Posted by Dean Alexander on Mon, Aug 16, 2010
First questions people face when they get married in one year is the filing status. Should we file single, head of household if one of the couple has been filing or even both, married filing jointly or married filing separately? The rule is what is your status at the end of the year? If at December 31 you are married then you can file married filing jointly.
Should people automatically file a joint return? Generally speaking you are better off filing a joint return. There may be other reasons however that may compel them to file differently. The most obvious reason that causes people to file married filing separately (some people erroneously file head of household or single even though they are married) in the existence of an IRS tax problem. One person may owe back taxes. To insulate the partner of the old tax debt they choose to file separately.
What if the couple decided to file jointly? Would they have defenses against the back taxes on the other spouse? There is the injured spouse defense. You basically say that the old tax debt is not yours because it happened before you met your spouse. The injured spouse provides tax relief to help you keep your refund or assets that you may have had before the marriage.
Other household keepings that you may want to remember is notify several authorities of your new status as per IRS Tips:
1. Change your name with SS administration file name change form SS-5. The web is www.socialsecurity.gov @ 800-829-3676
2. IRS address change: file form 8822 @ www.IRS.gov.
3. Notify your employer with the name change.
4. Verify your withholding based on your new combined income and make the withholdings changes with w-4 form
Posted by Dean Alexander on Fri, Jul 30, 2010
In our minds tax audits mean tax problems. Many ask why my return? How did I fall prey to a dreaded tax audit? There are several reasons that cause one's tax returns to be selected for an IRS audit. Let us just say that if we have done everything by the book and we have mitigated all the reasons for the tax audit that we will talk about, our return still may be selected through random selection.
Now let us talk about tax audit reasons other than random selection. Let us start by saying that the amount of income and tax liability may be a reason for an IRS audit. The larger the amounts on the tax return the better the chance for a tax audit. Why? It makes sense from the IRS point of view. The reasons go as follows: we will invest time and money for the IRS agent and we would like to recover our money. The higher the amounts reported (or not report or underreport) on your tax return the more handsome the chance they will recover money from you for their investment.
Let us speak about tax audit reasons that we would like to put them under the banner of self induced tax problems. It is a tax problem that you could have avoided but you either asked for it or mistakenly caused. Arithmetical mistakes on the tax return can cause your return to be selected for a tax audit. So check your math as they always say. Among other reasons are tax exemptions. Many taxpayers claim the wrong exemptions especially divorced taxpayers. Both parents sometimes claim same exemptions or more exemptions than they should.
For self employed people, the favorite items for an IRS audit are excessive car expenses relative to the income; meals and entertainment and the ever favorite office at home raises tax audit flags as well. Schedule C is one of the prominent schedules we see that cause tax problems to taxpayers.
The return can be selected for an IRS audit because you report high income on the schedule C. We recommend to our clients that if their income goes over $100,000 on schedule C, to consider incorporating. The opposite is true about income on schedule C. If you reported too little an amount and claim a lot of expenses, that may be a sure tax audit trigger. Some even deduct substantial expenses with $0 income on Schedule C. That may invoke the issue of hobby losses.
IRS audit can also be caused by taking deductions for expenses that do not suit the activities such as say liquor and beer purchase for an office supply store or say large office supplies expense by a truck driver.
One of the reasons that may cause you a problem and a tax audit is an amended return. This is true especially if you are claiming a large refund. They want to look at this return before they send you say $10,000 that you did not ask for to begin with. So be careful but always remember there is tax resolution to any problem. Next blog we will talk about the IRS audit and Taxpayer Rights
Posted by Dean Alexander on Mon, Jul 19, 2010
The simplest argument for filing taxes in time is that it is the law. You must comply with the law. If you are not a tax protestor, and we hope that you are not (tax protestors usually end up on the wrong side of the bed) then you have no qualms with the legality of filing.
