- IRS Dirty Dozen Tax Scams for 2017
- Six Overlooked Tax Breaks for Individuals
- Are your Social Security Benefits Taxable?
- Small Business Financing: Securing a Loan
- What Income is Taxable?
- Choosing the Correct Filing Status
- It’s Not Too Late to Make a 2016 IRA Contribution
- Eight Tax Facts about Exemptions and Dependents
- IRS Releases Updated Form 990-EZ
- What You Should Know about the AMT
IRS Dirty Dozen Tax Scams for 2017
Compiled annually by the IRS, the “Dirty Dozen” is a list of common scams taxpayers may encounter in the coming months. While many of these scams peak during the tax filing season, they may be encountered at any time during the year. Here is this year’s list:
1. Identity Theft
Tax-related identity theft occurs when someone uses your stolen Social Security number to file a tax return claiming a fraudulent refund. Taxpayers should use caution when viewing e-mails, receiving telephone calls or getting advice on tax issues because scams can take on many sophisticated forms, according to IRS Commissioner John Koskinen.
Taxpayers should secure personal information by protecting their computers and only giving out Social Security numbers when absolutely necessary. Though the agency is making progress on this front, taxpayers still need to be extremely cautious and do everything they can to avoid becoming victimized.
2. Phone Scams
Aggressive and threatening phone calls by criminals impersonating IRS agents remain a major threat to taxpayers. In recent weeks, the agency has seen a surge of these phone scams as scam artists threaten police arrest, deportation, license revocation and other things.
Scammers make unsolicited calls claiming to be IRS officials. They demand that the victim pay a bogus tax bill. They con the victim into sending cash, usually through a prepaid debit card or wire transfer. They may also leave “urgent” callback requests through phone “robocalls,” or via a phishing email.
Many phone scams use threats to intimidate and bully a victim into paying. They may even threaten to arrest, deport or revoke the license of their victim if they don’t get the money.
Scammers often alter caller ID numbers to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legitimate. They may use the victim’s name, address and other personal information to make the call sound official.
Phishing schemes using fake emails or websites are used by criminals to try to steal personal information. Typically, criminals pose as a person or organization you trust and/or recognize. They may hack an email account and send mass emails under another person’s name, or pose as a bank, credit card company, tax software provider or government agency. These criminals go to great lengths to create websites that appear legitimate but contain phony log-in pages, hoping that victims will take the bait so they can steal the victim’s money, passwords, Social Security number and identity.
Scam emails and websites also can infect your computer with malware without you even knowing it. The malware can give the criminal access to your device, enabling them to access all your sensitive files or track your keyboard strokes, exposing login information.
4. Tax Return Preparer Fraud
About 60 percent of taxpayers use tax professionals to prepare their returns. The vast majority of tax professionals provide honest, high-quality service, but there are some dishonest tax preparers who set up shop each filing season. Well-intentioned taxpayers can be misled by preparers who don’t understand taxes or who mislead people into taking credits or deductions they aren’t entitled to in order to increase their fee.
Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.
5. Hiding Money or Income Offshore
Through the years, offshore accounts have been used to lure taxpayers into scams and schemes. Numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.
The recent string of successful enforcement actions against offshore tax cheats–and the financial organizations that help them–show that it’s a bad bet to hide money and income offshore. The IRS offers the Offshore Voluntary Disclosure Program to enable people to catch up on their filing and tax obligations and taxpayers are best served by coming in voluntarily and taking care of their tax-filing responsibilities.
6. Inflated Refund Claims
Taxpayers should be on the lookout for unscrupulous tax return preparers pushing inflated tax refund claims. Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place. They might, for example, promise inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.
Scammers use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers frequently prey on people such as the elderly or non-English speakers, who may or may not have a filing requirement.
Because taxpayers are legally responsible for what is on their returns (even if it was prepared by someone else), those who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.
7. Fake Charities
Taxpayers should be aware that phony charities use names or websites that sound or look like those of respected, legitimate organizations. For instance, following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists use a variety of tactics including contacting people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds. They may also attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources.
