Tax Tips

10 Most Important Tax Facts You Should Know

Taxes are painful but there are laws that protect and impose them, so there’s no other choice but to abide by the rules. But there are things you should know about them, their extent and limitations. Below are the 10 most important tax facts.

Filing an income tax return is not applicable to everyone. Are you confused? Does it mean you’re encouraged to break the laws that protect and uphold taxes collection every year? No! This is not the implication.

The income you enjoy and receive each single year is subject for computation which serves as the basis of whether or not you’re going to file a federal income tax return. There are many factors that have to be considered such as how much you earned in the previous year, your filing status, your age, as well as the source of your income.

Most taxpayers avoid paying taxes by finding the standard deduction and by adding the personal exemption to the resulting figure. The bottom line is that there are exemptions to filing of a federal income tax return.

Tax breaks can still be enjoyed even if you don’t file a federal tax return. The so-called tax credits refer to the dollar to dollar reductions that are found in your tax liability form/s. Tax breaks have more benefits than the deductions because the latter just only reduce your tax payable based on your income.

Furthermore, for American Opportunity Credit (AOC) there’s still a possibility for you to have a money back along with credits even if you’re not having any tax to pay. If you’re a student, you have the a permanent AOC for some expenses like tuition fees. How much is the maximum credit? It’s $2,500 for every qualified student. The maximum percentage to be refunded is 40%.

Another term you should know regarding this is EITC or earned income tax credit. This is for the workers having low to moderate income. Kids are not a precondition to this; however, they help increase this benefit. The maximum credit to be claimed is $503 for workers without qualified children. The maximum amount, to some extent, is up to $6,242 covering 3 or more eligible children.

There’s no need for you to itemize the factors of certain deductions. The deductible factors like a student loan interest deduction is not needed to be itemized when availing or taking advantage of this. But you have to keep in mind that most deductions must clearly be itemized.

The IRS on the other hand has provided a leeway for adjustments to income. This happens when you’re not obliged to itemize the credits that you’re going to claim. Keep in mind that the checklist of deductions is found below the form 1040 front page. The most popular on the list are IRA deductions, moving expenses deductions, and the student loan deductions.

This is compulsory – file a tax return if you’re unable to pay your tax bill. It is an important reminder that when you fail to file a return and to pay your tax due, there are corresponding penalties you will tend to suffer. Those penalties can damage your pocket. To avoid this unwanted circumstance, make sure that you can file your return if you feel you’ll miss the payment.

There are doable options for you. The choices you may have include but not limited to paying through credit cards or availing a payment scheme through the IRS. You can take any of these options once you aren’t able to pay your full tax due on the specified date.

For self-employed individuals, estimating the income is significant. If you’re one of the self-employed people in this world, there are things you should also know about taxes. The tax system in general adopts the principle of “pay as you go.” For the employed, the employers automatically withhold the taxes from the salaries of the workers. Then the withheld amounts will be turned over to the IRS.

In comparison, the self-employed don’t have employers, do they? So there’s no withholding of taxes that is automatically done for the employed ones. The IRS wants you to do the job for them. You need to pay up if your expectation is that you owe the amount exceeding to $1,000 at the Tax Day.

Who are covered by this? The self-employed individuals are those professionals, freelancers, landlords, S corporation shareholders, businessmen doing businesses or trades through partnerships, and those who have significant investments in stocks, mutual funds and the like. The estimation is done through the use of federal form 1040ES, together with the Estimated Tax for Individuals in PDF. The interval of payment is every 3 months. If you pay late, then you’ll be paying penalty fees.

Filing schedule extension is not the extended time to paying your tax dues. Yearly, a Tax Day is always set. Now if you’re unable to file your tax applications on that particular day, you can simply ask for an extension.

How to file this extension? You can use the federal form 4868. There you can find the Application for Automatic Extension of Time to File. This is in PDF and is downloadable. There are also other applicable strategies available for you. Just always think that such extension to file that is requested is not the same as the extension be given for you to pay your dues.

Is there any cost when filing it? None! However, if you think you can owe during the tax period, a corresponding payment with regards to your extension application is needed. This must be done to avoid further penalties.

The best option? File on time and don’t procrastinate.

Even if the year-end already passes by, there’s still one chance for you to have a tax due deduction. This is more interesting. You can still take advantage of the benefits of tax breaks during year-end. One very effective method you can do in this regard is to have a savings fund for your individual retirement account or IRA. It is in accordance to the rules where you can contribute a lot to your IRA. Then, let such fund work for your previous tax year. You can enjoy this privilege if you do it during tax time.

Caveat: The government is always eager to do drastic measures (but only) if you fail to file and pay your tax obligations! What are the possible things the government might do against you? Confiscation of your passport is one. You want the state to do this to you, aren’t you?

To avoid penalties, make sure that you abide by the rules. Taxation is a law and it’s a serious government business, to say the least. Compliance is as important as you need to breath every single day for you to exist. The more painful repercussion happens when you owe back taxes.

What will the government possibly do? Your refund might be affected unfavorably. Collecting the due amount from your wages is also a possibility. To avoid from these drawbacks, comply and obey the rules and regulations.

Always take note that the IRS is always willing to work with you. If this agency is sending you letters, don’t ignore them. Address the issues promptly. Otherwise, you’ll suffer from the adversities the government can legally do.

Find a tax pro that does not compromise your pocket. Your busy schedule might affect your capacity to file on time your tax documents. So what will you do? You need to hire a pro to help you with this obligation. Most people might tell you that doing this can break your bank. It’s a wrong notion and perception because this is not always the case.

Hiring a tax expert professional is not that complicated and expensive. You can ask your friends for possible referrals. Though a tax expert is not always good for everyone, but this might be the way for you to have peace of mind and ease in doing so. You can also use the Internet to find for the right person to do the job.

One very important reminder for you if you’re going to hire a pro is to assess his or her credibility and capacity levels. If he or she is asking for a compensation, which is really the case to be, he or she must have PTIN. The IRS has the information regarding this based on its database. You can use such database to evaluate and gauge that person’s credibility parameter.

You don’t know before any of the things related to taxes that are cited and explained recently. But now that you already have the knowledge, you’re equipped. You can act things the right way. You can enjoy tax breaks based on some certain conditions. However, it’s more important for you to understand that paying your tax dues and obligations, if you’re not exempted from complying with it, is the most important civil task you need to do.

Tax News Tax Tips

6 Ways Your Business Can Avoid an 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.


Tax News

Meal and Entertainment Tax Deductions for 2018: Goodbye, Entertainment

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.


Tax News

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

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. 



Tax News

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.

Tax News

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

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.