Category: Uncategorized

Posted on by Jan Roberg

Summer Jobs for Teens Part 1, Five Things You Need to Know

teens need summer jobs

School's almost out!

Schools almost out and it’s summer job time. Here are five things you should know before you go to work:

1. The federal minimum wage is $7.25 an hour, but if you’re under 20 years old and you’re a new hire, the business can legally pay you $4.25 for the first 90 days of your job. There are also exceptions to the minimum wage laws for student workers, student learners and persons with disabilities; so if you fall into one of those categories you may not receive the $7.25 per hour even if you work longer than 90 days.

2. The minimum wage for people who get tips is $2.13 per hour, (basically restaurant wait staff)  if that amount plus your tips brings you up to the minimum wage. If you’re working in a restaurant keep really good track of the tips you receive. Every night you’re going to want to count out your tips and write it down. (It’s called a tip log.) You might need this as evidence at tax time that you didn’t really make as much money as your employer claims you did.

3. Wages: if your employer is going to pay you “wages”, you will need to fill out a W4 form. Here’s what one looks like: http://www.irs.gov/pub/irs-pdf/fw4.pdf    Don’t bother with all the questions at the top, just go straight to the bottom part where you start filling in your name and address. Check the box that you are single. On line 5 you are going to write 0 exemptions. If this is your first job ever and you’re only going to work over the summer and you are positive that you won’t make over $5,600 for the entire year, then write the word “exempt” on line seven. That means you’re telling your boss that you don’t want any federal income tax withheld. If you want to get a refund next April, then don’t write exempt, just keep the 0 on line 5 so there will be withholding.

4. Social security and medicare. It’s kind of hard to wrap your head around the idea that you’re paying social security and medicare taxes when you’re only 16 or 17, but you are. When you get your first paycheck, even if you say that you don’t want any federal income tax withholding, you will still be paying social security and medicare taxes. Let’s say that you get a job at $7.25 an hour and you worked for 20 hours before your first paycheck. Your pay should be $145. Your check though will only be for $136.81, because your employer has to take out $6.09 for social security and $2.10 for medicare.

5. Self employment. Some employers don’t want the hassle of handling payroll taxes on their summer help. They don’t give you a W4 form to fill out for your withholding, they give you a W9, it looks like this: http://www.irs.gov/pub/irs-pdf/fw9.pdf?portlet=3 What that means is your boss isn’t going to pay your social security and medicare taxes for you—you’ll have to do it yourself. This is really important—if you are a W9 worker, then you’ll have to pay income taxes in April. It means that you are self-employed and that you own your own business. Generally, students who make less than $5600 a year pay no income tax come April, but if you are self employed, you will pay taxes if your income is over $400. Every year I have to help students who found they had to pay taxes they had no idea they owed. It’s okay to work a W9 job, but know that you’re going to have to pay taxes on it. Here’s a link for more details on that: http://robergtaxsolutions.com/2010/09/employee-or-contract-labor/

Good luck with your job hunt and have a great summer!

Posted on by Jan Roberg

Rethinking Your Auto Deduction

claiming actual versus mileage expenses for your auto

Green Hornet car, photo by Jan Roberg

Generally, when I’m filing a tax return for a business owner, I tend to use the mileage rate.  For many of my clients, it’s the best deduction for them financially.  For some of them, I use mileage because they don’t keep good enough records for me to use their actual expenses. 

To be honest, I hadn’t really pushed the actual expense method much, but with gas prices creeping upwards of $4 a gallon and the IRS mileage rate at only 51 cents a mile, it’s time to rethink strategy.  Remember, you never want to leave money that’s yours on the table for the IRS.  If you want to claim your actual auto expenses for your business, there are some things you need to know.

 First, whether you claim your mileage or your actual automobile expenses, you still need to keep records of your business mileage.  A real common mistake people make is they think that they can hand over a bunch of receipts and claim their actual business auto expenses.  It doesn’t quite work that way.  You have to track your business versus your personal miles in order to determine a percentage.  Let’s say you saved all of your receipts for your auto expenses and they totaled $5,000.  It means absolutely nothing if you aren’t able to tell me how many miles you put on your car this year and how many of those miles were for business.    Without the mileage information to go with it, the $5,000 in receipts is pretty worthless.   

