ACC 330 Final Project Three Formal Letter to Client PDF

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Download ACC 330 Final Project Three Formal Letter to Client PDF

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Maloney, Hoffman, Raabe, & Young, CPAs 5191 Natorp Boulevard Mason, OH 45040

October 19, 2020

Dan and Freida Butler 625 Oak Street Corbin, KY 40701 Dear Dan and Freida: Thank you reaching out to me once again regarding your tax preparation services. I am pleased the overall process went well and you are completely satisfied with the outcome. I would be happy to address any of your concerns or answer any additional questions you have. Regarding your question concerning how your tax liability is calculated. Tax liability is calculated using your taxable income from all sources less any applicable deductions which equals your gross tax liability. Gross tax liability less any eligible tax credits equals your total income tax liability.

Options to lower tax liability and/or increase refund: A tax credit reduces your actual taxes, decreases tax payments, or increases a tax refund. The more tax credits you claim, the more of your hard-earned money you get to keep. In comparison tax deductions reduce your taxable income. There are several such deductions available to help reduce your taxable income and subsequently your tax liability.

One way, as you mentioned, would be putting pre-tax dollars into a retirement plan, like a 401(k), to reduce your taxable income for the year. You can establish a retirement account on your own or through your employer, if offered, and make contributions up to a limit of $19,500 for an individual or $26,000 if age 50 or older for 2020. In 2019, individual 401(k) contribution limits were set at $19,000, or $25,000 if you were 50 or older.

Another option would be using either a health savings account or flexible spending account, if offered by your employer, to contribute pre-tax dollars towards meeting health insurance deductibles for the year. Maximum allowable contribution amounts for 2020 are $3,550 for an individual or $7,100 for families. The annual “catch- up” contribution amount for individuals age 55 or older is $1,000. Bear in mind, these monies are yours and not subject to taxation provided they are used for specific allowable purposes. You might also consider converting your existing investments to tax-exempt municipal bonds. Interest on these is generally exempt from federal income tax and from tax by the issuing state or locality. However, earnings on these types of bonds will be lower than on corporate bonds, but this would be offset by a lower tax liability on any gains after sale. On the other hand, losses are completely deductible.

Regarding your question concerning qualifying children and dependents for tax credits. To be a qualifying child they must meet the relationship, residence, age, and support tests. The child tax credit and the dependent tax credit are provided to individual taxpayers based on the number of their qualifying children and dependents.

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A $2,000 tax credit is allowed for each qualifying child (including stepchildren and foster children). To be eligible for the credit, the child must be under age 17, a U.S. citizen, and a dependent of the taxpayer.

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In addition, a $500 tax credit is allowed for each dependent of the taxpayer (other than a qualifying child). Examples of qualifying relatives for purposes of the dependent tax credit include children over age 16 (including full-time students under age 24).

“The Child and Dependent Care Credit can be worth from 20% to 35% of some or all of the dependent care expenses you paid. The percentage you use depends on your income. ... The percentage falls by 1% for every additional $2,000 of income until it reaches 20% (for an income of $43,000 or more).” (e-file.com, 2020)

Hopefully, I have answered your questions regarding tax credits and qualifying deductions. If not, I have included the following link you can use to review in detail all the requirements for tax credits and deductions https://www.efile.com/tax-credits/ . Charitable contributions to qualifying charities or organizations are allowed and can help reduce your overall tax liability. You can either use the standard deduction or itemize deductions, whichever provides the greatest benefit. It is highly recommended that you keep accurate records of any charitable donations, in case of an audit, for your own protection.

“The IRS requires you to keep a record of any cash contribution, such as a canceled check, bank statement, credit card statement, or written statement from the charity showing the date of the contribution, the amount of the contribution, and the name of the charitable organization.” (e-file.com, 2020) “If you have made donations by text message, a phone bill will serve as a record of the contribution as long as the bill states the amount, the date on which the contribution was made, and the name of the organization to which you donated.” (e-file.com, 2020) “If the value of a single donation exceeds $250, you must acquire written acknowledgment from the qualified organization. Each contribution counts as a separate deduction and must be itemized. For 2019, cash donations are capped at 60% of your adjusted gross income (AGI). If your total deduction for non-cash contributions exceeds $500, you must fill out Form 8283 Section A. If your contribution of non-cash property exceeds $5,000, you may be required to obtain a third-party appraisal of the value. If that is the case, you will also have to fill out Form 8283 Section B.” (e-file.com, 2020)

IRS Circular 230, section 10-21. 10-22 and 10-34 would prohibit misrepresentations or omissions for tax purposes to avoid or substantially reduce tax liabilities. These would apply to both your questions regarding inflating deductions and unsupported charitable contributions. To knowingly do so, would be a violation of federal law, punishable by penalties, fines and or imprisonment. Therefore, I would have to urge you to reconsider that course of action. The consequences far outweigh any potential or perceived benefit.

It was my pleasure helping you and your wife through this process. If I can be of any further assistance, feel free to reach out to me again.

Sincerely, Victor R. Blue Tax Prepare

References: e-File.com (October 9, 2020). Dependent, Child Care Expenses Tax Credit. Retrieved on 10/21/20 from https://www.efile.com/tax-credit/dependent-care-tax-credit/ . e-file.com. (October 9, 2020). Charity Contributions, Gifts as a Tax Deduction. Retrieved on 10/21/20 from https://www.efile.com/tax-deduction/income-deduction/charitablecontributions/ ....