Taxable or Not Taxable? – Some of these items may surprise you.
Taxable or Not Taxable? – Some of these items may surprise you.
Here are nine areas of income that are often questioned by taxpayers regarding their taxability. Some items are, others are not. Sometimes the taxable nature of an item depends on other things. Here is what you need to know.
There are a number of areas in the tax code that cause confusion as to the taxability of money received. Here are some of the most common areas of confusion.
Alimony. Alimony is taxable to the person who receives it and deductible to the person who pays it. Special rules apply. Make sure you have proper documentation as part of a divorce decree to ensure you can support your tax position.
Child Support. Child support is not taxable to the person who receives it on behalf of their dependent. It is also not deductible for the person who pays it.
Free Services. Free service is almost always taxable as ordinary income under IRS barter regulations. You should report the fair market value of services received as income on your tax return. If you exchange services, you can deduct allowable business expenses against the value of services provided.
Illegal Activities. Even income received from illegal activities is taxable income and must be reported. Incredibly, the IRS even states that stolen items should be reported at the fair market value on the date the thief stole the item.
Jury Duty Pay. This is taxable as ordinary income. Yes, even doing your civic duty can be a taxable event.
Legal Settlements. A general rule of thumb with legal settlements is to consider what the settlement replaces. If the settlement revenue replaces a taxable item, like lost wages, the settlement often creates taxable income. This area is complex and often requires a detailed review.
Life insurance proceeds. Generally life insurance proceeds paid to you because of the death of an insured are not taxable. However, there are a number of exceptions to this general rule. For example, if you receive benefits in installments above the value of the life insurance policy at time of death or if you receive a cash payout of a policy you could have taxable income.
Prizes. Most prizes received should be reported as ordinary income using the fair market value of the item received. This area has been a major surprise to contestants on game shows and celebrities who have received large gifts at celebrations like the Academy Awards.
Unemployment Compensation. Typically unemployment compensation is to be reported as taxable income. Many are confused by this because of a temporary federal tax law that made unemployment compensation non-taxable during the recent economic recession. This is no longer the case.
Some of these areas can be complicated. What is most important is to realize when to discuss your situation.
Understanding Tax Terms: AFRs
Understanding Tax Terms: AFRs
The IRS often sees the transfer of funds as a loan, whether there is a loan agreement or not. This also means there is an implied term and interest payment. When the IRS says a transaction is a loan, what interest rate do they use? Enter AFRs. Here is what you need to know.
Your grandson needs a car, but cannot afford the payments. As a favor, you provide the $25,000 to purchase the car. You tell your grandson to pay you back when he can, but there is no loan document. The IRS sees this payment during an audit and asks you where your interest income is for this loan. Should this happen, you will quickly understand the meaning of AFRs.
Each month the IRS publishes a series of tables known as AFRs. So what are they and why should you care?
AFRs Defined
AFRs stand for Applicable Federal Rates. They are minimum interest rates that the IRS applies to a transaction when no rate is stated or implied. In other words, you may have a transaction that the IRS believes has an interest income/expense element to it, but none has been claimed by the taxpayer. These minimum interest rates are published each month by the IRS for three loan terms; short-term (0 – 3 years), mid-term (4 to 9 years) and long-term (over 9 years).
When does the AFR apply?
You may think that money you gave to a friend or that car sale to your cousin with repayment over time has no interest rate, but the IRS often sees it differently. So if no interest rate is stated, the IRS will apply the applicable AFR and you could be in for a tax surprise. Here are some common examples when the AFR rates can come into play:
- Loans to family and friends.
- Buying anything over time. If you take possession of an item, but can pay for it over a length of time, imputed interest is involved.
- Employee advances. This can include giving an employee the rights of stock ownership, but not expecting payment for the stock right away.
How to use the AFR knowledge to your advantage
- Create a loan document. Whenever you establish a transaction that has the expectation of repayment, write up a simple loan agreement. Not only will it clarify your repayment expectation, it also establishes the repayment terms. Please ensure both parties sign and date the document.
- Establish a safe interest rate. Use the AFR tables to establish an audit-safe interest rate. Remember, AFRs are also used if the IRS believes your stated interest rate is too low.
