Are Credit Card Perks Taxable?

 

Freeimages
Freeimages

Credit card companies are notorious for luring us in: low introductory interest rates, refer-a-friend bonuses, and cash back rewards and other perks. After all, card issuers are in the business of earning money each time we swipe our card through the payment terminal at check-out. What better way to get us to spend than to offer us incentives?

If you love to use your credit card with the cash back bonus program, you might want to read on. Some of those programs are taxable. It’s bad enough the credit card issuer gets your money with your monthly payment, but now Uncle Sam may want his share, too.

Taxable Rewards

Let’s suppose you get approved for a credit card and decide to open the bonus bank account attached to the card. As a reward, the bank issuing the card drops a cash bonus into the account. Sounds great, right?

At the end of the year, the credit card company will issue a 1099-INT form. You will need to report the amount shown on the 1099-INT as income on your tax return.

Non-Taxable Rewards

Some credit card bonus programs will issue a prize instead of cash rewards. Bonus points, airline tickets, air miles and merchandise vouchers are popular prizes.

You’re in the clear as long as the value of the prize is $600.00 or less. If those tickets you received are worth over $600.00, the credit card issuer or bank will send you a 1099-MISC form at the end of the year, which shows the taxable value you’ll need to report on your tax returns.

Certain cash back bonuses are also tax exempt: you’re not obligated to report the bonus as income if there is a spending requirement, such as spending the specified amount using the credit card.

As with any financial transaction, it pays to read the fine print when applying for a credit card with a reward program. If you get a bonus deposit for opening a bank account at the same time your credit card is approved, you will need to report that income at the end of the year.

Look over the fine print closely and decide which credit card rewards program is best for you. You could end up owing more money to the IRS if you’re not careful.

4 Red Flags: How To Spot a Bad Tax Preparer

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You’ve taken the DIY approach to filing your taxes, and you’d rather not do it again if you can help it. You’ve heard about professional tax preparers, but aren’t sure how to spot the bad ones. Since no two tax preparers are alike, here are some red flags to watch for:

1. They don’t ask you for any supporting documentation on tax filing day. Your tax preparer should ask you for your W2 and 1099 income forms, receipts for your itemized deductions (if applicable) and any other paperwork that can back up the figures that will be on your tax returns. If your tax preparer tells you they don’t need that information, get up and get out.

2. They file your return without your W2. While it’s true that the your final pay stub will have all the correct income information, along with state and federal taxes withheld, the IRS won’t accept your return unless you provide a W2 (filing by snail mail) or if your employer hasn’t yet filed their W2 information with the IRS.

Any tax preparer who tells you they can file your return without that information isn’t telling the truth.

3. They don’t have a Preparer Tax Identification Number (PTIN). Every qualified tax preparer that is a registered professional with the IRS has a PTIN. As to see your preparer’s PTIN; if they don’t have one, you’re not dealing with a legitimate tax professional.

Finally…

4. They encourage you to exaggerate or to embellish figures to increase your tax refund. This is not only unethical, it’s illegal. It may be tempting to take a larger deduction or to claim more expenses in order to increase your refund or to decrease your tax liability, but being charged with tax fraud just isn’t worth it. Walk away from a preparer that encourages you to do either. It’s not worth it.

A legitimate tax preparer will ask you for supporting documentation, will only file your return once your W2 is issued, and will only file a return based on verifiable numbers. They’ll also be registered with the IRS and will have a PTIN. Avoid any tax preparer that doesn’t meet these guidelines.

Tax day is stressful enough. Don’t add to the stress by allowing a sketchy tax preparer to file your returns. The additional stress, legal implications and financial hardship just aren’t worth it in the long run.

 

What’s In a Name? Name Changes for Taxpayers

Richert/freeimages
Richert/freeimages

 

If you’ve changed your name for any reason, chances are you’ve covered all your bases: employment records, school records, DMV records, and your health care records. Don’t stop there: be sure to advise the IRS of your new surname in order to avoid any last-minute delays in filing your tax return.

