Evans Wealth Management Blog

Articles written by Evans Wealth Management are designed to educate clients & potential clients on concepts important to their financial future.

How to Reduce Your Chances of an IRS Audit

It is that time of the year again --- tax season. The annual ritual is dreadful enough when it goes smoothly so the last thing you want is to be audited. While the average taxpayer has a 1 in 160 chance of being audited, there are several areas the IRS scrutinizes that can dramatically increase your odds. The following is a list of ten areas attracting the most IRS attention.

  1. Not Reporting Taxable Income: Businesses are required to report certain expenses to you and the IRS. They are reported to us via W-2 or 1099 forms. The IRS will match these amounts with the amounts reported on your tax return. Discrepancies increase the chance of an audit.

  2. Taking an Alimony Deduction: Alimony is no longer deductible under the new tax law, but both the payor and recipient are required to report it. Discrepancies between these amounts increase your chances of an audit.

  3. Running an All Cash Business: Certain businesses such as restaurants, ride-sharing, taxis, hair salons, … etc. receive a high percentage of payments in cash. The opportunity to underreport income causes the IRS to scrutinize these businesses more than most. Owning or working for these types of businesses raise your changes of being audited.

  4. Writing off a Hobby Loss: Is it a hobby or a business? It is an important question because business losses are deductible while hobby losses are not. Keep in mind, the goal of a business is to earn a profit. If you report losses in three of the last five years, the IRS may view your business as a hobby and disallow the business deductions.

  5. Claiming 100% Business Use of a Vehicle: This is another area considered ripe for abuse. If you claim all vehicle miles were 100% business use, make sure to document your mileage and own another car.

  6. Deducting Unreimbursed Business Expenses: Most employees are reimbursed for business expenses. If you aren’t, the deduction is only allowable to the degree unreimbursed expenses were greater than 2% of your AGI. Deductions greater than average raise red flags at the IRS.

  7. Claiming a Home Office Deduction: To claim this deduction you must have a dedicated space in your home that is used exclusively for work. The rules allow you to prorate a portion of home expenses such a utility bills. Greater than average deduction amounts raise red flags at the IRS.

  8. Claiming Large Charitable Donations: Claiming above-average deductions compared to others in your income range draw scrutiny. The key is to keep good records as proof of your donation.

  9. Deducting Entertainment Expenses: The new tax law does not allow entertainment expense deductions. However, travel and meals are at least partially deductible. Make sure to keep good records on the amount spent, place you met, who you met with and the purpose of the meeting to ensure deductibility.

  10. Not Reporting a Foreign Bank Account: In the past, one could avoid taxes by establishing a bank account outside the US unknown to the IRS. They are cracking down on these attempts to hide money. If you have over $10,000 collectively in foreign accounts during the past year, you are required to file special forms to report them by April 15th. Contact your local financial professional or CPA for more on the filing requirement.

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The January Rebound

After the 4th quarter sell-off, January followed with a strong rebound. By the end of last week, the S&P 500 was up 8% and is approximately 7.5% short of its all-time high set last year.

The most significant event of the month was the January 4th comments from the Federal Reserve Chairman, Jerome Powell. He backed off previous comments about expected Fed Funds rate increases in 2019 expressing the committee’s intention of not raising rates again until inflation accelerates. It was welcome news to investors, and it played a role in the January rally.

It was a broad-based rally as small cap stocks, internationally developed countries and emerging economies also participated in the market good fortunes.

The energy and industrial sectors led the market advance while defensive sectors like the utilities and consumer staples sector lagged.

 

Notable Market and Economic Happenings:

  • 80% of S&P 500 stocks are trading above their 50-day moving average. It is the highest reading in a year and suggests the market rally is benefiting a broad group of companies.
  • New home sales surged in November to 657,000 SAARs. This is the strongest reading since Q1 of 2018.
  • The Bureau of Labor Statistics report indicated the economy added 304,000 jobs in January exceeding expectations for the month by a wide margin.

 

Inspirational Thought for the Day:

“The greatest mistake you can make in life is to continually fear you are going to make one.” – Navjot Singh Sidhu

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Uncle Sam Wants You to Invest in Opportunity Zones

One of the least talked about provisions in the 2017 Tax Cut and Jobs Act is the “Qualified Opportunity Zone” program. In short, the program encourages new community and economic development in certain low-income areas in each state. It accomplishes this by attracting investors with recently realized capital gains to invest in these areas in return for a reduction in their taxes. Essentially, you become a venture capitalist in a low-income area in your community.

