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IRS Tax Scams: The Dirty Dozen

top IRS tax scam

It’s April and you know what that means: It’s tax season once again. While people are scrambling to file their tax returns on time, scammers are also scrambling to dupe people of their hard-earned money or tax refund. Here are the most common tax scams employed by crooks. 

Phishing 

This is still the most popular tax scam out there because it doesn’t give victims direct contact with the criminals. What scammers usually do is send out legit-looking emails to unsuspecting persons. Actually, the emails are usually sent out randomly. Out of a thousand phishing emails sent, a few are bound to open them—some out of ignorance while others due to genuine concern about the information contained in the email. Usually, this email contains a link that you have to click, and which will then lead you to a bogus website. On that website, you are supposed to give out personal information that the scammers will use to dupe you. Other links are spyware or malware that will allow the scammers to get details from your computer themselves. 

The most important thing you have to remember here is that the Internal Revenue Service (IRS) does not communicate via email. The agency always sends out letters of communication. But people usually fall for these fake emails because they seem real. For one, the subject usually makes it sound urgent, for example: IRS URGENT NOTICE or something similar. The email address also looks genuine: irs@yahoo.com. Again, remember that the IRS does not communicate via emails. So when you see an email that seems to be from the IRS, be suspicious right away. Do not open the email—but if you inadvertently open it, do not click on the links. Again, if you inadvertently clicked on the link, do not give out your personal details. You may forward these suspicious emails to phishing@irs.gov.  

Phone scams 

Intimidation usually gets people. That’s why phone scams, according to the IRS, have increased in recent years. This is because most of the scammers employ intimidation when they call people. The scammers usually call unsuspecting individuals and claim that they are from the IRS. To make it sound believable, the scammer would mention a badge number or some sort of identification number to prove that he works in the agency—unfortunately, there is no way for you to verify if what he is saying is true since you are on the phone. The scammer would then claim that you owe some money to the IRS. The threat would then follow: the scammer would claim that you would go to jail if you don’t pay your tax. If somehow the scammer realizes that you are an immigrant, he would then claim that you could be deported if you don’t pay your tax. When this happens, the best thing you could do is to say that you will refer this matter to a lawyer. If the caller insists—as he most definitely will—continue also to insist that you would rather speak to a lawyer first. You may also threaten right back at the caller and say that you know someone from the IRS and would rather speak to them than some stranger who claims to be from the IRS.  

Identity theft 

This is the most popular credit card scam out there. But it is also used for tax scams. Sometimes, this go hand-in-hand with the phishing and phone scams. So once you have given up personal information through the fake email or phone call, the scammer will then use your name, Social Security number and other personal information to file a tax return in a bid to get a tax refund. This is why you should never give up personal details that easily.  

Over the years, the IRS has improved its ability to detect tax returns made by identity thieves. But the agency cannot always get everything, especially since criminals have also upped their game. As the IRS states: “Protect personal data. Don’t routinely carry a Social Security card, and make sure tax records are secure. Treat personal information like cash; don’t leave it lying around.” 

Fraudulent charities 

Most people want to help, and donating to charities seems like a good way to hit two birds with one stone: you get to help others and you lower your taxable income. If you really want to donate to charities, do so with organizations that already have a good reputation. But these are already big organizations, so if you want to help the smaller ones because they need it more, just make sure that you did your due diligence in researching the organization. Make sure it is legitimate and it really helps the marginalized sector. Also, be suspicious when charitable organizations ask for your personal details when you donate. The donation and receipt of donation should be as far as the exchange will go.  

Unscrupulous tax return preparer 

People are always busy making a living, and tax returns are not as easy as filling out a personal data sheet. Preparing a tax return can sometimes drain the life out of you and it would take days to complete as you have to go through receipts and documents. This is why around six taxpayers out of 10 rely on professional tax preparers to help them with their tax return. This is well and good as they also know better what to do. But how well do you know your tax preparer? There will always be some bad eggs in a whole tray. So make sure you know your tax preparer well. If you still don’t have one, ask a good friend to refer you to a good one. Or if you find a tax preparer, check out his credentials and research his reputation. One proof that your tax preparer is doing his job properly is if he signs the tax return he helped prepare. Employ only those who will affix their signature as well as their IRS Preparer Tax Identification Numbers. 

 Bloated refund claims 

One thing that unscrupulous tax preparers do is inflate your tax refund claims through tax credits like the Earned Income Tax Credit and the Additional Child Tax Credit. These credits allow a taxpayer a bigger tax refund. So be careful with tax preparers who receive a fee based on percentage of the tax refund, they most definitely will inflate your claims to also bloat their fees. If you get caught, there will be potential jail time for you as well as penalty—then your tax refund won’t matter anymore.  