8. Falsely Padding Deductions on Tax Returns
The vast majority of taxpayers file honest and accurate tax returns on time every year. However, each year some taxpayers fail to resist the temptation of fudging their information. That’s why falsely claiming deductions, expenses or credits on tax returns is on the “Dirty Dozen” tax scams list for the 2017 filing season. The IRS warns taxpayers that they should think twice before overstating deductions such as charitable contributions, padding their claimed business expenses or including credits that they are not entitled to receive. Avoid the temptation of falsely inflating deductions or expenses on your return to underpay what you owe and possibly receive larger refunds.
9. Excessive Claims for Business Credits
Improper claims for business credits such as the fuel tax and the research credit are also on the IRS “Dirty Dozen” list this year. The fuel tax credit is generally limited to off-highway business use or use in farming. Consequently, the credit is not available to most taxpayers. Still, the IRS routinely finds unscrupulous tax preparers who have enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.
The research credit is an important feature in the tax code to foster research and experimentation by the private sector; however, the IRS does see a significant amount of misuse of the research credit each year. Improper claims for the research credit generally involve failures to participate in or substantiate qualified research activities and/or satisfy the requirements related to qualified research expenses.
10. Falsifying Income to Claim Credits
This scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income, usually in order to maximize refundable credits. Just like falsely claiming an expense or deduction you did not pay, claiming income you did not earn in order to secure larger refundable credits could have serious repercussions. Well-intentioned taxpayers can be misled by tax preparers who don’t understand taxes or who mislead people into taking credits or deductions they aren’t entitled to in order to increase their fee.
Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else.
11. Abusive Tax Shelters
Phony tax shelters and structures to avoid paying taxes continues to be a problem and taxpayers should steer clear of these types of schemes as they can end up costing taxpayers more in back taxes, penalties, and interest than they saved in the first place.
Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions. For example, multiple flow-through entities are commonly used as part of a taxpayer’s scheme to evade taxes. These schemes may use Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. They are designed to conceal the true nature and ownership of the taxable income and/or assets.
Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, reduced (even to zero) self-employment taxes, and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another.
Another abuse involving a legitimate tax structure involves certain small or “micro” captive insurance companies. In the abusive structure, unscrupulous promoters, accountants, or wealth planners persuade the owners of closely held entities to participate in these schemes. The promoters assist the owners to create captive insurance companies onshore or offshore and cause the creation and sale of the captive “insurance” policies to the closely held entities. The promoters manage the entities’ captive insurance companies for substantial fees, assisting taxpayers unsophisticated in insurance, to continue the charade from year to year.
Don’t use abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, seek an independent opinion if offered complex products.
12. Frivolous Tax Arguments
Taxpayers are also warned against using frivolous tax arguments to avoid paying their taxes. Examples include contentions that taxpayers can refuse to pay taxes on religious or moral grounds by invoking the First Amendment or that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable.
Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000.
If you think you’ve been a victim of a tax scam, don’t hesitate to call.
Six Overlooked Tax Breaks for Individuals
Confused about which credits and deductions you can claim on your 2016 tax return? You’re not alone. Here are six tax breaks that you won’t want to overlook.
1. State Sales and Income Taxes
Thanks to the PATH ACT of 2015, taxpayers filing their 2016 returns can deduct either state income tax paid or state sales tax paid, whichever is greater.
Here’s how it works. If you bought a big-ticket item like a car or boat in 2016, it might be more advantageous to deduct the sales tax, but don’t forget to figure any state income taxes withheld from your paycheck just in case. If you’re self-employed, you can include the state income paid from your estimated payments. In addition, if you owed taxes when filing your 2015 tax return in 2016, you can include the amount when you itemize your state taxes this year on your 2016 return.
