Tag: taxes

Posted on by Jan Roberg

Filing Your Uber Driver Taxes

If you’ve been earning money driving an Uber in 2021, here’s some things that might help you when filing your taxes. 

Whether you’re doing them yourself, of paying someone to prepare your tax return for you, the most important thing you need is your Uber statement.  Here’s an example of one from the 2020 tax year. 

As you can see, it shows the gross payment, the expenses, and the net payout.  Also, what’s really important is that it shows the miles that you drove.  You really need that mileage number for your taxes. 

There’s a second page to that statement and it looks like this:

This is really helpful because it breaks down what those expenses were.  It also breaks down any additional compensation that you received.  You’ll see in this example that the taxpayer received $704.40 in incentives and $1.77 in other miscellaneous payment. 

You would think that Uber would send out a 1099NEC for the $9,622.15 – the gross payment that they reported on page one – but they’re a little different.  They only give you a 1099NEC for your Additional Earnings.  In this case, the taxpayer got a 1099 for the $706.  She still has to report the full $9,622 of earnings though. 

So how do you do that? 

For the vast majority of people, you’re going to be doing this on a form called Schedule C.  And it’s just another form that’s a part of your regular 1040 tax return.  You don’t file a separate return for your Uber income, it’s all combined with your main taxes. 

Here’s a link to get the form: https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Ideally, you should be using  tax software to prepare your taxes.  I’m showing you the forms and where things go so that you know what it’s supposed to look like when you’re done. 

You see that Box B?  Enter code from instructions?  If you’re an Uber driver (or Lyft, or Door Dash, anything like that) your code is 485300 for taxi, limousine and ride sharing services.   

One line F it asks your Accounting method:  you’re going to pick cash.

Line G – did you “materially participate” in the operation of this business in 2021?  Well Yes – if you drove, you participated.

Line H – you just check that box if it’s the first year you’ve done it.

Line I – Did you make payments that require you to issue a 1099?  Probably not.  Uber drivers are solo workers.  So you’re probably not issuing any 1099s.  If you’re an Uber driver who’s hiring other people to work for you, you should probably check with a tax professional.

Now we’re into the Income portion of your return.  Gross receipts.  That’s easy – It’s right on the Uber statement.  Using the example from above, you’d put $9,622 on line 1. 

A note about 1099s and computer software:  If you get a separate 1099 from Uber like the taxpayer in the example, you’re going to need to enter that 1099NEC as a separate document.  In that case, you’d enter the Gross Trip Earnings of $8916 on the Schedule C in your tax software and the  software should also send the 1099 income to the Schedule C, so you still wind up with $9,622 on line 1.  The nice thing is, the Uber statement breaks it out for you.

Now in the expense portion of the Schedule C – probably the most important part is your car and truck expenses which is line 9, but I’m going to skip over that for a minute and get the easy part first, which is your other expenses.  They would go on line 27a. I like to list them out separately, but that’s just me. I also round to the nearest dollar, the IRS doesn’t want to look at pennies and most tax software won’t even acknowledge cents.

A note about Cost of Goods Sold:  As an Uber driver, you’re selling a service, not a product.  You’ll leave the whole of Part III Cost of Goods Sold section blank.

So now you’ve got your main expenses in.  It’s time to add in your mileage. Mileage goes on page 2 of your Schedule C in Part IV. Let’s go over those questions one at a time.

Line 43: When did you place your vehicle in service for business purposes?  It means, when did you start driving for Uber that’s all that means. 

Line 44:  Of the total number of miles your drove your vehicle during 2021, enter the number of miles you used your vehicle for:

a.  Business

b. Commuting

c. Other

You have the easy answer to a Business miles – because Uber gives it to you right on the statement.  In this example, it was 6,992 miles.

Line B – you leave blank because really for Uber you’re not commuting.

Line C other – this seems to be the hardest one for most people.  How many non-business miles did you put on the car this year?  People often ignore this, but it’s important.  And if you ever get audited, the IRS will want to know.  In this example, the person only put 8,632 miles on their car for the entire year.  So we’d put 1640 down for other.  (8,632 miles for the year minus the 6,992 miles driven for Uber.)

