Tax season is about to start, which means it’s that time of year where you need to be on the lookout for tax documents such as W-2s and 1099s. But what other documents and information do you need to have ready to complete your tax return over the next few months? That precise answer depends on your unique tax situation, but the following guide will provide a good overview of what you might need to have ready when you or your tax preparer files your tax return this year.
Details for Tax Filing this Year
Tax season is here again with the dreaded April 15 deadline fast approaching. Some of the more proactive taxpayers out there have already filed their 2016 tax returns and maybe already have their tax refund checks, too. But for those who haven’t yet done the deed, here are a few pointers about filing your return this year.
What’s Needed to File?
By now, taxpayers should have all the necessary tax documents to file their taxes, such as any 1099 forms for contract work and W-2 forms for payroll work. These forms are usually sent by employers or clients in late January. If you don’t receive these documents, keep in mind it does not relieve you from the responsibility of declaring your income in your tax return. Also, if you already know what your income is (this can often be readily determined by looking at your invoices and pay stubs), you technically don’t need your W-2 or 1099 forms.
When to File?
The deadline to file your federal tax return is the same every year: April 15. An exception to this rule is when April 15 falls on a holiday or weekend. In that case, the tax filing deadline is actually the next business day. So the deadline for filing your 2016 taxes is Monday, April 17, right? Nope. April 17 is the Washington DC Emancipation Day holiday. Therefore, the actual deadline for filing your taxes this year is April 18.
What If I Need More Time to File?
Luckily, the IRS allows taxpayers to obtain an extension by submitting Form 4868 with their tax payment. However, taxpayers should still pay as much of their 2016 tax bill as they can by April 18. This is due to the fact that even though the IRS may grant an extension to file the return, they do not grant an extension to submit the tax payment.
So even if the IRS grants a tax filing extension, the taxpayer will still have to pay interest and late-payment penalties if their entire tax bill isn’t paid by April 18. The tax extension doesn’t sound so advantageous after all, and is all the more reason to get your taxes prepared and filed on time.
Ways to File?
There are two primary methods of filing your federal tax return. The first is the good ol’ fashioned way of mailing it in. If you do this, don’t forget to sign the return. When filing as a married couple, your spouse will need to sign as well. Keep in mind that when mailing in your return, it will often slow down the speed in which you get a tax refund check. On the other hand, it may theoretically decrease the odds of you getting audited, since the IRS must spend more time and effort to examine a paper return versus an electronic return.
The alternative way to file is electronically. It’s usually more accurate and faster with respect to the time it takes to get your tax refund check. By filing electronically, a taxpayer can expect a tax refund check several weeks sooner than if they filed through the mail with a paper return.
Taxpayers have an extra few days to file their taxes this year with a deadline of April 18. By now, taxpayers should be well on their way to preparing and submitting their 2016 tax returns. And if you need more time to file, you can often get an extension. But understand that the extension only applies to filing your return, not actually paying your taxes.
Working for yourself is great. You get to be your own boss, decide how much (or how little) work you want to do and control your own professional destiny. But working for yourself has its price, one of the biggest being the self-employment tax.
What Is Self-Employment?
According to the IRS, you are self-employed if you run a business as a sole proprietor, independent contractor or partnership and make $400 or more. Basically, if you’re your own boss, even in a part-time business, you have self-employment earnings as far the IRS is concerned.
What Exactly Is the Self-Employment Tax?
The self-employment tax is a 15.3% tax on your income that is really a combination of two taxes: Social Security (12.4%) and Medicare (2.9%). Even if you aren’t self-employed, you’re likely still paying these two taxes, but in much lower amounts.
For the most part, for every $100 anyone earns, the IRS gets $15.30 in Social Security and Medicare taxes. If you are a W-2 wage earner, such as someone who works as an employee for an employer who takes your taxes out for you, you only have to pay half that, or $7.65. The remaining $7.65 is paid by your employer.
