Yes, I said “BUY” deductions. They do cost you money, you know.
Did you know that our government has a FREE deduction for most of us?
That free deduction is called the STANDARD deduction. I say it’s ” free” because you don’t have to spend a dime to claim this one. The amount of your standard deduction does change from year to year and is based on your filing status. Single, Married Filing Jointly, Married Filing Separately, Head-of-Household status – each one has a different standard deduction.
There are various categories of deductions that are allowable on 1040 tax return form Schedule A, Itemized Deductions. These different categories are:
- Medical and Dental Expenses
- Taxes You Paid
- Interest You Paid
- Gifts to Charity
- Casualty and Theft Losses
- Job Expenses and Certain Miscellaneous Deductions
- Other Miscellaneous Deductions
In deciding whether to take the standard deduction or whether to itemize deductions, I ask my clients if they own their own home. And if that answer is yes, I ask if they have a mortgage on their home. The reason…Interest paid on a home mortgage is usually the largest of deductions. If you own your own home, you also pay real estate taxes. If you live in a state that has an income tax, those taxes you paid or had withheld from your paycheck are deductible. Since there are states that do NOT impose an income tax, the government allows us to choose to deduct sales taxes paid instead of income taxes paid. And if you have a car, you may also be able to deduct the license plate registration fee.
Unusually large medical expenses can also shift you from taking the standard deduction to itemizing deductions. I tell my clients that this is NOT the big deduction I want them to have. Amounts you pay for medical insurance, doctor and dentist visits, prescriptions and lab fees are the common deductions. There are costs that are deductible and there are costs that are NOT deductible. How do you know which is which? Talk to your trusted tax advisor.
If you know you want to itemize, then you will also want to look at the gifts you gave to a qualifying charity during the year. These gifts can be money and they can be what I call “stuff.” Money does not just mean paid by cash. Money means cash, check, credit card. The important key is to get a RECEIPT for your gift. The Internal Revenue Service is paying much closer attention to this deduction because of fraudulent deductions claimed every year.
Deductions take money OUT of your pocket. Is your expense ordinary and necessary? Is your expense one you decided you needed only because you wanted to lower your tax bill?
Did you know that if you are in the 15% tax bracket and you spend $1000 on an “elective” deduction, you might save $150 of tax, but you are still out $1000! If you don’t need this deductible expense, don’t spend the $1000. Pay $150 more in taxes and you still have $850 in your pocket! If you have a choice, what is YOUR choice?
What will be the BIG GAME CHANGER for this upcoming tax season? For EVERY taxpayer, for every tax return preparer, you will need to have the answer to this question:
“Did you have minimum essential health insurance for at least one day in EVERY month of 2014?”
If you did have health insurance for yourself, good for you. “Did you have the minimum essential health insurance coverage for everyone in your family?” Tax return preparers will also need to know how much income your dependents earned. Why? Because household income plays a part in calculating your possible penalty for NOT having insurance. Before you panic, there are exceptions. If you are my tax client, I will be looking at every angle of this issue for you.
Did you know that the Affordable Care Act, commonly known as “Obamacare”, requires that every one of us are covered by minimum essential health insurance? Did you know that if you do not have this coverage, you may have to pay a penalty on your tax return?
Coverage can be a combination of Medicare Part A, Medicaid (ACCHS in Arizona), Military Health Insurance (Tricare) an employer sponsored plan. or insurance you buy on your own. These all help to meet the “Shared Responsibility” part of the plan.
If you do not have healthcare coverage for the entire year, you could be assessed a penalty. The penalty calculation formula is complicated. If I say there is a minimum penalty, will you realize that is the LOWEST it can be and that it is likely to be even higher? The lowest possible 2014 penalty for a single person is $95. The penalty for a married couple starts at $190. As the size of the family grows, the penalty grows. And it gets bigger every year. If you do not have the essential coverage for 2015, you could face a larger penalty.
This shows up on your income tax return because the IRS has been charged with the responsibility, to make sure we are paying our fair share. Not only must we pay our fair share of income tax. We must also pay our fair share of healthcare insurance premiums.
I am not a healthcare insurance provider. I am a tax return preparer. If you get your health insurance through “The Marketplace”, the insurance exchange agents will want to see your tax returns to determine how much premium assistance, or discount, you might qualify for.