Now I’m quite certain that people “make up” their mileage all the time.   But I also know, if you are selected for an audit and you have claimed auto expenses; I guarantee that your mileage log will be requested.  I guarantee it. 

So why set yourself up for losing an audit?  Keep good records, and you’ll have nothing to worry about.  What’s even better is that you may even find that you have a bigger deduction to claim than you would have had just by guessing at your miles.  (True story, client got audited, had to recreate his mileage log.  He used to lowball his mileage estimate to avoid an audit.  He’d listen to what the other guys in the office claimed and lowered his a little to be “safe.”  It didn’t work.  Turns out he underreported by about 5,000 miles.  That’s a $2500 deduction.  In his tax bracket that was worth $625.  Wouldn’t you like to have an extra $625?  He’s my best record keeper now.)

So now you’ve got your mileage log and you’ve determined that exactly 25% of your miles are used for business.  If we go back to the $5,000 of auto expenses you had, that would give you a deduction of $1,250.   You’d check that against what your deduction would be for claiming straight mileage.  As long as you claimed mileage the first year you put the car into service, you can switch back and forth between actual expenses and the mileage rate.  If you started with actual expenses, you have to stay with actual expenses until you change vehicles.

So if you’re claiming actual auto expenses this year, what do you need to keep track of?  Besides your mileage, you’ll want receipts for your gas, car washes, auto repairs, oil changes, tags, personal property taxes,  and insurance.  I can hear you thinking, “I don’t have receipts for my gas.  It’s too late to start for this year.”  Not really.  One nice thing about auto expenses is you don’t actually have to have a receipt for anything under $75—you may have to start saving the gas receipts soon, but most of us can still fill up for under $75, just barely anyway.  I always get my gas at the local shell station.  I always pay with my debit card.  I can go to my bank statement and tell you exactly how much money I spent in gas this year.  Granted, I’m boring and predictable (I do taxes for a living, give me a break!)  But I bet you can reconstruct your gasoline expenses too.   And from here on out, you can keep better records.  Please note–when I say you don’t need a receipt, that doesn’t mean you don’t need proof, you do need proof, you just don’t need to have the little printed receipt from the gas pump if the expense is under $75.

When you claim your actual expenses, you’ll also be claiming depreciation.  There are special rules and regulations about the depreciation you can claim on luxury cars, but most software programs these days will tackle that for you.  Remember that you’ll need information on the date your purchased the vehicle, the price you paid, and when you placed the car in service (using it for your business.)   Because you kept track of your mileage, you’ll know your exact business use percentage to claim as well.

But what about your mileage?  What if you haven’t been keeping records of that?  Once again it’s not too late.  In a perfect world, you have perfect records for the entire year.  But, if you have consistent auto usage, you can keep good records for 90 days and use those records to extrapolate the mileage for your return.  (Extrapolate is a pretty big word for the likes of me.  It basically means that if you’ve got good records for 90 days, we can make a pretty good guess as to how you did the rest of the year.)  A full year of tracking  is better, of course, but the 90 day rule has been accepted by the IRS in audits before so it’s a workable documentation plan. 

It’s really not too late to start tracking your actual auto expenses for your business.  But don’t wait much longer or it will be.

Posted on by Jan Roberg

How Long Should I Keep My Tax Records?

Files? What files?

Photo by Brian Wolfe.

It’s time for spring cleaning!  Every year around this time I receive phone calls from people who want to know what they can throw away.  Hopefully, this will help you decide what stays or goes.

According to the IRS, normally tax records should be kept for three years.  For the average taxpayer, 2007 and older can go. 

While the IRS says three, I prefer seven.  I personally wouldn’t throw away a tax return that’s any newer than 2004.  Here’s why:  Three years is the general statute of limitations for the IRS to pursue getting additional tax money from you.  Oops, you accidentally omitted a W2 when you filed your 2006 return—the IRS has three years to notify you of the mistake and request payment.  Normally, too late—too bad.  But—let’s say you omitted more than 25% of your gross income from your return, well then-now the IRS statute of limitations is six years instead of three.   How do you prove your case without your tax return?

If you haven’t filed a return at all-there is no statute of limitations so throwing away documents is certainly not a good idea there.  I always recommend filing a return even if you don’t owe anything in order to force the limitation period. 

