Author: Jan Roberg

Posted on by Jan Roberg

Checkpoint, How’s Your Withholding?

It's a good idea to just make sure that you are withholding enough tax from your paycheck.

It’s a good idea to just make sure that you are withholding enough tax from your paycheck.

 

I recently read an online forum where a fellow wanted to sue his employer for not properly withholding the man’s income taxes  from his wages.  While I felt sorry for the man and his looming tax debt, given some of the information he posted, I wasn’t convinced that the employer was at fault.  But the tax code and the forms are all pretty confusing, so how do you know that you are withholding correctly?  Fortunately, there is help.

 

First and foremost, if nothing has changed about your job or life situation and you’re happy with your refund/balance due situation, this isn’t for you.  If everything is fine, why change?  But–if you owed too much last April, or you had a job or lifestyle change, then you really should do a mid-year evaluation to make sure that your withholding is on track.  It’s a whole lot easier to change your withholding now than it is to make adjustments in December or after the year is already over.

 

What you need to do is have a copy of your latest pay stub and your last tax return handy.  You’ll need both to answer the questions in the calculator.  Then you’re going to click on the link to the IRS withholding calculator.

 

Now I’m going to be honest, the first time I looked at this I went, “Oh gee, who’d want to bother with this?”  But seriously, it’s the best program for figuring out where you stand with your taxes.  For most situations, I like it better than some of the fancy professional tax projection programs I’ve used.  Most importantly, you don’t need any special training to use it.  Just answer all the questions.  Sometimes you may have to guess, but do your best.  You really do need to have your latest pay stub and last tax return to do this though.  If you’re just estimating, it’s not going to be helpful.

 

The program will tell you, based on what’s actually been taken out of your check, how much your refund or balance due will be.  And, if you are expected to owe, it tells you how to change your withholding so as not have a balance due.

 

So let’s say you ran the program and it does recommend that you change your withholding.  What next?  That’s easy, take the information to your employer (or the payroll department) and fill out a new W4 form.  Unlike some other paperwork that can only be completed annually, you are allowed to change your W4 any time during the year.

 

So about that guy who wants to sue his employer?  I’ll leave that up to the courts.   As for me, I’d rather catch a problem before it gets out of hand, and the IRS withholding calculator lets me do that.

Posted on by Jan Roberg

College Tax Credit

Students heading back to school may qualify for up to $2500 in tax credits.

The American Opportunity Tax Credit can be worth up to $2,500 to help pay for tuition.

Updated August 2019

 

I’ve written in the past about saving for college, but what about if you’ve got that tuition payment coming due this fall? Here are a few tips to help you maximize your tax benefits.


The biggest tax advantage for tuition payers is the American Opportunity Credit which will still be available for 2019. It’s worth up to $2,500 in tax credits.  I said tax credit, not a tax deduction! That means that $2500 is written off of your taxes!  And for some people, up to $1000 of that is a refundable tax.

 

What’s a refundable tax?  That means,  even if you didn’t owe $2500 in taxes, you can still get up to $1000 back from the IRS.  How cool is that?

 

Now the American Opportunity Tax Credit starts to phase out if your Modified Adjusted Gross Income (MAGI) is $80,000 ($160K if married filing jointly) and is completely erased by the time your income reaches $90,000 ($180K for MFJ.)  If your income is near, or slightly over, the phaseout limit there are some things you can do now to keep your income in line.  (MAGI for most people is their regular income.)

 

First, the easy thing is to reduce your taxable income by contributing (or increasing the contribution)  to your company’s 401(k).   Many companies have their benefit sign ups in November so you may have already missed the boat.  But some companies are more flexible so it’s  worth checking out. The maximum you can contribute to your 401K plan in 2019 is $19,000 (or $25,000 if you’re over 50.) Of course, you’re also trying to pay tuition and perhaps eat once in awhile, so reducing you income by $25,000 might not be an option.

 

In addition to 401(k) plans, some companies have exempt cafeteria plans for health care or day care.  If you can take advantage of those programs it could be helpful in reducing your MAGI.  If you know you’ll spend the dollars anyway, why not remove that money from your taxable income?  (Frankly, that’s a good idea whether you’re tying to qualify for the college tax credit or not!)

