Taxpayer Tips for New Grads

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If you’re a member of the Class of 2015, chances are you have a lot on your mind: Finding work, moving to a new city, or moving back home to save on expenses while you get on your feet. If you’re one of the lucky ones who has landed a full-time job right out of school, your tax scenario is going to change. Here are some tips to make your first tax season a stress-free tax season:

1. Your Student Loan Interest is Deductible

If you’re already making student loan payments, there is some relief in sight at the end of the year: you can deduct your student loan interest. The IRS allows you to deduct the lesser of $2500.00 or the actual amount you paid in interest. For example, if you paid $500.00 in student loan interest, you can deduct that from your taxable income. Your student loan servicer(s) will issue a 1098-E form at the end of the year that will state the amount of interest you have paid.

Be sure to notify your student loan servicer of any address changes so your statement will arrive in time.

The IRS has established guidelines for claiming this deduction:

  • You paid interest on a qualifying student loan during the 2015 tax year
  • You were legally obligated to pay interest on the qualifying student loan (meaning that you were the person primarily responsible for paying off the debt – if you were paying off your friend’s loan, or  your child’s loan, you may not qualify for the deduction).
  • You are not filing taxes as married, filing separately (any other filing status is eligible)
  • Your modified adjusted gross income is less than $70,000 (if you’re single) or less than $145,000 (if you’re married and filing a joint return)
  • You are not being claimed as a dependent on anyone else’s tax return

While the student loan interest deduction may not completely take the sting out of your student loan payments, it can help in decreasing your overall taxable income, which in turn will mean you’ll be owing less in taxes.

2. Claim Your Own Exemption

Chances are if you’re younger than 24, have been a full-time student with your parents paying your expenses, you haven’t had to worry about claiming your own exemption each year.

However, if your financial situation improves after graduation and you’re able to pay your own bills and living expenses, you can claim the standard deduction of $4000.00 on your tax return, reducing your overall taxable income by $4000.00 right off the top.

3. Fill Out Your W4

If you landed a job after graduation, you’ll need to fill out a W4. While it may be tempting to claim more than one deduction, you could end up owing even more money at tax filing time. Instead, claim only yourself, just as you would on your tax return. This will prevent you from getting stuck with a larger than average tax bill at the end of the year.

Graduating from college  and landing a job in this tough economy is an accomplishment to be proud of. Get your financial future off to a solid start by understanding your student loan interest deduction, personal exemption, and how to fill out your W4 form properly. Doing so will make your first tax season painless and you won’t get stuck with yet another bill that’s tough to pay: a sizable tax bill.

 

 

How To Calculate Your Tax Bracket

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It might seem the IRS randomly assigns our tax brackets, but the agency actually use a very straightforward method to calculate your tax bracket. Understanding your tax bracket will help you to better prepare for tax day and to learn ways to reduce your overall tax liability for the future.

Factors That Influence Your Tax Bracket

Your tax rate is based on several parts of your tax scenario, including your filing status, number of dependents, your gross income, and eligible tax deductions.  You have the option of choosing from one of the five tax filing statuses: Single, Married Filing Jointly, Marred Filing Separately, Head of Household and Qualifying Widow(er).  Each status carries a specific standard deduction amount, which can reduce your taxable income. Your tax rate is also influenced by the number of exemptions you can claim.

In addition, there is an exemption amount for each eligible dependent claimed on your taxes each year.

Your tax bracket is also influenced by your gross income and allowable deductions. The IRS takes your gross income and subtracts your eligible deductions to arrive at your taxable income for that year. Your tax rate will be based on the remaining amount of income after subtracting your deductions.

Figuring Your Tax Bracket

OK, on to the math:

1. Total your gross income from all sources: earnings, self-employment income, interest, dividends, and capital gains.

2. Subtract your eligible deductions, starting with the standard deduction for your filing status. You can find this number in IRS Publication 17 (Note: not yet available for 2015 tax year). Be sure to include your eligible dependents in this figure.

3. Deduct the number of exemptions you can claim: be sure to include yourself and your spouse if you’re filing a joint return.