There are many benefits of filing in time besides being in compliance with the law. The most obvious benefit is getting your refund. If you are entitled to a refund and you don’t file, you may lose your refund because you are barred by the statute of limitations when you eventually file. We have seen people losing $7,000 or more of money in some cases that were coming to them and when they filed late they got nothing. Never mind that the IRS will ask you to pay the tax debt even if you don’t file. You guessed it. They file for you and now you owe back taxes (more on that later.)
One of the benefits of filing is that you may be able to wait out the IRS on you tax debt. The law states that the collection statute of limitation is 10 years. If for example you owe taxes and disappeared from the radar of the IRS for ten years, the IRS may have lost the amount of tax you owed forever. In this case you have got yourself a nice tax settlement.
One of the disadvantage of not filing your taxes is that the IRS will file on your behalf. IRS calls that SFR or substitute for return. Needless to say, in preparing your unfiled taxes, the IRS will not look after your best interests. The IRS will assume the worst against you. They will do a return for you as married filing separate even if you are single because filing separately causes you a tax liability higher than the latter. In an SFR, you will not get any deductions for your expenses.
For example, if you sell a house, the tile company will give you a 1099 for the proceeds and sends the IRS a copy of this 1099. The IRS records the total sale price as your income even if you were upside down on the house and they will not record the cost of the house. That is why we have many clients who come to us for $70,000 or even $100,000 of tax liability because of the sale of their residence when in fact they lost money. Unless you file, the tax liability remains on the book. The IRS had one of our clients owing over $250,000 in 2003 because of this exact issue. Guess how much he would have owed? Zero.
Because the amount of taxes owed is usually high you may even have a revenue officer appointed. When you have a revenue officer, that spells bad news. And to make things worse, we do charge more for revenue officers. So, that is another reason that you should file your taxes earlier.
Audits is another reason. If you don’t file, the IRS can select any return regardless how old it is for an audit. On the other hand if file in time and you happen to have a year in the past that you made a lot of income and you think if you get audited on that year you will pay a lot of money, this year cannot be audited after three years. So, here you may have gotten away with murder.
We have seen other benefits to filing your taxes in time that particularly come in handy when you have a bank levy or wage garnishment or even when you want to do an installment agreement or an offer in compromise. If you have unfiled returns, there will been no tax settlement for your tax debt unless you are in compliance. Tax compliance in this instance means filing all your back taxes. If have not filed, that may delay the process of IRS negotiation when you need it most.
Finally the IRS may even look sympethatic on your case if you have been filing on time.
Posted by Dean Alexander on Fri, Jul 16, 2010
The IRS is preparing to provide help to people with tax problems related to the oil spill in the Gulf of Mexico. BP is beginning to issue payments as compensation for lost wages or income, property damage, or physical injury. People receiving these payments may have questions as to whether these payments are subject to taxes or not. If you are benefiting from any of these payments, it might be a good time to foresee any future tax issues. The IRS has announced a Special Assistance Day on Saturday, July 17th from 9 a.m. to 2 p.m. local time at the following Centers in seven different cities:
1110 Montlimar Drive, Mobile, Alabama
651-F West 14th St., Panama City, Florida
7180 9th Ave. North, Pensacola, Florida
2600 Citiplace Centre, Baton Rouge, La.
423 Lafayette St., Houma, La.
1555 Poydras St., New Orleans, La.
11309 Old Highway 49, Gulfport, Miss.
It is good to know that the IRS is willing to provide help to those who are already experiencing a very difficult situation. At the Centers you will have the opportunity to work with IRS employees to provide tax help and resolve any tax issues you may have related to the oil spill. You will be able to ask questions about your specific tax situation and possibly have faster tax resolution to your tax problem. The IRS has also opened a toll-free line for people with tax problems due to the situation in the Gulf: 866-562-5227. You can call this number on weekdays from 7 a.m. to 10 p.m. and also on Saturday, July 17th from 9 to 2 CT.
If you have or anticipate a difficult tax problem related to the Gulf disaster and you need tax help, don’t hesitate to take advantage of these opportunities to resolve or foresee any tax issues. It is better to take care of things before they become more complicated.