Faking income to claim credit 

Again, this is something that an unscrupulous tax preparer would do. Actually, this is also something a taxpayer can do himself. This is the process of bloating an income since only taxpayers with earned income can qualify for a refundable tax credit. Don’t even take the risk because doing so will mean a much-bigger financial burden if caught by the IRS. If caught, you would have to pay back the refund you received along with interest and penalties. It is also worth noting that falsifying your income is a crime so there might be legal repercussions along with the fine. 

Padding tax return deductions 

Every taxpayer is authorized to claim deductions—and there are a number of them. Of course, there are requirements and limitations for the deductions that you have to abide by. But of course, taxpayers want more so they could be tempted to overstate deductions. Either that or the tax preparer does the padding to claim more deductions. Again, the financial consequence of such act could be more than the refund you have claimed. First of all, you would have to pay back the IRS the excess refund given to you along with penalties and interest. And then, you might have to face legal charges as well.  

Inflated claims for business credits 

Just like the other padding schemes, the IRS has ways in finding out if you have bloated your business credits by reporting some bogus ones. Every entity is entitled to business credits, but report only what is due to the business or the repercussions will be dire. The few credits you will earn will not be worth the penalty as well as the shame.

Offshore tax avoidance 

Make sure you report foreign investments because not doing so is illegal. There will be civil and criminal repercussions for foreign accounts and investments that are not reported to the IRS. It is a form of tax evasion since these investments are taxable. Not reporting them means you are evading the tax responsibility.  

Silly tax arguments 

Have you heard of the man who refused to pay taxes just because he thinks his tax money is being used to fund abortion in the US? Well, don’t try to follow in his footsteps because while the First Amendment demands that your beliefs should be respected, the law also states that it is every citizen’s responsibility to pay tax as it is the lifeblood of the government. 

Do not abuse tax shelters 

Just pay the appropriate amount of tax and you will not be in any trouble. There is no such thing as permanently avoiding taxation. So if anyone offers you that through tax shelters, just say no.  

Know that these scams, which the IRS dubs as the “Dirty Dozen,” can hit you anytime of the year. So don’t just be wary of them during tax season. These scams, though, peak during tax season, which is why the IRS often issues warnings ahead of the tax season. The most important shield against scams is information. If you are knowledgeable about how these scams work, then chances are you will not be duped.  

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12 Countries With the Highest Personal Income Taxes

Countries with highest income taxes and how to help with tax liens san diego

Right off the bat, let us talk about what a personal income tax is. This is practically the tax paid based on one’s personal income or one’s earnings.  

Americans have been complaining about how high the personal income tax rate in the US is.  

Although taxable income falls in different brackets, Americans pay from 10 percent to 37 percent tax rates. 

Although high, this isn’t actually the highest in the world and US only ranks seventh when it comes to the highest personal income taxes. 

And surprisingly people in countries that pay higher taxes are some of the happiest and more content because apparently, high taxes equal to a high level of liveability and higher quality of living. 

Which are the countries that levy the highest personal income tax in the world: 

Denmark 

On top of the list is Denmark. Denmark’s Personal Income Tax stands at a whooping 55.80 percent. But that isn’t even the highest tax rate Danish have paid. From 1995 to 2018, Denmark’s average income tax rate is 60.45 percent. 

The personal income taxes are collected from individuals. The Danish follows a progressive tax system, which means that the more you earn, the more taxes you pay. 

That income tax rate would have people screaming bloody murder. However, the Danish people, based on surveys and studies are some of the happiest people in the world, despite and in spite of having to pay an insurmountable amount of income tax. 

According to studies, nine out of 10 Danish people are happy to pay their taxes. 

The Danish people have this notion that they are not paying taxes. Rather, they are paying for quality of life. 

Denmark provides several high-level welfare program and social benefits to its citizens so high that they’d feel bad complaining about paying taxes because things that could cause worry to a lot of people whichever country they are in: education, health-care, are all taken care for. As they say, this is where all those tax dollars in Denmark go. 

For one, education in Denmark is free. And we aren’t talking about the primary education for elementary and high school. Denmark also offers free college education. Each student is also given a monthly stipend from the government. This means that every single Danish person do not have to worry about the cost of education for their children. 

Health care in Denmark is also top-of-the-line. It is also free for everyone.  

Sweden 

Second on the list is Sweden.  

Sweden has an average 48.2 percent in income tax rates.  

It can be as low as 29 percent and as high as 60 percent. 

But, just like Denmark, people are all too willing to pay these taxes owing to the fact that it is considered one of more  successful societies. 

You do not hear complaints from Swedish people about paying high-income taxes because they get the value for their money. 

Based on research, the Swedish people have a high trust rating for their government. They believe the government can manage their taxes well and that it will trickle down on it constituents. 

School rates are very affordable for the locals that they can send their kids to have a quality education, which costs 10 times less than what the British are paying for. 

They have the universal kindergarten coverage, free primary education, free health care, which includes dental and even have child allowance. 

