How To File a Tax Return When You Have No Income (And Why You Might Want To)

If your income is below the filing requirement, there is no need to file a federal tax return. But for some people, it still makes sense to file.

If your income is below the filing requirement, there is no need to file a federal tax return. But for some people, it still makes sense.

 

There are two main reasons for filing a US income tax return even if you don’t have any income to report.

 

1.  Identity theft, and
2.  Identity theft.

 

I realize it looks like I was repeating myself but I wasn‘t.  I’m talking about two different kinds of identity theft.  The first is related to an unauthorized person claiming your kids as dependents on their tax return.  The second involves someone claiming you, or impersonating you, on a tax return.

 

Let’s talk about your kids first.  Here’s a story I’ve heard several times:

 

“I’m on SSI and I support my daughter 100%.  We get nothing from her father but he claims her every year on his tax return and gets thousands of dollars in refund money.  I reported him to the IRS but I haven’t heard anything.  I tried to file a tax return but other tax company said I don’t have income so I can’t file.   Is there anything I can do to stop him from profiting on my child that he never sees?”

 

 

One way to deal with this issue is to report the tax fraud.  Here’s more information about how to do that:  http://robergtaxsolutions.com/2010/11/how-to-report-tax-fraud/.  But here’s the thing–the IRS will never tell you what happens.  You’ll never know if the fraud stops.  You might not have enough information to give to the IRS to stop the fraud.  But if you file a tax return and claim your child as a dependent–that messes up their computers and something is going to happen.   The IRS will have to deal with the issue.  You’ll need to be prepared to prove that your child lives with you to stop your ex from claiming your child, but hey–with no income, you’re not getting a refund.  You’ve got nothing to lose!

 

Here’s another story that I don’t hear as often, but I have had to deal with before:

 

I got a letter from the IRS saying that my tax return is wrong and that I shouldn’t have claimed those kids.  I don’t understand, I don’t have any kids and I never filed a tax return.  What’s going on?


 

 

Fraud isn’t limited to claiming kids that aren’t yours; the fraudsters will also use a non-filer’s identity to claim kids that aren’t theirs for huge refunds and then when the IRS investigates, some innocent person who never filed a return gets caught and gets fined.  It’s a nightmare to sort this all out.

 

So how do you protect yourself?  File a tax return.

 

Just because you don’t have any taxable income doesn’t mean you can’t file a tax return.  You won’t get any money back, but you can still file an information return just to let the IRS know that you’re out there.  Many software programs won’t process the return if you show no income, so you’ll want to plug $1 into the other income section on line 21 for the long form.

 

You can even file for free with no income from my website.  Just go to the “Do Your Own Taxes” tab at the top.  Of course, you can always go to the IRS.gov website and use their Free File Online instead.  The important thing is that you file a return and protect yourself.

Getting a 1099MISC When You’re Not Self-Employed

Portrait Of A Mature Man On Painting Wall With Roller

 

If you receive a 1099MISC document in the mail, and there’s a dollar amount listed in box 7 for Non-employee compensation, the IRS treats that as self-employment income and you’re supposed to pay self-employment tax on that income.  If you own your own business, that’s perfectly normal.  By the way, I’ve got lots of blog posts and tax tips for self-employed folks on this web-site so be sure to check those out.  I’ve got a list at the bottom.

 

But what if you’re not self employed?  Really not self-employed.  You’re stuck with a document that basically requires you to pay extra tax, what do you do?

 

First, only dollar amounts in box 7—count as non-employee compensation.  If you received dollar amounts in box 1 for rents or box 3 “other income” you don’t have to worry about the extra self-employment tax.  The rent goes on your Schedule E for rental income and the other goes on line 21 of your 1040.

 

But let’s get back to that non-employee compensation again.  What did you do to earn that money?  Is it in your field of work?  If the answer is yes, then it’s going to count as self-employment income even if you don’t think of yourself as being self-employed.

 

I’m going to use my friend Rick as an example.  He works for another tax company and he’s very good at what he does.  Every year, Rick gets laid off on April 15th.   My company stays open all year round and sometimes I’m super busy in September and October.  I could probably use some extra help around then.  If I hired Rick to help me with some tax returns, I’d give him a 1099MISC for the money I paid him and he’d have to report that as self employment income.   Even though Rick normally works for another company, he’s still in the business of preparing taxes.  The money I pay him for tax prep would definitely be considered self-employment income.