- Leverage gift rules. Remember you (and your spouse) can each gift up to $14,000 to an individual. If you stay under this threshold, you could defend your money transfer as a non-interest bearing gift and not a loan.
- Caution with housing transactions. Banks are asking buyers to document where they receive their money for their down payment. If the money comes from you, it could establish a potential implied loan document that you might need to defend. If you plan to help with a down payment in the future, try to understand the bank’s look back rules for this disclosure reporting and use this knowledge in conjunction with the IRS gift rules to avoid creating implied interest.
Should you wish to see the published AFR rates, they are available on the IRS website at www.irs.gov.
Understanding Your Special K’s – 1099-Ks are now being subject to underreporting IRS audits
Understanding Your Special K’s – 1099-Ks are now being subject to underreporting IRS audits
The IRS recently announced it is going to conduct automated audits of 1099-K filings against business income. This includes unicorporatated small businesses filing Schedule C with their Form 1040. How do you protect yourself from this audit risk?
For the first time, the IRS is reporting that it will be comparing filed 1099-Ks against income reported on business tax returns (including those reported on 1040 Schedule C tax returns). Knowing how this impacts you can save you an unwanted IRS correspondence audit.
Background
A couple of years ago the IRS introduced the 1099-K. This new informational tax return is meant to capture sales activity of previously unreported credit card transactions from places like e-bay and Amazon. Credit card processors are now required to report these transactions to you and the government if you have 200 or more transactions and over $20,000 in billing activity.
What is happening now
The IRS is now going to be comparing these filed 1099-Ks with the income reported by those receiving the form. If their computer audit shows you have not reported income sufficient enough to cover the activity on the 1099-K you will receive a letter asking for an explanation.
What you need to know
- 1099-Ks could include more than income. Since your 1099-K comes from a credit card merchant processor, whatever is on that credit card transaction is included on the tax form. This means it can often include sales tax receipts that have been passed on to your state. If you only record the income portion of the 1099-K, you may run the risk of under-reporting your 1099-K causing an underreporting audit.
- Sole proprietors using a Schedule C do not have a place to report 1099-K activity. If you are a sole proprietor, your business activity is reported on a Schedule C. There is not a separate line to report 1099-K activity. Given this, the problem with sales tax previously mentioned can become even more complicated.
- Make sure you do not double count. Remember 1099-K is credit card transaction activity that may also be reported within other types of 1099 reporting. You must make sure that Gross Revenue on your tax return matches the revenue on your business books.
- Leverage the IRS matching knowledge. Knowing that the IRS is going to run an automated underreporting match using 1099-K information, here are some suggestions;
- Make sure your Gross Income (gross receipts) surpasses the amounts shown on all related 1099 transactions. Focus on your 1099-MISC and 1099-K activity.
- Reduce your gross 1099-K activity to account for non-revenue transactions on a separate line and note what the activity represents. Do not net out the non-revenue portion of 1099-K activity as this may cause a mismatch for the IRS comparison program.
- Double check your book income against your tax return and make sure you can tie them to each other. Pay special attention to ensure your 1099-K activity is not over-stating your revenue.
Should you receive a correspondence audit from the IRS concerning a 1099-K call for help. Remember, this process will be new for them as well as for you.
When Filing a Tax Extension May Make Sense
When Filing a Tax Extension May Make Sense
Should you always file your tax return on or before the due date? Surprisingly, sometimes the answer is no. Here are some examples of when filing a tax extension might make sense.
While taxes owed are always due on or before the filing date of April 15th, taxpayers have the option of filing a tax extension that effectively moves their filing date to October 15th. Is this ever a good thing to do? Sometimes the answer is yes.
For most of us: file on time
It is almost always best to file your tax return on or before the April 15th due date because it starts the audit clock. Once filed, the IRS has a three-year period to audit this tax return from the tax filing due date or when you file your tax return, whichever is later. So if you do not file your return, the three-year audit time-frame does not start. (There are exceptions to this timeframe if you underreport your tax obligation by over 25%.)
In addition, your tax payment is due by the filing date whether you file your return or not. Since most of us need to prepare the tax return to know our obligation, it only makes sense to file it on time. So when does an extension make sense?