Parental leaves last up to 480 days. And for 390 of these days, they will still receive 80 percent of their income. 

The pension system for Sweden is also impressive. Although it follows a progressive standard with those earning more getting higher pensions, those who did not work enough are still guaranteed for state pension. 

Finland 

Completing the podium finishers for countries with the highest income tax is Finland. 

The personal income tax rates for Finland stands at 51.60 percent. Its highest rate was in 1995 when it reached 62.20 percent. And a record low of 49 percent in 2010. 

Being a welfare state, the Finns believe that collecting taxes and levying high taxes from its constituents are important in order to maintain the standard of living. They say the Finns are living stress-free lives as they no longer need to stress over basic needs because thanks to their income tax, the government has got their backs. 

Finns are believed to be a happy people and they are giving a lot of credit on the welfare the government gives. 

Let’s start even before childbirth. 

When you are pregnant, the government sort of throws you a baby shower, sending you a care package. And we kid you not. They get diapers, baby blakies, baby clothes. You can even switch this for cash.  

Maternity leave is mandatory in Finland. Scratch that, four months of PAID maternity leave. Both parents can even share a parental leave that’s good for six months. 

They can also opt for government-owned daycare centers, which, by the way, have licensed child care providers. 

And as part of its extensive health-care, the government can reimburse you for wages lost when your were sick or parents can make use of their Special Care Allowance  if you were absent because you were taking care of your sick kid. 

Schools are, of course, free. Kids are happier because they don’t subject students to standardized testing and school hours are shorter than the rest of the world. 

Canada 

The 4th is Canada with a personal income tax rate of 33 percent.  

In Canada, the income taxes its residents pay form the bulk of the government’s revenues.  

In 2018, Canada collected more revenues from income tax than corporate income tax. 

Although part of the income tax goes to social welfare programs, the bulk of what is used for welfare comes from sin taxes. 

Australia 

This country down under is on Top 5 in our list having levied a high income tax from its residents. 

Taxes are based on one’s income or it is progressive with those earning more required to pay more taxes. Those at the top of the income ladder could pay as much as 41.58 percent but a low of 0 percent. 

On top of the income tax residents and non-resident tax payers have to pay, they are also required to pay the Medicare levy at two percent. 

Medicare is Australia’s universal health care system and is the major health-care provider for citizens and permanent residents. 

Italy 

Italians live the high life or live to pay some of the world’s highest income tax. 

At sixth place, Italians are made to pay taxes at a progressive rate of 23 percent to 43 percent. 

Tax system in Italy is complex with many sub-categories. Basically, however, residents and non-residents are required by the government to pay income taxes based on personal capacity. 

Aside from income tax, there are other taxes you have to pay for other taxes like the regional tax and the municipal taxes. 

Bonuses are also subject to corresponding taxes. 

USA 

The America did not even break into the Top 5 but still made it to Top 7. With a progressive tax system, the USA levies an income tax rate of 37percent for the highest earners and 10 percent for those who belong to the lower bracket. 

Like every single country, the taxes are used to pay for various public services like social security that provides benefits like retirement and benefit for spouses and children of retired workers, it also gives aid for disabled workers. It is also used for medical benefits and for national defense or the military among others. 

Germany 

Every single euros you earn in Germany is subject to taxes. With a progressive system, the income tax rate go as high as 45 percent and as low as zero percent. 

Norway 

This Nordic country in Northwestern Europe levies a 38.52 percent tax rate for income. 

If we take the average rate of income tax from 1995 to 2018, it will have reached 41.79 percent. The highest in history for Norway is 47.50 in 2000. 

The UK 

The United Kingdom’s highest tax rate is 45 percent for and although the rate differs every year, the rates are dependent on how much of your income is above the personal allowance and how much income falls within each tax band 

A personal allowance is another term for the threshold above, which income taxes are based on.  

The good thing about the UK tax system is if you are earning less than your own personal allowance in taxable income in a tax year, then you may not pay any income tax at all. 

So while it goes as high a 45 per cent, the lowest in the income bracket, do not have to pay taxes. 

France 

In France, the income tax rates for the top earners is at 45 percent. Those in the lower bracket pay a 14 percent tax rate. 

Income tax is levied on several aspects. Aside from income from employment, taxes are also levied for income from pension, rental and investment. 

High earners pay an additional tax called ‘high income.’  

Netherlands 

The Netherlands is very considerate of its taxpayers. While those who earn more money actually pay a substantial amount of taxes, one’s personal situation may affect the amount that you pay in taxes. These situations may include marital status, type of work and residency status. 

Those who earn more naturally pay more and the income tax rate goes as high as 52 percent. 

 

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Tax Filing 2019: What You Need to Know

Unfiled tax returns help san diego

After a number of decades, the US tax code was finally amended last year. The Tax Cuts and Jobs Act was implemented in early 2018, and since you are going to file tax returns this year for the 2018 financial year, then you must know that there are a number of changes that will affect individual taxpayers. The changes will take effect until 2025. Here are some things you need to know about the changes. 