And then you’ve got the Four Questions.

45. Was your vehicle available for personal use during off-duty hours?  Yes or No. 

46. Do you (or your spouse) have another vehicle available for personal use?  Yes or No

47a.  Do you have evidence to support your deduction?  Yes – because Uber gave you evidence.

47b.  If yes, is the evidence written?  Yes – because it’s written right in that Uber document. 

Now if you’re using tax software, it will compute the auto expense for you and automatically put it on line 9.  But if you’re doing this by hand, you’d take the 2021 mileage rate, which is 56 cents per mile, and multiply it by the 6,992 business miles and you get $3,915.52 – which you’re going to round up to 3916.

So, in this example, after you’ve taken out your expenses you’ve only got $2,684 of taxable income. 

(Gross income of $9,622 minus auto expenses of $3,916 minus other expenses of $3,022 equals net profit of $2,684.)

That number will flow onto line 3 of the Schedule 1 which flows onto line 8 of your regular 1040.  (Don’t be intimidated by these line numbers and schedules.  Use a tax software and it should all be automatic.)

The part that gets a little hinky is the Self-Employment tax.  Once again, the software should compute it for you.  I’m just telling you so that you know to look for it.  Self-employment tax is computed on Schedule SE.  If you’re doing this by hand, your net profit goes on line 2, then literally you’re following the instructions line by line until you get to the bottom of the page. 

The quick and dirty check to make sure the math is right is you take your net income and multiply it by .9235, then multiply that by .153.  That’s going to be your self-employment tax. That goes on line 12 of Schedule SE and on line 4 of your Schedule 2 and that flow onto line 23 of your 1040.  In this case, the self-employment tax is $379.  (2684 times .9235 times .153 = $379.)

And there’s one more thing.  I promise, this isn’t too bad.  You get a deduction for ½ of the self-employment tax that you have to pay.  We don’t want to miss any deductions right?  So if the self-employment tax is $379, half of that is $190 (because we rounded up).  It’s going to go on line 15 of Schedule 1 which will flow to line 10 of your 1040. 

I’m talking about a lot of forms and Schedules here and that sounds intimidating, but don’t let it scare you.  Your tax software should generate everything.  I’m mentioning the forms so that you know what to look for.  If you’re using to doing just a straight 1040 with no extra schedules, it might seem weird to have all these other pages print out.  But a lot of the forms only have one or two items on them. 

If you’re filing a return with Uber income on it, in addition to your 1040 tax form you should also have:

Schedule 1-Additional income and adjustments to income

Schedule 2-Additional taxes

Schedule C – Profit or loss from business  (This is the heart and sole of your business taxes.)

Schedule SE – Self-employment tax

Here’s a link so that you can see how they’d look using the numbers in the example. https://robergtaxsolutions.com/wp-content/uploads/2021/12/2021-Fake-Uber-Driver-1.pdf

I always recommend talking to a professional to do your taxes.  But I also recognize that not everyone can afford it.  Hopefully, this can help you with your Uber Tax Return. 

FAQs

I won’t have time to answer your individual questions on this, but I do have some questions that people ask me all the time so I thought I’d address them here.

Q: I drove more than the mileage it says on my Uber statement. Can I claim that mileage as well?

A: Yes. You’ll just need to document it with some type of a mileage log. I like the MileIQ app, but you can use whatever works best for you. (I don’t get paid by Mile IQ, I just like their app.)

Q: I paid a lot of money for my gas and car repairs. I want to claim those expenses. Can I add those to my mileage?

A: The mileage expense includes your gas and repairs. It’s an either/or type of deduction. If you prefer to claim your actual expenses, that’s fine. Just make sure you document them with receipts. Remember, the amount of your actual expenses you can claim is limited by the percentage you used the car for business. It’s also important to remember that if you claim your actual expenses the first year that you use a vehicle – then you can NEVER claim your mileage in a future year.

Q: I bought a new Lexus for $40,000 and I want to write it off as a business expense. Can I do that?

