Tag: tax payment

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Tax Tips

How to File for Tax Extension

We offer help with unfiled tax help san diego

Nobody enjoys paying taxes—but it is essential that we do. However, there is something even less enjoyable than paying taxes—paying penalty! So always file your tax return on time as well as pay your tax on time. If you are not prepared to file your tax return, then you must file for an extension to file a tax return.  

It is actually better to file for an extension to file tax return rather than haphazardly file it. The danger here is that you may not be able to maximize tax benefits and credits under the tax law. You actually need time in order to correctly fill out your tax return. You also need the pertinent information and knowledge about your taxes and the tax relief that are due you. In fact, if you can hire assistance, that would be best—they know best about these things.  

In other cases, you may be unable to timely file tax return because you are still waiting for a document that will help you get a tax benefit or credit. If you really need this document in order to be able to enjoy your right to a tax relief, then you file for an extension to file a tax return. There is no penalty to filing for an extension, but there is a penalty if you are unable to file a tax return.  

However, there is one thing that you need to remember: while the Internal Revenue Service (IRS) is open to giving taxpayers extension to file their tax returns, it is not exactly open to given taxpayers extension to file their tax. In other words, you may file your tax return at a later date, but you cannot be late in paying your tax! 

You may ask: But how do I know how much I owe the IRS if I have not done my tax return? Well, you have to estimate how much you owe the government. It is better to make a large estimation than a small one. Anyway, that’s why the IRS also does tax refunds—although, you won’t be getting that refund anytime soon. Another option is to enter into an installment agreement with the IRS so that you don’t have to pay a large chunk of the tax. Although, this is not going to be easy peasy, as you have to prove to the IRS that you cannot afford to pay the total amount of your tax due. Another option is to pay at least 90 percent of your estimated tax due to avoid getting interest charges and being billed for penalty. The interest and penalty will really hurt because there are things that you shouldn’t be paying anyway if you were just being meticulous about your taxes. By the way, you can pay your tax in a quarterly basis so it won’t be too heavy financially. 

In case you are not privy to the tax details, the deadline of the filing of tax returns is April 15. That is also the deadline to file for extension to file tax return. Typically the IRS gives an extension of six months starting April 15 for taxpayers to file their tax returns if they were able to timely submit the extension request.  

There are a few U.S. groups, though, who get automatic tax exemptions despite not filing for them. If you are any of the following, then you don’t need to file for an extension:  

  • Military men deployed in combat zones. Obviously, they deserve this kind of special treatment. They are allowed to pay their tax dues 180 days after leaving a battle zone. 
  • American citizens outside the country. But the deadline is not much. They have until June 15 to file their tax returns. So if you have plans of going on a trip outside the country, you should think of some arrangement for your tax return or tax payment especially if you will be out of the country between April 15 and June 15. Besides, the IRS would not mind early payments or early filing of tax return.  

  • People who were unfortunate enough to be affected by a natural disaster. But since this is something that nobody foresees, it is the IRS that sets a deadline. 

Now that you have all those details, what do you need in order to file for an extension to file a tax return? IRS Form 4868. This is the official document that you will need. If you believe that you don’t actually owe money to the IRS because you merit a tax refund, you could just Free File your tax return along with Form 4868. This is for free and is available via the government website: IRS.gov. This is tax-preparation-and-filing software, so basically, you will be e-filing your tax return. But if you have any tax due, then you pay for it along with your Form 4868. You can still e-file your tax return, but you can no longer use the Free File. You may also pay your tax due online. There are three ways to do this: credit or debit card, the IRS Direct Pay and the Electronic Federal Tax Payment System. When you pay online, make sure you indicate that it is for Form 4868. Don’t worry, it will appear during processing, you just need to click it. You may also file your tax return through regular mail, along with your check.  

So, what happens if you don’t pay your tax on time or file your tax return on time?

We already established that there will be a penalty—but how bad is it? There will be an interest charge for non-payment of tax, which compounds daily. The rate of the interest will be determined every quarter, usually at a federal short-term rate, plus three percent. A late tax payment will also be billed a penalty fee, which is half of one percent of the tax due. It is charged monthly until such due is paid off. There is a separate penalty charge for the late filing of tax returns, including the extended ones. The penalty is five percent of your tax due every month that the return has not been filed. But the maximum penalty stops at 25 percent. For returns that are 60 days late, there is a minimum penalty of $135 or the balance of the tax due on the return—whichever is smaller.  

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Fresh Start Program

2019 IRS Fresh Start Program: Everything You Need to Know

What is the IRS fresh start tax relief program san diego

Do you have back taxes with the Internal Revenue Services (IRS)? Well then you should take advantage of the IRS Fresh Start Program. For this year, the program is the most convenient way to handle paying off your back taxes, especially when it involves a large amount.  

So what is this program? The program broadens the assistance taxpayers get from the IRS Restructuring and Reform Act of 1998. The program aims to help citizens pay off their tax debts. Every taxpayer can take advantage of the IRS Fresh Start Program for the entire year of 2019. However, tax experts are recommending that taxpayers take advantage of the program because of the volatility of the national leadership. This is not exactly a law so it could be scrapped if the President chooses.  

So how does the program work? 