What are the 2019 Tax Brackets?

There are still seven brackets in the amended tax code, but as the name of the law (Tax Cuts and Jobs Act) suggests, taxes are lower. Introduced by the Republicans and the Trump administration, the law reduces individual tax rates (except for a couple of brackets) while increasing the standard deductions and family tax credits. Itemized deductions are also lowered while personal exemptions are limited. 

As mentioned, with the exception of two brackets, the tax rates have been mostly reduced. The minimum tax rate, though, will remain at 10% for the lowest income earners of America. But for the second to seventh brackets, here are the changes: the second tier tax rate was at 15% but has since been reduced to just 12%, from 25% to 22%, 28% to 24%, 33% to 32%, sixth tier tax rate stays steady at 35%, while the top-tier tax rate was reduced from 39.6% to 37%. 

There are also changes in the income brackets like an increase in the income threshold for the higher tax brackets. This means that fewer people will get the maximum tax rate. Before the changes in the tax law, those who got the maximum 39.6% tax rate were married couples who earned a minimum of $480,050. But with the new law, only married couples who earned a combined income of $600,000 will be charged with the maximum tax rate.  

For taxpayers who are single, here are the income ranges of the seven tax brackets for the filing of 2019 tax returns: $0 to $9,525; $9,256 to $38,700; $38,701 to $82,500; $82,501 to $157,500; $157,501 to $200,000; $200,001 to $500,000; and over $500,000. 

For married taxpayers who are filing jointly, the income ranges are: $0 to $19,050; $19,051 to $77,400; $77,401 to $165,000; $165,001 to $315,000; $315,001 to $400,000; $400,001 to $600,000 and over $600,000. 

Head of household income ranges: $0 to $13,600; $13,601 to $51,800; $51,801 to $82,500; $82,501 to $157,500; $157,501 to $200,000; $200,001 to $500,000 and over $500,000. 

For married people who are filing separate tax returns, here are the tax brackets: $0 to $9,525; $9,526 to $38,700; $38,701 to $82,500; $82,501 to $157,500; $157,501 to $200,000; $200,001 to $300,000 and over $300,000.  

Standard deduction 

As earlier mentioned, there will be a higher standard deduction under the new law. In fact, the Tax Cuts and Jobs Act nearly doubled the standard deductions. An individual taxpayer could choose between the standard deduction or the itemized deductions, which is essentially the sum of all individual tax deductions that he or she is entitled to. So as a taxpayer, you could weigh your options and choose the alternative that will give you the most advantage, tax-wise. According to reports, though, more Americans prefer the standard deductions.  

So for single people and married people who are filing separately, the standard deduction is now $12,000, which is almost double the 2017 standard deduction of $6,350. For married couples filing jointly, the standard deduction is $24,000, again, almost double the 2017 standard deduction of $12,700. The head of household will get a standard deduction of $18,000, up from the $9,350 of 2017. Because of this, tax experts are now estimating that 95% of citizens will be asking to apply the standard deduction rather than the itemized deductions. The standard deductions for the 2019 tax year are already available for those interested. They are a few hundred dollars higher than the current rate. 

Personal exemption 

So while the standard deduction rates are much higher than in previous years, it doesn’t really mean that the Tax Cuts and Jobs Act is way better for Americans. While the standard deduction was almost doubled, taxpayers are also losing the personal exemption. So it’s like the government merely put the personal exemption in the standard deduction in order to simplify the tax code. The personal exemption is a tax break for each person in the family. So if you have eight people in the household, each of them could claim a personal exemption. That was a valuable benefit that has been taken away by the tax amendment. 

Child Tax Credit 

To make up for the loss of the personal exemption, which would have come in handy for children, the Child Tax Credit has been increased. Note that this is a tax credit and not a deduction. This means that it will reduce the amount of tax you owe to the government. Having children under the age of 17 will qualify you to a Child Tax Credit of $2,000 per child. $1,400 of this is refundable—in cases where you don’t have a tax liability.  

Mortgage interest 

Owning a home is really expensive, this is why the government is trying to help through a deduction for mortgage interest, which is among the more popular tax breaks. There are a couple of changes to this tax break, though. One, the limit to the total deduction that will be warranted has been reduced to the interest on up to $750,000 of the debt. Second, the previous additional limit for additional deduction on interest was also removed.  

SALT deduction 

Yet another popular tax break that Americans used to take advantage of is the state and local taxes known as SALT. These are the taxes paid on properties like house, cars and other personal properties. With the new law, though, the SALT deduction has been given a cap of $10,000. The thing is, while the amount is not bad at all, in some instances, $10,000 is already enough for just the SALT on the house. This is probably the most controversial provision of the law.  