A: That’s outside the scope of this blog post. (There’s a whole lot of issues there.) Generally, I’m not in favor of it, but this is one of those times where if you want to write of the purchase of a new vehicle, it’s worth the money to get professional tax help.

Q: I have other expenses besides my miles and what’s on my Uber statement. Can I claim those?

A: Yes. Some extra expenses might be bottled water or snacks for your passengers or your cell phone usage. Normal car maintenance would be included in your mileage, but one driver I know had to pay to have her car cleaned after a drunk passenger threw up all over her back seat. I wouldn’t consider that to be a “normal” auto expense so I included that as an additional business expense on her return.

Q: I didn’t just drive for Uber, I also drove for Lyft and Door Dash. Do I need a separate Schedule C for each job?

A: No. You can combine your Uber, Lyft and other driving jobs onto one Schedule C because they’re all in the same category. Now, if you drove for Uber and moonlighted as a DJ or some other completely unrelated job, then you’d want to prepare a separate Schedule C for that business.

Posted on by Jan Roberg

W4 for Dummies

W4 forms can be confusing. Get help here.

The single most popular blog post I ever wrote was about how to fill out your W4 form. Unfortunately, it’s all garbage now with the new tax rules. It’s time to take a new look at how to fill out that W4 form.

First thing to know is that the form is kind of funky. If you look at the 2019 form, well here, take a look: 2019 W4 Form



Being realistic, you might not want your employer to know all that stuff about you. Seriously, is it any of your boss’ business how much income you have outside of work? Or how much you donate to charity? The IRS is already aware that this form is a problem and they’re working on a new one. So far, it’s only a draft and it looks like this: 2020 W4 Form

What I’d like to see on these forms is an option to just withhold a straight percentage. I think that would be the easiest thing to do, but the IRS doesn’t listen to me so we’ll have to work with what we’ve got. Let’s start with the easy ones.

Students

If you are a high school or a college student, and you expect to earn less than $12,000 for the year, you’ll want to claim “exempt”. All you do is write “Exempt” on line 7 of the W4. Leave line 5 blank. Leave line 6 blank. You don’t fill out any of those other pages. Give your employer the first page and you’re done. Easy peasy!

Single People With Only One Job

Whether you’re paid a salary or by the hour, if you are single and working full time, you’re going to check the box that says single and claim one allowance on line 5. That one is also easy.

Married People Where Only One Person Works

If you’re married, and your spouse does not work, you will check the box that says you’re married, and you will claim 2 allowances on line 5. That’s it.

And that’s the end of the easy answers. Let’s look at the harder stuff.

Unmarried People with Children who Always Qualify for EIC

If you have children and in the past you’ve always qualifed for the Earned Income Tax Credit, unless you just got a big raise, you’ll probably still qualify for EIC. In that case, you don’t need a whole lot of withholding. You’re going to check the single box and claim 2 allowances for yourself, plus 4 more for every child you have under the age of 17. You might not have any federal withholding taken out of your check, but in the event that your income is high enough to require some withholding, you should be covered. It’s safer than claiming “exempt” in case you do have some federal tax liability.

Married People with Children who Always Qualify for EIC

It’s harder to qualify for EIC when you’re married because if both spouses work, the second income often kicks you over the limit. If only one spouse is working, check the married box and claim 2 allowances for you and your spouse together, plus 4 more for every child under the age of 17. Same as above.

If you both work, it’s a little trickier. Have the higher income spouse “married but withhold at the higher single rate” with one allowance, plus 4 allowances for each child under the age of 17. Have the lower income spouse claim “married, but withhold at the higher single rate” with 1 allowance. This should protect you in the event that the second income kicks you out of the EIC tax credit range.

Multiple Jobs, High Income Earners, and Working Spouses

The absolute best thing to do in this situation is to use the IRS withholding calculator. Here’s the link: IRS Withholding Calculator

Once you get to that page, you’re going to want to click on the blue box that says “Withholding Calculator”. You’re going to want to have your most recent tax return and most recent pay stubs with you when you do this. The IRS withholding calculator asks a lot of questions, (full disclosure, it’s kind of annoying) but it’s going to give you the most accurate results.

