personal taxes Archives | Page 2 of 3

CPA Tax Tip: What is Taxable? Almost Everything.

“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.” – Will Rogers

We get a number of calls throughout the year from individuals asking if certain types of income is taxable. The fact is that all income is taxable unless the law specifically excludes it.

Taxable income includes money you receive, such as wages, tips, interest, dividends, and retirement. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return. (From a business standpoint, I usually don’t recommend barters because it seems one party ultimately feels that they got cheated.)

Some types of income are not taxable except under certain conditions, including:

Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable. Be careful with your life insurance strategies so you don’t get an unpleasant surprise at the end of the year.
Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable. This is a little tricky. It has changed somewhat from the days when my wife was in graduate school since the 1980’s.
If you got a state or local income tax refund, the amount may be taxable. You should have received a 2013 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G. One of the important facts as to its tax-ability is whether you itemized the previous year, and did the state tax deduction provide a tax benefit to you.

Here are some types of income that are usually not taxable:

Gifts and inheritances
Child support payments
Welfare benefits
Damage awards for physical injury or sickness
Cash rebates from a dealer or manufacturer for an item you buy
Reimbursements for qualified adoption expenses

IRS Sources:

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

CPA Alert: Top Ten Tips to Help You Choose a Tax Preparer

Believe it or not, taxpayers are not the only persons hurt by fraudulent or unprepared tax preparers. The IRS has an interest in weeding those people out. Every year we acquired new clients that have tax returns that were improperly prepared. Sometimes we have to amend the prior years return. One time a person came to us because their S-corporation was suspended for not filing its returns. After we checked into it, we discovered that the tax preparer had not filed ANY corporate returns from its inception. The tax preparer had been fabricating numbers from the corporation onto the client’s personal return. We had to file five years of tax returns which racked up penalties and interest.

The IRS has some good tips when reviewing a tax preparer because you are still responsible for what is on it regardless if you prepared it or not.

1. Check the preparer’s qualifications. All paid tax preparers are required to have a Preparer Tax Identification Number or PTIN. In addition to making sure they have a PTIN, ask the preparer if they belong to a professional organization and attend continuing education classes.

2. Check the preparer’s history. Check with the Better Business Bureau to see if the preparer has a questionable history. Check for disciplinary actions and for the status of their licenses. For certified public accountants, check with the state board of accountancy. For attorneys, check with the state bar association. For enrolled agents, check with the IRS Office of Enrollment.

3. Ask about service fees. Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can. Always make sure any refund due is sent to you or deposited into your bank account. Taxpayers should not deposit their refund into a preparer’s bank account.

4. Ask to e-file your return. Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically. IRS has safely processed more than 1.2 billion e-filed tax returns.

5. Make sure the preparer is available. Make sure you’ll be able to contact the tax preparer after you file your return – even after the April 15 due date. This may be helpful in the event questions come up about your tax return.

6. Provide records and receipts. Good preparers will ask to see your records and receipts. They’ll ask you questions to determine your total income, deductions, tax credits and other items. Do not use a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.

7. Never sign a blank return. Don’t use a tax preparer that asks you to sign a blank tax form.

8. Review your return before signing. Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.

9. Ensure the preparer signs and includes their PTIN. Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.

10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Tax Scams Can Hit All Year, Especially During Tax Season

Imagine getting a call or e-mail from an “IRS Agent” who claims that you owe them a lot of money and will have your bank account levied? Just reading that sentence may raise the heart rate of some of you.

Here are some warnings from the IRS and some steps you can take to protect yourself:

Be vigilant of any unexpected communication purportedly from the IRS at the start of tax season.
Don’t fall for phone and phishing email scams that use the IRS as a lure. Thieves often pose as the IRS using a bogus refund scheme or warnings to pay past-due taxes.
The IRS doesn’t initiate contact with taxpayers by email to request personal or financial information. This includes any type of e-communication, such as text messages and social media channels.
The IRS doesn’t ask for PINs, passwords or similar confidential information for credit card, bank or other accounts.
If you get an unexpected email, don’t open any attachments or click on any links contained in the message. Instead, forward the email to phishing@irs.gov. For more about how to report phishing scams involving the IRS visit the genuine IRS website, IRS.gov.

