Category: Taxes

Posted on by Jan Roberg

What is a Progressive Tax? What is a Flat Tax?

Income Tax

Photo by Images Money at Flickr.com

I see a lot of internet questions about flat taxes and progressive taxes.  It seemed that since I do a tax blog, it was time to tackle those basic questions.

 

A flat tax is a tax that is the same for everyone, under all circumstances.  A good example of a flat tax is the sales tax rate.  It doesn’t matter whether you are rich or poor; everyone pays the same sales tax percentage.  Some cities have a flat income tax.  For example:  The City of St Louis, Missouri has a 1% income tax on wages of people who live or work within the city limits.  It doesn’t matter whether you make $15,000 a year or $150,000 a year; you still pay the 1% city tax.

 

A progressive tax increases as your income goes up.  This is what our current federal tax code is like.  For a single person, the first $9,750 isn’t even taxed.  Then the next $8,700 is taxed at 10%, the next  $26,650 is taxed at 15%,  the next $50,300 at 25%, the next 93,300 at 28%, the next $209,699 at 33% and anything over $388,351 is taxed at 35%.

 

Those rates change if you’re married or filing as head of household.  I’m not going to post all the tax rates here.  If you want to look, check out the tax rate tables at the IRS website:   http://www.irs.gov/pub/irs-pdf/i1040tt.pdf The tax rates are all listed on page 14.

 

Tax Incentives are tax rules that are intended to influence behavior.  Things like the mortgage interest deduction which is designed to help people buy homes, or the charitable donation deduction which is designed to get people to donate to charity are examples of what would be considered tax incentives.

 

There’s been a lot of talk about changing the tax code.  Right now, we have a progressive tax code with lots of tax incentives.   Major changes to the tax code will be difficult to pass; there are many lobbyists and interest groups that all have their own agendas.  There will be lots of pressure on our representatives to keep the tax loopholes.   The whole concept of changing the code is so controversial that the Senate Finance Committee leaders have offered to keep Senator’s ideas secret for 50 years.  http://www.businessweek.com/articles/2013-07-25/congress-will-keep-senators-tax-reform-wishes-secret-for-50-years

 

The tax code has nearly doubled in length over the past two years.  If I had any say in the voting, I’d like to see the tax code made easier.   Yes, a difficult tax code keeps me employed, but I can live with the consequences.  I think a simplified tax code is good for the country.

 

What changes would you make?  What deductions do we really need, if any?  What needs to go?  Post your answers, I’m curious.  Your post won’t show up immediately.  My site has a delay to screen for spam.  You wouldn’t believe what kind of weird comments there’d be without it.   But if you make a post, it will show up within a day or two.  Thanks.

 

Update:  I posted this blog on Tuesday morning, August 6.  Tuesday evening I saw this segment on The Daily Show.  I’m pretty sure that John Oliver doesn’t read my blog, but he’s at least on the same wave length.  http://www.thedailyshow.com/watch/tue-august-6-2013/don-t-mess-with-taxes

Posted on by Jan Roberg

Where’s My Amended Return?

Day 222 (Or is this Day 1 now?) - Oops!

Photo by Kate Sumbler on Flickr.com

What do you do when you file an amended tax return but you haven’t heard back from the IRS? Well now you have access to an online tracking tool to let you know what’s happening. It’s called “Where’s My Amended Return?” Okay, so the IRS isn’t so great at catchy names, but that’s probably what you’d type into Google if you were researching it right?

And the best part is, it’s not that difficult to use. Here’s a link to get you there: http://www.irs.gov/Filing/Individuals/Amended-Returns-(Form-1040-X)/Wheres-My-Amended-Return-1

If you don’t want to do this on the internet, you can always call them. The number to follow up on an amended return is: 866-464-2050. That is a toll-free number, I recommend not calling when you can click the link and get the information much faster. Save calling the IRS for those times when you absolutely need to.

In order to access the amended return information (whether you call or use the internet) you’re going to need to provide the following information: social security number (if you’re married filing jointly you’ll need the social of the primary taxpayer–the primary is the person whose name is on the top, not necessarily the one who makes the most money. You’ll also need your of birth (or the primary’s) and your zip code.

