We are Richmond's One-Stop Shop!

If you're a small business owner, self-employed, a freelancer or just an individual who needs help - Accounting Works provides customized solutions for your individual needs!  We are Richmond's one-stop shop for everything accounting - even payroll services!  Let us know what we can do for you!

Good Finances From The Beginning

Having a strong system in place at the inception of your small business is vital to tracking your growth and being prepared for unexpected expenses.  I've helped many small businesses put a system in place from the very beginning, which has helped them to continue growing their business and making their finance management easier than they thought it would be!

Starting A Business? Avoid the Usual Pitfalls with Good Financial Management
By Intuit

Looking to launch your own business? There’s good news for you: The small business segment is growing rapidly, and it’s a great time to start a business. According to the Small Business Administration, “While corporate America has been ‘downsizing’, the rate of small business ‘start-ups’ has grown, and the rate for small business failures has declined.”

As an entrepreneur, starting your own business is one of the most exciting times of your life. You wake up every day doing what you love. However, along with the pride and joy of having your own business also comes the often difficult (and daunting) task of managing aspects of your business that you are not an expert in. One such task is managing your finances and understanding your financial footprint. It’s a task that is often feared yet small business owners know that it’s a necessity to the survival of a business.

Small business owner, Nadine Quintero launched her own doula business, Fruits of My Labor Birth, in January of this year. She was excited to embark on her mission-driven business of helping women through the process of childbirth. However, even with 10 years of prior experience working with pregnant women, Quintero, like millions of other new business owners, is fighting against statistics: one-third of small businesses fail within the first two years because they run out of money.

At this point, you may be thinking, “How can I ensure long-term financial health for my business?”

It’s a no-brainer that financing your new business, sustaining the flow of money that comes in and goes out, and ensuring a steady stream of income is essential to the long-term survival of any business. Deeper knowledge about your finances and how to make smart business decisions as a result is also equally important. Similar to Quintero, the majority of business owners are experts on the service or product they build their business on; they’re not financial experts. According to a recent Intuit survey, only 40 percent of small business owners consider themselves financially literate, and two-thirds wish they knew more about their finances.

Good financial management is not just about knowing how much money you have in the bank. You need to understand your finances beyond balancing a checkbook and knowing what your finances indicate about the health and wellbeing of your business. Partnering with a financial expert, and integrating a financial management tool that best suits your business needs are two key decisions you should make early on. Not only should you look to integrate a financial management solution during the early stages of your company, you need to ensure that it can grow and adapt to the changing needs of your company. Once you deeply integrate a financial management platform, you don’t want to change. In fact, Intuit data found that 70% of new businesses buy accounting, payroll or HR services in the first 12 months. Only 7% of SMBs switch suppliers in a given year.

“A strong financial backbone can make or break any small business,” said Karen Peacock, senior vice president of small business at Intuit. “We’ve created QuickBooks to be that backbone, helping small business owners simplify and streamline their finances so they can focus on their customers and growing their business.”

According to a recent Intuit survey, 2 out of 3 small business customers say they’ve become more efficient since they started using QuickBooks. These businesses save an average of 6.4 hours per week on accounting activities since they started using QuickBooks.

In addition to QuickBooks, Intuit has created a number of resources to fuel small business success. Last year, the company launched the OWN IT Network, an online community of small business owners supporting each other in growing their businesses. For aspiring entrepreneurs, Intuit’s created a free tool to guide new business owners through the critical first steps on how to start a business. Finally, the Small Business Center is the ultimate guide for operating a small business, providing guidance, advice, insights and data to arm entrepreneurs with practical resources.

The most important lessons Quintero’s learned while starting her business: to learn from other people’s mistakes and to find the right experts to work with. While Fruits of My Labor hasn’t required extensive bookkeeping quite yet, Quintero is using QuickBooks to keep track of her early expenses and income and will hire an expert as her business grows. Currently, QuickBooks is providing Quintero the ability to track financial data from invoices and payments. And when she’s ready, the software will enable her to scale as her company grows, offering features that are more suitable for complex business operations and potentially even a channel for funding. Furthermore, she relies on experiences from other entrepreneurs to build a strong and successful business.

“As an early-stage business, I have a lot of decisions to make, from hiring employees to determining the best way to provide customer service to figuring out a payment model,” said Quintero. “While we’re trying to learn how to manage a business along the way, I’m comforted by the fact that QuickBooks helps solve for a fundamental part of my business.”

Intuit QuickBooks is built to fuel small business success by providing a robust ecosystem of cloud-based financial management solutions. Follow this series to learn about resources available to new and aspiring small business owners, including tips, tricks and anecdotes about financial management, aligning yourself with the right partners, and using the cloud and new tech innovations to achieve long-term success.

To view the originial article, visit Entreprenuer.com

Small Business Accounting Software: Use Free Software or Pay?

A big part of what Accounting Works Solutions does is help small businesses implement a user-friendly system (including software and accounting platforms) to meet with current and future accounting needs.  Whether that means invoicing, inventory cost estimation, tracking expenses, or payroll - it's important to plan for growth.  My experience is that when small businesses start from the ground up working with a professional accountant, they save time, hassle, and money.  If you get started with the correct platform right away, it can not only grow along with your needs but it can save you from having to learn an entirely new system once you've achieved your growth goals. 

How to Choose Between Free and Paid Small Business Accounting Software

By: Juan Martinez

As your company matures, it's important to determine whether or not you need a software upgrade to streamline business processes. This is particularly true in saturated industries. If dozens of reliable partners are available to meet your needs, how do you determine who to choose, how much to spend, and whether or not your choice tool is secure enough to handle your data? Perhaps no other industry creates this dilemma like the accounting software market.

With freemium, small business, and enterprise tools available, it can be difficult for small to midsize businesses (SMBs) to determine which solution is right for them. You might have the money to buy expensive software such as Cougar Mountain Denali Summit and Microsoft Dynamics GP, but do you really need all of that customization functionality and scale? Conversely, you might be able to get away with using free tools by companies such as Wave, but is the tool smart enough to handle more complex tasks?

To find out what SMBs should look for when choosing paid accounting software, I spoke with Scott Davisson, co-founder of Acclivity, provider of desktop-based small business accounting tool AccountEdge. I asked him about pricing, flexibility, security, and customer service.

1. Does Your Paid Software Do More Than the Core Four? 

Davisson said most of the free accounting tools can handle account management, expense tracking, invoicing, and sales. These are the bare minimum tasks that any tool should be able to help you accomplish, regardless of how much you're willing to pay.