Here are several steps you can take to help protect yourself against scams and identity theft:

Don’t carry your Social Security card or any documents that include your Social Security number or Individual Taxpayer Identification Number.
Don’t give a business your SSN or ITIN just because they ask. Give it only when required.
Protect your financial information.
Check your credit report every 12 months.
Secure personal information in your home.
Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.
Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact and are sure of the recipient.
Be careful when you choose a tax preparer. Most preparers provide excellent service, but there are a few who are unscrupulous. Refer to Tips to Help you Choose a Tax Preparer for more details.

For more on this topic, see the special identity theft section on IRS.gov. Also check out IRS Fact Sheet 2014-1, IRS Combats Identity Theft and Refund Fraud on Many Fronts.

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Don’t Be Surprised By Taxes Come April 15th

Surprises are usually fun. I remember the Dean Martin show in the 1960s. In the middle of his show he would go to a door and casually open it to let in a cameo appearance by a celebrity. It was fun because it was a surprise, not a shock.

During the year you should keep an eye on your tax withholdings. If you under-withhold taxes you could be subjected to penalties. Here are some examples that can change what happens in April:

Wages and Income Tax Withholding

New Job. Your employer will ask you to complete a Form W-4, Employee’s Withholding Allowance Certificate. Complete it accurately to figure the amount of federal income tax to withhold from your paychecks.
Life Event. Change your Form W-4 when certain life events take place. A change in marital status, birth of a child, getting or losing a job, or purchasing a home, for example, can all change the amount of taxes you owe. You can typically submit a new
Form W–4 anytime.
IRS Withholding Calculator. This handy online tool will help you figure the
correct amount of tax to withhold based on your situation. If a change is
necessary, the tool will help you complete a new Form W-4.

Self-Employment and Other Income

Estimated tax. This is how you pay tax on income that’s not subject to withholding. Examples include income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets. You also may need to pay estimated tax if the amount of
income tax withheld from your wages, pension or other income is not
enough. If you expect to owe a thousand dollars or more in taxes and meet
other conditions, you may need to make estimated tax payments.
Form 1040-ES. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you need to pay estimated taxes on a quarterly basis.
Change in Estimated Tax.
After you make an estimated tax payment, some life events or financial
changes may affect your future payments. Changes in your income, adjustments,
deductions, credits or exemptions may make it necessary for you to refigure your estimated tax.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any
tax advice contained in this e-mail (including any attachments) is not intended
or written to be used, and may not be used, for the purpose of (a) avoiding
penalties under the Internal Revenue Code or state tax authority, or (b)
promoting, marketing, or recommending to another party any transaction or
matter addressed herein.

How Long Should You Keep Your Tax Records?

My mom showed me an old tax return filed the year I was born. It was for tax year 1957 filed in 1958. There wasn’t much to the return, but the one thing that caught my attention was a receipt for a medical deduction that my dad had kept with the return…a vasectomy. (Was I really that bad?)

I don’t recommend you necessarily keep tax receipts for the rest of your life, but here are some tips provided in part by the IRS:

• You should keep copies of your filed tax returns as part of your tax records. They can help you prepare future tax returns. You’ll also need them if you need to file an amended return. (Of course there is a statute of limitation rule that eliminates any refund if you file too late.)
• You must keep records to support items reported on your tax return. You should keep basic records that relate to your federal tax return for at least three years. Basic records are documents that prove your income and expenses. This includes income information such as Forms W-2 and 1099. It also includes information that supports tax credits or deductions you claimed. This might include sales slips, credit card receipts and other proofs of payment, invoices, cancelled checks, bank statements and mileage logs.
• If you own a home or investment property, you should keep records of your purchases and other records related to those items. You should typically keep these records, including home improvements, at least three years after you have sold or disposed of the property. This may also support your depreciation deduction which have a life much greater than a normal deduction.
• If you own a business, you should keep records that show total receipts, proof of purchases of business expenses and assets. These may include cash register tapes, bank deposit slips, receipt books, purchase and sales invoices. Also include credit card receipts, sales slips, canceled checks, account statements and petty cash slips. Electronic records can include databases, saved files, emails, instant messages, faxes and voice messages.
• If you own a business with employees, you should generally keep all employment-related tax records for at least four years after the tax is due, or after the tax is paid, whichever is later.
• The IRS doesn’t require any special method to keep records, but it’s a good idea to keep them organized and in one place. This will make it easier for you to prepare and file a complete and accurate return. You’ll also be better able to respond if there are questions about your tax return after you file. We recommend using a paperless system for most records that can be attached to your accounting software. This method saves space and keeps the supporting tax documents at your fingertips.

Looking for help with all this, contact yours truly, The LA CPA!

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CPA Tip: Get a Basic Understanding of Your Taxes

The media has not shown the IRS in a favorable mood, lately. However, taxes are here and you probably pay them. Many tax questions I am asked would have been answered by the questioner if they just understood the basic premise of how our tax system work. This understanding may have also helped these people in their personal financial decisions.

The IRS actually has a site that teaches about taxes. The site can be used by high school teachers in instructing their students about our tax system.

The program is a free online tool designed in partnership with teachers for classroom use. The interactive tool is a great resource for middle, high school or community college students. However, anyone can use it to learn about the history, theory and application
of taxes in the U.S.

Here are seven reasons why you should consider exploring the Understanding Taxes program:

1. Understanding Taxes makes learning about federal taxes easy, relevant and fun. It features 38 lessons that help students understand the American tax system. Best of all, it’s free!

2. The site map helps users quickly navigate through all parts of the program and skip to
different lessons and interactive activities.

3. A series of tax tutorials guide students through the basics of tax preparation. Other features include a glossary of tax terms and a chance to test your knowledge through tax
trivia. Interactive activities encourage students to apply their knowledge
using real world simulations.

4. Understanding Taxes makes teaching taxes as easy as ABC:

Accessible
(web-based)
Brings
learning to life
Comprehensive

5. It’s easy to add to a school’s curriculum. Teachers can customize the program to fit their own personal style with lesson plans and activities for the classroom. They will
also find links to state and national educational standards.

6. The program is available 24 hours a day. All you have to do is access the
IRS website and type “Understanding Taxes” in the search box.

7. There are no registration or login requirements to access the program. That means people can take a break and return to a lesson at any time.

You can use the Understanding Taxes anytime during the year. The IRS usually updates the program each fall to reflect current tax law and new tax forms.

Additional IRS
Resources:

Understanding
Taxes

IRS YouTube Videos: English | ASL

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S.
Department of the Treasury and Internal Revenue Service, we inform you that any
tax advice contained in this e-mail (including any attachments) is not intended
or written to be used, and may not be used, for the purpose of (a) avoiding
penalties under the Internal Revenue Code or state tax authority, or (b)
promoting, marketing, or recommending to another party any transaction or
matter addressed herein.

You No Longer Have to Bring the IRS to Tears for a Home Office Deduction

Years ago I was representing a screenwriter before an IRS audit. We did not prepare the
return but was defending our client’s home office deduction in a place that the client no longer lived, or had pictures. The agent baulked on allowing the deduction due to the lack of verifiable facts. I then leaned closer to the female auditor and told her that this client had written the screen play of a famous Disney animated movie in that very same home office. The auditor teared up and said, “My daughter loved that movie!”

We got the full deduction.