The “Where’s My Amended Return?” website will only access information on 1040Xs for the current three eligible years. If you amended old tax returns or you have Net Operating Loss Carry-backs–this website won’t have any information for you, you’ll have to call the IRS directly for that information.

While this new web tool is good for most returns, there are a few other things you won’t be able to get information on: injured spouse claims, returns with foreign addresses, and business returns are not available here. Also, if your amended return was re-routed because of some special circumstance; such as you amended your return because of a CP2000 notice (that’s one of those IRS nasty little ‘whoopsie we think you made a mistake’ letters.)

Even though there are many types of returns that aren’t listed in the “Where’s My Amended Return” website, it’s the best place to start. Any time you can get an answer from the IRS without having to actually call and wait on hold it’s a good thing.

Generally, you’ll have to wait at least three weeks before you can access information from the “Where’s My Amended Return?” website. Most amended returns take 12 weeks to process and some can take even longer. If you’re looking for a refund, think in terms of waiting at least three months before you’ll see the money.

Of course, if you owe, you should pay right away, because the debt will back date to the date the original return was due and the IRS will start charging you penalties and interest from that point in time. For what it’s worth, they do pay you interest if you have a refund coming.

Amended returns are not the fastest thing happening at the IRS, but at least now you have a tool for tracking them.

Posted on by Jan Roberg

Innocent Spouse Relief

Innocent spouse relief form 8857

If you had no knowledge of your ex-spouse’s business dealings and tax issues, you may be eligible for innocent spouse relief from the IRS.

 

Innocent Spouse and Injured Spouse are two terms that often get confused when people are looking at IRS issues. You are an injured spouse if the IRS takes your tax refund to pay for a debt that is owed by your spouse. You may be able to retrieve some (if not all) of that money by filing an injured spouse claim. For more information on that see Injured Spouse Relief: http://robergtaxsolutions.com/2011/03/injured-spouse-relief/

 

Innocent Spouse is where your spouse (or rather ex-spouse) has done something where there is tax liability for which you don’t have any responsibility for. Let me give you an example:

 

Abusive spouse is running around and gambling behind your back. You’re living in a hovel while spouse is living large, playing at the casino and spending money on fancy hotels and alcohol. You finally escape the situation and divorce bad spouse only to find that the IRS is after you for spouse’s tax debt from the gambling winnings. You had no knowledge of the money, and the spouse was forging your signature on the tax returns. This is where you would file for innocent spouse relief.

 

It used to be that you had to file an innocent spouse claim within two years of the actual tax return. Most innocent spouses weren’t able to file that quickly. It often takes longer than that to realize there’s a problem, or get out of an abusive situation. Fortunately, the IRS realized that and they’ve eliminated the two year rule. If you have applied for innocent spouse relief before and were denied because of the two-year rule, you may re-apply.

 

There are three types of Innocent Spouse Relief:

 

Innocent Spouse Relief – you filed a joint return and there is understated tax that is due to erroneous items like unreported income or unsubstantiated deductions, and you had no knowledge of these things. (Example, you get an audit letter about income your ex had that you had no knowledge of.)

Separation of Liability Relief – this is where an unpaid tax liability is divided between you and your ex-spouse for taxes that were filed while together. No refunds are granted in this case, only a separation of liability for unpaid taxes. (You get divorced and you agree that you will pay $X amount of tax which was your responsibility and your ex will pay $Y amount. You pay your share and your ex doesn’t so the IRS goes after you for the tax money. This is a good time to file for Separation of Liability Relief.)

Equitable Relief – if you don’t qualify under one of the above categories but it would be grossly unfair to force you to pay the tax, like in the abusive spouse example above.

 

A couple of other general things you need to know. First, you can’t have transferred assets or done anything fraudulently try to avoid paying taxes. You either had to not know about the tax owed or you were forced to sign documents against your will. Often, there is some type of abuse in these innocent spouse cases, you will be required to substantiate that. This isn’t an easy process. The worst part is if you file for Innocent Spouse Relief, your ex will be informed. If you are the victim of an abuser, you need to make sure that you are physically safe before you file this type of claim.