"That's the core," said Davisson. "If all you need is to do that, then you're probably fine on a freemium model. As those needs get more complex…that's where you might start to evaluate your needs about what's out in the market and how much it costs."

Additional needs might arise that your freemium tool can't handle. If you need software that can handle things such as billing for time, inventory tracking and payroll, you're probably going to need to invest in a paid tool. Also, although most free tools can handle sales data, if your business has multiple departments, you might want to consider going with a more complex tool because most freemium tools won't allow you to enter sales data by department (rather, you'll need to enter the data as one lump unit).

2. How Flexible is Your Accounting Tool? 

One of the main reasons businesses select enterprise-level accounting software over lower-cost or freemium applications is that enterprise tools often provide limitless customizations that can bend and layer the software specific to each client's needs. Small business tools, such as the one provided by Acclivity, won't offer that level of complexity.

However, this doesn't mean you're stuck with what comes out of the box. Think about what third-party integrations your SMB software offers. Does it integrate with a customer relationship management (CRM) tool? Does it pull in data from your e-commerce software? If a small business accounting tool can provide you with multiple integrations and add-ons, then you might not need to spend big bucks on an enterprise-level platform.

"The software needs to be flexible enough to meet your needs," said Davisson. "But it's a tricky goal. Our software isn't for one specific type of industry. We need to have a solution that fits your needs, but we don't have that out-of-the-box customizability. We're sort of like a Swiss Army knife. Our add-ons give customers additional components that bolt onto the software to continue to make it relevant to their needs."

3. Is Your Software Secure? 

One of the main points of differentiation that you'll find between enterprise-class, SMB, and freemium accounting software is the level of security that your vendor intends to provide. If you're not paying a cent for your software, do you realistically expect Fort Knox-level security?

This is one of the reasons Davisson said his clients prefer on-premises software to cloud-based tools. "A lot of people are pulled to the cloud against their will," he said. "But they don't trust their finances in the cloud. It's about security and control."

AccountEdge is a desktop-based tool that can be expanded into the cloud with a companion app. However, Acclivity doesn't offer a cloud-only version of the tool. "Part of why we're seeing a lot of activity and interest is because, once we license the desktop software, you can put it on your own network, behind a firewall, it's yours," Davisson said. "In terms of security, that gives you the ultimate control."

This doesn't mean that cloud-based tools are inherently less secure than desktop apps. For example, Intuit QuickBooks Online Plus stores data on firewall-protected servers where the data is encrypted. When your data leaves the web browser, it's transmitted over Secure Sockets Layer (SSL) encryption technology. Intuit also lets administrators limit who can access specific types of data inside the tool should they decide to make certain information available to executive-level employees only.

4. Customer Service 

This one should be a no-brainer. The more competitive a market becomes, the more important customer service has to be. Can you reach your accounting software vendor if and when something isn't properly working? Can you reach them on the medium of your choice or do they force you to pick a specific communication platform? Are the service representatives speaking your language or did the vendor outsource its help desk team?

These are incredibly important questions you should ask each of your prospective vendors. It's highly likely that enterprise-level accounting software will offer 24/7 support, especially if you're willing to make five-figure annual payments or more. However, if you're trying to choose among a list of freemium and paid SMB tools, you'll want to closely investigate your service options.

To view the original article, click here.

How to Maximize Your Refund!

From Fox Business, comes great advice on how to maximize your return! That is - if you haven't already spent it somewhere else...!

5 Simple Steps to Triple The Value of Your Tax Refund
By: Chuck Saletta

According to the IRS, the average refund taxpayers received during the 2016 filing season was $2,732. That's a substantial chunk of change, but what if I told you that you could take that money and potentially triple its value for you by the end of this year?


Indeed, you can turn that average refund into over $8,000 toward your retirement by the end of this year, with absolutely no impact to your lifestyle. All you need to do is follow these five simple steps.

Step 1: Contribute your refund check to your IRA
For 2016, if you or your spouse are working, you can potentially contribute up to $5,500 each to either a Roth IRA or a Traditional IRA. If you're age 50 or up, that potential contribution increases to $6,500.

• Your taxable compensation for the year, if your compensation was less than this dollar limit.

A refund check of $2,732 fits easily within those limits, which makes it a straightforward way to turn your tax refund into money for your retirement.

Step 2: Increase your contributions to your traditional 401(k) or equivalent plan at work
Your tax refund isn't a gift from the Government. It's the return to you of an interest-free loan you handed Uncle Sam during the year by over-withholding your taxes. Take that money back and put it to productive use for yourself. You can contribute pre-tax money to your traditional 401(k) and get not only your money working for you but also money Uncle Sam would have otherwise taxed from you.

To fully make use of your refund check, increase your 401(k) contributions by enough to make up for both the refund itself and the tax you won't be paying on the contributed income. The basic math is Refund / (1-marginal tax bracket). If you're in the 25% tax bracket and got that typical refund, that would turn into $2,732 / (1-0.25) = $3,642.67.

Step 3: Adjust your withholding at work to get it closer to break even
In step 2, you invested the money that you had over paid Uncle Sam, but in doing so, you did decrease your take home paycheck. Key to making this plan neutral to your everyday lifestyle is to decrease the amount Uncle Sam withholds every paycheck. Using IRS Form W-4 or your employer's substitute, you can adjust your withholdings to make it so you won't be making another large interest free loan to Uncle Sam this year.

When you're making this adjustment, your objective should be to get close to break even when it comes time to filing your taxes next year. If you reduce your withholdings too much, you could have to pay underpayment penalties on top of any taxes you owe. The key is to be within one of the IRS' "Safe Harbor" limits. For 2016, the key Safe Harbor limits are:

• If you owe less than $1,000 in taxes for 2016 when it comes time to file in 2017
• You've paid at least 90% of what you owe for 2016 (66 and 2/3% for farmers and fishermen)
• You've withheld or paid via timely estimated tax payments at least 100% of what you owed for 2015 (110% if your income in 2015 was above $150,000 or if it's above $75,000 and your filing status is "married filing separately")

Step 4: Thank your employer for its 401(k) match
Many employers offer a match to encourage employees to contribute money toward their own retirement. Matches vary by company, but a common practice is a $0.50 match for every $1.00 the employee contributes, up to some percentage of salary. On that $3,642.67 contribution you made in step 2, a 50% match would be an additional $1,821.33, contributed into your retirement account, on your behalf.

Step 5: Count your cash
Your $2,732 IRA contribution from your refund check plus your $3,642.67 contribution to your 401(k) plus your employer's match of $1,821.33 brings your total to $8,196. That's triple your original refund amount, now working on your behalf to help fund your retirement.

