Archives for October 2019

Why it’s important for taxpayers to know their filing status

When a taxpayer files their tax return, they need to know their filing status. What folks should remember is that a taxpayer’s status could change during the year. So, any time is a good a time for a taxpayer to learn about the different filing statuses and which one is best for them.

Knowing the correct filing status can help taxpayers determine several things about filing their tax return:

Is the taxpayer required to file a federal tax return or should they file to receive a refund?
What is their standard deduction amount?
Is the taxpayer eligibility for certain credits?
How much tax they should pay?

The taxpayer’s filing status generally depends on whether they are single or married on Dec. 31 and that is their status for the whole year.

Here’s a list of filing statuses and a description of who claims them:

Single. Normally this status is for taxpayers who are unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
Married filing jointly. If a taxpayer is married, they can file a joint tax return with their spouse. When a spouse passes away, the widowed spouse can usually file a joint return for that year.
Married filing separately. Alternatively, married couples can choose to file separate tax returns. It may result in less tax owed than filing a joint tax return.
Head of household. Unmarried taxpayers may be able file using this status, but special rules apply. For example, the taxpayer must have paid more than half the cost of keeping up a home for themselves and a qualifying person living in the home for half the year. Taxpayers should check the rules to make sure they qualify.
Qualifying widow(er) with dependent child. This status may apply to a taxpayer if their spouse died during one of the previous two years and they have a dependent child. Other conditions also apply.

More than one filing status may apply and taxpayers can generally choose the filing status the allows them to pay the least amount of tax.

IRS recommends business owners e-file payroll tax returns

With the Oct. 31 quarterly payroll tax return due date just around the corner, the Internal Revenue Service today urged business owners to take advantage of the speed and

IRS Forms 940, 941, 943, 944 or 945 are used to report employment tax information. The IRS recommends electronic filing, or e-filing, of these returns.

E-filing saves taxpayers time by performing calculations and populating forms and schedules using a step-by-step interview process. Once submitted, the information is quickly available to the IRS thus reducing processing time.

E-filing is the most accurate method to file returns. Those who e-file receive missing information alerts. Electronically filed returns have fewer errors, which reduces a taxpayer’s chance of receiving an IRS notice.

The IRS takes safeguarding personal information seriously and e-filing security is a top priority at the agency. E-file security standards ensure tax information is protected from security breaches. The IRS requires all authorized IRS e-file providers to ensure only authorized users have access to secure information.

The IRS acknowledges receipt of e-filed returns within 24 hours. The agency retains the information on the tax return, making it accessible to the filer or tax professional around the clock. Unlike filing a return on paper, e-filing assures the filer that the tax return is with the IRS and not misplaced or lost in the mail.

There are two options for electronically filing payroll tax returns:

Self-file
- Businesses purchase IRS-approved software. A list of providers offers options based on the relevant tax year.
- Business owners may need to pay a fee to electronically file their returns.
- The tax software requires a signature. The taxpayer has the option to apply for an online signature PIN or to scan and attach Form 8453-EMP, Employment Tax Declaration for an IRS e-file Return.
Have a tax professional file on behalf of the business
- Use the Authorized IRS e-file Provider Locator Service to find a tax professional who offers this service.

Only the business owner can apply for an online signature PIN. Third parties, such as attorneys, CPAs, tax return preparers or other tax professionals can’t request a PIN on behalf of the business, nor can they use the PIN to sign returns on behalf of their clients.

IRS reminds employers about the benefits of EFTPS

The Internal Revenue Service today wants small business owners who are employers to know that the Electronic Federal Tax Payment System has features that can help them in meeting their tax obligations. EFTPS can help employers whether they prepare and submit payroll taxes themselves or if they hire a payroll service provider to do it on their behalf.

Many employers outsource to third-party payroll service providers some or all their payroll and related tax duties, such as tax withholding, reporting and making tax deposits. Third-party payroll service providers can help assure filing deadlines and deposit requirements are met and streamline business operations. Most payroll service providers administer payroll and employment taxes on behalf of an employer, where the employer provides the funds initially to the third party. They also report, collect and deposit employment taxes with state and federal authorities.

Treasury regulations require that employment tax deposits be made electronically and employers should ensure their third-party payer uses the Electronic Federal Tax Payment System (EFTPS).