 

To explore if you might qualify for Innocent Spouse Relief, try this interactive questionnaire on the IRS website: http://www.irs.gov/Individuals/Explore-if-you-are-an-Eligible-Innocent-Spouse

 

Here’s the form that you file for Innocent Spouse Relief: http://www.irs.gov/pub/irs-pdf/f8857.pdf

 

You file this separately; it does not go with your tax return. It gets mailed to

 

Internal Revenue Service
Innocent Spouse
Stop 840-F
PO Box 120053
Covington, KY 41012

 

OR,

 

You may fax the Form 8857 and attachments to the IRS at 855-233-8558.

 

Make sure that you put your social security number on every page of the attachments.

Posted on by Jan Roberg

Common Law Marriage and Your Tax Return

The married couple

Photo by Carrie Phisher on Flickr.com.

I often get contacted by people who are facing an audit based upon their “family relationship.” The IRS will send an inquiry about a person’s relationship to a child in an EIC claim and the person being audited will say that he or she is “common law” married to the child’s birth parent.

Here’s the thing: the rules for common law marriage are very specific. I know that a lot of people seem to think that a couple is common law married if they live together for seven years. That’s just not true. (I used to believe that too, it’s something I was told when I was a kid.)

But in reality, there are only certain states that recognize common law marriage. If a couple is deemed common law married in one of those states and then move to a non-common law marriage state, the new state still has to recognize the marriage.

In most common law states, you can’t just say you’re married, you have to “hold yourself out to be married”. For example: you call yourselves husband and wife, you file joint income tax returns, you use the same last name.

If you have a common law marriage, and you end your relationship, then you must get a divorce even though you never had a wedding.

If you’re going to argue to the IRS that you have a common law marriage, you need to know the facts. First, you need to know which states recognize common law marriage in the first place:

  • Alabama
  • Colorado
  • District of Columbia
  • Georgia (if created before January 1, 1997)
  • Idaho (if created before January 1, 1996)
  • Iowa
  • Kansas
  • Montana
  • New Hampshire (but only for inheritance purposes, this won’t work on your tax return)
  • New Mexico
  • Ohio (if created before October 10, 1991)
  • Oklahoma (but there’s conflict in the courts, marriages created before November 1, 1998 are recognized, common law marriages after that date may not be recognized)
  • Pennsylavania (if created before January 1, 2005)
  • Rhode Island
  • South Carolina
  • Texas
  • Utah

If you live in one of these common law states, you will need to check with your state to find out the rules that make you qualify as married. This link gives you an outline of some of the state requirements. http://www.uscis.gov/ilink/docView/AFM/HTML/AFM/0-0-0-1/0-0-0-26573/0-0-0-30679.html

Common law marriage is not to be taken lightly; it’s marriage. Before you use the common law marriage argument with the IRS, make sure you’re serioius about being married.

Posted on by Jan Roberg

Filing an Extension for Your Personal Taxes

To the finish

Photo by david.ian.roberts on Flickr.com

Are you late filing your taxes this year? You’re not alone. It seems that many people are behind.

 

It’s important to know that an extension gives you an extension of time to file your tax return; it’s not an extension of time to pay your taxes. I think a lot of people want to file extensions because they owe and they think it will give them more time to pay. It doesn’t.

 

The penalty for paying late is ½ of 1% per month. So, let’s say that you owe $10,000 on your taxes. You file an extension, but don’t pay anything towards what you owe. When you actually file and pay in October, instead of owing $1000, you’re going to owe an extra $300. (.005 times $10,000 times 6 months = 300)

 

No matter what, if you’re not ready to file your taxes before April 15th, do file an extension. Although the late payment penalty is ½ of 1% per month, the penalty for not filing (or filing an extension) is 5% per month. That’s ten times as much as the late payment penalty. You don’t want to have to pay that.

 

If you need to file an extension—that is, ask for more time to file your taxes, here are three ways to do it:

 

1. File electronically, using tax software. If you don’t have tax software already, you can use the 1040.com software on this website. Here’s a link: Do Your Own Taxes

 

2. You can mail in a paper copy of the extension form. It’s called a 4868. Here’s a link: IRS Extension Form

 

3. You can make a payment towards your taxes with a credit or a debit card. And that will give you an automatic extension for your taxes. If you just want to make a payment, it’s pretty easy. You’ll start at the IRS website, and chose your payment provider from there. Here’s the link:  IRS Direct Pay

 

So if you can’t get those taxes done before filing time, do get that extension filed.  If you owe the IRS, it could save you some money!