 

If your income is clearly too high to qualify for the American Opportunity Tax Credit, it may make sense to not claim your student as a dependent and have her put the credit onto her taxes.  You’ll need to play with it.  The credit isn’t as good when a dependent student claims it herself – she’ll lose the refundable part – so if she doesn’t have enough income for a tax liability, it’s not going to be worth it.

 

So when paying tuition, how do you get the biggest bang for the buck?  If  you have a student whose tuition will easily exceed the $4000 required to take full advantage of the tax credit, you don’t really need to think about strategy here.  The form you get from the college will show you paid $X dollars for tuition and you won’t have to think about qualifying expenses for tax credits. The form is called a 1098T form.  For 2019, you absolutely must have that form to qualify for the American Opportunity Tax Credit.  Here’s the thing – your college aged student is over 18, the school is going to give the form to her.  You have to get it from your student to file your taxes.

 

If you’re lucky enough to get good scholarships or an inexpensive school,  you’re going to need to be able to prove you spent money on qualified expenses.  Tuition, fees, and books count.  If your tuition is only $1500, it’s important to keep those receipts for books and campus fees as well to add to your tuition expense.  Room and board won’t count.

{A note about books:  if you have an older student and couldn’t claim books in the past because of the restrictive rules, it’s changed for this credit.  Now, your student can buy books from a used bookstore, Amazon.com or any other place where student texts are sold, and still use the receipt towards this credit.}

 

On the flip side, if you’ve got a student at an expensive school and you’re well over the $4,000 threshold, you might not want to pay the second semester tuition before January, especially if you have a student thinking about taking a year off.  Pay that next year’s tuition in January so you can spread out the tax credit.

 

With the American Opportunity Credit, you get a 100% tax credit on the first $2000 of tuition paid.  That’s a dollar for dollar tax credit.  After that, you get a credit of 25% of the next $2000 of tuition paid.  The first $2000 worth of tuition is more valuable than the next.  Still, a 25% tax credit is nothing to sneeze at either.  Also, if you pay tuition in 2019 for classes that will be taken within the first three months of 2020, that counts towards the credit too.  Come December, if you haven’t already exceeded the $4,000 tuition expense amount, it may make sense to pay your next semester a little early.

 

Which students qualify for this credit?  It’s available to students who are in their first four years of college, they must be at least a half time student, they have to be at a qualified institution, and they cannot have a felony drug conviction.

 

If you’d like more information on the American Opportunity Credit, or other education credits, IRS publication 970 has  answers.  (It’s 83 pages long, but it does have almost everything in there.)  You can access it here:  IRS College Tax Credit

 

One final thing, because everybody asks me this:  if you pay for tuition with a loan, it still counts as you paying tuition.  You can still claim the credit.

Posted on by Jan Roberg

Saving for College

Saving For College

New parents always want to start saving for their child’s college education. People often ask me what’s the best way to do that?   To be honest, for different circumstances I give different answers, but these are some of my standard recommendations.

First, before you put any money into a college savings plan, make sure that you have enough money in your emergency savings fund. You should have enough money in savings to cover at least three months worth of expenses (I prefer to see six.)  If you lose your job or have some other financial emergency, putting food on the table and a roof over your child’s head ranks over having money for college. People fight with me over that, they say, “No, I want to have money I won’t spend.” Bingo, that’s why it’s called savings. Think of your savings account as your college fund, it’s just step one.

Once you’ve got that established, I like to see money in a Roth IRA. Once again, this isn’t a college fund, but it makes sense financially. First, a Roth IRA can be used to pay for college expenses penalty free.   Also, because you get no tax break for contributing to a Roth, you pay no income tax on the money when taking it out.   And it grows tax free, so a Roth is a good vehicle for college savings.  Secondly, suppose your child decides not to attend college or manages to get a free ride at a University? Well, then you’ve just got more retirement money sitting around for you. (Sweet.) Third, let’s say you’re not financially able to pay for all of Junior’s tuition and you need to apply for financial aid. Money in a child’s 529 plan is considered to be fully available to pay for college. Money in an IRA is not. Your financial aid package will be better if your funds are in a Roth.