2. Child and Dependent Care Tax Credit
Most parents realize that there is a tax credit for daycare when their child is young, but they might not realize that once a child starts school, the same credit can be used for before and after school care, as well as day camps during school vacations. This child and dependent care tax credit can also be taken by anyone who pays a home health aide to care for a spouse or other dependent–such as an elderly parent–who is physically or mentally unable to care for him or herself. The credit is worth a maximum of $1,050 or 35 percent of $3,000 of eligible expenses per dependent.
3. Job Search Expenses
Job search expenses are 100 percent deductible, whether you are gainfully employed or not currently working–as long as you are looking for a position in your current profession. Expenses include fees paid to join professional organizations, as well as employment placement agencies that you used during your job search. Travel to interviews is also deductible (as long as it was not paid by your prospective employer) as is paper, envelopes, and costs associated with resumes or portfolios. The catch is that you can only deduct expenses greater than two percent of your adjusted gross income (AGI). Also, you cannot deduct job search expenses if you are looking for a job for the first time.
4. Student Loan Interest Paid by Parents
Typically, a taxpayer is only able to deduct interest on mortgage and student loans if he or she is liable for the debt; however, if a parent pays back their child’s student loans that money is treated by the IRS as if the child paid it. As long as the child is not claimed as a dependent, he or she can deduct up to $2,500 in student loan interest paid by the parent. The deduction can be claimed even if the child does not itemize.
5. Medical Expenses
Most people know that medical expenses are deductible as long as they are more than 10 percent of Adjusted Gross Income (AGI) for tax year 2016. What they often don’t realize is which medical expenses can be deducted, such as medical miles (19 cents per mile in 2016 and 17 cents per mile in 2017) driven to and from appointments and travel (airline fares or hotel rooms) for out of town medical treatment.
Other deductible medical expenses that taxpayers might not be aware of include health insurance premiums, prescription drugs, co-pays, and dental premiums and treatment. Long-term care insurance (deductible dollar amounts vary depending on age) is also deductible, as are prescription glasses and contacts, counseling, therapy, hearing aids and batteries, dentures, oxygen, walkers, and wheelchairs.
If you’re self-employed, you may be able to deduct medical, dental, or long-term care insurance. Even better, you can deduct 100 percent of the premium. In addition, if you pay health insurance premiums for an adult child under age 27, you may be able to deduct those premiums as well.
6. Bad Debt
If you’ve ever loaned money to a friend, but were never repaid, you may qualify for a non-business bad debt tax deduction of up to $3,000 per year. To qualify, however, the debt must be totally worthless in that there is no reasonable expectation of payment.
Non-business bad debt is deducted as a short-term capital loss, subject to the capital loss limitations. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. Any amount you are not able to deduct can be carried forward to reduce future tax liability.
Are you getting all of the tax credits and deductions that you are entitled to?
Maybe you are…but maybe you’re not. Why take a chance? Call the office today and make sure you get all of the tax breaks you deserve.
Are your Social Security Benefits Taxable?
Social security benefits include monthly retirement, survivor, and disability benefits. If you received Social security benefits in 2016, you should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount.
Note: Supplemental Security Income (SSI) payments are not taxable.
If Social Security was your only source of income in 2016 your benefits might not be taxable. You also may not need to file a federal income tax return this year; however, if you receive income from other sources, then you may have to pay taxes on some of your benefits.
Your income and filing status affect whether you must pay taxes on your Social Security. An easy method of determining whether any of your benefits might be taxable is to add one-half of your Social Security benefits to all of your other income, including any tax-exempt interest.
Next, compare this total to the base amounts below. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. In 2016, the three base amounts are:
- $25,000 – for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year
- $32,000 – for married couples filing jointly
- $0 – for married persons filing separately who lived together at any time during the year
Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet. Please call if you need assistance figuring this out.
Retirement income is generally not taxed by other countries. As a U.S. citizen retiring abroad who receives Social Security, for instance, you may owe U.S. taxes on that income, but may not be liable for tax in the country where you’re spending your retirement years.
If Social Security is your only income, then your benefits may not be taxable, and you may not need to file a federal income tax return. If you receive Social Security, you should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount of your benefits.
