Five Things to Know about Estimated Taxes and Withholding

Five Things to Know about

Estimated Taxes and Withholding

(IRS Tax Tip 2017-70)

With 10 million taxpayers a year facing estimated tax penalties, the IRS offers some simple tips to help prevent a surprise at tax time.

People pay taxes on income through withholding on their paycheck or through estimated tax payments. Taxpayers who pay enough tax throughout the year can avoid a large tax bill and penalties when they file their return.

Taxpayers should make estimated tax payments if:

  • The tax withheld from their income does not cover their tax for the year.
  • They have income without withholdings. Some examples are interest, dividends, alimony, self-employment income, capital gains, prizes or awards.

Here are five actions taxpayers can take to avoid a large bill and estimated tax penalties when they file their return. They can:

  • Use Form 1040-ES. Individuals, sole proprietors, partners and S corporation shareholders can use  this form to figure estimated tax. This form helps someone calculate their expected income, taxes, deductions and credits for the year. They can then figure their estimated tax payments.  
  • Use the Withholding Calculator on IRS.gov. This tool helps users figure how much money their employer should withhold from their pay so they don’t have too much or too little tax withheld. The results from the calculator can also help them fill out their Form W-4. Taxpayers whose income isn’t paid evenly throughout the year, can check Publication 505 instead of the calculator.  
  • Have more tax withheld. Taxpayers with a regular paycheck can have more tax withheld from it. To do this, they must fill out a new Form W-4 and give it to their employer. This is a good option for taxpayers who participate in a sharing economy activity as a side job or part-time business.  
  • Use estimated payments to pay other taxes. Self-employed individuals can make estimated tax payments to pay both income tax and self-employment tax. Self-employment tax includes Social Security and Medicare.  
  • Use Form W-4P. Generally, pension and annuity plans withhold tax from retirees’ payments. Recipients of these payments can adjust their withholding using Form W-4P and give it to their payer.

Taxpayers Should Be Wary of Unsolicited Calls from the IRS

Taxpayers Should Be Wary of

Unsolicited Calls from the IRS

(IRS Tax Tip 2017-53)

Unsolicited Calls from the IRS

Taxpayers who get an unexpected or unsolicited phone call from the IRS should be wary – it’s probably a scam. Phone calls continue to be one of the most common ways that thieves try to get taxpayers to provide personal information. These scammers then use that information to gain access to the victim’s bank or other account. 

When a taxpayer answers the phone, it might be a recording or an actual person claiming to be from the IRS. Sometimes the scammer tells the taxpayer they owe money and must pay right away. They might also say the person has a refund waiting, and then they ask for bank account information over the phone.

Taxpayers should not take the bait and fall for this trick. Here are several tips that will help taxpayers avoid becoming a scam victim.

The real IRS will not:

  • Call to demand immediate payment
  • Call someone if they owe taxes without first sending a bill in the mail
  • Demand tax payment and not allow the taxpayer to question or appeal the amount owed
  • Require that someone pay their taxes a certain way, such as with a prepaid debit card
  • Ask for credit or debit card numbers over the phone
  • Threaten to bring in local police or other agencies to arrest a taxpayer who doesn’t pay
  • Threaten a lawsuit

Taxpayers who don’t owe taxes or who have no reason to think they do should follow these steps:

  • Use the Treasury Inspector General for Tax Administration’s IRS Impersonation Scam Reporting web page to report the incident.
  • Report it to the Federal Trade Commission with the FTC Complaint Assistant on FTC.gov. 
  • Taxpayers who think they might actually owe taxes should follow these steps:
  • Ask for a call back number and an employee badge number.
  • Call the IRS at 1-800-829-1040.

Every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are the Taxpayer Bill of Rights.

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How to Protect Yourself from the Equifax Data Breach

How to Protect Yourself from the Equifax Data Breach

The massive Equifax breach means consumers need to be on guard against data thieves. The credit-rating company hack earlier this year left approximately 143 million people’s personal information exposed and vulnerable. Here are the steps you take to help protect yourself in the wake of this event.