How It’s Done:

Since the IRS relies on Social Security Administration (SSA) records when verifying your name on your tax returns, you’ll need to update your SSA records with your new last name. You’ll need to complete form SS-5, “Application for a Social Security Card.” Fill it out, drop it in the mail, or head to your local SSA office and drop off the form there.

It will take a few weeks for the changes to appear in your SSA records, so it’s a good idea to take care of the name change with the SSA as soon as possible to avoid any delays in processing your return. If the IRS notices a discrepancy between the name on their records and SSA records, your return will be rejected if you filed it electronically.

Adopting A Child:

You’ll need to do the same if your new family member already has a Social Security Number (SSN). If they don’t, you’ll need to obtain an Adoption Taxpayer Identification Number (ATIN). You’ll need to complete IRS form W-7A and submit it to the IRS.  You can then use the ATIN to claim your child as a dependent on your tax returns until you can get a Social Security Number for him or her.

Life changes can also mean name changes. Don’t neglect to update the SSA with your new name, or you could end up tangling with the IRS over a delayed or incorrect tax return. Life is hectic enough; don’t let a delayed tax return add to the mix. Take care of your name change early, and you’ll be in the clear come tax day.

 

Your Guide to Tax Penalties

Photo: cohdra/morguefile
Photo: cohdra/morguefile

For most people, filing taxes carries enough headaches without worrying about penalties and fines from the IRS. Here is a recap of some of the most common IRS penalties and fines.

Late Tax Payment Penalty: If you owe a balance due on your taxes and don’t pay by midnight on the due date, the IRS will assess a Late Tax Payment Penalty. The outstanding balance will also accrue compounded interest. The best way to avoid the Late Tax Payment penalty is to file an extension if you feel you need more time to file your return or to save toward your balance due.

Underpayment Penalty for Estimated Tax: If you are self-employed and fail to pay enough toward your estimated tax due, the IRS will assess the Underpayment Penalty for your estimated taxes. The 1040 ES instruction booklet has a worksheet that you can use to calculate your estimated taxes due. A licensed tax advisor will also be able to help you calculate the correct amount.

Charitable Organization: If you run a charitable organization, your organization’s tax-exempt status is open to IRS scrutiny at any time. If the IRS determines that your organization is engaging in profitable transactions, they will revoke your charity’s non-exempt status and impose a fine.

Failure to File: The IRS will assess this penalty if you file your taxes late or not at all. You can avoid this assessment altogether by filing an extension; you will have an additional six months to gather your paperwork and tax forms. Be sure to file the extension before the April 15th tax deadline.

Incorrect Reporting or Fraud: This offense carries the most severe penalty: as high as 75 percent if the IRS is able to determine that you attempted to submit fraudulent information. Additionally, there are penalties if you failed to report taxable income or if you exaggerated an expense deduction.

If you’re concerned that your tax filing scenario will put you in the line of IRS fire, consult a knowledgeable tax advisor. He or she will able able to assess your situation, advise you of your options, and can represent you before the IRS should the IRS assess a tax penalty or fine.

You can lessen your chances of being hit with an IRS penalty by filing accurate and truthful tax returns, filing on time, and requesting an extension if you are not able to meet the April 15th tax deadline. Doing so will reduce your chances of facing IRS fines and penalties.

 

“To Err Is Human,” Your Guide to IRS Penalty Abatement

Marinela Prodan/freeimages
Marinela Prodan/freeimages

“To err is human, to forgive is divine.” In this case, the IRS could be the forgiving party in the equation. The First Time Abatement, or FTA, is available to you as a means of reducing or eliminating a tax penalty altogether.

Guidelines

The IRS will generally consider issuing a First-time Penalty Abatement if you have had no prior substantial tax penalties with the IRS within the past three years.  The IRS may grant you a First Time Abatement (FTA) in one of these two instances:

Reasonable cause would apply if there was a legitimate circumstance that prevented you from filing your tax return on time, such as a serious illness (sorry, having a bad case of the Mondays doesn’t count in this case) or disaster.

