Tax Audit
Can Summer Camp or Day Care Really Save Me Tax Dollars?
Yes! You may qualify for the Child and Dependent Care tax CREDIT. How do you qualify? Your dependent must be age 12 or younger, when the care is given. No credit is allowed in the year your child turns 13. An older dependent or spouse may qualify if they are mentally or physically unable to care tor themselves. Your dependent must have lived with you for more than half the year. There are special exceptions for dependents who are born or who die during the year. You will list their names and social security numbers on the tax credit form plus how much you paid for each individual person’s care.
This care must be given in order for you to go to work or look for work. You must have income from wages or other taxable compensation. If you are married and filing a joint return, this work requirement applies to both of you.
What if you are a stay-at-home parent and don’t have a job? If you go to school full time, you may be considered as having earned income for this credit. This credit is not available to spouses choosing the “married but filing separately” tax filing status.
This payment has to be made to someone other than your spouse, You cannot take a credit if you pay the parent of your qualifying person for the care. Payments you make to someone you claim as a dependent on your tax return do not qualify for the credit. If you do pay for your own child, who is not a dependent on your tax return, they must be age 19 or older that year. You will list each care-giver’s name, address, social security number or employer ID number PLUS the total amount you paid that care giver. The Internal Revenue Service tax law will dictate how much credit is allowed on the amount of expense you incurred.
Some care-givers are people who run their businesses “on the side.” If they do not provide you with their social security or employer identification number, you do not get to claim the credit. They are cheating the tax system. And you are paying their tax. (Just sayin’.) Is theirs the only care you can get for your child? Is theirs the only care you can afford for your child?
You are able to give someone up to $13,000 per year for this year. That gift amount can change every year. That gift is not taxable to them and is not deductible by you. Generally a gift is given with no expectation of anything in return. Day care given in exchange for money or something else of value is not a gift. The income the care giver receives is their taxable income, whether they have a hobby or a business.
Money you pay for your babies in day care may qualify for the credit. Money you pay for older children’s after school care may qualify. What about summer school? The tuition is not deductible. But the cost for care after summer school class may qualify for the tax credit.
What about summer camp? Day camp may qualify but a camp where the child stays overnight does not qualify. And what about if the dependent who needs care is an adult? There is also adult day care. Your expenses for all of these different types of dependent care may qualify for the Child and Dependent Care tax Credit.
The tax laws are always changing and get more and more complicated. There will always be more that needs to be said. I hope this blog has helped you understand some of the CREDIT that your family may qualify for. If you have questions about your day care situation, post your question in the comment section of this blog or consult your tax advisor.
I’ll talk about Education Tax Credits and Education Expenses in another blog.
A former insider’s view of the BIG IRS Machine and what’s going on today
How can you play to win if you don’t know the rules? I have always focused on how to do things correctly. I want to know the rules of the games I play so I can play to win. And that’s what I want to give you, also.
When I was in law enforcement, I learned that there are some people who will never want to knowingly break the law. There are others who want to know what they can do to bend the rules. They don’t really want to break the law, but they don’t want to follow the straight and narrow path, either. And there are others who might have cared at one time, but don’t care anymore and they just want what they want. They care about themselves. They don’t think of anyone else involved.
The Internal Revenue Service is often in the news. But usually that news is to tell us, the tax-paying public, the changes in the tax law. Tax season is the time when the IRS wants to spotlight public figures who have done something wrong tax-wise. They get mileage out of these stories in trying to help the law-bending public understand the penalty of breaking the tax laws.
Tax season is never over. But today it is after April 15th. And the IRS is in the news again. This time IRS is the one in the spotlight. Somebody done somebody else wrong. We are being told that the IRS targeted specific groups. They did what some police people are accused of doing. They used profiling. They were on the lookout for groups that appeared to be more conservative than others. IRS is accused of denying or delaying the applications of groups wanting tax-exempt status.
The first group I think of as tax-exempt is religious. Other tax-exempt groups include scientific, literary and other charitable organizations. There are hundreds of other tax-exempt groups. Like social groups and fraternal societies, veterans organizations, political organizations. Don’t forget homeowners associations.
I’m not here to defend the IRS. I am just sharing with you some of what I learned as their former employee. When I was an auditor-in-training I was learning the ropes of the job of income tax auditor. What was my job? How do I do it well? As an employee of the federal government I had an honorable job and I wanted to do it well. It was the auditor’s job to see that the law was properly applied.