The IRS Fresh Start Program was designed to help taxpayers with outstanding tax debts qualify for an OIC or Offer in Compromise. The goal of the government agency is to lessen—or eradicate, if possible—the number of financially struggling individuals who have tax debts to the government. The program also aims to solve tax debt issues earlier than the previous times. The program also aims to limit tax liens issued by the government. The Fresh Start Program also aims to make the rules more accessible to taxpayers.  

The IRS Fresh Start Program made some modifications to the IRS Tax Debt Relief laws in order to make tax relief easier to accomplish among taxpayers. A number of requirements have been removed from the program, reducing the steps in order to make things easier and more convenient for the taxpayers. This allows millions more Americans to enjoy their tax benefit.  

The program is not just for individual taxpayers, they are also for small businesses. Tax debts are common among small businesses, which are struggling to pay off their taxes as the company also struggles. But with the IRS Fresh Start Program, perhaps small businesses could at least find relief in the tax department if it is still having a hard time getting its financial footing in the business world. Programs like this are really comforting to individual taxpayers and the smaller companies.  

Here are the adjustments in the tax laws carried under the IRS Fresh Start Program: 

  1. Tax liens have higher thresholds. 
  2. Introduction of tax penalty relief.
  3. Installment agreements are more readily available to a greater number of people. 
  4. The Offer in Compromise agreement is expanded. 

Tax liens 

Under the Fresh Start Program, the minimum threshold of back taxes that will merit a tax lien has been increased. Before, a taxpayer with a couple of thousands in back tax is already in danger of getting a tax lien. Under the new program, the IRS ruled that taxpayers will not get a tax lien until they have racked up at least $10,000 in tax debt.  

Over the years, the IRS has not been as trigger happy with its issuance of tax liens—that is partly because the government agency doesn’t have a more comfortable budget to have more people and more systems in place for easy identification of citizens who warrant a tax lien on their property. Still, a tax debt of at least $5,000 used to be in danger of being tagged for a tax lien. But as earlier mentioned, the IRS really wants to take it easy on its constituents. This is why it has stretched its minimum tax debt threshold.  

However, taxpayers should note that this discussion is limited to the tax lien, or the government’s hold over a property for failure of a taxpayer to pay off his tax debt. There are other ways for the government to collect like through a wage garnishment.  

But back on the issue of a tax lien, the taxpayers would be happy to know that if they have a tax lien on their property, this could be withdrawn after some requirements are fulfilled. This means that if the taxpayer owes the IRS some $10,000 and was slapped with a tax lien, he could have the tax lien revoked even before he has paid off the government the total amount he owes. You just need to submit an Application for Withdrawal by filling out the IRS Form 12277. The IRS will then assess if there is merit to your request.  

There is also a faster way to get the tax lien removed, also through the use of Form 12277. You file the form, which is also a form of concurrence to the Direct Debt Installment Agreement. This agreement allows the IRS to automatically take part of your monthly salary as amortization for your tax debt. This is a way better deal than having to sell some of your properties in order to settle your tax debt. The amount that will be directly deducted from your pay check will be agreed between the two parties—the taxpayer and the IRS.  

Of course, once you sign the Direct Debit Installment Agreement, you have to abide by it. If not, your debt will go back to what it once was and a new Notice of Federal Tax Lien could be issued.  

Tax Penalty Relief 

One thing that is really messed up with back taxes is the penalties. There is a reason why a taxpayer is in debt, and that’s because he doesn’t have an abundance of money to pay off that debt. Just as any other debt, the back taxes come with interest and penalties. A taxpayer could be imposed with a penalty of as much as 40% of his outstanding tax debt. This provides the perfect picture of being kicked while already down. 

The IRS Fresh Start Program, though, will make sure you have a lot of leeway to pay off tax debt. The main reason why the program was implemented in the first place was to give people a chance to get rid of their tax debt. Getting some sort of financial pardon is one way to ease the burden of the taxpayer. Besides, there will be no loss from the government if part or the whole penalty will be erased. Under the program, a taxpayer could enjoy some form of relief from tax penalties for various “offenses” like failing to file the tax return on time or not having filed a return at all. The program also offers relief from a taxpayer’s failure to pay the tax on time or his failure to make a required tax deposit.  

This benefit is very important as you could easily save yourself from paying 40% of your tax debt in the form of tax penalty.  

Installment Agreements 

As mentioned multiple times, the IRS Fresh Start Program aims to make tax debt less burdensome for the taxpayer. This is why the IRS has made installment programs available for a taxpayer to pay off back taxes. An installment agreement is greatly advantageous because a tax debt could be too large to be paid in full in a one-shot deal. Some may be forced to sell properties in order to comply with delayed tax obligation. But with installment payments, the taxpayer is allowed to spread out payments for tax debt over a certain period of time. This installment period could last six years or 72 months, which allows you the barest minimum amortization.  

One set of taxpayers that would greatly benefit from this are those who have inherited money or maybe those who won the lottery. What most don’t know is that those “earnings”—whether heirloom or raffle winnings, will be taxed during the next fiscal year. Many of those who received a large sum of money would spend most of those without realizing that part of it should go to the government. In most cases, these citizens have already spent the tax of that large sum of money. When the tax bill arrives, the taxpayer could no longer afford it and so he starts to owe the government. Since it’s a large sum of money, the tax will also be quite large. So it is very helpful if this large tax amount could be spread out in a few years.  