EFTPS helps employers keep an eye on their tax responsibilities, even if they have hired a payroll service provider. EFTPS is secure, accurate, easy to use and provides an immediate confirmation for each transaction. Anyone can use EFTPS. The service is offered free of charge from the U.S. Department of Treasury and enables employers to make and verify federal tax payments electronically 24 hours a day, seven days a week through the internet or by phone.

Additionally, employers who use payroll service providers can verify that payments are made by using EFTPS online. The EFTPS webpage has information for employers who use payroll service providers. For more information, employers can enroll online at EFTPS.gov, or call EFTPS Customer Service at 800-555-4477 for an enrollment form.

The IRS recommends that employers do not change their address of record to that of the payroll service provider as it may limit the employer’s ability to be informed of tax matters.

Inquiry PIN
Third parties making tax payments on behalf of an employer will generally enroll their clients in the EFTPS under their account. This allows them to make deposits using the employer’s Employer Identification Number (EIN).

When third parties do this, it may generate an EFTPS Inquiry PIN for the employer. Once activated, this PIN allows employers to monitor and ensure the third party is making all required tax payments. Employers who have not been issued Inquiry PINs and who do not have their own EFTPS enrollment should register on the EFTPS system to get their own PIN and use this PIN to periodically verify payments. A red flag should go up the first time a service provider misses or makes a late payment.

Employers enrolled in EFTPS can make up any missed tax payments and keep making tax payments if they change payroll service providers in the future. They can also update their information to receive email notifications about their account’s activities. Access to this feature requires a PIN and password for the system.

Once they opt-in for email notifications, they’ll receive notifications about payments they submit including those made by their payroll service provider. Email notification messages show:

Payments scheduled
Payment cancellation
Return of payments
Reminders of scheduled payments

Employers who believe that a bill or notice received is a result of a problem with their payroll service provider should contact the IRS as soon as possible by calling or writing to the IRS office that sent the bill, calling 800-829-4933 or making an appointment to visit a local IRS office.

If an employer suspects their payroll service provider of improper or fraudulent activities involving the deposit of their federal taxes or the filing of their returns, they can file a complaint with the Return Preparer Office using Form 14157, Complaint: Tax Return Preparer. A check-box on Form 14157 allows the employer to select “Payroll Service Provider” as the subject of the complaint. Once received, Form 14157 complaints will receive expedited handling and investigation.

What is a Bond anyway?

You may have heard of stocks and bonds but do you know the difference? A few months back we talked a little bit about what a stock is (click here to read the post) so now let’s take a look at bonds.

One of the primary differences between a stock and a bond, at its most fundamental, is that when you hold stock you own a portion of the company. When you hold a bond what you have is a loan to that company.

Why Bond?

If you are a company and you need money to do research or purchase new equipment you might sell off some of your company as stock. This will bring in cash that is outside of normal business income. But then you, the company, are in a position where several other people now have an ownership stake, possibly with rights to vote on the direction of the company. Maybe you don’t want that, or you’ve got no stock left to sell. Or, maybe your company’s reputation or growth potential is not what it should be to bring in the amount of cash you need. Then you might opt to issue a bond.

Essentially a bond is an instrument wherein the purchaser is told up front what the face value of the bond is, and when exactly it will be paid back, and what percentage will be earned and when those payments will be made. This is good for the company because it knows exactly what and when it will owe back to the bond holders.

Why not just borrow from a bank, you may wonder? It may be difficult for a company to borrow enough cash from a bank, especially if the amount is quite high. And in the case of the government it can’t exactly borrow from itself so it issues bonds to do things like build roads and build schools.

Upside Downside

For the investor, a bond is often considered “safe”. This is because of the certainty of the payback arrangement. However, that portion of cash is tied up in that instrument for a fixed time frame. Those funds tied up in bonds then can’t be used to purchase stock or put a down payment on a house, for instance. And, if you are able to sell your bonds you may have to take less than you would have received if they were allowed to come to maturity.

Sources

Where do bonds come from? There are several different entities that can issue a bond.

Government –The U.S. can issue bonds and these are generally considered the most secure of financial instruments.

Municipal – These can also be local governments, states, and municipalities.

Corporate – These are issued by corporations and can be sold either on a public market or “over the table” – essentially a private market where bonds are bought and sold.

Agency – These are bonds issued by government agencies, like the water company.

Types

Now that you know where bonds come from you might have heard a few types which we can illuminate. Of course, as with all financial instruments within these types are several sub-types and details, too many to discuss here.