Even then, the IRS wanted me to know the penalty for stepping over the line. They have their own internal affairs division. IRS wants their employees to do their job properly. And if an employee chooses to cross the line, there is a penalty to pay. In most jobs those penalties may include time off without pay, demotion to a lower pay grade position, and even dismissal. Heads will roll.
Why does it take so long to discover this bad news? It takes time for cream to rise and It takes time for dust to settle. Before any case can be brought to trial, first someone has to be found out. Then evidence must be collected. Only the TV crime show can solve a case in 60 minutes.
When this kind of bad news goes viral, we can be glad to know that the system does work. Yes, one bad apple will spoil the whole barrel. That apple is removed. The barrel gets washed out. We begin again.
The IRS is here to stay. They are not going away. I play by the rules. When the rules change, I have to change my game plan. I hope I can help you, too.
Always to your lowest legal tax,
Nellie T Williams, EA
Adjusting Your W2 Income Tax Withholding
We have just celebrated the end of the “1040 Marathon”. But that does not mean that income tax season is over. Have you filed your return or are you “on extension?” Or maybe you are just going to file your tax return later this year.
This blog is “a day late and a dollar short” for filing 2012 tax returns. But it is right on time for 2013 tax planning!
Even if you are afraid you will owe tax, I do recommend you file your return before April 15th. Especially if you are going to owe tax. When you owe more than $1000 when you file your return, the Internal Revenue Service will assess you a late-filing penalty of 5% per month. That’s 5% of the tax due. The only good news about this is that the maximum penalty is 25%. Well, 25% of $1000 is $250. PLUS the IRS must charge you interest on top of the penalty.
If you think you are going to owe tax and you request an extension of time to file, pay some money with that extension to keep that extension valid. If you don’t pay your tax by April 15th, the IRS must assess that late penalty.
Here’s a tip you can start using right away. If you are self-employed it is up to you to estimate your taxes. You make quarterly estimated tax payments. If you don’t pay enough, and you don’t pay enough on the date the quarterly estimated tax payments are due, you can be assessed a late-payment penalty. This is different from the late-filing penalty I talked about earlier.
If you are an employee, you should have taxes withheld from your paycheck. That income tax withholding is considered paid evenly throughout the year. If you have more withheld in November and December than in the earlier months, your total withholding for the year is still considered paid evenly all through the year.
You can adjust your withholding any time during the year. Does your payroll department restrict how many times they will adjust your paycheck? Just be careful that if you are not taking enough out in the first part of the year, that you don’t run out of paychecks before the end of the year. You want to have enough withheld to make your total enough to cover your tax bill on April 15th. Once January comes around you are already into the next year.
You may have other income that is taxable, like interest or dividends, rental income or sale of property. You might want to or need to make estimated tax payments. Estimated tax payments are due April 15th, June 15th, September 15th and January 15th. If you want more information on how to estimate your taxes, shoot me an email.
Remember this. Failing to plan is planning to fail. Nobody ever PLANS to pay more than they have to. So keep you eyes open on your own tax situation to keep the IRS out of your wallet.
Always to your lowest legal tax,
Nellie T Williams, EA
Amended Tax Returns – Everything You Need To Know
Can you “fix” your tax return?
I don’t mean toy with the numbers. Not THAT kind of fix. I mean repair or correct a return that has already been filed.
Yes, you can fix a mistake on your tax return. This is called AMENDING your tax return. You file an amendment to your tax return. This is an amended tax return.
Form 1040X is the special form used to file a change to an original 1040 series return. Use the 1040X to “fix” a 1040EZ (the easy form), a 1040A (the short form), a 1040 (the long form) or even a 1040NR (the form used by non-residents with income from the United States).
Some of my clients are frustrated when I wait to finish their tax return. And that turns out to be the BEST thing we could have done. Because while they think we’re finished and ready to file, later comes a corrected form or a late-issued form that usually means more tax is due. If we had filed the tax return early in the season, we would be filing an amended return now.
Amended returns are not just for current tax year returns. They are not just for the 2012 tax return you are filing in 2013. Sometimes there is a balance due the IRS. Sometimes the IRS owes YOU a refund.
Tax returns have a time limit for the IRS to review what you have voluntarily filed. Tax returns also have a time limit for you, the taxpayer, to file a claim for refund. You can file an amended return for any tax return that has not run out of time, or “the statute” has not expired.