Of course, you have to prove to the government that you really cannot pay the tax debt in full. This is why you have to provide the IRS with financial statements proving your incapability to pay off such amount on a one-time basis.  

In order to avail yourself of the installment agreement, you have to apply via the Online Payment Agreement tool on the IRS website: IRS.gov. Or you may fill out IRS Form 9465, which is essentially the Installment Agreement form. This usually works for debts that are less than $50,000.  For amount larger than that, or for installment requests of more than six years, you need to submit a Collection Information Statement. This can be achieved by filling out the IRS Form 433-A or Form 433-F.  

Offer in Compromise 

Another important benefit under the IRS Fresh Start Program is the expansion of the Offer in Compromise or the OIC, which essentially allows a taxpayer to haggle with the IRS to pay back less than what he actually owes the government. Essentially, this is akin to the Tax Debt Forgiveness Program wherein part of your tax debt will be forgiven by the IRS. Of course, this is dependent on your ability to pay. If the IRS can see that you really cannot pay off such amount, then a percentage of your debt will be removed.  

The change in the new program lies on the requirements. So while this benefit is already available beforehand, it is not readily accessible to majority of the taxpayers. The Fresh Start Program makes this OIC easier to qualify for. The time between filing of paperwork and approval was also reduced by a great deal.  

Experts suggest that in order to get the best deal with the IRS, your request should make it seem like you are offering the maximum amount of money that you are capable of producing over a certain period of time. This is also when experts say taxpayers should hire a tax professional to draw up the papers for the OIC—after all, the average taxpayer don’t really know his maximum paying capability—maximum being loosely used here. Know that the IRS will reject any OIC requests if it determines that the taxpayer could actually pay more than the offered amount or even the entire tax debt itself. Calculation of income, assets, liabilities and other financially related matters will come into play during the IRS’ assessment of the request.  

The IRS website has a tool that will give you an idea whether your offer would be something the agency would be amenable to. The tool is called the Offer in Compromise Pre-Qualifier, which is available in the IRS website. 

How to apply for the IRS Fresh Start Program 

You don’t apply for the program in general. But you do apply based on the above-mentioned changes: tax lien, tax penalty relief, installment agreement and Offer in Compromise. So choose which among the four would best suit your need. Once you’ve chosen which tax relief is appropriate for you, you choose the right IRS form for the tax relief.  

Again, hiring a tax expert or professional will come in handy. The expert could look at your financial statements and easily assess which relief would be best for you. So a tax professional could be a tax lawyer, a certified public accountant or a debt resolution agency. Aside from just drawing up the paperwork, the professional would also be able to deal with the IRS agent equally. For an average person facing off with an IRS agent, the former will be at a disadvantage.  

But if you have to do this on your own, here are some basic pieces of information that you will need in order to qualify for tax relief: 

  1. You should have filed all tax returns.  
  2. Prepare financial statements that could prove that you don’t have the capacity to pay off your tax debt. 
  3. You should not be in the middle of a bankruptcy proceeding. 
  4. Make sure that estimated tax payments for the year have been carried out.  
  5. Small business owners with employees should have made all required Federal tax deposits.  
Categories
Foreign Income Taxes Tax Tips

Foreign Income Reporting: What You Need to know

how to report foreign income

It might seem like a complicated provision of the US tax law but it is actually quite simple: Americans who are living and working abroad or Americans earning from different sources worldwide, are required to file a tax return. Just as those earning in the US are paying their taxes.

You have to pay taxes if you have personal income, which includes salaries, wages, commissions, tips, consultancy fees, pension fund, alimony, US and foreign security, interests, dividends, capital gains, rental property, farm income, royalties, inheritance or payment in kind.

You need to pay taxes even if you are not in the USA as long as you are receiving income from foreign sources.

You are required to pay taxes even if you have already been taxed, and even if you aren’t earning but your spouse is.

You are required to pay taxes if you are abroad and self-employed.

For self-employed, your income will be used to figure out your net earnings to know how much you need to pay.

US citizen who operates businesses in Guam, Puerto Rico, American Samoa, the Commonwealth of the Northern Mariana Islands or the US Virgin Islands must pay taxes on your net earnings from self-employment from these sources. Aside from this, you must also pay the self-employment taxes.

Most payments received by US Government civilian employees for working overseas are also taxed. There are, of course, exemptions but, generally, you are required to report any earnings from abroad: foreign financial assets or accounts that meet certain thresholds.

 

What is a foreign earned income?

 

A foreign earned income is income earned for services performed in a foreign country during the tax period in your home, which is the US. Even differentials and danger pay of US government employees working overseas should be reported as a form of wages.

 

What are the other types of foreign income that may be taxed in you are a US government civilian employee? 

 

Sale of home

Whether you are selling your home within or outside the US, you will be taxed

 

 Sale of Personal Property

 If you are set to earn from a sale of a property, you also need to report this. 

 

Who are considered for this type of tax? 

If you received income, as mentioned beforehand, those working for the federal government, who are based abroad, you qualify for this type of tax.

This also applies to all US person—US citizen, Legal Permanent Resident, Foreign National other non-US person who needs the Substantial Presence Test (SPT) in order to determine if they qualify. 

 

What is the Substantial Presence Test?