The IRS just waived a magic wand by listing some tips on the new law that offers an easier way to deduct a home office without substantiating expenses. Here are the facts:

This simplified option does not change the rules for who may claim a home
office deduction. It merely simplifies the calculation and recordkeeping
requirements. The new option can save you a lot of time and will require less
paperwork and recordkeeping.

Here are six facts the IRS wants you to know about the new, simplified
method to claim the home office deduction.

1. You may use the simplified method when you file your 2013 tax return
next year. If you use this method to claim the home office deduction, you will
not need to calculate your deduction based on actual expenses. You may instead
multiply the square footage of your home office by a prescribed rate.

2. The rate is $5 per square foot of the part of your home used for
business. The maximum footage allowed is 300 square feet. This means the most
you can deduct using the new method is $1,500 per year.

3. You may choose either the simplified method or the actual expense
method for any tax year. Once you use a method for a specific tax year, you
cannot later change to the other method for that same year.

4. If you use the simplified method and you own your home, you cannot
depreciate your home office. You can still deduct other qualified home
expenses, such as mortgage interest and real estate taxes. You will not need to
allocate these expenses between personal and business use. This allocation is required
if you use the actual expense method. You’ll claim these deductions on Schedule
A, Itemized Deductions.

5. You can still fully deduct business expenses that are unrelated to
the home if you use the simplified method. These may include costs such as
advertising, supplies and wages paid to employees.

6. If you use more than one home with a qualified home office in the
same year, you can use the simplified method for only one in that year.
However, you may use the simplified method for one and actual expenses for any
others in that year.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any
tax advice contained in this e-mail (including any attachments) is not intended
or written to be used, and may not be used, for the purpose of (a) avoiding
penalties under the Internal Revenue Code or state tax authority, or (b)
promoting, marketing, or recommending to another party any transaction or
matter addressed herein.

IRS Tax Notices: And Who Says People Don’t Write Letters Anymore?

Though out the year, we get emails from a handful of clients who have received a tax notice from a government agency. Believe it or not, the vast majority do not result in the client paying money. But still, it is nerve-racking for our clients, especially since they are due to an IRS oversight.

The IRS also offers some tips:

Don’t panic. Many of these letters require a simple response.

2. There are many reasons why the IRS sends correspondence. If you
receive an IRS notice, it will typically cover a very specific issue about your
account or tax return. Notices may require payment, notify you of changes to
your account or ask you to provide more information.

3. Each notice offers specific instructions on what you need to do to
satisfy the inquiry.

4. If you receive a notice advising you that the IRS has corrected your
tax return, you should review the correspondence and compare it with the
information on your return.

5. If you agree with the correction to your account, then usually no
reply is necessary unless a payment is due or the notice directs otherwise.

6. If you do not agree with the correction the IRS made, it is
important that you respond as requested. You should send a written explanation
of why you disagree. Include any information and documents you want the IRS to
consider with your response. Mail your reply with the bottom tear-off portion
of the IRS letter to the address shown in the upper left-hand corner of the
notice. Allow at least 30 days for a response.

7. You should be able to resolve most notices that you receive without
calling or visiting an IRS office. If you do have questions, call the telephone
number in the upper right-hand corner of the notice. Have a copy of your tax
return and the notice with you when you call. This will help the IRS answer
your inquiry.

8. Remember to keep copies of any notices you receive with your other
income tax records.

9. The IRS sends notices and letters by mail. The agency never contacts
taxpayers about their tax account or tax return by email.

Your CPA can help you muddle through these letters. A CPA usually deals with these letters and understands how to respond. For example, just today I received a call from a client who was assessed for a late filing fee for a return a prior accountant filed. However, I probably got the penalties abated because of a little-known exception.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S.
Department of the Treasury and Internal Revenue Service, we inform you that any
tax advice contained in this e-mail (including any attachments) is not intended
or written to be used, and may not be used, for the purpose of (a) avoiding
penalties under the Internal Revenue Code or state tax authority, or (b)
promoting, marketing, or recommending to another party any transaction or
matter addressed herein.