You might be like one of my clients. We are filing for a solar water heater credit on their 2012 return. AND we are filing a 1040X, amended return, for 2009 to claim the credit for qualifying windows they installed that year. If we waited until after April 15, 2013, we would have run out of time to file that 1040X for 2009 and they would have lost their chance to “claim” that year’s energy credit.
Another client is new to me this year. He is retired from the fire department. He has his health insurance premiums withheld from his pension benefits. I learned that this qualifies for a special treatment on his tax return. The preparer he used the last three years didn’t know about this special treatment. So I am amending his 2009, 2010 and 2011 returns to claim a larger refund. That 2009 1040X will be filed before April 15, 2013 so he doesn’t lose his refund for that year. The other years will be filed now, too. They will each go in their own separate envelope to the IRS.
Another client is going to have to amend his 2011 tax return for additional income he just found out about. In this case he’ll have to pay more tax. But by coming forward voluntarily, he will avoid some penalties that IRS would definitely assess if they had to tell him that he owed money. IRS punishes you with penalties when they have to hunt you down.
There are many different situations that will cause you to file an amended. Can you think of a reason why any of your tax returns should be changed? Did you realize you claimed too much of one deduction? Did you realize you have MORE deduction you are allowed to claim. Did you find out something you didn’t know when you first filed your return?
Preparing the 1040X form is a little more complicated than preparing a return the first time. Don’t be afraid to get some help with this one. IRS will take a close look before they send you money. You’ve waited this long. You don’t want to run out of time to claim the money you are entitled to.
Always to your lowest legal tax,
Nellie T Williams, EA
I Love Her – Can I Deduct Her?
I love her. She lives with me. Can I claim her?
It Depends.
In order to claim someone (whether male or female) as a dependent on your individual income tax return, there are questions that need to be answered. There are rules to follow. Of course! We are dealing with the Internal Revenue Service and the tax laws handed down by our lawmakers in Congress.
First, you never claim your spouse as your dependent. Your marital status determines your filing status. I explained in an earlier blog that you may choose married filing jointly or married filing separately.
Second, you can never claim a person who can be claimed as a dependent by someone else. The dependent must be a US citizen, US resident-alien, US national or a resident of Canada or Mexico. There may be an exception to this rule for certain adopted children.
Third, the person you want to claim must be your QUALIFYING CHILD or your QUALIFYING RELATIVE. What does this mean?
The Tests for a Qualifying Child
All five of these five tests must be met for Qualifying Child:
1. This child must be your son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them. So this child must be related to you. Notice that niece and nephew can qualify, but cousin cannot.
2. This child must meet one of these three age limits: A) be under 19 at the end of the year (and also must be younger than you or your spouse if you are filing jointly), B) be a student under age 24 at the end of the year (and younger than your or your spouse if you file jointly), or C) be any age if permanently and totally disabled. So a child who turns 19, is not a student, and is not permanently and totally disabled, is not going to quality as your dependent child.
Jack has a son, Jerry, who is still in college but Jerry is 26 years old. Jerry still lives at home, but Jack cannot claim him as a dependent child because Jerry is over 24.
3. This child must have lived with you for more than half of the year. Your baby born alive during the year, or a child who died during the year, is considered to have lived with you their whole year. If you share custody with another person (maybe you are divorced or separated or never married), special rules apply to help determine which parent will claim the child. This is a great topic for a future blog.
4. This child must not have provided more than half of their own support for the year. What does this mean? Consider the costs to provide a roof over your heads and food on the table, clothes on his or her back, school tuition, books and supplies and the list goes on. How much money does your child earn? Could he or she have paid half or more of their own cost to live?
Jerry (in the example at #2 above) made enough money to keep Jack from being able to claim him. Since Jack couldn’t claim him, Jerry got to claim himself on his own tax return.
5. This child is not filing a joint return for the year unless they are married and the only reason they are filing a tax return is to get a refund of income taxes withheld or estimated taxes paid.
The Tests for a Qualifying Relative
You might want to claim someone besides a child. Can they meet these four tests for Qualifying Relative?
1. The person cannot be your qualifying child or the qualifying child of any other taxpayer. (If Jerry, above, was 25, lived at home and didn’t have an income, he s Jack’s son, is not a qualifying child, but might be his qualifying relative.)
2. The person must be related to you (as in qualifying child above), or must live with you all year as a member of your household, and your relationship must not violate local law.