(I’ve seen a few senior citizens get burned from not filing.  It’s rare but it does happen.  For example:   A business gets audited and they have issues going back 5 years.  The business finds it should have issued a 1099 so they send it late to avoid paying taxes and penalties  from their audit.  Now the senior citizen, who thought he didn’t have a tax issue get’s an audit letter for 5 years ago.  His only income was social security and that little job he did on the side.  The senior didn’t know about self employment taxes, he just figured the income was so small he didn’t have to file.   Now he’s facing huge penalties and interest on a bill that’s 10 years old.  Had he filed a tax return, even if he omitted the 1099 income, the statue of limitations would have prevented the IRS from coming after him  5 years later.)

There is also no statute of limitations if you file a fraudulent return.  Let’s say you claim a $10,000 deduction for contributing to a charity that doesn’t exist, or one that does exist but you never really gave them the money.  (Yes, that’s pretty common and yes you will get caught if you try.)   That’s tax fraud, and if the IRS proves that you committed fraud on the one return, they can go back and look at another return, and another, and another.  Get the picture?  Now, if you’re making stuff up about your charity you won’t have any documents to save in the first place.  But you should keep all of the legitimate documentation for those returns in a safe place.  Once you’ve been caught committing fraud, everything else on your tax return is subject to scrutiny and without documentation, you could wind up losing your legitimate deductions also.     

You’ll want to keep documents that relate to the purchase of a home, stock, or business property for longer; at least until the property is sold, and then for at least three years after that.  Especially hang on to documents showing that you have purchased stock.  Most people naturally hang onto home and business property documents, but stock purchase documents seem to get lost.  In a perfect world, you buy your stock and the company you buy it from keeps the records and you don’t have to think about it.  The world is not perfect.  Hang on to your stock purchase and sale documents.  Without them you’re leaving tax money on the table for the IRS.

If you are not a US citizen and you’re living in the United States, keep copies of all of your US income tax returns forever.   The IRS does not provide information to the Immigration Department.  Your tax returns could mean the difference between staying in this country and deportation. 

If you are a foreign citizen, living in a foreign country and you file or have filed US tax returns.  Keep a copy of any US tax return that you have filed and any proof of filing.  For you, the proof of filing is what’s really important.  If you electronically filed, you’ll want a copy of your e-file confirmation, if you mail returns, use certified mail, return receipt requested and keep those receipts with your tax papers. 

If you have business expenses, you’ll want to maintain receipts and records of any expenses you have relating to your business.  If you have a home office, that includes your expense records for your utilities, rent or mortgage interest also.  If you’re not claiming a home office, you don’t need to save all of your utility bill receipts.  Some cities have special programs for seniors where they can get rebates on their utility bills.  If you participate in a program like that, you’ll want to save your receipts for as long as the program requires, usually at least a year.

One final thing:  if you’re throwing away tax documents, use a shredder.  Your tax documents have your name and social security number.  Those two pieces of information plus your date of birth will pretty much give an identity thief everything he needs to access your bank accounts, which are often also listed on your tax returns.  Be safe out there.

Posted on by Jan Roberg

Will I Go to Jail for EIC Fraud?

EIC Fruad

There’s a big difference between accidentally claiming your child and criminal tax fraud.

I often hear the question, “Will I go to jail if I cheat on my taxes?”  People see celebrities go to prison all the time, Richard Hatch, the guy who won a million dollars winning “Survivor”was been all over the news for awhile for tax evasion.  He spent four years in prison.   Note:  if you win a million dollars on national television, it’s safe to assume that the IRS knows about it and is looking for it on your tax return.  Other celebrity tax evaders include Wesley Snipes, Darryl Strawberry and Willie Nelson.  (And the list goes on and on….)

But what about EIC fraud?  What happens to you when you claim a child that’s not yours, or if you allow someone to claim your child when that person isn’t the parent?  What’s the punishment there?

If the IRS examines your return and finds that you cannot claim EIC, the worst case scenario would be that they impose “civil fraud” penalties on your return.  The penalty for civil fraud is 75% of your underpayment of income tax.

Say for example that you involved yourself in a scheme where you claimed children that didn’t belong to you over the course of three years.  The difference between what you received as a tax refund averaged $5,000 more each year than if you didn’t illegally claim those children for a total of $15,000 in excess refund dollars.  When the IRS catches up with you, they will demand their $15,000 plus another $11,250 for the penalty which would make your balance due $26,250.  Add to that the interest you’d be charged and you see how costly this is.

