Tax Preparation & Planning

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Author Archives: Steve


Can I Claim My Boyfriend As a Dependent When Filing Taxes?

As a tax preparer, I hear questions like this from time to time.

The short answer to you claiming your boyfriend as a tax dependent is: No.

While I like the way you’re thinking, it’s not possible. Your boyfriend is awfully lucky to have your help and support but the IRS is not going to provide you with a tax benefit for your relationship.

The IRS has a seven-part test for dependency. And someone has to qualify by answering ‘yes’ to all of them.

The first three apply to everyone:

  1. To claim another person as a dependent, the taxpayer cannot be eligible to be claimed as a dependent on someone else’s return.
  2. A person cannot be treated as a dependent if he or she files a joint return with a spouse.
  3. The person claimed as a dependent must be either a US citizen, US national, or a resident of the United States, Canada, or Mexico.

Now, the next four tests depend on whether the prospective dependent is a “qualifying child” or a “qualifying relative”.

As your boyfriend is not a child, then you have to use the “qualifying relative” tests.

  1. The relative must be a son, daughter, foster child, or a descendant of any of these (such as a grandchild), a brother or sister or child off these, a parent or grandparent, a close inlaw or step-sibling, or “any other person other than the taxpayer’s spouse who lived with the taxpayer all years as a member of the taxpayer’s household IF the relationship does not violate local law”.
  2. The “relative” must not be a qualifying child of any other taxpayer.
  3. The relative must have gross income of less than $4,050 in 2017.
  4. The taxpayer must have provided over hald of the relative’s support in 2017.

I think you’ll be hard-pressed to have your boyfriend qualify as a relative even if you stretch the “any other person who lived with the taxpayer” test above.

If you need help filing your taxes, reach out to Steve Stanganelli, CFP(r) of Boston Tax Planners.


Are Withdrawals from a Roth IRA Taxable?

Have you taken money out of a Roth IRA? At this time of year, it  is common for tax preparation clients to ask me about Roth IRAs and taxes. So, are withdrawals from a Roth IRA taxable?

Let’s say you withdrew $10,000 from a Roth IRA and you’re trying to prepare your taxes on your own. How do you calculate the taxable amount if any?

Before I can answer this, we need to know some of the background. So let’s meet Dan.

Dan has had a Roth IRA account for three years. He withdrew $10,000 from this account to pay off some debt. He was taxed on 10% of the total amount, which left him a balance of only $9,000. Currently, Dan lives in Texas which has no state income taxes. He received a Form 1099-R showing a taxable amount in Section 2A of the form as blank. How can he calculate the taxable amount? His 1099-R form has his prior Washington, DC address, but as a member of the military he has been relocated to Texas now.

Boston Tax Planner Answer:

You only pay taxes on the gains above what you invested. Your initial and subsequent investments into the Roth IRA form your basis. I recommend that you go back to your statements to calculate the amount of your investments. If you need help, reach out to the investment custodian (the folks who prepared the 1099). They should also be able to tell you what the amount invested was.

It’s possible that you have no taxable gain and this is why there is no taxable amount listed on the 1099. For example, if you invested $10,000 and withdrew $1,000, then for tax purposes you received a partial return of your principal. There is no tax on this in a Roth IRA.

When you contact the custodian you should update your address information. But it should not be a problem for filing your federal income taxes. Since you live in Texas where there is no state income tax, you shouldn’t have to worry about that either. Whether or not you need to file a different state tax return will depend on which state and how long you lived there.

If you are like Dan and need help with your taxes, please contact Steve Stanganelli, CFP(r) at


Are Gifts to Parents Tax Deductible?

Raise your children well. They may choose your nursing home and may even provide support you with financial support in your old age. If you’re lucky to have a child who turns the tables on you and provides you with support, you may get a question like I did: Are gifts to parents tax deductible?

A taxpayer sends a portion (about $1,500 each month) of his income to his parents who live overseas. While he is employed, his wife is not. So, when he sends money to the parents, is is considered a gift and is it tax deductible? In his case, his parents live overseas but the response is still the same.

Are Gifts to Parents Tax Deductible?