 

 

 

 

 

 

 

Posted on by Jan Roberg

Top Tips to Prepare 1099-MISC Forms on Your Own

1099MISC

You can prepare your own 1099 MISC forms. All you need are the right forms.

 

The 1099-MISC form is what you need to give to a contract laborer if you pay them over $600 in the course of the year.  There’s a whole new emphasis on reporting and so many more businesses are finding that they need to be issuing 1099s.  But there’s a lot of confusion about how.

 

A few years ago I was at the IRS office near my house asking if they had any of the new 1099-MISC forms that I could have.  “What do you want them for?”  The IRS agent asked me.  So I explained to her that I was teaching a class about 1099s and wanted to have the actual forms to hand out to the class.

 

“Oh thank God!”  She said.  Now, I work with the IRS a lot.  I do audits and debt resolution, and although I genuinely like most of the agents I get to work with, I can assure you that “Oh, thank God,” is not a phrase used when the IRS is dealing with me.   (Unless it’s used as “Oh thank God she’s gone now, but that’s about it.)

 

So I asked her why she was so excited that I was teaching a 1099 class and she told me about all the mistakes that they see and the problems they have with bad 1099s. “Somebody’s got to teach this stuff,” she told me.    So I figured it would make for a good blog topic.

 

The Basics

 

Here’s a link to see the 1099-MISC form.   1099MISC       If you’re the business owner, you need to issue the 1099 to the recipient by January 31.  New for 2017 – you must submit the 1099 to the IRS by January 31 also.

 

My directions here are just an overview; here are the official IRS directions:   IRS 1099 Directions  If you have questions, that’s the best place to look.

 

The Quick and Dirty

 

Generally, when you prepare a 1099-MISC you’ll put the dollar amounts in box 7 for non-employee compensation.  If you’re preparing a 1099-MISC for any other reason, you should check the rules to make sure you’re using the right box.  I’m talking about non-employee compensation.  Write in the white part of the box, not the red.

 

Payers name, address, etc, is you.   Recipient is who you paid.  I recommend using EIN numbers instead of Social Security Numbers whenever that’s an option for safety.

 

You put the whole amount of money you paid the person into box 7.  For example, let’s say I hired Brad the Painter to do some work in my offices.  I paid him $600 for the labor, $75 for the paint, and $25 for his parking.  If I paid that money to Brad, even though part of it was for supplies not labor, I give him a 1099 for the whole $700.  Brad will write off the $75 for paint and $25 for parking as his business expenses.

 

Mail your 1099MISC with a transmittal form.  1096 Transmittal Form   

 

The filer is you (or your company.)  The forms being reported is the 1099-MISC.  The total amount reported on the 1096 is the total of what you paid the 1099 contract laborers.  Here’s a clue—that number you put in box 5 should also go somewhere on your business tax return as a 1099 contract labor expense.

 

The IRS’s Biggest Complaints

  1. People are supposed to use the red forms.  You have to use the real form; you can’t print it off the computer, even if you have a color printer.  Those forms are scanned so it has to be the right paper.  You can order your 1099-MISC and your 1096 transmittal from for free from the IRS.  Here’s the link:  IRS Forms Order
  2. Don’t cut the copies.  Leave all the pages whole.  If you only have 1 form to issue, just leave the second one blank.
  3. Don’t staple the returns.  Don’t fold, spindle or mutilate them in any way.  They have to go through a scanner so leave them plain.
  4. That means you have to mail them in the big envelope.  I keep getting asked about that.  Don’t fold means use a big envelope.

 

Smaller Complaints

  1. Do not use a $ sign when typing in the amounts.  It’s already on the form.
  2. Do use a decimal point and cents.  So I didn’t pay Brad $700 I paid Brad 700.00
  3. Do not put 0’s in spaces, just leave them blank.
  4. Do not use # signs.  For example, on the form 1096 where it asks for the number of forms, I would write 1, not #1.