Complying with IRS regulations would be  nearly impossible under these circumstances, and the IRS will take that into consideration when deciding whether or not to grant you a one-time penalty abatement.

The IRS may also grant you the FTA if they made an error in calculating the amount of tax you owe. Be careful, though: the burden of proof will be on you in this case, so you’ll need to provide enough supporting documentation to prove your claim.

The FTA is a little-known program that can be of great help to you if you meet the guidelines. After all, why pay tax penalties if they were calculated in error or if circumstances such as illness or disaster prevented you from filing your taxes on time?

Time To Seek Help

As with any other tax matter, the IRS has a myriad of codes, regulations and requirements…in other words, you’ll need to jump through some hoops. In this case, having a knowledgeable tax attorney or Enrolled Agent by your side will help tremendously. They’ll interpret the IRS codes, requirements, and jargon for you, and they will let you know if you qualify for the FTA program.

Facing tax penalties due to circumstances beyond your control or IRS error is one instance where the IRS can be a little forgiving if you file for the FTA. This program can reduce or eliminate your tax penalty altogether if you are able to substantiate your claim with the right documentation.

If you’re facing tax penalties due to illness, disaster, or IRS error, don’t wait. We have tax attorneys and Enrolled Agents on staff who can assist you with the sometimes tricky process of filing for the FTA program. Get started today by clicking the white “Start Chat” button or by giving us a call. Don’t go it alone. We’re here to help.

Audit Letter 3172: The IRS Talks Tough About Your(Past Due) Taxes

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If you’ve been blowing off that tax debt and not replying to any of the IRS’s  earlier correspondence, chances are Audit Letter 3172 will find its way into your mailbox.

This is the letter where Uncle Sam lays down the gauntlet; if you don’t reply or appeal within 30 days the IRS can and will impose a tax lien on your property as a means of recovering the past due taxes you owe them.

As mentioned before in earlier entries, a tax lien isn’t pretty. It’s not only a substantial amount of money that the IRS is attempting to collect, but a tax lien will also appear on your credit report under “public records.” It will be visible to any prospective landlord, lender, and employer. An open tax lien will torpedo your credit rating and make it difficult for you to secure financing (cars, homes, some student loan products such as the Grad Plus loan or private student loans) or an apartment lease.

What’s On The Letter

The letter will have the following information:

  • The amount you owe
  • The tax period for which the lien is issued
  • Instructions for filing an appeal
  • Contact information for reaching out to the IRS

What To Do Next

Once you get the notice, it’s vital that you contact the IRS right away at the number that’s listed on your letter. Doing so demonstrates good faith that you are willing to address your past due taxes.

Once you have the letter in your hands, don’t assume that you are out of options. You have the right to review the letter and to appeal the IRS’s findings if you feel the past due taxes are in error. You also have the option of setting up an installment plan with the IRS.

At this point you should also consider reaching out to a qualified tax advisor. They have the skill, ability, and tax law knowledge to negotiate with the IRS on your behalf. A tax pro will also make sure you understand your rights in dealing with the IRS.

Life happens. Past due taxes happen. If you receive an Audit 3172 Letter from the IRS, don’t despair. You do have options. Respond to the letter before the 30-day deadline, either on your own or with a tax advisor who will act on your behalf.

If you’re facing a tax lien, past due taxes or any other tax-related hardship, we have qualified tax pros on staff to assist you. Get started today by clicking the white “Start Chat” button or by giving us a call. Learn about your options, put your mind at ease, and get your tax matter cleared for once and for all. You don’t have to go it alone.

 

Audit Letter 3391: What You Need to Know

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No one likes to receive a letter from the IRS, but if you forgot to file your taxes, you’ll eventually receive the 30-Day Nonfiler Notice, or Audit Letter 3391.

This notice is sent to taxpayers who neglect to file their taxes for at least one tax year and who owe taxes. Each missing tax year will be disclosed on the letter, along with the amount of taxes you owe for a given year.

What To Do

As with any IRS notice, you have 30 days to respond. If you agree with their findings, sign/date the notice, and follow any other instructions or procedures described in the letter.