Good Grief, I Can’t Stand it! Is There Any Other Way?

Okay, this is my cheater trick. Did you owe last year? If not, you probably don’t need to change what you’re doing. If you did owe, don’t change your allowances, just add additional withholding to make up the difference in tax that you owed.

For example: let’s say that you claimed single with 2 allowances last year but you wound up owing an additional $1,000 in taxes for whatever reason. If you get paid every other week, that means you get 26 paychecks a year. You’d take $1,000 divided by 26, so you’d have an extra $38.46 taken out of each check.

Of course, if you’ve only got 14 pay periods left in the year, you might want to withhold more now and change it in January. Or you could set the rate now and just make an estimated tax payment to cover the difference. Do what works best for you.

I Still Need Help

I get it, this is confusing. Literally hundreds of people asked questions on the old blog post. I had to quit answering them. I just could’t keep up. I have my regular clients to attend to and it was overwhelming. If you still need help, contact your tax advisor. If you’re already paying someone to do your taxes, they should be able to help you with your W4, and they’re going to know so much more about you than I will.

If you don’t have a tax advisor, you can call my office and I can help you with this, but I’m going to charge you $200 to prepare your W4. I would need your most recent pay stubs and your latest tax return.

Posted on by Jan Roberg

Your Job Search and Your Taxes

Photo by kate at Flickr.com

 

People often ask me about deducting job search expenses on their tax returns.  Every year I hear stories on the news, “Don’t forget, your job search expenses are tax deductible!”  While this is true that job search expenses can be deductible—many times, they really aren’t.

 

For one thing, if you’re job hunting, you can only deduct your job search expenses if you’re looking for a job in your current occupation.   I do taxes; I’m in the accounting field.  If I decide to chuck it all and become a belly dancer—I couldn’t deduct those job search costs since belly dancing is not related to accounting.  (Tap dancing—maybe: http://www.youtube.com/watch?v=fNKRm6H-qOU)

 

But say you truly are looking for a new job in your field, what can you deduct?  Here’s a pretty good list:

     

  • Employment and job placement agency fees
  • Cost of preparing and mailing copies of your resume
  • Travel expenses to look for a new job, but only if the trip is primarily to look for a job.  (If you’re a professional snow remover and you’re job hunting in Honolulu it’s really not going to fly with the IRS.)
  • You can deduct your job search expenses even if you do not find a new job

 

After you figure out what your qualified job search expenses are, it goes as a miscellaneous itemized deduction on your Schedule A.  That means that your job hunt expenses will have to be more than 2% of your adjusted gross income before they even start to count.  And remember that even then, you’ll need enough other items on your Schedule A form to make it worth your while—also known as itemizing deductions.

 

Here’s an example:  Christie is an office manager for a small law firm and makes $50,000 a year.  She paid $500 to a professional resume service, and $2,000 to a placement agency to help her find a new job.   Although most of the out of state companies that interviewed her paid for her travel, she did have $100 of out of pocket travel expenses.  In this case, Christies total job search expenses were $2,600.

 

Now 2% of Christies adjusted gross income is $1,000 ($50,000 times .02 = $1,000.)  So in this case, Christie would have a miscellaneous deduction of $1,600.  ($2,600 expenses – $1,000 threshold = $1,600.)   So if Christie had other deductions to go along with it, great, then she could benefit from claiming her job search expenses.  If she didn’t have any other deductions, then she’d still be better of claiming her standard deduction.

 

You cannot deduct your job search expenses if you are looking for a job for the first time.  This rule keeps most recent grads from claiming job search expenses.

 

Don’t let not being able to claim a deduction keep you from spending money that you need to spend to look for a job.   If your resume needs help, hire a resume writer.  If a placement agency can help you, use one.   Be sure to put your best foot forward.