What makes this even worse is that if you are charged with civil fraud the IRS can then turn the case over to the Criminal Investigation Division for prosecution.  You could face both civil and criminal penalties at the same time—meaning they put your butt in jail, levy your bank account and put a lien on your house and any other property you own.

Most people who get caught for EIC fraud don’t have the money to pay back the tax owed, not to mention the added fines.  And of course, the higher the dollar amount owed to the IRS, the higher the likelihood of criminal charges.  So you really don’t want to hear the word “fraud” if the IRS comes calling.

But that’s the worst case scenario, fraud is pretty dangerous stuff, and they have to be able to build a case for it.  One of the key points of fraud is that you knew you were doing it.  I once spoke to a potential client over the phone, she had received an IRS letter and they were charging her penalties for fraud.  As she explained her case, she kept insisting that “she didn’t know.”   I thought there might be a case for her so I asked, “You mean you didn’t know it was wrong to claim someone else’s child?”  She said, “No, I didn’t know I could get caught.”  That’s not going to get you off of fraud charges.  I gave her the name of an attorney—if there’s a possibility of criminal charges, you’ll want the tax attorney over the EA or CPA.  (EAs and CPAs have client privilege for tax issues only, for criminal cases, only an attorney has privilege—meaning what you tell them, they can’t tell on you.)

In most cases though, a much more likely scenario is an accuracy related penalty—that would be 20% of the under-reporting.  Let’s say you live with your girlfriend, she has a kid, she said you could claim the kid; you don’t know it’s illegal but you get caught.  You’ll have to pay back the EIC plus the accuracy related penalty.  If the EIC difference was $5000, then you’d add another $1250 making the balance due $6,250.  The IRS would add interest to that as well.

Generally, if you lose an EIC audit, you’ll also be banned from claiming EIC for somewhere between 2 and 10 years depending upon the severity of the case.  That’s probably the worst penalty for most people.  Many of the people who get in trouble for EIC generally are able to claim EIC in other years.  Being banned from EIC for 10 years can cost a person over $50,000.  That’s a lot of money.

Accuracy penalties usually involve amounts of over $5,000.  If your EIC under-reporting is less than that, you’re more likely to pay “late payment” penalties which are equal to ½ of one percent per month.  For example, you file your return in February of 2008, in March of 2010 they catch up with you.  This means that the penalties have been adding up for 24 months, you’ll pay 12% for the penalty, plus the interest owed.  Let’s say you only got an extra $1000 for falsely claiming EIC, you’d have to pay back $1,120 plus interest of course.  The IRS will always get their interest payment.

But what if it’s not my fault? That’s a very common question.  What if it really isn’t your fault?  What happens if you went to a preparer that didn’t know any better and claimed EIC for you when she shouldn’t have.  Or worse, you had a crooked preparer.  (These things really do happen.)

You’ll have to report the preparer.  There are serious fines and penalties for tax preparers associated with EIC negligence and fraud.  The smallest, yet the easiest to prove, is the EIC due diligence paperwork.  For every tax return that has EIC on it, a paid preparer must have a form 8867.  Here’s a link to see what it looks like:  http://www.irs.gov/pub/irs-pdf/f8867.pdf

The link is to the official IRS form.  In my office, my computer software actually uses the same form but I’m required to sign it and have my client sign it as well basically stating that everything on the EIC form is true.  Here’s the thing—the IRS can call up any tax office at any time and say, “Hey, we’re coming to audit your 8867 EIC forms.”  As the owner of a tax business, I have to be able to pull them all and have them ready for inspection.  If I don’t have an 8867 form for every EIC tax return I prepare, its $100 for each one I’m missing.  Guess what, I’m not going to be missing any of those forms.   I can’t afford it and I don’t prepare that many EIC returns.  You can bet that an office with lots of EIC returns has itself covered in the forms department.

So here’s where I’m going with this, if your preparer really is crooked, do report him to the IRS, it’s the right thing to do.  But if you lied to your preparer about your relationship to the child you claimed or some other EIC offense, and the IRS goes to the preparer’s office and pulls the 8867 forms, and they find a signed affidavit with your signature saying that you are the actual parent of the child—now you’ve just proved that you committed a fraud.  That’s the last thing you want to do.  Remember, a plain error costs a lot less than fraud and there’s no jail time involved.

