Banks.com writes: No one likes doing taxes. It’s a simple fact. Each year we stress about getting all the necessary documents in by the deadline and finding time to actually file accurately by April 15th. Many people aren’t aware that you can request anIRS tax extensionfor any reason, and you are almost always approved. While an IRS-approved tax extension provides you six extra months to file, it does not allow extra time to pay any tax balance due. This doesn’t mean, however, that filing a tax extension won’t save you money.
If you are late filing taxes and owe the IRS money you will be charged two penalties. One is called the late filing penalty and the other is the late payment penalty.
IRS Late Filing Penalty
Known as the “failure to file penalty”, it is a fee if you owe tax and you don’t file your tax return (or a tax extension) on time.
Fee: 5% per month for the tax balance due. ($50 per month on every $1,000 you owe)
Tax Extension Advantage: Once approved for a tax extension this penalty fee is eliminated until your extended tax deadline (six months).
IRS late Payment Penalty
Penalty assessed if you don’t pay all the amounts you owe in time. You owe this penalty even if you filed a tax return or tax extension on time.
Fee: The good news is that it’s only a 4-6% penalty per year which works out to about $4 per month on every $1,000 you owe.
This is much cheaper than credit card interest. Never put your tax balance on a credit card. You are much better off paying lower interest to the IRS.
So remember, you can avoid the BIG late filing penalty by getting a tax extension, and don’t sweat about the late payment penalty. It’s just a small interest payment.
Eric McWhinnie for WallStCheatSheet.com writes: The retirement crisis in America is far from being solved. Workers are increasingly responsible for their own retirement savings, but are faced with a seemingly endless supply of obstacles. Households are experiencing stagnant wage growth, rising living expenses, and an overall sluggish labor market. Making matters worse, millions of people lack financial knowledge and often overlook ways to help them reach their retirement goals.
Benjamin Franklin once said that, “An investment in knowledge pays the best interest.” A large portion of the nation should heed this wisdom and learn about the Internal Revenue Service’s Retirement Savings Contributions Credit, also known as the Saver’s Credit. This overlooked credit is available to low and moderate income workers saving for retirement, but only 24% of Americans with annual household incomes of less than $50,000 are aware of the credit, according to the 15th Annual Transamerica Retirement Survey.
What do you think?
“The Saver’s Credit is a tax credit that reduces an eligible taxpayer’s federal income tax, making it a meaningful incentive for low- to moderate-income individuals and households to save for retirement in a 401(k), 403(b), or IRA,” said Catherine Collinson, president of nonprofit Transamerica Center for Retirement Studies. “Unfortunately, many eligible workers may be missing out on the Saver’s Credit because they are unaware of it, including workers who have saved in a 401(k) or similar plan in 2014 who may miss it when filing their tax returns. Other workers might have saved had they known about it.”
The credit reduces a taxpayer’s federal income tax and may be applied to the first $2,000 ($4,000 if married and filing jointly) of voluntary contributions an eligible worker makes to a 401(k), 403(b), or similar employer-sponsored retirement plan, or an individual retirement account. In order to qualify, you must be age 18 or older, not a full-time student, and not be claimed as a dependent on another person’s return. As the chart above shows, the Saver’s Credit is worth a percentage of your contribution, and adjusted gross income limits do apply — the less you make, the greater the percentage. The credit is also a benefit in addition to other advantages, such as tax deductions on retirement accounts.
What do you think?
Income limits for the Saver’s Credit change over time, so it’s important to check for updated figures on an annual basis. The IRS recently reminded taxpayers about the credit and noted that the income limit will increase to $61,000 in 2015 for married couples, while the limits for heads of households and individuals will rise to $45,750 and $30,500, respectively.
What do you think?
The IRS provides the following example of the Saver’s Credit: “Jill, who works at a retail store, is married and earned $30,000 in 2014. Jill’s husband was unemployed in 2014 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2014. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $29,000. Jill may claim a 50% credit, $500, for her $1,000 IRA contribution.” That’s a 50% return for just making the contribution. Workers need to use Form 1040, 1040A, or 1040NR to file their taxes with the credit, which is detailed on Form 8880. Savers have until April 15, 2015 to make a contribution for the 2014 tax year.