 

For some good free advice about job hunting, check out this website from BestCollegesOnline.com.   Although the article is written specifically for online students, there’s so much good and basic job hunt information in there it’s worth checking out.    Face it, when you don’t have a job, free is a pretty good price.  Here’s a link:  http://www.bestcollegesonline.com/career-skills-learn-school/

Posted on by Michael Siebert

Time Value of Money and Taxes

Photo by Brian Mooney at Flickr.com

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

-Albert Einstein

_______________________________________________________________________

You probably have come across time value of money in one your finance classes or at least have a basic understanding of the idea.  Time value of money, as defined by Investopedia.com, is “the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.”  Basically, money is worth more now than it is later.  This idea would not exist however, if there was no concept of “interest”.

 

There are two types of interest – simple and compound.  Simple interest is interest paid on a beginning principal balance only.  If you are receiving monies, the interest earned in a given period is not added back to the principal and then applied the interest rate again and appears perfectly linear on a graph.  Compound interest is interest paid on a beginning balance and any interest that has accumulated in given a period of time.  On a graph compound interest appears with a geometric (or exponential) growth pattern.

 

The present value of a future sum is the core formula for the time value of money.  All time value of money equations are based off this formula so it is extremely important to review.  It is expressed as such:

 

PV = FV / (1 + i)^n

Where

PV = Present Value
FV = Future Value
i = interest rate
n = number of periods

 

The future value of a present sum is expressed as FV = PV * (1 + i) ^n.  We won’t discuss perpetuities or annuities in this post nor will we execute any actual calculations with the TMV formulas.

 

So how can we use this time value of money concept for tax optimization and more importantly, individual wealth?

 

Retirement Planning:  We have all seen the example where Johnny starts an IRA at age 35 while Susie starts one at 21 and the amazing difference of the account values when they both reach age 59 and a half.  This is because Susie’s IRA endured 14 more years of compounding.  The choice between a roth and a traditional IRA has important tax implications and time value of money has some influence in the decision.  With a Roth IRA for example, the taxpayer can receive tax free distributions of earnings at age 59 and a half while with a traditional IRA, the taxpayer receives an above the line deduction on IRA contributions – given that AGI thresholds are not crossed – and is taxed on the distributions.  If your income is expected to increase as you get older and your marginal tax rate is also expected to increase, then a Roth IRA makes more sense – naturally.  Do the immediate tax savings of traditional IRA contributions outweigh Roth IRA tax free distributions?

 

Tax Planning: Accelerate deductions, postponing income recognition.  This concept goes hand in hand with the time value of money concept – money today is worth more than money tomorrow.  By accelerating deductions you essentially reduce your taxable income and end up with a bigger refund or smaller balance due.   Some examples include prepaying your home mortgage interest in a given year, making an alimony payment in December as opposed to January, and writing off an asset using section 179 expensing or bonus depreciation as opposed to depreciating it over several years.  The amount of tax savings probably doesn’t have enough compounding power for individuals to make a huge substantial presence but for well established businesses it most definitely does.  Examples of postponing income are increasing your retirement plan contributions to a 401(k) plan, legally deferring compensation, and delaying the collection of any debts you are owed.

 

Investment Planning:  Younger people can be more aggressive because they have more time to make up for their losses.  A younger person’s portfolio can afford more risky securities such as stocks.  As one gets older, the switch to dividend producing stocks and bonds usually happens because the “interest rate” is more stable.

 

With time value of money, the uncertainty of the interest variable is the most difficult to tame.  Those who can predict its patterns the best, tend to make the most money.

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

What Every Divorced Woman Needs to Know About Retirement: Social Security

Ex-spouses may claim Social Security based upon their exes' earnings.

If you’re divorced, but were married for more than 10 years to your ex-spouse, you may be able to claim Social Security benefits based upon his income.

 

This may come as a surprise to you, but your ex-husband could turn out to be good for something after all. If you were married for at least 10 years, you may be entitled to Social Security benefits based upon your ex’s income—that is, if he’s entitled to Social Security benefits.