I can only hope that my children will be as generous to us in our later years as you are with your parents. Your gift is probably greatly appreciated by your parents and helps them enrich their quality of life. While your monthly payment can technically qualify as a gift, it has no impact on your personal income taxes under current tax rules.

Technically, you and your spouse may gift a maximum amount of $14,000 per year per person. This would equal a total gift of $28,000 by your wife to your parents. Add that to the $14,000 per year per person that you can gift. That means you can gift a total of $56,000 from your household to their household. But this gifting only makes a real difference when calculating gifts to reduce the total of a taxable estate for estate tax purposes. If your personal estate is worth less than the federal exemption (currently about $5.2M and possibly a non-issue next year if the tax bill winding its way through Congress is finalized), then it’s not likely to be an issue.

On the other hand, if your parents could qualify as dependents and you paid for their medical services directly, then you could find that some or all of your cash transfers may qualify as itemized medical deductions.

After January 1, 2018 the new tax law will be in effect. Based on what I see, this itemized medical deduction option may be moot as there will be a lower incentive to itemize after the standard deduction increases.

If you’d like an objective second opinion about your taxes and are looking for a road map on how to live better by planning well, please reach out to Steve Stanganelli, CFP®, CRPC®, AEP® at Boston Tax Planners, a service of CVWA LLC. Email him at


6 Things You Should Do Today to Prepare for Tax Season

6 Things You Should Do Today to Prepare for Tax Season:

Tax season might seem luxuriously far away, but it will be here before you know it. Before the IRS begins accepting returns, it’s a good idea to audit your own situation and take action now, if needed.

Preparing now means completing your taxes will be much easier and faster later. The earlier you file, the earlier you get your refund (if you’re eligible for one) — and the sooner you can use that money to pay down debt, bolster your savings, or buy that TV you’ve been eyeing for months.

Figuring out how to prepare taxes and staying ahead of any potential issues can save you time when you’re ready to submit your return.

1.) Get Organized
2.) Think Now About Extensions Beyond the April 17, 2018 Filing Deadline;
3.) Review Your W-4 and Adjust Your Withholdings;
4.) Research Tax Preparers and Services – Tax planning and tax preparation are not the same thing and not everyone provides both services;
5.) Check for Deductions and Make a File with Needed Documents (see #1);
6.) Start Saving or at least don’t be shocked by the fee to prepare your taxes – the national average for a basic tax return (1040A and state return) is $176 and the cost goes up for more complex returns: Itemized 1040 with Schedule A and one state return is $273 (national average) and $457 for itemized 1040 with Schedule C Business Income or Capital Gains. Other schedules and other state tax returns will likely increase the fee.


Is Monthly Income from Divorce Taxable?

As part of my divorce planning practice, I often work with clients to help them chart out their cash flows and projected tax issues to help reduce surprises. Sometimes folks can be confused about what is taxable income.

In one case, a woman asked if the monthly benefit she received from her ex-spouse’s military pension was taxable since it was considered “property” in the divorce decree in the state in which she lived.

For reference, alimony received is considered taxable income. But this is clearly not alimony and wasn’t listed as alimony in her divorce decree. Nonetheless, the monthly income she is receiving from her ex-spouse’s pension may very well be taxable.

Military retirement pay based on age or length of service is considered taxable income for Federal income taxes. However, military disability retirement pay and veterans’ benefits, including service-connected disability pension payments, may be partially or fully excluded from taxable income based on a variety of tests.

It sounds to me like this is retirement pay (and not part of any disability) so this will be added to her total adjusted gross income.

Whether or not it becomes taxable will depend on how much her total income is and home much of this income (from this and all other sources) may be offset  by deductions (itemized or standard) and exemptions.

If you’re receiving any military retirement income you will likely receive a Form 1099-R from the US Office of Personnel Management each year detailing what was received and what portion is ‘taxable’.

Taxpayers may want to plan ahead and calculate whether they may have any tax owed and how much, if any, quarterly estimated tax payments that they may want or need to make. Speak with a qualified tax professional or tax adviser to help figure out this detail. Call us and we’ll be happy to help.


Chef Anthony Bourdain In Hot Water with the IRS

Famous Chef Anthony Bourdain Didn’t Pay Taxes for 10 years— Sounds good, right? But here’s What Can Happen.

