Charged Up! podcast: Mastering your taxes


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Episode 67 with accountant Barbara Weltman


When it comes to preparing taxes,
good advice can save you thousands of dollars. In this episode we talk with
well-known accountant Barbara Weltman on the must-dos of taxes, how to
calculate credit card rewards, and what to do if you own your own small business
or side hustle. So, before you tackle those taxes yourself, give yourself the
gift of free tax advice and see if there’s money you could be saving!

So, let’s get Charged Up! about
mastering taxes!


Hoff: Barbara, thank you so much for joining me

Weltman: It’s a pleasure.

Hoff: So it’s tax time, and for some that means a
refund that they can use to pay down debt or save or a purchase something nice.
For others it means coughing up a bunch of money that they hopefully had the
wherewithal to set aside.

I want to start with some best
practices. If someone is using a tax preparer what are some questions they need
to be asking and may not think of?

Weltman: When using a preparer you want to make sure that he or she is
legitimate. You want to steer clear of anybody who’s kind of shady, and you may
know this by what they say or don’t say. For example if they say they’re going
to guarantee you money or they’re charging you a percentage of your refund or
they won’t show you their preparer tax identification number, they’re PTIN, or they
refuse to sign your return run away as fast as you can, those are kind of shady
practices that is a tip off.

And the reason why you want to
steer clear of such a preparer is because when the IRS catches these types of
preparers then they go look at all the clients that they dealt with, and then
you are basically inviting IRS scrutiny, which is something you obviously don’t
want to do.

Hoff: Right, absolutely. And what about like as far
as maximizing their deductions as taxes? What are some things people just don’t
really think of that actually are maybe deductible or they think are deductible
and they’re actually not?

Weltman: I think the good news when it comes to this is that if you’re
using a paid preparer or if you are using software to prepare your return
you’re not likely to overlook deductions, because you’re going to be asked or
prompted about various expenses. And then you’re going to know whether or not
they’re deductible.

I think one of the things that
people may think is deductible that is not is commuting. And no matter how far
you commute or how costly it is to do so you usually can’t deduct your
commuting costs, and there’s a couple of minor exceptions but for the vast
majority commuting costs are not deductible.

I think one of the things that
some people may think is a problem and they may be reluctant to claim a
deduction even though they’re entitled to is the home office deduction. Because
there’s been a lot of buzz about that being an audit red flag and people don’t
want that to happen, but I think that if you are entitled to it, because you
work from home, the Small Business Association says 52 percent of all
businesses in the U.S. are home-based, so a lot of people legitimately work from
home and would be entitled to the deduction.

The thing is just make sure
you’re entitled to it, follow the rules, and then just don’t worry about it.
And another reason why I think it’s a legitimate write-off is the fact that the
IRS has gone so far as to create what amounts to a standard deduction for a
home office. So you don’t even have to figure out all your particular expenses
related to this space that you use in your home that you can just use the IRS

Hoff: Now if you have an actual office at your job
that you could be using but you’ve asked to work remotely and you do work from
home then you could not write that off as a home office, correct?

Weltman: That’s exactly correct because you have to work at home for the
convenience of your employer not for your own preference. And for the
convenience of your employer usually means that there’s no office space for
you. It doesn’t mean that you’re allowed to just work a couple of days from
home because it’s better for your personal situation.

Hoff: How does the office need to be set up? Does it
have to be in a room with a door so you have an exact amount of square feet? Or
let’s say you use the dining room, instead of using it as a dining room you use
as your office and set it up as an office, could you then deduct that whole
square footage? Does it have to be an actual room or could it be just a space
that you’ve designated as your office?

Weltman: That’s a great question. You have to use the home office space
regularly and exclusively for business, which means that your dining room table
which your family eats on later on in the day is not going to qualify because
it’s not exclusively used for business. But you don’t have to use an entire
room as a home office, whatever space you have; you don’t even need a formal
partition or anything like that. As long as the space that you allocate for
business use is used only for business.

