What You Need to Know About Washington State Taxes for 2017

Washington State

Washington State has made many “best” lists for taxes: the state sales tax is about average (although local sales tax may vary), and there is no state income tax. Are there any major tax changes you should know about moving into 2017? Well, it depends upon where you live. The good news is that there are no statewide changes to sales or property taxes; more on the state’s estate tax below. However, there are some small increases for local communities, which we’ve outlined below. Spoiler alert for residents of Washington’s larger cities: there are no tax changes on the docket for Seattle or Spokane in 2017.

Transportation Benefit District

Effective as of late 2016 the cities of Centralia, Ellensburg, Enumclaw, Othello, Mattawa, Shelton, Tacoma, and Twisp have all established a Transportation Benefit District, which increases local sales and use taxes by a small percentage in order to fund transportation services.

Local sales tax changes for car dealers and leasing companies

Grays Harbor, Mill Creek, Monroe, Shelton, and Twisp have all instated tax changes for local sales tax on motor vehicle sales and leasing. However the tax uses (Grays Harbor, for example, is using the funding for “criminal justice and public safety purposes”) and rates vary across regions.

Other increases

In addition to using the above taxes for public safety, Grays Harbor is also enacted a dedicated Public Safety Tax effective January 1st 2017.

Estate taxes

While there is no formal increase in the state’s estate tax per se, Washington state does adjust annually for inflation. Accordingly you can expect an increase in the estate tax in 2017.

Is your hometown listed above and are you curious about the specifics of the increase? Check the Washington State Department of Revenue’s website for a comprehensive overview of the tax changes for 2017.

Image credit: Tim Durkan

School’s Back in Session: Taxes and Adult Education

Educational Expenses

Thinking about heading back to school, but worried about the cost of education? As an adult, you might be able to claim the Lifetime Learning Credit equal to 20% of qualified education expenses–up to $10,000. You can also deduct your educational expenses as a job or career expense. Here are a few things you should know about deducting your educational expenses.

You cannot deduct any courses for which your employer paid

Any classes your employer pays for you cannot claim on your tax return. It’s also worth knowing that your employer is able to pay for up to $5,250 a year for your classes before it counts as part of your income.

You can deduct a lot of expenses

For tax purposes, “education” is a pretty broad term, and therefore it’s not necessarily restricted to college courses. For example, personal development courses, courses to enhance or cultivate professional skills, and even certain activities that do not involve formal instruction may all qualify. There are a couple of criteria, though. For starters, the course maintains or improves skills that are required for your job or your current trade. For example, a seminar that teaches skill sets directly pertinent to your job. Your educational expenses will also satisfy the criteria if the course(s) are required for your job, or to retain your job title or rate of pay.

Expenses cannot qualify you for a new trade

Looking to change careers? Any courses you take to move into a new professional field do NOT qualify for a tax deduction. For example, a marketing professional cannot deduct course costs for a law degree. Note that this deduction is not qualified nor disqualified by your intent: so long as the expenses qualify you for a new career, they are automatically disqualified whether or not you intend to change careers.

Thinking about an MBA? Be cautious about a deduction

Although the qualifications for the deduction are largely objective, there are a few subjective elements for each scenario. That being said, MBA candidates had mixed results when trying to claim an educational deduction for an MBA program–many such cases ended in court. So long as you garner evidence that your new degree is not in pursuit of a new career, you might be able to claim the deduction.

Image credit: Sean MacEntee

What to Look for in a CPA

CPA Questions

Looking for a CPA can be a daunting task, as many prospective clients are largely unfamiliar with exactly what a CPA can offer. We’ve compiled a short list of tips to help you find the right CPA for your needs, including some questions to ask both yourself and your potential CPA.

Credentials

Are you hiring a CPA, or a general accountant? There’s nothing particularly wrong about hiring one versus the other, so long as you know what services to expect in return for payment.

Referrals

Would someone recommend this CPA to you? Who are their other clients? Are most of their clients returning clients? How long have they had most of their regular clients? These are all questions you might consider asking your CPA before employing their services.

Availability

Is this CPA’s availability consistent with your needs (not all are available year-round)?

Advice

Is this CPA capable and willing to offer creative business advice?

Responsiveness

Hiring a CPA doesn’t grant you 24/7 access to them, but you should be able to get a sense of how quickly they will normally respond to your questions or emails. Do they have a response timeframe? Can you call during normal business hours and speak to your accountant? What kind of services require a formal appointment?

Transparency

Make sure your CPA is completely transparent about rates: are they going to charge you an hourly rate to respond to an email or take a 2-minute phone call? Ask up front: if they seem hesitant to give you a clear answer, you might consider looking elsewhere.