4. Refer to the “Adjustments to Income” section of the IRS Form 1040 to find which deductions you may qualify for, e.g., student loan interest, moving expenses, self-employment tax, educator expenses, and so on.

5. Subtract all of these deductions from your income. The final number is your taxable income, or the amount that is subject to federal income tax.

Once you have this figure, you can refer to the IRS tax tables to determine your tax bracket. You can find the tax tables in IRS Publication 17 or in the instruction booklet for Form 1040. The tables will have both the tax rate percentage and the dollar amount of tax you’ll owe for that year.

Even if you are going to have your taxes prepared and filed by a tax pro or VITA volunteer, it’s a good idea to know your tax bracket in advance.This is especially true if you’ve had a large income increase such as a raise or sizable bonus.  You can get an idea as to how much you’ll owe in taxes and how you can reduce your future tax liability.

Self-Employment Tax Forms For Home-Based Business Owners

Running a home-based business comes with its share of perks: no nasty daily slog back and forth to the office, more control over your time and resources, and the ability to create your own work schedule according to business needs without having to appeal to the office chain of command.

Owning your own business can be rewarding and enjoyable, but you do need to be aware of the different tax forms pertaining to self-employment so your transition from employee to business owner will be a smooth one. 

 Instead of just filing a 1040 EZ form every year and attaching your W2, you’ll need to attach additional forms to your tax return. Here is a breakdown of the three most common tax forms for home-based businesses:

Schedule C: Profit and Loss From Business

The Schedule C attachment is by far the most important tax form you’ll use. In it, you’ll state your business profit and loss figures. You’ll need to report your total revenue for the year, offset by your expenses. The business expenses section is categorized according to the type of business expense. Qualified expenses deductions include:

  • Marketing/advertising
  • Supplies
  • Office expenses
  • Inventory
  • Payroll

Schedule SE: Self-Employment Tax

The Schedule SE form is used to calculate the correct amount of self-employment tax that is due at the time you file your return. Since you don’t have an employer, you’re required to submit both portions of the Social Security and Medicare taxes (FICA). Here’s how to calculate what you owe:

  • Multiply 92.35 percent of your net profit (after expenses and deductions) by 15.3 percent. This will be your Self-Employment Tax
  • You may deduct half of this amount as an adjustment to income on Form 1040

Form 8829: Business Use of Home

If you operate your business out of your home, you may qualify for the Business Use of Home tax deduction. You’ll need to attach Form 8829 to your return in order to claim this deduction.

  • Calculate the square footage of your office space
  • You can then claim a portion of your home expenses as a deduction based on the office area.

Eligible expenses include:

  • Utilities: water, gas, power
  • Telephone/internet charges
  • Repairs
  • A portion of your rent or mortgage

Here’s the catch: the office space must be used regularly and exclusively for business: your combination gaming area/home office/den won’t qualify.

While this isn’t an exhaustive list of tax forms for entrepreneurs, these are the three most essential forms for you to use, especially if you run your business from your home.

Self-employment tax codes can be tricky, especially if this is your first year filing as a self-employed person. Checking in with a qualified tax pro will be to your benefit, as he or she can advise you on record-keeping, estimated quarterly taxes, and the precise calculations for home office use.

Running your own business can be satisfying in ways you won’t experience  with a conventional job. By staying on top of the change in your tax status and filing the correct forms, your transition from employee to business owner will be a smooth one.

 

Tackle Tax Day By Getting Organized In Advance

Photo: Ladyheart/morguefile
Photo: Ladyheart/morguefile

2015 is winding down and tax season will be here before you know it. Want to free yourself from the stress of last year’s tax day? Start organizing your paperwork now to get a jump on tax season. Your tax return prep will be painless by keeping these tips in mind:

Organize All of Your Records.

