There’ve been lots of ads about filing your taxes for free online. That’s all fine and dandy, but if you’re not careful, it’s not really free. For example, if you go to the IRS website, you can probably file a free federal tax return, but there will be a charge for filing the state return. What tends to happen; is people go to the IRS site, file their federal return and then don’t file their state return because they have to pay for the state program. They decide that they’ll get the forms from the library or someplace later and then they “forget” and then get a nasty little note from the state saying they owe money. That’s when they wind up calling someone like me (or worse one of those “pennies on the dollar TV ad places”) and they pay much more for fixing their tax problem than they would have had to pay in the first place.
So, is there really such a thing a totally free e-file? Yes, but there are restrictions. For example: here in Missouri, you can go to the Missouri Department of Revenue site and get a free state and federal tax return program. Generally, you’ll have to qualify for the Earned Income Credit, or be under age 20, or be in the Military. You must access one of the tax providers from the Missouri website to get the free tax return. Here’s the link: http://dor.mo.gov/personal/individual/vendors.php#freeonline
The most important thing to remember is that you have to access the tax programs from the Missouri website in order to get the free filing! The same holds true for other free file programs. You must access the program through the government link in order to qualify for the free file, otherwise you will be expected to pay for the service.
Some states, like Illinois, will let you file your tax directly through their state website. You’ll have to prepare your federal tax return first, but then you can file your state. To find out if you qualify to the Illinois web-file, click on this link: http://tax.illinois.gov/Individuals/StudentQualifications.htm
In a case like that, you’ll want to do the IRS free file first. That link is:
The IRS won’t have that site open until January 14th. But once it comes open, there will be a list of free file providers and the requirements for using the service. Generally, if your income is below $57,000 you should be able to find at least one service that will free file your return through the IRS website.
Do not forget to file a state return! I cannot stress that enough. After the federal filings are all in, the IRS shares the information on your federal tax return with the state listed as your home address. If you deserve a refund, the state will not notify you, and you’ll just miss out on receiving your refund. If you owe, you will receive a notice showing your balance due, plus penalties for not filing and penalties for late payment, plus interest due on the amounts owed. These notices will not take into account and deductions that you might be entitled to. It’s definitely in your best interests to file your own return and not take the state’s bill at face value.
What do you do if your income or other circumstances prevent you from using the free e-file programs? This is of course making the assumption that your tax situation is easy enough for you to file your own taxes. (You are reading this Blog on a professional tax preparer web-site, if you can’t prepare your own return really you should be calling me, right?)
My recommended for pay “prepare your own taxes” website is here:
Although much less expensive than having a professional prepare your return, this site is not free. It’s actually through Drake software. I use their professional version when I prepare income taxes for my clients. I like the online software because as new issues pop up, the software is updated constantly. You’re less likely to have tax return mistakes due to software issues when you use an online program. Also, the online programs will determine which forms you need, 1040EZ, 1040A, or 1040. The program will pick the easiest form you qualify for. You also don’t need a credit card, you have the option of having your fees withheld from your refund if you’d like. You can try it out for free, then if you choose to file with this program you can pay, otherwise just walk away.
What about the tax filing products that you buy at Sam’s Club and Office Depot? The tax return products in a box are generally good products IF you remember to download and install the latest updates before you actually file your return. If you fail to download and install your updates, those programs are close to worthless, especially this year with all the last minute changes made by Congress. Be sure to buy the program that’s best for you. Don’t buy the “basic” when you need the “premium.” Read the boxes carefully to determine what type of filer you are. If after looking at the examples on the box you honestly don’t know which program to buy, you should have a professional prepare your return.
One more tip for filing your own return: Many tax companies will, for a fee, review a return you’ve prepared yourself. I do it all the time. This is especially helpful for people who don’t feel 100% comfortable with filing for themselves or just if you have questions. It’s a low cost alternative to hiring a full professional service versus going it completely alone. Be careful though, some companies use that as a ploy to get you to purchase their professional filing services. They offer a cheap “review” rate then tell you you’ve missed something but won’t tell you how to fix it. Reputable companies will tell you what’s wrong, why it’s wrong, and how to fix the problem.