Perhaps best of all, you just figured out how to save that $8,196 with no impact to your everyday lifestyle. Every penny of that money came straight from your tax refund this year, from the money that would otherwise have been a tax refund next year, and/or from your employer's matching program.

How often can you come up with $8,000 that easily?
As fun as it might be to hold that $2,732 refund check, wouldn't it be even more fun to see it turn into more than $8,000 this year? On top of that, once you've taken these five steps, that $8,196 will be in your retirement accounts, where it can grow tax-deferred on your behalf for the rest of your career.

That's an amazing opportunity available to you simply by choosing to no longer offer Uncle Sam an interest free loan, instead putting that very same stack of your own money to work for you. So get started today, and turn that tax refund into the foundation for your financial future.


To see the original article, click here.

The Richmond Wildlife Center Needs Your Help!

This is a cause that's close to my heart and they need your help to keep going. Your contribution is completely tax deductible!

The Richmond Wildlife Center is the first and only professional wildlife medical center in the Greater Richmond region providing veterinary and rehabilitative care to sick, injured and orphaned wildlife. We are the only professional veterinary facility in the area permitted to intake, treat and rehabilitate sick, injured and orphaned wildlife beyond their veterinary care through the eventual release of the animal back to the wild. We are also the only facility and wildlife rehabilitators in our area permitted by law to be in possession of,  permitted to transport or treat Bald Eagles, Golden Eagles and other threatened and endangered species.

Spruce Up Your Small Business Finances

With the sunny weather finally kicking in, it's a great time to review your small business finances so you can rest easy when comes to vacation time! This article has 10 great tips on how to clean up some of those financial cobwebs and increase efficiency.

10 Ways to Spruce Up Your Small Business Finances This Summer
By: Nate Matherson

After a particularly brutal winter, the summer months are a welcome shift. For small business owners, the change in seasons should be a reminder to do some cleanup and organization. After long months of building your business model, generating sales and managing your company, it is important to take some time to evaluate where you are and where you want to be. With summer around the corner, vacation plans are in full swing, and the pace at work usually slows down. It is the perfect time to organize your business and your finances.

Reevaluating your business operations can help you stay on the right track. Here are ten tips for getting your business finances in shape:

Analyze Your Income and Expenses:

Cash flow issues—especially old bills piling up—can keep your company from keeping up with payables. Pay any past due invoices and check your own past due receivables to see who owes you money. As an entrepreneur, with so much going on, it is easy to miss an invoice. A simple phone call or email reminder is usually all it takes to get paid the money you are owed. Be persistent, and if clients keep stalling, eliminate customers who are regularly late. And maybe for once, put together an updated balance sheet.

Look Over Contracts

From your technology systems to paper suppliers, your business probably has several contracts with different services. Each one is an opportunity to renegotiate for significant savings. Even if your contract is not up yet, you can still negotiate based on a potential early-renewal or an increase in services. If there have been any problems with the services, such as appointment no-shows, use that as leverage for a discount.

Get Your Records Together

As a small business owner, you probably have mountains of paperwork waiting to be filed. From invoices to purchase receipts, these documents are essential records for your business. File everything away or scan the documents and file them electronically so you’ll have everything at your fingertips when it is time to complete your taxes.

If you rely on accounting software, such as QuickBooks or FreshBooks, to manage your business’ finances, you may have missed important program updates. Most companies update their software every year, and if you are using the old version, you may not have new essential features. Consider using Bench or inDinero as newer, fresher, alternatives to traditional accounting software. Through personal experience, I can attest that managed accounting software can save you quite a bit of time and headache.

File Quarterly Reports

Many small business owners are shocked by quarterly and self-employment taxes. The next quarterly payment is due June 15, so now’s the time to review your income statements and expenses. If you’ve missed a deadline, talk to your CPA about how much to pay for the next tax period to minimize any penalties.

Hire Fresh Talent:

Summer is the perfect time to refresh your workforce. It is college graduation season and thousands of newly minted graduates are looking for entry level employment. Hiring recent graduates can be a great way to refresh ideas, processes, and culture at your small business. And, hiring to graduates is significantly cheaper than experienced employees. Hiring graduates is competitive. Hiring millennials is much different than hiring from previous generations. You should consider thinking outside the box with unique benefits and job responsibilities. Millennials are looking to make an impact and they might be able to give your small business a fresh boost.

Review Pricing Structure

Pricing is one of the most challenging areas for a new business. If you price too low, you give the impression of substandard quality. Too high, and you’ll lose out on customers. As your company has grown, you likely negotiated special deals or discounts with clients and, as a result, your pricing structure is irregular. Compare your services and costs those of your competitors to see what you should be charging.

Check Subscriptions and services

Over time, you may have signed up for programs or services that made your life simpler for an individual project, then have gone unused and forgotten. These recurring subscriptions add up, so take some time to review your statements and cancel any subscriptions you and your staff do not use regularly. Use tools like Trim or Truebill to find and remove unwanted subscriptions.

Set New Goals

Since the summer is usually slower, it is a perfect opportunity to do some planning and a mid-year checkpoint. Evaluate how much progress you have made, where you flourished and where you struggled and establish new goals for the rest of the year. Looking at your income receivables will help give you concrete targets for the next six months.

Establish Credit

If your business has been performing well, you should start planning how to scale up your business operations. Expanding and growing your capacity requires money, and many small businesses rely on credit to meet their needs. If you’ve been relying on your personal credit card and bank accounts, it is time to break away and open up a business checking and credit account. The credit card can give you much needed liquidity in times of emergency or opportunity so you can be nimble and respond to new challenges.

Increase Efficiencies

Entrepreneurs often find creative ways to get things done, often on the cheap with no budget at all. While the do-it-yourself route can be useful when building your business, it is not always the most efficient. Use the summer months to research and learn new processes or programs to streamline your operations, whether it is new software that manages inventory or a more secure online store. With Cloud technology, many of your programs and accounts can be synced together and automated, reducing the amount of time you spend on administrative work.

If you find yourself with a smaller to-do list than usual, take advantage of the slow period and spruce up your finances and business operations. Eliminate distractions by turning off your phone, closing your email and shutting your office door, so you have the time and space to get organized and create a more efficient and cost-effective work environment. It takes a conscious effort and dedication to go through your accounts, processes and forms, but the commitment can produce high returns and set you up for a successful second half of the year.

To read the full article, click here.