However, if you receive income from other sources as well, from a part-time job or self-employment (either U.S. or the country you’ve retired to), you may have to pay U.S. taxes on some of your benefits.
You may also be required to report and pay taxes on any income earned in the country where you retired. Each country is different, so consult a local tax professional or one who specializes in expat tax services.
Some states tax social security income as well: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
Note: Even if you retire abroad, you may still owe state taxes–unless you established residency in a no-tax state before you moved overseas. Also, some states honor the provisions of U.S. tax treaties; however, some states do not, therefore it is prudent to consult a tax professional.
Questions about income related to Social Security? Don’t hesitate to call.
Small Business Financing: Securing a Loan
At some point, most small businesses owners will visit a bank or other lending institution to borrow money. Understanding what your bank wants, and how to properly approach them, can mean the difference between getting your money for expansion and having to scrape through finding cash from other sources. Unfortunately, many business owners fall victim to several common, but potentially destructive myths regarding financing, such as:
- Lenders are eager to provide money to small businesses.
- Banks are willing sources of financing for start-up businesses.
- When it comes to seeking money, the company speaks for itself.
- A bank, is a bank, is a bank, and all banks are the same.
- Banks, especially large ones, do not need and really do not want the business of a small firm.
Understand the basic principles of banking.
It’s vital to present yourself as a trustworthy businessperson, dependable enough to repay borrowed money and demonstrate that you understand the basic principles of banking. Your chances of receiving a loan will greatly improve if you can see your proposal through a banker’s eyes and appreciate the position that they are coming from.
Banks have a responsibility to government regulators, depositors, and the community in which they reside. While a bank’s cautious perspective may be irritating to a small business owner, it is necessary in order to keep the depositors’ money safe, the banking regulators happy, and the economic health of the community growing.
Each banking institution is different.
Banks differ in the types of financing they make available, interest rates charged, willingness to accept risk, staff expertise, services offered, and in their attitude toward small business loans.
Selection of a bank is essentially limited to your choices from the local community. Typically, banks outside of your area of business are not as anxious to make loans to your firm because of the higher costs of checking credit and of collecting the loan in the event of default.
Furthermore, a bank will typically not make business loans to any size business unless a checking account or money market account is maintained at that institution. Ultimately your task is to find a business-oriented bank that will provide the financial assistance, expertise, and services your business requires now and is likely to require in the future.
If you need assistance deciding which bank best suits your needs and provides the greatest value for your business operation, don’t hesitate to call the office.
Building a favorable climate for a loan request should begin long before the funds are actually needed. The worst possible time to approach a new bank is when your business is in the throes of a financial crisis. Devote time and effort to building a background of information and goodwill with the bank you choose and get to know the loan officer you will be dealing with early on.
Bankers are essentially conservative lenders with an overriding concern for minimizing risk. Logic dictates that this is best accomplished by limiting loans to businesses they know and trust. One way to build rapport and establish trust is to take out small loans, repay them on schedule, and meet all requirements of the loan agreement in both letter and spirit. By doing so, you gain the bankers trust and loyalty, and he or she will consider your business a valued customer and make it easier for you to obtain future financing.
Provide the information your banker needs to lend you money.
Lending is the essence of the banking business and making mutually beneficial loans is as important to the success of the bank as it is to the small business. This means that understanding what information a loan officer seeks–and providing the evidence required to ease normal banking concerns–is the most effective approach to getting what is needed.
A sound loan proposal should contain information that expands on the following points:
- What is the specific purpose of the loan?
- Exactly how much money is required?
- What is the exact source of repayment for the loan?
- What evidence is available to substantiate the assumptions that the expected source of repayment is reliable?
- What alternative source of repayment is available if management’s plans fail?
- What business or personal assets, or both, are available to collateralize the loan?
- What evidence is available to substantiate the competence and ability of the management team?
Even a brief examination of these points suggests the need for you to do your homework before making a loan request because an experienced loan officer will ask probing questions about each of them. Failure to anticipate these questions or providing unacceptable answers is damaging evidence that you may not completely understand the business and/or are incapable of planning for your firm’s needs.
