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Make Sure to Not Claim an Ineligible Dependent on Your Taxes

July 17, 2025 by admin

Claiming dependents on your tax return can significantly reduce your tax liability through exemptions, deductions, and credits. However, claiming an ineligible dependent—whether accidentally or intentionally—can lead to serious consequences, including IRS penalties, delayed refunds, and even audits. Understanding the rules and repercussions is essential for responsible tax filing.

Who Qualifies as a Dependent?

Before diving into the risks of misclaiming, it’s important to understand the criteria the IRS uses to determine dependent eligibility. There are two main categories:

1. Qualifying Child

Must meet all of the following:

Relationship: Your child, stepchild, sibling, or descendant.
Age: Under 19, or under 24 if a full-time student (no age limit if permanently disabled).
Residency: Lived with you for more than half the year.
Support: Did not provide more than half of their own financial support.
Filing Status: Not filing a joint return (unless only to claim a refund).

2. Qualifying Relative

Must meet all of the following:

Not a qualifying child of another taxpayer.
Gross Income: Less than the IRS threshold (e.g., $4,700 in 2023).
Support: You provided more than half of their support during the year.
Relationship or residency: Related to you or lived with you all year.

Common Mistakes That Lead to Claiming Ineligible Dependents

Sharing custody: Divorced or separated parents may both try to claim the same child.
Adult children: Claiming a child who earned too much or provided most of their own support.
Extended family or roommates: Claiming individuals who don’t meet relationship or residency requirements.
Double claiming: Both taxpayers in a split household claim the same person.

Consequences of Claiming an Ineligible Dependent

Delayed or Rejected Refund

If the IRS detects a problem (especially if the dependent’s Social Security Number has already been used), your return may be flagged and your refund delayed or denied.

Amended Returns or Audits

You may be required to file an amended return and repay any credits or refunds you received in error. This can trigger an IRS audit, which may require documentation of eligibility.

Penalties and Interest

The IRS can impose penalties for negligence or fraud, along with interest on unpaid taxes.

Loss of Valuable Tax Credits

Claiming an ineligible dependent may incorrectly qualify you for:

Child Tax Credit (CTC)
Earned Income Tax Credit (EITC)
Dependent Care Credit
Head of Household status

If disallowed, you may lose eligibility for these credits for up to 10 years if the IRS deems the claim fraudulent.

What to Do If You’ve Made a Mistake

1. Don’t Ignore IRS Notices

If you receive a notice or letter from the IRS about your dependent claim, respond promptly with any requested documentation or corrections.

2. File an Amended Return

Use Form 1040-X to amend your return if you realize you’ve claimed someone who doesn’t qualify. This can reduce penalties if done proactively.

3. Seek Professional Help

A tax professional can help assess your situation and guide you through rectifying the mistake and dealing with the IRS.

Tips to Avoid Errors

Use tax preparation software with dependent eligibility checks.
Keep thorough records: proof of residency, school records, income, and support documents.
Coordinate with other household members or ex-spouses to avoid duplicate claims.

Final Thoughts

Claiming a dependent can offer significant tax benefits, but the rules are strict and must be followed carefully. If you’re unsure whether someone qualifies, it’s better to double-check than risk penalties or audits. When in doubt, consult a licensed tax professional or the IRS website for guidance.

Maximizing Deductions: Overlooked Tax Deductions You May Be Missing

June 13, 2025 by admin

When tax season rolls around, everyone is looking for ways to reduce their tax bill. One of the most effective strategies for lowering taxable income is to take full advantage of deductions. However, many taxpayers miss out on key deductions simply because they aren’t aware of them or don’t think they qualify. To help ensure you’re not leaving money on the table, here are some commonly overlooked tax deductions that could help reduce your tax liability.

1. Medical Expenses

Did you know that you can deduct certain medical expenses if they exceed a certain percentage of your adjusted gross income (AGI)? For the 2023 tax year, you can deduct qualified unreimbursed medical expenses that are more than 7.5% of your AGI. This includes things like doctor visits, prescription medications, dental treatments, and even travel costs related to medical care. If you have significant medical expenses, keeping track of all receipts and eligible expenses can result in considerable savings.