Tax return preparation will take more time this year. It may cost you more this year in more ways than one. In this business, one thing we can all count on every year is that the law is ever-changing.
In spite of this tax news and gloom, I wish you all a Merry Christmas and Happy New Year!
December is the holiday month. We just had Thanksgiving, coming up is Christmas and then New Year’s. What must you do before the clock strikes midnight?
Individuals need to know about their numbers. Anyone who has a business needs to know about keeping track of their income and expenses. What is the key to tracking your income and expenses? Do not let this word scare you, it is really just a simple activity. This word is one of only three words in the English language that have three double letters in a row. This word is bookkeeping. It just means keeping the books, keeping the numbers.
Your Statement of Income is keeping the numbers for your money in. Your Statement of Expenses is keeping the numbers for your money out. Businesses combines the income and expenses statements into one Profit and Loss Statement.
There is a very popular software program that many business owners use to help them – QuickBooks. The personal version is more of a checkbook tool called Quicken. Some of my clients use QuickBooks and many of my colleagues use QuickBooks Pro.
The danger with any software is that it is just a tool. Do you know how to best use this tool? My friend, Joe DiChiara, a CPA in New York, says that QuickBooks is a pretty good tool. He believes it has more features than most of us need to use. My friend, Barbara Starley, a CPA in Arizona, is a QuickBooks Pro Advisor. She helps people untangle their bookkeeping software missteps.
For years, I used a professional accounting software to help my clients with their accounting needs. The software company was sold to another company whose professional cost priced me out of providing accounting services. That was when I began using Excel spreadsheets to track my income and expenses. The spreadsheet method might be just fine for you, but it does not create the balance sheet we need.
What does the balance sheet show? What does it balance? The balance sheet is like a teeter totter. On one side you list your assets, what you own, and their values. On the other side you list your liabilities, the money you owe, and your equities, the value you hold as an owner of your company.
Double entry means for every entry you have on the left side of your ledger, you have an equal entry on the right side of your ledger. When they are equal, or when they match, they balance. And that is what you want in a double entry set of books. Do not mistake double entry books with a double set of books. If you have two sets of books, you are looking for trouble.
Do you have to have certified financial statements? Only if your banker requires them for a loan. But you certainly wants to stay on top of your numbers.
Today I will finish the second half of what we might call the IRS Taxpayer Bill of Rights. They call it the Declaration of Taxpayer Rights. If you want to see the IRS Mission Statement, go back to the earlier two articles on this topic.
I became The IRS Insider based on my personal experience as an income tax auditor. The IRS is a BIG organization. My perspective is limited to the Examination and Appeals Divisions. I have colleagues who help me and help you with the Collections side of the big tax machine.
Remember, every employee of the government is a person, an individual with a job to do. Are they just like you? Does one of you throw your weight around? Can you follow the Golden Rule and still protect yourself? Yes, I believe you can.
The Golden Rule is NOT “He who has the gold, rules.” The Golden Rule is NOT “Do unto others before they do unto you.” The Golden Rule is “Treat others the way you would like to be treated.” You can always catch more flies with honey than you can with vinegar.
The very next right is all about the gold, IRS Collections.
“5. Payment of Only the Correct Amount of Tax. You are responsible for paying only the correct amount of tax due under the law — no more, no less. If you cannot pay all of your tax when it is due, you may be able to make monthly installment payments.
“6. Help With Unresolved Tax Problems. The Taxpayer Advocate Service can help you if you have tried unsuccessfully to resolve a problem with the IRS. Your local Taxpayer Advocate can offer you special help if you have a significant hardship as a result of a tax problem. For more information, call toll free 1-877-777-4778 (1-800-829-4059 for TTY/TDD) or write to he Taxpayer Advocate at the IRS office that last contacted you.
“7. Appeals and Judicial Review. If you disagree with us about the amount of your tax liability or certain collection actions, you have the right to ask the Appeals Office to review your case. You may also ask a court to review your case.
“8. Relief From Certain Penalties and Interest. The IRS will waive penalties when allowed by law if you can show you acted reasonably and in good faith or relied on the incorrect advice of an IRS employee. We will waive interest that is the result of certain errors or delays caused by an IRS employee.”