Before you apply for a loan here’s what you should do:
1. Write a Business Plan
Your loan request should be based on and accompanied by a complete business plan. This document is the single most important planning activity that you can perform. A business plan is more than a device for getting financing; it is the vehicle that makes you examine, evaluate, and plan for all aspects of your business. A business plan’s existence proves to your banker that you are doing all the right activities. Once you’ve put the plan together, write a two-page executive summary. You’ll need it if you are asked to send “a quick write-up.”
2. Have an accountant prepare historical financial statements.
You can’t talk about the future without accounting for your past. Internally generated statements are OK, but your bank wants the comfort of knowing an independent expert has verified the information. In addition, you must understand your statement and be able to explain how your operation works and how your finances stand up to industry norms and standards.
3. Line up references.
Your banker may want to talk to your suppliers, customers, potential partners or your team of professionals, among others. When a loan officer asks for permission to contact references, promptly answer with names and numbers; don’t leave him or her waiting for a week.
Walking into a bank and talking to a loan officer will always be something of a stressful situation. Preparation for and thorough understanding of this evaluation process is essential to minimize the stressful variables and optimize your potential to qualify for the funding you seek.
The advice and experience of an accounting and tax professional is invaluable. Don’t be shy about calling the office with any questions or to request a consultation.
What Income is Taxable?
Are you wondering if there’s a hard and fast rule about what income is taxable and what income is not taxable? The quick answer is that all income is taxable unless the law specifically excludes it. But as you might have guessed, there’s more to it than that.
Taxable income includes any money you receive, such as wages and tips, but it can also include non-cash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.
Here are some types of income that are usually not taxable:
- Gifts and inheritances
- Child support payments
- Welfare benefits
- Damage awards for physical injury or sickness
- Cash rebates from a dealer or manufacturer for an item you buy
- Reimbursements for qualified adoption expenses
In addition, some types of income are not taxable except under certain conditions, including:
- Life insurance proceeds paid to you because of the death of the insured person are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
- Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable.
- If you received a state or local income tax refund, the amount may be taxable. You should receive a 2016 Form 1099-G from the agency that made the payment to you. If you do not receive it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Be sure to report any taxable refund you received even if you did not receive Form 1099-G.
Important Reminders about Tip Income
If you get tips on the job from customers, that income is subject to taxes. Here’s what you should keep in mind when it comes to receiving tips on the job:
- Tips are taxable. You must pay federal income tax on any tips you receive. The value of non-cash tips, such as tickets, passes or other items of value are also subject to income tax.
- Include all tips on your income tax return. You must include the total of all tips you received during the year on your income tax return. This includes tips directly from customers, tips added to credit cards and your share of tips received under a tip-splitting agreement with other employees.
- Report tips to your employer. If you receive $20 or more in tips in any one month, from any one job, you must report your tips for that month to your employer. The report should only include cash, check, debit and credit card tips you receive. Your employer is required to withhold federal income, Social Security and Medicare taxes on the reported tips. Do not report the value of any noncash tips to your employer.
- Keep a daily log of tips. Use the Employee’s Daily Record of Tips and Report to Employer (IRS Publication 1244), to record your tips.
Bartering Income is Taxable
Bartering is the trading of one product or service for another. Small businesses sometimes barter to get products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Typically, there is no exchange of cash.
If you barter, the value of products or services from bartering is taxable income. Here are four facts about bartering that you should be aware of:
1. Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to its members who barter and file a copy with the IRS.
2. Bartering income. Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they get.
3. Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
4. Reporting rules. How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.
If you have any questions about taxable and nontaxable income, don’t hesitate to contact the office.
Choosing the Correct Filing Status
It’s important to use the right filing status when you file your tax return because the filing status you choose can affect the amount of tax you owe for the year. It may even determine if you must file a tax return. Keep in mind that your marital status on December 31 is your status for the whole year. Sometimes more than one filing status may apply to you. If that happens, choose the one that allows you to pay the least amount of tax.