So what should I do if I receive an EIC audit letter?  If you have the rightful claim to EIC, fight it.  If you’re not sure, maybe you do, maybe you don’t—seek professional help.  I’ve seen innocent people lose EIC audits because they didn’t know the rules.  Don’t take chances, it’s too costly.  If you know for a fact that you should not have claimed a child, pay up and get it over with as quickly as possible.  It won’t be easy, but in the long run it will be better for you.

If you know that you’ve illegally claimed EIC, don’t wait for the IRS to come after you.  File an amended return and pay the tax.  You’ll definitely have to pay interest, but by filing an amended return and paying before you get an IRS letter, you have a very good chance of avoiding the penalties.  You’ll probably sleep better too.

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Here are some links that might help:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

 

Posted on by Jan Roberg

How to File for an Extension

Herman's worried face

Herman's worried about his taxes. Photo by Toastiest.

April 15th is almost here and you’re still not ready to file your taxes.  The penalty for filing your taxes late is 5% of what you owe per month up to 25% of your tax debt. If you owe the IRS $1,000 and you don’t file your taxes on time then you could wind up owing them $250 for being late in addition to the $1,000 tax that you owe. (And it only gets worse.) Eliminate that late filing penalty by filing an extension.  (Okay the due date this year is April 18th, think 15th it’s safer.)

The federal extension form is called form 4868. It’s pretty easy to fill out. Here’s a link to the IRS website to get a copy of the form: http://www.irs.gov/pub/irs-pdf/f4868.pdf
Besides the basics like your name, address and social security number, the form asks you to list your estimated tax liability, what payments you made, and how much you expect to owe. This is the section where people freak out—but don’t!

Estimated tax liability means: how much money do you think the government gets from you this year—this is not how much you still owe or how much of a refund you’re going to get. If you’re using the 1040, it’s the number on line 60. But you’re thinking; “If I’ve already done my taxes, then I don’t really need to be filing an extension now do I?” That’s true– it’s just to give you a clue as to what the form means. If you are completely clueless, use the tax liability from last year’s taxes.

Payments made: includes the withholding from your W2s plus any estimated tax payments that you’ve already made. If you had the IRS keep your refund from last year’s return to pay taxes for 2010, that counts too.
Balance due: How much do you think you need to pay? That would be the tax liability minus the payments made. If you suspect that you’re supposed to owe, then you really should pay your best guess as to your balance due to avoid any late payment penalties. (Or pay as much as you possibly can.)

That’s what you’re supposed to do. Now, let’s talk about what people really do— which isn’t the same as the instructions I’ve just given, but I figure we should tackle a little reality so that you know what the consequences are. These are real issues that real people ask me about every year.

I can’t pay my taxes so I need to file an extension, what should I do? First, the most important thing to know is that an extension doesn’t give you an extension of time to pay, it’s only an extension of time to file. The late payment penalty is ½ of 1% of what you owe per month for each month that you owe. The maximum late payment penalty is also 25% of what’s owed. You’re still better off paying late rather than filing late because the penalty is much lower. If you’re taxes are done, you may as well just file them instead of filing an extension. The late payment penalty kicks in during April whether you file the actual return or the extension—so you’re not saving any money with the extension.

I’m missing some information so I really can’t file but I’m pretty sure I don’t owe. I’ve heard that if you don’t owe that you don’t need to file an extension, is that true? There is no late filing penalty if you don’t owe anything. That said, you might want to file an extension anyway just in case you’re wrong. The extension is free and your butt is covered for the filing penalty in case you do owe.

I have no clue what my liability is or my withholding. I can’t pay anything now if I did owe. What do I put on the form? I get that a question a lot. If you really don’t know, put 0, 0, and 0. You know those numbers are wrong, but at least you’ll have the form turned in to prevent the late filing penalty. Note: if you at least have your W2s, list your liability as the federal tax withheld (box 2 of the W2), the payments as the same thing, and the balance due as zero. At least you’ll have something there to report.

What if I report my tax liability wrong? What if I say the liability is $12,000 and it turns out that when I have all the correct information and I prepare the return that my liability is only $10,000—are they going to expect me to pay the difference anyway? No—you made a best guess with the information you had at the time, and that’s all it was.