Often I quote Justice Learned Hand, judge of the US Court of Appeals, who said,
“Anyone may arrange his affairs so that his taxes shall be as low as
possible; he is not bound to choose that pattern which best pays the
treasury. There is not even a patriotic duty to increase one’s taxes.
Over and over again the Courts have said that there is nothing sinister
in so arranging affairs as to keep taxes as low as possible. Everyone
does it, rich and poor alike and all do right, for nobody owes any
public duty to pay more than the law demands.”
The mission of the Internal Revenue Service is to “provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.”
I became The IRS Insider based on my personal experience as an income tax auditor. The IRS is a BIG organization. My perspective is limited to the Examination and Appeals Divisions. I have colleagues who help me and help you with the Collections side of the big tax machine.
When you are in the audit “hot seat” you may not feel it is fair for you to be there, but the IRS just has unanswered questions based on the tax return you filed.
Below, is the IRS Declaration of Taxpayer Rights, I may comment on one or more of these rights, but will not paraphrase or condense them. I have so much to say about your right to representation that this article is limited to only this one item, Taxpayer Right Number Four.
“4. Representation. You may either represent yourself or, with proper written authorization, have someone else represent you in your place. Your representative must be a person allowed to practice before the IRS, such as an attorney, certified public accountant, or enrolled agent. If you are in an interview and ask to consult such a person, then we must stop and reschedule the interview in most cases.
“You can have someone accompany you at an interview. You may make sound recordings of any meetings with our examination, appeal, or collection personnel, provided you tell us in writing 10 days before the meeting.”
Based on my own experience, when a taxpayer wanted to record our interview, it made me even more cautious about what I was saying. That is not to say that I wasn’t careful to speak the truth or to act in a courteous manner without the recording. It meant that as IRS employees, we were less spontaneous. We were more guarded in what we said.
Every case that is worked by any IRS employee is subject to review by their division’s review staff. If the reviewer has questions about determinations made, the case can be “kicked back” to the auditor for explanation. If the review staff feels the case has not been developed fully, or worked properly, it will not be closed until the auditor addresses the concern of the reviewer.
As the auditor gains experience on the job, the better judgment they develop and the fewer cases are returned by the reviewer. But a random case will still be subject to review at any time in the examiner’s career.
When the taxpayer wants to record the interview, they must request this 10 days in advance of the appointment so that the auditor can arrange for their own recording device. The auditor will also have their supervisor, or another auditor, present during this recording. Will you have someone accompany you? Or will you feel outnumbered?
Do you want this interview to be the most formal or the most comfortable? I know, it is never comfortable in the audit “hot seat.”
Next post I’ll talk about the remaining four taxpayer rights.
If you are an employer, you are expected to deposit the taxes you withhold from your employees on a timely basis. If you owe less than $2,500 total for the quarter, you may make this payment with your Form 941 report. This report includes both Federal Income Taxes withheld AND the combination of social security and medicare taxes withheld (known as FICA) from the employees’ paychecks PLUS the employer’s matching FICA amount. If you owe less than $2,500, you could be a business with a small number of employees.
If you are a business that will owe more than $2,500 for the three months in the quarter, you must pay your “trust fund” taxes on a monthly basis. The taxes you withhold from your employees are called “trust fund” taxes because your employees are trusting you to pay the taxes withheld from their checks to the Internal Revenue service for their individual tax benefit.
If you do NOT withhold the proper amount of social security or medicare taxes from your employees’ checks, you could be responsible to pay what should have been withheld. If you do not pay what you are responsible for paying, you could (you probably will) be charged with penalties. Those penalties can be substantial and they can be BIG.
Do not run your business on your employee’s monies. That decision can put you out of business. If you are trusting one of your employees to make these deposits, make sure they are being made. Trusting an employee who is not trustworthy can also put you out of business.
If an employee seems so dedicated to their job that they do not take any time off this could be a warning sign to you. The employee who refuses vacation and sick leave could feel they must be there every minute of every day to make sure their deception, their theft from you, remains undetected.
Yes, we must trust our employees, but we must also be vigilant in conducting our businesses. The newspapers are full of stories of big-hearted people who are taken advantage of by people with self-centered ulterior motives.
Are YOU are the one to sign the reports, to sign the checks, to decide who gets paid this month and who must wait if there is not enough money to pay all of the bills? Do not decide to make the IRS wait for these taxes. The IRS could decide to give you (the decision maker) more time, jail time that is. That can put you out of business, too.