The easiest and most accurate way to file your tax return is to consult a tax professional who is able to choose the right filing status based on your circumstances. Here’s a list of the five filing statuses:
1. Single. This status normally applies if you aren’t married. It applies if you are divorced or legally separated under state law.
2. Married Filing Jointly. If you’re married, you and your spouse can file a joint tax return. If your spouse died in 2016, you can often file a joint return for that year.
3. Married Filing Separately. A married couple can choose to file two separate tax returns. This may benefit you if it results in less tax owed than if you file a joint tax return. You may want to prepare your taxes both ways before you choose. You can also use it if you want to be responsible only for your own tax.
4. Head of Household. In most cases, this status applies if you are not married, but there are some special rules. For example, you must have paid more than half the cost of keeping up a home for yourself and a qualifying person. Don’t choose this status by mistake. Be sure to check all the rules.
5. Qualifying Widow(er) with Dependent Child. This status may apply to you if your spouse died during 2014 or 2015 and you have a dependent child. Other conditions also apply.
Don’t hesitate to call if you have any questions about filing your tax return this year.
It’s Not Too Late to Make a 2016 IRA Contribution
If you haven’t contributed funds to an Individual Retirement Arrangement (IRA) for tax year 2016, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 18th due date, not including extensions.
Be sure to tell the IRA trustee that the contribution is for 2016. Otherwise, the trustee may report the contribution as being for 2017 when they get your funds.
Generally, you can contribute up to $5,500 of your earnings for tax year 2016 (up to $6,500 if you are age 50 or older in 2016). You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.
Traditional IRA: You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer’s pension plan.
Roth IRA: You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.
Each year, the IRS announces the cost of living adjustments and limitation for retirement savings plans.
Saving for retirement should be part of everyone’s financial plan and it’s important to review your retirement goals every year in order to maximize savings. If you need help with your retirement plans, give the office a call.
Eight Tax Facts about Exemptions and Dependents
Most people can claim an exemption on their tax return. It can lower your taxable income, which in most cases, that reduces the amount of tax you owe for the year. Here are eight tax facts about exemptions to help you file your tax return.
1. Exemptions Cut Income. There are two types of exemptions. The first type is a personal exemption. The second type is an exemption for a dependent. You can usually deduct $4,050 for each exemption you claim on your 2016 tax return.
2. Personal Exemptions. You can usually claim an exemption for yourself. If you’re married and file a joint return, you can claim one for your spouse, too. If you file a separate return, you can claim an exemption for your spouse only if your spouse:
- Had no gross income,
- Is not filing a tax return, and
- Was not the dependent of another taxpayer.
3. Exemptions for Dependents. You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative who meets a set of tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim on your tax return. To learn more about these rules, please call the office.
4. Report Health Care Coverage. The health care law requires you to report certain health insurance information for you and your family. The individual shared responsibility provision requires you and each member of your family to either:
- Have qualifying health insurance, called minimum essential coverage, or
- Have an exemption from this coverage requirement, or
- Make a shared responsibility payment when you file your 2016 tax return.
Please call if you’d like more information about these rules.
5. Some People Don’t Qualify. You normally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.
6. Dependents May Have to File. A person who you can claim as your dependent may have to file their own tax return. This depends on certain factors, like total income, whether they are married and if they owe certain taxes.
7. No Exemption on Dependent’s Return. If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person on your tax return. This rule applies because you can claim that person as your dependent.
8. Exemption Phase-Out. The $4,050 per exemption is subject to income limits. This rule may reduce or eliminate the amount you can claim based on the amount of your income.
Don’t hesitate to call if you have any questions about exemptions and dependents.
IRS Releases Updated Form 990-EZ
In late January, the IRS released an updated Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, that helps tax-exempt organizations avoid common mistakes when filing their annual return. One out of three paper filers has an error on their form, according to the IRS and the new option was designed to help tax-exempt organizations navigate the form more easily.