 

 The SPT is a criterion set by the IRS, the taxation body of the USA, to determine if a person, who is not a citizen or not a permanent resident of the US, will qualify for this certain tax purpose. The IRS says that an individual must be physically present in the US (all 50 states including the territorial waters of the US) for at least:

1. 31 days during the current year, and

2. 183 days in three years: This includes the current year and 2 years before that. To count this, the IRS’s formula is counting all the days you were present in the US in the current year; 1/3 of the days you were present in the first year before the current year; and 1/6 of the days you were present in the second year before the current year.

 

Factors to consider in filing tax returns?

 

Now that we have determined if you qualified for this tax purpose, you now need to know the type of tax returns that you should file a tax return. The following are the factors that determine if you must file a tax return; First, you need to know what your filing status is.

 

Filing status is the first thing you need to determine before the actual filing. This is an important part of the process because selecting the proper status that you are qualified in will help you get the lowest tax and the biggest refund. There are five statuses that you could belong to. These are the Single for those who are not married; head of the household for those who pay more than half of the cost of keeping up a home and if you have dependents; Married couple, on the other hand, can file jointly or separately. Second, the income you earned, while working for a foreign country Third is the age Fourth is if you are a dependent of another US taxpayer

 

What is not considered as a Foreign Income?

 

The IRS will not include these as foreign earned income and are therefore not taxable:

  • Meals and accommodation that the employers provide
  • Pay received as a US government employee
  • Moving expenses
  • Pension payments

 

Reporting Foreign Income

 

Anyone who qualifies for this, either residing in the US or living and earning an income abroad, must file the tax form 1040 to report income earned not just in the US but from across the world. Form 1040 is a tax form used to report an individual’s gross income. And this applies to every US citizen. Earned income is reported in Line 7 of Form 1040; in interest and dividend income on Schedule B; income from rental on Schedule E. Here are the basic things you need to know when filing the foreign Income 1040 that shows how income is included in your Tax return.

Schedule A

In Schedule A, it states that if you paid for property tax or foreign mortgage interest, you can take the deduction same as that in the US.

Schedule B

You have to report your foreign interests here and if you have ownership or signature authority over foreign accounts.

Schedule C

This applies to those who own sole proprietorship in foreign business.

Schedule D

It is for capital gain, unless distributed from a fund and that it goes to Schedule B. Report rental income from a property will be included in Page 1 of Schedule E. Members of foreign partnership or other companies need a more thorough report. Aside from placing in on Schedule E Page 2, they also need to make a report in other tax forms like 5741, 8621 and 8865, whichever one is applicable.

 

How does living abroad reduce your US taxes?

There are means to lessen the burden of taxpayers as well. But these means are not reasons for you to get away with your responsibility of paying your taxes especially if your incomes are above the filing threshold.

And there are two ways to reduce your US Tax.

These are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit.

The FEIE uses the IRS form 2555.

This method lets you exclude a certain amount of your foreign earned income from the US tax.

The exclusion amount in $105,900 in 2019.

To understand how the system goes, here is an example of an approximate calculation is: If you earned, for example, $110,000, subtract the $105,900. The difference is taxable by the US.

The other method, the foreign tax credit, uses the IRS Form 1116.

This is applied to prevent double taxations, taxpayers are granted tax credits.

Although it doesn’t happen all the time, this happens when taxes are similar in nature. It allows taxpayers to use a foreign tax credit to offset the taxes already paid in the foreign country.

Here, if you paid the same amount of tax in the foreign country as the amount you should have paid in the US, then you will no longer need to pay. If you paid less tax in the foreign country than what you should have paid in the US in taxes, all you need to do is pay the difference in your tax returns with the IRS. On the other hand, if you paid more, you are entitled to a foreign tax credit.

Again, let us reiterate that you can only claim a foreign tax credit for foreign taxes on the same income that the US is taxing.

Once more, if your foreign earned income is less than $105,900 (in 2019), you can use the FEIE for a reduced US tax. If you earned more than $105,900, you may try and make use of the foreign tax credit.

If you have used the FEIE (using the IRS Form 2555) the year before and you decided to use the foreign tax credit this year, you cannot go back to using the FEIE for six years except for when you have the permission of the IRS to switch back.

 

THRESHOLD

It has been mentioned a few times in the article.

An income tax threshold is the income level by which a person starts paying taxes.

These are based on the type of filing status:

Single, this is basically for single individuals, who are unmarried on the last day of the Tax Year.

The Head of Household, which is for those, even the unmarried ones, who have lived away from their spouses but it spent the bulk of the household’s expenses; the Married filing jointly; married filing separately; and Qualified widower with a dependent child

If you have a gross income that is below what is stipulated in the threshold, you are automatically exempt from the responsibility and do not need to get anything from the IRS.

Foreign Housing Exclusion

 

Can you ultimately get away with not paying US taxes, especially those who are now residing out of the country? Not entirely. Because they may only avoid paying US tax on a portion of that income. This is limited to earn income from self-employment and, in some cases, it includes housing in certain situations.

For the housing exclusion, those working and living outside the US, you may exclude amounts paid by your employer for housing expenses.

As long as you meet the PRT requirement you may exclude housing cost for these. The housing expenses that qualify got the exclusion are rent, repairs, utilities, real and personal property insurance and non-refundable security deposits and lease payments.

Those that don’t qualify for the exclusion are the cost of buying property, home improvement cost, salaries for domestic labors and deductible taxes and interests like those in for mortgage interest.