You’ll need to refer to last year’s return, so make sure you have a copy of that tax return handy. If you used DIY tax prep software, print out a copy of last year’s return and put in a safe place. Place it in a file, along with all documentation for income, expenses, and deductions:

*Paystubs: You’ll be comparing the year-end figure on your paystub with the information on your W2. Hang on to your current paystubs in the meantime.
*Receipts for deductions: If you’re going to itemize deductions, save all of the related receipts ( e.g., child/dependent care, homeowner’s deductions,  medical/dental expenses).
*Receipts for business-related expenses: meals, mileage, supplies, payroll, office equipment, insurance, home office expenses.
*Award letters for unemployment and disability insurance
*Documentation verifying amount of child support you’ll be receiving or paying
*Bank statements verifying interest income and mortgage payments
*1098 and 1099 forms
*Social security income verification

Tuck everything away in a folder, adding to it as you receive receipts other needed documents. Use a productivity app or spreadsheet program to document income and expenses. When tax day rolls around, you can transfer the totals from the app or spreadsheet onto your tax return.

Remember you’ll need to report all of your income: base wages, tips, side-gig income, gambling winnings, and so on. Careful record-keeping of your income will prevent tax day errors later on.

Of course, everyone’s tax scenario is different, so if you have questions regarding your specific tax needs, it’s best to talk with a qualified tax advisor well in advance of tax season to make sure you’re on the right track.

With 2015 winding down and the busy holiday season just weeks away, it’s easy to set aside tax matters for another day. However, tax season will be here before you know it, so advance preparation is the key to avoiding a stressful tax day experience. Plan ahead, organize your documents, and tax day will go much more smoothly.

Score! Your Guide to Fantasy Sports Winnings and the IRS

american-78095_1920Fantasy sports teams are a great way to channel your inner big-league team owner. After all, you can draft players, create and manage rosters, and compete against other fantasy teams throughout the season. What’s not to love about that?

Fantasy sports are also a way to pick up some extra money, and the IRS is knows this. Here’s what you need to know about fantasy sports leagues and the IRS.

Will My Winnings Be Taxed?

While the IRS has no specific tax code regarding fantasy sports winnings. At the same time, you’re required to report all income, including cash winnings if they exceed $600.00 in a single tax year.

Can I Write Off My Fantasy Sports Expenses as Losses?

You could potentially write off your expenses as losses if you also win money in the same year. This rule only applies if you win prizes or cash, and the IRS will allow you to write off losses only to the extent of your winnings.

Reporting Your Winnings

Since the IRS doesn’t classify fantasy sports as gambling, any cash and prizes worth over $600.00 will need to be reported as “miscellaneous income” on your tax return. Take the total from the 1099-MISC form issued by the fantasy league, and enter that amount on your 1040 or 1040A tax form. Even if you don’t get a 1099-MISC in the mail, you are required to report earnings over $600.00.

Read the program’s terms and conditions carefully when signing up: there should be a provision stating the program will issue a 1099-MISC on all winnings over the $600 threshold.

If you enjoy fantasy sports, keeping making those picks! One way to avoid potential tax troubles from unreported income is to keep careful records of your winnings throughout the year. If they exceed $600.00, be sure to include them on your tax return to avoid future tax troubles.

Fantasy sports leagues are a popular hobby for all types of sports fans. Where else will you get the chance to draft and manage your team, and to have that team play against others in the league with some money on the line?

Keep careful records of your cash and prize winnings, and report them at the end of the year on your tax form, even if the fantasy sports program didn’t issue a 1099-MISC. By doing so, you’ll avoid future tax problems related to unreported income.

What Is The First-time Penalty Abatement?

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If you’re like most taxpayers, you do your best not to run afoul of the IRS. After all, you don’t want to get saddled with penalties for late payment, late returns, or any other offenses, right? However, things happen: you miss a tax filing deadline, or send in your tax payment later than you’d like. The resulting tax penalties aren’t pretty, but you may have some recourse, especially if you haven’t had any prior penalties.

What Is The First-time Penalty Abatement?

The IRS established this penalty relief provision for first-time “offenders” who are otherwise in good standing. Under the First-time Penalty Abatement program, you could get your penalties reduced or eliminated.

While the IRS is strict about imposing penalties, they do offer a break to first-time offenders. If you’ve never incurred a tax penalty before, this program could be your means to a lighter penalty.

What’s the catch? You will need to meet certain guidelines.

Reasonable Cause: Suppose you were ill on tax day and didn’t file your return, or if you were dealing with other circumstances beyond your control. Your penalty abatement request would fall under the Reasonable Cause category.