Let the Federal Government Help Pay for Your Kids

If you are a working parent, you may need to pay for the care of your child or children. These expenses may qualify for a tax credit that can reduce your federal income taxes. Here are eight key points the IRS wants you to know about this credit.

1. You must pay for care so you – and your spouse if filing jointly – can work or actively look for work. Your spouse meets this test during any month they are full-time student, or physically or mentally incapable of self-care.

2. You must have earned income. Earned income includes earnings such as wages and self-employment. If you are married filing jointly, your spouse must also have earned income. There is an exception to this rule for a spouse who is full-time student or who is physically or mentally incapable of self-care.

3. You must pay for the care of one or more qualifying persons. Qualifying children under age 13 who you claim as a dependent meet this test. Your spouse or dependent who lived with you for more than half the year may meet this test if they are physically or mentally incapable of self-care.

4. You may qualify for the credit whether you pay for care at home, at a daycare facility outside the home or at a day camp. If you pay for care in your home, you may be a household employer. For more information, see Publication 926, Household Employer’s Tax Guide.

5. The credit is a percentage of the qualified expenses you pay for the care of a qualifying person. It can be up to 35 percent of your expenses, depending on your income.

6. You may use up to $3,000 of the unreimbursed expenses you pay in a year for one qualifying person or $6,000 for two or more qualifying person.

7. Expenses for overnight camps or summer school tutoring do not qualify. You cannot include the cost of care provided by your spouse or a person you can claim as your dependent. If you get dependent care benefits from your employer, special rules apply.

8. Keep your receipts and records to use when you file your 2013 tax return next year. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your return.

Alternatively, you can register for your employer’s “Cafeteria Plan.” These plans allow you to deduct your childcare expenses from your wages.

For more details about the rules to claim this credit, see Publication 503, Child and Dependent Care Expenses.

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Child and Dependent Care Tax Credit: It’s Still Expensive to Raise a Kid

“Back in the day, we didn’t have child tax credits, we just raised them on chewin gum and knee patches.” Well, back in the day, they didn’t have athletic club teams and every kid of activity available to drain a parent’s bank account.

But, there is a little reprieve. The Child and Dependent Care Credit can help offset some of the costs you pay for the care of your child, a dependent or a spouse. Here are 10 facts the IRS wants you to know about the tax credit for child and dependent care expenses.

1. If you paid someone to care for your child, dependent or spouse last year, you may qualify for the child and dependent care credit. You claim the credit when you file your federal income tax return.

2. You can claim the Child and Dependent Care Credit for “qualifying individuals.” A qualifying individual includes your child under age 13. It also includes your spouse or dependent who lived with you for more than half the year who was physically or mentally incapable of self-care.

3. The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.

4. You, and your spouse if you file jointly, must have earned income, such as income from a job. A special rule applies for a spouse who is a student or not able to care for himself or herself.

5. Payments for care cannot go to your spouse, the parent of your qualifying person or to someone you can claim as a dependent on your return. Payments can also not go to your child who is under age 19, even if the child is not your dependent.

6. This credit can be worth up to 35 percent of your qualifying costs for care, depending upon your income. When figuring the amount of your credit, you can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals you can claim up to $6,000 of your costs.

7. If your employer provides dependent care benefits, special rules apply. See Form 2441, Child and Dependent Care Expenses for how the rules apply to you.

8. You must include the Social Security number on your tax return for each qualifying individual.

9. You must also include on your tax return the name, address and Social Security number (individuals) or Employer Identification Number (businesses) of your care provider.

10. To claim the credit, attach Form 2441 to your tax return. If you use IRS e-file to prepare and file your return, the software will do this for you.

Take every available deduction and credit you are entitled to. It can make the difference between a refund and taxes due in April. Always check with a tax professional before making any decisions.

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