It is not always easy being the business owner. You are the one that can put “The Buck Stops Here” sign on your desk. I wish you only the best in your business. I wish you only the best when it comes to your tax situation. If you need help, consult your tax professional.
The end is near, the end of the tax year that is. We just ended the third quarter and are beginning the fourth quarter of this calendar year.
What does this “quarter” stuff have to do with you, the individual income taxpayer? If you filed an extension for your personal tax return, that return is due by October 15th.
Most individuals can file that personal tax return electronically. Once in a while there is something complicated that may require you to mail your tax return to the Internal Revenue Service Center, but those cases are rare. I highly recommend e-filing whenever possible, it cuts down on processing errors and you get confirmation that your return has been filed.
If you are in business for yourself, or have other income on which you have no withholding, you may pay estimated tax payments. The third quarter payment was due September 15th. If you missed that date, send that payment now to minimize late payment penalties when you file your tax return. The payment for the fourth quarter is not due until January 15th of this coming year. Of course, you can pay it early if you want to.
If you miss the due date for your tax return, whether individual or business, file that late return as soon as you can. If you file a late, or delinquent, tax return with taxes due, don’t be surprised when you get a bill for interest and maybe penalties. The government is the biggest business there is. They want you to file and pay on time. If you don’t they will look to collect more money from you.
Are you an employer? Do you have employees? The third quarter employment tax returns are due before the last day of October. You want to be sure to file those reports before the “witching” hour on Halloween. Don’t let the Tax Goblins come knocking on your door, that knocking would come in the form of a notice in the mail. If you fail to file a return to the IRS is expecting, they will ask you for it. If you fail to send them the money they are expecting, they will ask you for it and more.
Before you get busy with your fall and winter holidays, now is a good time to start organizing the papers you’ve been collecting all year for this upcoming tax season. How can I think of this already? It’s my business. You don’t have to think about it like I do, but I get phone calls all through the year, so I know once in a while someone else is thinking taxes. Is it deductible? Can I do this or that? I want you to stay out of tax trouble!
I started this blog with “The End is Near.” I don’t see an end to the IRS, they work 24/7 closed only for an occasional federal holiday. We file a tax return every year. I want you to pay only your lowest legal tax. File on time. Pay on time. Watch your calendar. Save your receipts. Let your tax advisor help you.
Welcome to the fourth quarter.
Last time I covered the basic thought that Organization is the key. Do you use the “jumble” method of keeping your receipts? Is your jumble kept in a box or a bag or an envelope? YOU are the one to sort these papers into categories. Why wait until tax day? Get a jump and do your sorting all year long.
If you haven’t already started a simple way of collecting your important tax papers, begin that new habit today. Use a table, the bed or even the floor to make little piles of receipts by category. Then you can put that now neat stack of receipts into the container of your choice. This will make for easy reference come tax time. You will see how convenient it is to put things were they belong so you can find that certain document when you want to, when you need to.
When a new client comes to my office with their own jumble of records, I tell them the same thing I’ve just told you. YOU know how you spent your money. I need to know how you spent your money. There are different pages to a tax return and the deductions that belong on one page usually do not also appear on another page. My job is to prepare your proper and accurate tax return. I need your help to do this.
Last time I promised to talk contributions. Do you get a receipt for every contribution you make? When you make an offering to your house of worship, do you write a check? Do you just put cash in the offering plate or basket? Do you use their gift envelope system?
Internal Revenue Service wants to see evidence of what you claim as your deduction or expense. I remember hearing from a fellow auditor that a taxpayer being audited was claiming substantial cash contributions. When asked for his documentation, he said that was a matter between him and God. The auditor agreed and said that his deduction would also be a matter between him and God.
The auditor determined that his deduction was disallowed. That is a favorite term at the IRS. His deduction was NOT allowed. He owed tax as a result of that audit.
Records are your defense in a tax audit. Not just your best defense, they are your ONLY defense. Whether this audit is by the IRS or your state department of revenue or treasury, or by the sales tax division or by the unemployment division, PROOF is what they want to see. Timely (at the time of the contribution) records are necessary and your best friend.