In 2018, US Citizens or resident aliens supporting the US Armed Forces in designated combat zones may qualify for the exclusion, even if their home is in the US.

To claim, the foreign tax exclusion, you must need to file through Form 2555 or Form 2555-EZ.

 

Learn the Ropes

A requirement in filing tax returns is to have your social security number for all US citizens and residents.

For non-resident foreign spouses, you need to secure an Individual Tax Identification Number (ITIN).

Please note, especially for those living outside the country, that failure to file your taxes will lead to the revocation of your passport.

The IRS is required to inform the state department of delinquent taxpayers. If your passport will not be renewed, you will be facing more serious problems especially if you are working abroad.

So, make sure you do your end to prevent any inconvenience.

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Categories
Tax Tips

How to pay taxes using a credit card

things to consider before paying with a credit card

With all the necessary expenses that you need to cover within a particular calendar year, it would be somewhat of a miracle to have budgeted for your tax obligations. More often than not, this seems to be the cited expenditure that most taxpayers conveniently forget to set aside some funds for when the season comes around. Don’t be caught trying to empty out your pockets when this inevitable bill comes due.

Ideally, in a perfect setup, after all the amounts have been withheld from your paycheck, there should be enough left to cover your taxes. But, this may not be the case especially if other pressing and urgent matters take precedence. There may be some huge tuition amount that needs to be paid, or an emergency medical expenses, that just happened out of the blue. Fear not, there are some options available for you to satisfy pending tax obligations.

Let’s try to review some possible scenarios wherein you are unable to pay in a timely fashion. Some examples may be:

  • The IRS accepts late payments. However, there will be a penalty incurred. This monthly late fee is usually pegged at one percent of whatever is owed. So, if the amount owed is a thousand dollars, the late fee charged will be ten dollars. Don’t let this amount increase because as your debt grows so will the imposed penalties follow accordingly.
  • The IRS is open for payment plan for you to settle your tax debt. There probably would be a one-time fee charged amounting to about $195. Monthly interest will also be part of what’s due.
  • The IRS also considers payments for taxes through a credit card. With this option, the terms and conditions of your credit card agreement come into play. So, consider the advantages and disadvantages at the onset before paying your taxes with your credit card.

 

What are the benefits of paying your taxes through credit card?

If your credit limit is quite substantial on your credit card, you just might be able to settle your outstanding taxes. With flexible payment terms, which depends on your credit card provider, you have some choices on how to effectively settle this debt. In some sense, owing the issuer of your credit card may feel somewhat less anxious then dealing with the IRS. The following highlight some advantages in using your credit card to address tax payments:

Reward points can be earned.

With a rewards credit card, rewards can be accumulated on your balance. Should this be the case, the benefits can follow when your taxes are placed on the credit card that may be returned to you through some rewards points. Please review what restrictions the credit card may have. This usually focuses on the type of purchases and some minimum charges accumulated before the rewards can be enjoyed.

There may be a longer time period to settle your tax obligation.

Filling out of additional forms may not be required because you are using your credit card. You can go beyond the April 15 filing deadline when you pay your taxes with this option. With the traditional method, the IRS allows filing after April 15, but there are documents that still need some legwork.

Interest charges may be avoided

But this happens if you have a credit card with a long 0% introductory rate on purchases and can pay off the credit card balance before the introductory period ends. You need to scrutinize it thoroughly.

What are the drawbacks of using a credit card for paying taxes?

Gaining some rewards points on your credit card and having more than ample time to pay it off may be a good thing, but beware of some drawbacks that can crop up.

There’s interest to settle on tax owed

When you are not able to pay off your balance in full and this debt grows over time, the interest will incrementally increase as well. The monthly charges can be minimized with a low-interest rate credit card or one that carries a promotional interest rate.

Convenience fees will most probably be charged

The IRS will charge a convenience fee of 2.49% of your tax bill when using the credit card option. For a $1,000 tax bill, the convenience fee may amount to almost $25. The more taxes you owe, the more convenience fee will be charged.

The debt cannot be bankrupted.

One of the types of debt that you can’t bankrupt is income tax. If a personal financial crisis hits, declaring bankruptcy will have no effect on credit card debts accumulated due to taxes.

The credit card provider may tag you as a possible risk.

When you use your credit card to pay for your tax obligations, the credit card provider may tag you as someone who is in financial distress. There shouldn’t be a reason to use your credit card if you are able to fully comply with your tax debt. Interest rates may be raised by the issuer, and your credit card limit may be lowered or canceled altogether.

Go over some assessments of the risks of using a credit card

You’ve only transferred your tax debt to your credit card instead of the IRS. So, you are still subject to any charges incurred on your credit card. Pay this off in a timely manner and you shouldn’t have any problem. Any late payments will go to your credit card report that may adversely affect your credit rating.

 

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Categories
Business Taxes

Exploring the IRC 183 or IRS Business Hobby Loss Tax Rule

what is the irs hobby loss rules

Hobbies like card collecting, craft-making, embroidery and other activities may just seem like another productive way for others to use their free time. But, by engaging in these activities, they also have the potential to earn a little extra income. There’s an existing IRS requirement that encourages hobbyists to state these income earnings on their tax returns. However, expenses can also be deducted.