 

A note about handwritten returns:  Handwritten returns are more likely to have errors than other returns.  Usually it’s a Taxpayer Identification Number and name mismatch.   If you are using a person’s name—use their social security number.  If you are using a business name, use the EIN number.  That’s a common mistake.    Be sure to use block print and not script.  Yes, I need to say, print neatly.

 

If you are typing it on a typewriter, you need to use black ink and 12 point courier font.

 

The 1099-MISC reporting rules have a lot of people confused, but you don’t have to do this alone.  We can prepare 1099-MISC for a fee and we e-file them with the IRS.

Posted on by Jan Roberg

Seven Things You Need to Know About Claiming the Foreign Earned Income Exclusion on Your US Tax Return

Euro

Photo by mammal at Flickr.com

If you’re an American citizen working outside of the country, you may be able to exclude some (or even all) of that income from your US income taxes by using Form 2555, the Foreign Earned Income form. Here are some things you need to know about the form:

 

1. Currently, the exclusion for 2012 is $95,100. The exclusion for 2013 will be $97,600.

 

2. In order to claim the exclusion, you must have a tax home in a foreign county. You must also meet the bona fide residence test or the substantial presence test. Basically, if you work full-time inside a foreign country for the entire calendar year, then you’ll meet the bona fide residence test. If you work outside the United States for 330 days out of a 365 day period, then you’ll meet the substantial presence test.

 

3. If you are in a foreign country as a US government employee, then you are not allowed to claim the foreign earned income exclusion.

 

4. When reporting your foreign income, remember to convert any income and expense amounts into US dollars. You can get foreign currency exchange rates from the US Department of the Treasury: http://fms.treas.gov/intn.html

 

5. If your income turns out to be higher than the exclusion amount, your tax rate will be the higher rate, as if you had to pay tax on the full amount of income. For example, if you prepared your tax return and after claiming the Foreign Earned Income exclusion and any other deductions that you were entitled to, let’s say you have $5,000 of taxable income left. Normally for a single person, $5,000 of taxable income would mean $500 of tax—because that’s the 10% income tax bracket. But not in this case. It’s more likely to be $1400, because when you add back the excluded income, it puts that single person back into the 28% tax bracket.

 

6. If you are married and your spouse works, you may each claim an exclusion for foreign earned income.

 

7. If you claim the foreign earned income exclusion, you cannot take the credit for taxes paid to a foreign country on any income that was excluded. If your income exceeds the exclusion amount, it’s generally a good idea to run the numbers both ways to see which gives you the better tax advantage.

 

Expat taxes can be confusing. If you’re trying to navigate your way through the Form 2555, give us a call, we can help.

Posted on by Jan Roberg

Is My Social Security Income Taxable?

Do I have to pay tax on Social Security?

Photo by Jan Roberg.

People often ask me if their Social Security income is taxable.  No, sorry, I just lied.  When I finish preparing  a tax return for someone on Social Security I’ll often hear, “What do you mean my Social Security is taxable? ”  People who say that are usually angry when they say it too.  But, for many people, Social Security is taxable.

So how do you tell if your Social Security is going to be taxed?  Here’s the quick and dirty way to figure it out.  First, take half of all of the Social Security income you get and add that to all of the other income you get.  If you’re single and the amount is over $25,000 you’ll start getting hit with tax.  If you’re married filing jointly—then you’ll start getting hit at $32,000.  If you’re married-filing separately and don’t live apart—then it’s all taxable.

So this can totally mess up your tax rates.  For example—let’s say you ‘re currently in the 15% tax bracket and you haven’t crossed into “Taxable Social Security Land” yet, but you’re right on the border.  You want to take a really nice vacation and it’s going to cost you $10,000.  How much money do you need to take out of your IRA to go on vacation and pay the income tax?

Well, you know you need 15% more for the tax so let’s say you take out $12,000.

$12,000 X 15% = 1800

That means that you’ll have $10,200 for your vacation, right?  (12,000 IRA – 1,800 income tax = 10,200 vacation money)

Looks good, except it’s wrong.  See, if you’re on that border, then half of the $12,000 is going to go into the taxable Social Security pile.  So instead of paying 15% on $12,000 you’re paying 15% on $18,000; that’s another $900 in taxes.  ($18,000 X 15% = $2,700    and    $2,700 – $1,800 = $900) 

Now you don’t have enough money to pay for your vacation.  You’ll need to be taking more out of your IRA and then even more of your Social Security will be taxed.