If you are self-employed, you have no “employer” to pay half of the 15.3% Social Security and Medicare tax bill. As a result, you’re stuck with paying the entire 15.3% of the Social Security and Medicare taxes, instead of the 7.65% if you were a W-2 wage earner.
If you make over a certain amount ($118,500 in 2015), what you pay in self-employment taxes drops a large amount. Anything you make over that amount is subject to only Medicare taxes and not Social Security taxes.
Finally, the self-employment tax rules apply no matter how old the taxpayer is or if the taxpayer is already receiving Medicare and/or Social Security payments.
How Do I Pay Self-Employment Taxes?
If you are subject to the self-employment tax and have an expected end-of-year tax liability of $1,000 or more (after taking all withholdings) you generally have to pay your taxes quarterly. Even if you plan on paying your entire tax liability on April 15th, you must make estimated quarterly tax payments or pay a penalty.
One exception to this quarterly estimate tax payment requirement is when other income tax withholdings amount to 90% or more of your total tax bill. For example, if you make $100,000 per year, but $91,000 comes from a W-2 job and $9,000 comes from self-employment work, you won’t need to make estimated quarterly tax payments. This exception applies even if you will have more than $1,000 in expected end-of-year tax liability.
The Self-Employment Tax Deduction
The self-employment tax isn’t all bad news. The 7.65% in extra taxes you have to pay (compared to a W-2 wage earner) can be taken as a tax deduction. This doesn’t alleviate the entire self-employment tax burden, but it helps.
The self-employment tax isn’t the most complicated tax requirement ever handed down by the IRS, but things can get a little tricky if you have multiple jobs and are really close to the estimated quarterly tax payment threshold. If you’re not sure whether you’re subject to the self-employment tax, are required to make estimated quarterly tax payments or how much those estimated quarterly tax payments should be, you probably want to speak with a tax professional.
The IRS’ official task is to collect taxes as required by the Internal Revenue Code. But because not every taxpayer pays taxes on time or in the correct amount, the IRS effectively becomes a debt collector — and what an effective and powerful debt collector it is.
The IRS has several tools to collect taxes owed. One of its most feared and powerful tools is the tax levy. Tax levies are particularly burdensome because they allow the IRS to take your personal property and assets. Luckily, the IRS can’t go about taking whatever personal assets it wants. It has particular rules about what it can levy and how much it can take.
Tax Levy Basics
A tax levy is the actual taking of property by the IRS in order to pay a tax debt. The two main types of tax levies include wage garnishments and the seizure of personal assets.
A tax levy usually won’t occur unless a tax lien has been placed on the taxpayer’s property first. A tax lien is a security interest taken by the IRS in all of a taxpayer’s property. The purpose of the tax lien is to protect the IRS’ ability to collect the tax debt from a particular taxpayer.
Personal Property Subject to IRS Seizure
The specific types of property the IRS may seize in order to satisfy a tax debt is vast. Examples include paychecks, personal residences (subject to exceptions), vehicles and financial accounts. Basically, almost anything a taxpayer owns can be levied, unless specifically excluded by law. So an easier way to identify which personal assets can be seized by the IRS is to find out what personal assets must be left alone.
Personal Property That Cannot Be Collected by the IRS
Section 6334 of the Internal Revenue Code lists types of property that the IRS may not seize when attempting to recover an unpaid tax debt. These include:
- Essential clothing
- Up to about $7,700 worth of personal effects and furniture
- Up to about $3,800 worth of books or tools necessary for schooling or work
- 85% of a taxpayer’s public assistance, worker’s compensation and unemployment benefits. The IRS may levy these income sources, but only up to 15% of the amount.
- Undelivered mail
- Certain pension and annuity payments
- Wages necessary to pay child support and provide for basic living expenses
Personal vehicles and residences are subject to IRS seizure, but there are limitations and exceptions to this. Additionally, the IRS understands that there’s no point in taking something that might hinder a taxpayer’s ability to pay its tax debt.