 

Here’s how it works: let’s say you’re thinking about retiring. You go to the Social Security website and find out what your benefits would be if you retire at 62, if you retire at your full benefit age, and if you retire at age 70. Then you call Social Security to find out what your benefits would be if you used your ex’s Social Security benefits. The number is (800) 772-1213. If you retire at 62, you can get 35% of his benefit; at full retirement age, you can get 50% of his benefit.

 

Let me show you with an example: Jane is 60 years old and she’s contemplating what she wants to do about retiring, whether to start taking benefits at 62 or hold out until later. She runs the numbers on the Social Security website ( www.ssa.gov )  and gets the following information:

 

  • Retire at 62, monthly benefit: $ 585
  • Retire at 66, monthly benefit: $ 820
  • Retire at 70, monthly benefit: $1,040

 

Those aren’t great numbers. Jane didn’t always work because she was raising a family, and when she did work, well, she didn’t make all that much money. But Jane’s ex-husband, Tom, made plenty of money. Using the Quick Retirement Calculator at ssa.gov: http://www.socialsecurity.gov/OACT/quickcalc/index.html.

 

Jane estimates Tom’s Social Security earnings will be $2,586 per month at retirement. Now she’s going to want to actually talk to the Social Security folks to get the real numbers, but the calculator will give her a rough idea.

 

So, if Jane retires at 62, she can qualify for 35% of Tom’s money which would be $905 per month. If she waits until her full retirement age, she can qualify for 50% of Tom’s money which would be $1,293. For Jane, she can make more money retiring using Tom’s benefits than she can make on her own.

 

This is really important to know:

  • Your ex-husband will not lose his Social Security benefits if you use them
  • You cannot be currently remarried and qualify for your ex’s benefits
  • If you have had more than one marriage that lasted for over 10 years; you may use the spouse that gives you the greater benefit

 

If you claim Social Security based upon your ex-husband’s benefits before you reach full retirement age you will not be able to switch back to your full benefit at age 70. You really want to think long and hard about those numbers before you retire early.

 

What you’re eligible to receive from Social Security is very personal. It’s all based upon your individual contributions, you can’t make any assumptions based upon what your friends or neighbors get. You can learn what you’re eligible for by creating your own account at the Social Security website. It only takes about 10 minutes. Finding out about benefits from an ex-spouse will take a bit longer because it involves a phone call and the hold times can be pretty long. Isn’t it worth finding out?

Posted on by Jan Roberg

How to Negotiate Your Own Payment Agreement With the IRS

Tax On Money Background
I’ve heard two stories in just as many days about people who paid one of those TV tax companies thousands of dollars to help them with their IRS debt and when all was said and done, all they got was a monthly installment agreement with the IRS.  I’ve got a big problem with that–because in both of those cases, the people could have used that money to pay down their debt–and done the installment agreement themselves for free.
While not everyone can handle their IRS tax debt problem themselves, before you go sending thousands of dollars to some company with a 1-800 phone number, lets see if you can handle this yourself for free first.
The first question:  Do you really owe the money in the first place?  That’s pretty important.  If your taxes were professionally prepared and you have a huge balance due-well you probably really do owe the IRS.  On the other hand, if you haven’t filed for several years and the IRS says you owe them lots of money–there’s a good chance you don’t.  Anybody does taxes better than the IRS–anybody!  The CPA down the hall, H&R Block, VITA, the really bad tax place I won’t name down the street, and even my high school intern — they all do taxes better than the IRS.
True story:  a couple of years ago, I had a high school intern while I was working at the big tax company.  She had only been there for a couple of days, she was supposed to help with the phones, photo copies and data entry type stuff.  A woman came to me with an IRS tax debt of $16,000.  I took the case, but I was busy working on another return so I asked the intern to just do the basic data entry work for me.  A little while later she came to me and said, “I did the data entry but I’m afraid you’re going to have to show me what I’m doing wrong.”  “What do you mean,” I asked, “It’s just data entry.”  “I know,” she said, “But I heard you say she owes the IRS $16,000 and on all the returns I input she’s got refunds!”
I looked over everything the girl had done.  It was perfect.  Instead of the woman owing the IRS $16,000, the IRS owed her $8,000.  So when I tell you that anybody prepares a tax return better than the IRS–I’m not kidding.  Now you can go to an IRS office and they will help you with a return–those people know what they’re doing (usually), but those computer generated IRS returns that get mailed to you are garbage.  Plain and simple.
Second question:  Do you owe less than $50,000?  If you owe more than $50,000, you won’t be able to do an IRS streamline installment agreement.  If you can pay enough on the debt to bring it to $50,000 or less, then you can still do the streamline–otherwise you are going to want to get some help with your debt.  But let’s say you owe $52,000.  Well, you could pay some tax company $8,000 to negotiate for you, but if you paid $2,000 towards the debt, you could negotiate for yourself and still have $6,000 more pay your debt or buy groceries or whatever.
Third question:  How much can you afford to pay each month?  Let’s say you got hit with an IRS bill of $6,000 and you just didn’t have any money saved to pay it.  Realistically, look at your financial situation and figure out what you can afford.  What’s the most you could possibly pay without causing yourself a hardship?  That’s going to be your upper limit number.  You need to think it through because you don’t want to commit to paying $500 a month if it means you lose your house.
Here’s the mechanics of it:  In a perfect world–you should be able to pay of your IRS debt within 2 years (24 months.)   So if you take that $6000 and divide it by 24, then your monthly payment would be $250.  And if you can afford that–great!  That’s the preferred timeline for the IRS to have you pay off your debt.
But if you can’t handle the $250 a month, you need to know that the IRS will go as far as 72 months (or six years) for you to pay off the debt.  So if you take $6,000 and divide that by 72 then you get $85 dollars a month (I rounded up to the nearest 5.)
What you might want to do is negotiate the $85 payment, but then pay the $250 to get rid of the debt faster.  That way you’ve got some wiggle room if you lose your job or have some other issue.
Here’s the other stuff you’ve got to know:
There is a fee of $105 for setting up the installment agreement.  It’s lower if you set up direct debit from your checking account or it may be reduced if your income is low–make sure you ask about it, they won’t always tell you.
If you’re trying to negotiate a payment agreement and things are just not going your way, it’s okay to
back out before you commit.  Tell them that you think you’re going to need professional help and that you will have to call them back later.
Once you do have an agreement, you have to hold up your end of it.  Make your payments on time.  If you’re late, your installment agreement is void and you’ll have to start all over again–including the $105 fee for setting up the agreement.  (Not to mention those nasty letters they send about putting a lien on your home and levying your bank account.)
One final word, if you can’t handle the installment agreement yourself–maybe your tax issue is too complex or you’re just too intimidated to deal with the IRS, get help from a local professional.  You’ll need an enrolled agent or CPA because they’re licensed to represent you before the IRS.  I recommend using someone local (okay, someone like me) that you can meet with in person.  Sometimes, IRS debt issues will cost a few thousand dollars to settle up, depending upon the work that needs to be done.  But it’s important to know what is going to be done before you pay that kind of money out.  $8,000 for something you can do yourself is too high a price.  Ask questions, know why they’re charging you that much, and what you’re getting for it.  You have a right to know.
Posted on by Jan Roberg

Open letter to Charlie Dooley

Charlie DooleyDear Mr. Dooley,
I read in the St. Louis Post that you recently released your personal income tax return for public inspection. I do taxes for a living so of course I had to check. The first thing I noticed is that you prepare your own taxes. The second thing I noticed is that you missed a big deduction. Mr. Dooley, you forgot to claim the real estate taxes that you paid in 2009. You missed out on a $1,056 deduction (real estate taxes paid is public record.)
Mr. Dooley, the tax money you would have saved on this deduction alone would have covered the cost of having your return professionally prepared. Who knows what else you could have missed that I can’t just pull up on the internet.
Mr. Dooley, I’m looking forward to seeing you in my office this coming February. If you’re going to be making your tax returns public, they’d better be right.

Posted on by Jan Roberg

Employee or Contract Labor

With the economy being in turmoil, a lot of people are turning to contract labor jobs. That’s where the company doesn’t hire you as a regular employee, even though you work for it. You won’t receive a W2 at tax time, but you will receive a form 1099MISC and you will be expected to pay tax on that.