IRS Error: You’ll need to provide supporting documentation for this claim, but if you can determine that the IRS made an error in calculating your tax liability, you could receive a penalty abatement or reduction.

Administrative Waiver: The majority of first-time penalty abatements fall into this category. If you have no prior penalties with the IRS, and this is your first time you’ve failed to follow IRS regulations, the IRS may be willing to grant you a penalty abatement.

If you’ve run into a tax penalty due to minor oversight or circumstances beyond your control, you may be eligible for the First-time Penalty Abatement program. You have the option of requesting the abatement on your own or consulting with a tax professional if you prefer.

 

Is There Such Thing as IRS Debt Forgiveness?

Chances are, being “one in a million” means that you stand out from the crowd and have something unique to offer. However, being one in a million with respect to the IRS doesn’t have the same meaning. Over 1 million taxpayers owe taxes to the IRS at any one time. If you’re among them, you have plenty of company, and chances are you’re worried about your tax debt.

In order to lighten their workload and to make the best use of existing personnel and resources, the IRS isn’t going to pursue each and every taxpayer. While the IRS does make a good-faith effort to collect taxes that are owed, current staffing and resource levels make collecting from each and every person unrealistic.

In some cases, the IRS is willing to relinquish some of its claim to your tax debt if you owe back taxes. If you’re tight on cash and owe back taxes, there are programs available to you.

Fresh Start

Fresh Start was enacted as a means of clearing tax debt entirely. There are currently two option available to you under this program: Partial Payment Installment Agreement (PPIA) and the Offer In Compromise (OIC).

The PPIA option is the most common under the Fresh Start program. The PPIA allows you to make affordable payments on your IRS account until the debt is cleared entirely or if you have paid the debt for 10 years.

The OIC program allows you to settle your debt with the IRS by paying a mutually-agreed upon amount. You could qualify for OIC if you meet any of these criteria:

  • Have not been turned down for OIC in the past
  • Owe a new debt
  • Are in full compliance with the IRS (no outstanding past debt, or no history of defaulting on prior payment arrangements)
  • Have no plans to file for Chapter 7 bankruptcy or are unable to do so.

You can file for an OIC online or enlist a tax pro to help you file the forms. 

RCP and CNC

Both of these statuses refer to the likelihood of the IRS being able to collect on your tax debt. In doing so, the IRS will asses the Realistic Collection Potential (RCP) of your account. Your tax debt could be designated as RCP if:

  • You’re low-income
  • Have no means to pay the account
  • Have no assets such as bank accounts or real estate the IRS could potentially seize and liquidate in order to satisfy your tax debt.

While your tax debt may not be forgiven altogether, the IRS typically won’t make any collection attempts.

The Currently Not Collectible (CNC) option also prevents the IRS from collecting on your tax debt. This status indicates you also don’t have the means to pay what you owe, and this designation was designed to allow you to slowly increase your income or come up with the means to satisfy your tax debt. Once your account reaches 10 years, the IRS can no longer legally collect from you.

In any case, the IRS cannot legally collect from you if your tax debt is older than 10 years. If you’re facing back taxes, there are program available to you that can take the sting out of owing back taxes.

In any event, you can take the DIY approach or hire a tax pro to walk you through the process and explain your options and rights. It’s always best to check in with a tax pro if this is your first time owing back taxes. Don’t let back taxes get you down. Take charge of your tax debt.

 

 

 

How To Appeal An IRS Wage Garnishment

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Facing IRS wage garnishment is no joke. Unlike credit card companies or banks, the IRS doesn’t need to obtain a court order to garnish your wages. Instead, they send a notice to both you and your employer notifying you of their intent to garnish your wages, usually for non-payment of an outstanding tax debt.

The IRS will typically garnish your wages if all other attempts to collect on your tax debt have failed, especially if you haven’t responded to any of the IRS’s correspondence, or if you haven’t made a good-faith effort to repay your tax debt. Here are some tips on appealing your IRS wage garnishment:

You need to act quickly once you receive the Notice of Intent to Levy from the IRS. You have a 30-day grace period during which you can appeal. Don’t wait until the last minute. Take action the day you receive the notice. Call the IRS at the number shown on the letter. You can request an appeal if any of the following apply to you:

  • You received the IRS notice while you are filing for bankruptcy
  • The legal timeframe (statute of limitations) for the debt has expired
  • You’ve already paid the IRS in full
  • You were never given the chance to appeal the debt
  • You qualify to file for innocent spouse relief

Use The Correct Form

You must use the proper form in order to file your appeal. You can find IRS Form 12153 (Request For A Collection Due Process or Equivalent Hearing) on the IRS website. This form will formally start your appeal process, so be sure to fill it out completely and accurately. It will need to be mailed directly to the division indicated on your Notice of Intent to Levy; you won’t be able to email it or fax it. Be sure to send it via certified mail with a return receipt.

File For Garnishment Exemption

If you feel you can’t afford to have your wages garnished by the IRS, you can file an appeal in court. You must provide documentation that supports your argument. The court will want to know about your total household income, the number of dependents you support, your fixed expenses (rent, mortgage, insurance, car payments, utilities, child/dependent care), any unique circumstances that prevent you from supporting yourself or your family, such as prolonged illness or permanent disability.

Be sure to bring the following to court:

  • Income documentation: paystubs, 1099 forms, disability/public assistance award letters, copy of divorce decree showing or other document verifying child/spousal support income.
  • Expenses: rent/mortgage statements, property tax statement (if you own your home), copies of utility bills, copies of car payment statements, child/dependent care receipts, student loan statements, and statements for any other fixed expenses you have.

If the court rules in your favor, it will order the IRS to release the garnishment order or levy.

If the thought of appealing an IRS wage garnishment is intimidating, you’re not alone. Most people elect to hire a tax professional who can walk them through the process, explain their rights, and represent them before the IRS. Appealing an IRS wage garnishment can be a long, complicated and confusing process. You must be able to follow the IRS’s strict appeals protocol to the letter if you want a favorable outcome. A qualified tax pro can make sure everything is taken care of, down to even the  smallest detail.

Facing an IRS wage garnishment is a stressful experience. While you do have the option to file for an appeal and to seek a court order to release the garnishment(levy), hiring a tax pro is your best defense. A qualified tax advisor can file the appeal on your behalf, walk you through the appeals process and make sure your taxpayer rights are upheld.

If you’re facing an IRS wage garnishment, we can help. Get started today by clicking the white “start chat” button on the top of the page, or by giving us a call. You don’t have to go it alone.

 

 

Check Out These Great IRS Tools

Marinela Prodan/freeimages
Marinela Prodan/freeimages

 

If you hear “IRS” chances are you picture hours spent on Eternal Hold, long lines in their field offices, or worse yet, dealing with pages of complex tax terms. All you want to do is file a return, learn more about deductions,  track the status of your refund, or research basic tax information.

Fortunately, the IRS feels your pain and has created some great online resources for busy people like you:

1. Interactive Tax Assistant: The Interactive Tax Assistant offers answers to your essential tax concerns, such as determining your filing status, tax credits, and more. You’ll answer a series of questions online, follow the prompts, and you’ll have access to the tax code information you need.

2. Volunteer Tax Return Preparation Lookup: If you earn $50,00 or less and need help filing your return, this tool will help you locate free tax prep assistance in your community.

3. FreeFile: This online portal is available to you if you earn $60,000 or less. You can file your return online for free, but it helps to be familiar with basic tax codes (see Interactive Tax Assistant).

4. Electronic Federal Tax Payment System: The Electronic Federal Tax Payment System (EFTPS) offers online payment options if you have a federal tax balance. You can use this system to pay income taxes, payroll taxes, and estimated taxes. No more snail mail payments!

5. Online Payment Agreement: If you have a tax balance and need to pay it off over time, the Online Payment Agreement is a great tool to use if a tax pro’s services just aren’t in your budget.  You’ll be able to set up an IRS installment plan and make monthly payments to clear your tax balance.

6. Authorized E-File Provider Search: If you want to electronically file your tax return and would rather have a tax preparer file them, use this tool to locate authorized E-File providers. Just enter your zip code, and the system will generate a list of authorized E-File pros in your community.