2. Charitable Donations

Most people know that donations to charity are deductible, but many don’t realize just how much they can deduct. Besides cash contributions, you can also deduct the value of non-cash donations like clothes, furniture, or household items given to qualified organizations. Even out-of-pocket expenses for volunteering, such as mileage or supplies, can be deducted. Just make sure to keep good records and receipts, as the IRS requires documentation for these deductions.

3. Home Office Deduction

If you’re self-employed or run a small business from home, you might qualify for the home office deduction. Many people shy away from claiming this deduction due to fears of an audit, but the IRS offers a simplified option that makes it easy to claim. You can deduct $5 per square foot of your home used exclusively for business, up to a maximum of 300 square feet. Alternatively, if your actual expenses (rent, utilities, and repairs) are greater, you can calculate and deduct the portion of those costs that apply to your home office.

4. Student Loan Interest

If you’re paying off student loans, you may be eligible to deduct up to $2,500 of the interest you paid during the year. This deduction is available even if you don’t itemize, which makes it especially valuable for young professionals just starting out. There are income limits, so be sure to check the IRS guidelines, but for many taxpayers, this can be an easy way to reduce taxable income.

5. State and Local Taxes (SALT) Deduction

The SALT deduction allows taxpayers to deduct up to $10,000 in state and local taxes, including property taxes, state income taxes, and sales taxes. If you live in a state with high taxes, this can provide significant relief. You can choose to deduct either state income taxes or sales taxes, whichever is higher, but not both, so be sure to do the math and see which option benefits you most.

6. Retirement Contributions

Contributing to a traditional IRA or 401(k) not only helps you save for the future but can also reduce your current-year taxable income. Contributions to these retirement accounts are tax-deductible up to certain limits, and the savings can add up quickly. For 2023, you can contribute up to $6,500 to an IRA, or $7,500 if you’re age 50 or older. For 401(k)s, the contribution limit is $22,500 ($30,000 if you’re over 50). These contributions lower your taxable income, meaning you pay less in taxes now while saving for retirement.

7. Job Search Expenses

If you’re searching for a new job in your current occupation, you may be able to deduct some of the costs associated with the search, even if you don’t land the job. Eligible expenses include things like resume preparation, travel costs to interviews, and job placement fees. Keep in mind that these expenses must be itemized, and they are subject to the 2% AGI rule, which means only the amount of your total miscellaneous deductions that exceeds 2% of your AGI is deductible.

8. Educator Expenses

If you’re a teacher, you probably spend some of your own money on classroom supplies. The good news is that you can deduct up to $300 of unreimbursed expenses (or $600 if both you and your spouse are educators). This can include things like books, classroom materials, and even professional development courses.

Conclusion

Maximizing your deductions is one of the best ways to lower your tax bill, but it requires careful planning and documentation. By being aware of commonly overlooked deductions, you can ensure you’re getting every tax break available to you. Remember, tax laws can be complex, and everyone’s financial situation is different, so it’s always a good idea to consult with a tax professional to make sure you’re maximizing your deductions and minimizing your tax liability.

Regular Reviews of Your Business’s Operating Health Are Essential

May 13, 2025 by admin

Small business owners who conduct regular reviews of their business’s operating health are more likely to detect potential issues before they develop into major problems. Certain areas — cash flow, gross profit margin, receivables, among several — should be monitored regularly since they hold the greatest potential for harming a company’s long-term financial health. Here’s what to look for:

Cash Flow Issues
It’s a red flag if your cash flow isn’t enough to cover expenses because payments for goods or services are slow in coming. And you should be concerned if your cash reserves accumulate rather than being put to work. Excess funds may be parked in short-term investment accounts, but ideally, they should be put to work growing the business.

Gross Profit Margin
If your gross profit margin shrinks over several quarters, then your production costs may be rising at a faster pace than your prices. Or it could be due to the fact that you are charging less than in the past. Either way, declining gross profit margins threaten your business’s financial health.