One more point in favor of paying towards retirement before paying for college. When push comes to shove, if there is no money for college, a motivated kid can get a loan for school. But if you’re 70 years old and your only income is your Social Security check, do you honestly think a bank will give you $100,000 to help you with your retirement expenses? It’s not going to happen.  It’s kind of like the airplance emergency demonstration, you need to put on your own oxygen mask first,  before you help someone else.

So let’s say you have all your bases covered, you’ve got savings and you’ve got retirement money, then what? Now we can start with the 529 plans. Although there are no federal tax benefits for 529 plan contributions, they do grow tax free. Also, many states exempt a portion of your income from tax when you contribute to their state plan. For example, in Missouri, you can contribute $8,000 a year tax free to a 529 plan. If you’re married, both spouses can contribute– giving you a $16,000 tax deduction. Here’s a link to their website:

http://www.treasurer.mo.gov/Most.asp

The most important thing about saving for college is to start.  You won’t believe how fast your kids grow up until they’re already grown.  By then it’s too late.  Good luck.

 

Posted on by Jan Roberg

World Cup and Productivity

World Cup and Productivity

Has the World Cup affected your work day?  It’s been creeping into mine all week.

I rent my little office for my local practice here in St. Louis from a global conglomerate.  Although the people who share my space with me are pretty much small, local businesses, the company we rent from has offices all over the world.  One of their cardinal rules is that all the offices must be the same.  Therefore, my little office in St. Louis has World Cup soccer on the TV in the lounge all day long.   It’s addicting.

For some reason, the only station we get that shows World Cup soccer is in Spanish.  It doesn’t matter though, as it was pretty easy to figure out that “Gooooooooooooooooooool!!!!!!!” means “Goal!” in Spanish.  Other than that, it doesn’t much matter what else they say.  It’s just kind of fun.

At first, I thought I was the only one who cared.  Okay, I really was the only one who cared in my office.  But, today, with the US playing, there were more converts.  Fortunately, this is not my busy time of the year so I can afford to relax and watch a little television once in awhile.

Am I being productive?  Well, let’s see,  this is supposed to be a tax blog.  Oops.  I guess that I now have evidence that World Cup Soccer messes up worker productivity.   I can live with that, at least for awhile.

If you’d like to stall your productivity too, click on the link below.  It shows the Australian soccer team getting some training assistance from African animals.  As for me, I really do need to get back to work.

Australian Football Teams Secret Training Camp Exposed

Posted on by Jan Roberg

Scam of the Month Club

Scam of the Month Club

One of the things I like about summer is that I have more time to catch up on my reading.   Not just my summer beach novels, but my business related journals as well.  During tax season, I basically read what I have to and get back to work.  In the summer, I have time to read about all the new laws and new tax proposals and have time to really absorb the information.

There’s a whole hierarchy to the newsletters I receive:  1.  Important and relevant–those that come from my professional organizations or the IRS itself.  I pay for the privilege of getting this information and so I read it immediately.  2.  Other legitimate tax information services–there’s a wealth of information out there.  I can’t read it all, but in the summer, I like to catch up.   And 3, the group that I consider to be the “scam of the month club.”   I’m guessing that doesn’t need much explanation there.

One of the necessary evils of my job is going through my spam folder.  Occasionally I receive legitimate business mail that gets diverted to spam, so I have to sort through it.   Of course, my spam folder is where I usually find my tax scam of the month.    Now to be honest, most of the spam is so obvious that I don’t even bother to open it, but sometimes it’s kind of fun to look at.

For example:  “Write-off your Rolex, We’ll Show You How!”   No, don’t even try it.  It’s not a legitimate business expense.

One that’s been popular this year,  “Never Pay Taxes Again, it’s  Unconstitutional!”  Actually, that argument is a little old.  The income tax was declared unconstitutional in 1895.  In 1909 Congress proposed to make it part of the Constitution and it was ratified as the Sixteenth Amendment in 1913.  The government has had a right to collect an income tax for almost 100 years.