Hoff: OK, so good to know. That’s just for people
because it is so common that people work from home now and a lot of offices are
virtual, I think it’s important to kind of know what qualifies and what doesn’t
so that they make sure that they deduct that because that can be a big

Speaking of itemizing and
deductions, when is it worth it? And then what is the best way to go about it
if you do know that you’re going to be deducting and itemizing at the end of
the year?

Weltman: Well, if you have maintained records for your itemized expenses,
meaning you have proof of your charitable contributions including written
acknowledgments for donations of $250 or more, it may pay to itemize. The good
news is that if you’re using software or pay preparer it will help you
determine whether it makes sense to itemize or to claim the standard deduction,
whichever saves you more money. If you don’t have the records then you may just
want to use the standard deduction.

I think the difficulty comes for
people who are kind of on the cusp. For people who know they don’t have a home
mortgage, they don’t have state and local income taxes, we’re talking about
2017 returns and those kinds of things, they’re deductible, they know to take
the standard deduction. But going forward in 2018 it’s going to be more

Hoff: Yeah, and we’re definitely going to get into
that a little bit because I think if somebody is preparing now for next year
what are things that they can be doing and thinking of right now so they’re not
at the end of the year trying to scramble to find everything that they did and
get all those papers together since there are changes. But first what would you
say the most common mistakes people make during tax time?

Weltman: Well, I think one of the most common mistakes is that people fail
to report all income that’s been reported to them or they don’t report it
correctly. Meaning that if you get a W2, a 1099, a schedule K1 you have to
report what’s been reported to you because the IRS computers are going to
cross-check this with what’s been reported to the IRS versus what’s reported on
your return.

So for example if you received a distribution
from an individual retirement account or 401(k) and you received a form 1099R, be sure to report what you
received correctly on your return. In other words you may have to report the
amounts, even if part of it may not be taxable to you and that you have to
follow the reporting rules. But be sure to report what’s reported so the IRS
computers won’t single you out.

Hoff: OK, so that means look at all of your
investments, look at whatever stocks even if you’re not taking anything out of
your let’s say E-Trade account so you don’t feel like it’s cash that you’ve
earned, if they paid out a dividend and all that stuff you need to be reporting
all of it.

Weltman: Exactly, and you will be getting information returns as I said
like the 1099 DIV if you got dividends, or the 1099 INT if you got interest
from a bank account. Or if you’re an independent contractor you’re going to get
a 1099 MISC to report the income that was payable to you. So if you fail to
report the income on your return, the IRS is going to know about it.

Hoff: And I’ll quickly want to get into side gigs
because I think a lot of people are kind of picking up extra jobs on the side
as they either want to make more money or they want to test the waters before launching
their own business, what are the different types of side gigs that people need
to be actually making sure they’re documenting and reporting so they don’t get
in trouble? Let’s say you are baby-sitting on the side and they just pay you
cash or you’re driving for Uber, what different ones that you need to be making
sure that you report and what amount does it need to be when you know that you
could get in big trouble if you don’t?

Weltman: As a technical matter you have to report all of your income from
wherever you get it, from whatever source. There’s no dollar amount that you
have to earn from Uber before you have to start to report it. But there are
filing thresholds, so if for example the local neighborhood baby sitter earns a
few hundred dollars a year that person may not have to file a tax return and
report that income. But for a person who’s working a day job and then driving Uber
at night they’re going to have to be filing a return and they’re going to have
to be reporting their income from the gig.

Hoff: Can you report it if you’re just getting paid
cash or does it need to be now an official thing, let’s say if you’re
baby-sitting or doing something and you get an official form from the person
who’s hiring you?

Weltman: The method of payment technically doesn’t dictate whether or not
you have to report it. You’re supposed to report your income. I will say though
that for independent contractors there’s more reporting going on than ever, for
example if anybody pays you $600 or more in a year you’re going to get a 1099
MISC reporting that income. If you accept credit cards or PayPal or other
electronic payments and you do a certain number of transactions or have a
certain amount of revenue from those transactions in a gross amount you’re going
to be receiving a 1099K from the bank or the credit card processor. And so the
IRS uses this information to see that you’re reporting your income.

Hoff: All right, good to know. So what about credit
card rewards? We’ve had people ask that they have to declare the credit card
rewards that our experts say no. Is there ever a circumstance where you would
have to mention credit card rewards on a tax form?