Is Cloud-Based Accounting Right for Your Small Business?

Accounting Works specializes in helping small business owners set up easy to use software for everyday accounting needs.  If your business involves being out in the field or multiple employees conducting transactions, Cloud-based tools might be the right option for you!  Since everything can be accessed from anywhere your expenses and invoices can always be up to date even with multiple users.  One of the benefits of a subscription-based service is that updates will be available regularly at your normal subscription cost rather than purchasing updated software every few years.  This article from Entreprenuer.com goes into detail about how Cloud-based accounting could benefit you.

3 Benefits of Cloud-Based Accounting Tools for Small-Business Owners
By: Jen Cohen Crompton

What do a pastry chef, a construction project manager and a creative design director have in common? As small-business owners, each opened up shop to serve customers and do what they love -- not to spend hours on accounting or bookkeeping.

Fortunately, today’s small-business owner can take advantage of an ever-growing suite of organizational tools and technologies to reduce the headaches of managing invoices, bills and receipts while increasing the time spent pursuing new business opportunities. These tools are increasingly available as cloud-based offerings, and most small businesses should consider migrating their current accounting workflows to the cloud.

What, exactly, is the cloud? Cloud-based software, or software as a service (SaaS), offers users access to technology on a subscription basis. The software provider securely hosts all necessary databases and servers, and small-business owners access their data anytime, anywhere via internet connection.

Many small-business owners may wonder if they can expect the same functionality from cloud-based accounting programs that they’re accustomed to with traditional desktop versions. While it’s true that cloud-based versions of tools like QuickBooks may provide slightly different functionality compared with a desktop version, what current versions of cloud tools lack in functionality they make up for in versatility and long-term viability.

Software providers are likely to continue phasing out desktop solutions and limiting or discontinuing support, which means that customers who migrate accounting workflows to the cloud today won’t be stuck with an unsupported product in the future. Additionally, small businesses that upgrade accounting workflows to the cloud can also enjoy a number of other benefits that SaaS models allow. Here are a few:

1. Enable smart organization for a distributed workforce.
Since accounting information stored in the cloud can be added or accessed anywhere, team members can quickly and easily complete their work regardless of their physical location. Whether a sales rep needs to add expense receipts or a project manager needs to check an invoice for a supplier, having cloud-based tools in place makes organizing and accessing important information as easy as taking a picture of a document or searching by vendor, amount or date.

2. Maintain relationships and easily verify discrepancies.
Relationships with vendors and distributors play an enormous role in the success of many small businesses. When a vendor or distributor questions why a bill hasn’t been paid, small-business owners that leverage cloud-based tools can quickly search for invoices. Advanced cloud tools allow team members to search by virtually any term to locate a bill and identify whether it was missed and pay for it quickly to preserve the vendor relationship.

3. Use a broader suite of secure apps.
Cloud applications such as QuickBooks Online and Neat not only provide access to information and documents from any device, but they also integrate with other cloud-based tools. As soon as a small business starts using one cloud-based accounting technology, it’s easy to extract and leverage data across a number of different platforms and reduce time spent on manual data entry.

Small-business owners start businesses because of passion for what they do -- not to spend time managing paperwork. Migrating traditional accounting workflows to cloud-based solutions enables small-business owners to reduce time spent managing information and improve overall operational efficiency.

For the original article, click here.

Helping Businesses Get Started; A Compass Home Solutions Story!

Charles Williams is a local Richmond small business owner.  His company, Compass Home Solutions, specializes in home organization of every variety.  From decluttering a home room by room when everyday life just gets out of hand, to implementing an organized schedule when there are not enough hours in the day— his goal is to reduce stress for his clients.  After being in the industry for 4 years, Charles decided to take a chance and open his own business on January 1st, 2015 and thus was born Compass Home Solutions!

Being an organizational zealot, Charles knew the importance of keeping his finances in order when starting this new venture.  He will be the first to admit that he is horrible at math, so he knew he needed help.

“If there’s anything math related, I want nothing to do with it,” he admits.  “I knew that before I started my business I needed to find someone,” so he sought the help of Stephen Fishel of Accounting Works.

Stephen initially started working with Charles on setting up a software system to stay organized for invoicing and tracking expenses. “He got me to the point where I could handle my day to day accounting,” he says when recalling starting to work with Stephen. “I’ve absolutely saved money not paying for programs I didn’t need, paper stock, supplies I would’ve never needed without his guidance.”  Not having a lot of start-up capital, it was important to Charles to save as much as he could in initial expenditures.  

“The first year I was in business, we didn’t set up quarterly estimated [tax] payments, because we weren’t sure how much I’d bring in, but this year we’ve set them up.”  Compass Home Solutions has grown a lot in just one year of business expanding to services for Realtors and prepping homes for sale.  As Charles’ business expands and his accounting questions get bigger he knows he won’t have any trouble tackling accounting problems. “[Stephen[ is always in his office and accessible.  If something doesn’t sound right, I still call him up."

If you’re looking to start your own business or need help organizing a system for your daily accounting issues, Accounting Works is there for you! 

Help Keep Richmond Wildlife Center Open!

The Richmond Wildlife Center is currently running a GoFundMe drive to keep the Wildlife Center open. 

The Richmond Wildlife Center has been an all volunteer, non-profit hospital for critically ill or injured wildlife as well as abandoned exotics found in the wild.  Each year they service anywhere from 300 to 500 animals not including outside calls for assistance, they monitor trends in their patient intake which helps monitor important public safety issues like disease control. 

The founder, executive director, wildlife rehabilitation and veterinary assistant, Melissa Stanley has poured endless amounts of time and energy into the Richmond Wildlife Center since founding it in 2010, and dedicated her life to the rehabilitation of wildlife.  

Read more about the Richmond Wildlife Center, Melissa’s work, and see lots and lots of great photos, too, by visiting their site and donate today!  From an accountant’s perspective, all donations are 100% deductible!  So get the best of both worlds and help save the Richmond Wildlife Center today!

GoFundMe Richmond Wildlife Center

DIY Tax Software, Not So User Friendly

This article from AccountingToday is a great read! It not only outlines the benefits of using a tax professional versus tax software, it explains that the taxpayer is still liable for any filing mistakes and NOT the software company itself.  Even though you've followed all of the prompts and double checked everything, it doesn't mean your purchased software covers the intricacies your individual circumstances.  In most cases you can find your tax bill a little lighter by using a professional who is aware of tax law and every exemption you qualify for.  If you owe less by using DIY software, it is most likely a mistake and could end up costing you a lot in the long run!