All in all, the Tax Cuts and Jobs Act provides advantages and disadvantages. Some provisions of the amendment are better than the Internal Revenue Code of 1986. And Americans will also feel the loss of a number of tax breaks under the new code. According to the Real Clear Politics poll in December, about 42% of Americans did not like amendment while some 40% approved it.  

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2019 Tax Filing: Tax Season to Start Soon Despite Shutdown

When to file taxes this 2019

The government is still in partial shutdown but the tax season will be right on track. Despite trouble in government budgeting, the Trump administration and the Internal Revenue Service (IRS) announced that the issuance of tax refunds will not be affected. The shutdown had thousands of Americans expecting a tax refund worried.  

The IRS recently announced that it can start processing tax returns on Jan. 28, 2019. This date is consistent with the start of the tax season in the last few years. However, Americans can start submitting their tax returns now. The Jan. 28 schedule only pertains to the processing part on the end of the IRS.  

Americans were worried that the government shutdown, which is expected to go on during tax season, will have an effect on the tax returns. Many Americans were excited upon hearing that the tax refund could be bigger this year. MSN Money reported last year that the new tax law, which took effect at the start of 2018, will result in bigger tax refunds. Citizens feared that the shutdown would delay refunds. This fear is not unfounded since historically, the IRS does not pay refunds during a government shutdown. A shutdown refers to the failure of the government to submit appropriation bills to fund federal operations. In this particular case, the shutdown stemmed from President Donald Trump’s demand to fund his promised wall: the $5.6 billion US-Mexico border wall. Democrats in Congress were unwilling to give in to Trump’s demand resulting in an impasse. 

There have been 15 government shutdowns in US history. During shutdowns that fall on tax season, no tax refunds were released. But then again, there has never been a shutdown as long as this. Even worse, this shutdown doesn’t seem to have an end in sight. 

But the White House made it clear that the IRS will be allowed to release tax refunds during the shutdown. This was also confirmed by the IRS. 

“We are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown,” said IRS Commissioner Chuck Rettig. “I appreciate the hard work of the employees and their commitment to the taxpayers during this period.” And to ensure that the processing of tax refunds will not be delayed, the IRS also recalled its furloughed workers to help in the operations.  

For the quickest way to get a refund, electronic filing would be the best way to hand over tax returns to the IRS. According to the agency itself, tax refunds for electronically filed tax returns are paid out within 21 days. For those filing by snail mail, they could expect the refund within six weeks. One could check the status of his refund online. On the IRS website, one may click on the “Where’s My Refund” section in order to check the status of the refund. In order to access this, one will need his social security number or ITIN, filing status and exact refund amount. The status will be available within 24 hours of e-filing the tax refund. But for those filing through regular mail, it will take at least four weeks for the status to be available. Those without internet connection could still access the tool by calling 800-829-1954. The status is updated every day.  

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What are the most litigated tax issues?

When you have a disagreement with the IRS, you can apply for certain appeals to plead your case. This means that you are strictly dealing with the IRS to see if they can consider your unique situation. If you are able to give a reasonable cause, they can give you some leeway.

If you are unable to come to an agreement with the IRS, you can seek a remedy through the United States Tax Court.

This Tax Court is a separate entity from the IRS. If you are a complainant against the IRS, this particular federal court is an avenue to review your situation. Some situations may include an interest abatement, worker classification disagreements, there may be a request for relief from joint and several liabilities on a joint return. Bankruptcy Court and the U.S. Court of Federal Claims may review other matters that are not under the jurisdiction of the tax court. There is a right to an appeal the decision of any of these courts with some limited exceptions.

Your petition needs to be filed in a timely manner — no excuses or extensions. Then it gets calendared. If there is no settlement, a trial may occur. Tax courts have no juries so a judge will hear the case.

The following are some examples of the most litigated tax cases:

  1. Accuracy-related penalty.
  2. Trade or business expenses.
  3. Summons enforcement
  4. Gross income
  5. Collection due process (CDP) hearings.
  6. Failure to file penalty, failure to pay penalty, and failure to pay an estimated tax penalty.
  7. Civil actions to enforce federal tax liens or to subject property to the payment of tax.
  8. Frivolous issues penalty.
  9. Charitable deductions.
  10. Passive activity losses and credits.

More than half of these cases reviewed were filed by taxpayers who represented themselves. They didn’t acquire legal representation. The Latin term for this is pro se meaning for one’s self or on one’s own behalf. Pro se seems to be the de facto status for those who are found to have the delinquencies of failure to pay, failure to file, other estimated tax penalties, and frivolous issues penalty. The main reason for this is because it involves personal stories. These may not be covered by statute or case law but these personal statements still need to be shared.

The best course to take is to seek professional help from those experienced with these legal issues. Representing yourself may seem like a good idea at the time. In your personal capacity, you can perhaps explain why you are unable to fulfill the tax requirements cited against you. But, there may be other issues that you might miss. Ask for referrals or conscientiously look for that tax professional who can give you sound advice on how to positively present your case.