Receivables
If your receivables are growing faster than your sales, then it’s clear that your customers are not paying what they owe you in a timely manner. Look for ways to improve your collection procedures. For example, be proactive and consistent about issuing invoices and providing any necessary supporting documentation. Set up a system in which you contact customers as soon as you detect any delays in payment. Be persistent in contacting customers whose accounts are past due.

Debt
Debt is generally not a problem as long as it is kept under control. However, excessive debt can erode your cash, cut into your profits, and reduce the return you’re getting on your investment in the company.

Assets
If your business carries inventory, you need to carefully measure your turnover rates. Your cash flow will suffer if your inventory turns over slowly. One smart approach may be to determine how many days’ worth of product you would ideally like to have on hand and adapt your purchasing to meet that goal. In addition, pay attention to fixed assets. If you have equipment that’s not being fully utilized, you may be able to repurpose it. If not, it may be time to sell or donate it.

Professional Input Can Be Valuable
Business owners should evaluate a broad range of financial information when making decisions. The input of a financial professional can be helpful in the assessment of a business’s overall financial health.

When Is the Ideal Time to Plan Your Estate?

April 13, 2025 by admin

There’s really no time like the present when it comes to planning your estate. Ignoring or postponing estate planning can create several serious problems down the road for you and your loved ones. For example, your personal possessions and other assets could end up in the hands of individuals that you no longer want to have them. The following could also occur:

Your estate could be reduced by taxes;
Your minor children’s future could be decided by a court;
A court may have to make life or death medical decisions on your behalf;
You may have no say over the management of your assets if you were to become incapacitated.

You can avoid these scenarios by crafting a will and taking other estate planning steps. Here is what you need to do.

Start With a Will

A will is the foundation of smart estate planning. You use your will to specify who will receive your assets and when they are to receive them.

Perhaps one of the most important functions of a will is that it allows you to name a guardian for your minor children. The peace of mind that comes from knowing your minor children will be taken care of by someone you trust is invaluable.

You should review your will periodically to ensure that it still reflects your wishes. You may decide to update your will if there are changes in your life, such as births, deaths, marriages, or divorces in your family.

Next, Focus on Other Important Legal Documents

A durable power of attorney for health care, also known as a health care proxy, allows you to name someone else to make medical decisions for you under certain circumstances. Once it is in place, hospitals, doctors, and other health care providers are obligated to follow your agent’s decisions as if they were your own. Another key estate planning document is a living will. This document generally addresses the type of medical care you want (or don’t want) as it relates to life sustaining treatments.

Update Beneficiary Designations

There are certain rules that govern the distribution of assets not controlled by a will. The proceeds of life insurance policies and retirement plan accounts are examples of non-probate assets. Your retirement plan benefits and life insurance proceeds will generally pass on your death to the person(s) you’ve designated as beneficiary on your account.

As is the case with your will, you should review your beneficiary designations regularly and update them when necessary to reflect any changes that have occurred in your life. You want to ensure that your assets will pass to your loved ones exactly as you want.

Utilize Trusts

Trusts are at the heart of effective estate planning since they are exceptionally flexible tools that can accomplish numerous objectives. Trusts can provide asset management and protection as well as ensure the future financial security of surviving family members. They can help avoid probate, unify an estate plan, and help reduce estate taxes. They can meet your charitable giving goals and also be structured to support a child or relative with special needs.

Factor In Out-of-State Moves

Income tax and estate tax laws differ from state to state. If you intend to pull up roots and make your home in a new state, investigate your future home’s rules regarding taxes. If there are differences, you may need to revise your estate plan.

Seek Professional Assistance

An estate plan can incorporate numerous, sometimes complex elements. You want to be sure that all the moving parts are working in harmony with your goals. A financial professional can work with your legal counsel to make the estate planning process considerably easier for you.

How to Set Up a Bookkeeping Cycle in QuickBooks Online

March 10, 2025 by admin

Young female financier with calculator working inside office at workplace, businesswoman behind paper work satisfied smiling, good achievement results, working with contract, accounts and charts. Do you have a regular schedule you follow with your QuickBooks Online work? It can be a good strategy.

Bookkeeping is cyclical. You tend to do the same things over and over, which may get to be a bit of a drag for you. QuickBooks Online can automate some processes, and it certainly helps minimize duplicate data entry, but you’ll undoubtedly find yourself growing weary of repetitive tasks.

We can’t help you avoid this drudgery completely, but we’d like to suggest a new, more organized way to attack your accounting tasks in 2025. It could be especially helpful if you’re a new QuickBooks Online user and don’t have a routine established yet. But even long-time users might find this routine helpful. It can keep things from slipping through the cracks and simply make you more productive and confident that you’re addressing all of your accounting issues.

Give it a try and see what you think.

What Should You Do Every Day?

Even if you don’t have expenses to enter or invoices to process, it’s a good idea to log into QuickBooks Online every day. If you’ve connected your online bank and credit cards to the site (which you absolutely should), there will probably be transactions to go over. So after you’ve taken a look at your Dashboard (especially your Tasks), hover your mouse over Transactions in the toolbar and click Bank transactions.

Click Update in the upper right to make sure you’re seeing the most recent transactions. If you’re doing this every day, it shouldn’t take long to go over the income and expenses that have been imported since you last logged in.

You should be looking at newly imported transactions daily and completing the fields provided as comprehensively as possible.

If you don’t know what Match or Record as transfer mean, we should schedule a session to go over transaction management in QuickBooks Online.

Every Week

You need to be monitoring your accounts receivable and payables on a weekly basis – at minimum. There are two ways to do this. You can:

Run reports.

• Click Reports in the toolbar and scroll down first to Who owes you. Run Accounts receivable aging summary. QuickBooks will display past-due transactions in several columns (Current, 1-30 days, 31-60 days, 61-90 days, and 91 and over). If you’re keeping up with your receivables, you shouldn’t be seeing numbers in most of the columns, unless you’re in a known collections process.

• Scroll down to What you owe and run Accounts payable aging summary. This works like the aging receivables report. Again, you shouldn’t be seeing much activity here unless you’re in a payment dispute with a vendor.

• You can also run the Open Invoices report to quickly see the Due date and Open balance entries here. Ditto the Unpaid Bills report.

Consult the All sales page.

Hover your mouse over Sales in the toolbar and click All sales. The colored bars and numbers at the top of the page show you the status of your sales. Click the orange bar in the middle to see a list of overdue invoices. If there are any, you can set a Send reminder by clicking the corresponding down arrow in the Action column. While you’re there, look at estimates and unbilled income and take any action needed.

Every Two Weeks (or more often, depending on product volume)

If you sell products and track inventory in QuickBooks Online, you should keep a close eye on your stock to see if you need to:

• Reorder,

• Bring in a larger supply because something is selling well, or,

• Discount or discontinue a product because it’s not selling.

Click Reports in the toolbar and run Product/Service List under Sales and customers and look at the Quantity on hand column.

Every Month

Reconcile your accounts (Transactions | Reconcile).

It’s really, really important that you reconcile your accounts every month. We can help you with this.

No one likes to do this, but it’s way easier to do regular reconciliations than it is to have to go back several months to track down a problem. If you’ve never done this in QuickBooks Online, it works similarly to how you used to reconcile your accounts by comparing a bank statement and your paper checkbook register. Only you’re comparing your bank or credit card statements to your accounts in QuickBooks Online. Before you start, make sure you’ve matched and categorized all of your downloaded transactions.

Run a Profit and Loss report for the last month.

Click Reports in the toolbar and click Profit and Loss under Business overview. Did you make a profit last month?

Every Quarter

If you’re planning to apply for a loan or looking for an investor, or if you just want a deeper understanding of how your business is doing, consider having us create and analyze standard financial reports for you, like the Balance Sheet and Statement of Cash Flows. You can run these yourself in QuickBooks Online, but it really takes an accountant’s eye to understand and interpret them.

