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!
Millions of American workers have received their W-2s (or will receive them soon, since January 31 was the deadline to send them), and they are the primary income reporting tool for most 1040 filers. They can be received in person, electronically or by mail. In addition to taxes, the W-2 also is used to determine future social security benefits, so it’s important to make sure the information on the form is accurate.
To help, the American Payroll Association has five tips for getting the most out of your W-2.
1. Verify you have received all of your W-2s. You should receive a W-2 form from every organization you received compensation from during 2013. If you do not receive one by early February, contact the company’s payroll department and request a ‘reissued statement’.
If you earned $600 or more from a single company for freelance or contract work, you should receive Form 1099-MISC, Miscellaneous Income, instead of Form W-2 and will be responsible for all taxes on that income.
2. Verify your name and Social Security Number (SSN) match your social security card. The name and SSN on Form W-2 must match your social security card in order for you to receive your social security benefits. Ask your payroll department for a corrected Form W-2, if needed.
3. Review your Form W-2 against your final 2013 paystub. Contact your payroll department immediately if there are any discrepancies.
Important items to review on Form W-2:
A. The amount in Box 1 is likely to be smaller than your final 2013 paystub year-to-date gross pay if you participated in a 401(k) or other employer-sponsored retirement savings plan.
B. The Box 3 total should not exceed $113,700 – the 2013 social security wage base.
C. It is likely that Boxes 1, 3, and 5 will be smaller than your final 2013 paystub year-to-date gross pay if you used pre-tax dollars to pay insurance premiums, or to contribute to flexible spending accounts.
4. Check for tax credits. Depending on your eligibility, you may qualify for thousands of dollars from the Earned Income Tax Credit. Read the back of Form W-2 copies B, C, and 2 to determine your eligibility.
5. Give yourself an instant raise! The average person overpays their taxes by nearly $250 a month. Adjust your Form W-4 to more closely match your tax liability. You could increase the money you receive in each paycheck.
CPA Practice Advisor 2/7/2014