When to file an extension
- Missing or incorrect information. If you are waiting for a business tax statement (K-1), it is impossible to file your tax return with accuracy. This is often a problem for taxpayers who are waiting for LLC business tax forms. Perhaps your W-2 or a 1099 has errors on it. It is often better to receive a corrected form prior to filing your tax return. This is especially true if you are required to attach the form to your tax return.
- Recharacterizing Roth IRA rollover amounts. If you roll funds from a tax-deferred IRA into a Roth IRA, the fair market value of the investments at the time of the rollover are taxable as ordinary income. If the investments later lose value, you still need to pay tax based upon the fair market value at the time of the rollover. To solve this problem, there is a one-time roll back (recharacterize) opportunity to avoid paying tax on the inflated value. You can conduct this reclassification up to your tax filing due date including extensions. Many savvy investors who roll funds into a Roth account will often file an extension to make sure they do not pay too much in tax on the fund transfer.
- Extra time for self-employed to donate to a retirement plan. You can buy time to fund a SEP IRA, solo 401(k), and SIMPLE plan through your extension due date. But take caution, as this extended retirement plan funding does not apply to traditional IRAs and Roth IRAs. These latter plans must be funded by April 15th.
- Avoid late filing penalty. If you fail to file a tax return, two tax penalties come into play; a late filing penalty and a late payment penalty. By filing an extension, even if you cannot yet pay the tax, you can push out the potential late-filing penalty for another six months.
- Extend the time to receive a refund. You have three years to claim a refund. This clock starts on the due date of your tax return, unless you file an extension. With an extension, the three year clock starts six months later, on the new (extended) tax due date.
While filing a tax extension is one of the last things you should consider doing, sometimes it may make the most sense.
Do You Need to File a Tax Return?
Do You Need to File a Tax Return?
Too many assume they are not required to file a tax return. Knowing that it is possible to receive a refund even if no tax is due, should be reason enough to review your situation. Here are some tips.
Too many taxpayers assume they are not required to file a tax return and end up losing a potential refund. To help ensure this does not happen to you, here are some common things to help you decide whether a review of your situation is in order.
- Know the triggers. You are required to file a tax return based on your income, filing status, and age. If your income is above the amounts below, you are generally required to file a tax return.
| FILING REQUIREMENTS | ||||||||
| Status: | Age* | Gross Income | ||||||
| Single |
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| Married filing jointly (MFJ)** |
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| Married filing separately |
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| Head of Household |
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| Qualifying Widow(er) with dependent child |
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| * If you were born on 1/1/49, you are considered to be age 65 at the end of 2013.
** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900 you must file a return regardless of age. |
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- Tax is withheld. If your employer or other supplier withheld money from you and provided it to the federal government, you need to file a tax return to receive any applicable refund. This is also true if you made any estimated tax payments or applied overpayments from last year’s tax return to this year’s tax obligation.
- The Earned Income Tax Credit (EITC). If you worked and made less than $51,567 you may be eligible for an EITC-related tax refund, even if you owe no tax.
- Education related credits. If you are a student or pay/support a student, there are numerous tax incentives available to you. One of the credits, American Opportunity Credit, is refundable up to $1,000 even if you owe no tax.
- Health Coverage Tax Credit. In 2013 there is a health insurance premium credit called the Health Coverage Tax Credit (HCTC). If you received Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty you may be eligible to receive a credit for up to 72.5% of your health insurance premiums. In 2014 there is also a new Health Insurance Premium Credit that may require you to file a tax return when you did not do so in the past.
- You took plan distributions. Remember if you withdraw funds from a pre-tax retirement plan or health saving account you may now owe tax on this ordinary income.
- You received informational tax returns. In most cases, if you receive 1099s or W-2s you will want to ensure you file a tax return to avoid an IRS matching program audit. This is especially true if you have CD’s that are rolled over. These 1099s can often trigger a false read of your taxable income by the IRS. Something easily fixed by filing a tax return.
- Special Situations. There are also other situations that may require filing a tax return. Some of the more common:
- You have unreported tips
- You have self-employment income in excess of $400
- You received group-term life insurance proceeds
- You owe taxes on other income received
- You are repaying a first-time home buyer credit
If any of the above apply to you, it may make sense to review your situation.