Steve Chung for Lawyerist.com writes: Tax season is just around the corner and tax professionals will be asked numerous variations on the question “is __________ tax deductible?”
Over the years, I have heard poker chips, underwear, breast implants, and animal waste. When calculating taxable self-employment income as a solo practitioner, you are allowed to deduct a wide range of expenses from gross revenue so long as they are business related. However, there are some basic rules and limitations.
Basic Deductibility Requirements
A business expense must meet certain not-so-clear-cut requirements to be deductible. First, the expense must be ordinary and necessary. For federal tax law purposes, an expense is ordinary if it is customary in the industry. An expense is necessary if it is appropriate and helpful in developing and maintaining a business.
A business expense must also be reasonable, meaning it cannot be lavish or excessive. Whether an expense is ordinary, necessary, and reasonable depends on the facts and circumstances. A stethoscope is an ordinary and necessary expense for a physician, but not for a personal injury attorney. Poker chips could be tax deductible for a professional gambler.
Some myths about deductibility:
An expense can be made once. It does not have to be recurring in order to be ordinary or necessary.
An expensive purchase can be reasonable, ordinary, and necessary.
Advertising is a good example, since these costs are usually large. And regardless whether you stop advertising after a short time, advertising costs are considered customary and helpful in developing and maintaining a law practice.
A comical example of a non-ordinary business expense can be found in the case of Henry v. Commissioner. The taxpayer was a CPA and tax lawyer who purchased a yacht and named it the 1040. On his federal income tax return, he deducted the yearly depreciation cost of the yacht along with insurance and maintenance costs. When he was audited, he argued that he bought the yacht to associate himself with fellow yacht owners who tend to be wealthy and are likely to need tax advice. He called it the 1040 to advertise himself as a tax specialist. The Tax Court disallowed the deduction, holding that a yacht is not a customary expense of a CPA/tax lawyer.
Exceptions to the Rule
Even if your business expense is ordinary, necessary, and reasonable, the tax code has a number of exceptions and modifications to the deductibility rule. Here are some of the common ones specific to solo lawyers.
Expense or Capitalize?
A business expense is fully deductible if you will enjoy the benefit of the purchase within the taxable year. But if the benefit of your asset lasts longer than one year (for example, purchasing a computer) or if it improves the value of the asset (upgrading a computer), then the expense must be capitalized and a portion of the cost must be deducted over a number of years. Typical purchases you must capitalize:
Furniture
Computers
Printers
Smartphones
However, you can still fully deduct a capitalized asset by using the Section 179 deduction.
You may be tempted to expense a purchase that must normally be capitalized in order to get a lower tax bill for the current year. But if you are in a low tax bracket now and anticipate being in a higher tax bracket in a few years, then it may be a better idea to capitalize the asset and get bigger tax savings over the next few years.
Meals and Entertainment
As a solo, you have to network a lot. This means having lunch meetings with clients, potential clients, referral sources, industry leaders, and mentors to name just a few. Sometimes, you may discuss business at the golf course, a ball game, or at a soiree. However, with rare exceptions, you are only allowed to deduct 50% of the cost of meals and entertainment spent in connection with a business activity.
The question of what is a business-related meal or entertainment expense is highly dependent on your facts and circumstances. Some may innocently misinterpret the rule while others will abuse it. So if the IRS chooses to audit your meal and entertainment expenses, expect them to be very aggressive and intrusive. You will have to show who you met, the business purpose of the meeting, and what business objectives were accomplished at the meeting. Keep notes.
Home-Office Deduction
Many solo practitioners work from home, some or all of the time. If part of your home is used for your practice, then a percentage of your home expenses can be deducted as a business expense. This includes mortgage interest, rent, utilities, maintenance, and depreciation. Mortgage principal payments are not deductible.
You must meet two tests to qualify for the home office deduction:
Part of your home must be used regularly and exclusively for the business. The easiest way to do this is to dedicate one room exclusively to your practice. This means no personal items — beds, video games, or children’s toys — in the room. To obtain the biggest tax benefit, consider converting the biggest room in your house into a home-office. While this might make your home look odd, it should not be a problem for those who live alone and rarely have guests over. If you live in a studio, you will have to dedicate a portion of the home exclusively for the business. So keep non-business items away from the designated business area.