Basically, it is anticipated the tax problems will evolve around three issues:
1. Property damage tax issues
2. Payments in lieu of lost wages
3. Payments for sufferings
First if you get compensated for the property damage you incurred the tax problem that you may be facing is the following question: do I recognize gain or loss on payments of damage? The answer depends on what is called the tax basis in the property. For starters think of tax basis as the cost of the property. If you are compensated more than your cost then you have a taxable income.
Now let us instead of saying cost we use the term “basis” The term tax basis means simply modified cost. If you benefited from having the property and depreciated the property then the IRS will not use the cost but the cost minus the depreciation that you took in prior years and that is what they call basis.
The second issue that inevitably will come about as a result to the spill in the Gulf is compensation for lost income. This compensation is taxable because it is considered as wages that would have been taxable in way had it been earned without the Gulf spill.
Third type of compensation which we may encounter and you may need tax help on is the compensation damage as a result to some physical damage or mental anguish. This type is not taxable compensation.
Posted by Brian Rotolo on Fri, Feb 05, 2010
The Schedule A, also known as the long form.
We hear about it from friends and family, especially during tax season. You know, from people who tell you about what you can and can’t write off as a tax deduction on your personal income tax return. We all want the tax help and advice to maximize our tax deductions and reduce our taxes. To help out, I’d like to clear up some of the misconceptions floating around and make it clear to you what items you can deduct. First I’ll give you a basic idea of what the Schedule A Form is and when to use it, and then, of course, some of the common write offs you can take.
Most individuals fill out a Form 1040 when preparing their taxes. On this form, Line 40 is where you can do one of two things: either take a standard tax deduction or put the total tax amount from an attached Schedule A. How do you know which amount to use? The only way to know is to fill out a Schedule A and then compare the total you have there to your standard deduction.
The standard deduction amount varies depending on your filing status and the tax year: in 2008 married filing jointly or qualifying widow(er) it was $10,900, head of household was $8,000, and married filing separately or single filer was $5,450. If the total deduction shown on your Schedule A is less than this amount, you will pay less in taxes if you use your standard deduction. In other words, use the standard deduction!
Generally speaking, those who own homes and pay large mortgages, those who have large medical bills, or those who incur a lot of business expenses not covered by their employer are the typical taxpayers I see who end up using a Schedule A. For many other people, however, the standard deduction is larger and thus should be used. The following are some common deductions and rules you should know as you fill out your Schedule A:
- You can deduct home mortgage loan interest on your main and second home. Only the person who is liable for the loan can make this deduction, even if someone else is actually paying the mortgage. It also must be a home, as only interest on a land purchase isn’t deductible.
- Equity line of credit loan interest is deductible.
- Personal property taxes, like for a home, are deductible if they are charged on a yearly basis and are based only on the value of the personal property.
- Transfer taxes are NOT deductible as real estate taxes.
- Qualified medical expenses in excess of 7.5% of your adjusted gross income (AGI) are deductible. A few specific points I see often: lodging at a hotel during a surgery is deductible at $50 per night per person, the cost of home improvements for medical reasons is deductible minus the value increase in your home, and general health improvements (like a gym membership) are NOT deductible.
- Medical insurance premiums are deductible and are not subject to the 7.5% rule.
- Medicare A (covered under Social Security) is NOT deductible on Schedule A as a medical expense.
- State and local income tax is deductible.
- Qualified business expenses in excess of 2% of your AGI are generally deductible. Meals while on business are only deductible 50%.
- Property losses can be deducted up to the portion not covered by insurance.
Disaster losses in a Presidentially-declared disaster zone are also deductible.
- Charity contributions are deductible, but are limited to a maximum of 50% of your AGI.
There are many specifics when it comes to donations, so I advised you speak with a tax professional before you donate to make sure you document your gift correctly. One note: if you donate a car, you can deduct the smaller of the free market value of the car on the date of transfer or the gross proceeds from the sale of the car by the organization you donated to.
- Margin interest is deductible.
- Gambling losses are deductible only up to the amount of gambling winnings.
- Personal bad debts are not deductible on the Schedule A because they are considered short term capital losses, and as such are limited to $3000 per year. Any balance can be carried forward.