May 21, 2013

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Writing Off Bad Debts on Your Taxes

May 10, 2013 By

Writing off bad debts is always an inevitable part of any business operation. Whether one likes it or not, there are points in business when you are forced to write off a debt, especially when a client fails to pay for a service rendered. A typical case could be where you agree with a client that you will undertake a service at an agreed fee only for the client to fail in meeting his or her side of the agreement.

Writing off debts in a business needs a business operation that is genuinely honest. Your accounting needs to be spot on and you must keep good track of any profits and losses. If you incur a loss of $1,000 when using the cash basis model of accounting, it is only logical to say that you cannot deduct a loss twice. This means that you will not report a sale because the value of the sale or service you have given is zero.

On accrual basis, you only have the sum lost recorded in accrued revenue, thereafter you write it off. The difference in this case is zero.

For example, assume that you had provided the service based on a contract worth $2,000, and had hired somebody to do it for let’s say $600 while using office equipment worth $400. These expenses you incurred while undertaking the contract will be deducted from the $2,000. In this case, it means you might have had a profit of $1,000. The IRS does not allow anyone to deduct their profits from a bad debt. Your taxable income would have been $1,000 but in this case, it is a loss of $1,000 but you cannot deduct it from your taxable income.

In any contract, say one involving offering a service, you must’ve spent time. If you had spent a total of 2 hours while your hourly rate is $200 per hour, it means that you might have walked away with $400. The next mind boggling question that you might ask is; how do you treat the $400? You cannot write off the value of time that you spent working on your contract.

IRS does not recognize time that anyone spent doing a job for a client. If you incur bad debts with your time, then you are the sole bearer of the losses that you have incurred. The same principle applies in cases where individuals might have chosen to volunteer their services in a community project. The value of time you spend in services means nothing to the IRS. The IRS will only consider the value of the supplies that you might have used to perform such services. For example, the cost of gas that you used in the vehicle used while engaging in a volunteer service delivery.

Bounced checks that are never redeemed by clients should also be treated as bad debts using the same procedure. When using the accrual accounting model, the same procedure of writing off bad debts applies. For sole proprietors or those who are filing tax returns for corporate businesses, your bad debts will be handled in Schedule C when you are filing tax returns.

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Various Ways to Pay Your Tax Debt with the IRS

May 2, 2013 By

Every eligible taxpayer is expected to pay taxes and file tax returns annually. You might be facing a mountain of financial challenges, which is understandable. However, Uncle Sam expects you to abide by the law and pay; but if you cannot clear your tax debt by the due date, there are other legally viable options you can resort to.

Typically, the IRS is supposed to collect taxes due within 10 years from the date of filing tax returns. Upon negotiation, the IRS may structure the payment amounts in a way you can pay off within the collection period. If you choose to ignore the tax obligations, the IRS has all the rights to move in on your assets and recover the tax amount owed. IRS officials may slap a lien on your house, freeze the bank accounts, seize tax refunds which you were otherwise eligible to, or even garnish your wages.

All you have to do is to plan your tax payments well and you will never have to worry about any aggressive IRS collections methods. 

The determination of the tax amount outstanding is the first thing you should do, since payment options vary based on the amount. Also, if you want to save yourself from a lien, ensure that the tax due does not exceed $10,000. If you have an untainted tax-compliance history, the IRS may relax the amount to be paid immediately and accept any proposed tax payment plan.

Offer-In-Compromise: This is an agreement between IRS and the tax payer to settle the tax debt at a lower amount than what is actually owed. This will however, depend on the debt amount and your income. The IRS scrutinizes your ability to pay, income, expenses, assets equity, amongst other factors before approving any OIC applications. You will be required to fill the IRS Form 433-A and Form 656 plus a $150 non refundable fee.

Credit card payment: The IRS penalties and interests are pretty high compared to some credit card rates. To evade paying nominal interests on your tax debt, the credit card payment might be ideal. Find out the rates from your credit card company and weigh the two options.

Grab A Fresh Start: The IRS is always coming up with a variety of options to enable as many taxpayers as possible to pay their taxes. The Fresh Start Program is available for taxpayers who owe less than $50,000 and your fail-to-file penalty can be waived up to six months by filing the IRS Form 1127-A

Installment Agreement Online: If you owe less than $25,000 and have up-to-date tax returns filed, then online payment agreement is a great solution. You can decide how much to pay per installment if you owe less than $25,000. However, if it exceeds $25,000, you will have to apply by filling a form 433-F to work out an Installment Agreement payment arrangement.