Death and Taxes. There’s no escaping them. And if you try, you could be in hot water with the IRS — no matter who you are. At age 44, famous chef Anthony Bourdain never had a savings account and hadn’t filed his taxes for a decade. In an article on CNBC.com1, Bourdain explains that he used to always owe money, thanks to constant job-hopping, perpetual debt, and drug use. Ultimately, celebrity chef Anthony Bourdain got in hot water with the IRS because of it.

“I didn’t put anything aside, ever,” he told Wealthsimple in an article on BusinessInsider.com2. “Money came in, money went out. I was always a paycheck behind, at least.” His major turning point came right before his first book, “Kitchen Confidential,” hit store shelves and turned him into the famous chef and travel writer that he is today. After his risky career shift paid off he immediately called the IRS and credit card companies to settle his balances. Now, he is determined to never owe anyone money again.

If you’re behind on filing your taxes, or owe an outstanding balance, know that you have options. Here’s what happens and how you can settle your balance and avoid further consequences.

What happens if you don’t file your taxes?
No one individual’s tax situation is the same, but everyone is subject to the same fees and interest charges if you don’t file or pay on time. The first fee is called the failure-to-file penalty, which comes to 5 percent of your unpaid taxes for each month your tax return is late, up to 25 percent.

In the event you did file your tax return on time but didn’t pay the total amount owed, you could be subject to a failure-to-pay penalty. This penalty is 0.5 percent of your unpaid taxes for each month you don’t pay, up to 25 percent. In addition, you’ll pay interest charges equal to the federal short-term rate, plus 3 percent.

Don’t wait

Don’t wait until you receive a letter from the IRS before making a plan to file your taxes or pay an outstanding balance. By then your account will already be levied with interest and a host of fees. The sooner you start rectifying your tax situation, the fewer penalties and interest you’ll pay in the future. Follow in chef Bourdain’s footsteps and reach out the IRS to settle your balance before they have to contact you.

Can’t pay your taxes?

The IRS offers options for taking care of taxes that can’t be paid all at once. Whether you have a balance of $10,000 or as much as $50,000, you can apply for various payment plans that offer the chance to pay your tax bill in affordable installments. Look for Form 9465 or head to the IRS website and search for the Online Payment Agreement form.

If you continue to ignore your tax situation, it won’t ever go away. Just like a rotten egg it will come back to ruin any soufflé. And you don’t want to live in fear of not paying your taxes. Mr. Bourdain sums it up nicely, “to me, money is freedom from insecurity, freedom to move, time if you choose to make use of time. If they [IRS] call me in for a full audit, great, here I am. It’s all there. I lived a lot of years afraid of the bank, the landlord, and the government calling. Nowadays, it’s nice to not be afraid.”3

Don’t try to cook the books with the IRS. Sure, there’s nothing wrong with trying to find legal ways to minimize your tax bill. And with the right tax planning help, you may lower your taxes. But if after that, you find that you still owe, then it’s best to make a plan to pay it. Trying to avoid it will ultimately backfire. And that’s a bad recipe that neither you nor any chef will want to cook up.

Need help? Then call Boston Tax Planners and we’ll help you navigate and prepare a plan to pay your past taxes and plan ahead to minimize your next tax bill.


Can I Still Deduct an IRA When Contributing to 401k Plan?

Here’s the latest question to the Tax Corner: Can I still deduct an IRA when contributing to a 401k plan?

Does any participation in an employer sponsored plan make one ineligible to participate in a self-directed IRA?

Question: I have two part-time jobs. 95% of my wages are generated at job #1 where no 401K plan is offered. I work infrequently at part-time job #2 where a 401K plan is offered and I have participated in the plan. I will only accumulate a couple hundred dollars in taxable wages in 2017 from job #2, and will therefore contribute less than $50 to the 401K plan. Given that, I would like to opt out of the 401K plan and contribute to a self-directed IRA based on the sum of my wages from both jobs. THE PROBLEM. In 2017 I have worked at job #2 and had tax deductible contributions allocated to the employer sponsored 401K plan (the amount is less than $20). Since I have already participated in this plan in 2017 is there a way to have my employer or sponsor ‘recall’ those funds from the employer based 401K account? Then I will not have participated in any employer sponsored plan in 2017 making me eligible to participate in a self-directed IRA.?