One that caught my eye the other day was “Tax Deductible Cruise.”   That one was intriguing because, to be quite honest, there are some cruises, or portions thereof, that can legitimately be claimed as tax deductions.   But, there are a lot of things out there that aren’t.

For one thing, you cannot deduct the cost of a cruise (or any other type of travel for that matter) to attend one of those investment related seminars.  You can only deduct travel related to your trade or business.  Just because the promoter of a convention says it’s tax deductible, doesn’t mean it is, you have to go by tax law.

That said, there are times when you can legitimately combine your business trip with personal travel and claim a deduction.  For example, the IRS is holding one of it’s National Tax Forums in Orlando this summer.  The IRS Forums are a very legitimate deductible expense for me.  If I spent an extra day down there visiting my good friend, Mickey Mouse, my trip would still be deductible.  I couldn’t deduct the hotel cost for the extra day spent at Disney World, but the travel costs for the trip would still be written off.

There are even some times when you may even be able to deduct that cruise, or maybe part of it, for business.  The key of course is legitimacy and excellent records.  (That’s both, not either/or.)   Legitimacy meaning that you have a real business purpose relating to that cruise.  And by record keeping, I mean that you substantiate the amount of money you spent, the time you spent it, the place and business purpose of every expenditure.  And you do it while you’re on the cruise, or right after, not six months later in your accountants office while doing your taxes.  You can pretty much guarantee that deducting a cruise as a business expense is going to get a thorough review by the IRS.  Your best defense is to have flawless records.

If you’ve read about some tax idea on the internet and you’re wondering if it’s true or not, get a professional opinion.  You certainly don’t want to miss out on a valuable opportunity, but you don’t want to be duped either.  Many scams have some point of fact in them to start with.  (Like the unconstitutionality argument, it was true back in 1895.)  You know the old saying, if it sounds too good to be true, then it probably is.

Posted on by Jan Roberg

Where’s My Tax Refund?

How to hunt down your tax refund

After you file your tax return, you should have your refund within 21 days.  Often, it’s faster than that, but not always.  Here’s how to check on your refund.

 

First step:  the quickest and easiest way to check on your refund is through the IRS website. Go to www.irs.gov and click on the “Where’s My Refund?” icon. You will need your social security number, your filing status (single, head of household, etc.), and the exact dollar amount that your refund is supposed to be for. You must have that information to get any kind of an answer.

 

From there, you’ll know whether or not your refund has already been sent, is still being processed, or if there’s something else holding up your money. A common example of that would be if you owed back child support and the state stepped in to take your federal refund to cover it. If you owe more than what your refund is for, then you won’t be seeing any of that tax money. If you refund is for more than the amount of the debt, you will eventually get the remaining balance, but it will take several weeks before you see it.

 

Let’s say that you don’t have an outstanding debt, and the IRS site says that you’ve already received your refund. Then what do you do? First, check to see if it was direct deposited into you account. That happens to be quite common. Be sure to check your bank statements before you ask the IRS to put a tracer on your refund.  Yes, that sounds like a “duh” sort of statement, but you’d be surprised how many people can’t seem to see that they’ve already gotten their refunds in their account.

 

If you did not have direct deposit but were expecting a check, the IRS can put a tracer on it. They can tell you where it was mailed to, if it was cashed, etc. They can even reissue the check if it was lost (after a specified period of time and some paperwork.)

 

One thing the IRS can’t help you with is a Refund Anticipation Loan (RAL) or Refund Anticipation Check (RAC). Let’s say you had your taxes done at a place that offers you a “bank product”, either they give you a loan against your tax refund or they take their tax prep fees out of your refund. Instead of getting your money directly from the IRS, you’re actually getting it through a third party-usually a bank that has an agreement with the tax company. If your refund is to be direct deposited into your bank account, then everything should be fine.  There’s usually a two or three day delay between when the IRS says they issued the refund and when you actually get it from a service like this.