Puttable – This is a type of bond where you can sell it back to the company before the maturity date.

Callable – This is a type of bond where the company can pay you back earlier than the maturity date.

Zero-Coupon – “Coupon” is what the percentage periodically paid out is named. So, a zero-coupon bond is one where there is no percentage paid out. But it is sold at a lower rate than the face value. So, you may purchase a bond worth $100 for $98.75. When it matures you will get back your investment of $98.75, plus $1.25.

Convertible – These are bonds that can be turned into stock, and how and when that is done can be very complicated, but suffice to say that this type of bond allows one to go from a lender to and owner of the company.

Taxpayers can compare eligibility and benefits of two education credits

There are two education credits that can help taxpayers with higher education costs: the American opportunity tax credit and the lifetime learning credit. There are several differences and some similarities between them. Taxpayers can claim both benefits on the same return, but not for the same student or same qualified expenses.

Here’s a comparison of these two credits:

What is the maximum credit or benefit?
American opportunity tax credit: Up to $2,5000 credit per eligible student
Lifetime learning credit: Up to $2,000 credit per tax return

Is it refundable or non-refundable?
American opportunity credit: Refundable for up to 40 percent of credit
Lifetime learning credit: Not refundable

Can taxpayers claim the credit if they file with the filing status married filing separately?
Both credits: No

What is the limit on maximum adjusted gross income for the other filing statuses?
American opportunity credit: Married filing joint: $180,000 Other statuses: $90,000
Lifetime learning credit: Married filing joint: $136,000 Other statuses: $68,000

Can a taxpayer claim credit if they be claimed as a dependent on someone else’s tax return?
Both credits: No

Must the taxpayer or their spouse be a US citizen or resident alien?
Both credits: Yes, unless nonresident alien is treated as resident alien for tax purposes.

What is the number of tax years for which the credit is available?
American opportunity credit: Four tax years per eligible student
Lifetime learning credit: Unlimited

What type of program is required?
American opportunity credit: Student must be pursuing degree or other recognized education credential
Lifetime learning credit: Student doesn’t need to be pursuing degree or other recognized education credential

What is the number of courses for which the credit is available?
American opportunity credit: Must be enrolled at least half time for at least one academic period in 2019
Lifetime learning credit: Available for one or more courses

What qualified expenses does the credit cover?
American opportunity credit: Tuition, required enrollment fees, course materials
Lifetime learning credit: Tuition and fees required for enrollment and attendance

For whom can the taxpayer claim the credit?
Both credits: the taxpayer, their spouse, or a student they claim as a dependent on their tax return

Who must pay the qualified expenses?
Both credits: the taxpayer, their spouse, the student, or a third party

It can cost you for slacking off on filing your taxes.

We are human and as such, at some time “may” have been tempted to ignore filing taxes or to simply postpone the routine to the point that you owe the government years’ worth of tax returns. What would happen if I didn’t file my taxes this year? Is the government really going to come after me?

Experience has proven, you would benefit more filing your return in magic marker rather than simply ignoring when due — no matter how frightening the chore might be.

“Every once in a while, tax preparers will have a client that have valid life-threatening problems or something [that prevents them from filing their taxes]. There are innumerable situations in which a taxpayer might fail/pay their taxes.

Outlined below are a few common instances of what you can expect if you fell short this past tax filing season:

What if…

…It’s October 16 and you still haven’t filed your taxes, or your electronic filing was rejected:

If you don’t file your return to the government by the April and October deadlines, you’ll get hit with a failure-to-file penalty, which starts at 5% of however much you owe, maxing out at 25% of your tax bill. If you wait more than 60 days to file, you’re charged a $135 fee or 100% of the taxes you owe (whichever is less). On top of that, you’ll be charged a painful 3% daily compounding interest on the unpaid balance .There’s an exception here: If you’re owed a refund, you won’t be charged a late-filing fee at all. But you won’t get that refund unless you file a return, and you’ve only got three years to claim it before your refund winds up somewhere other than your hands.

What to do: If there are extenuating factors that make it impossible for you to file on time, you can apply for an additional extension with the government. That can buy you additional “some additional time to file” but not to pay anything owed and must be done by the last day for extension filers tax deadline date.