Installment Agreement For Large Balance Due: In case the tax due exceeds $50,000, you will have to apply for an Installment Agreement by filling the form 9465-FS and form 433-F plus the collection statement and sending them to the IRS via mail. Your financial information will be reviewed before the IRS approves your application. Upon approval, you may have to pay a fee that is totalled up based on the income, and the type of plan you may qualify.

Important Tips

That tax code is complicated, and most of the provisions contained may be confusing. It is for this reason that you might want to consider help from a professional, CPA, tax attorney, or enrolled agent who can negotiate with the IRS on your behalf. You must also keep up to date with changes in your life that might affect your taxes and proper estimation of your taxes; use the IRS Form 1040-ES for this.

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Five Myths about Selling Your Home and the Truth Behind Them

April 11, 2013 By

Selling a house, especially one you have lived in for years, can get emotional, especially if you have many fond memories of the house. However, you should not lose focus on the financial and tax implications of selling your home. You should keep in mind, how you will gain the highest profits from the sale and dealing with Uncle Sam, who is definitely eager to claim a share of the gains.

However, there is a lot of conflicting and confusing information surrounding the sale of personal property. Falling for any of these myths might result in miscalculated moves on these types of sales; here are some quick facts for you:

1. You Have to Be Living in the House at the Time of Sale to Claim Capital Gains Exemptions

Most taxpayers believe that they have to be living in the house at the time of sale to claim an exemption. This is misleading because the exemption only requires that you must have owned and lived in the house for at least two out of five years prior to the sale. Furthermore, the years don’t have to be chronological. For example, you can live in the house during the second and fourth year and still be eligible for the exemption that amounts to $250,000 and $500,000 for single and married taxpayers respectively.

2. You must be Over 55 to Claim the Capital Gains Exemption

Initially, the exclusion could only be claimed by taxpayers aged 55 or older and the amount was capped at $125,000. However, this was changed with the enactment of the Taxpayer Relief Act of 1997 that scrapped the age factor. So long as you meet the other requirements, age should be the least of your worries.

3. You Have to Invest the Gains from Your Home Sale into a New House to Claim the Exemption.

Yes, this used to be the case for houses sold before May 7, 1997 in what used to be referred to as “rollover rule.” This rule is no more, and the IRS is less concerned about how you spend your money (but your spouse may definitely be interested).

4. The Exclusion is Available for Any Number of Homes

No, the IRS only allows exclusions for one house at a time, and it has to be your primary residence. Your primary home is the one you spend most of your time. You can however, move into another home and if you meet the criteria, claim exclusion, when the time comes, on the new one as well.

5. If You Lose Money on the Sale of Your Home, You Can Claim a Capital Loss

Just like any other transactions, selling your home can result in a gain or loss. However, if you encounter a capital loss, you unfortunately, cannot claim the loss with the IRS.

Other important facts;

·         You don’t have to counterbalance capital gains with losses from the sale of another house; a gain is a gain, and so is a loss.

·         Home improvement expenses like painting are not deductable, but can increase the basis of working out capital gains and losses

·         The Obamacare 3.8% medical tax will only be imposed on unearned income or investment if the income exceeds $200,000 and $250,000 for single and married joint filers respectively. You don’t have to worry if your income is below threshold.

·         Only work-related moving expenses are deductable, not just any relocation.

There you have it. If you are contemplating selling your home, you now know what to expect. However, if you need more information, don’t just consult anyone. Instead, talk to a tax professional.

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Five Important, but Often Overlooked, Tax Deductions & Credits

April 4, 2013 By

When filing taxes, 99.9% of taxpayers closely pay attention to deductions lest they let an opportunity to ease their tax burden slip through their fingers. However, compared to tax credits, deductions are less attractive, since tax credits actually cut your tax liability. Deductions and credits or any other tax breaks available will go a long way in trimming your tax bill, but there are several tax breaks that are overlooked by most taxpayers when filing. Discussed below are the top four tax such credits and deductions:

1. Job Search Deductions: Job searching is a job in its own right and incurs expenses that range from transport to interview sites, résumé consultations, preparing your résumé and even mailing it to potential employers, long distance telephone calls, amongst other. The IRS accepts deductions of job search costs on Schedule A as miscellaneous expenses. Go ahead and search for that job claim a deduction, so long as it is in the same line of work as your former job.

2. Work-Related Relocation: Assuming that you have secured a job and have to relocate, go ahead and pack your up your things and move. Moving expenses are deductable and the beauty of it is that you actually don’t have to itemize to deduct. Just be sure that the move passes the IRS test before you deduct.