There might be a bit of misunderstanding and confusion as to what really distinguishes a hobby from an actual business. The categories seem to overlap in a variety of ways. Let’s just say that if your hobby generates some income, there are a few basic guidelines that need to be understood in the IRS Business Hobby Loss Tax Rule:

What qualifies a certain endeavor as a business and what differentiates this from a hobby?

For the IRS, there are several factors that are taken into consideration when classifying activities considered either as a business or a hobby. It’s that critical relationship to profit, which becomes one of those determining factors. Here are some questions to ponder on which can help you decide if what you are doing is mainly a business or just a hobby:

  • Do you make a sizeable profit from what you are currently engaged in?
  • Is the profit consistent over a number of years?
  • With that income generated from the activity, are you dependent on that for living expenses?
  • Are there any changes implemented in your process to increase your profit?
  • In your past experiences when you were engaged in similar activities, did you get any profit?
  • Would you be able to transform your hobby into a business with the knowledge and experience that you have gained?

Answering in the affirmative to a good number of these questions means that you are engaging in a business. A negative response will indicate that you still have a hobby.

What does the IRS consider a profitable hobby?

When your income is able to exceed your expenses, that’s when a profit is declared. So, let’s say you make unique trinkets and your capital for the materials was only $100. People admired your creations and you were able to sell your trinkets for $800. The profit you made is equal to $700.

The IRS has hobby business tax rules that basically say: if profits are few and far between, you have a hobby; but if the profit comes in regularly, that only means you have a business. If this profit has been consistent for about three to five years, then most probably you have a business.

For breeding horses, showing and training them to even racing them, if a profit was made in two of the last seven years, the IRS considers this particular hobby a business.

For your hobby, are you able to write off expenses?

Expenses related to your hobby can be written off, but these shouldn’t exceed what you bring in. These deductions must be itemized. To claim the standard deduction, this means expenses for your hobby cannot be written off.

Unpaid taxes amounting to about $40 billion per year is a huge loss for the IRS because there are some hobby expenses that aren’t eligible. To qualify as a deductible, the hobby expense should be necessary and useful. A book to organize your stamp collection is a qualified expense.

If you’re paying people to help you with your hobby, or advertise and apply for insurance premiums, then all these fall under the expenses for your hobby. The desk or furniture and equipment you use for your hobby can be considered as depreciating assets. You can claim part of that value as a hobby deduction. Be careful that your expenses do not go beyond what you earn from your hobby.

If you lose money because of a hobby, what should you do?

Because of the expenditures incurred from your hobby, your profit gets all eaten up, technically that cannot be deducted from your income. If it was a business loss, that can be deducted from income in another year. The IRC 183 can give a more detailed explanation of the IRS hobby loss rules.

For a hobby, how do you go about deducting expenses?

Use Schedule A of Form 1040 to deduct hobby expenses. Mortgage interest, charitable deductions, medical expenses, other itemized deductions on your tax return are also part of this schedule.

What happens when the IRS decides to classify your hobby as a business?

That would be a good thing when the IRS thinks that your hobby should be classified as a business. There’s more freedom to claim expenses and these expenses can be deducted whether or not you decide to claim the standard deduction.

Schedule C or C-EZ is the form you use for a business to report income and expenses. The added bonus is that for a loss, there are options to roll the loss backward or forward in order to claim it against profits in another year.

If the opposite occurs, what happens when the IRS classifies your business as a hobby?

The IRC 183 hobby loss rules come into effect should the IRS determine that your business should be classified as a hobby. That means that you will be unable to claim a loss against income in another year. Because your activities should be considered as a business, having them classified as a business will probably make your tax liability go up.

Aside from looking into profitability, the IRS delves deeper into how these activities are treated. For the IRS to consider your hobby as a business, you have to keep the activities like it’s a real business. Organized and detailed records will definitely support this. Invoices to clients, advertising budgets, a business plan produced in writing only prove that you have a business aimed at making a profit.

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Tax Tips

Things You Can Give Up to Pay Off Tax Debts

some of unnecessary expenses you can rid off to save for your tax debts

It’s hard to have a negative encounter with the government—you’ll never win. And the government has enough resources to go after you. This sounds dire, but when it comes to tax debt, you should really be responsive. The government could put you to jail or take away your properties. So if you have a tax debt, you’d better make sure you pay it or settle an agreement with the IRS. If you fail to respond, you will have to pay more than what you actually owe.

 

But if you owe the government money, it only means that you don’t have extra money to spare. So how do you pay off your tax debt? Actually, when you list down all your daily, weekly and monthly expenses, you’ll realize that there are a lot of expenses that you can actually do without. Here are some of the things you could give up in order to pay off your tax debt.

 

Dining out

You could still continue to eat your favorite food without breaking the bank. Try cooking them at home. Remember that when you are at home, there’s no servers’ salary to consider. So when you cook your favorite meal, there are no add-on expenses because you don’t have waiters, cooks, and dishwashers to pay for. You also don’t need to tip anybody. So give up eating in restaurants and start cooking your own food. It’s cheaper and you get to learn a new skill as well.

 

Landline

Does anybody still use landlines? People are now communicating through text and chat. Landlines are a thing of the past. So if you still have one at home, give it up. You will not lose contact with anybody without it anyway.