Cleaning Up the Mess Left By DIY Tax Software
By Greg Freyman

More and more taxpayers are turning towards do-it-yourself tax software to prepare and file business and individual income tax returns.
With every passing year, our offices receive an ever-increasing number of calls asking for help fixing previously self-filed returns. Consumers of these products are beginning to treat tax preparation software as virtual tax return preparers. As the IRS has focused on increased regulation for paid providers of tax return services, I believe the Service’s scope should include tax preparation software providers as well.

The security of taxpayer accounts and personal information has been a top priority of the IRS for e-file providers since the electronic filing program’s inception. Publication 4557, Safeguarding Taxpayer Data, and Publication 4600, Safeguarding Taxpayer Information were published to provide guidance and best practices. However, in 2015, Intuit’s TurboTax systems were hacked, leading to many fraudulent returns being filed without the taxpayers’ knowledge, due to poorly designed security measures. The repercussions of the fraudulent returns left fraud victims having to manually file their tax returns, file police reports detailing possible identity theft, and monitor their credit reports for any other signs of their information being used. Despite the security breach, no penalties were imposed against Intuit. The company was only instructed to prepare a list of changes to reduce tax fraud by the next filing year.

Tax preparation software providers need to apply the same strict data-handling guidelines to self-preparation tax software as do the professional tax preparers.

Another significant issue with do-it-yourself software is the consumer’s reliance on it to do the impossible and apply the voluminous amount of tax law to their individual scenario. Without a firm grasp of the ever-changing tax law, individuals are relying heavily on the automated prompts within the system to help guide them, further creating the illusion that preparing and filing income tax returns is simple in all cases.

Granted, a tax return may be simple, and the software utilized may be sufficient, in some cases. However, even in straightforward scenarios, costly mistakes can and do happen. A client of ours, for example, forgot to enter the city tax that was withheld from them, costing them approximately $4,000 while self-preparing a very simple return. Additionally, what most fail to realize about tax audits and proceedings is that the burden of proof, unlike the legal system, fall on the taxpayer to show the reason why certain deductions were taken or key information was omitted from the return. Consumers of these tax products need to be reminded that relying on prompts from the software does not constitute a viable defense.

Another case involved both a business and a personal income tax return, and arose from the taxpayer’s limited knowledge of Schedule K-1s, the IRS’s ability to cross-reference documents, misclassifying large expenses, and misrepresented 1099 filings. The taxpayer had not included Schedule K-1’s on his personal return after preparing his own business’s return. The taxpayer failed to realize that the IRS operates on a matching system in which it matches third-party filings with an individual’s return. The mismatch of the K-1 that was present on the S corporation return, but not found on the client’s 1040, triggered a correspondence audit. In yet another example, the client incurred over $161,000 worth of penalties and interest over multiple years, and had to spend over $30,000 in accounting fees over a number of years, working with the IRS and states, to remove the incorrect penalties and amend six years of business and individual tax filings.

The cause? The client used self-preparation tax and payroll software, and assumed their company was correctly filing partnership and payroll forms for years. In fact, the client had been sending in payroll tax deposits, but not filing all of the forms consistently, omitting filing for the periods where no payroll tax was due. The client was unaware of a requirement that mandated taxpayers to file zero payroll forms. Since the IRS had not received zero payroll forms, the tax liability from prior periods was assumed for the periods with missing tax forms. Aside from missing forms, the client was also unaware that an employee had a certain type of visa status that exempted an employer from certain payroll taxes. Presenting this information helped to show that a payroll tax overpayment existed on the account, helping to reduce their penalties and interest.

Taxpayers should be made aware that the software they are using and relying on to prepare and file their taxes may not adequately report their tax liability to comply with tax laws. Furthermore, taxpayers may inadvertently be leaving more of their money on the table due to the automated software. ABC News recently showed a segment on how one family’s refund amounts differed when using do-it-yourself tax software, a storefront tax preparer and a tax accountant. Their highest refund was calculated by the tax accountant. The family admitted to having overlooked a key item within the tax software, which the tax accountant had found for them. By engaging in an open dialogue with a tax professional, the family was able to more than double their tax refund amount.

Until the IRS requires all tax preparation software providers be held to the same standards of paid tax professionals, we must continue to advocate for our clients and those burned by do-it-yourself software. It is up to us to remind taxpayers to seek professional help with their tax issues to avoid costly mistakes. The services of tax professionals may seem more expensive upfront than do-it-yourself tax software at first glance. To overcome this obstacle, it is important to showcase the value in choosing tax professionals who not only provide peace of mind, quality of service, and thorough investigation and resolution of their tax issues, but also perform in-depth tax research and perform representation services. As tax professionals, we need to keep the dialogue open with our clients and those attempting to navigate through tax laws on their own, and remind them of the value we bring.

The original source of this article is found at AccountingToday.com

3 Tips to Spring Clean Your Business Plan

Spring cleaning isn’t just for your home.  If there are things you need to do to get your house in order, now is the time to do it before it's too late. Refresh your plan for the year!  Taxes are over and it’s time to start planning for next year.  Get your quarterly and yearly goals in order and you can maximize profit, minimize spending and get your small business finances running smoothly. Not to mention be able to fully relax on your summer vacation!

Quarterly Tax Payments

You probably already pay quarterly tax estimates as a small business owner. If you don’t already do that, you should.  It keeps that one BIG bill at bay in the long run.  If you are already doing that, make sure to established a separate account just for the funds going towards your tax bill. It’s also imperative to keep your business accounts away from personal ones.  This helps you keep more accurate records of business income or expenses and minimizes confusion about how much your quarterly payments should be.

Cash Flow

Spring is an amazing time for any business.  People are starting to get out and about, reemerging from their winter funk and non-spending habits.  It’s time for updates to wardrobes, houses, and finances!  A good tip is to check your cash flow every week.  This will let you know if your cash flow is stuck in accounts receivable and more accurately time income and expenses. 

Update Your Plan

Take the time to write down a formal business plan.  If you don’t have one in place, there are no goals to reach with no direction to achieve them.  Take the time to do this because it will make a difference.  If you already have one in place, but it’s from last year, review it!  Do you still have the same goals as last year, or do you want to aim a little higher for the next?  This will help you prioritize time and money in order to curb extraneous spending.  Strategizing your business is a productive task and can really increase profits.

Spring cleaning is a really great way to start fresh not only in your personal life but for your business, too!  So get motivated this season and take these steps towards organizing your business!