1)      Determine the exposure of your information: Go to Equifax”s website here and follow the instructions provided. You’ll need your Social Security number handy to complete the check and to tell if you”ve been impacted by the breach.

2)      Enroll for free credit monitoring: Regardless of exposure, consumers who have information under Equifax are entitled to free credit monitoring for one year, along with other monitoring and protective services. You can learn more about what is available here.

3)      Monitor your credit reports and accounts for unusual activity: Equifax, Experian and TransUnion, the three major credit reporting companies, are required to supply you with a credit report free of charge once every 12 months. Go to AnnualCreditReport.com and request them. Once you have the reports, monitor them to ensure there are no unauthorized accounts, incorrect personal information or credit inquiries you didn’t initiate. These are signs of fraud and you should follow up on them to ensure you weren’t the victim of identity theft.

4)      Consider implementing a credit freeze: If you see suspicious activity or are highly concerned, you can place a credit freeze to help deter an identity thief from opening new accounts in your name. Visit the consumer information section of the Federal Trade Commission website to learn more about credit freezes and how to activate one.

5)      Set up fraud alerts: Fraud alerts require potential creditors to verify your identity before they can open an account, issue a new card or increase a credit limit. Remember that fraud alerts won’t necessarily prevent identity theft, but they will make it much harder for someone with your personal information to use it.

 

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Benefits of Delaying Retirement Number Many

Benefits of Delaying Retirement

Traditionally, retirement was short and peaceful. People worked jobs that were hard on the body – such as farming, manufacturing, tradesmen or railroad workers. If you made it to retirement, you were relieved to have the chance to wind down your days in restful repose.

That all changed in the latter part of the 20th century. Retirees began to take advantage of affordable travel opportunities enabled by cars that could drive great distances and highways that could accommodate them, as well as regional intracontinental airlines. In the 1980s, exercise became a popular pastime and retirees could be found at fitness clubs, aerobics classes and racquetball courts. There was a sweet spot in time when retirement was short enough not to outlive savings and retirees were healthy enough to enjoy an active leisure life.

But a lot of things have changed over the past 30 years. More jobs are automated and life expectancy rates, especially for people who reach age 65, are longer than ever. By middle age, it is common to have developed one or more chronic conditions, making a long retirement a less-than-healthy one. Furthermore, we experienced a pretty severe recession and slow economic recovery, when many pre-retirees had to dig into their savings just to stay above water.

Another area that has changed is the transition from employer-sponsored pensions to 401(k) plans. This has fostered a different way of looking at retirement. Back when many workers had pensions, all they had to do was accumulate enough credits and they could retire with a guaranteed stream of income for life. That gave people something to look forward to. Now, with self-directed retirement plans, workers know that the longer they work the more they can save and the longer their investments have time to grow – which actually creates an incentive to work longer. Another reason people tend to work until at least age 65 is so they don’t have to pay for their own healthcare insurance, for which premiums have grown exponentially over the past 15 years.

In addition, the longer we earn an income the longer we can delay drawing Social Security benefits. Once you start taking a benefit, that payout level remains permanent throughout your life. However, the longer you wait, the higher the payout. In fact, people who delay to age 70 can take advantage of Delayed Retirement Credits, which increase their level of payout 5.5 percent to 8 percent a year past full retirement age.

Now that people are living longer, many are healthy enough to continue working longer as well. Plenty of employees want to continue working not only for the money, but for social interaction and intellectual engagement. When retirement was 10 years or less, that seemed like enough time to wind down and relax. But with today’s workers facing 30 years or more in retirement, the prospect of not having a regular place to go, people to see, and work to do for a few decades isn’t quite as appealing.

However, what if you hate your job and can’t imagine staying on past traditional retirement age? A recent study found that people who changed jobs in their 50s were more likely to work longer. In some scenarios, using well-earned experience can translate into a more rewarding job opportunity. Consider that even if you don’t earn more money, a lateral move could still yield higher financial rewards if you enjoy the new job and want to continue working there indefinitely.