Your home office must be the principal place of business. This test is met if you use your home office exclusively and regularly for administrative or management activities. And you must have no other fixed location where you conduct substantial administrative or management activities.
Some people think that if the business has a separate office, then they automatically fail this test. Not always. When determining whether your home is the principal place of business, the IRS considers the relative importance of the activities performed at each place where you conduct business, and the amount of time spent at each place. You should be able to meet this requirement so long as you spend a majority of your time doing administrative and managerial work at home. This includes billing, legal research, brief writing, ordering supplies, setting up appointments, and keeping books and records. I know many attorneys who use a separate office address only to pick up mail and meet a client once in a while.
If you don’t think you meet the principal-place-of-business test, you can still claim the home office deduction if you meet clients at your home office or if you have a separate structure in your home used exclusively and regularly for your law practice.
There is speculation that those who claim a home-office deduction have a greater chance of getting audited. While this will likely remain a state secret, chances are the more aggressive you are with your home-office deductions, the more likely your chance of getting audited.
Most business-related purchases are obviously tax deductible. But there are many exceptions and limitations. Understanding them can help you minimize your tax bill and avoid an argument with a tax advisor, or worse, an IRS auditor.
Steven Chung is a tax attorney in Los Angeles specializing in federal and state tax controversy resolution.
Reid Abedeen for ValueWalk.com writes: Millions of Americans face a challenge inmeeting their budgetsevery month – not just financially, but also in their time budgets, says investment advisor Reid Abedeen.
“Knowledge is power and time is often money, but what if you don’t have the time to empower yourself with knowledge? For many households, that often means losing out on thousands of dollars through tax deductions,” says Abedeen, a partner at Safeguard Investment Advisory Group, LLC (www.safeguardinvestment.com).
“As a family man myself, I understand what it means to work hard to provide the best possible for my wife and children. Had I not worked in the financial sector for almost two decades, I might not have understood how to best troubleshoot my tax return, I sympathize.”
Strategies to help your family this tax season
Abedeen offers the following strategies that may be relevant for your family this tax season.
Take tax deductions for capital loss. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately. However, you may deduct capital losses only on investment property, not on property held for personal use.
Fund your retirement to the max. You can contribute up to $5,500 to an IRA in tax-year 2014, or $6,500 if you are age 50 or older. Workers in the 25 percent tax bracket who contributed $5,500 to an IRA would save $1,375 on their 2014 tax bills. You’ll want to check your eligibility and understand the deadline for the 2014 deduction. If you make a deposit between Jan. 1 and April 15, you need to tell the financial institution which year the contribution is for.
Advisory fees are tax-deductible. Don’t feel like spending money to save and make money? There’s a workaround. Before closing the door on the possibility, inquire with a financial expert. Most are happy to give a free initial consultation, and you don’t have to be a millionaire to make it worth your while.
Gift assets to children. You don’t even have to file a gift tax return on an asset that’s valued less than $12,000, which is not taxable. If the fair market value of the gifted asset is more than $12,000 per person per year, but less than $1 million, there is the requirement of filing a gift tax return, but you won’t be taxed. The gift still is not income taxable to the recipient.
Deduct a home-based office when used for your employer. If space in your home is used exclusively and regularly for a trade, you can count that as a deductible. Calculate the square footage of your home office and divide the area of your office by the area of your house. If the percentage is 14 percent, for example, that represents the percentage of your total home expenses that can be allocated toward the home office deduction. For further questions, consult a professional.
“You’ll want to be very vigilant regarding these details of these deductions,” Abedeen says. “For any questions, I seriously recommend consulting a professional.”
And don't look to the IRS to provide much help. The agency says it'll limit answering tax questions to just the most basic ones. Finally, the IRS has eliminated the return preparation assistance it once provided to taxpayers who are mostly low-income, elderly or disabled.
This decline in service hurts a lot of taxpayers. According to the Taxpayer Advocate's report, "nearly 200 million Americans interact with the IRS each year, more than 3 times as many as any other federal agency. The IRS receives more than 100 million phone calls, 10 million letters and 5 million visits to its walk-in sites each year."