Because taking that distribution makes your Social Security Taxable—your real tax rate is 22.5% instead of 15%.

$2,700 tax divided by $12,000 distribution = 22.5% tax rate

For lots of people, there really isn’t much you can do.   If your income is high enough, you’re stuck with your Social Security being taxed and there’s no way out.   But for some folks—you can plan ahead to avoid this bumped up tax—or at least try to reduce it.  You’ve got to know about the tax though if you’re going to plan ahead for it.  If you want help figuring out if your Social Security is taxable, give us a call.

Posted on by Jan Roberg

Olympic Tax Bill

Olympic Flag

Photo by SouthEastern Star ★ on Flickr.com

It seems that Congress is falling all over itself trying to make the prize money that our Olympic athletes win in London tax exempt. They’ve had a week to watch the games, think about it, and propose legislation. Pretty fast work for our political leaders. I guess Congress cares about your tax bill if you’re an amazingly great athlete—but they don’t care enough about the rest of us to finish the work for settling the tax code for our 2012 taxes. Yes, I’m talking about this year’s taxes!

 

Seriously, we’re hearing all of the candidates talk about what they want to do with our taxes for 2013—next year. But as of this date (August 2012) there are several tax issues that still haven’t been decided about your taxes for this year. Did you know that?

 

Here’s the big thing we don’t know yet:

 

AMT, the Alternative Minimum Tax. Right now, the exemptions for AMT have fallen to the old 2001 levels. If you were married filing jointly in 2011 and made less than $150,000, your AMT exemption would be $74,450. Using the 2001 rules, the exemption is $49,000. Now for most people, talk about Alternative Minimum Tax sounds like a bunch of mumbo jumbo—but to put things in plain English—if our people in Washington do not settle this issue, 20 million more Americans are going to get hit with the AMT tax this year. Most of those people have no idea this is coming. You could be one of those 20 million and not even know it. And I’m talking about 20 million people who will be added to the AMT rolls; people who already pay the alternative minimum tax will be paying even higher AMT taxes than in previous years. Thousands of dollars more!

 

Now, in fairness, the Senate does have a bill on the floor that would actually increase the exemption by $4,300. I expect it to pass (I hope), but not until much later this year, like in December. There’s something fundamentally wrong with not knowing what you should have to pay on your income taxes until after you’ve already earned your entire year’s salary.

 

Some other tax issues for this year that are still up for grabs include: deducting state and local sales taxes instead of state income taxes, the classroom teacher deduction of $250, allowing senior citizens to transfer IRS funds to charity tax free, the tuition and fees deduction for college expenses, and a whole host of business related tax incentives. How can you make a move if you don’t know if you don’t know if you’re allowed to do it or not?

 

Congressional inaction on current tax issues means that many people will have their refunds delayed next year. That’s not fair to you or to me.

 

But back to the Olympic athletes: I’m an Olympics junkie. I love watching the games and I admire our athlete’s accomplishments. And when NBC does its little heart tugging stories on our athletes’ struggles, I understand wanting to give them all a break. But how much of a tax break do we really need to give folks like Serena Williams, Michael Phelps, and LeBron James? They’re already making millions of dollars a year. Here’s the thing—if Congress were to pass the new AMT exemption—it would essentially make Serena’s gold medal prize money tax free, while at the same time helping millions of other Americans who could probably use the tax break a little more than Serena does.

 

I get it, the Olympics is news and talking about them gets our politicians some media exposure. (Guilty as charged, I’m blogging with an Olympic theme myself.) But there are some very real tax issues this year for the rest of us that Congress hasn’t addressed yet – and we deserve to have our leaders settle the issues sooner, rather than later.

 

PS: As far as the medal earnings for the athletes that are not already millionaires is concerned—any decent accountant will be able substantially reduce the tax on Olympic winnings, and in many cases reduce it down to zero. From a serious tax standpoint, it shouldn’t even be an issue.