3. This person’s income for the year 2012 must be less than $3,800 (this amount can change year by year)
4. You must provide more than half of the person’s total support for the year. There are exceptions for multiple support agreements, children of divorced or separated parents, parents who live apart, and kidnapped children.
This information is foreign to the average taxpayer, often referenced by the average tax preparer and comes direct from IRS Publication 17. If you have specific questions about your dependents, consult your tax advisor or post your question in the comment box. I’d love to consult with you.
Always to your lowest legal tax,
Nellie T Williams, EA
W2 Forms and 1099 Forms Due Now
W2 Forms and 1099 Forms are due by January 31st!
Are you ready to file these required forms? The LAST thing any employer wants is to be delinquent in his employer’s filing requirements. What is required and when?
December 31st marked the end of the fourth quarter of the calendar year. Not only do you have the fourth quarter employers reports due by January 31st. You also must give your employees their W2 forms by January 31st.
You must also give any independent contractors their Forms 1099 Miscellaneous by January 31st. Caution: Do NOT make the costly mistake of treating an employee as an independent contractor! Attention Employees – the next blog is devoted to YOU!
In addition to the W2 forms given to the employee, you must also send a copy to Social Security Administration (SSA) with the transmittal Form W3. If you withheld state taxes for the benefit of your employee, you must also send a W2 copy to your state (with your state’s W3 equivalent). Form W3 must be filed with SSA by the last day of February. I tell my employer clients there is no penalty for filing early. If you file the W3 at the same time as you issue the W2 forms, you are more likely to file it on time.
Most employers file the quarterly report Form 941 to report the taxes withheld from the employees’ paychecks. The taxes withheld include the employees’ federal income taxes, Social Security taxes and Medicare taxes. PLUS the employer matches the Social Security and Medicare taxes. If you are self-employed you are considered both employer and employee and you pay the full 15.3 percent of earnings.
IMPORTANT NOTE: The 2% “Payroll Tax Holiday” that employees enjoyed these past two years expired on December 31st. Effective January 1, 2013 the employees’ responsibility for Social Security and Medicare taxes returns to 7.65 percent of their wages. Medicare taxes are withheld on every dollar of pay, but the 2013 maximum earnings subject to Social Security tax is $110,100 for both employees and self-employed people.
According to the IRS, “Employers should start using the revised withholding tables and correct the amount of Social Security tax withheld as soon as possible in 2013, but not later than February 15, 2013. For any Social Security tax under-withheld before that date, employers should make the appropriate adjustment in workers’ pay as soon as possible, but not later than March 31, 2013.” So we have a little grace period here to “catch up” on the proper amount that should be withheld beginning January 1st.
You may be a small employer that has been given permission from the IRS to file an annual Form 944 instead of the quarterly Form 941. Form 944 is due by January 31st for the preceding calendar year wages paid.
In addition to Form 941 (or Form 944), Forms W2/W3 and state equivalent forms, you must also file (and pay) by January 31st, your 4th Quarter state income tax withholding report, file (and pay) your 4th Quarter state unemployment tax report, and file (and pay) your annual federal unemployment tax report Form 940. Unemployment tax is generally paid on the first $7000 of wages paid to a covered employee. Remember to take into account any deposits you made during the earlier quarters for federal unemployment taxes.
To recap:
By January 31, 2013:
1. File Form 941 for the 4th quarter 2012 OR Form 944 for the whole year 2012
2. File your state’s 4th Quarter 2012 income tax withholding tax reports
3. File your state’s 4th Quarter 2012 unemployment tax report
4. File Form 940 for the whole year 2012 federal unemployment tax report
5. Give Forms W2 to your employees
6. Give Forms 1099 to your independent contractors
By February 28, 2013 :
1. Send Form W3 with Copy A of all Forms W2 to Social Security Administration
2. DO not mail the W3/W2 to IRS, it goes to SSA
3. Mail Form 1096 with IRS copy of Forms 1099 to the Internal Revenue Service.
4. 1096 is the form that goes to IRS
5. I’s OKAY to file these transmittal forms in January. You don’t have to wait till February 28th.
Always to your lowest legal tax,
Nellie T Williams, EA
New Year Tax Moves
Now that the old year is out and the new year has begun, what do you need to do NOW to help protect yourself and your business from an IRS tax audit?
FIRST: Do you use your car for business? If you have not already done so, go out right now, or as soon as safely and reasonably possible, make a note of your odometer reading.