Honesty

Understand that a CPA provides a service, and one of those services is *not* to make an otherwise bleak financial situation look better. A CPA is not a money fairy: if you haven’t been honest with yourself about your earnings and expenditures, you might not like the numbers at the end of the day.

Image credit: Brad Hagan

Tax Benefits for Parents with Young Children

Raising children is a lot of work, and it can be quite expensive. Fortunately, the government knows this, and accordingly offers a few tax exemptions for parents with young children. It’s important to note that for many of these exemptions, both parents must be working, or the nonworking spouse must be a full-time student or actively looking for work.

Tax Benefits for Parents

The tax benefits available are as follows:

1. Child Tax Credit: you can save up to $1,000 off your taxes for every child under the age of 17. It’s worth noting that the child must be claimed as a dependent and must live with you for at least half of the year. Joint-filing couples with incomes above $110,000 or single head of household filers who make over $75,000 are not eligible to claim this credit.

2. Child Care Credit: If you were working or looking for work while paying for child care, you may be able to claim a credit between 20-35% of your child care costs. This credit caps at $3,000 per child, or $6,000 for more than a single child. Any child under the age of 13 is eligible.

3. Medical Mileage Deduction: children are prone to injury and illness, and trips to the doctor can take up a lot of time. Fortunately all those trips may qualify you for a tax break. As a parent you may be able to deduct mileage, tolls, parking, and other costs associated with taking your child to the doctor. However only illness or emergency trips are deductible; not trips for a regular checkup.

4. Dependent Exemption: the dependent exemption reduces your taxable income by $3,900 per child under the age of 19. This exemption can be extended up to the age 24 for full-time students.

Image credit: www.SeniorLiving.org

Four Important Questions to Ask Your CPA

CPA

A good CPA can offer an invaluable service, but how can you determine if a particular CPA will be a good fit for you? Here are a few questions to help get you started.

1. What services do you offer beyond reporting and number-crunching?

A good CPA can do more than just perform calculations; they should have your best interests as a client in mind. That being said, they should be willing to point out possible deductions or credits that you’re not claiming, which in turn can help you maximize your tax return.

2. Who are your other clients?

Knowing what kind of clientele your CPA maintains can help you know a few things: do they have returning clients? Are they mostly businesses or individuals? Asking a couple questions about a CPA’s client base could help you decide whether or not a particular CPA is a good fit for your needs.

3. How are fees calculated?

This will help you not only estimate how much you will pay for services, but will also help you know whether or not your CPA may try to gouge you on pricing. For example, will you be billing an hourly rate for a 2 minute phone call or for a short email response to your questions? A good CPA may still charge for such services, but it may also be indicative of a CPA who is looking to maximize profit for minimal services.

4. How many people will be servicing my account?

Ideally you will be working with one person, which allows that CPA to familiarize themselves with your account and any particularities.

Image credit: Alan Cleaver

Four Reasons Your Tax Refund Could Be Seized by the IRS

Tax Refund

While tax season can be stressful, tax refunds can be a boon for many filers. However, there are a few reasons as to why the IRS could conceivably seize your tax return. Check out the list below to see if you could be in danger of losing your return.

1. Student loan default: student loans are virtually inescapable–which is in part why their interest rates are better than most other loans–and defaulting on one is a sure way to lose your tax return. The good news is that federal student aid lenders are notably lenient on repayment schedules: if you encounter financial hardships, simply give them a call to prevent a tax refund seizure.

2. Unpaid tax debt: two things are certain, death and taxes. Accordingly, failure to pay taxes from previous years will prompt the IRS to withhold your return, regardless if the debt is old or recent. It’s also worth noting that the IRS could seize your return for either state or federal taxes owed.

3. Bankruptcy: Under Chapter 7 bankruptcy, filers could lose their refunds, but are able to exempt some of their tax refund from seizure. However, under Chapter 13 bankruptcy, a trustee can request a seizure of your entire tax refund to be applied to your debts. If you filed for bankruptcy and are worried about losing your refund you should contact your attorney or trustee for clarification.

4. Unpaid child support: both federal and state agencies can seize a portion of – of your entire – tax refund for outstanding child support debts. Even after your child turns 18, if you are delinquent on past child support payments your return could be seized.

Image credit: GotCredit

What is the Work Opportunity Tax Credit?

The Work Opportunity Tax Credit (WOTC) was signed on December 18, 2015 by President Obama. This relatively new federal tax credit is designed to provide jobs for minorities by offering employers an incentive for hiring minority candidates.

The WOTC promotes a more diversified work environment by targeting people who have barriers to finding employment. It’s also intended to help with moving the economy from a dependent state to a self-sufficient state by helping workers with long-term unemployment find steady income and become an economic participant and contributing taxpayer.