What about my state? Do I have to file an extension for my state? Good question. Sometimes yes, sometimes no. If you’re using a computer software program, it will tell you about your state requirements. If you’re just filing by hand, you’ll need to check out your state’s department of revenue website. Here’s the IRS page with state tax agency links: http://www.irs.gov/businesses/small/article/0,,id=99021,00.html

Here in Missouri, if you file a federal extension and you don’t owe Missouri income tax, you can just attach a copy of your federal extension to your Missouri return when you do file. If you owe, you’re supposed to submit an extension form with a check. The important word in that sentence was “check”.

Bottom line: if you know that you can’t file on time, file for an extension. Do not wait until April 18th. It’s not like the old days where the post offices stay open until midnight for tax day. Do it now and get it out of the way.

Posted on by Jan Roberg

Reporting the ROTH IRA Conversion on your Tax Return

Retirement

Retirement by Scott Wills

It might have seemed like a simply marvelous idea at the time, but lots of people who did the ROTH IRA conversion are having a bear of a time getting it all sorted out on their income tax returns.  If you’re one of those people, hopefully this will help.

I’m going to tell you where the numbers should show up on the form.  If you know where things are supposed to go, then you’ll know if it’s right or not.  Quite frankly, the most difficult part for me has been using the computer software to get the numbers to go in the right place.

Let’s run a few different scenarios, all using a rollover of $15,000.  In all of the scenarios, you’re going to use form 8606 to let the IRS know that you did a ROTH conversion instead of just taking the money out and spending it.  This will keep you from being charged the 10% penalty for early withdrawal.

In our first example, you’re rolling over $15,000 from a traditional IRA and you have no basis (meaning you didn’t pay taxes on any of the $15,000.)  Down near the bottom of the first page of the 8606 is Part II, the section about ROTH IRA conversions.  Question 16 wants to know the amount that you converted:  that’s $15,000.  Line 17 will be blank, line 18 will be the taxable amount of $15,000.  Lines 19 and 20 are based upon if you’re paying the tax in 2010 or if you’re splitting it between 2011 and 2012.  If you’re paying the tax this year, then you’ll have the number 15,000 on line 15b of your 1040 form.  If you’re putting off paying until next year, then that line will be blank.

One of the questions I’ve been asked is, “If I don’t pay the tax this year, how does the IRS know that I’m supposed to pay it next year?”  Line 20.  Rest assured, anyone with numbers in lines 20a and 20b will have their returns looked at during the  next two years to see if they remembered to pay the tax.  I guarantee it.

Our second example still has you rolling over $15,000 and that’s all the money you have in your IRA.  What’s different is that you paid taxes on $5000 of that money.  Just like before you put 15,000 on line 16, but now you put $5000 basis on line 17.  That makes the taxable amount only $10,000.  You decide about whether to pay now or later.

Our third scenario is a little trickier.  You’re still rolling over $15,000 and your basis is $5,000—the difference this time is that you have a total of $60,000 total in your IRA.  Unlike the above example, you can’t just deduct the $5,000 of basis from what you rollover, it has to be proportional to your total IRA amount.  5000/60,000 equals 8.33%.  That percentage of 5000 is $417.  You’ll put $15,000 on line 16 for the rollover, $417 on line 17 for the basis.  That means that the taxable amount on line 18 will be $14,583.  (I know, it doesn’t sound as good as the other scenarios does it?)  Don’t forget that you still have $4,583 in basis to use if you do any conversions in the future.

And our last scenario, you have $5,000 in basis from before and you made a $5000 non-deductible IRA contribution this year.  The $15,000 is your entire IRA.  This time, you also have to fill out Part 1 of form 8606.  On line 1 you will put $5,000—the contribution you made this year.  On line 2 you will put $5,000 the basis you had before.  One line 3 your add them together for $10,000.  Then you’re going to skip down to Part 2 (unless you had SEP and SIMPLE IRAs) and put $15,000 on line 16.  Your total basis will be $10,000 on line 17, and your taxable conversion will be $5,000.

Knowing what form you need and where the numbers go is only half the battle.   Getting the numbers to go where they’re supposed to go using computer software can be more challenging than doing it by hand.  If you’re using brand name software like Turbo Tax, you can call their expert hotline for help.

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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:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

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.