 

But let’s say I hire Rick to paint my office instead.  Rick’s not a painter, he doesn’t do that as a business, he’s just helping me out because I need my office painted and I’m helping him out because he needs the money.  We’re friends.  Painting is not his line of work.  So technically, he’s not self-employed and he shouldn’t have to pay self-employment tax on that income.  It’s a one shot deal never to happen again.  How do you account for that?

 

Well, it used to be that if you received a 1099MISC for non-employee compensation for under $1000 and you put that amount on line 21 of your 1040—the IRS would let that slide and not audit for self employment tax.   But starting with 2013 tax returns, the IRS has announced that they will send notices to anyone with 1099MISC income (with non-employee compensation) on line 21 instead of putting it on a Schedule C—where it will be taxed with self-employment tax.

 

There’s no box to check or form to fill out with your 1040 to say, “Hey, I’m not self-employed!  I shouldn’t have to pay self-employment tax!”  So what do you do?

 

You’ve basically got two options:

 

One:  Claim the income as business income and write off any and all expenses associated with the job.  This is going to be the best choice for people who have expenses with a job like mileage or supplies.

 

Or, two:  File your 1040, pay the self employment tax, and then file an amended return 1040X taking the income out of self employment and putting it on line 21 with the explanation that you are not self-employed and the income should not have been subject to self employment tax.

 

Why do this as an amendment instead of doing it that way the first time?  Because the IRS has already announced that they are sending letters out to anyone who puts 1099MISC for non-employee compensation income on line 21.  And they charge fines and penalties for underreporting your tax.

 

By filing and paying the self-employment tax first, then amending, you’re giving the IRS the opportunity to examine the situation and make a determination.  You may win, you may lose.  But if you win—the case is closed and they won’t come back at you.  If you lose—it doesn’t matter.  You already paid the tax and they can’t fault you.  No harm, no foul.

 

Most people who receive a 1099MISC for non-employee compensation are going to be considered self-employed by IRS standards.  You may as well file the schedule C with your tax return and pay the self-employment tax.   If you think you might be an exception give us a call, we can help you sort out your options.

5 Things You Probably Didn’t Know About Santa’s Tax Return

 

5 Things You Didn't Know About Santa's Tax Return

 

What about Santa’s taxes?     Here’s a few things I bet you haven’t thought about before.

1.  Given that Santa travels about 75 and a half million miles a year (mostly on December 24th) his mileage deduction (at 54.5 cents per mile in 2018) is $41,147,500.

 

2.  Reindeer are depreciated over a period of 7 years.

 

3.  North Pole elves are considered employees and receive W-2s.   Elves outside of the North Pole are considered contract labor and receive 1099s.   (There are people who work as “elves” outside the North Pole that work for other organizations–like at the mall, who receive W2s, but they are not real elves and are not employed by Santa himself.)

 

4.  Because the elves live at the North Pole for the convenience of their employer, and since living at the North Pole is a condition of employment, elf lodging is not taxable to the elves.

 

5.  Santa doesn’t actually make any money from his toy distribution operation.  Most of Santa’s income comes from royalties from his guest appearances in movies, books, and television commercials.

 

_____________________________________________________________________________________

Footnotes:

1.  Santa’s distance traveled:  The Physics of Santa,  http://www.daclarke.org/Humour/santa.html

 

2.  Reindeer depreciation:  IRS publication 225 Farmer’s Tax Guide

 

3.  Elves are employees:  Common Law Rules of employment, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

 

4.  Elf housing:  IRS publication 15B  Employer’s Tax Guide to Fringe Benefits

 

5.  Santa’s income from royalties:   https://en.wikipedia.org/wiki/Royalty_payment

Personal Budgeting – Is it for You?

Photo by 401(K) 2013 at Flickr.com

 

Individuals and corporations (as well as income from estates and trusts and estate and gift transfers) are all subject to taxes pending the presence of taxable income. Among one of the numerous benefits with budgeting is planning for the impact of these taxes. But first let’s look into why certain entities do and do not budget.

 

In a corporate setting, budgeting is a necessary part of the accounting system and managers often receive pay increases if production is within budget. Also, budgeting is imperative in corporations in order to stay current with the ever changing government regulations and to keep up with the current industry competition.

 

What about the small business level? Do you like to stay up late and write up budgets and proforma financial statements? Not everyone does. And in my opinion, not everyone has to. Jan and I have seen many successful small businesses who do not write up formal budgets for their businesses. It’s your choice but I am not against them whatsoever. Of course, the bigger your company is getting, the more likely you will want or even have to start creating budgets.