Why? Because if you do this like I do, every New Year’s Day, you will have an accurate reading of your car miles at the very BEGINING of the year. This beginning reading is also the reading for the END of the previous year. This will allow you to prove the TOTAL number of miles driven on your car. And then each trip you drive for business purposes you will enter into your AUTO LOG, the date, where you went and the number of miles driven to get there. Remember, commuting is not deductible.
SECOND: If you do not already have a business bank account, separate from your personal bank account, get a business account ASAP
(as soon as possible). Set up your account to generate statements on the last day of each month. Keep your bank statements for EVERY MONTH so you can match your business income with your bank deposits. It will also allow you to see the debits, the checks written. You will have a clear picture of your money in and your money out.
THIRD: Begin assembling your 2012 documents, receipts, paperwork so you really can aim to pay only your lowest legal tax. You already have on hand much of what you are going to use. Is your paperwork in a pile or do you have it sorted into files? Remember, it’s YOUR tax return I am helping you protect.
LASTLY: Watch your mailbox. In the next several weeks you will be getting important papers. And the IRS will
get their copy of your W2s and your 1099 forms. If you are a homeowner and pay a mortgage, you should be getting a Form 1098 showing how much interest you paid on your mortgage. Do you have interest and dividend income? If so, you’ll get a 1099INT or 1099DIV. If you bought or sold stocks, you will get a statement from your broker. Depending on the size of your portfolio, this statement can be many, many pages per account.
Your tax adviser is going to want you to bring EVERYTHING in to your appointment. If they are good, they want to save you money just like I do.
Always to your lowest legal tax,
Nellie T Williams, EA
Time Marches On
This is the end of the year, not the end of the world. I thank my God every morning I awake.
Before we rush away from this festive season, I hope you all had a very Merry Christmas, a happy holiday, and I wish you all a very happy New Year!
Time marches on whether we plan for it or not. And TOMORROW is THE last business day of the year!
The Most Important Thing
What is THE most important thing you still need to do before the clock turns from 2012 to 2013? If you don’t make any decision, you have just made a decision.
Has our Congress come back from their happy holiday to deal with what we’ve all been hearing about? Are they going to do anything to save us from our “fiscal cliff”?
If Washington does nothing, then temporary “band-aid” fixes put in place over the past several years will expire. We may lose some deductions. We may have smaller exemptions. Credits may be reduced. Expect to pay more tax.
PLUS, while most of us see the IRS as the bad guy, they are just what I call the “Tax Police”. The job of the Internal Revenue service is to enforce the laws that Congress has put in place. Forms designers at the IRS must first know what Congress has passed before they can finish the forms that we all need in order to prepare our tax returns.
If you file a simple tax return with only wages and take the standard deduction, you will be able to file sooner than someone who itemizes deductions. But IRS told us back in November that NO ONE will be able to electronically file ANY tax return until January 22nd! And some of us will have to wait longer than that for forms to be released from the government.
Get to the Point
I am known to “cut to the chase”. I get “to the point”. I have to remind myself to slow down and tell the whole story before I give away the punch line. So if you ever feel I have jumped to the conclusion too quickly, feel free to let me know you want more. Leave a comment to any blog and your comment will let me know how to better help you.
What is important to know at the end of the tax year? What questions do I hear from my clients? Every year, any year, you want to know that you have paid in enough tax to cover your anticipated liability. Have you had enough withheld from your paycheck? If you are self-employed, have you had a profit? Have you paid enough in estimated tax payments? The fourth estimated tax payment for 2012 is due January 15th, 2013.
Use It or Lose It
Have you used all of your “use it or lose it” benefits through your work? Have you met your medical deductible so that now every penny for prescriptions or office visits qualify for reimbursement? Can you refill that Rx and put it in this year’s covered expenses?
In Arizona we have tax credits for specific charitable contributions that may be available to you. These state credits will reduce your state income tax dollar-for-dollar. These contributions may also qualify for a federal tax deduction. A deduction is not dollar-for-dollar, but may help you lower your tax bill.
Does your state offer a credit you can “purchase” in the next few days? You will want to know if you have a tax liability to reduce before you make this contribution. No credit is free. No deduction is free. They first will take money out of your pocket before they put money back into your pocket.