On average, varying where workers fall in the target groups, employers can receive a credit of $1,200 to upward of $10,000 per employee hired. This program extends for a five-year period, ranging from December 31, 2014 to December 31, 2019, giving the new-age generation a time to get into a job placement without much hassle.

Overall, WOTC is an effective tax credit to help motivate employers to diversify their hiring processes and allow for equal employment opportunity in America.

Businesses looking to receive these tax credits have to follow certain guidelines. Hiring a professional to help out with getting these tax credits approved may be necessary for faster expedition of each credit. Be a part of the change and see which target groups are involved with the new WOTC program.

Image credit: Jeff Djevdet

Transforming Your Parents’ Medical Bills into Tax Free Retirement Savings

Medical Debt

As the Baby Boomers have grown older, the time has come for many children of this generation to start looking into their parents’ finances. Most people will wind up taking over their parents’ finances at some point and it’s important to understand how to optimize their savings by obtaining tax deductions from their parents’ medical bills.

Switching Your Parents from an IRA to a Roth IRA

In 2017, all ages will have an itemized deduction for their medical expenses if they exceed 10% of their annual gross income (AGI). For example, if you have an AGI of $50,000 and you had over $7,500 in medical expenses, you could qualify for a $3,750 itemized deduction for your taxes.

With age, people tend to have a lower AGI and more onerous medical bills; this leads many children to have a negative taxable income for their parents (AGI is $40,000 but medical expenses are $65,000). However, if children don’t invest correctly, they could be losing out on money even if they aren’t paying taxes. Since the excessive $15,000 won’t roll over onto the next year, you could pay taxes for one year and not for the next.

If they meet all requirements, switching your parents to a Roth IRA could help with children having a tax free retirement savings. Taking that $15,000 and putting it into a Roth IRA, where it will incur no taxes, helps with maximizing the amount of wealth for the owner and the eventual beneficiary of the IRA (children).

Image credit: CafeCredit.com

The Potential Pitfalls of Early IRA Withdrawals

Anyone owning a Roth individual retirement account (IRA) must begin taking scheduled withdrawals at age 59 ½. It is important to take your required minimum distributions (RMDs) as planned to avoid penalties. One of the benefits of an IRA account is that your funds are not taxed until they are distributed, similar to an annuity.

Standard Early Withdrawal Penalty

Roth IRAs require account holders to take their first withdrawal at age 59 ½. If you take a withdrawal early, it is subject to a 10 percent penalty. That penalty is on top of any additional income taxes. The amount of income tax liability that you will have depends on income tax bracket.

Contributions made to your investment, and any gains it earns are also taxed as you make a withdrawal.

How to Avoid the Penalty

There are a few ways to avoid being penalized for withdrawing early from an IRA. If you have had to take a withdrawal for medical expenses that are not reimbursed, you may be able to avoid penalties.

Other situations include:

• Military duty call
• IRA owner’s passing
• Permanent/total disability
• Divorce proceeding judgment
• Some educational expenses
• Some first-time home purchases

It is important to review the requirements for each method of avoiding paying penalties for having to make an early withdrawal from your IRA.

Closing Thoughts

If you are not great with finances, it may be a good idea to appoint a financial power of attorney to handle your distributions, schedule timely withdrawals, and assist you in preparing your taxes. The power of attorney should be someone that can be trusted, and someone with a verifiable background in finance.

Image credit: Investment Zen

Three Tactics Happy People Use during Tax Season

Happy people tend to do their taxes a little differently. Unhappy people tend to quickly get through their returns without checking for additional ways to reduce their tax bills. Unhappy people are also often those that wait until the last minute to file or request extensions. As we’ll explain in this article, happy people are those who tend to file early, stay organized and search diligently for all possible deductions and credits.

Starting Early

Happy people tend to start preparing their tax returns as soon as all of their required documents are in-hand. Early filers often get their returns processed faster, resulting in their refunds being received earlier. Early February is a common time to start preparing tax returns.

Organizing

Do you have itemized deductions in multiple categories? Organizing deductions and receipts by category is something that happy people do. Unhappy people are the ones that tend to take a shoebox full of receipts to their accountants to sort through. Keeping your documents organized helps the tax return preparation process go faster.

Seeking New Credits and Deductions

Happy people tend to take the time to seek out credits and deductions to reduce taxable incomes, reduce tax liabilities, and pad their refunds. New credits and deductions are made available to qualifying taxpayers often, so it is important to stay up-to-date on new tax laws, available credits, and additional deductions.

Closing Thoughts

Even if you are typically unhappy, it is a good idea to get started on your taxes early. It is also a good idea to view the available deductions and credits and determine your eligibility to receive a larger refund, as many happy people do. Taxes don’t have to add to your unhappiness, they can actually bring a ray of sunshine to your life.

Image credit: Joe Goble