 

Sadly, many people who use that type of service don’t have bank accounts, and they pick up their checks directly from the tax company. If you had your taxes prepared on April 15th and expected to receive one of those checks, you could have been in for a rude awakening when you went to get your refund check on the 17th and found the tax office to be closed. In fairness, your big national companies will have an office open someplace,and someone there should be able to find your check for you. It just might take some hunting to find the right person to help.

 

Then, there are those companies that just completely shut down. That’s a little scarier. (Okay, a lot scarier.) Even though your tax preparer completely disappeared, all is still not lost, because he had to work with a bank in order to process your refund. A little detective work through your papers should get you a name and phone number of the bank processing the refund and connect you with your money. To be honest, it’s an agonizing process-computerized answering machines, being on hold for ages, “that’s not my department” answers, etc. You have to be pretty persistent, but you will eventually get your money.

 

In general, it’s best to put as few layers between you and your refund as possible, and you’ll be less likely to be hunting down your refund long after it’s due.

Posted on by Jan Roberg

Garage Sales and the IRS

Garage sales provide tax-free income

Updated June 2016.

 

While a robin may be the first sign of spring, to me a garage sale is the first sign of summer. Garage sales are full of so much promise. Whether it be the hope of some extra cash or the fantasy of a clean basement, garage sales have a happy, summery feel to them.

And tax-wise, they’re almost never counted as taxable income. That makes them double good in my book. Let’s face it, everything you’re selling at your garage sale is going at a loss. Really. That baby stroller you paid $90 for but are trying to sell for $15-it’s a loss. The $50 pair of jeans that looked so good 20 pounds ago that you’re trying to sell for $10–loss. Since you can’t claim personal losses on your tax return, it doesn’t even get reported.

{Okay, tax technicality:   if you sold those items for more than you paid for them, then you should be reporting the sales and claiming the profit as taxable income. But seriously, nobody in my neighborhood is making a profit on their old junk.}

So why am I even writing about garage sales in a tax column? Because after your sale, you pack everything left over into a package for the Goodwill, right?  Of course!   Otherwise your basement will be a mess again. So here’s my point, when you do that, write down what you packed up and list  the prices you put on everything. That way, you’ll have a list of your donations which  you’re going to need at tax time.

Too busy right now? Just take a few pictures with your digital camera. Then you’ll be able to look at them when you really need that list for your 2010 tax return. Trust me, come next February, you’re not going to remember what you sent to the Goodwill in May.

So now you’ve got a triple good: non-taxable income, a clean basement, and a tax deduction all rolled into one summertime event. How can anybody not like a garage sale?

 

Posted on by Jan Roberg

Avoiding an Audit

How to Avoid an Audit

Everybody wants to avoid getting audited by the IRS.

 

Updated July 2016

Every year people ask me, “What can I do to prevent being audited by the IRS?” The honest answer is, “Absolutely nothing.” Because in fact, everyone is audited every year. You just don’t know it. Every year, your tax return is run through a computerized audit. First there is the search for missing documents—such as an unfiled W2 form or interest statement.  This is called the document matching program.

 

What I’m saying is that every year, your tax return is getting audited by a computer.  You just don’t know because you don’t hear anything from the IRS unless there’s a problem.

 

Now it used to be that when a return got tagged by the computer,  a human being would take a look at it.  A return that got snagged by the computer might still not be audited if it made sense to the human. If the human still had a question, then an audit letter went out.  Nowadays, there isn’t much human verification, so a lot more letters get sent for returns that normally wouldn’t seem to be a problem.  That’s why you don’t just want to automatically pay the IRS if you get a letter – there’s been no double check, you might not really owe.

 

Even people who don’t file tax returns are audited. The IRS runs the documents about your income even if you don’t file a return. If they determine that you’ve earned enough income to file, and you owe them money, rest assured, you’ll get a letter about it.  If the IRS figures you should be receiving a refund – rest assured, you won’t hear a thing!

 

Another audit device the IRS uses is called the DIF score, it’s a process where the IRS basically checks “what’s normal” for expenses for taxpayers in various income brackets.  The IRS tracks data for all sorts of things, if your “DIF” score is out of line for your profession, that’s also likely to trigger an audit.

