundown of the benefits:

  • Coronavirus-related distributions are no longer subject to the standard 10% early-withdrawal tax.
  • Ability to split total distributions over three years- as you split your debt into multiple years, your taxable income per year is reduced.
    • For example, if you withdraw a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal tax return for each year: 2020, 2021, and 2022.
  • If you wish to repay the distribution, you can complete the payment within three years after the withdrawal date. Like a direct trustee-to-trustee transfer, you will not owe federal income tax on the distribution.
  • Lastly, if you choose to amend your taxes, you may receive a refund from paying the income taxes for the distribution.

 

 To qualify for assistance, the IRS requires an ‘acceptable self-certification’:

  • If you were diagnosed with COVID-19 by a CDC approved test
  • A spouse or dependent was diagnosed with COVID-19 by a CDC approved test
  • If you experienced adverse financial consequences due to you, your spouse, or a member of your household:
    • Being quarantined, furloughed, or laid off, or had work hours reduced due to COVID-19;
    • Being unable to work due to lack of childcare due to COVID-19;
    • Had a reduction in pay (or self-employment income) due to COVID-19 or had a job offer rescinded or start date for a job delayed due to COVID-19.

Learn how we turned Martha’s $22,000 tax liability into a tax refund:

Pension Schedule

   Martha came to us after she withdrew $68,643 from her pension plan. Since she distributed her funds before the mandated retirement age, she accrued $6,864 in penalties. On top of the penalties, there are also federal and state taxes, adding $16,000 to her overall bill. Before Martha came to us, she owed $22,864 in taxes and penalties.

    Her husband's furlough from his job last August qualified the couple for relief. After consulting Alejandro, our EA and tax advisor, she was able to abate the $6,864 penalty entirely and split her withdrawal into three separate, taxable distributions. For the years 2020, 2021, and 2022, she will recognize $22,881 from her retirement plan. This way, Martha can meet her family's needs while paying only a fraction of what she owed in taxes. In the end, reducing her taxable income resulted in Martha receiving a tax refund for the 2020 tax year. Thanks to Alejandro, Martha went from being tens of thousands of dollars in debt to the IRS to have the IRS owe her money back during a time of need.

Don't let the pandemic pressure you to go into debt with the IRS. Consult Mendoza&Co today to see how we can work for your tax needs.

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Mendoza & Company, Inc. is a full-service accounting, Payroll, and Tax Resolution firm in Bethesda, MD and Miami, FL. As a client, you gain a professional team with expertise in multiple fields, providing you the right advice to strengthens your organization and long-term goals.

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