The updated Form 990-EZ includes 29 “help” icons describing key information needed to complete many of the fields within the form. The icons also provide links to additional helpful information available on IRS.gov. These “pop-up” boxes share information to help small and mid-size exempt organizations avoid common mistakes when filling out the form and filing their return.
On the new Form 990-EZ, the help icons are marked in boxes with a blue question mark. The icons and underlying links work on any device with Adobe Acrobat Reader and Internet access. Once completed, filers can print Form 990-EZ and mail it to the IRS.
Although many large exempt organizations are required to file Form 990-series information returns electronically, the IRS encourages all exempt organizations to consider filing electronically.
In 2016, the error rate for electronically-filed 990-EZ returns was only one percent, compared to the 33 percent error rate in paper-filed returns. In 2016, the IRS processed over 263,000 Forms 990-EZ, with the majority of the filings–139,000–on paper.
Exempt organizations should keep in mind that the new help icons do not replace the Form 990-EZ instructions. Filers should review the Form’s instructions when completing a return and use the help icons as an additional tool.
Form 990-series returns are due on the 15th day of the fifth month after an organization’s tax year ends. Many exempt organizations use the calendar year as their tax year, making May 15, 2017, the deadline to file for tax year 2016.
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What You Should Know about the AMT
Even if you’ve never paid Alternative Minimum Tax (AMT), before, you should not ignore this tax. Why? Because your tax situation might have changed and this might be the year that you need to pay AMT. AMT attempts to ensure that taxpayers who claim certain tax benefits pay a minimum amount of tax. You may have to pay this tax if your income is above a certain amount.
Here’s what you should know about the AMT:
1. When AMT applies. Your filing status and income determine the amount of your exemption. You may have to pay the AMT if your taxable income, plus certain adjustments, is more than your exemption amount. In most cases, if your income is below this amount, you will not owe AMT.
2. Exemption amounts. The 2016 AMT exemption amounts are:
- $53,900 if you are Single or Head of Household.
- $83,800 if you are Married Filing Joint or Qualifying Widow(er).
- $41,900 if you are Married Filing Separate.
Your AMT exemption is reduced if your income is more than certain limits.
3. Use the right forms. If you owe AMT, you usually must file Form 6251, Alternative Minimum Tax–Individuals. Some taxpayers who owe AMT can file Form 1040A and use the AMT Worksheet in the instructions.
4. AMT rules are complex. The easiest way to prepare and file your tax return is to use a qualified tax preparer who will figure out AMT for you if you owe the tax. Call today for more information or to set up a consultation.
Establishing Preferences in QuickBooks
QuickBooks was designed to serve the needs of millions of small businesses. To do that, it had to include the tools and processes suitable for a wide variety of companies. But Intuit recognized that every organization is unique, so your copy of QuickBooks can be customized in ways that make it work best for you.
You could just dive in and start adding records and transactions but doing some setup first is highly recommended. If you don’t, you may run into some issues later, such as finding that some features you need haven’t been turned on, for example, or that QuickBooks is simply not doing some things the way you do. The good news is that you can change many of these.
QuickBooks refers to these options as Preferences. You will find them by opening the Editmenu and selecting Preferences.
Figure 1: To start customizing QuickBooks so it works best for you, open the Edit menu and choose Preferences.
As you can see, the left vertical pane contains a list of Preference types. Click on any of these to change the option screens to the right. Always click the tabs labeled My Preferences and Company Preferences to make sure you see everything that is displayed for each type (sometimes one will have no choices).
Setting up Reminders
Let’s look more closely at one set of Preferences: Reminders. It’s very important that you visit these screens when you begin using QuickBooks. Depending on how big your company is and how complex your accounting processes are, there may be things you need to do every day, like pay bills and follow up on overdue invoices. It would be nearly impossible for you to do everything on time if you did not ask QuickBooks to keep track of critical dates and remind you of them.
Click Reminders in the left vertical tab. You will see one option under My Preferences. Do you want QuickBooks to show Reminders List when opening a Company file? If so–and this is a good idea–click the box in front of that line if there is not a check mark there already, and then click Company Preferences.