Okay, you’re reading this on a professional tax preparation website and I’m an enrolled agent. Are you really expecting to see any answer other than, “Always?” So you’ve been warned. But seriously, many people are perfectly capable of preparing their own income taxes and they do it quite well. For those people, the question is, when do you get a second opinion? Here’s my list:
Whenever you have a major lifestyle change, like getting married, having a baby, buying a house, starting a new career, retiring. You get the picture. Many of the big life style changes have tax implications that go with them, it’s a good time for a professional.
Whenever you start a new business—many of the biggest tax problems occur during the first year of business. Even if you’ve started a new business before, the rules are constantly changing. You would be amazed at how many people prepare the wrong tax form for their business.
Whenever you’re dealing with two or more states on your tax return—most home software programs don’t handle multiple states well. Some of them can handle two states. Even with my professional tax software, if there are three or more returns, I’m often re-computing the figures by hand. If you hire a company that sells an accuracy guarantee, always purchase that agreement for a multistate return. Most tax preparation firms focus on the federal return and the state information automatically flows through from the federal. There isn’t a lot of training for state returns, the assumption is that the software will handle it. The problem is, the software is only as good as the person using it. Multistates require someone with experience. (Ah, like me, just saying.)
If you’ve had stock options-I put this in because one year I represented several people who all worked for the same company. They received stock options and didn’t report them correctly on their tax return. They all received scary IRS letters saying they owed thousands of dollars in taxes. Once I was done with their amendments, they all received refunds, but they shouldn’t have even had to have gotten letters in the first place.
Finally, I recommend having your taxes reviewed every three years, even if you don’t experience any of the above. Let’s say you’ve been doing your taxes on your own and a law changed and you missed a big tax deduction. You only have three years to file an amendment to get your money back or you’ve forfeited the refund.
When I ask, do you own a corporation, I’m talking about a C-Corp, not an S-Corp. And I’m not talking about being just a shareholder in Coca Cola or GM, this post is specifically for people who own their own business and have it set up as a regular corporation.
It’s time to think about a qualified dividend distribution. Right now, qualified dividends–and here I’m talking about money that’s been held for over one year, are taxed at the capital gains tax rate. Right now, the capital gains rate for most people is 15%. Next year, there’s talk of changing that. And even with the various proposals going on in Congress, qualified dividends may still lose out and get taxed at a higher rate anyway. No matter what, you can pretty much assume that the tax rates will not go down.
So, right now, it’s time to think about a distribution. Many owners of small corporations like to keep excess funds within the corporation (that’s your retained earnings) and it makes sense so that you have money to grow the company with. And, to be honest, for some people, it’s a bit of a tax shelter-”save it for a rainy day” kind of thing. Holding money in the corporation so they don’t pay personal income tax on it unless they really need it. If you’re in the “rainy day tax shelter” camp–now is your rainy day. For most people in your situation, taking the money now is going to cost you less than taking it in the future.
So what do you need to do? Well, I always tell my clients to never take some random advice they read off of the internet, and I’m going to tell you the same thing. You need to sit down with your accountant (or accountants if you use separate ones for your business and personal taxes) and make a plan. Here’s what you want to consider:
1. How much money is available in the corporation to give as a qualified distribution? Qualified is the important word here because a non-qualified distribution is taxed at your ordinary income rate. You want a qualified distribution because of the lower tax rate. Use your good business judgement, don’t take out too much, just the excess.
2. You’ll want to see how your personal 2010 tax return will be affected if you take in that extra income. (Also, if you’re not the sole shareholder, will taking a distribution hurt your fellow shareholders as well?) Saving money on the tax rate is good only if it doesn’t hurt you somewhere else. For example, if your higher income keeps you from claiming the education tax credit on all that tuition you paid to send your kid to college, then the cost of taking the qualified dividend might outweigh the benefit of the lower tax rate. That’s why you want to sit down with your tax person and figure this out before you try it. You may be playing a balancing act — let’s say a $20,000 distribution won’t work, but what if you take $5,000 instead? Computer tax planning programs were made for these situations. What’s important is that you do it now, before December 31st. If you wait until next month–you’ve missed your opportunity.