Some retirees decide to go back to work because they’ve had a bit of fun but find they miss the day-to-day routine of work and having a broader network of interpersonal relationships. In fact, they often find their experience and expertise was sorely missed, and in some situations, are more valued by their colleagues. This might not happen in all cases, but the lure of renewing friendships, professional appreciation and additional income offer compelling reasons to come out of retirement.

 

Healthcare Reform Update

Healthcare Reform Update

The Affordable Care Act (ACA) – also known as Obamacare – was not the perfect solution to the nation’s need for affordable healthcare, but it did increase the availability of quality, affordable healthcare for small businesses. Companies that had struggled for years – not only to find affordable health insurance for their workers but also to negotiate double-digit premium increases every year – were relieved to have choices and manageable premium rate increases.  Following Trump’s inauguration, Republican attempts to repeal the ACA without providing an alternative solution recreated the nightmare for many small firms. The administration’s ultimate failure to kill Obamacare ended up being a relief for many entrepreneurs and small business owners, but many issues remain unresolved. Healthcare Reform.

Business owners see the need for a bipartisan effort to develop realistic and affordable solutions, which would enable the small business sector to thrive and continue to fuel our nation’s economic growth. Here are some of the concerns that leaders have identified:

  • A recent report from the Congressional Budget Office on the fiscal impact of the Federal government yanking the cost-sharing subsidies that support the ACA marketplaces (a revision that would most likely occur if Republicans continue to gut the ACA) suggests that insurance premiums for small businesses would increase an average of 20 percent next year growing to a 25 percent increase by 2020. Although the Federal government is required by current laws to pay these subsidies, President Trump has indicated he wants to stop these subsidies by any means possible as part of his mission to dismantle the ACA. The CBO has calculated that the potential economic impact on the federal deficit could be as much as $194 billion, because a move like this would require consumers to obtain additional tax credits to offset their premium payments.
  • The elimination of cost-sharing subsidies would likely lead many insurance companies to exit the individual insurance market, and could disrupt the health insurance marketplace and leave small business owners with limited access to affordable health insurance options.
  • Small business advocates oppose the introduction of any measures that would result in separate risk pools for the healthy and the sick, and want to see measures to encourage businesses to establish association health plans.
  • Sector leaders want to see steps taken to expand Medicaid. ACA already had provided coverage to an additional 14 million previously uninsured Americans – a total that includes an estimated 2 million small business employees.
  • Entrepreneurs want to see healthcare tax equity measures in place for the self-employed to allow them to deduct healthcare expenses from FICA tax obligations.

The small business segment is hailed as the champion of job-creation in the United States. If it is to continue in this vital role, lawmakers must expand efforts to do more to reform healthcare insurance.

Job Search Expenses Can be Tax Deductible

Job Search Expenses

Can be Tax Deductible

(IRS Tax Tip 2017-24)

Taxpayers who are looking for a new job that is in the same line of work may be able to deduct some job-hunting expenses on their federal income tax return, even if they don’t get a new job.

Here are some important facts to know about deducting costs related to job searches:

  1. Same Occupation. Expenses are tax deductible when the job search is in a taxpayer’s current line of work. 
  2. Résumé Costs. Costs associated in preparing and mailing a résumé are tax deductible.
  3. Travel Expenses. Travel costs to look for a new job are deductible. Expenses including transportation, meals and lodging are deductible if the trip is mainly to look for a new job. Some costs are still deductible even if looking for a job is not the main purpose of the trip.
  4. Placement Agency. Job placement or employment agency fees are deductible.
  5. Reimbursed Costs. If an employer or other party reimburses search related expenses, like agency fees, they are not deductible.
  6. Schedule A. Report job search expenses on Schedule A of a 1040 tax return and claim them as miscellaneous deductions. The total miscellaneous deductions cannot be more than two percent of adjusted gross income.

Taxpayers can’t deduct these expenses if they:

  • Are looking for a job in a new occupation,
  • Had a substantial break between the ending of their last job and looking for a new one, or
  • Are looking for a job for the first time.