Weltman: That’s a really good question. So the IRS thus far has not tried
to tax credit card rewards. So if you get cash back on a credit card it is in
taxable. The IRS looks at the cash backs as effectively an adjustment to the
purchase price of the items you pay, so they’re not trying to tax this. But I
want to point out that frequent flyer miles awarded as a promotion like say by
a bank for opening a bank account that would be taxable. And this particular
situation came up in the IRS and the tax court said, “Yeah, that’s
taxable.” In this case a particular bank issued a 1099 valuing the
frequent flyer miles and that the taxpayer receiving it who cashed in the
voucher for a ticket was taxed on it.

Hoff: Interesting, so it’s only if you’re issued
essentially a 1099. So if you sign up for an American Express card and you get
a hundred thousand points as your sign up bonus after you spend the minimum
spend they don’t send you a 1099 that’s not something that you need to be taxed
on, but if they do, you do.

Weltman: Yeah, you’re right. And really I think it’s usually when it’s a
separate promotion, not a promotion for the card itself but rather in this case
it was a bank offering this is a reward.

Hoff: Right, because I think it is interesting if
you do get gifts of a certain amount or you give gifts of a certain amount. So
can we briefly talk about that? I think this is something that is confusing to
a lot of people. Let’s say you give your parents $20,000, do they need to
declare that on their taxes or your parent gives you $20,000, puts it in your
bank account to help you out a house purchase or anything like that, is that
something that you needed to declare?

Weltman: When you get a gift of any amount, $20,000, $20 million, if you
get that gift it’s tax-free to you. You don’t have to do anything as the
recipient. The person who makes the gift has to handle it, but it’s not an
income tax issue, it’s a gift tax issue. So if you give more than an annual
exclusion amount which happened to have been $14,000 in 2017, it’s going to be
$15,000 in 2018 per person then you just have to report it. And you may not
necessarily have to pay any gift tax on it because you have a lifetime
exclusion amount in the millions. So it’s just a question of reporting it, but
it has nothing to do with income tax, and just to repeat as the recipient
there’s no burden on you, it’s tax-free and you don’t have to report it.

Hoff: OK, good to know. Also about kind of one of
those surprise taxes that might crop up as people who had their debt forgiven,
so they’ve been able to negotiate down their debt, they used a service to do
that, they negotiated down their debt and yet then they get something in the
mail that says, “Hey, you actually owe taxes on the money that was forgiven,”
almost treating it as income. Can you go into that a little bit? When would
somebody have to pay that and when would they not have to pay that?

Weltman: Well, it’s really unfortunate that you think that you’re settling
up debt because you have a financial issue and you’re not really flush enough
to pay off the debt that you owe, and then turn around and the government says
the cancellation of debt income is taxable. And so as a general rule you do
have to report all of the debt that you’re relieved of, the amount that you
didn’t have to pay that you would otherwise have had to pay.

There are some exceptions in
having to report this. So if you filed for bankruptcy or you were insolvent at
the time the debt was canceled then you’re not taxed on it. But other than
that unfortunately it’s good to have the credit card burden off your back but
you may have to divvy up in taxes.

Hoff: Wow, and is it taxed at the regular rate of
your income?

Weltman: Exactly, it’s just another kind
of ordinary income just like wages or bank interest.

Hoff: Wow, OK. So it is important. So only if you
were really insolvent at the time of the debt being forgiven or bankruptcy was
an issue then you would to be able to not have to pay that. But if you’re
making an income and you’re OK and you just couldn’t afford those bills then
you will have to pay the taxes on that.

Weltman: That is correct.

Hoff: And do you declare that or will you get
something from the IRS or from the credit card companies that forgave your debt?

Weltman: There’s a 1099 for that. There’s a special 1099 reporting
cancellation of debt that you will receive from the bank or the credit card
company. And again this will be reported to the IRS. And there’s even been a
case recently where a taxpayer got this 1099 but just really didn’t understand
that he had to report the debt, and the court said, “Well, sorry, the fact
that you didn’t understand it doesn’t mean that it’s tax-free. You still have
to report it.”

Hoff: Right, ignorance is not an excuse when it
comes to the law unfortunately. How about charitable giving? So let’s say
during Hurricane Harvey and other major events, we know basically when you give
something to Goodwill or to the Red Cross, you make a cash offer that you will
get a form and then you can then deduct that. But what if you instead give your
frequent flyer miles or something like that, is that a case where you can then
deduct that later? And how should you go about making sure that you could?

Weltman: Well, it’s really a generous thing to donate your frequent flyer
miles to charity. And Make A Wish Foundation uses 2.8 billion miles each year
and they’re always soliciting for donations. But the bad news I guess from a
tax perspective is that you can’t take a chargeable deduction for this. And the
reason is the miles are viewed as property, and a deduction is limited to your
basis and property. Well, because you aren’t taxed on your frequent flyer miles
you have no basis so you have nothing to deduct. So it’s a great thing to
donate the miles especially if you won’t be able to use them and somebody else
can, but you can’t get the deduction for it.

Hoff: And then speaking about that for businesses if
you use frequent flyer miles too, if you own your own business and you are
using frequent flyer miles once in a while to take a trip, what happens when it
comes to then deducting your travel expenses down the road?

Weltman: Well, let’s say you use your frequent flyer miles for business,
you can’t double dip. So because you are in tax on the frequent flyer miles the
IRS said back in 2002 you wouldn’t be taxed on them but you can’t deduct them
either. If you get a free ticket for business trip you can’t deduct the cost of
the ticket.

Hoff: So it’d be smarter to then just use it for
personal travel and then go ahead if you know that you’re going to have to use
it anyway.

Weltman: And pay for the ticket.

Hoff: And pay for the ticket, because that’s what
you’ll be deducting.

Weltman: Exactly. You pay for the business travel, use your frequent flyer
miles for the personal travel.

Hoff: I don’t know if you know this specifically,
but what if you have a card that you use for business let’s say and you earn
miles and then use it for personal travel, that’s not a problem because you’re
personally liable I guess for your business cards too, right?

Weltman: Yeah, that’s not a problem. I mean, let’s face it most of the
mileage is accumulated on business travel. And you use it for your personal travel
and that’s fine. And even if let’s say a company charges the tickets to a
company card but lets you use the personal travel, that’s fine too.

Hoff: OK, fantastic. So, we talked about the new
tax laws coming into place and we talked about how 2018 tax year will be very
different from this tax year, let’s go into the biggest changes the average
person is going to see. How can they best prepare now to minimize their tax
burden and be organized with the information that will be required next tax

Weltman: If you’re working for a company you’ve already seen what the new
law means to you, it means lower taxes and more take-home pay because that’s
already been implemented. But one of the biggest changes is the dramatic
increase in the standard deduction which means that fewer people will be

So if you won’t be itemizing
because of the new higher standard deduction and the elimination of certain
itemized deductions as well, the elimination or the curtailment, then you won’t
need to keep records throughout this year. But again for anyone who may be
uncertain it’s still advisable to keep records so that you could decide later
on whether itemizing will still make sense for you for 2018.

Hoff: And what if you have that home office and you
have a mortgage that you’re paying, are those again you think there’ll be
enough to be able to itemize I guess depending on the size of the mortgage and
the interest that you’re paying on that? Or is the deduction going to be so big
that you probably won’t even be able to deduct your home office anymore?

Weltman: Well, if you are an employee you are not going to be able to
deduct your home office anymore regardless of anything, because the deduction
for unreimbursed employee business expenses is eliminated for 2018 through
2025. So if you pay for your travel or any other business expenses that your
employer doesn’t cover, you’re going to just be out of luck, you won’t be able
to itemize with that.

I think that really the good
thing may be that employers will consider more reimbursement arrangements so
that you will be able to be covered for your out-of-pocket costs that you incur
on behalf of the business. And if it’s done in the correct way, in other words,
if the company sets up an accountable plan for reimbursements then you will not
have any income and the company would like to do this because of a couple of
reasons – they won’t have any employment taxes, they get to deduct the amounts,
they’ll have no employment tax cost, and in this ever-tightening job market
this will be a way to attract and retain good employees.