IRS Identity Theft Season Begins Now
IRS Identity Theft Season Begins Now
Be on your guard as the IRS identity theft season starts in late January. Here’s what you need to know.
Each year thieves try to steal billions in Federal Withholdings by stealing your identity. As the IRS focuses more attention on this quickly growing problem, now is the time of year to be extra vigilant.
Early tax filing season is the worst time
Your federal tax account at the IRS has plenty of money in it from all the taxes withheld from your paycheck during the course of the year. Until you file your tax return, the IRS does not know whether you need to pay more in or they need to refund you the excess amounts withheld.
Thieves know this too, and will try to file a fraudulent tax return before you have time to submit your own. By doing this, they can steal some of your withholdings and be long gone by the time you file your own tax return. So what can you do?
- File early. The sooner you file your tax return, the less likely a thief will beat you to your refund.
- Check your credit reports. See if there is any suspicious activity on your accounts and on your credit reports.
- Protect your ID. Be suspicious; never give out your Social Security Number, do not leave your credit card unattended, never give ID information to someone who called you, use the password function on your phone, be aware of strange mail, and shred important documents. Often your best defense to IRS ID theft is to use best practices to protect your information.
The IRS is becoming a better spotter
If the IRS suspects something is wrong with your filed tax return they will send you a notice. If this happens to you:
- Respond Immediately. Get the direct contact information from the IRS web site and let them know that you have a possible identity theft problem.
- File an Identity Theft Affidavit (IRS form 14039). This will record your problem with the IRS and they will take extra steps to ensure your account activity is coming from you and not the ID thief.
- File a police report.
- Contact the credit bureaus.
Having your identity stolen is one thing. Having your tax withholding stolen and then having to unravel this problem within the IRS is a major hassle. Try to stay vigilant and know that there are steps to help protect your tax records. Is there good news in all this? If the IRS pays out a refund to someone stealing your identity, they are on the hook for this loss, not you.
Check Those 1099s
Check Those 1099s
As you receive informational tax forms like W-2s and 1099s, you will want to make sure they are correct and received on a timely basis. Here are some tips to make this part of your tax filing experience smooth.
Now is the time you will start receiving year-end informational tax forms. We’re all fairly familiar with W-2s from our employer, but you will also probably receive a number of different 1099s. Make your tax filing experience smooth this year by staying on top of these informational tax returns. Here are some tips.
- Know the different types of 1099s. The most common 1099s that taxpayers receive are:
- 1099 INT: for interest received
- 1099 DIV: for dividends received
- 1099 B: for brokerage transactions (selling stocks and mutual funds)
- 1099 R: for annuity, retirement, and pension income
- 1099 MISC: for miscellaneous income
- 1099 K: for merchant card activity
- Make a list. Review last year’s list of informational tax forms and create a checklist of them. Add to that list any new forms you might expect to receive. Mark them off your list as you receive them.
- Check for accuracy. Review each of the informational tax forms for accuracy. Is the income, interest, annuity or other income correctly reported? If cost is reported on the 1099 B, is it the correct amount? Make sure your name and your tax ID (Social Security Number) are also correct.
- Take corrective action. If you have not received your information return by the mid February, contact the issuing organization. Also call and start the process to correct any errors you find. Make sure you follow up any correction request in writing.
- Conduct withholding verification. If the supplier withheld any tax on this activity ensure it is noted as well.
- Understand those 1099 Ks. This is the new kid on the 1099 block and was introduced to try to capture sales activity from places like e-bay and Amazon. If you receive one of these, please pay special attention to the information being reported to you and the IRS. These forms are complicated and track payment processing transactions. If not properly understood, you could inadvertently double book income on your business activity.
If you have any questions please ask. (813) 283-0642 or email ajhall@hcpagrp.com
Do You Have a Sleeping Tax Penalty for 2014? – If you know someone who lacks health insurance…read this!
Beginning in January, 2014, you will be required to have health insurance or face a potential penalty. The initial penalty will be $95 per individual, $285 per family or 1% of your income whichever is greater. There is also a potential penalty assessed on employers who fail to offer employees health care insurance.