If you disagree, you have the right to file an appeal. You have only 30 days to do so; don’t wait until the last minute to file an appeal. If you let the 30-day period expire, you automatically forfeit your right to appeal.

If you disregard the notice altogether, the IRS has the right to begin collection action against you, up to and including asset levy and imposing a tax lien  against you.

How To Avoid Receiving Audit Letter 3391

You’re most likely reading this and thinking, “Duh. Just file your taxes.”

Life can get hectic and tax filing day can slip by if you’re a busy person with a lot on their plate. Bills, work, kids, and other responsibilities can turn your attention away from important deadlines such as tax day.

Don’t let another tax year slip by, especially if you expect to owe taxes; that’s when you’re most likely to receive an Audit Letter 3391.

Set a reminder in your phone, on your desk calendar or anywhere else you’re likely to see it. Stay organized throughout the year by keeping all of your tax documentation in one place, such as a filing system or scanned to a portable drive.

Even if you don’t expect to owe taxes each year, you need to file a return. Don’t let the IRS come calling. If you do receive a letter and if the thought of dealing with the IRS on any level leaves you cold, consult a licensed tax professional. He or she will advise you of your options and guide you through the process of responding to the notice and providing the information required by the IRS.

Life happens. Taxes don’t get filed. In that case, you could end up receiving the Audit Letter 3391 from the IRS. Don’t ignore it. Be proactive, respond within the 30-day window, and stay current with filing your tax returns, even if you don’t expect to owe any taxes. You’ll be ahead of the game and you’ll have one less thing to occupy your time in the long run.

When A Job Isn’t A Job: Work/Study And Your Taxes

shho/freeimages
shho/freeimages

A work/study gig can be a good deal if you’re a busy student who will be spending a lot of time on campus. You won’t have the hassle of seeking off-campus employment, and an on-campus job generally offers more flexible scheduling so you can focus more on your coursework.

Work/Study is offered in conjunction with federal financial aid, such as SEOG grants and Pell Grants. You or your parents will need to demonstrate “genuine financial need” in order to qualify. You will also need to be enrolled in at least six course hours; for most schools that translates roughly to two courses or part-time study.

You can be awarded Work/Study as either an undergraduate or graduate student, and you will have had to indicate your interest in a Work/Study award when you completed the FAFSA form. You can either apply for a Work/Study job on campus, or your school will assign one to you.

But Is It Income?

Here’s where it can get confusing, especially if this is your first time with Work/Study income: while it is considered a part of a federal financial aid package and therefore not considered a job per se,  you will be deriving income from your Work/Study position.  Uncle Sam will definitely want his share at the end of the year.

When you first report to your Work/Study gig, you’ll have to fill out a W4 form as you would for any other job; your withholding from each paycheck will be based on the information you provided on your W4.

At the end of the year, you’ll receive a W2, just as you would for a conventional job. You’ll also need to report your Work/Study income on your tax returns, just as you would for any other form of  wages, such as tips or wages from another job.

Landing a Work/Study position can be a good deal if you’re a busy student: you get to work on campus, hours are generally scheduled around your courses, and if you’re lucky you can work in a department that ties in closely with your major.

Although Work/Study isn’t considered a job in the traditional  sense, it is still considered income, so you will need to pay taxes on that income. Be sure to report your Work/Study wages on your tax returns at the end of the year. By reporting this income, you’ll save yourself the hassle of dealing with the IRS and back taxes in the future.

Donating Your Car to Charity

Sarah Buxton/freeimages
Sarah Buxton/freeimages

You did it. Despite student loan payments, rent, and utilities, you’re now earning enough to add a new car to the mix. You’ll no longer be paying enough in repair bills to send your mechanic’s kid to college, and you’ll have safe, reliable transportation.

What to do with your old car? If it’s a beater or a very old car, you’ll get very little for it. If you’ve ever thought of donating your old car to charity, here are a few things to keep in mind:

Is It A Qualified Charity?