Filed under: Self Employed, Tax Deductions, Uncategorized
Batman stopped by my office the other day. He usually doesn’t visit me in his Bat costume, but he had just done a charity fundraiser as Batman and had promised the ladies in my office to visit us in costume. (I’d just like to point out that not all of my friends and clients are super heroes. I do know plenty of normal people.)
I recently did a post about a fellow who made a business out of appearing as Superman. On a good day, Superman can take in some decent money. After Batman’s successful fundraiser, he kind of wondered aloud about following in Superman’s footsteps and making occasional appearances for pay also. While I recently made the case for Superman being a legitimate business, Batman’s income I believe would be a hobby.
How do you tell if something is a business or a hobby? Sometimes it’s kind of hard to tell. Everybody recognizes that if you open up an Ace Hardware store selling tools and duct tape you’ve got yourself a real business. But what if you make purses and wallets out of duct tape and sell them at craft fairs? Where does that fit in? What if you breed your champion Cocker Spaniel and sell the puppies? Dog breeding is a real business, but how many litters makes you a breeder? It’s not all black and white. Here are some guidelines to help you.
First, I want to point out the most important key ingredient that the IRS uses to determine if you are a real business: a 1099MISC showing an amount under “non-employee compensation.” There are numerous guidelines as to what constitutes a business versus a hobby and this one is never mentioned. Yet it’s the most important factor as far as the IRS is concerned! If you receive a 1099MISC, the IRS counts that as self-employment and they will tax you not just income tax, but an additional 15% self employment tax. As a professional preparer, if I see one of those, even if I truly believe that your business should be classified as a hobby, I’m preparing a Schedule C showing you as a business. That’s how the IRS is treating that income.
What’s the difference in how your income is classified and why is it important? Business income is taxed at your regular income tax rate plus the self employment tax rate. Let’s say your regular tax rate is 25%, then your business income is taxed at 40% (25% + 15% = 40%.) The advantage of being treated as a business is that you can write off your direct business expenses against the income and you can even have a loss that will offset your other income. Hobby income is taxed at your regular tax rate, there is no self employment tax so you pay less tax on hobby income. The disadvantage is that although you can write off expenses against your hobby income, you can never take a loss. Also, for many people, the hobby expense write off is a worthless deduction. (It goes on the Schedule A under miscellaneous deductions subject to the 2% limitation rules.)
You cannot switch your business back and forth from hobby to business depending upon whether or not you have a profit or loss. It’s okay to grow your hobby into a business. It’s even okay to downgrade your business into a hobby. But flip flopping for the sake of lowering your taxes is just going to land you in trouble with the IRS. You need to put a little thought into it before you start claiming business losses.
If you’re not receiving 1099 MISC forms, what other tests can you use to prove your business is real and not a hobby? One is the three year test–if you’ve shown a profit in three out of the past five years, then you’re considered a business. This is a good rule, but it’s not completely hard and fast. There are court cases proving businesses to be valid even though they’ve shown losses for more than three years. Even though its a good rule of thumb, I don’t like to see people get too hung up on it, there are other tests.
Is the business carried out with the intention to make a profit? Does the taxpayer (or the taxpayer’s advisors) have the knowledge to make the business a success? Does the taxpayer spend enough time on the business to indicate a profit motive? Has the taxpayer made a profit on similar activities in the past? The answers to these questions is why I put Superman in the business category and not the hobby category. Superman had previous paid experience as a costumed character and model, and he also had a website devoted to his business and posted blogs about how to be a superhero. He clearly devotes a great deal of time to his business. Batman,on the other hand, wouldn’t really pass these tests, that’s why I consider his income to be hobby income.
One final point. Batman takes offense at Batman labeled as a hobby. “Batman isn’t a hobby, it’s a calling.” Like I said in the beginning, some of my friends are normal.