Hoff: All right, so anything else that you think we
need to know about that we may not have realized about the new tax plan and how
it’s going to affect us?

Weltman: Well, another thing that we talked earlier about people who are
working in the gig economy, and there is a new deduction, a 20 percent
deduction of qualified business income and it’s meant for owners of
pass-through entities including independent contractors. And this is going to
be a great kind of reduction. It reduces taxable income much like the standard

The new deduction is very
complicated with many limitations and we’re waiting for IRS guidance on various
rules related to the deduction. We may not have them anytime soon, but come
next year at tax time I think many people will see that their taxes are lowered
because of this new deduction.

Hoff: And speaking of that, so if people have side
gigs or they’re self-employed and they’re just using even their Social Security
number to give to the employers, the people that are hiring them for different
jobs and stuff to deduct their taxes, what should they be considering in order
to get that big tax break? Do they need to form an S Corp, a C Corp? What do
they need to do to make sure they get that 20 percent tax break and they’re
part of that?

Weltman: Well, that’s a good question. First of all the break only applies
to pass-through, to owners of pass-through entities. So it wouldn’t include
anyone who owns a C corporation, because a C corporation is a separate
taxpayer. But your choice of entity for a business is a very complicated
matter, and it goes beyond federal taxes. So you have to consider state taxes
as well as non tax issues. For example if you think you’re going to want to do
equity crowd funding for your business you need to be a  C corporation, you can’t be an S corporation
because of the limitation on shareholders.

So whether you should set up a
particular type of entity or make a change at this time from the way you’re
operating now to another type of entity that requires a full discussion with
your legal and tax advisers.

Hoff: What about people with side gigs? So it might
be just they do it a limited amount of time but they’re making money, they’re
an independent business so to speak, will they get that tax break that small
businesses are getting?

Weltman: If they’re working as independent contractors or they’ve set up an
LLC or an S corporation they’re going to have the opportunity to qualify for
the 20 percent deduction. There are limitations on the deductions that may
curtail or prevent you from any of it but they will have access to it, that’s
the important thing.

Hoff: OK, so that’s one thing that they need to be
asking when they start getting their taxes ready for next year. What about
refund anticipation loans, receiving the anticipated amount of your refund
before you get it, do you recommend people stay away from these, why or why

Weltman: Well, I’m not a fan of refund anticipation loans which are really
short-term loans with high interest. So I say just wait for the refund. And the
IRS says most refunds are issued within 21 days, so if you note your bank
account on you your tax return the IRS will deposit it directly cutting the
receipt time even further.

Refunds related to the earned
income tax credit or the additional child tax credit were not allowed to be
issued before mid-February, that’s just the law. But the IRS expects the
earliest refunds related to these credits should be available in taxpayer bank
accounts or debit cards starting Feb. 28, 2018, assuming these taxpayers
chose direct deposit and there are no other issues with their tax return. So,
again the bottom line here is just opt for direct deposit and file
electronically and you’ll get your refund pretty quickly in most cases.

Hoff: All right, because otherwise you’re just being
a really high interest loan on something that’s your money any way that you
would be getting pretty quickly anyway. Finally Barbara, a lot of amazing
information, what gets you charged up about mastering the tax game?

Weltman: Well, I’ve been involved with taxes for more than 40 years, it’s
hard to believe. And I have to say never a dull moment. Things are always
changing. But I get charged up about helping people learn how they can save
money and stay out of trouble with the IRS. I see the same mistakes being made
that cost people money that they could take tax breaks that they’re
legitimately entitled to but they make the mistakes and fail to do that. And I
want to help them avoid these mistakes and know how to take advantage of

Hoff: Perfect. Thank you so much, really great
information. As we head into tax season I think it’s important that people pay
attention to what they’re deducting and knowing what they can deduct and take
advantage of that while they still can. Barbara, thank you so much for joining
me today.

Weltman: My pleasure.

See related: Pros, cons of paying taxes with a credit card,  What records to keep and how long to keep them, Charged Up! podcast: How to write a financial plan

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