Divorce or Separation May Affect Taxes

Divorce Taxes

(IRS Tax Tip 2017-23)

Taxpayers who are divorcing or recently divorced need to consider the impact divorce or separation may have on their taxes. Alimony payments paid under a divorce or separation instrument are deductible by the payer, and the recipient must include it in income. Name or address changes and individual retirement account deductions are other items to consider.

IRS.gov has resources that can help along with these key tax tips:

  • Child Support Payments are not Alimony.  Child support payments are neither deductible nor taxable income for either parent.
  • Deduct Alimony Paid. Taxpayers can deduct alimony paid under a divorce or separation decree, whether or not they itemize deductions on their return. Taxpayers must file Form 1040; enter the amount of alimony paid and their former spouse’s Social Security number or Individual Taxpayer Identification Number.
  • Report Alimony Received. Taxpayers should report alimony received as income on Form 1040 in the year received. Alimony is not subject to tax withholding so it may be necessary to increase the tax paid during the year to avoid a penalty. To do this, it is possible to make estimated tax payments or increase the amount of tax withheld from wages.
  • IRA Considerations. A final decree of divorce or separate maintenance agreement by the end of the tax year means taxpayers can’t deduct contributions made to a former spouse’s traditional IRA. They can only deduct contributions made to their own traditional IRA. For more information about IRAs, see Publications 590-A and 590-B.
  • Report Name Changes.  Notify the Social Security Administration (SSA) of any name changes after a divorce. Go to SSA.gov for more information. The name on a tax return must match SSA records. A name mismatch can cause problems in the processing of a return and may delay a refund.

For more on this topic, see IRS Publication 504, Divorced or Separated Individuals.

Five Tax Tips When Starting Your Own Business

Five Tax Tips When Starting Your Own Business

 

(IRS Tax Tip 2017-18)

Starting Your Own BusinessNew business owners may find the following five IRS tax tips helpful. These tips are the very first tax issues you need to consider as you organize your company for tax reporting:

1. Business Structure An early choice to make is to decide on the type of structure for the business. The most common types are sole proprietor, partnership and corporation. The type of business chosen will determine which tax forms to file.

2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax a business pays depends on the type of business structure set up. Taxpayers may need to make estimated tax payments. If so, use either IRS Direct Pay or estimated tax payment vouchers to make them. 

3. Employer Identification Number (EIN) Most businesses are required to need to get an EIN for federal tax purposes. You can either complete form SS-4 and mail the application to the IRS or apply for and EIN online.

4. Accounting Method.  An accounting method is a set of rules used to determine when to report income and expenses. Taxpayers must use a consistent method. The two most common are the cash and accrual methods:

a. Under the cash method, taxpayers normally report income and deduct expenses in the year that they receive or pay them.

b. Under the accrual method, taxpayers generally report income and deduct expenses in the year that they earn or incur them. This is true even if they get the income or pay the expense in a later year. (Please note that certain types of business are required to use the accrual method.  For example, most businesses with inventory can only use the accrual method of accounting for reporting to the IRS.)

8 Things that Could Trigger an IRS Business Audit

8 Things that Could Trigger a IRS Business Audit

IRS Business Audit

Whether you’re doing taxes for your own business or a tax professional prepares your business return, the small – but real – possibility exists for an audit.

Understanding the chances of an audit and what the Internal Revenue Service may pay particular attention to can help you and your taxpayer during an audit, if and when one occurs. What are some common triggers that might lead to an audit by the IRS?

Running a Home-Based Business

Operating a business from one’s home is becoming more and more common with high-speed Internet. However, the IRS is scrutinizing just how much of a home is actually used for a home office. Per IRS Publication 587, someone claiming a den or single room of their house will be more likely to have the deduction approved versus claiming their entire home. Similarly, the sole room or workspace must be used exclusively for one’s business, not for family entertaining or personal storage.   