Post Traumatic Tax Season

     Everyone finally gets to take a moment to catch their breath after all the preparation they put into (or paid for) preparing their tax return.  Finalizing the paperwork is both scary and relieving.  But now that it’s over, what to do next?  Just sit around for another 12 months until its time to start scrambling forms together again?  No.  Whether you are stressed about your tax liability or wondering what to do with that large sum of money, here are 5 things you can do to prepare for next year.

Refinancing

The Real Estate industry is all abuzz about how rates are still low into 2016.  Remember though, a financial move that could reduce your payments or interest affects your tax liability at the end of the year.  Reducing your interest rate reduces your itemized deductions, this could lead to a larger amount owed to Uncle Sam come next April 18.  If you do some preemptive accounting, you can suitably tailor your withholdings or estimated tax payments throughout the year.  Avoiding that jaw dropping liability takes a little more planning than crossing your fingers and hoping for the best.

Installments

If your tax bill is too large for you to be able to pay it all in one lump sum, you can request an installment agreement or payment plan.  If you’re unable to pay your tax bill because of a singular event, filling out the proper forms should be enough.  If you often find yourself falling short of your tax bill, it’s time to start thinking of increasing your estimated payments or withholdings.  The IRS has been willing to combine previous installment plans with new ones, but the third time is not the charm in this case.  To read about these plans visit http://www.irs.gov/Individuals/Payment-Plans-Installment-Agreements.

Secure Your Income for Retirement

Why not make the maximum contribution to your retirement fund.  Whichever works best for you, either a traditional IRA or a Roth IRA, you’ll save money in taxes by allocating the funds to your retirement.  A Health Savings Account (HSA) is also a savvy way to increase your deductions and put your hard earned money to work for you.

Unintended Savings 

Keep saving that big return!  Uncle Sam held on to it for you all year,   if you can live without it, a big return can be good for putting away in your emergency fund, college savings for your child or a large home repair you know is coming down the road.

Unemployment

Unfortunately, if you’re collecting unemployment checks, you still have to pay taxes on that income.  You can request federal withholding from these checks to cover that amount.

     As long as you do a little preparation throughout the year, paying taxes won’t be as much of a burden come April.  Tax laws are ever-changing, so being up to date on what’s relevant this year will help you plan according to their benefits or disadvantages. 

When to Stop Claiming your Children as Dependents

There has been a trend in recent years of kids returning home after college to save money.  Whether it's because they're still trying to find that great job, saving to buy a home, or don't know their next move, when it comes to supporting your kids, tax filing can get complicated.  Here are some scenarios in which you still qualify for filing your adult children as dependents, especially if they're still in college.  The limits for exemptions tend to change from year to year, so make sure you're up to date with what tax law requires of how much you're able to claim.

Can You Claim Your Adult Children on Your Taxes?
It's possible, but after they turn 19, the rules become complicated

By Penelope Lemov

All good things come to an end, and in the realm of taxes, that certainly applies to the dependency exemption parents can claim for raising their children. But when exactly does that exemption end?
The $3,800 exemption on 2012 tax returns is a tax break you can claim regardless of whether you itemize or how much money you earn, as long as your son or daughter was under 19 last year. But if your child was 19 or older, well, it’s complicated.

When You Can Claim Adult Children

Here are the rules:

Let’s start with the simplest case. If your child was 19 to 24 and a full-time college student for at least five months of the year, the exemption is yours for the taking, so long as you provided at least half of his or her support.

This isn't a high bar to meet for parents of undergrads or grad students. “If you’re paying for their education, it’s a no-brainer,” says Harold Miller, a CPA in New Haven, Conn. “That’s the largest expense in supporting them.”

When calculating whether you provided more than half of the support, you don’t need to factor in any scholarships or financial aid your child received. Nor do you need to count gifts from grandparents, as long as your son or daughter saved or invested the money.
“If you’re paying for more than half of their support while they are in college, they could have a summer job and earn $5,000, and that’s still OK,” says Barbara Weltman, an attorney and contributing editor at J.K. Lasser’s Your Income Tax 2013.

When Dependency Exemptions Get Complicated
When the kids have completed college and you’re still supporting them, however, the dependency exemption rules get far more complicated.

That’s an increasingly common phenomenon. In the wake of the Great Recession, with a great number of recent college grads unable to find work, many have moved back home. According to the most recent census data, 19 percent of men ages 25 to 34 — and 10 percent of women in the same age range — live with their parents.

For you to claim a child who’s no longer a full-time student, your son or daughter must be what the IRS calls a “qualifying relative.” This is the same category you might use to claim an elderly parent or child [with disabilities]. (For the rules on claiming your parents on your taxes, see “How to Claim Tax Breaks for Supporting Your Parents.”) Another thing you might have to consider: If you were divorced or separated last year, the decision over who gets to take the exemption would be a matter of negotiation.

The Tax Rules Regarding Support
To be a qualifying relative, your child didn’t have to live under your roof in 2012, but you had to provide at least half of his or her support. Here’s the catch: You can take the exemption only if your adult kid earned less in gross income than the exemption is worth ($3,800), regardless of how much you contributed to his or her expenses. So even though your daughter has been trying to gain traction in an exciting career, if she took a part-time gig tending bar in the meantime, that could be the kiss of death, taxwise.

Although the dependency exemption is fairly sizable, keep in mind that it’s a deduction from income, not a credit against your taxes. So its actual value depends on your tax bracket. For example, at the 25 percent bracket (taxable income between $70,700 and $142,700 for couples filing jointly), a $3,800 exemption is worth $950.

“It’s a nice amount, but not anywhere near what it costs to support a child,” says Marty Kurtz, president of the Financial Planners Association and a planner in Moline, Ill.

To read the original article, click here.

15 Things to Keep After Filing & How Long to Keep Them

In Kelly Phillips Erb's own words, a Forbes Tax writer, here are the things you need to keep after filing your return and for how long!

1. As a rule, keep your tax records and supporting documentation until the statute of limitations runs for filing returns or filing for refund. For most taxpayers, that means that you’ll want to keep those records for three years following the date of filing or the due date of your tax return, whichever is later.

2. If you don’t report all of the income that you should report (generally, if you omit more than 25% of the gross income shown on your return), the statute of limitations is extended: you’ll want to keep those records for at least six years. You may also want to get a better tax professional.

3. If you file a clearly fraudulent return or if you don’t file a return at all, the statute of limitations never actually runs. That means that there is no time limit on IRS action. In that event, you’ll want to hold onto your records forever. And in that case, you absolutely want to get a better tax professional and possibly a defense attorney on speed dial.