Answer from our Boston Tax Planner:

Based on my tax research resources, the short answer is participation in an employer plan will make you ineligible for a tax-deductible IRA in the same year.

An employee is covered by an employer retirement plan for a tax year if the employer has a:

• Defined contribution plan (profit-sharing, 401(k), stock bonus, or money purchase pension plan) and any contributions or forfeitures are allocated to the employee’s account for the tax year.

• IRA-based plan (SEP, SARSEP, or SIMPLE IRA) and the employee has an amount contributed to the IRA for the tax year. • Defined benefit plan (403(b) annuity, cash balance, or plans for federal, state, or local government employees, other than section 457(b) plans) and the employee is eligible to participate within the tax year. An employee is covered even if he or she declines to participate, does not make a required contribution, or does not perform the minimum service required to accrue a benefit for the year.

No vested interest: If any amount is allocated to or a benefit accrues to an employee’s account, the employee is covered by that plan even if he or she has no vested interest in (legal right to) the account.

If it’s early in the year, you may be able to talk with your employer about withdrawing from the plan, taking the deferred contribution as income and adjusting your payroll records so that Box 13 on your 2017 W2 will not be checked. That is an operations issue you’ll need to refer to the payroll and 401k administrator. (I personally doubt that an employer would allow such a ‘recall’).

On the other hand, you may still consider a contribution to a non-deductible traditional IRA. It would need to be coded this way with the custodian and reported on your taxes to account for basis (and future tax issues). So if you can’t successfully ‘recall’ funds, consider the non-deductible route.

And depending on your income, you may want to consider a Roth IRA contribution instead. This will provide for ‘tax diversification’ in the future since the funds can be withdrawn without having to pay any income taxes on accrued gains, dividends and interest.

You really should consider having a good tax advisor as part of your team even if you are planning to direct your own investments.


401k Hardship Distribution for Medical Expenses

Ask the Money Coach:

My mother got into a car accident and can not make decisions on her own. I am currently her power of attorney. How can I cash out her 401K to pay for her expenses?

She has been out for over a week and doctors expect her to be disabled for quite some time. I need help to pay for everything so how can I get access to her 401k?

Response from Boston Money Coach:

For the immediate issue, you can contact your mom’s employer and speak with the HR department or the company’s 401k administrator about their specific requirements.  Employer plans may offer the option allowing employees to withdraw from the balance contributed by the employee but not all employers offer the option.  If the employer’s plan does allow for “hardship distributions,” you’ll be provided with the details on limits and procedures by them. You’ll need to provide documentation to them of your power of attorney.

Amounts Eligible for Distribution

Depending on what the plan allows, you may be eligible to tap from the balances accumulated from the employee elective deferrals, the employer profit-sharing contribution and any regular employer matching contributions.  Generally, the amount earned on elective deferrals is not available for a hardship distribution.

Criteria for a Hardship Distribution

To be eligible for a hardship distribution, from a participant’s account you need to show that the distribution is:

  • because of an immediate and heavy financial need, and
  • limited to the amount necessary to satisfy that financial need.

There are several “safe harbor” provisions available.  Medical expenses for an employee, employee’s spouse or children or beneficiary are at the top of the list.  Other eligible situations include costs incurred for the purchase or repair of the employee’s primary residence, education or funerals.

Tax Treatment of Distributions

Under IRS rules, you may withdraw money from the employer-sponsored plan but you will still have to pay income tax on the amounts and if your mom is under age 59 1/2 there will be a 10% penalty.

A Teachable Moment in Tax Planning

Tax and financial planning cannot prevent such crises but proper planning can help deal with them with less stress.  Life is filled with risks. At any time we can be literally and figuratively hit by something unexpected.  The goal of financial planning is to find ways to mitigate these risks.

Companies are supposed to have “disaster plans” in place.  We owe it to ourselves and our loved ones to do the same.

This is why I suggest to families that they review their auto and property insurance regularly to make sure that they have proper coverage in place for things like medical expenses.  I also suggest long-term and short-term disability insurance to help ensure that there will still be income coming in even if you are still in the hospital. I’m also a fan of supplemental benefits coverage (think AFLAC) to provide cash that may be a resource to cover bills above and beyond medical care.