Unfortunately, for more people, preparing and filing their tax returns on their own is getting increasingly difficult, especially now that taxpayers face new filing burdens under the Affordable Care Act. That means having a professional prepare your taxes is a good idea. Here are a few good reasons to add to the list of why that's so.
Did you buy health insurance on an exchange?
If you bought health insurance on one of the exchanges last year and received a subsidy that reduced your health insurance premium, you'll have new forms to file. Nearly 6 million Americans could fall into this category and will have to complete a Form 1095-A. A tax pro can use this information to complete the newForm 8962 Premium Tax Credit that you'll need to file to claim any unused subsidies.
Are you tripped up by the Alternative Minimum Tax?
This pesky tax nabs over 5 million taxpayers. You'll know if you're one of them if you check line 45 of your tax return and see this additional tax owed there. A tax professional can advise you on a few strategies that could reduce the AMT on your 2014 tax return. He can also check to see if you can claim a credit this year for the tax paid in prior years.
Can you claim a home office deduction?
If you're self-employed, then most likely you've performed at least some of your work from an office in your home. If so, you can claim a deduction for expenses you incur in connection with the business use of your residence (whether you own or rent). A tax pro will know how to claim these expenses on Form 8829. He can also help you figure out if it's better to use the new Simplified Option for Home Office Deduction. This option allows people who meet the criteria for claiming a home office deduction to claim a flat deduction of $5 per square foot, on a maximum of 300 square feet, for a total deduction of up to $1,500.
Are you self-employed?
If you're self-employed, there's a lot of room for deducting your reasonable business-related expenses. You'll benefit from an experienced tax pro who knows the ins and outs of the Schedule C and who can advise you on the best type of retirement plan that maximizes your deductible contributions. Also, he'll let you know when you should file a Form 1099 to report any payments you made to others.
Did you have significant investment activity?
If you have a lot of investment transactions to report, completing the Schedule D, Capital Gains and Losses can be a pain. The new cost-basis reporting rules require you to categorize this information, making this even more complicated. Hiring a tax pro just to complete this schedule can be worth the money.
The major national tax prep firms with walk-in centers, such as H&R Block, Jackson Hewitt and Liberty Tax Service, should be well positioned to reap a slew of new customers this year.
Jake Benson, founder of LibraTax for UpStart Biz Journals writes: The UpTake:Taxes have always been a burden, but in the age of bitcoin, they can seem outright impossible. One bitcoin founder whose company helps with bitcoin taxes, share the ins and outs of what it takes to file in your cryptocurrency taxes.
T
he more ways you use bitcoin, the harder it gets to account for. That's partly due to the fact that it's classified as 'property' by theIRS. So while bitcoin functions much like a currency for its users, the tracking and reporting requirements are more akin to trading stock. Just like stocks, a taxpayer has to recognize the value on receipt and the value upon disposal and report the difference.
So, if you're one of those taxpayers who had bitcoin on the balance sheet last year, get ready: this will be the first tax season where the IRS will be paying attention to digital currencies.
To illustrate just how difficult the situation is, I'll provide a simple eight transaction example of basic bitcoin usage. In the slideshow at the top of the page (launch it by clicking on the first photo) is a theoretical history of my bitcoin transactions. This is the basic information one can retrieve from the 'blockchain.'
In all of this, you'll need to do more than just provide the basic information that a transaction occurred. You'll also need to categorize them by transaction type and taxable event (note, anytime you buy anything with bitcoin, it is equivalent to a sale of bitcoin for the price of the good purchased).
You also need to figure out what the dollar value of each transaction was. Given the fluctuations in bitcoin prices over the past year, this can be tricky. If you don't have it recorded somewhere, you have to look it up.
Once you've got all your data in place, it's time to satisfy the IRS. The revenue agency will require you to fill out tax form 8949, which is similar to 'Schedule D' for those familiar with reporting capital gains and losses on stock. You will also have to include any bitcoin income or bitcoin donations on the respective tax form.
For a better sense of what a bitcoin transaction flow looks like, check out the slideshow. One thing: I have not illustrated the issue of long-term gain versus short-term gain, which adds almost another magnitude of difficulty. Basically, if a bitcoin is more than one year old when it is sold, that gain/loss is categorized separately and taxed at a lower rate.
This, hopefully, has given you a better sense of how the federal government is watching you're bitcoin and how you should report it. Doing it yourself isn't impossible, but with all the steps needed to figure out the valuation, it's not easy.
The difficulty of tracking bitcoin is one reason I created LibraTax, software designed to address the unique characteristics of digital currency and blockchain technology and make the accounting of it easy to handle.
But whether you do it yourself or use my product or someone else's, the biggest takeaway is that you have to be prepared to satisfy the IRS.
Over the past 6 months, we’ve been testing an integration with QuickBooks Online with a closed group of customers. We’re happy to finally announce that we are now opening up this integration to all our customers.
If you’re not familiar, QBO(www.intuit.com.my) is the leading Accounting System in the world, listed on the NASDAQ(INTU) with a $26B Market cap.
StoreHub has partnered with QBO(check us out on their partners page) to bring a GST-Ready cloud based accounting solution that is awesome to our customers.
No more having to print end of shift reports manually and giving them to your accountant to key in
Track your stock accurately in your accounting solution
So how does this integration work?
When you close your end of day shift, a shift report is generated and sent to the StoreHub Backoffice.
We then send two sales receipts to QBO, one for cash sales and one for credit sales. We also include all products that were sold in these receipts. This means that your inventory stock value is automatically adjusted in the accounting system.
Your accountant can easily reconcile your payments with your bank statements!
That’s it. Really easy.
To get started, simply go to your StoreHub Backoffice and click on Settings-> Add Ons and Enable the Quickbooks Integration there.
If you don’t currently use QuickBooks Online and are interested to know more, feel free to visit www.intuit.com.my or get in touch with us. We’ll be happy to point you down the right track!
Dianne Kennedy for US Tax Aid writes: Real estate is the best thing going if you want to build wealth AND not pay tax. Tax is a drag on an economy. It slows down the ability to re-invest. So, the less tax you pay, the more money you have to re-invest.
Real estate is also the best (and sometimes only) way to build passive income stream to eventually replace a W-2 job. Cash flow, appreciation, tax breaks – you can have it all with real estate, provided you buy the right property and have a solid tax strategy in place.
First, let’s talk about a misused tax strategy when it comes to real estate. In fact, some people who didn’t know what they were doing with this strategy have made it more difficult for the people who use it correctly. I’m talking about the real estate professional status. If your income is under $100,000 per year (adjusted gross income), you can take a deduction of $25,000 per year. If your AGI is over $150,000, you can’t take any deduction. The exception is if you’re a real estate professional (REP). If you’re a qualifying REP, you can take all of the real estate losses against your other income no matter how much the loss is or how much your other income is.
There are three very specific rules that you must follow to qualify as a REP:
You or your spouse must individually have 750 hours of real estate activities per year and more hours than any other trade or business,
You and your spouse must materially participate in running the properties, and
Each property alone must qualify.
That’s the quick summary. Some of the things to consider: what are real estate activities (hint: think active), if you have a business outside real estate you’ll need to track your business hours too, be prepared for the IRS to require 500 hours of participation if you have a property manager, what constitutes participation for a property and the option of making an aggregation election for your properties so that you only have to meet one material participation qualification.
The REP status is still a viable strategy in 2015. Be prepared for IRS pushback if you’ve got a property manager and avoid stupid mistakes like putting something down as occupation that is not real estate-centric.
If you do happen to get audited, make sure you have a qualified IRS rep right from the start. The scope of the audit will be determined by the first phone call. Don’t make a mistake!
The big hot button for 2014 tax returns is Form 3115. The IRS has said that they are checking all businesses that do NOT file the form with the 2014 tax form. That may or may not mean an audit. Personally, I’d say every business, business structure and real estate investor needs to file this complicated form. Without filing the complicated tax form this year, though, you’re getting IRS scrutiny and that can’t be a good thing.
Medical insurance and S Corporations has gotten a lot more complicated due to conflicting opinions from the IRS and DOL (Dept of Labor). This has to do with the Affordable Care Act (ACA) aka Obamacare. The problem is with S Corporations who have just a few employees In the past, the S Corp has been able to reimburse employees for their insurance and provide a tax free benefit to their employees. No more! The S Corp must have a separate policy in the name of the corporation that covers the employees. Without that, the policy premium is taxable to the employees. No argument on that one. That’s what the law says.
The conflict has come about because the IRS and DOL have issued completely different opinions based on their interpretation of ACA as it applies to shareholders and medical insurance. The IRS says that you can take a deduction for medical insurance premiums paid on behalf of the shareholder, provided the S Corp reimburses the employee or pays the premium directly. They are then reported by the shareholder as an ‘above the line’ deduction on the first page of their Form 1040. The DOL says it can’t be deducted unless the policy is in the name of the S Corp, something that is impossible in many areas of the country. (Many areas can’t get single insured medical insurance in the name of the corporation.)
I think most business owners who have tried to do-it-yourself on tax prep are discovering that 2014 is the tax year where they finally need to break down and hire a tax pro. It’s getting more and more complicated.
PDR Certified Public Accountants writes: If you’re self-employed as a sole proprietor, partner or LLC member, you may owe the self-employment tax.
The tax is the government’s way of collecting Social Security and Medicare taxes from your net self-employment income. Any tax owed is in addition to any income taxes owed to the Feds and your state.
Here’s what you need to know about the self-employment tax.
First Stop: Social Security and Medicare Tax
If you’re an employee, a portion of your wages is hit with a Social Security tax. The amount is called the wage base and it is linked to the increase in average wages, not the Consumer Price Index. In 2015, the Social Security tax is 12.4 percent on the first $118,500 in wages (up from $117,000 in 2014).
All of your wages are hit with the Medicare tax of 2.9 percent. That tax climbs to 3.8 percent at higher income levels: $200,000 for unmarried folks and $250,000 for married joint-filing couples.
In general, half of these federal employment taxes are withheld from your paychecks while the other half gets paid by your employer. However, you pay the extra 0.9 percent Medicare tax if you are a high earner. Your employer doesn’t owe any part of this.
Second Stop: Self-Employment Tax
Self-employed folks must bear the full brunt of these two taxes combined, either in quarterly estimated tax payments or when they file their federal income tax returns. For 2015, the maximum 15.3 percent self-employment tax rate is on your first $118,500 of self-employment income (up from $117,000 for 2014). If your income exceeds the $118,500 ceiling, additional net income will be subject to the 2.9 percent Medicare tax. The additional 0.9 percent Medicare tax applies once your net self-employment income exceeds the applicable threshold ($200,000 for unmarried individuals or $250,000 for married joint filing couples).
The Future of the Self-Employment Tax
What you pay in self-employment taxes is likely to increase. As the Social Security tax ceiling increases to account for inflation, more and more of your income will be socked with the 12.4 percent Social Security tax.
According to the Social Security Administration’s latest projection, the Social Security tax ceiling is expected to increase to $165,600 for 2022. That would mean a Social Security and Medicare tax bill of $25,337 on self-employment net income of $165,600.
Some observers think there is a good chance the tax ceiling will increase beyond the projected number or even be removed in an attempt to put the Social Security system on a sounder financial footing. Without a ceiling, you would owe the full 12.4 percent Social Security tax on every dollar you earn.
Now for the Good News
It is not all doom and gloom, however. The good bits of news include:
If you have a job and have Social Security tax taken out of your wages, you get credit when calculating your self-employment tax bill. For example, say your 2015 salary is $100,000 and you also earned $50,000 of net self-employment income from a side business last year. You only have to pay the maximum 15.3 percent self-employment tax rate on the first $18,500 of your net self-employment income because you get credit for already having paid Social Security tax on your $100,000 salary. However, you must still pay the 2.9 percent Medicare tax on your self-employment income. This gets taken care of automatically when your tax accountant fills out Schedule SE while preparing your Form 1040.
You can generally deduct 50 percent of your self-employment tax bill on page 1 of Form 1040. The write-off is available whether you itemize or not. However, you cannot deduct any portion of the extra 0.9 percent Medicare tax on high earners.
You generally don’t have to pay self-employment tax on profits from selling business assets that are not considered inventory. For example, say you sell a small office building that has been used for years to house your unincorporated business. You don’t owe any self-employment tax on the gain.