Beginning in January, 2014, virtually everyone will be required to have health insurance or face a potential penalty. The initial penalty will be $95 per individual, $285 per family or 1% of your income whichever is greater. There is also a potential penalty assessed on employers who fail to offer employees health care insurance.
What is not known is whether there will be some penalty grace period due to all the sign up problems with the government’s web site. If you are uninsured, your best defense is to review your health insurance options and register for an appropriate health insurance policy as soon as possible.
What you need to know
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Every state is required to have an insurance exchange. This exchange is a web site where everyone can view health insurance options. If you need to shop for a policy, this is a good place to start. |
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No pre-existing condition limitation. Remember you are no longer to be refused insurance because of a pre-existing condition. Nor can you be charged an incremental premium based on health or gender. |
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Buy or pay the penalty? Hopefully, not many will be faced with this dilemma. Part of the health insurance legislation is the requirement for most small businesses to offer a qualified plan or face a penalty billed to their business. |
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Will I be penalized? There are exceptions to the penalty if you have to spend more than 8% of your household income on the cheapest health care insurance premiums. There are also subsidies if you cannot afford health care insurance. This is in the form of a health insurance premium tax credit if your household income is between 100 and 400 percent of the federal poverty level. |
If you do not have health insurance start looking now. Remember this penalty may already be impacting you. With proper planning you should be able to avoid the unpleasant task of facing a tax penalty surprise at the end of 2014.
Beware of This New IRS Scam
Beware of This New IRS Scam
The IRS recently announced a new scam to steal your money from theives posing as the IRS. Here is what you need to know to protect yourself.
Lost in the recent news regarding stolen identities at Snapchat and the credit and debit card theft at major retailers, is the dramatic increase in identity theft and scams using the IRS. One of the more recent scams announced by the IRS is worth noting.
The scam
Callers identifying themselves as the IRS phone you and disclose that you owe delinquent taxes. They say that unless there is immediate payment by debit or credit card you may be subject to immediate deportation, arrest, loss of a license or loss of your business.
Why does this work?
These callers sound legitimate and the scams are often fairly sophisticated. Per the IRS, the callers who commit this fraud often;
- Use common names and fake IRS badge numbers.
- Know the last four digits of the victim’s Social Security number.
- Make caller ID appear as if the IRS is calling.
- Send bogus IRS emails to support their scam.
- Call a second time claiming to be the police or DMV, and caller ID again supports their claim.
What can you do?
While the IRS never initiates communication via email, they sometimes do initiate contact via the phone. So what steps can you take to ensure this does not happen to you?
- Mail is the typical IRS contact vehicle. Initial communication with the IRS is most often the mail. Your fraud alert should go way up with a phone call or email.
- No personal information from you. Never give personal information to the caller. This is true even if the person calling sounds legitimate.
- Get their information. Get the caller to give you all the information they have on the case. Get their badge number. Also get the name of their supervisor and the division they work with at the agency. Then hang up.
- Initiate the contact. After hanging up, contact the IRS. You can then confirm whether the call was legitimate. Here are the legitimate contact points:
- Internet: www.irs.gov
- 1040 questions: 1.800.829.1040
- To report fraud: Treasury Inspector General for Tax Administration at 800-366-4484
If, by chance, the request appears to be genuine please ask for help prior to sharing any information. As the old adage goes, it is better to be safe than sorry.
Plan Your 2014 Retirement Contributions
With the setting of contribution limits to qualified retirement plans for 2014, now is a good time to plan for your 2014 retirement contributions.
As part of your planning for next year, now is the time to review funding your retirement accounts. By establishing your contribution amounts at the beginning of each year, the financial impact of saving for your future should be more manageable. Here are annual contribution limits for the more popular programs:
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Take action
If you have not already done so, please consider:
- reviewing and adjusting your periodic contributions to your retirement savings accounts to take full advantage of the tax advantaged limits
- setting up new accounts for a spouse or dependent(s)
- using this time as a chance to review the status of your retirement plan
- reviewing contributions to other tax-advantaged plans like Flexible Spending Accounts (health care and dependent care) and pre-paid medical savings plans like HSAs (Health Savings Accounts)
While the annual limits did not go up for these plans in 2014, it is still a good idea to review your funding plans for your retirement.