3. Charitable Donations: As some hunt for jobs, there are some taxpayers who had an amazing financial year, and earned more than enough or they just feel philanthropic and ready, to share the little or much they have earned with the less fortunate. Charitable donations, be it cash, a car, some items, etc., are deductable.

4. Aging Parents and Medical Expenses: Baby boomers have a lot of responsibilities, especially in ensuring that their aging parents are taken good care of. Sometimes, your parents can be claimed as a dependent resulting in some additional exemptions during filing. Your folks don’t necessarily have to qualify as your tax dependents, but if you spend money on medicine and healthcare, then you can write these expenses off your own Schedule A.

You might be losing lots of tax savings if you keep claiming the same tax breaks every year without researching on other tax breaks you might be eligible for. Just ensure that you are not missing out on valuable tax deductions and credits that could help you save an extra dollar. However, to avoid any IRS problems, understand the requirements of all deductions and credits before claiming them on your return.

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Tax Payment: The Significance of a Tax Home for Frequent Travelers

April 1, 2013 By

We live in a fast paced world where technology has revolutionized almost all aspects of human life; socialization, education, work, and even businesses transactions. The world is flooded with mobile tech gizmos like smart phones, iPads (and their like), tablets, laptops, etc., all hooked to the internet.

Students can now take classes from anywhere in the world at any time of day or night, business people “talk business” from anywhere, and so can professionals work from wherever they deem fit. Some spend most part of the year driving (or flying) to various destinations out of choice with their families, enjoy viewing the picturesque sceneries along the way, and education their kids on the move. It has never been easier to be an in-touch nomad, but how does that affect your taxes?

For instance, some individuals prefer cruising around and living in 18-foot RVs over homes. In fact, some even sell their homes in favor of RVs that serve almost all purposes of a house. Such taxpayers enjoy their mobile lives, stay in touch with their friends and relatives via social networking sites or popular video conferencing apps, and pay their bills online. Life to them is easier; they have little to worry about, such as no rent or mortgage bills at the end of the month, and they can change neighborhoods as often as they wish.

You will be forgiven for assuming that such taxpayers have huge deductable travel expenses. But in real sense, they actually have zero, unless they have a tax home. Most seamen, long-haul truckers, and others who lead mobile lives face this common tax challenge. To deduct lodging and meals when travelling, you must define your tax home and the IRS considers the following factors when making this determination:

  • Do you pay rent or mortgage on your tax home? You don’t have to be making monthly payments, but IRS considers regular and continuous payments for the house.
  • Have you ever earned income in that specific area? How do you justify this as your tax home then?
  • How often do you travel? It is possible that you get contracts that require frequent travelling but it is important to have a common home where you retire after your travels? And have you tried to secure work in your tax home area?

Cunning taxpayers trim down their expenses to earn home based expenses and travel more for the rest of the year. If you have an online business, then you should definitely use your tax home address for that purpose. You can generate your income from that address and it doesn’t matter how long you stay on the road so long as you have a base.  Since you won’t be there most of the time, simply choose a tax home in a state without income tax. You may want to rent a room from a trusted relative or friend to forward your documents and mails. This will ensure that you don’t miss out on any IRS correspondences as you work on your projects or make money on the move.

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More Flexible Offer-in-Compromise Terms with the Fresh Start Initiative

March 27, 2013 By

The Offer in Compromise (OIC) is an agreement between the IRS and a taxpayer that lets him or her settle an IRS tax debt for less than the actual liability owed. Interested and eligible taxpayers are allowed to put in an OIC application, which is only approved and granted by the IRS upon confirmation of the applicant’s inability to pay the full amount either in lump sum or via a payment agreement. OIC applications are approved upon thorough review of the taxpayer’s assets and income to determine the most sensible collection prospects.

In its commitment to make tax debt repayment much easier and flexible, the IRS introduced what it dubbed the “Fresh Start” initiative that expanded the Offer in Compromise program. More flexible terms were introduced in this initiative making it possible for financially strained taxpayers to pay up their tax dues adjustably and efficiently.

The following are some of the notable changes;

·         The calculation of a taxpayer’s prospective income was revised. As opposed to the original OIC that required the IRS to review four years of future income if the tax debts were to be paid in five or less months, only one year is currently reviewed. For offers to be cleared in two years (24 months) the number of years to review prospective income were chopped from five to only two. Please note that the maximum allowable duration for paying off tax debts with an OIC is 24 months.

·         Taxpayers can repay their minimum student loans guaranteed by Uncle Sam for their post-high school education. This provision requires that you provide proof of payment to the IRS.

·         Taxpayers are also allowed to pay state as well as local delinquent taxes. This means that if you owe both state and local delinquent taxes, and cannot fully pay them, you can be allowed to negotiate monthly payments to state tax authorities in some cases.  

·         The standard Allowable Living Expense allowance was also expanded to incorporate average expenses for essential needs for citizens residing in the same geographic locations. The set standards are usually used to evaluate and establish installment agreements and Offers in Compromise applications. With the expanded National Standard miscellaneous allowance, taxpayers can now cover some costs like bank charges and credit card payments.

You can find more information on the “Fresh Start” initiative by visiting the IRS website. Read the IRS Form 656-Offer in Compromise and the IRS Form 656-B-Offer in Compromise Booklet. Alternatively, call the IRS or talk to a tax professional.

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Important Tips for Filing Amended Tax Return

March 22, 2013 By

Errors are likely to be committed during tax filing, and the only remedy is to understand how to fix them. Actually, some of these errors may not require any fixing, but it is important to take note of the following important tips:

1. Situations to Amend: Normally, if your filing status, income, number of dependents, crucial tax deductions, or tax credits were erroneously reported or omitted from the original return, then you should amend.

2. When You Do Not Have to Amend: There are some circumstances that don’t require an amendment. Math errors or requests of missing forms like the IRS Form W-2 and schedules during the tax return processing are automatically handled by the IRS. You consequently don’t have to amend your return.

3. Necessary Forms: To amend your return, use the IRS Form 1040X-Amended U.S. Individual Income Tax Return and Forms 1040, 1040A, 1040EZ, 1040NR or 1040NR-EZ to amend a previously filed return.  You must see to it that the box for the year you are amending is correctly checked on the IRS Form 1040X. Note that amended tax returns cannot be electronically filed, you have to do it manually and mail them to the IRS.

4. More than One Amended Returns: Use different 1040Xs if you are emending returns for multiple years, each year with a separate form. They should also be mailed in separate envelopes to the right IRS processing center (read the instructions on the form under “where to file”).

5. The IRS Form 1040X Columns: The 1040X has three columns; column A has the original figure as filed in the original return, column B shows the changes made and column C, the amended information. You can find explanations about certain changes and the reasons for these changes at the back of the form.

6. Other Forms and Schedules: If the changes you make affect other schedules or forms, attach the affected forms to the IRS Form 1040X and mail them together. You risk delaying the processing if this is not done.

7. Extra Refunds: If the amendments you make result in more refunds, only file the Form 1040X after receiving the original refund, cash the check, and wait for the extra refund.

8. More Tax: If after amending, you owe more taxes, just file the 1040X and pay the extra tax as soon as possible, as delays might result in increased interests and penalties.

9. When to File: Amended tax returns must be filed within three years from date of filing the original one to qualify for any eligible refunds or two years from when the tax debt was paid-whichever that is later.

Finally, the normal processing time for amended tax returns is between eight and twelve weeks, so only follow up if you don’t receive communication from the IRS on the status of your returns after this period.

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Five Ways to Know Whether to Pay Online Sales Tax or Not

March 21, 2013 By

It is usually confusing to establish whether to pay online sales tax or not. You will definitely know after receiving a confirmation email from the online company, long after the cost of the product or service purchased has been deducted from your credit or debit card. It is however, much better to be fully aware of this before confirming the order. You can learn of impending online sales tax through the following five ways:

1. Distribution Facility: The site where you make the purchase from might not have a store in your state, but if it has a warehouse or a distribution establishment of sorts, then the purchase might still attract a sales tax in your state.

2. Brick and Mortar: If your seller has a brick-and-mortar store in your state, then just know that you must pay tax on your purchase even if the goods have been shipped from outside the state.

3. Amazon Tax: Most states have put in place expanded connections named nexus that makes it possible to apply sales tax. Amazon currently collects taxes from the following states; California, Kansas, North Dakota, Kentucky, New York, Texas and Washington. Starting September 2013, residents of Virginia will start paying taxes on Amazon purchases. From January 2014, Indiana, Nevada and Tennessee states will join this group and later South Carolina that is set to implement this is January 2016.

4. Consent Deals: Some online sellers have partnered with state authorities to remit tax for sales that are made to customers in their respective states. This information might be available on their websites or you will be prompted to add tax during check out. This might however, be hard if you are purchasing from sites like Amazon, but you can always find out by visiting the supplier’s or manufacturer’s website.