Note: We try to answer all the questions that come to us but please be patient. It’s our busy season right now. We may not get to your post until the weekend. When you make a post and use the capcha code, it won’t immediately show up. You see, for every normal person like you that posts, there’s about three advertisements for things your mother wouldn’t approve of. (We try to keep this a G rated website.) We have to edit those out. If you need an answer right away, here are some links that might help:
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If you want to hire us, please call (314) 275-9160 or email us. We do prepare returns for people all over the country (and a few foreign countries as well.) We are sorry but we cannot prepare an EIC return for someone outside of the St. Louis area because of the due diligence requirements.
Filed under: Jobs, People, Self Employed, Tax Deductions, Uncategorized
What do you do for a living? Are you in advertising, construction, real estate? When you tell people what your job is do they seem to have a grasp of what that means? Some people’s jobs aren’t so easily defined, like Superman for example.
Actually, his name is Charlee Chartrand and he dresses as Superman for his job. This is not your every day occupation. Now I don’t know Mr. Chartrand and I don’t do his taxes, if I did, my confidentiality rules wouldn’t allow me to talk about him. I read about him in Sunday’s Post Dispatch. I did contact him and ask for his permission to use him as an example though.
The main part of Mr. Chartrand’s job is that he dresses as Superman, hangs around at Cardinals games and collects tips for posing in pictures with fans and tourists. He’s also been performing at birthday parties. If you think there’s no money in this, think again, he can earn as much as $400 in tips in a day. And that’s why he’s going to need to figure out his deductions before he files his tax return.
So what can Superman deduct? Let’s hit the obvious thing first: the costume–all of it. Cleaning, repairing, replacing, clearly this is one clothing expense that will count as a business expense. I would also include his undergarmets. You can’t dress as Superman and wear any old boxer shorts.
The hair: most of the time hair cuts and styling products, etc are not considered legitimate expenses for business, even if you are a professional actor or television personality. In Superman’s case here, I would claim his hair expenses. He has to dye his hair black to be Superman, and he uses four different products to get just the right effect–including the “S” shaped curl on his forehead. I think that goes far beyond what would be normal for Mr. Chartrand during his off duty hours.
I can’t tell from the photo if Superman is wearing make-up or not. He doesn’t look like it, but if he was, I’d allow it. (He might need to darken his eyebrows to match his hair.) A note about make-up: generally, make up is frowned upon by the IRS as a business expense. A clown wearing clown make-up would qualify for a deduction, but most women in any business would not. I once helped a dancer with her return and as we went through her expenses she claimed “a gallon of eyelash glue.” Now, I thought that was an excessive amount even for a professional dancer. “Not for eyelashes,” she said, “It’s to keep my costume on!” Evidently, during a dress rehearsal she had had a “wardrobe malfunction”. In order to keep herself looking decent, she glued her costume on to make sure she stayed covered. That clearly fit the category of “necessary” and I put it in. (Even the meanest IRS agent couldn’t argue that one.)
Let’s get back to Superman, He can probably claim either a home office deduction or rent for his work space. And, since he travels from his home office to his gigs, he can deduct his mileage as well. These are expenses that are pretty normal for many small businesses. It’s important to remember that even unusual businesses have normal types of expenses. Another normal type of expense for Superman might be advertising, if he has flyers or cards that he distributes to get new business.
Here’s another expense that I would use for Superman that might seem out of the ordinary: comic books—Mr Chartrand uses comic books to compare against his costume and maintain the authenticity of his look. I’d count it as a valid business expense.
Also, Mr. Chartrand has a goal of moving to Los Angeles. Making a permanent move to Los Angeles would count as a moving expense, as opposed to a business expense. But, if Mr. Chartrand makes a trip to Los Angeles, to test the market so to speak, he could probably write off most of that stay as a business deduction. This would give him a chance to test out the market and give himself an out to come home if he found Los Angeles wasn’t the place for him.
When claiming business deductions, the key phrase the IRS uses is “ordinary and necessary”.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
When you’ve got a one-of-a- kind type of career, it’s not always easy to figure out what ordinary means. Hopefully, Superman’s example can give you some ideas about what’s ordinary and necessary for your business.
To read more about Charlee Chartrand, aka Superman, this link will take you to the St. Louis Post-Dispatch article about him: