Most people file their tax return because they have to, but even if you don’t, there are times when you should. You may be eligible for a tax refund and not know it. This year, there are a few new rules for some who must file. Here are six tax tips to help you find out if you should file a tax return:
By: Isaac M O’Bannon, Managing Editor CPA Practice Advisor
While millions of American taxpayers wait for their W-2, 1099 and other important tax documents to arrive in the mail, their thoughts turn to the often-dreaded prospect of filing their 2014 tax returns.
With all the annual changes to the tax rules and its complexity, it’s not surprising that millions of Americans hire a paid preparer. After all, asking questions or searching the Web for answers often leads to more confusion and misconceptions, because when it comes to taxes, one standard answer usually does not fit all.
The National Association of Enrolled Agents, an organization of federally licensed tax professionals, has pointed out six frequently-encountered tax myths.
Myth 1: “I’m filing an extension this year, so I don’t need to pay anything yet.”
Fact: Tax extensions only extend the time you have left to file, and do not change the date on which you have to pay taxes owed. If you owe taxes and file an extension, you still have to pay the taxes owed by April 15, regardless of the extended deadline date. Otherwise, interest and penalties begin to stack up.
Myth 2: “I had a really big loss in the stock market this year, so I won’t owe any income taxes.”
Fact: Deduction of capital losses against ordinary income is limited to $3,000 per year. Also, whether you reinvest or receive dividends, they are income and are taxed as such.
Myth 3: “They paid me in cash, so I don’t have to report it.”
Fact: If it’s income, you must report it. You must always report income, regardless of whether it’s cash, tips, bonuses or dividends.
Myth 4: “I’m too young to have to pay taxes.”
Fact: Even dependents working part-time while in high school must file a tax return if they earned more than $6,200 in 2014, if they want to receive their refund or if their unearned income is more than $1,000. There are numerous other situations that may lead to a dependent having to file a tax return. To be safe, consider consulting a licensed tax professional.
Myth 5: “Income earned outside the U.S. is not taxable.”
Fact: The operative word is “income,” which means it’s taxable. The IRS requires taxpayers to report all earned income, even if it’s earned abroad.
Myth 6: “Tax preparers only fill out forms that you can do yourself.”
Fact: Licensed preparers know the intricate (and constantly changing) tax laws, regulations and codes, and how they can be applied for your benefit to save you money. Enrolled agents receive IRS-approved annual continuing education, ensuring that they have the most up-to-date strategies to make sure you pay only what you owe and get any refunds you are due. Enrolled agents, CPAs and tax attorneys are also the only tax professionals who can represent taxpayers before the IRS.
At long last, Congress granted a reprieve for most of the expired tax provisions that had remained in limbo this year, but the late-breaking tax relief is only temporary.
The new legislation – the Tax Increase Prevention Act of 2014 – restores these tax breaks retroactive to January 1, 2014. However the provisions expire again on December 31, 2014, so Congress will likely take up these measures again after the holidays. The president is expected to sign the approved bill into law.
The tax extenders cover a wide range of tax breaks both large and small for individuals and businesses. Here are ten of the most popular items for your clients.
1.State and local tax deductions: In lieu of deducting state and local income taxes, a taxpayer may elect to deduct states sales taxes. Deductions are based on actual receipts or a state-by-state table (plus sales tax paid for certain big-ticket items).
2.Section 179 deductions: A business can currently deduct, or “expense,” up to $500,000 of qualified assets placed in service in 2014, subject to a phaseout threshold of $2 million. Prior to the latest extension, the maximum allowance was just $25,000 with a $200,000 phaseout threshold.
3.Bonus depreciation: A separate provision allows a business to claim 50% “bonus depreciation” for qualified assets placed in service in 2014. Note that bonus depreciation may be combined with the Section 179 deduction in some cases.
4.Charitable IRA rollover: If you’re over age 70½, you can roll over up to $100,000 of IRA proceeds to a charity without paying tax on the distribution. This technique is often used to satisfy the rules for required minimum distributions (RMDs).
5.Research credits: This popular tax credit, which has been extended numerous times in the past, provides a tax credit equal to 20% of qualified expenses exceeding a base amount. Alternatively, a business can elect to use a simplified 14% credit.
6.Tuition-and-fees deduction: Taxpayers may deduct tuition and fees paid to a college in lieu of claiming one of the higher education tax credits. However, the maximum deduction of $4,000 is phased out based on modified adjusted gross income (MAGI).
7.Hiring credits: The Work Opportunity Tax Credit (WOTC) is available to employers hiring workers from one of several disadvantaged groups. Generally, the maximum credit is $2,400 per worker, although it can be high as $9,600 for certain veterans.
8.Mortgage loan forgiveness: This provision authorizes a tax exclusion for mortgage loan forgiveness on debts up to $2 million. The exclusion is available only on debt forgiveness for a principal residence.
9.Home energy credits: The residential energy credit has existed in various forms for years. For 2014, a maximum $500 credit may be claimed for 10% of qualified energy-saving expenditures like new heating and air conditioning systems.
10.Teacher classroom expenses: Teachers and certain other educators are able to deduct up to $250 of their out-of-pocket classroom expenses. This deduction is claimed above-the-line.
More than half of taxpayers hire a professional when it’s time to file a tax return. Even if you don’t prepare your own Form 1040, you’re still legally responsible for what is on it.
A tax return preparer is trusted with your most personal information. They know about your marriage, your income, your children and your Social Security numbers – all of the sensitive details of your financial life. If you pay someone to prepare your federal income tax return, the IRS urges you to choose that person wisely. To do that, take some time to understand a few essentials.
Most tax return preparers provide outstanding service. However, each year, some taxpayers are hurt financially because they choose the wrong tax return preparer. Well-intentioned taxpayers can be misled by preparers who don’t understand taxes or who mislead people into taking credits or deductions they aren’t entitled to in order to increase their fee. Every year, these types of tax preparers face everything from penalties to even jail time for defrauding their clients.
Here are a few tips to keep in mind when choosing a tax preparer:
IRS FS-2014-11, December 2014
With the complications associated with the Affordable Care Act (Obamacare) it is very important for you to get assistance with filing your tax return this season. Please give us a call with any questions concerning your return preparation. We have PROFESSIONALS on staff that know the answers!
Published March 26, 2012
When trying to find a professional tax preparer, consumers face an alphabet soup of choices.
Most people turn to the two well-known groups of licensed tax professionals: certified public accountants (CPA) and enrolled agents (EA). No matter the acronym after their name, the first step in your decision-making process is to make sure the person is licensed.
“If they’re able to answer your questions and you understand, that’s when you want to continue to work with them,” says Alan Pinck, an enrolled agent with A. Pinck & Associates in San Jose, Calif. “Communication is key. It shouldn’t be an intimidating situation. We have enough intimidating situations in our lives. When mistakes happen, it doesn’t hurt to get a second opinion.”
Here’s a breakdown of the two professions:
An EA is authorized by the U.S. Department of the Treasury to represent taxpayers before the IRS for audits, collections, and appeals, according to the National Association of Enrolled Agents (NAEA). EAs advise, represent and prepare tax returns for individuals, partnerships, corporations, estates, trusts and any entities with tax-reporting requirements.
EA’s only tend to focus on preparing taxes, and many specialize in tax resolution. In addition to an IRS-administered testing and application process, enrolled agents must complete at least 72 hours of continuing education every three years.
A CPA’s bread and butter tends to be performing tax, accounting and financial services to businesses. Not a ll specialize in taxation, and some specialize in more than one service. Most states/jurisdictions require at least a bachelor’s degree, two years public accounting experience and a passing score on the CPA exam to obtain a license. The IRS does not require attorneys and certified public accountants to complete continuing education, but some state licensing offices have added additional requirements. In Massachussetts, for example, CPAs need 80 hours of continuing education every two years.
Starting in 2013, the IRS will require tax preparers to pass a tax exam and obtain 15 hours of continuing education every year.
To sum it up simply, “Taxes are laws, and accounting is numbers,” Pinck says. The price for preparing a return may even be comparable between a CPA and a EA.
So how do you choose which type of professional is right for you? It’s not always black and white and requires an evaluation by each individual, but here are some general guidelines from the experts:
Choose an EA:
When you have out-of-state returns. Enrolled agents are the only taxpayer representatives who receive their unlimited right to practice from the federal government (CPAs and attorneys are licensed by the states). That means if you need to file in more than one state and eventually need representation before that state in an audit or resolution case, the same EA can do it, Pinck says.
When you need help resolving an IRS dispute or expect to owe. People who don’t have the resources to pursue a taxation attorney often hire EAs instead for civil resolution cases, according to David Miles, an enrolled agent with 20/20 Tax Resolutionin Broomfield, Co. Not only do EAs rates tend to be more affordable, they can their tax law expertise to represent clients in tax proceedings, audit hearings and appeals.
EAs help ensure clients are treated appropriately by the IRS, work out payment plans on the best possible terms, and ensure the IRS follows laws that protect taxpayers, Miles says.
Choose a CPA when:
A little accounting guidance wouldn’t hurt. If you own a small business, hiring a CPA with a bookkeeping and reporting background can help you get organized and on track for the next year. “When you have a couple million dollars in business, some of the accounting can get complicated. We make sure everything is in the right bucket,” says Irene Wachsler, a CPA with Tobolsky & Wachsler CPAs in Massachussetts.
An audit of your business deductions, expenses and income is in order. A CPA’s main differentiator is the ability to attest an audit, which means it affirms to the IRS that financial statements are truthful, says Theodore Flynn, CEO and president of the Massachusetts Society of CPAs. To do that, a CPA will request bank statements and other proof, which limits the possibility of mistakes, Wachsler says. But make sure any professional you hire will guarantee their work on your returns, she adds. That means they agree to represent you later pro bono if there’s a problem with the return.
Essential Solutions LLC has both professionals on staff to serve our clients needs. Still have questions? Give us a call.
Alimony is deductible by the person making the payments. The receiving ex-spouse must report alimony as income on his or her tax return.
Unfortunately, in a recent Treasury Department audit of tax returns, 47% of those that claimed to pay alimony did not have a matching tax return from someone that added the payment back as income. This mismatch of alimony payments and claimed income is now one of the areas in the spotlight of the IRS.
To protect yourself, all divorce papers should be kept indefinitely. This includes retaining copies of separate maintenance agreements or other written documents that spell out the basis for alimony and/or child support payments. In addition, double-check the Social Security Number or Tax ID of your ex-spouse for accuracy. Errors in entry will, in all likelihood, begin to see penalties assessed.
With new tax laws beginning in 2014, a number of taxpayers who were not traditionally required to file a tax return may now need to do so. Here are three new situations in 2014 that may require you to file a tax return.
Have questions concerning this information? Please give us a call.
Minimizing your taxes requires a year round effort. The following events will have an impact on your tax liability. In most cases, proper tax planning can minimize any negative tax consequences. Whenever a situation on this list occurs, call your EA.
Tax Season 2014 has come and gone and now it’s time to think about tax planning for tax year 2014. Items which could impact your 2014 taxes include certain life events and expired tax provisions.
Certain Life Events
Have you recently had a birth, adoption or death in your family? Have you gotten married, divorced, retired, or changed jobs this year? If any of these life events occur in 2014, we need to discuss the potential impact on your 2014 taxes. For example:
Other Steps to Consider Before the End of the Year
You should thoroughly review your situation before year end to determine the best tax strategies for 2014 and the impact on 2015 as well. Accelerating income/deferring deductions into 2014 or deferring income/accelerating deductions to 2015 are just a couple of approaches that could benefit you.
If you have any foreign assets, be aware that there are reporting and filing requirements for those assets. Noncompliance carries stiff penalties.
Please call me at your convenience to set up an appointment to estimate your tax liability for the year and discuss any questions you may have.
The form of business you operate determines what taxes you must pay and how you pay them. The following are the four general types of business taxes.
All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized. Refer to Business Structures to find out which returns you must file based on the business entity established.
The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return. For additional information refer to Publication 583.
Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. For additional information, refer to Estimated Taxes.
Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.
Generally, you must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.
Note: There are Special Rules and Exceptions for aliens, fishing crew members, notary public, State or local government employees, foreign government or international organization employees, etc. For additional information, refer to Self-Employment Tax.
When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file. Employment taxes include the following:
For additional information, refer to Employment Taxes for Small Businesses.
This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following.
Form 720 – The federal excise taxes reported on Form 720 (PDF), consist of several broad categories of taxes, including the following.
Form 2290 – There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Report the tax on Form 2290 (PDF). For additional information, see the instructions for Form 2290 .
Form 730 – If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. Use Form 730 (PDF), to figure the tax on the wagers you receive.
Form 11-C – Use Form 11-C, Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering.
Excise Tax has several general excise tax programs. One of the major components of the excise program is motor fuel. For additional information, refer to Excise Taxes.