SO many reports can be audited. Even if you do not file a report you are required to file, the agency expecting that report can file one for you. Lack of knowledge is no defense. My objective is to help you increase your knowledge and increase your defense. I want you to avoid that audit.
Keep a list of personal items you donate to a qualified charity (not the corner collection box) from your closet or home. Next time I’ll spend more time discussing this favorite deduction.
If you have already filed your 2013 tax return, you have nothing to worry about. While some of your friends are burning the midnight oil trying to finish up their tax returns, you can relax. Next week’s blog is just for you.
But, if you haven’t filed your tax return yet, the deadline is just a few short days away. What do you do first?
First, find all of your income documents for 2013. These types of papers include your W2 form from your employer, your bank statement showing interest income earned on your account, unemployment benefits received, alimony from your ex-spouse.
All income is taxable unless it is specifically excluded. Child support you received is not taxable income and it is also not deductible by the person who pays it.
What if you don’t have the papers you need? Or what if you can’t find, all of the papers you need? Is filing an extension a good choice for you?
What you need to know about extensions is this. An extension will only allow you more time to file your paperwork. An extension will not allow you more time to pay the taxes that are due on April 15th. If you usually get a refund, and if your income and withholding are the same this year as they were last year, it may be safe for you to request an extension.
But if you wind up owing taxes when you do file your tax return, your return will be considered filed late. Your taxes will be considered paid late. You could owe a penalty for filing late and you could owe another penalty for paying your taxes late. Plus, you will also owe interest on taxes that are not paid on time.
If you think you might owe tax, are you able to make a payment with your request for extension? If you wind up having paid in more than was needed to cover your tax bill, you can request that overpayment be refunded to you. You can also request an overpayment be applied to next year’s tax.
If you are having trouble getting your paperwork together, you will want to be sure to go to my website, www.BulletProofYourTaxes, next week. Check out the blog posts. I’ll be writing another article specifically on how to organize your important tax documents throughout the year. Some people thrive on the adrenalin rush. But if you are practicing “just in time” management, you may not even know the bliss in surrendering to the peaceful flow of life.
Like many of my colleagues, I am deadline driven. April 15th is certainly another of those deadlines. I invite you to remember the nursery rhyme “Row, Row, Row Your Boat.” It encourages us to row our boat, but also to row it gently down the stream. Not upstream. Not against the current. And row your boat merrily. Enjoy life. We only have this moment. And we will never have it again.
Remember the story of Cinderella? This beautiful young lady wore glass slippers and rode to the ball in a horse drawn carriage. She met her Prince Charming, but what happened when the clock struck midnight?
What will happen to you when the clock strikes midnight on April 15th?
Were you one who filed your return early? Did you already have your refund directly deposited into your bank account? Are you scrambling to find your paperwork? Are you rushing to beat that tax clock? Did you know that haste really does make waste. Careless mistakes can cost you money.
Will you be filing an extension? Did you know that an extension does NOT give you more time to pay? If you are going to owe tax on your return, file on time if you can. Pay later if you must.
An extension is a request for more time to file the paperwork. It is automatically granted, but only if you request the extension. I will be requesting extensions for several of my clients along with filing an extension for myself.
Some of my clients plan every year to file an extension. Then our new deadline to file our returns moves from April 15th to October 15th. Most states accept the federal extension, so you may need to tile a second extension for your state.
If you will owe money, file on time and pay some of the money you owe on the taxes if you can. The Internal Revenue Service will send you a bill for what you owe and that bill will include interest on the taxes not paid by April 15th. The IRS is required by law to charge, or assess, interest.
When you get your bill, pay as much as you can. If you didn’t pay in full, you will get another bill. The IRS will ask you if you want to set up a payment plan. There is an application, or processing, fee to set up this payment arrangement. You will have to supply financial information. You will be dealing with the IRS Collection Division. The IRS Collector is called a Revenue Officer.
If you owe money and file for an extension, that extension will be considered not valid. It will be just like not requesting that extra time to file your papers. If you find out when you finish your return that you actually owe money (instead of expecting a refund) file that return as quickly as possible. You may incur a penalty for paying late, but you can minimize the penalty for filing the paperwork late.
My IRS experience is in the audit arena, not in IRS Collection. I have colleagues who are former IRS Collection Officers and know exactly how to help you. If that is where you find yourself, I am happy to connect you with someone who can help you. Just let me know how I can help you.