 

Now I bet you’re wondering, “How do I get my hands on those DIF scores Jan mentioned so that I can keep my return from being pulled for audit?” Yeah, I’d like a copy of those too. Unfortunately, the IRS doesn’t publish them. That would be like showing your hand in a poker game.  Every tax preparer in the country would like to know how those DIF scores are arrived at.

 

In the meantime, your best defense for an audit is hanging on to your records. Now that tax season is over, make sure that you’ve put all those papers someplace safe. Hopefully, you won’t need them.

Posted on by Jan Roberg

Unclaimed IRS Refunds

The IRS won't tell you they owe you money.

If you want the IRS to give you a refund, you’ve got to file a tax return.

Updated June 11, 2016.

One thing you might not know about the IRS is that if you don’t file a tax return, they prepare one for you— whether you ask them to or not. Surprised? Well you shouldn’t be. They take the information documents that they’re sent, like your W2s, and then they compute your taxes using the worst possible filing status. If it comes out showing that you owe, then you’ll get a letter telling you to pay up.

 

But what happens if they find out that you should be getting a refund? Well, nothing. They don’t send you a letter saying, “Dear Sir: Even though you’re too lazy to file your income taxes yourself, we’ve done them for you and we want to send you a big, fat refund!”

 

Right now, the IRS has data showing that there is close to $1 billion of unclaimed income tax refunds out there. If you’ve got a refund coming, and you don’t file your return within three years of the due date, you lose out on that money forever!
But why bother? How much money are we talking about for one person? Of the people who have refunds coming across the nation, the median refund is estimated to be $718. But that’s based upon the IRS doing your taxes. You could, in fact, be owed much more.

 

For example: let’s say you are a divorced mother with two school-aged children and a mortgage. When the IRS does your return, they compute your taxes based upon you being single, taking a standard deduction, and having no children. In a case like this, that $718 refund could be worth over $4,000!

So how do you know if you’ve got money coming?  You know what they say, you can’t win if you don’t play.  Same with taxes, you can’t get a refund if you don’t file!

Posted on by Jan Roberg

IRS Emails – It’s a Scam!

the IRS won't email you

Updated June 2018.

 

I originally posted this warning over 8 years ago – and the problem is:  it’s still going on!

 

I’ve been asked to help get the word out about IRS scams.  Right now appears to be a popular time for scammers to send phishing emails masquerading as the IRS.  One of the most popular scams involves telling you that there’s a problem with your refund and asking you for bank account information.  The emails look pretty convincing with the IRS logo and official sounding language.  Don’t be fooled!  The IRS will never ask you for your social security number or bank information in an email.  Never.

 

If you receive one of these emails, please forward it to phishing@irs.gov.  That way, the IRS security staff can examine it and take action.  Be sure to delete the email and whatever you do, do not click on any links or open any attachments.  Does it really help to forward the email?  I don’t know.   But the IRS won’t know about a scam if no one tells them so I recommend forwarding it.

 

In addition to the refund scam, another popular scam involves winning a lottery or contest where the email claims that the Department of the Treasury needs you to write a check for your tax withholding.   Not true.  “Withholding” means that the contest agency will hold back some of the money that you would have received for your prize to pay the government.  You should not have to write a check to receive your prize.  Ever.

 

And the phone call that says the IRS will file a lawsuit against you?  Yep, that’s another scam.  Here’s my video about that:  IRS scam video

 

If you’d like to read more about IRS scams, check out this link.  It tells about scams, how they work, and how to recognize them.  IRS Scams

 

Most importantly, talk to people!  You’re reading this on the internet, you’ve probably heard all about these scams.  But maybe you know someone who isn’t as savvy as you are.  The whole reason scams are effective is that they catch people who are vulnerable.  Senior citizens and immigrants are often targets, but they’re not the only ones.  There are scams targeting college students, scams targeting veterans, scams targeting small business owners, etc.   You name a group, there’s probably a scam targeting them.  So please, be on guard for these scammers, and please let your friends and neighbors know about them too.  Thank you.