4. If you file a claim for credit or refund after you file your return, you’ll want to keep your records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later.

5. If you are a partner or S corporation shareholder, the statute of limitations is generally controlled by the date of your individual return.

6. If you file an amended return, it does not extend the statute of limitations for your original return. The clock doesn’t restart: the original date determines the statute of limitations (some exceptions apply if you file within 60 days of the assessment window).

7. You’ll want to keep supporting documentation for as long as the statute of limitations runs. Supporting documentations for your tax returns includes not only your forms W-2 and 1099 but also bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.

8. Don’t forget about those Obamacare requirements. Beginning with the 2014 tax year (the return you filed in 2015), you’ll need to keep records of minimum essential health insurance coverage or proof that you qualified for an exemption or premium tax credit (especially if you had to pay it back).

9. If you make nondeductible contributions to a traditional IRA, hold onto those records until you make a complete withdrawal/distribution: you don’t want to pay tax on those twice. But don’t stop there. As a rule of thumb, you should hold onto all IRA records – including Roth contributions – until you withdraw all of the money from the account.

10. If you claim depreciation, amortization, or depletion deductions, you’ll want to keep related records for as long as you own the underlying property. That includes deeds, titles and cost basis records.

11. If you claim special deductions and credits, you may need to keep your records longer than normal (for example, if you file a claim for a loss from worthless securities or bad debt deduction, you should keep those records for seven years).

12. If you have employees, including household employees, keep your employment tax records for at least four years after the date that payroll taxes become due or is paid, whichever is later. This should include forms W-2 and W-4, as well as related pay information including benefit forms.

13. If you claim any other special tax benefits not mentioned above (for example, the first time homeowner’s credit), a good rule of thumb is to keep your records for as long as the tax benefit runs plus three years.

14. If you own property that will result in a taxable event at sale or disposition (like stocks, bonds or your home), you’ll want to keep records which support your related tax consequences (capital gains, etc.) until the disposition of the property plus three years. That means, for example, that you should keep records related to your home, including home improvements, for as long as you own the house. Remember that you’re entitled to exclude up to $250,000 of gain on the sale of your home ($500,000 if married filing jointly) – so keep excellent records of the cost of the home as well as any improvements or other adjustments to basis.

15. If you receive property as the result of a gift or inheritance, you’ll want to keep records that support your basis in that property. Generally, if you inherit property, your basis is the stepped up value as of the date of death; if you receive a gift, your basis is the same as the donor’s basis. Don’t toss those old records just because you’re the new owner of the assets.

The full article "Tax Records You Should Keep After Tax Day (And How Long to Keep Them)" By Kelly Phillips Erb can be found here.

A Break After Busy Season!

It was so amazing to take a break after the busy tax season!  Thank you to all of my clients.  I was so happy that after offering my services for personal tax returns I was able to help out some great people who just needed some help getting the most out of their return!  Had so much fun at Northside Grille with the Richmond Business Alliance and looking forward to a wonderful summer!

Last Minute Money Saving Tax Moves

Now that we’re really down to the wire, it’s time to start crunching those numbers!  You’ve have a little bit longer this year, Individual Tax Returns are due on April 18th, but you may want to take the weekend to make sure you’re taking advantage of all the deductions available to you.  Lower your tax liability and avoid IRS scrutiny with some of these last minute tips.

1. Did you know you could deduct the cost of your 2015 Startup?

As long as your costs fall below the $50,000 mark, you could deduct up to $10,000 of your taxable income.  Up to $5,000 for research, development and creation of your business and $5,000 for the implementation costs such as incorporating, patenting, and legal fees.  Research costs spent improving your product or service are considered eligible expenses as well.

What doesn’t count:

-Advertising

-Promotions

-Quality control testing

-Consumer Surveys

2. Did you know that the threshold for big company purchases has been raised?

If you’ve purchased expensive equipment last year for your business, this year you can deduct up to $500,000 as long as your total eligible property costs are less than $2 million.  This can include big items like a new walk-in refrigerator for restaurants, or furniture for your office space, even computer programs.

What doesn’t count:

- Improvements on rental properties

- Air conditioning or heating units

- Any property used outside of the U.S. 

Did you know that in addition to mileage you can deduct auto loan interest?

Everyone’s favorite year end deduction— mileage, now includes any interest you’ve paid on auto loans!

What doesn’t count:

- Your daily commuting miles don't count as business miles

3. Did you know that the Home-Office deduction equation has simplified?

It has! Up to 300 square feet at $5 per square foot for a whopping total of $1,500. There is still the old method available for filing, it may be worth looking into which one saves you more.

What doesn’t count:

- Multi-Use Space; a playroom/office doesn’t count. Neither does your living room where you occasionally check emails.

It’s not too late!

Contribute to a Health Savings Plan (HSA), a Retirement Savings Plan like a traditional or Roth IRA and a percentage will be deductible.  However, each one has a cap A Roth IRA cannot except $5,500, or $6,500 if you’re over 50.  HSAs max out at $3,350 for individual and $6,650 for families.

Take these extra few days to scrutinize your account statements.  An extra couple hundred in tax liability is nothing to scoff at! 

4 Things You Need to Track When You're Self Employed

Being self-employed means there's a lot of weight on one person's shoulders - yours!  So come tax time, all of those small accounting and bookkeeping tasks that you've put off are mounting up.  When it comes to staying organized when there are so many other things to do, they key is to keep it simple. This article outlines the important things that you need to be tracking weekly, monthly and quarterly as a person who is self-employed. There may even be an app out there that can help you!

4 Things You Need to be Tracking if Your Self Employed
By Matt Rissell

There are more than 14 million entrepreneurs in the United States today. Together, they represent more than 10 percent of the nation’s 146 million workers. But it doesn’t stop there; the employees those entrepreneurs hire constitute yet another 20 percent of the U.S. workforce—putting a whooping 43 million people (three for every 10) under the self-employed/small business umbrella.

However, it’s a well-known statistic that eight out of 10 small businesses fail within the first 18 months. Which means that 80 percent of those 14 million entrepreneurs will never get their small business off the ground.

Why? Well, there’s a number of reasons a business can fail, but almost all of those failures can be attributed (at least, in part) to inconsistent or nonexistent tracking. One of the most critical things you need to track is also the easiest to do ... but oftentimes the most overlooked—and it can save your business thousands of dollars in gross payroll costs each year. Sound good? Keep reading. These are the four things you need to be tracking if you want to see success.

