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e 2017 tax filing season officially begins this week as the IRS starts accepting tax returns. There are many reasons to consider filing your tax return early. Here are some of the most common:
Get your refund. There’s no reason to let the government hold your funds interest-free, so file early and get your refund as soon as possible. While new legislation delays receiving refunds for tax returns claiming The Earned Income Credit and the Additional Child Tax Credit until after February 15th, the sooner your tax return is in the queue, the sooner you will receive your refund.
Minimize your tax identity fraud risk. Once you file your tax return the window of opportunity for tax identity thieves closes. Tax identity thieves work early in the tax-filing season because your paycheck’s tax withholdings are still in the hands of the IRS. If they can file a tax return before you do, they may be able to steal these withholdings.
Avoid a dependent dispute. One of the most common reasons an e-file is rejected is when you submit a dependent’s Social Security number that has already been used by someone else. If you think there is a chance an ex-spouse may do this, you should file as early as possible.
Deliver your return to someone who needs it. If you are planning to buy a house or anticipate any other transaction that will require proof of income you may wish to file early. This is especially important if you are self-employed. You can then make your filed tax return available to your bank or other financial institution.
Beat the rush. As the tax filing deadline approaches, the ability to get help becomes more difficult. So get your documentation together and schedule a time to get your tax return filed. It can be a relief to have this annual task in the rearview mirror.
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More than 90% of individual tax returns are now filed electronically, and usually the process goes smoothly. However, when an e-filed tax return is rejected, e-filing can become more complicated.
Common causes for rejected tax returns
Simple filing errors. Most rejections are caused by things such as misspellings, typos on Social Security numbers, or missing forms. When an e-filed tax return is rejected the IRS e-filing system sends back reject codes. These codes are specific to lines on the tax return and descriptions of the problem are readily available. Most of these errors can easily be corrected.
Dependent Errors. This error occurs when someone else has claimed a dependent on a previously filed tax return. This often occurs with divorced and unmarried couples each claiming the same child on their tax return. The IRS does not take sides in this situation, they simply take the earlier filed return and reject any subsequent returns.
Identity Fraud. Someone else has already filed a tax return using your Social Security number.
What to do
Most errors are simple, are easily corrected, and your tax return is resubmitted for e-filing without much additional delay. However there are two instances that require your immediate attention. When either of these occur, you will need to file your tax return via the mail and work to correct the error for future tax filings.
- Dependent Errors. A dependent can only be claimed on one tax return. If a dependent is already claimed on another individual’s tax return you will need to provide proof that the dependent belongs on your return. If this happens, contact the other party who claimed your dependent and ask them to amend their return. Let them know that you’re filing your tax return correctly claiming the dependent. Your filing will target both tax returns for a potential IRS audit. This audit risk often is enough motivation to correct the problem.
- Identity Fraud. Criminals using stolen information submit tax returns electronically in an effort to steal your tax withholdings. Fraudulently claimed refunds are then automatically deposited into thieves’ bank accounts. Unfortunately, you may discover the theft when your e-filed tax return is rejected. If this happens to you:
⇒ File a paper tax return.
⇒ Include form 14039: Identity Theft Affidavit with your tax return.
⇒ Confirm your identity using the IRS Identity Verification Service or by calling the IRS.
⇒ Mail your tax return using Certified Mail with Return Receipt Requested so you are certain of timely delivery.
⇒ Immediately take steps to protect your financial information. The following link will take you to the Federal Trade Commission’s identity theft area for recommended steps to protect yourself.
FTC Identity Theft Assistance
While solving the cause for a rejected e-filed tax return can be a headache, the sooner the problem is addressed the sooner your refund can be received.
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As relevant tax records start filling mailboxes, how can you make sure your tax preparation goes smoothly and efficiently this year? Here are some tips.
2. Time to sort. Now that everything is all together, the best practice is to sort your information into the same buckets used on your tax return. At a minimum, sort the information into the primary categories below. If you have a lot of one category, sort that stack into the following sub-categories.
3. “Not sure” bucket. There may be things you receive that you are not confident about needing for tax filing purposes. These items should be gathered in one place for review.
4. Sum it up. Once the information has been categorized, create a summary of the information. This summary can be a printed copy of an organizer, or it could be a simple recap you create.