 

And you? Do you have a budget? Not your small business, not your S Corp, not your partnership, but YOU? Personal budgeting for some can be worse than going to the dentist. If a template is all that is holding you back, we have a free one in this blog and in the downloads tab on top of the website. This budget template has a very clean presentation and is nicely detailed. I am certain that you will like it.
 

RTS Personal Budget – Click to Download

 

The RTS Personal Annual Budget is available for download from this blog or from the downloads tab near the top of the website.

 

My point with this blog was not to tell you that budgeting will solve all of your problems and that once you create the perfect budget, the weight of the world will be lifted off your shoulders—although for some people it will. Making a budget is not imperative for your success – many Americans alike get up and go to work everyday, make a modest salary, and support a family with discretionary income leftover all without ever touching excel. Where am I getting at? If you don’t have a reason for making a budget, then you simply won’t. Money is different things to different people – a blog post in its own—and some people do not care to know how much money they are making on a monthly basis.

 

However, what about the gentleman who finds himself with enormous tax debt and needing to do an offer in compromise with the IRS? To do that, he has to do a 433-A (OIC) which asks you to provide monthly income and expenses–essential a monthly budget.

 

Will creating a budget reduce my taxes? Not necessarily. Whether you make a budget or not, your income will always be subject to taxes. However, it does help plan your tax liability and gives you a more accurate picture of what your taxes and tax bracket could be given accurate estimates.

Deducting Your Starbucks Coffee on Your Income Tax Return

Starbucks coffee as a business expense

Meeting for coffee is a deductible business expense.

If you deduct business expenses on your tax return, then you probably already know that if you meet someone for a meal that you can deduct 50% of the bill as a “meal and entertainment” expense. You can’t deduct the cost of just yourself going to lunch, since you have to buy your own lunch anyway. For example: if I go to McDonald’s by myself this afternoon and get a Big Mac; even though I go during my business lunch hour–it’s not a deductible expense at all. But if I take Mike, my employee, to McDonald’s for lunch and I pay for his meal as well–then I can claim 50% of the bill as a business expense because we’ll be talking shop.

This is where Starbucks comes in. I suspect that more business is conducted at Starbucks coffe shops than anywhere else. It’s sort of every small business owner’s “office away from home”–neutral networking territory. If you do the whole networking thing, certainly you’ve had the “Let’s meet for coffee” meeting.

Coffee meetings are safe. Generally you’re not billing for time at a Starbucks meeting. Being an accountant, I think some people are afraid to come to my office. They think that if they walk though my door I’ll put the meter on and start billing them. (I’m not that bad, really!)

Many small business owners don’t have offices, so Starbucks is a good place to hold a meeting. I know some small business owners who spend hours at Starbucks. For the price of a cup of coffee you also get a table to work at and an internet connection.

So, how do Starbucks coffee receipts fit into your tax return? I’ve got two ways:

  1. 1. You meet a business acquaintance for coffee and you pick up the tab for both of you. Keep track of the meeting and you easily meet the 50% deductible rule.

  1. 2. You meet a business acquaintance for coffee but you only pay for your own coffee. (This is pretty common.) You can still probably claim this as a business expense but you have to be a little more careful. There’s an old 1953 court case (Sutter v. Commissioner of Internal Revenue http://www.leagle.com/decision/195319121ttc170_1172) that states that you can’t deduct entertainment expenses just for yourself if you’re paying what you normally pay for something.

So — If you’re going to Starbucks everyday and picking up a latte whether you’ve got a meeting or not– that’s a normal expense for you so a Dutch Treat Starbucks coffee isn’t a deductible business expense for you.

On the other hand, if you’re not buying gourmet coffee unless you’re at a business meeting, then you’d be allowed to claim that expense. The whole key here is to document, document, document.  For me–I pay a $30 fee to my office manager so that I may have coffee at work. At one cup a day, that works out to $1.50.  At Starbucks, my coffee costs $4.50;  so clearly, I’m not normally spending $4.50 on coffee unless I’m having a meeting.

Under the Sutter rules, I don’t have to subtract my normal coffee cost from what I spend, I can deduct 50% of the whole cost. I just have to be able to prove that my normal coffee cost is less than $4.50.

Does the IRS really go back to 1953 tax court cases when they audit returns? Yes, as a matter of fact, they do. Even though there have been significant changes to tax law since that case, Sutter is still invoked in audit cases with high entertainment expenses.

Personally, given how many people use Starbucks for their meeting rooms and internet connections, I think the IRS should allow a 100% deduction for Starbucks as a rent and computer expense. But don’t try that, it won’t fly with the IRS. The best you’ll get is a 50% deductible meals and entertainment expense.

Tax Planning Strategy for High Income Earners with S-Corporations

Are you a high income individual with an S-Corporation? Photo by Jacob Bøtter at Flickr.com

 

Whenever I’m talking about tax strategies for high income earners with my clients they always ask, “What do you mean by high income?”  If I’m talking to a person face to face and I bring up tax strategies for high income earners, I mean the person I‘m talking to.  I wouldn’t bring it up otherwise.  Since you happen to be reading this on the internet, for this post I generally mean people with incomes over $200,000.

 

Here’s what’s up:  The new Medicare tax on investment income (or Obamacare tax, Net Investment Income tax, Healthcare tax, or whatever you want to call it) also taxes your  S Corporation profits.  Let that sink in for a minute.  S Corporation profits will be counted in the same category as interest and dividends and capital gains for the 3.8% Medicare investment tax.

 

Let me give you an example of how this could affect you:  Let’s say you’re single and you have wages of $150,000 and S-Corp profits of $200,000 for a total of $350,000 in Adjusted Gross Income.

 

To figure the medicare investment tax you’d take $350,000 – 200,000 (the base) = $150,000.  You have $200,000 in investment income, you’re only going to pay the 3.8% on whatever is over the base so your Medicare investment tax is 3.8% time $150,000 which equals $5,700.

 

At $150,000 on wages, you’ve already maxed out the Social Security withholding that you were subject to so additional Social Security tax doesn’t affect this example.

 

Now let’s compare your investment Medicare tax with your wage Medicare tax.   Withholding on your wages is 1.45%, plus the employer contribution on your wages is an additional 1.45%–so as the owner/employee of your S-Corp you’re paying 2.9% Medicare taxes on your wages.  Once you cross the $200,000 wage point, there’s an additional 0.9% Medicare wage tax bringing the Medicare wage tax to 3.8%.  That’s the same rate as you would pay with the Medicare Investment tax.

 

It used to be that one of the benefits of being an S-Corporation was that you didn’t pay the extra 2.9% (now 3.8%) Medicare tax.   You’re losing the savings benefit you used to have.

 

Now this doesn’t affect everybody.  If your S-Corp income is lower, this might not matter to you.  That’s why you have to do some comparisons.

 

So, a really important question for you is going to be–is your S Corporation still the right business structure for you?  For some people, the answer will be yes.  For others, it might be time to convert to a regular C Corporation, a Sole Proprietorship, or Partnership.

 

The Obamacare tax will be reported on Form 8690 and added to your 1040 personal income tax return.

 

How can you tell?  This year, more than any other year, you want to get your taxes done on time.  Run the numbers all the ways that you’re thinking about.  Be sure to figure things based on the changes you’d make if you had a different business structure.  Then you can make an informed decision based on the numbers.

 

Remember, your corporation taxes are due by March 15th.  If you want to revoke your S-Corp election for 2014, you have to do that by March 15th of 2014 otherwise it will be too late.  Of course, you can revoke your S-Corp election and still file an extension for your 2013 taxes.  But the smart thing is to run your numbers before you revoke the election–because you still might be better off keeping your S-Corp.   For many companies, changing your corporate status will give you no benefit–for many others it will.  That’s why it’s so important to make the decision with your eyes wide open and with all the facts in your hand.

What Business Gifts Can I Deduct on My Tax Return?

If your business is buying gifts for clients, remember that you can only deduct $25 per person that you buy a gift for.

If your business is buying gifts for clients, remember that you can only deduct $25 per person that you buy a gift for.

 

 

If you give a gift as a part of your business it’s a deductible business expense.     BUT! You can’t deduct more than $25 for gifts you give to a person during the tax year.    This $25 limit has been in place for ages and hasn’t been adjusted for inflation for as long as I’ve been doing taxes.  That makes keeping within the gift budget a little trickier every year.

 

I think some people do a lot of “fudging” on the gift expenses, but the IRS seems to be taking a closer look at everything these days so you need to know what you can and can’t deduct.  And make sure you document everything and keep those gift receipts.

 

Here’s some real questions that people have asked me about deducting gifts on their tax returns.

 

What if I give two different gifts, like a birthday and a Christmas gift?  Can I deduct $50 then?

No.  Sadly, the $25 limit is on gifts for the entire year, not $25 per gift.

 

What if I give a $100 gift to my client’s family of four?  Can I deduct the full expense?