But the best and most effective part of any safety net is having an emergency cash fund – liquid, safe and readily accessible. Another important element is proper legal documents in place.  As in this case, a family member of trusted friend having a power of attorney will help by allowing someone the authority to represent you and conduct your financial affairs in your absence.

But none of this works if you don’t plan ahead for the worst even when we all hope for the best.


8 Ways to Minimize Your Taxes

It’s tax time again. While taxes are the price for a civilized society, there’s nothing in the law that says you can’t lower your own tax bill. So at this time of year, I do get questions about taxes. Most folks are looking for ways to minimize taxes. Here are 8 ways to minimize taxes. You may find one or two that work for you.

You can minimize tax liability in more ways than can be counted here. You are limited only by your imagination, the creativity of your professional team and your willingness to go right up to whatever lines the IRS has.

Tax Minimization versus Tax Evasion

As noted once in a US Supreme Court opinion, tax avoidance is not illegal. Tax evasion is.  Being on the right side of the line is key. There are lots of legal ways to minimize your taxes.

For some who have deep pockets and can afford to hire teams of high-priced tax attorneys and accountants, the number of creative ways found to avoid taxes can almost be limitless.  But like investing, these kinds of options also come with high risks if the IRS deems the strategies to be illegal or abusive.

For most people without an entourage of professionals, there are still some conventional ways to minimize your tax liability.

Options for Self-Employed or Rental Property Owners

The best options usually involve being self-employed or owning rental real estate. For these folks there is the opportunity to use depreciation, a calculated non-cash expense, to lower one’s taxable profits from a business or rental property. Likewise, you can find ways to legally shift income.

One way is to hire family members like a spouse or minor children which shifts net profit from your tax bracket to someone who may be in a no-tax bracket. This works especially well if you help the minor child use his income to fund a Roth IRA which gives him a head start on retirement savings and is a neat way to save for college, too.

Another option is to supplement medical expenses through a Medical Expense Reimbursement Plan (MERP) sponsored by your enterprise. Let’s face it. You were going to incur and pay those expenses anyway but through these methods you can now get a legal tax subsidy.

Ways to Minimize Taxes When Receiving a W2

For those who are W2 earners, the best options relate to employer-sponsored benefits. Take advantage of any benefit that shifts income to a tax-deferred vehicle.  These include employer-sponsored retirement plans, flexible spending accounts for health or dependent care.

If you don’t work outside the home but you have a spouse who does, then be sure to fund your own IRA to the max.  This will help your own retirement but also reduce your current year taxable income.

Investing Strategies that Lower Taxes

If you have deeper financial pockets, you can consider investing in municipal bonds which produce tax-exempt income or in partnerships like oil and gas exploration which produce depreciation and losses that can be used to offset your other income.

Lower Taxes in Retirement: Think Roth IRA

While lowering taxes in the current year are what most people are now asking about, it’s also advisable to plan ahead for taxes in retirement. As you put aside money in your IRAs and company 401(k)s, you’re lowering your current tax bill. But you’ll find that Uncle Sam will be waiting to take his toll when you start taking distributions in retirement.

One way to lower your future tax bill will be diversifying where your retirement money is held. By funding or converting other IRA funds to a Roth IRA, you’ll have the option to withdraw funds tax-free in retirement or allow them to continue to grow because you won’t have to take a minimum distribution from these accounts.

Because of income threshold limits, you may not directly qualify for opening or funding a Roth IRA. But with a little bit of help, you can navigate the rules to fund a ‘backdoor Roth IRA’ which will save you money on taxes in retirement.

Next Steps

To really figure out your best options, you should have a plan. So, you should reach out to a qualified financial professional who knows how to integrate tax planning for your personal situation.


Avoid Common Tax Filing Mistakes

Common 1040 Mistakes to Avoid

You may be in a rush to get your tax returns filed but take some extra time to avoid common tax filing mistakes that I see all the time.  These slip-ups often creep into federal and state tax returns.

No one wants to delay their federal tax refund. But mistakes happen.  So it never hurts to check twice to make sure that you’ve filled out your 1040 form correctly.

These are some of the most common tax filing mistakes to avoid, the little slip-ups that aggravate both the IRS and the taxpayer and can cause your tax return to be rejected or delayed.