You’ll may still face some consequences, but the government appreciates taxpayers who at least “communicate” and file their return(s), even if they can’t pay their whole bill. On-time filers pay a discounted late-payment fee of 0.25% per month so long as they have a payment agreement in place. But really, it’s the compounding 3% interest charges on unpaid tax bills that can do the most damage.

If you owe less than $50,000, you’re qualified to set up a payment plan with the government and should do as soon as possible. You might consider enlisting the help of a Tax Firm or Tax attorney for assist, especially if you’re more than a year behind.

There are situations when taxpayers simply can’t file their taxes and/ pay their bills and don’t qualify for payment assistance. In that case, the IRS will eventually levy a federal tax lien against you. In a worst-case scenario, the IRS can garnish your wages, bank accounts, Social Security benefits and even your retirement income to recoup unpaid taxes.

What If I don’t file by the end of the day today?

If you do not pay the full amount you owe by the tax deadline, even if you file an extension, you will be assessed a penalty of 0.5% of your balance due per month or part of a month after the deadline. The amount of your failure-to-pay penalty will not exceed 25% of your back taxes.

What happens if you miss the tax extension deadline?

If you miss both the April 15 and October 15 tax filing deadlines and are owed a refund, chances are that nothing will happen to you. In fact, the IRS will more than likely deduct any interest and penalties you owe from that refund. It is up to you then to file and claim that refund if you want it.

Can I file a second extension on my taxes?

In general, you can‘t file a second extension. … Once upon a time you could request a second extension (Form 2688) until mid-October if you couldn’t file by the first extension’s mid-August deadline. In 2005, the IRS eliminated the second extension and updated the first extension deadline (Form 4868) to October 15.

What happens if you miss the tax deadline 2019?

If you haven’t paid at least 100 percent of the tax you owe by April 15, 2019 you‘ll end up owing a late payment penalty of 0.5 percent per month until the tax is paid. The maximum late payment penalty is 25 percent of the amount due. You‘ll also owe interest on whatever amount you didn’t pay by April 15.

Can I still file my taxes after deadline?

For those who didn’t file by the April deadline.There is no penalty for filing late if a refund is due. Penalties and interest only accrue on unfiled tax returns if taxes are not paid by April 15, the tax filing deadline this year in most states.

Taxpayers who donate to charity should check out these resources

Taxpayers who donate to a charity may be able to claim a deduction on their tax return. These deductions basically reduce the amount of their taxable income. Taxpayers can only deduct charitable contributions if they itemize deductions.

Here are some resources for people making donations:

Tax Exempt Organization Search
Taxpayers must give to qualified organizations to deduct their donations on their tax return. They can use this tool to find out if a specific charity qualifies as a charitable organization for income tax purposes.

Publication 526, Charitable Contributions
This pub explains how taxpayers claim a deduction for charitable contributions. It goes over:

How much taxpayers can deduct.
What records they must keep.
How to report contributions.

Publication 561, Determining the Value of Donated Property
Taxpayers generally can deduct the fair market value of property they donate. This publication helps determine the value of donated property.

Form 8283, Noncash Charitable Contributions
Taxpayers must file form 8283 to report noncash charitable contributions if the amount of this deduction is more than $500. The instructions for this form walk taxpayers through how to complete it.

Schedule A, Itemized Dedications
Taxpayers deducting donations do so on Schedule A. The instructions for this form include line-by-line directions for completing it.

Frequently asked questions: Qualified charitable distributions
Taxpayers age 70 ½ or older can make a qualified charitable distribution from their IRA – up to $100,000 – directly to an eligible charity. It’s generally a nontaxable distribution made by the IRA trustee to a charitable organization. A QCD counts toward their minimum distribution requirement for the year.

More information:
Tax Topic 506 – Charitable Contributions
Deducting Charitable Contribution at a Glance

The child tax credit benefits eligible parents

Taxpayers who claim at least one child as their dependent on their tax return may be eligible to benefit from the child tax credit. It’s important for people who might qualify for this credit to review the eligibility rules to make sure they still qualify. Taxpayers who haven’t qualified in the past should also check because they may now be able to claim the credit.