For example, if a taxpayer needs his or her car to get to work, the IRS is probably not going to seize the car. Doing so might result in the taxpayer becoming unemployed and therefore the IRS will have a more difficult time collecting the tax debt.
An overarching theme of the IRS’s seizure powers is that it will take as much as it can to collect its tax debt, but it won’t take so much that the taxpayer is either unable to pay the rest of the tax debt or becomes destitute.
The IRS’ public policy considerations and list of exempt property are hardly going to serve as a consolation to anyone facing a tax levy. A taxpayer facing a potential levy is understandably going to be scared and extremely concerned. In order to stop the IRS from taking your personal property, you’ll likely need help from a tax professional.
Not every decision the IRS makes is absolute. In fact, most of the IRS’ most significant conclusions and findings are subject to potential review by a neutral examiner at the taxpayer’s request. However, not every taxpayer who disagrees with the IRS should appeal the decision. But for those that do, the following is a general overview of the appeals process
When and Why to File an Appeal
The following is a sample list of typical IRS decisions that can be appealed:
Any dispute that deals with a legitimate tax issue, such as a legal or factual disagreement, can be appealed. What can’t be appealed are religious, constitutional, political and moral disagreements with the IRS. Also, you can’t file an appeal for the sole reason that you can’t pay the tax debt the IRS believes you owe.
Submitting the Appeal
In order to handle the appeals process, the IRS has set up the Office of Appeals, which is a completely separate and independent office from the IRS. The goal of the Office of Appeals is to resolve tax disputes without resorting to the courts, which can be a costly and drawn out process for both sides.
The appeals process begins after an audit or some other tax decision. Following the decision, the IRS will ask the taxpayer to either accept or appeal its decision within a particular time period, which is usually 30 days. The taxpayer has two potential methods of proceeding with an appeal.
The first method is the Small Case Request appeal. This method is only available where the taxes, penalties and interest at issue for a particular tax year add up to $25,000 or less. When making this request, the taxpayer must explain what the taxpayer disagrees with and the basis for that disagreement.
The second method is the Formal Written Protest appeal, which is required for disputes amounting to more than $25,000. In a Formal Written Protest appeal, the taxpayer must provide the following information or take the following actions:
- The taxpayer’s contact information, such as address and phone number.
- A copy of the letter containing the IRS’ decision for which the taxpayer is appealing.
- Identify the tax years at issue.
- The specific IRS decisions or findings that the taxpayer disagrees with.
- Facts and specific laws that support the taxpayer’s belief that the IRS made an incorrect determination.
- Swear to the following statement: “Under the penalties of perjury, I declare that I examined the facts stated in this protest, including any accompanying documents, and, to the best of my knowledge and belief, they are true, correct, and complete.”
Once the appeal is submitted, the taxpayer should hear back from the Office of Appeals within 90 days, when a conference will be scheduled. These conferences are held before a Settlement or Appeals Officer and usually fairly informal. The taxpayer can have a CPA or attorney represent them if they choose. Occasionally, the appeal can be handled over the phone or by mail.
Following the conference, the Appeals Officer will make his or her decision and try to reach a settlement with the taxpayer. These settlements commonly side with the taxpayer at least to some extent, since the Appeals Officer wants to avoid the taxpayer being unhappy with the results of the appeal and taking the case to trial.
If a settlement can’t be reached and the Appeals Officer sides with the IRS, the taxpayer has the option to further challenge the IRS in a court of law.
The appeals process is not something a taxpayer should decide to do as a knee-jerk reaction to an IRS decision the taxpayer disagrees with. There are many things to consider before initiating the appeals process. For instance, the Appeals Officer may bring up issues that the IRS auditor missed. Also, during appeals process, any interest will continue to accrue. The decision whether to appeal, as well as the appeals process, can be difficult for the typical taxpayer, so professional tax advice is highly recommended.
Your tax return may not be due for another few months, but that doesn’t mean you shouldn’t start working on your end-of-year tax plans. With the calendar year ending soon, there are certain steps you should consider to minimize your tax obligation.