5. Be Safe, Always Pay: Save for Oregon, Alaska, Montana, Delaware, and New Hampshire, as well as the District of Columbia, there are 45 states with sales taxes. All the states with sales taxes also have use taxes and therefore, if you are making any online purchases that are shipped to any of these states, you should be prepared pay your sales taxes, including the use tax due.

Some people have argued that the collecting of use taxes is illegible, but it is actually within the law for states to collect this tax. Therefore, before placing that online order and checking out your payment, don’t forget to consider the tax factor.

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Get Free IRS Tax Information by Connecting with the IRS on Social Media

March 12, 2013 By

Are you connected with Uncle Sam on social media? Well, some taxpayers are uncomfortable with the idea of following or liking the IRS’s Facebook and Twitter pages or even watching their YouTube videos. Some compare this to granting a stalker an express pass to your bedroom and uncover some personal secrets within the walls of your house. Are these fears justified? The answer is no; you really don’t have to shy away from being “social” with the IRS on social networking sites.

The IRS uses a number of technological solutions to enable taxpayers find access to significant tax information like changes in the tax code, new initiatives, services, and products. It has gone ahead and even developed very effective tax apps that have made acquisition of tax information a breeze.

IRS2Go: Most Americans own smart phones, some have more than one. As a result, there has been swelling demand for solution-driven apps that can simplify the otherwise complicated things in life. In the same spirit, the IRS designed the IRS2Go, a smartphone app that lets you get tax updates on the go, check your refund status with just a click and follow the IRS on Twitter. You can find the app in the Apple App store for use on iPhone or iPod device and GooglePlay store for use on Android devices.

YouTube Videos: The IRS posts short but very enlightening videos on its YouTube channel on an array of tax-related topics. Other than English, these videos are also available in Spanish and American Sign Language.

Twitter: Get tax-related announcements, news for tax pros, and job seekers’ updates by following the IRS on Twitter. The Twitter username is @IRSnews.

Facebook: You can also access tax-related information for individuals, tax pros and other tax issues by liking their Facebook pages. Furthermore, get some general tax information on these pages, but ensure that you don’t post personal details on social media.

Audios and Podcasts: The audio recordings are typically short on specific tax-related topics. They can be found on iTunes or Multimedia Center on the IRS website.

Widgets: These tools can be placed on blogs, websites or social networking sites to direct people to the IRS website.

CAUTION: The IRS mainly uses the discussed tools to better their service delivery. Therefore, you must not at any point, divulge personal data, like your Social Security Number, on social media. Personal tax or account-related questions cannot be answered on these platforms. Instead, channel them directly to the IRS officers or visit their website.

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Deducting Moving Expenses from Your Tax Return

March 8, 2013 By

Sometimes, relocating is inevitable, as you may be forced to move with your family, especially around summertime when school is out. You shouldn’t worry so much about the moving expenses if you are relocating to take up a new job. Uncle Sam allows you to deduct some of the moving expenses. Explained below are some important points you must note to successfully deduct moving costs from your tax return:

  •          Time factor: Normally, you are only allowed to deduct expenses you incur within a year from the first day you report to your job in a new location. On arrival to the new area and work station, you are expected to have worked for not less than 39 weeks within the first year. Other than meeting this important rule, the self employed must in addition, work full time for a total of not less than 78 weeks within the first 24 months after arriving at the new work location to qualify for this deduction.

In case your income tax return filing is due before the time test is met, but you expect to meet it, you can still go ahead and deduct. For special rules and exceptions to this rule, read the IRS Publication 521-Moving expenses for detailed information.

  •          Distance Factor: To deduct moving expenses, the new primary job location must be more than 50 miles away from your previous home than your former main job location was from your preceding home. This is measured using the shortest possible route taken to work from your home.
  •          Travel Costs: You can also deduct some expenses incurred on the way from your old home to the new one like the lodging expenses for your household members and yourself. Others include airfare, parking costs, vehicle mileage, and toll fees. Please note that you are only allowed one-way deduction per person.
  •          Household Assets: You can also deduct the costs for transporting household goods and personal property like packing expenses, crating, insurance, storage, and even pets.
  •          Utilities: The expenses of connecting and disconnecting utilities can as well be deducted.
  •          Non Deductable Expenditures: Any expenses for purchasing a new home, renew driver’s license, car tags, amongst others cannot be deducted. Furthermore, if these costs were reimbursed by your employer, include the refunded amount as taxable income on your tax return.

Finally, use the IRS Form 3903-Moving Expenses to establish how much of the moving expenses should be deducted from your tax return. Don’t forget to inform the IRS and the U.S. Postal Service of your address change. To notify the IRS, use Form 8822-Change of Address.

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