7. Where’s My Refund: This portal allows you to track your tax refund. You can access this tool beginning seven days after your filing date. Fill in the requested fields, you deposit information, and the system will generate your tracking information and estimated deposit date.

Life these days is hectic. Who has time to be on Eternal Hold or to stand in long lines? The IRS has come to your rescue with this series of online tools to help you with basic tax matters such as tracking your refund or determining your tax filing status.

Of course if you’re dealing with a complex tax matter such as past due taxes, liens, asset seizures, or wage garnishments, it’s best to enlist a tax pro who can help you.

We have qualified tax pros on staff to help you untangle the toughest tax matters. Get started today by giving us a call or by clicking the white “start chat” button at the top of the page.

 

4 IRS Audit Myths That Won’t Die

Photo: cohdra/morguefile
Photo: cohdra/morguefile

The IRS is a popular target for urban myths that seem to have taken on a life of their own. It would stand to reason that people just want to file their taxes and get on with their lives, content to keep the IRS at bay by doing so. The good news is that IRS audits are less frequent than they used to be, thanks in part to budget cuts, and the staffing reductions that went with them.

The bad news is that almost anyone is at risk of an audit since the IRS randomly selects returns for audit. Even with the budget cuts and staffing reductions at the IRS some audit myths persist. Here’s a look at some of the most popular myths, and the truth behind them.

Myth: You’ll Get Audited If You Claim Multiple Exemptions. If you’re afraid to claim the exemptions to which you’re entitled, you could be cheating yourself out of a refund or tax credit. You could me missing out on a refund or tax credit for any of the following:

Child/dependent care
Home Office
Travel, business, moving, or medical expenses

Fact: The IRS doesn’t audit returns with exemptions any more often than it audits returns without them. By not claiming the above exemptions, you could be denying yourself money to which you’re legally entitled in the form of a tax credit or a larger refund.

Myth: You’ll Get Audited If You’re Wealthy. If you’re a low-to-modest income taxpayer, you may think you’re in the clear. After all, why would the IRS go after someone who earns very little and who has little to no money to hand over to the government, right?

Fact: The IRS screens for false, misleading, or missing information on all returns, regardless of how much the taxpayer earns. The IRS selects returns at random.

Myth: You Won’t Get Audited If A Tax Pro Does Your Return. It’s easy to fall for this myth because tax return pros have extensive training in tax procedures, tax codes, and tax law. If anyone can get you out of an audit, they can, right?

Fact: A professionally-prepared return is no less vulnerable to an audit than a DIY return. Since the IRS selects returns at random, a professionally-prepared return is just as vulnerable to audit as a DIY return. While a tax pro can do a great job of thoroughly and accurately filing a complex tax return, that return is no less vulnerable to an audit.

Myth: Avoid an audit at all costs. Don’t respond to audit notices or any correspondence from the IRS. If you get audited, you’ll end up in jail in some cases.

Fact: Nothing can be further from the truth, especially the myths surrounding jail time. What will happen if you ignore IRS notices, however, is the IRS will be less willing to work with you if they have to hound you into responding.

If you do get an audit letter from the IRS, follow all the instructions on the letter, including instructions for submitting documentation or for reaching the IRS. Chances are, you’ll just be asked to clarify or confirm some of the information on you return, or to provide documentation supporting your claim of an exemption or deduction.

If you do end up owing money to the IRS, you can make payment arrangements if you’re not able to provide payment in the full amount.

Regardless of the outcome, an IRS audit is nothing to fear or avoid. While it’s certainly not anyone’s idea of fun, it’s not the torturous process you hear about in myths and rumors. Whatever you do, don’t duck the IRS.

There are many urban myths and horror stories surrounding an IRS audit. By arming yourself with the facts, you can determine which is truth and which is fiction. While budget cuts and staffing reductions have hit the IRS hard; they are still randomly selecting returns for audit regardless of your income level and whether or not your return was professionally prepared.

Whatever you do, don’t duck the IRS if they should come calling. Enlist a tax pro if you’re unsure of how to respond to an audit notice.