Perhaps, the most important thing to produce will be showing adequate records. This will be your best evidence to prove that you did your utmost to comply with the requirements of the law. Keep your files in order so that you will be able to show these when necessary.

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6 Ways Your Business Can Avoid an IRS Audit

how your business can avoid irs audit

Did you know those small businesses are more prone to be audited than the large ones? According to a report, a sole proprietorship is the most popular form of small business ownership. It is 10 times more likely to be audited than others business types. This is because the Internal Revenue Services (IRS) noted that about $100 billion of small-business income went unreported. The government looks at small businesses more closely than others.

But there are ways to avoid  IRS audit.

Don’t file your tax returns electronically

The good thing about the US is that almost everything can be processed electronically. It’s faster and more convenient. However, if you are an owner of a small business and want to avoid IRS audit, then it may be better to file your tax returns manually. Electronic filing allows the IRS to capture 100% of your tax return because technology is more efficient that way. On the other hand, it is believed that only 40% of the information from manually filed returns is captured by IRS hands.

Avoid vagueness

Clarify all deductions that you are trying to claim. The popular “miscellaneous” label should be avoided. make sure to tag deductions properly so they will be considered by the IRS.

If you tag an unusual expense, make sure there is an explanation. IRS agents consider unusual expenses a red flag and you would surely be audited. Also, you have to always substantiate deductions that are not very common. Meals and entertainment expenses are the most common deductions being sought for. And as such, federal agents look at these more sternly. This is why you should substantiate these expenses.

Check out this article on the latest in meals and entertainment tax deductions.

Be on time

For sure, you already have an idea on how much tax you are going to pay even without communication from the IRS. Pay your tax in advance or at least on time. You will draw more attention if tax payments are delayed because that is a big red flag on the part of the IRS. And of course, file your tax returns on time. Being late is like stamping yourself with: Audit Me!

Separate business and personal deductions

IRS agents have been doing their job for years, so they can easily spot an authentic business deduction from a personal one. Make sure that personal deductions are made separately from the business deductions.

Be accurate

This is plain logic. If the IRS notices the discrepancy in your records, they will think that you are not telling the truth in order to pass of an audit. This is why it is important the records you filled out in the tax return matches the information you have filed under W-2 and 1099 forms.

Hire the experts

There is nothing wrong with asking for help. In fact, tapping the expertise of tax professionals could save business owners a lot of effort and maybe even a lot of money. They know what they are doing, hence, will be able to provide the appropriate information in the tax returns. They may even throw in a good business tax advice.

 

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Meal and Entertainment Tax Deductions for 2018: Goodbye, Entertainment

Restaurant Chilling Out Classy Lifestyle Reserved Concept

Meals and entertainment are integral parts of a business. If you want a good deal from a supplier, you would want to sweet-talk him over a meal—maybe a glass of wine or two. You would even find out the supplier’s favorite band and take him to a concert or even organize your own concert. The same goes for a potential client. You could talk business over coffee or get some sandwiches after looking at a business site—a house or unit if you are into real estate or the business establishment if you are offering products or services.

Meals and entertainment may also be offered to employees, especially when they are forced to work at odd hours like late at night or during holidays.

As a business owner or manager, it is important that one knows the rules on tax deductions for businesses. Some of these are meal and entertainment tax deductions. 

Meals and entertainment tax deductions are very important especially if you are just starting your business and are still keeping it afloat. It is even more important that you are updated with the rules on tax deductions. You don’t want to abuse the law on tax deductions only to find out later that there were changes in the provisions. That is essentially the case with meal and entertainment tax deductions this year.

According to the new rule, which will take effect until 2025, entertainment is no longer tax deductible. The years before, a business owner could get a 50% deduction from entertainment bills. This is the effect of Tax Cuts and Jobs Act, which is aimed at reducing individual and corporate tax rates.

Considered entertainment are concerts, sports events, theaters, among others.

Business meals and travel meals still enjoy a 50% deduction rate. These are necessary expenses in conducting a business. Tax laws actually call this an “ordinary and necessary” expense. It makes sense because while eating is part of our system, spending for another person’s meal may be expensive, especially since it is expected that this will not be a one-time thing. The government recognizes the business person’s efforts to go such length just to keep the business moving and eventually succeed. So if you visit a supplier or you attend a conference that will help you with your business, then keep the receipts and label them appropriately. You have to indicate what you talked about with the person you were “doing business” with and keep the receipt to be considered in the deduction.

In-house cafeteria and worksite meals used to be fully tax deductible. According to the 2018 changes, you can only get a 50% deduction from it. Under the law, employees who work in a restaurant, catering service or vessel should have free meals. Their meals are no longer 100% deductible. The same goes for meals that some employers provide for people who are not working in the office. When you provide meals for these workers, then keep the receipt and you will get a 50% tax deduction. However, by 2025, this benefit will no longer exist.