If you decide that you want to work with us in any capacity, like helping you with reconciliation and/or modifying your Chart of Accounts, there’s another way we can help. If you ever have trouble categorizing an expense, select Uncategorized Expenses as the Category. If we’re meeting with you once a month, we can run a report on these and help you categorize them correctly.

Is Your Favorite Pastime Turning Into a Small Business? The IRS Wants to Know.

February 10, 2025 by admin

If you’re making $400 or more on your hobby, it’s time to start declaring it on your income taxes.

We take on hobbies because we enjoy them. But at some point, we sometimes get enough people wanting the woven towels or the birdhouses or the Christmas ornaments we make that it’s time to start charging for them. Supplies cost money, and your time is certainly worth something.

A lot of people get started that way. Before you know it, they’ve set up a shop on Etsy and started exhibiting at craft shows. At what point does this become a business, they may ask themselves.

If you’re bringing in $400 or more per year on your side gig, you should know that there are two good reasons why you should be reporting your business on your Form 1040:
• You’ll be able to deduct at least some of your expenses, and,
• The IRS mandates it.

8 Questions

When your hobby becomes a small business, you’ll have to complete and file a Schedule C with your 1040.

If your personal enterprise has turned a profit in three of the last five years, it’s quite likely that your creative endeavors have become something that requires a Schedule C along with your 1040. The IRS suggests that you ask yourself eight questions to help determine whether it considers you a business and not a hobby. They go something like this:

1. Does the time and effort you put into the activity show you intend to make a profit?

2. Does the activity make a profit in some years, and if so, how much profit does it make?

3. Can you expect to make a future profit from the appreciation of the assets used in the activity?

4. Do you depend on income from the activity for (at least part of) your livelihood?

5. Are any losses due to circumstances beyond your control or are the losses normal for the startup phase of your type of business?

6. Do you change your methods of operation to improve profitability?

7. Do you carry out the activity in a businesslike manner and keep complete and accurate books and records?

8. Do you and any advisors you might work with have the knowledge needed to carry out the activity as a successful business?

How Will You Report Your Income?

Depending on how much money you make and where/how you sell your products, you may receive a 1099 of some sort. If you accept credit cards, it will most likely be the 1099-K: Payment Card and Third-Party Network Transactions. If you take checks and cash, you’ll have to add it all up yourself. Keep any documentation you have if this is the case. You’ll report this on your Schedule C.

How Will You Know If An Expense Is Deductible?

Some business expenses are obvious. If you’re making birdhouses, for example, everything you buy to assemble them should be considered part of your Cost of Goods Sold. If you’re buying products wholesale and reselling them, that should be deductible, too.

But there’s a lot of gray area. The IRS says that legitimate business expenses are those that are “ordinary and necessary.” An ordinary expense is one that is typical and widely accepted in your industry. A necessary expense, on the other hand, is one that is useful and appropriate for your business operations. An expense doesn’t need to be essential to qualify as necessary.

Some small business owners really stretch the interpretation of “ordinary and necessary.” There’s a famous case where a company that had a warehouse tried to deduct the cost of cat food. The contents of the warehouse were attracting rodents and snakes, and they wanted to feed stray cats who would keep the population of unwanted visitors down. The IRS accepted it as a legitimate business expense.

Our point here is not that you should try to find some outlandish business expenses to deduct. But we want you to really think about what it costs you to do business. If you’re ever audited, you’ll have to make a case to the IRS about why you claimed a particular purchase as necessary for your business. Keep meticulous records of your purchases.

On to a New Year

Keep these things in mind as we move into a new year – and tax preparation season. You may want to consider reclassifying your hobby as a business and filing a Schedule C with your 1040. We’re not IRS auditors, of course, so we can’t tell you whether a certain purchase will be considered a deductible business expense. But we can help you deal with the tax-related issues you’ll face should you decide it’s time for you to start claiming income and expenses for your pastime-turned-business.