Reporting Business Losses

It is normal and often expected for a business to have losses during the first few years. However, if losses are still reported years after the business’ incorporation, the IRS might take a second look.    

Higher Income, Higher Audit Chances

On average, the chances of an individual audited by the IRS is about 1 percent. However, the more income reported, the greater the likelihood of an audit. Tax returns showing incomes of $200,000 and more have an increased chance of an audit, about one in every 30. Filers making $1 million or more have an even greater chance of an audit – about 11 percent.

Lopsided and Unsubstantiated Charitable Deductions

Donating and not substantiating a high percentage of one’s income might raise a red flag with the IRS. Giving away half of one’s income, not appraising a car or similar valuable donation or forgetting to include IRS Form 8283 might have the IRS requesting an audit.

Major Currency Withdrawals and Deposits

Businesses that make deposits or withdrawals of $10,000 or more may trigger an IRS audit. The IRS gets countless reports of these types of withdrawals every day, and they will naturally pique the interest for an audit.

Medical Bills  

Bills from medical problems might be deducted if they meet a certain threshold. If medical bills add up to more than 10 percent of a filer’s adjusted gross income and they are younger than 65, they might be deductible. However, gym membership fees, nonprescription medications and medical procedures for aesthetic purposes only do not qualify under the rules as medical expenses. 

Partially Completed Tax Returns

Whether it’s a Social Security number, a signature or a 1099 Form not submitted, the IRS’ system and auditors often flag such returns. And sometimes computer or data entry mistakes result in an audit to ensure there are no other errors in the tax return.

Tally Up and Include All 1099s

Staying organized with all types of 1099s will help a tax return go smoother, reducing the chances of accidentally forgetting a 1099 and potentially triggering an audit. Whether it’s a 1099-MISC documenting income earned from self-employment, a 1099-INT for earned interest, a 1099-G documenting an income tax refund or another type of 1099, ensuring all necessary 1099s are included will ensure the IRS’ system is in agreement with the supplied 1099s.

The IRS can still choose to audit a business’ tax returns regardless of the circumstances. However, staying organized, following IRS regulations and maintaining one’s own records will help reduce the number of errors – which will make it a much smoother process for all involved during tax time.

Tax Tips for Taxpayers Traveling for Charity

Tax Tips for Taxpayers Traveling for Charity

(IRS Tax Tip 2017-12)

During the summer, some taxpayers may travel because of their involvement with a qualified charity. These traveling taxpayers may be able to lower their taxes.

Here are some tax tips for taxpayers to use when deducting charity-related travel expenses:

  • Qualified Charities.  For a taxpayer to deduct costs, they must volunteer for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are generally qualified, and do not need to apply to the IRS. A taxpayer should ask the group about its status before they donate. Taxpayers can also use the Select Check tool on IRS.gov to check a group’s status.
  • Out-of-Pocket Expenses.  A taxpayer may be able to deduct some of their costs including travel. These out-of-pocket expenses must be necessary while the taxpayer is away from home. All costs must be:
    • Unreimbursed,
    • Directly connected with the services,
    • Expenses the taxpayer had only because of the services the taxpayer gave, and
    • Not personal, living or family expenses.
  • Genuine and Substantial Duty.  The charity work the taxpayer is involved with has to be real and substantial throughout the trip. The taxpayer can’t deduct expenses if they only have nominal duties or do not have any duties for significant parts of the trip.
  • Value of Time or Service.  A taxpayer can’t deduct the value of their time or services that they give to charity. This includes income lost while the taxpayer serves as an unpaid volunteer for a qualified charity.
  • Travel Expenses a Taxpayer Can Deduct.  The types of expenses a taxpayer may be able to deduct include:
    • Air, rail and bus transportation,
    • Car expenses,
    • Lodging costs,
    • Cost of meals, and
    • Taxi or other transportation costs between the airport or station and their hotel.
  • Travel Expenses a Taxpayer Can’t Deduct. Some types of travel do not qualify for a tax deduction. For example, a taxpayer can’t deduct their costs if a significant part of the trip involves recreation or vacation.