5. Is something missing? Pull out last year’s tax return and create a list of things you needed last year. Use this as a checklist against this year’s information. While this process will not identify new items, it will assist in determining missing elements that qualified in prior years.
6. Finalize required documentation. Certain deductions need substantiation and logs to qualify your expense. Common areas that need this are business mileage, charitable mileage, medical mileage, moving mileage, non-cash charitable contributions, and certain business expenses. These logs should be maintained throughout the year, but now is a good time to make sure they are complete and ready to go for tax filing.
It is very easy to overlook something given the lengthy list of taxable income items, deductions, and credits. By following these tips, you can significantly reduce that risk.
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Normal due date: Friday, January 16, 2017
If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The fourth quarter due date is now here.
Remember you are required to withhold at least 90% of your current tax obligation or 100%* of last year’s federal tax obligation. A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment might be necessary. Here are some other things to consider:
Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. While a quick payment at the end of the year may not help avoid the underpayment penalty, it can help reduce the amount of the penalty.
W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may wish to change your W-2 withholdings to address this problem in the future.
Self-employed. Remember to account for the need to pay your Social Security and Medicare taxes as well. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter to pay your estimated taxes.
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Child Custody Agreement and Taxes
A child custody agreement can have serious implications on your tax filing and your taxes overall. This issue should be addressed with your attorney or with your accountant while you are going through the process of negotiating or litigating child custody or a divorce agreement. Waiting until after you have finalized a child custody agreement to investigate the tax impact is not advisable.
State law on child custody does not dictate who gets the tax deductions. If your child custody agreement is entirely silent on this issue, the parent with primary residential or sole custody will have all of the tax benefits available through the children. That party will be able to claim the children as deductions, and so forth. This can be a significant issue. There are parents who simply assume that if they are paying thousands of dollars per year in support, they will be able to take the children as deductions. Not so. This is incredibly important when you consider that all child support payments are not tax deductible to the payor and they are not taxable to the recipient parent.
Thus, when negotiating your child custody agreement, you must address the issue of how custody will be structured and who will receive the tax benefits. This negotiation should be a part of an overall financial scheme that encompasses a consideration of all issues, including child custody, child support, property, alimony, and tax impact.
The ability to claim head of household instead of married filing separate or even filing single can be incredibly important to your overall tax scheme. You can claim head of household if you have your children for more than 50% of the time. Thus, a head of household tax filing should be a part of the overall negating outline in a divorce or separation situation. A child custody agreement that is silent on this issue is really not a well negotiated or written agreement.
Your child custody agreement can address this issue in a number of ways. If your child custody agreement provides for joint shared custody, it must state who has the children for 50% of the time. If you have two children, you can divide that up so that each parent has the possibility of filing for head of household. If you simply have joint custody and one parent has residential custody, you can still provide a head of household deduction to the other parent by wording the agreement in a way that allows for that filing.
There are other tax benefits available to parents that have to be considered when negotiating a child custody agreement. Many or most of those tax benefits are variable depending upon your income level ad whether or not you can claim the child or children as deductions. If you are really thinking through your child custody agreement, you will negotiate all of these benefits. The objective should be to maximize all available benefits for both parties, thereby providing an overall highly advantageous tax impact for your child custody agreement.
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]]>What is a 1099 MISC?
Generally speaking, the IRS requires you to report certain payments you made during the year to independent contractors. The 1099-MISC form is a single page on which you report to total amount you paid to the independent contractor during 2016.
Form 1099-MISC
The 1099-MISC forms must be issued to any person you paid at least $600 in rents, services or other income payments. For example, if you hired a contractor to renovate a room in your home and paid them $5,000, a 1099-MISC filing would be required. As with practically any IRS filing, there are additional situations that require a 1099 filing. Any payments to attorneys must be reported regardless of the amount. Royalties totaling over $10 also must be reported. Generally, you are not required to report payments to a corporation.
When and What Must Be Filed?
The 1099-MISC form is a multi-layered carbon form, so make sure the information you provide appears clearly on all of the copies. Once you fill out the form, provide Copy B to the person you are reporting to the IRS by January 31, 2017.
Copy A of the 1099-MISC form is intended for the IRS. You must file it by February 28, 2017 if you are sending the form by mail. If you prefer to file electronically, you have until March 31, 2017.