Posted on by Jan Roberg

Injured Spouse Relief

Sad Couple Sitting On Couch After Having Quarrel

 

So you filed your tax return expecting a nice refund and then nothing comes back. You go to the IRS “Where’s my Refund?” website and find a note that says your refund was held because of a prior tax debt—but you don’t have one. Turns out your beloved spouse owed back taxes from before you were married. Is there anything you can do?

Yes, there is. You may be able to file for Injured Spouse Relief.

How do you know if you qualify as an injured spouse? First, you must have made and reported tax payments. That means you either had income tax withheld from wages or you made estimated tax payments, or you claimed a refundable tax credit like the Earned Income Tax credit. Second, you must not be legally obligated to pay the past-due amount. For example, you weren’t married to your spouse when he or she incurred the debt.

Are there any kinds of debt besides federal income tax that can cause my refund to be taken? Your refund can be taken for state income tax, child or spousal support, or federal student loans.

Note: if you live in a community property state, there are special rules. If you’re in one of those states, you’ll need to see IRS Pub 55.

If you filed a joint return and you are not responsible for your spouse’s debt, you may request your portion of the refund by filing the Injured Spouse Allocation form, Form 8379.

If you haven’t filed yet, you can submit form 8379 along with your tax return. If you’ve already filed and received a federal offset notification, you can submit a form 8379 by itself. You can e-file the 8379 when it’s submitted with a return. If you’re sending in a paper tax return (okay, you know you should be e-filing whenever possible) then you need to write “INJURED SPOUSE” at the top left corner of your 1040.

If you’re filing the 8379 by itself; make sure that you list both spouses’ social security numbers in the same order as they appeared on your income tax return. I know this sounds kind of silly but it’s really important to put the social security numbers in the right order. You might be thinking that the spouse that’s injured should have his/her name on the top, but put your names in the same order as on the tax return.

How Come the Injured Spouse Allocation Form doesn’t tell you  how much you’ll get back? Good question, but it doesn’t. The IRS will determine how much of your refund you will receive. Part of the issue is that allocation for couples from the community property states will be different from couples who aren’t in community property states.

How long will it take me to get my refund after I file an injured spouse claim? It’s going to be slower than a regular refund. If you e-file a form 8379 along with your federal return, it will take about 11 weeks to process. If you mail your return in your refund will take around 14 weeks. If your tax return was already file and you’re sending in an Injured Spouse Allocation by itself, expect the IRS to take about 8 weeks to process it.

Am I better off just filing separately? Sometimes, yes. But if you qualify for any of the tax credits that aren’t allowed to couples who file separately then the Injured Spouse Allocation is your best choice despite the delay to your refund.

_______________________________________________________________________

Here are some links that might help:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

Posted on by Jan Roberg

Rental Income Basics

The Quails Nest

The Quails Nest, photo by Eric M. Martin

Are you a landlord?  Are you renting property out to someone?  Maybe you were trying to sell a house but the market was too tough so you rented it out to someone.  If so, that makes you a landlord and you’ll need to report your rental income on your tax return.  Here’s some basic information you need to know.

First, the form you need to fill out is called a Schedule E.  You file it with your regular 1040 form.  If you look at the form you’ll see columns A, B, and C.  That’s for people who own more than one property.  If you just own one place that you’re renting out, put everything in column A.  If you own a duplex or a multi unit apartment building, you still put everything in column A.  If you own three separate houses that you’re renting out, then you use a separate column for each property.  If you own 20 properties, you’re going to use 7 of these forms.  (If you own 20 properties, you’re hiring a professional anyway.)  The totals will go in the column on the far right. 

Do not do this by hand.  You’re going to be depreciating the property and unless you really know what you’re doing you’ll mess it up.  Tax software will talk you through it and handle the depreciation and everything.    Do not buy the cheap software.  If you’re buying Turbo Tax, get the Premier package.  If you’re buying H&R Block At Home, you need the Premium Edition.  The cheaper packages are not designed to handle rental real estate issues so don’t even try.

Now that you’ve got the proper software and you’ve got all your information ready, what all do you need to be reporting anyway?

Income:  basically, you’re going to report the income you receive from rents the year in which you receive it.  That means, if someone paid you rent six months in advance, you report all of the rent that you received, even though some of the rent is meant for next year.

Security deposits:  security deposits are not rent.  You don’t report that as income unless you’re going to keep it.  It’s not income when you get it, and it’s not an expense when you refund it to your tenant.