No.  Any gift you give to the customer’s family is considered to be an indirect gift to the customer.   So unless you independently do business with each of the other family members, you may only deduct $25 for the gift.

 

My husband and I each own our own businesses and our businesses have some clients that overlap.  Can we each deduct $25 for gifts to our overlapping clients? (Okay, nobody asked me this one, I saw it online and thought it was a good question.)

Surprisingly, No.   Technically, a husband and wife are treated as one taxpayer and it doesn’t matter if you have separate businesses or separate employers.  Partnership partners are also treated as one taxpayer when it comes to gifts as well.

 

I sent one of those holiday gift tins that cost $24.95.  The extra Holiday message cost $1.95 and the shipping was $9.95 for a total of  $36.85.  Am I stuck only claiming the $25?

Actually, in your case, you can deduct the whole amount.  The gift itself was under $25.  You are allowed to deduct the incidental costs like shipping, wrapping or engraving on jewelry.

 

I gave my client two football tickets that cost $150 total.  Am I stuck only claiming $25?

Before the Taxpayer and Jobs Act, anything that could have been considered as entertainment could be deducted as an entertainment expense–even if you didn’t go with the client.  So prior to 2018, you could have deducted $75–half of the amount as an entertainment expense.  But now, after the Taxpayer and Jobs Act, you can’t deduct entertainment at all.  So no part of that gift would be considered to be deductible.

 

If bought my daughter an IPad for Christmas.  Since she sometimes does some work for me, can I write that off as a deductible business expense? (And yes, this was a real question.)

Since she does supposedly works for you,  you are issuing her a W2 for her wages right?  If you don’t issue a W2–then claiming she works for you probably isn’t going to pass muster with the IRS.

But let’s be realistic.  You’re either buying an IPad for the business, or you’re buying an IPad for your daughter.  If you’re wrapping it up and putting it under the tree as a present from Daddy – that’s a gift.  And it’s not a business gift.  If you really want to call it a business gift, fine, but you only get to deduct $25.

If she really works for you and she needs an IPad to do her job, you buy her an IPad for her job and it goes on your business asset list.  She might have some incidental personal use – that’s fine, but it’s a business asset not a gift.  

 

Remember, small incidental gifts valued at less than $4 with your logo on it don’t count as a “gift” towards that $25 total.  If you’ve been giving away mugs and pens for advertising, don’t worry–those are still  100% deductible.

 


Updated 7/20/2019

Tax Planning Isn’t Rocket Science, But it Can Save You Money!

Tax planning can save you money.

You don’t have to be a rocket scientist to do a little planning ahead to save big dollars on your tax return.

Today I want to talk about tax planning, and  why it’s so important.

 

I recently got a call from a woman who wanted to take $30,000 out of her IRA to buy something special.  She went to her financial planner to take the money out and he told her that she needed to take another $7500 out just to cover her taxes, but to talk to a tax person first.  So she called me.

 

Well, I ran the numbers for her and if she took $37,500 out of her IRA , it was going to cost her over $9,000 in state and federal taxes combined.  Even though she would be withholding $7500 for her federal taxes, she’d still have to come up with another $2000 to be whole.  Then we started talking.

 

You see, she didn’t need to make the purchase right away, she was just thinking about it.  So I decided to see what would happen if we split the $30,000  between 2013 and 2014, $15,000 each year.  What a difference!  Instead of paying over $9000, she’ pay $688 per year total for her state and federal income  taxes combined.  That wasn’t a typo–six hundred and eighty-eight dollars a year.  $1376 total tax for a savings of over $8000!

 

So by waiting for another 60 days to take half the money she wanted out of her IRA she’d save $8000.  How cool is that?

 

In fairness, the woman’s particular situation just put her into a sweet zone for this to work out so well.  For many people, splitting up the IRA withdrawal  would not save them any taxes at all.  But my point is–how do you know?   By taking the time to ask–she saved $8000.

 

What’s going on in your life that could benefit from a little tax planning?  Selling some stocks or mutual funds?  Donating to charity?  Do you own a small
business?   Are you getting married?  Getting divorced?  Having a baby?  Getting a new job?  Buying a home?  Any of these events, and many more, could use
a little tax planning.

 

My business card says, “If you don’t have a tax strategy, you’re probably paying too much.”    It’s true.  So often in my job, I’m trying to help people who’ve already made decisions and come to me when its’ too late to make changes.  Why would you want to give the IRS more money then you need to?  It’s not rocket science, it’s just common sense.   The best way to keep more of your money is to make a plan for keeping it.  Call me.  I can help.