The IRS has made a major effort to cut down on red tape, but you’ll still find it with 1099-MISC filings. In addition to filing the 1099 with the IRS, you must also file a 1096 form. The 1096 form is the “Annual Summary and Transmittal of U.S. Information Returns” form. It is one page and extremely easy to fill out.
Although the IRS has an excellent web site, you can’t download 1099 forms off of it. The official forms are still multi-layered carbon paper, which means you need to get a physical copy. The IRS should send you the forms in the mail. If they don’t, you can order them off the IRS site or call the IRS to have them sent to you. If all else fails, you can usually find the forms at major post office and public library locations. If you fail to file 1099s, the IRS will penalize you $50 per 1099.
More than a few people have grumbled about filling out 1099s so early in the year, but doing so has indirect benefits. You are forced to start organizing your records for 2016.
Written by Cozette M. White
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]]>Pursuant to relevant provisions of the tax code, you can take significant deductions if you donate money or goods to a qualified charity. A qualified charity is one that is registered with the IRS as a 501(c)3 entity. The 501 designation refers to the relevant section of the tax code.
Importantly, not all charitable organizations are qualified with the IRS. You can go to the IRS web site and search through a list to see if a particular group is included. If they are not, red flags should go be raised.
Before claiming your deduction for donations, there are a couple of things to keep in mind:
- Politics – You may feel strongly about certain political ideologies, issues or candidates. You can contribute to the causes, but you can’t deduct the contributions as charitable giving.
- You can only deduct contributions actually made for the year in question. If you forgot to claim donations on your tax return for the 2015 year, you cannot claim them on a 2016 return. Instead, you should go back and amend the 2015 return.
- If you make a contribution for a good or service, you can only deduct the amount you contribute which is in excess of the fair market value of the good or service. For instance, many charitable groups will hold auctions to raise money. If your winning bid for a two night hotel stay is $800, you can claim a deduction for the bid amount minus the normal cost. You cannot just write off $800.
- In general, donations of stock or property should assigned the fair market value, not an arbitrary figure based on your opinion. Big ticket items should be supported with an appraisal.
- The rules for donating automobiles have changed. The charitable group should have sent you correspondence regarding the amount it was able to sell the vehicle for. This is the amount you can deduct, not the blue book amount previously allowed. If the charity has not sent you anything, call them to get written confirmation. They know it has to be done under new IRS regulations.
Donating to charities is a positive moral step. Make sure to claim your deductions to reap savings on your taxes.
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]]>The post Automobile Tax Expenses appeared first on Dr. Cozette M. White.
]]>The powers that be have historically written sections into the tax code promoting business activities. One of the traditional write-offs has always been the expenses associated with using a vehicle for business purposes.
The simplest automobile tax expense situation is one in which a vehicle is used entirely for business. For example, if you have a van used for a delivery service and nothing personal, all expenses associated with the van can be written off. This is known as the exclusive use situation. For many small businesses, however, a vehicle will be used for both personal and business reasons.
Where you use a vehicle for both personal and business reasons, you can only deduct the automobile expenses associated with the business use. Keep in mind that drivin
g to and from work is not considered business mileage, while driving from an office to meet a client is considered business mileage.
There are two methods for determining deductible automobile tax expenses. The first is a simple calculation known as the standard mileage deduction. The second is the actual expenses method. You can choose whichever deduction provides you with the biggest deduction unless you lease the car. With a lease, you must use the standard mileage deduction.
The standard mileage rate deduction is a calculation wherein you multiply your total business mileage for the year by a figure provided by the IRS. For the 2016, the figure provided by the IRS is 54 cents per mile. The IRS has not yet released the standard mileage rates for 2017 yet. The rates are typically updated in December for the following year. So we expect the IRS to release the standard mileage rates for 2017 in December of 2016.
The actual cost expense option is exactly what it sounds like. It is the actual cost associated with using the vehicle for tax purposes for a particular tax year. Automobile tax expenses will include gas, tires, repairs, oil changes, registration costs, licensing, insurance and so on. In many cases, the actual expense deduction will end up being larger than the standard mileage deduction.
Regardless of the method you choose, you must document the automobile tax expenses. This means keeping a mileage book and receipts of anything you intend to deduct.
For full details on mileage rates visit https://www.irs.gov/tax-professionals/standard-mileage-rates/.
Written by Cozette M. White
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