Property or services in lieu of rent:  that’s a little trickier.  Let’s say that you have a tenant in an apartment that rents for $1,000 a month.  You have a tenant who’s particularly handy and she painted the house for you in July in exchange for a month of free rent.  On your Schedule E, you would record the $1000 as rent received, but you would also record the $1000 as an expense to the property.  Generally, whatever price you and your tenant come up with will be considered to be the fair market value of the labor (or property.)

Expenses paid by tenant:  If your tenant pays a bill that normally would be considered your  bill, then you have to count that as income as well.  Say for example that a water main broke and you couldn’t be there to meet the plumber and pay him.  Your tenant (bless her heart) not only met the plumber but also paid the bill.  Because the bill was yours (and not the tenant’s) you must also include that amount as income.  And of course, you’ll be writing off the bill as an expense also.

Posted on by Jan Roberg

Men Divorcing: Tax Issues

Divorce Cakes a_005

Photo by Dr. John Bullas

When you’re going through a divorce you have a million things to think about, and probably the last thing you want to spend time on is taxes.  But it’s important to think about them early, rather than later—here’s why.

As an enrolled agent, I usually don’t get to talk to men going through a divorce unless they’re already a client.  Instead, I see is what happens to divorced men at tax time after it’s too late for me to fix things.  Here’s the basic problem:  a guy is going through a divorce.  He goes to his attorney and hands over his pay stubs so that a fair and reasonable amount can be determined for child support. 

The child support is based upon the breadwinner’s take home pay.  This is where the problem is.  Up until the divorce, the man generally has been filing his tax returns as “married filing jointly”; which has a lower tax rate than “single.”  If he has children there are the exemptions for the kids which reduced his tax.  Of course the exemption for the wife will be eliminated with the divorce too.  If he owned a home then there were itemized deductions and tax advantages that he’ll lose as well.  Bottom line:  getting a divorce will increase a breadwinner’s income taxes.

For example:  Let’s say John is going through a divorce.  He makes $4,000 a month and brings his pay stubs to his attorney to determine the child support payment.  Currently, John’s withholding is based on 4 exemptions; one for him, two for his kids, and an extra one because of his deductions.  In this case, his federal withholding would be $248 per month.  But the reality of the situation is that after the divorce, John will be single and filing as single with probably no exemptions on his tax return.  He should be withholding $561 per month instead, that’s a difference of over $300. 

This creates a double whammy.  First, the child support is set based upon John’s take home pay which right now looks like it’s $300 a month more than it really should be – so John winds up paying more in child support then he can really afford.  Then, when tax time comes around, John wasn’t withholding enough and now he has a tax debt of $3600 that he never expected and can’t afford to pay because all of his extra money is going to his child support. 

Remember, paying child support does not count as a tax deduction.    

So what does John do next?  He goes to his attorney and pays the attorney to renegotiate the child support payment.  This costs him even more money and ticks off the ex-wife (who wasn’t too pleasant to begin with-that’s why she’s the “ex” wife.)  So now he’s got a tax debt, attorney fees, an angry ex-wife, and in the meantime, he’s racking up another IRS bill because he can’t afford to change his withholding if he wants to make those child support payments. 

Now a really good attorney recognizes this problem and would have John change his withholding before he ever went to court.  But from my end, I’ve seen too many cases where this wasn’t done.  So if you’re going through a divorce, you need to be the one to make sure that you’re protected.  Plan out what your tax situation will be as a single man and prepare for it up front.  Hire help if you need it, it will be money wisely spent.

Posted on by Jan Roberg

Enter our NCAA Basketball Picks Contest

Enter the Roberg Tax Solutions NCAA Basketball  Tournament Bracket contest for a chance to win a $10 Starbucks giftcard!  No purchase necessary.  All you have to do is “like” us on Facebook and submit your NCAA Basketball picks before midnight March 14th.

Winner will be based on who picks the champion, tiebreaker based upon points earned in the lower brackets.  Five points each final 4 and semi-final game, 1 point each all other games.

Like us on Facebook at:  http://www.facebook.com/home.php#!/pages/St-Louis-Tax-Preparation-Roberg-Tax-Solutions/101639683227199

E-mail your picks to :  jroberg@robergtaxsolutions.com

You can get a bracket from ESPN at http://a.espncdn.com/i/ncaa/11mens_bracket.pdf