 

Cable Subscription

Cable is nice. It can keep you entertained at home rather than going out to watch movies or pay for any other kind of entertainment. But here is the question: are you able to maximize the use of cable? If you have a regular job, chances are you spend more time awake in the office than at home. So you pay for the cable connection but more often, no one is watching any of the cable offerings. Cable is something you can easily give up especially with the multitude of entertainment available in the internet.

 

Car

Sometimes, owning a car is a necessity. But sometimes, it is not. There are two scenarios: either you live far from the office or you live nearby. For the former, if there are no trains in your area, then it might be more practical to drive your car to work rather than get a cab or ride multiple buses, which could drain your energy. However, if there is a train, it’s cheaper and faster, hence, more practical. If you live near the office, though, you could ride your bike to work—this is like hitting two birds with one stone: it’s cheaper and it’s environmentally friendly. Keeping a car is very expensive. Fuel is not getting any cheaper. And then, you have to maintain the car as well. There are also times when you have to shell out for the emergency repair of the car. There is also the issue of parking, the fee of which is very expensive in the urban areas.

 

When it comes to considering the things you have to sacrifice in order to pay off your tax debt, you just have to weigh the financial and physical pros and cons in order to make the right decision. When you list down all your expenses, you will eventually realize that there are many items there that you don’t actually need.

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Tax Tips

Should You Take Out a Loan to Pay Off Back Taxes?

When you are operating a business, be ready to experience a cash shortage once in a while. It happens to even the biggest companies during its first few years of operation. So when a business is not doing too well financially at a certain period and tax season is just around the corner, should you take out a loan to pay taxes? ABSOLUTELY! Taxes need to be paid. And in some cases, the business should pay off back taxes.

Sometimes, taking out a loan is more practical even with the interest that it incurs. The Internal Revenue Service (IRS) is a tough adversary. It can do so many things to you, your business, your savings, your assets, and properties if taxes are not paid diligently. When the business happens to have been tagged by the government, pay off back taxes immediately. Failure to do so would entail penalties and interest and worse: tax lien or levy, which may result in seizure of money in the bank and some properties.

The IRS is not very forgiving, so it is essential that taxes will be prioritized and that you pay off back taxes if ever you have been negligent about your tax responsibility. But more than the actual tax payment, you have to file your tax return on time. If you fail to pay tax and fail to file a return at the same time, the penalty is 5% every month. That’s a lot steep, don’t you think? And that’s an unnecessary expense because you would not have that kind of penalty if you only filed your tax return on time and paid your tax promptly as well.

In some cases, you are not even aware that you have delinquent taxes. As soon as you realize this or received a note about it, make sure to pay off back taxes. The best deal for you would be to take out a personal loan in order to settle your tax obligation. Why is this essential? Because it is better to pay interest in a loan than taking on the interest and the penalty from back taxes.

But why would a personal loan be better than paying off delinquent tax through credit card? Simple: Credit card interest rates are higher. If you have access to a rewards credit or a zero percent promo on a credit card, then that would be a better alternative. In most cases, though, credit card debts have stiffer interest deals and the monthly amortization may be unpredictable.

When you take out a personal loan in order to pay off back taxes, chances are the interest rate would be much lower than when you pay with your credit card. If you have a pristine credit score then taking out a loan would be so much easier. You need to settle unpaid taxes immediately in order to steer clear from possible penalties and interests that the IRS will impose. And that’s exactly why it is more practical to take out a personal loan to settle unpaid taxes.

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Tax Tips

How to Select a Tax Professional?

Anybody can file a tax return. A lot of people will actually ask why they should pay for professionals when they can just file the tax return themselves. But there is actually a great advantage to hiring a professional. In most cases, it is actually more practical—financially and physically—to have a professional handle your tax return.

Tax professionals are aware of the law and the benefits a taxpayer is entitled to. Therefore, the professional can maximize the tax deductions you are eligible for to reduce the amount you have to pay. But what kind of tax professional do you actually need? Here is a brief guide:

Certified Public Accountant

A CPA is authorized to represent a taxpayer in all tax matters. An accountant is probably the most knowledgeable about tax matters that include audits, tax debt resolution, and appeals. A CPA has a field of expertise but he has knowledge in all tax-related aspects. Here are some of a CPA’s fields of expertise:

  1. Assurance services
  2. Corporate financing
  3. Financial accounting
  4. Income tax planning and preparation
  5. Management consulting

Enrolled Agent

Just like the CPA, the enrolled agent can represent a taxpayer in all kinds of tax-related activities. But while the CPA is empowered by the State, the enrolled agent is empowered by the Department of Treasury. The enrolled agent is actually the most common professional individuals hire to handle tax returns—this includes consultations, representations and actual preparations of the tax returns. Enrolled agents can represent an individual taxpayer or a company through a corporation or partnership. They can also represent an estate or a trust or any other entity that will file a tax return.

Tax Attorney

A tax attorney has a more wide scope of expertise because it covers both taxes and law—especially tax matters and legal aspects that are directly intertwined. If you own a business, especially if it is already a large corporation, a tax attorney is the best professional to help you with the company’s tax return. Here are some crucial fields of expertise for a tax attorney:

  1. Structure and treatment of business
  2. Criminal investigations by the Internal Revenue Service
  3. Lawsuits against the Internal Revenue Service
  4. Cases that have reached the Tax Court

Registered Tax Return Preparer

For simple tax returns or claims for refund, a registered tax return preparer will suffice. If you have tax issues and you need professional advice, don’t go knocking on a registered tax return preparer’s office because he is not authorized to hand out tax advice.