Are you being tempted with a “last minute” business investment because of some accelerated depreciation benefit? Stop! Ask yourself if you really need that piece of equipment. Do you need to spend that money? Is it truly better to write that investment off in this year of purchase? Or is it better to save some of that equipment expense for next year and for the next year and for the year after that one? Depreciation is designed to spread the deduction out over the expected life of the asset.
The Bottom Line
The bottom line for me is always this: I want you to know the basics. I want you to know the general rules so you are not caught off-guard and have to write a bigger check than you expected at your tax appointment.
To your lowest legal tax,
Nellie T Williams, EA
IRS Deadlines and Extensions
Tick, Tock, Tick, Tock!
Have I ever told you about the time line that the INTERNAL REVENUE SERVICE is bound by? There are due dates. There are many of them.
Most of us are calendar-year taxpayers. That means our tax year ends December 31st. And when we file an individual income tax return, a Form 1040, that is due April 15th of the following year. At one time the 1040 was due March 15th, but so many people asked for extra time the due date was changed to April 15th. Even today, many people still ask for extensions. Not too long ago the extension gave us two additional months to file the return. And so many people asked for a second 4-month extension that the 2nd extension was eliminated and IRS now gives us one six-month extension. This means that if you REQUEST an extension of time, your April 15th due date has been extended to October 15th.
An extension of time only gives us time to file the paperwork. It does not give us any more time to pay our tax. The tax is still due by April 15th. If on April 15th you think you will owe tax with your tax return, you can make a payment with your extension and still get more time to finish your paperwork to file a correct and accurate tax return. If you wind up owing tax when you file that extended return, the extension will not be valid. Interest will be charged from April 15th until your taxes are paid in full. Penalties will also be assessed for late-filing and for late-paying your tax. This is not a pretty picture.
If you have a business and file a corporate return, whether it be a “C” Corporation or an “S” Corporation you may have a calendar-year entity or a fiscal year entity. Both “C” and “S” corporations have income and expenses. They have Income Statements and Balance Sheets. They have Schedules of Depreciation for assets like equipment and buildings. A “C” Corporation files an 1120 return, can have a tax liability on income greater than expenses, and the corporation would pay that tax. If you elect for that corporation to be treated as a small or “S” corporation, it files an 1120S return instead and the income greater than expenses, or profit, passes through to the shareholder (or shareholders) on form K1. The shareholder includes their share of the corporate profits on their 1040 tax return along with their other income. To keep it simple, if the corporation uses a calendar year, then that corporate return is due March 15th. And, like a personal 1040 return, can elect a 6-month extension that for the corporation ends September 15th.
Whether business or individual, you must request an extension. They are not automatic. And they are only good for filing the paperwork, the tax returns.. Any taxes due must be paid by the due date to avoid interest and penalties.
Have you ever heard the expression, “The shoemaker’s son goes barefoot.”? Lots of times I feel like the shoemaker’s son. My own tax returns are always on extension. Could I file them early and avoid the rush? Sure, but what would be the fun in that? I must really love the adrenaline rush. I am all about time management. But last week was truly “Just in Time! Management.” Did you ever stay up late studying for an exam? Did you ever pull an “all-nighter” where you didn’t get any sleep at all? I did. I did in college and I did last week, too. In some ways I am a lot like some of my own clients. I was busy finishing clients’ business returns and getting ready for an out-of-town business trip, and I found myself staying up all night to file my own business return before leaving for the airport for my business trip. tick, tock, tick, tock….
If you miss the extension deadline that return is just flat out delinquent. And I cannot be late and stay in business for you! So I missed a little sleep.
It is still September. But October is right around the corner! Like many of you, I, too, must finish my personal 1040 return before October 15th. Even though we have a deadline to meet, I encourage you to take the time you need to do a good job of getting your figures together. It is so much better and easier to file correctly to begin with. Remember, you are signing under penalty of perjury that you are filing a correct and accurate return.
If you do later find you need to amend a tax return, there’s a form for that. And the 1040X Amended Return has its due date too. Often you may file what you think is an accurate return only to get an additional form that you forgot about or didn’t even know you should have waited for. This often happens when you are the heir of someone who has passed away and you inherit something taxable. In that instance you will owe tax with that amended return. It is so much better to file that amendment than to wait for the IRS to tell you about your additional income and tax due. If you wait too long to file on your own, the IRS will start that ball rolling.