Not signing your return. If you file online like most individuals, many tax software programs require you to type your name on the “Your Signature” line and in the “Sign Here” section, along with your spouse’s name if you file jointly. In many cases you’ll need a PIN code to file.  If you still file a hard-copy return, you’ve got to sign your name on the “Your Signature” line, and the same goes for your spouse on the “Spouse’s signature” line. No valid signature equals an invalid return.1

Not getting your name right. Believe or not, some people mistype their names as they e-file. More commonly, they enter an old name – a maiden name, for example – that doesn’t match the name linked to this taxpayer identification number. Another problem that I’ve encountered is with hyphenated last names.  So if you’ve changed your name, the Social Security Administration (and other federal agencies, as applicable) need to know that.1

Missing the filing deadline(s) applicable to you or your business. Is your company an S corp? That means you will probably need to file a Form 1120S by March 15. Is it a sole proprietorship? That means you have until April 15 to file a Form 1040C. If you are new to making estimated tax payments, you have hopefully pored over Form 1040-ES with a tax professional to figure out how much tax is due by each quarterly payment period.2

Turning in Form 4868 (the “extension”) gives you until October 15 to file, although any federal taxes owed must still be paid by April 15. If you are a servicemember on duty outside the U.S. and Puerto Rico, you have until June 15 to file your return and pay taxes, and you can also use Form 4868 to file as late as October 15.3

If you file late (that is, you submit your return after April 15 without using Form 4868 to request an extension), you face a penalty – a 5% penalty per month following the return’s due date, capping out at a 25% maximum penalty after five months. The penalty for unpaid taxes is .5% per month after the April 15 deadline, and 6% interest a year. If you have taxes a year overdue, you will be assessed both the monthly and yearly penalties.2

Making numerical errors. Even with some of the great tax prep software now available, math errors still happen. In fact, they happen largely because people don’t use the software: the taxpayers who insist on filing paper returns are 20 times more likely to commit math mistakes than those who e-file, the IRS reports.1

And let’s not forget about those all-too-common ‘finger errors’ when typing into a calculator or on a keyboard.  It doesn’t hurt to check twice.

If an electronically filed return contains a math mistake, it gets sent back to the taxpayer or tax professional for correction and resubmission. If a paper return has a math mistake, the IRS has to refigure it on the taxpayer’s behalf. That takes time and delays your expected refund.1

Additionally, some taxpayers get Social Security numbers wrong – not necessarily their own, but those of their spouses. Also, a smooth direct deposit of a federal tax refund won’t happen if a taxpayer types in an inaccurate bank account number.1

How many times has that happened to you?  It’s happened to me.

Selecting the wrong filing status. This happens a lot with divorced moms and dads. To determine if they should check the “head of household” box or the “single” box, they should take the online interview at

I once had a couple who were each divorced and recently remarried (to each other) ask to file as “Married Filing Separately” thinking that would be less complicated.  It took a little bit of time to explain that that wasn’t a good deal for them.

Claiming a credit or deduction you shouldn’t. Again, tax prep software tends to ward off this mistake. Credits often inappropriately claimed (or ignored): the Child and Dependent Care Credit, the Earned Income Tax Credit and even the standard deduction.1

Many business owners overlook deductions or claim them in error. Sometimes this can be traced back to slipshod record-keeping; other times, it stems from faulty assumptions. According to a survey from small business accounting software maker Xero, the most common merited deductions that aren’t claimed by SBOs are those for depreciation (30%), out-of-pocket capital expenses (29%) and car and truck expenses (16%).2

Claiming employees as independent contractors. Some small business owners try to save money by doing this, but the IRS may disagree with such claims. If so, the business can end up on the hook for employment taxes related to that employee.2

It’s worse in the state of Massachusetts where the definition of who is an independent contractor is even more restrictive than the feds; thus, exposing the business owner to a host of taxes and penalties later one if ever discovered.

So what steps can you take to try and reduce the risk of errors on your 1040 form? You can file electronically; you can use some of the terrific tax prep software available; you can turn to a skilled tax professional to help you prepare and file your return. No one is perfect, but those are all good moves to make this tax season.

And don’t forget to be like Santa … check twice.  That’s one way to be nice.


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