Here is where you will tell QuickBooks whether you want to see summaries or lists for each reminder, or neither. You can also specify how much advance notice you want for specific tasks by entering a number of days. QuickBooks comes with default settings, but you can easily change these.
Figure 2: QuickBooks comes with default settings for Reminders, but you can enter your own Preferences here.
As you can see, it is easy to specify your Company Preferences. Click the appropriate button under Show Summary, Show List, or Don’t Remind Me. If you’ve requested a reminder, delete any number that appears in the box in front of days before or days after and then enter your own.
Make sure that you look through all of QuickBooks’ Preferences and change any that don’t fit your company. Some simply have to do with the way QuickBooks displays information and how it functions, but others have direct impact on your accounting work. As always, call the office if you have any questions.
You will probably want to visit many of the options under Preferences because each may have numerous options. Here are several examples of what you might want to consider:
- Accounting. Do you want to use account numbers and classes?
- Checking. Which accounts should QuickBooks automatically use for tasks like Open the Pay Bills, Open the Make Deposits, and Open the Create Paychecks?
- Finance Charge. Will you be assessing finance charges on late payments from customers? What is the interest rate, minimum finance charge, and grace period?
- Items & Inventory. Do you want inventory and purchase orders to be active?
- Multiple Currencies. Does your company do business using other currencies?
- Payments. Can customers pay you online? What methods can they use?
- Payroll & Employees. Will you be processing payroll using QuickBooks?
- Sales & Customers. Do you want to use sales orders? How should QuickBooks handle invoices when there are time and costs that need to be added?
You can see why it is important to study QuickBooks’ Preferences early on. It will help you avoid unnecessary roadblocks and ensure that your company’s needs are reflected well in the software.
Tax Due Dates for March 2017
Farmers and Fishermen – File your 2016 income tax return (Form 1040) and pay any tax due. However, you have until April 18 to file if you paid your 2016 estimated tax by January 17, 2017.
Employees who work for tips – If you received $20 or more in tips during February, report them to your employer. You can use Form 4070.
Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in February.
Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in February.
Partnerships – File a 2016 calendar year income tax return (Form 1065). Provide each partner with a copy of their Schedule K-1 (form 1065-B) or substitute Schedule K-1. To request an automatic 6-month extension of time to file the return, file Form 7004. Then file the return and provide each partner with a copy of their final or amended (if required) Schedule K-1 (Form 1065) by September 15.
S Corporations – File a 2016 calendar year income tax return (Form 1120S) and pay any tax due. Provide each shareholder with a copy of Schedule K-1 (Form 1120S), Shareholder’s Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1. If you want an automatic 6-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe.
Electing large partnerships – File a 2016 calendar year return (Form 1065-B). Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an Electing Large Partnership. This due date applies even if the partnership requests an extension of time to file the Form 7004.
S Corporation Election – File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2017. If Form 2553 is filed late, S treatment will begin with calendar year 2018.
Electronic filing of Forms 1097, 1098, 1099, 3921, and 3922 – File Forms 1097, 1098, 1099, 3921, and 3922 with the IRS (except a Form 1099-MISC reporting nonemployee compensation). This due date applies only if you file electronically. Otherwise, see February 28. The due date for giving the recipient these forms generally remains January 31.
Electronic Filing of Form W-2G – File copies of all the Form W-2G (Certain Gambling Winnings) you issued for 2016. This due date applies only if you electronically file. Otherwise, see February 28. The due date for giving the recipient these forms remains January 31.
Electronic Filing of Forms 8027 – File copies of all the Forms 8027 you issued for 2016. This due date applies only if you electronically file. Otherwise, see February 28.
Electronic Filing of Forms 1094-C and 1095-C and Forms 1094-B and 1094-B – If you’re an applicable Large Employer, file electronic forms 1094-C and 1095-C with the IRS. For all other providers of essential minimum coverage, file electronic Forms 1094-B and 1095-B with the IRS. Otherwise, see February 28.
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