1. Your business AND personal expenses.
This might seem like a given, but you’d be surprised how many business owners don’t realize the importance nor have an accurate view of their business vs. personal expenses. Use a do-it-all expense tracking system like Expensify to keep your bank account, and your business, on track.


2. Your quarterly and yearly taxes.
Tax time for entrepreneurs can be a huge hassle—and a major financial blow—especially if you haven’t been relentlessly tracking your business and personal expenses. Tracking and understanding where you stand come tax season will help you avoid any nasty surprises and ensure you’re getting every dollar you deserve! Use tax software designed specifically for small businesses like yours. I recommend Avalara for automatic monthly and quarterly tax filing or TurboTax Home & Business for to track, organize, and maximize your annual refund.

3. Your billing and invoicing.
Are you still billing and invoicing using paper invoices and snail mail? Pay or get paid faster and easier with a business payment system like bill.com. Knowing exactly what your profits and losses are, right now, enables you to make smarter decisions for your business and ultimately make more money.

4. YOUR TIME.
Time is your most precious commodity—do you know where you’re spending it? Accurate and easy time tracking results in real-time business insight, more accurate job and labor costing, and faster payroll. Customers who use TSheets save an average of 2-8 percent on gross payroll costs each year. Time is the easiest and most important thing you should be tracking—but often the most overlooked. How much would you save, simply by making the switch to automated time tracking?

To see the original article, click here.

Last Minute Tax Tips for Small Businesses

When you’re running a business it’s hard to do it all. Filing your taxes in a timely manner can be difficult and if you’re a business owner this is especially true because you typically have a lot on your plate. The problem with waiting until the last minute to file your taxes is that you may miss some things that will work to your advantage. Here are some of the things you want to pay attention to when you’re filing this year:

Free Filing

If you made less that $57k in the past year, you are eligible to use free e-filing software. What’s great about this is that there is little to no out of pocket expense to you and it's typically self-explanatory. You get asked questions about your business and finances, and you fill out the form like you would any other questionnaire. 

Start-Ups

Did you start your business last year? You qualify for a $5k deduction since starting a business is considered a capital expense. This may not apply to everyone but it definitely applies to some, and if you did start a new business last year, congrats! It’s not easy. 

Education

Did you take a class or course to receive training to improve your business? If so, that also qualifies as a deduction. Things like seminars and conventions count too!

Driving

Mileage is one of the easiest deductions for you to qualify for. Whether it’s meeting clients, getting supplies or doing research around town, you can get a deduction for using your own vehicle to run your business. Most business owners have to do this at some point or another, just make sure that you keep track of your miles and maybe even use a helpful app to do it for you!

Working from home

Being your own boss is great, but if you also get to work a lot from home and have a dedicated space just for that, that also qualifies as a deduction. You do have to specify square footage but that shouldn’t take too long to figure out. 

Insurance

There’s no one looking out for you but yourself when you’re self-employed, this is why getting health insurance is on you. Not to worry though, IRS knows that this can be a costly expense for someone who has their own business and sometimes either offers assistance or a tax break to ensure you’re healthy enough to run your business. 

Software and subscriptions

Quickbooks, Photoshop, Paypal - if you’re a business owner you may be familiar with some of the these software programs. Most of these require a monthly subscription which can end up costly hundreds of dollars a year, take this as a deduction also because it is considered a business expense.

Hotels and Meals

We never know where work will take us, but we do know that covering these expenses can get costly. That is why saving all your receipts for both meals and hotels is important. Most of these things, as long as they are a business expense, are also deductible. 

Change in Small Business Expense Threshold for Deductions

Straight from the IRS, news that allows small businesses to immediately deduct expenses that would previously have to be spread out annually through depreciation deductions!

For Small Businesses: IRS Raises Tangible Property Expensing Threshold to $2,500; Simplifies Filing and Recordkeeping

WASHINGTON —The Internal Revenue Service today simplified the paperwork and recordkeeping requirements for small businesses by raising from $500 to $2,500 the safe harbor threshold for deducting certain capital items.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.

“We received many thoughtful comments from taxpayers, their representatives and the professional tax community, said IRS Commissioner John Koskinen. “This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers.“

Responding to a February comment request, the IRS received more than 150 letters from businesses and their representatives suggesting an increase in the threshold. Commenters noted that the existing $500 threshold was too low to effectively reduce administrative burden on small business. Moreover, the cost of many commonly expensed items such as tablet-style personal computers, smart phones, and machinery and equipment parts typically surpass the $500 threshold.

As before, businesses can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold. The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.

For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000.

To access the original article, click here.

Which Education Deduction/Credit Works Best for You?

When thinking about education expenses when filing your 2015 tax return there are basically 3 options. There are two tax credits available to those who have paid expenses for higher education in 2015. They are The American Opportunity Credit and the Lifetime Learning Credit.  The third option is claiming your tuition and fees as a deduction.  Where a tax deduction reduces only your taxable income, claiming one of the credits reduces your bill by the actual credit amount  Only one of these credits can be claimed for a qualifying student, you cannot claim both in the same year.  However, if you have paid education expenses for two students, these credits can be claimed on a per-student, per-year basis!  As with any accounting, it’s all in the math.  A lot of people will be better off claiming the credits and reducing their bill outright. Whereas making deductions might still land you in the same tax bracket, barely making an impact.  Ultimately, the bottom line will always tell you which is the best way to go.

Here is a guide to which option may be best for you:

Tuition and fees deduction

You are allowed up to a $4,000 deduction and you don’t even have to itemize them.  The deduction is for the taxpayer, not the student.  If there are multiple students in the household, this may not be the most beneficial

American Opportunity Credit

You are allowed up to $2,500 credit per eligible student, therefore, if you have two students in the household you could receive a $5,000 credit off of your final tax bill.  The American Opportunity Credit is only available for the first 4 years of any student pursuing an undergraduate degree and needs to be enrolled at least half-time during one academic period to qualify.  All of your tuition and required enrollment fees are qualified expenses along with any course materials and supplies needed and don’t have to be purchased from the institution in order to qualify.

Lifetime Learning Credit

This allows up to $2,000 credit per return— not student.  So only one Lifetime Learning Credit can be claimed per tax year no matter how many qualifying students.  However, the advantage of this credit is that you can claim it for any post-secondary education and it applies to all courses that help acquire or improve job skills.  It is not necessary to be pursuing a degree or other recognized education credential.  All qualifying expenses include tuition and enrollment fees, and course materials, supplies and equipment purchased from the institution.

No matter what your situation, these are three great tools to use to whittle down tax liability, and for good reason. These days education can be expensive so take advantage of all the help you can get!