Typically, an investor with a large, short-term capital gain might have to pay 35% or more in taxes on the gain leaving 65% for future investment. However, an opportunity zone project allows you to invest 100% of the gain. It effectively defers the tax owed for years and, in some cases, could eliminate it altogether.

Like any investment, it is not without its risks. It is possible that you could lose some, if not, all the original investment. Any investor should proceed with caution and do your homework. This includes not only researching the fund you invest in but also to ensure the tax benefits mentioned will apply to you.

This investment offers the potential for considerable upside, but it has an above-average amount of complexity and risk so seek guidance from a professional before finalizing any decisions.

To learn more about these opportunities in the Atlanta area, see the following link with more details: https://www.investatlanta.com/federal-opportunity-zones

 
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A December to Not Remember

For those receiving cars for Christmas, it was a December to remember. Wish I could say the same for investors. In a month known for reliable returns, it was a month to forget when it came to your investments. There were any number of factors playing into the decline. Slowing global growth, a Federal Reserve determined to raise rates and global trade tensions top the list. Investors focused on the negative resulting in a decline of the S&P 500 index of -8.8% for December and -4.5% for the year.

During December, large cap stocks outperformed their small cap peers. Growth stocks modestly outperformed value. The energy and financial sectors led the market decline while utility stocks lost the least. Overall, it was hard to hide from the market decline.

International investments performed better but both the developed and emerging indexes were lower for the month. Both finished down for the year also.

The Federal Reserve raised rates for the fourth time this year. The Fed Funds rate target range is from 2.25% to 2.5%. 

Noteable Market Comments in 140 Characters or Less:

 - In the final 15 minutes of trading the S&P 500 saw a drop of 0.62% followed by a rally of 0.70%.

 - If you were long Treasuries and short natural gas and Bitcoin, you had a great final month and a half of 2018.

 - Yield curve will be one of the biggest stories in 2019 as it finished 2018 at its flattest level of the year and in over a decade.

Inspirational Thought for the Day:

"Starve your distractions. Feed your focus."  - Kirby Smart

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Are Wills a Good Substitute for Revocable Living Trusts?

Q. If I have a revocable trust, do I still need a will or an advanced healthcare directive?

 

A. You will still need a will and advanced healthcare directive even if you choose to place your assets in a revocable trust. The will not only deals with your assets but addresses important decisions such as who will take care of your minor children or receive certain family heirlooms. The advanced healthcare directive simple communicates to doctors and loved ones your wishes in the event of a life-threatening medical situation.

 

Q. If I have a will and advanced directive, why consider a revocable living trust?

 

A revocable living trust is a legal document that places your assets in trust for you during your lifetime and specifies how the assets are distributed upon your death. Assets are placed in trust either by re-titling the asset or by giving the asset to the trustee. Examples of assets that can be placed in trust include but aren’t limited to real estate, bank accounts, personal property, vehicles and business interests. Because this is a “revocable” trust, you can move assets in and out over the course of a lifetime.

 

You and your spouse are named as co-trustees. You are also required to name a successor trustee who will be responsible for transferring the assets to your beneficiaries according to your wishes. The successor trustee has a significant amount of responsibility if you were to become incapacitated. In this situation, they would be responsible for managing your affairs, including property or business issues. All of this takes place without court involvement.

 

The two big benefits of a revocable living trust are privacy and avoidance of probate.

 

Privacy: A will is a public document and probate court documents are open for the public to view. In contrast, trust documents are private and not open for review by the public. Assets in a trust are transferred without the involvement of the probate court.

 

Avoidance of Probate: In many states, probate court costs can be as much as 5% to 10% of the value of the estate and the process can drag out from several months to over one year. Probate in the state of Georgia is not known to be terribly burdensome but this could change over time. The successor trustee of a revocable trust can settle the trust outside of court without supervision.

 

Drawbacks: The most frequently cited drawback to the revocable living trust structure is the cost. Many just decide to have a will and advanced healthcare directive instead. You should inquire as to the difference based on your specific situation, but in most cases the difference in upfront costs is minimal. After considering the difference in backend costs, it is break-even at worst. The relative ease on the heirs seems more than worth the upfront costs.

 

Finally, don’t forget to fund the trust. This is easily the most overlooked detail in the revocable living trust process. There is a fair amount of work required to place the assets into the trust; however, your financial or legal advisors should be willing to help with the execution.

 

A revocable living trust isn’t necessary, but it is an excellent option for many. Certain situations make it even more attractive for some. Making the decision based on consultation with trusted legal counsel or financial advisor is the best path to ensure success.

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