Here are some details about this credit:

The maximum amount of the credit is $2,000 per qualifying child.
Taxpayers who are eligible to claim this credit must list the name and Social Security number for each dependent on their tax return.
The child must be younger than 17 on the last day of the tax year, generally Dec 31.
The child must be the taxpayer’s son, daughter, stepchild, foster or adopted child, brother, sister, stepbrother, stepsister, half-brother or half-sister. An adopted child includes a child lawfully placed with them for legal adoption. They can also include grandchildren, nieces or nephews.
The child must have not provided more than half of their own support for the year.
The taxpayer must claim the child as their dependent on their federal tax return.
The child cannot file a tax return for the same year with the status married filing jointly, unless the only reason they are filing is to claim a refund.
The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
In most cases, the child must have lived with the taxpayer for more than half of 2019.
The IRS Interactive Tax Assistant tool Is My Child a Qualifying Child for the Child Tax Credit? helps taxpayers determine if a child qualifies for this credit.
In some cases, a taxpayer qualifies and gets less than the full credit. These taxpayers must have earned income of at least $2,500 to receive a refund, even if they owe no tax, with the additional child tax credit.
The credit begins to phase out at $200,000 of modified adjusted gross income. This amount is $400,000 for married couples filing jointly.
Taxpayers can use the worksheet on page 6 of Publication 972, Child Tax Credit, to determine if they can claim this credit.

Taxpayers whose dependent does not qualify for this credit might be able to the claim the credit for other dependents.

A Brief History of the Buck

It may seem like the dollar – the U.S. currency – has been around forever. But in our country’s infancy we had a different currency called the Continental currency, or Continentals. And even before Continentals, the colonies issued their own currency to finance things like military campaigns, buildings, and pay government officials and the like. Also, bills of credit were issued by the government and by the states. Those were, in essence, promises to pay a debt. There was not much coinage (actual coins made of metal) minted by the U.S. in those early years.

The Continental

Continentals were issued by Congress in large part to fund the Revolutionary War against the British. When Congress deemed it needed more money for the war, it printed and circulated more Continentals. Thus, by the time the war was winding down there was too much paper currency and bills of credit in circulation. There was also a problem of counterfeit currency on the market. And by that time, Continentals were worth almost nothing.

Many attempts were made to shore up the currency to no effect. When the Continental Congress then ratified the Constitution, it included language prohibiting the states from issuing their own currency, limiting the number and type of currency in circulation. An attempt also was made to take old currency out of circulation in order to make what was left more valuable. However, none of these efforts worked effectively.

After the Revolutionary War wrapped up Congress appointed a Superintendent of Finance to monitor monetary policy and a few years later the U.S. authorized a new currency, the U.S. Dollar.

Pieces of Eight

Why “dollar” and not “pound”? We were a British colony after all. Well before and during the war, much of the coinage in circulation were Spanish pesos and eight of them were called a dollar (pieces of eight refers the fact that Spanish currency is divisible by eight). In fact, most of the coinage circulating of the time was from somewhere else, not minted here. Thus, when it came time to create a national currency, Congress chose a moniker that was already in circulation. Fun fact: the Spanish dollar was still legal tender in the U.S. up until 1857.

Back when the Continental Congress ratified the Constitution it also included language that connected the dollar to the value of gold and silver. And our dollar was backed by gold and/or silver for a long period of our history until 1971 when our currency fully became fiat currency rather than currency backed by commodity.

What is the difference you may ask. Commodity currency is backed by a thing of value, like gold or silver. But, if your currency is backed by a thing – even if that thing is shiny and pretty and worth a lot – there are only so many of those things. And if you come to the end of your things to back your currency then you must limit growth. Or worse, devalue your currency.

Gold Standard

The U.S. dollar being backed gold and silver is not as straight a line as some may believe. At times of war and heavy financial pressure the government could and did issue treasury bonds backed only by the government. Fun Fact: for a long time one could take one’s dollar bills into the Federal Reserve bank or one of the Regional Reserve banks and request they be exchanged for gold or silver. In 1900 silver was detached from it and only gold was used to back the dollar. There were several variances in the valuation of a dollar linked to gold until finally in 1971 the dollar was allowed to become fiat currency.

A fiat currency, which most of the world’s currencies now are (remember our discussion of Bitcoin?), is backed by an entity. In our case, the dollar is backed, as it states on bills by “the full faith and credit” of the U.S. So, now instead of things of value determining how much our currency is worth, the stability of the entity determines (among many other factors) the value of the dollar. This is where the Federal Reserve comes in. As the central bank of the U.S. it alone determines monetary policy and thus how much cash and debt is in the market at any given time.

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