The IRS has an online tool for checking whether or not a charity is qualified:http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check. As a general rule, the following categories of charities are qualified:

  • Public schools, colleges, churches, volunteer fire departments, utility emergency funds, local animal shelters or humane societies and rescue organizations, health-related organizations, research hospitals and large charities such as the Red Cross, American Heart Association, or the United Way.
  • Any charity that is designated as 501 (c)(3) charity is a qualified charity. If your charity of choice has an up-to-date website, that information is usually found on the “About Us” page.

How Much Will I Get?

Much of this will depend on how the charity will use your donated vehicle. If they sell the car, you can only deduct the sales price. Once the car is sold, the charity will send you a copy of the bill of sale. If the car sold for $2,000 despite a fair market value of $3500.00, you can only deduct the $2000.00 as a charitable deduction.

If the charity doesn’t sell the vehicle and uses it instead, you may be able to deduct the fair market value of the car. For example, if you donate your old SUV or minivan to the local senior center and they use the vehicle for Meals on Wheels, you can claim the fair market value, or Blue Book Value of the vehicle.

In this case, the safest thing to do is to obtain a letter or other written proof they will be keeping the vehicle for their own use. This documentation will come in handy should the IRS ever question this deduction.

Getting a new car is a welcome relief if you’ve been driving an older car.  You’ll have steady, reliable transportation with all the new tech features and gadgets. If you’d like to donate your old car to charity,  make sure the charity is a 501 (c)(3) charity in order to be eligible for the charitable contribution deduction.

The amount of your deduction will depend on how the charity will use the vehicle, either reselling it or using it for their own purposes. Either way, your contribution will benefit your community, your designated charity, and you’ll be able to deduct your contribution from your taxes at the end of the year. Clearly a “win-win” for everyone.

All About The Earned Income Tax Credit

 

Samantha Villagran/freeimages
Samantha Villagran/freeimages

 

If you are a low-income taxpayer, the Earned Income Tax Credit (EITC) can actually increase the dollar amount of your refund. Unlike other tax credits that simply lower your overall tax liability, the EITC actually puts more money where you need it most…in your pocket.

In order to qualify for the EITC, your income must be at or less than the following, based on your filing status and number of qualifying children living with you in 2015:

  • Single, Head of Household or Widowed: No kids: $14820.00; 1 child: $39131.00; 2 children: $44464.00; 3 or more: $47747.00
  • Married, filing jointly: No kids: $20330.00; 1 child: $44651; 2 children: $49974.00, 3 or more children: $53267.00

2015 Maximum Credit Limits

  • No children: $503.00
  • 1 Child: $3359.00
  • 2 children: $5548.00
  • 3 or more children: $6242.00

As with any tax credit, the IRS has strict requirements. You must:

  • File a joint return if you are married
  • Earn income from a job
  • Be between the ages of 18-65 if you have no qualifying children
  • Be a US citizen or tax-paying expatriate
  • Have a qualifying child if your income is above a certain threshold. For EITC purposes, a qualifying child must live with you and receive financial support from you for more than half the year, be a legal relative, be younger than 19 or younger than 24 by the end of the tax year if they are a full-time student.

Claiming The Credit

In order to claim the credit, you will need to complete the Schedule EIC (Earned Income Credit) and list each qualifying child by name, birthdate, relationships to you, and their social security numbers. IRS Publication 596 has tables that you can use to figure your exact credit.

You’ll then transfer that information on to your 1040 tax form on the line that reads “Earned Income Tax Credit”

If you are a low-income taxpayer, the EIC can be a useful tax credit. Instead of just lowering your overall tax liability, the EIC can actually increase the dollar amount of your tax refund, which can help with paying bills and other expenses.

If you’re not sure if you qualify for the EIC, a qualified tax prep specialist can help you. Community groups such as VITA offer low-to-no-cost tax prep services for low-income families and seniors, making tax prep services accessible to all taxpayers.

You can also contact us be clicking the white “Start Chat” button on any of our webpages. We have qualified tax prep specialists on staff to assist you.