Figure out your tax brackets
One of the first things you need to do is figure out what your tax rate will be for this year and next year. This is important; depending on your tax bracket status, it may be more advantageous to defer certain tax deductions or income to next year, or take them this year.
Defer or accelerate income and tax deductions
Once you know which tax bracket you will be in this year and most likely be in next year, you can decide how you want to time when you use certain deductions and receive certain income. For example, if you think you will be in a higher tax bracket next year, you might want wait to use a deduction until next year and do everything you can to receive all the income possible this year. But if you anticipate being in a lower tax bracket next year, you might want to use the tax deduction now and defer the expected income until the next tax year. Note that if you are able to receive a current year’s income in the following year, such as an end-of-year bonus, you’ll need to confirm this is a normal business practice for your employer.
Take full advantage of your flexible spending account
Also known as a flexible spending arrangement or FSAs, these financial accounts allow an employee to put pre-tax dollars into an account throughout the year, which can then be spent on certain health expenses not otherwise covered by the employee’s health plan. One of the biggest drawbacks of an FSA is that funds contributed, but not used, are forfeited at the end of the calendar year. Recent changes have mitigated this “use-it-or-lose-it” rule somewhat by allowing up to $500 to be carried over into the following calendar year. The changes also allow the employer to provide a grace period of up to 2 ½ months to spend the money.
Make an extra mortgage or state tax payment
By paying that January mortgage payment in December, you can effectively take 13 months worth of deductible mortgage interest for the current year. The same principle can be used for state taxes due early the following year. Instead of making that state tax payment in January, make it in December and claim a bit more in your itemized deductions for the current tax year. But be careful if using this tax strategy: if you are subject to the Alternative Minimum Tax, or AMT, you may not be able to take full advantage of these early payments.
Selling off losing investments can give you tax losses to offset any capital gains during the current tax year. There are a few things to keep in mind. First, you can only use up to $3,000 in losses to offset any gains. Any additional losses can be carried over to the next tax year, though. Second, be aware of the wash-sale rule, which will effectively undo the tax offset if a “substantially identical” security is bought or sold within 30 days of the tax offset sale. Three, do not let your desire to engage in loss-harvesting override your overall investment goals.
These are just a few of the potential end-of-year tax strategies you may want to consider. And not all these tips will be right for everyone. The best thing to do is to consult with your tax professional to see which steps make the most sense and the best way to go about taking full advantage of them.
The United States has a pay-as-you-go system for the collection of income taxes. Most individuals see this concept in action automatically, when their employer withholds taxes from each paycheck. For those who are self-employed or receive a large cash payment from a one-time financial event, there is usually no automatic income tax withholding. But Uncle Sam doesn’t have to wait long to get his money because of the quarterly estimate tax payment requirement.
Government spending constantly goes up, no matter what politicians promise. With so many government programs, pork barrel spending and earmarks, it’s no wonder this country’s debt continues to rise. And exactly how does the government pay for all this? With taxes, whether creating new ones or increasing the rate of existing ones. The following blog discusses some of the strategies available that can help keep the government out of your wallet! Continue reading “Watch Your Wallets!”
Nobody likes paying taxes, but everyone likes being able to reduce the taxes they have to pay. There are several ways you can get a few tax breaks, whether it’s a tax deduction, tax credit or tax exemption. Even if you already utilize a few, you may still be asking yourself if you’re taking full advantage of what’s available. When you prepare your tax return, are there any tax breaks or secrets that you might be missing? The following article will discuss a few tax breaks available to almost anyone that you could be missing out on. Continue reading “Tax Breaks for the Average Person”
Unlike the past few tax seasons, you have a few extra days to file your taxes in 2016. This is because 2016 is a leap year and Emancipation Day, a recognized Washington, D.C. holiday, is on Friday, April 15th. In addition to having until April 18th to file your taxes, the following tips can provide additional help in wrapping up your 2016 tax season.