And to end on a positive note: Recreational and social activities for employees, including holiday parties, are still 100% deductible even after 2025.

 

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Tax Deductions Homeowners Can Still File in their 2017 Tax Returns this April

tax breaks for homes for 2017 tax return

There are different home-related expenses you can deduct on your tax return. These tax breaks are made available for homeowners, and they can file these 2017 tax deductions for home expenses until the April due date.

Homeowners can take advantage of deductions for mortgage interest, real estate taxes, installing energy-efficient home improvements, canceled debt on a mortgage,  having a home office, and a whole lot more.

Topping the tax breaks that claims the most significant deductions available for homeowners is the annual mortgage interest you pay on your home mortgage. The amount that you can claim for mortgage interests on home loans is up to $1 million as a deduction for your return this year.

Vacation and second homes, which include condominiums, houses, apartments, mobile homes, boats, and similar properties, are also investments homeowners can deduct mortgage interest and property taxes from,  for as long these are rented for 14 days or less per year. Exceeding the 14-day rental limit per year, the Internal Revenue Service (IRS) considers it as an income property.

When the income property is sold, the seller has two options: either to pay the capital gains tax or execute a tax-deferred exchange for other real estates ( that have the same or greater value) that will generate income. These tax rules and related circumstances are among those stipulated in the Internal Revenue Code.

A residential moving cost reduction may apply to homeowners who move to a new job location at least 50 miles from their previous area of residency. This regulation applies to regular company employees, self-employed and those who work from home amid certain applicable guidelines.      

Basically, a tax deduction cuts down your taxable income. Your total deductions are deducted from your taxable income to determine your total tax bill for the year.

Other expenses you can claim your tax deductions include refinancing a house wherein a good number of homeowners build substantial equity for home equity loan applications. If all or some of the new home equity loan are used for home improvements, then portions ―if not all of the points ― can be deducted in the current tax year.

Sudden, unexpected, unusual or accidental losses from fires, floods, earthquakes, storm damage, and theft are current expense deductions.  These losses must exceed 10% of your adjusted gross income for them to be qualified as tax-deductible expenses.

As to home offices,  used regularly and exclusively for business, the homeowner may even be an employee and qualify for the tax breaks when filing the 2017 taxes in April 2018.

Homeowners have access to these tax deductions that don’t apply for renters and these tax breaks can add up to quite a sum. Claiming these tax breaks can be a very helpful way to counterbalance the additional expenses involved in homeownership. 

 

 

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How Does the IRS Treat Bitcoin and Other Cryptocurrency?

“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” – Thomas Carper, US-Senator

The Internal Revenue Service (IRS)  is cracking down on cryptocurrency transactions due to alleged devious patterns. The Bureau focuses on the scheme for two primary reasons:  trading cryptocurrency and converting cash into virtual currency are seen as tax evasion and money laundering strategies. Nevertheless, this concept incurs a platform that is highly debatable.

The strategy has resulted in the IRS presenting guidance on the reporting and taxation requirement for the sale, purchase, and trade of cryptocurrency — although some stipulations remain unclear.

The IRS is a bureau of the Department of Treasury that is tasked with the enforcement of income tax laws and oversees the collection of federal income taxes.  It is also responsible for enforcing the Internal Revenue Code.

Financial experts disclosed that virtual currency is treated as property for U.S. federal tax concern.  This means the virtual currency is not considered legal money because the sovereign did not issue it.

The IRS is aware that many investors made tremendous wealth with cryptocurrencies.

Consequently, it has created a virtual currency team within the agency. It has also hired a cryptocurrency software company called Chainalysis to trace the Bitcoin economy, according to a contract obtained by the Daily Beast , a media firm.

However, economic kibitzers enthused that for you to owe taxes, you would have to sell your cryptocurrency, trade for another cryptocurrency or purchase something with it to be considered taxable events.

“If you sell your cryptocurrencies for a profit you will owe a capital gains tax either short-term or long-term depending on taxable income,” said financial guru, Zack Pinnell.

Under the current U.S. tax code, liquidating or spending those Bitcoins would put you in the highest tax bracket. So your long-term capital gains rate would be within the 15 percent to 20 percent range. Some U.S. institutions have otherwise requested that the IRS proposes a definitive structure for taxing crypto-inclined investments in the country.

The system is gaining legitimacy as a protocol approach for business transactions, micropayments, and overtaking the popular remittance tools.  Cryptocurrency  is a form of digital money designed to be secure and anonymous in most cases. It allows users to make secure payments, without having to go through banks. Some economists describe the scheme as “separation of money and state”.

Cryptocurrencies are represented by  Bitcoin, Ethereum, DigitalNote, LiteCoin and PotCoin, Dash, Ripple, Monero among other options.