Maybe you find you left something off that is to your benefit, that would lower the tax you already paid, that would generate a refund for you. Here is where the timing is really important. You only have so much time to file that request for refund. Generally you must file the 1040X within three years of the date you filed that original return. This due date can be tricky, so be sure to consult your professional for advice on your 1040X.
Well, back to extended 1040s due October 15th. Since you and I will be getting our 2011 tax return information in order, may I suggest it is also a good time to start organizing our 2012 (this year we are in) data? Do you hear it? tick, tock, tick, tock …
To our lowest legal tax,
Nellie Williams, EA
Image: FreeDigitalPhotos.net
Know Your ABCs and Avoid IRS Problems
Your Income Tax Return is More than Just 1, 2, 3…
Your Income Tax Return is also A, B, C, D…
When you start your tax return, after the heading with your name, address, Social Security Number you will eventually get to the lines that allow you to voluntarily report your income.
Ours is called a voluntary system because you voluntarily report your different sources of income. In other countries the government has an agreement with employers to withhold their required taxes. Our voluntary system does not allow you to decide to file one year and not file another year. It is not that kind of voluntary.
AND if you decide not to voluntarily report your total income, ALL of your income, the Internal Revenue Service has it’s own ways of determining you have been less than totally truthful.
Page one of your 1040 Income Tax Return shows gross wages, interest and dividend income, net business profits and other sources of income. Your net business profits come from Schedule C – another form! Your interest and dividend income come from Schedule B – another form!
Page two of your 1040 Income Tax Return has a space, a line, for you to report your total itemized deductions. Finding your total itemized deductions takes work, but it can be worth it in saving you tax! There are several categories of itemized deductions. They are reported on Schedule A – ANOTHER FORM!
Unless you are filing a 1040 EZ, the simplest of income tax returns, you will have more than one page to your tax return, more forms before you are finished. And when your tax preparer asks you questions, it is not because they are nosy (maybe they are nosy) but they want to find every tax benefit for you. Yes, a good preparer will charge you for saving you money, but I hope you believe that paying that tax preparer to help you pay your lowest legal tax is a very good investment.
Schedule A, Itemized Deductions is not for everybody. The biggest deduction is usually interest paid on a home mortgage. If you do not own your own home you may not be itemizing. But the government has special gift for you. You do not have to do anything extra to take advantage of this tax saving gift. That gift is called the Standard Deduction. The amount varies depending on your filing status (see my blog on filing status here) and it can also change year-by-year depending on what laws our Congress pass.
If you thought the Internal Revenue Service made the laws, you are mistaken. It is Congress that makes the laws. It is the job of the IRS to interpret the laws and design the forms to properly implement the laws. It is YOUR job to understand the laws and file a correct tax return. And that is where your trusted advisor, someone like me, comes in to help you file a correct and accurate return.
If you engage the services of someone like me, we help you pay your fair share, your lowest legal tax, and not a penny more. With the advent of the RTRP, Registered Tax Return Preparer, everyone who is paid to prepare a tax return MUST take the required number of education hours each year and annually report their hours to the IRS in order to stay in business. RTRP is the entry level tax return preparer. The designation was years in the making and came about to protect YOU, the public, from unscrupulous tax return preparers. You’d be surprised at how much tax fraud is committed by people pretending to want to help you and take your money.
The last part of page two is where you SIGN your tax return. You need to know that when you sign your tax return you do so under the penalty of perjury. You are attesting that yours is an accurate return.
Did you know you are swearing under oath that you have reported all of your income? Did you know you are swearing under oath that you are taking the deductions you are entitled to according to the law? Did you know you are swearing under oath that you can verify all the numbers on your return if asked to do so? That is why keeping records (see my blog on record keeping) is so very important. And you can swear all you want about keeping your logs, keeping your receipts, but you’ll be swearing up a storm if you don’t have them when the IRS comes calling. 
Did you know there are two or three signatures on every return? You sign. If you are married filing jointly, your spouse signs. And your preparer signs. We all sign under penalty of perjury. It is my job, as your preparer, to ask you the questions that support our (and I say our because your return is our joint effort) tax return entries. I can’t answer for anyone but myself, but I will tell you, you cannot pay me enough to knowingly lie for you on your tax return. The penalties are severe.
Oh, my, I can carry on. Watch for my next blog where I begin talking about medical deductions, the very first section on Schedule A.
To your lowest legal tax,
Nellie Williams, EA
Bullet Proof Your Taxes
Image: FreeDigitalPhotos.net