For people who have no advance knowledge about numbers, finances, and taxes, filing a tax return will be quite complicated. So it is better to just trust the expert to handle such matters. Aside from possibly saving some tax money by taking advantage of all the tax deductions that you are privileged to have, entrusting the filing of a tax return to a tax professional would mean less to zero stress for you.

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Installment Agreement Offer in Compromise

What is an IRS tax debt relief?

Get Tax Debt Relief from Stop My IRS Bill Team

Should you happen to owe the IRS some back taxes,  you need to give back what you owe them —  just like any lender. It’s very important to seek proper representation when dealing with the IRS. Please choose a reputable firm to represent you.

Also, please try to pay what you owe, even if it starts with a minimal amount. It will go a long way in covering your debt over a certain period of time.

But, there are certain economic challenges that might prevent you from paying your taxes on time. This is where some sources of relief can step in.

Look into an Offer in Compromise (OIC)

When you enter into an agreement with the IRS to pay less than the full amount owed, that becomes an Offer in Compromise (OIC). The debt can be broken into installment payments or settled with a lump sum. Hopefully, you will be able to settle your tax debt with this mode of payment.

But, there are certain circumstances the IRS will consider before this relief is agreed upon. The original amount due should be deemed uncollectible. Or a “doubt to liability” may be presented because you doubt that the amount shown is what you actually owe. And finally, if the amount to be collected may cause undue hardship to the family, the IRS may consider collecting a smaller amount. Let’s just say that a younger member of the family may need some medical care, and paying the debt may impede critical treatment. The IRS is not that heartless to demand immediate compliance.

Proposing an IRS payment plan

Do not shirk your responsibility to pay what you owe. The IRS is willing to work with you because they want to collect what is due to the government. That’s why an IRS payment plan may be considered as a viable option.

If you’re given a period of five years, maybe an arrangement can be made to cover the debt so that it can be settled amicably. Of course, the arrangement is dependent on the amount owed and the type of tax debt incurred. Once you receive a notice from the IRS, please follow the instructions attached to the notice. The first thing you should do is contact them straight away through a phone call or by sending an email. Further instructions will come forward and the opportunity to request an installment agreement should be forthcoming.

What is the light at the end of the tunnel?

The fact that you have a debt to settle comes with its share of stressors and other challenges. But always remember that the IRS always seeks an amicable agreement to settle the debt. You need to take an active role to put your financial problem in order. When nothing is done, that might prove to be more precarious.

Asking help from an Enrolled Agent may give you the guidance you need. These professionals are quite familiar with setting up an Offer in Compromise or an IRS Payment Plan. They may not charge you unless they have achieved some success in alleviating your tax burden. Don’t be scared to work with the IRS and get some relief right now.

 

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IRS Notices Tax Levy

What is the IRS Notice CP 523?

irs form 656 for offer in compromise
Photo from IRS website

This letter is sent to you by the IRS if you default on your IRS payment plan. An explanation is given about the payment plan and if there is no action taken within 30 days, this agreement may be terminated. A tax lien may be levied against your assets after about 90 days if there is still no action taken.

For U.S. residents, notices are sent via certified mail. Those who are staying abroad are contacted through registered mail.

When is the IRS Notice CP 523 usually received?

Should your check payment bounce or other monthly payment arrangements go awry, the payment plan is considered defaulted by the IRS. Other cases may be that insufficient financial information was submitted or incorrectly inputted. Obtaining a new balance or failing to file a tax return also puts you in default. Any failure to pay will be taken as a default.

What are the steps to take when you receive the IRS Notice CP 523?

Make a payment before the termination date or payment deadline indicated in the notice. That might put you back on the installment plan. Call the IRS to confirm the payment made.

Contact the IRS immediately if there are errors in the payment agreement or the amount due is incorrect.

When your new balance accrues, that will probably lead to a payment plan default. Coordinate with the IRS or a tax professional to restructure a new monthly payment plan. The form 433-F, a financial statement, may require submission.

Request for a Collections Appeals Program (CAP) if you are unable to resolve this issue with the IRS. You must apply for this within 30 days from the date of termination.

What are the timelines that occur upon receipt of IRS Notice CP 523?

If there’s no payment made when notice was received, the payment plan may be terminated after 30 days based on the printed date on the notice. You have 45 days to appeal the defaulted agreement. Wait for the agreement to terminate, then you have 76 days to appeal the notice of intent to terminate the installment agreement.

If there is no action within 90 days, the failure-to-pay penalty rate increases, and a tax lien may be filed. Assets may be seized. Don’t wait for this to happen by contacting a tax professional to help you sort out this matter.

Again, please don’t hesitate to get information and guidance from professionals who are very well-versed with these types of cases. The Installment Agreement may be reinstated if several factors come into play. This may mean submitting more financial information so your capacity to pay can be without question. Don’t let it lag too far or you might have a more difficult time getting your monthly installments in order.

There may be some additional fees and other documents that need to be filled out and promptly given to the IRS. Avoid getting tangled up in having a tax lien levied against you. This is because you risk losing your assets that might be used to settle your outstanding tax debt liabilities.