Subconsciously, one of the big reasons why many investors plunge into cryptocurrencies is to avoid government regulations and intrusions. So you wouldn’t expect investors to be that forthcoming. However, they may not have much of choice going forward as the IRS appears more aggressive in ferreting out crypto capital gains.

A National Security Agency  (NSA) report allegedly leaked by Snowden, an American computer professional and former CIA revealed that an entity attached to the IRS is undertaking an extensive tracking operation on the Cryptocurrency cycle.  The long arms of the law are bound to undertake massive monitoring and tax implementation of the scheme.

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Home Office Tax Deductions: What’s the Real Score?

Home office interior

Having a home-based business has its perks. You get to be your own boss. You have more freedom and flexibility over your schedule (and attire). You can spend more quality time with family and friends. You also get to minimize risk and overhead costs. Plus, you can claim your business expenses as home office tax deductions.

When filing your 2017 taxes this April, you must consider the allowed home office deductions.

Below are key points to consider for you to claim tax deductions for home-based business, as detailed in IRS Publication 587 (rules apply to individuals).

Generally, to qualify for tax deductions, you must use part of your home as your principal place of business operation, or as a place where you do business with your clients or customers. “Home” refers to a house, apartment, boat, condo, mobile home, or another type of property which provides basic living accommodations. However, it doesn’t include any part that is used exclusively as a hotel, motel, inn, or similar establishment for temporary lodging. By this categorical definition, the tax deduction is available whether you are the homeowner or a renter.

 

Trade or Business Use

First, you must use part of your home in connection with an actual trade or business, and not just for any personal profit-seeking activity. So if you use your study area to manage your stock portfolio, but you do not make investments as an actual broker or dealer, then you cannot claim home office tax deductions since the activity is not part of a trade or business.

Exclusive Use

To qualify as “exclusive,” you must use a specific area (a room or other identifiable space) for your trade or business. This area doesn’t have to be marked off by a permanent partition, but it must not be used for personal purposes. If you are a website designer, for example, and you work in a spare bedroom which also serves as your kid’s playroom, then the said area is not used exclusively in your trade or business, and so you cannot claim a deduction.

However, there are exceptions. You can still claim tax deductions for a home-based business for parts of your home used for non-business purposes if you use the part in question:

  • For the storage of inventory or product samples

If your trade is selling products at wholesale or retail, and your home is the only fixed location of the said business, and you regularly use the separately identifiable space suitable for storage in your home for keeping the inventory or product samples for use in your trade or business.

  • As a daycare facility

You can claim a deduction if you are using a space of your home for providing care to older people or those with physical or mental problems. This is also applicable for services that allow you to babysit the younger ones. Furthermore, you must have applied for and been granted (or been exempt from having) a license, certification, registration, or approval to operate as such under state law.

Regular Use

The requisite is there should be a regular usage of a specific area of your home for business. Incidental or occasional business use (such as occasional phone calls) is not considered as “regular” and will not be a basis for home office tax deductions.

Principal Place of Business

Your business may take you to several locations. For instance, you meet with clients somewhere, but your home may still be your “principal” place of business considering the relative importance of activities performed and amount of time spent at each place. For your “principal” place of business to qualify for tax deductions, you must use your home office exclusively and regularly for administrative or management activities of your trade or business. As well, you don’t have any other fixed location where you conduct said operations substantially.

The examples of these activities include billing customers, keeping books, ordering supplies, and setting up appointments. If you, being an employee, use part of your home for work, then in addition to above tests, you must prove that such use is for the convenience of your employer (and not just merely appropriate and helpful for you).

Deductible Expenses

In claiming your home office tax deductions, you may use Actual Expenses or the Simplified method, depending on which would be more advantageous for you.

For Actual Expenses, either direct or indirect, you can claim certain expenses such as real estate taxes, qualified mortgage insurance premiums, home mortgage interest, and casualty losses. These are deductible whether or not you use your home for business. So you need to pro-rate to determine the portion related to home office and other related expenses.

If you are filing using Form 1040 Schedule C, you first compute the deduction on Form 8829 (Expenses for Business Use of Your Home).

For Simplified Method, you can generally compute the deduction by multiplying the prescribed rate ($5 for 2017) by the area of your home used for qualified business use, with the maximum area set at 300 square feet. Under this method, depreciation is treated as zero, and you claim the deduction directly on Form 1040 Schedule C instead of using Form 8829.

Regardless of the method, you may not deduct business expenses more than the gross income limitation.

Record Keeping

Make sure to keep records to support your eligibility to claim your home office tax deductions. You have to include vital data in your files such as the amount of your actual expenses, invoices, canceled checks, and receipts. The exact measurements of your home used for your business should also be kept as one of the bases for tax computations.

You can save money by enjoying your legal privilege to have a tax deduction when you use a space of your home for your business. If you’re not sure on what to do, you can consult a tax professional who can help and guide you.