Contract labor is good for employers who are a little gun shy over hiring. It’s also good for employees who may need to work to put food on the table, but don’t want to commit to a job that they wouldn’t ordinarily take.

If you’re thinking about accepting a contract labor type job, here’s a few things you should know. First, when you receive a form 1099MISC, the IRS treats that as self employment income. That means, at tax time you’re going to have to file a Schedule C along with your 1040 long form. You will be required to pay your own Social Security and Medicare taxes, in addition to paying what your employer would normally have withheld.

Let’s use an example: Heather and Melanie are both high school seniors looking for summer jobs. Heather gets a job at McDonald’s making $10 an hour. Melanie gets a contract labor position also making $10 an hour. They both work 20 hours a week. Since this is the only income the girls will make all year, we’re not even going to look at regular income tax (they won’t owe any) we’re just going to look at their take home pay and self employment taxes.

Since Heather works as an employee, McDonad’s is required to withhold her Social Security and Medicare taxes (FICA). Heather makes $200 a week, but she’ll only take home $184.70 because McDonald’s will hold back $15.30 to pay her FICA. What most people don’t realize is that in addition to the money McDonald’s holds out of Heather’s paycheck, McDonald’s also pays an additional $15.30 towards Heather’s FICA. At the end of 12 weeks, Heather will have $2,216.40 that she was paid by McDonald’s. She will owe no income tax at the end of the year.

Now let’s look at Melanie. As a contract laborer, Melanie has no FICA withheld from her pay. For one week, she gets a check for $200. At the end of 12 weeks, she’ll have been paid $2,400. The difference here is that Melanie will have a tax bill of $339 that she’ll owe at tax time. After paying her taxes, Melanie will only have cleared $2,061.

[Geek alert: if you checked my math, you’d say. “but 2400 times 15.3% is $367” -and yes, you’re right. The first $433.13 of self employment income isn’t taxed so the actual equation is income x .9235 x .153.]

In our example here, it’s better to be hired as an employee because the company pays half of your payroll taxes. But that doesn’t mean that you should not take that contract labor job. For one thing, you may be able to write off some of your job expenses, which would reduce your self-employment taxes. Or, you might negotiate a higher hourly wage rate. An increase of 7.65% would basically cover the additional tax paid by the employer. Knowledge is power. Knowing how you’ll be taxed and how much you’ll be taxed let’s you make smart decisions.

Posted on by Jan Roberg

Back to School Time

Whho’s Back to School Time

 

In my neighborhood it’s back to school week!  Here’s some tax tips related to sending the kids back to school.

 

It seems like if they start school on Monday, then the gift wrap/candy sale starts on Tuesday.  If you have a choice, you’re better off writing a check directly to the PTO for whatever donation you’d like to make to the school rather than buying whatever the kids are selling.  For one thing, the school will get all of your donation instead of the money going to some fundraiser sales company.  For another, your check to the PTO will be 100% tax deductible.  (I would argue that 50% of whatever you pay for the gift wrap should be counted as tax deductible as well, but the fund raising companies will argue that their gift wrap really is worth $7 per roll so it’s an iffy deduction.)

 

If you’re a school volunteer, the money you spend for the classroom counts as a charitable contribution.  For example, let’s say you’re the “Halloween Party Mom.”  You spend $30 on candy, $20 on art supplies, and $15 on face paint.  Save those receipts because that’s a $65 contribution to the school.  The same goes for scouts and church groups.  Hold on to those receipts for  those projects as well.

 

Now if the kids pay an activity fee and you’re using the kids’ activity money to buy supplies, then you can’t deduct those receipts.  But if you’re spending your own money on projects, then you definitely can use that as a deduction.   Scout leaders–your uniform is deductible, your kids uniform isn’t.

 

Remember that the mileage you put on your car for volunteering is also deductible with your contributions.  Charity miles are counted as 14 cents per mile.  It doesn’t seem like much, but for some people it really adds up.

 

Welcome back and have a great year!