While most of us are never audited, when it happens we can feel like a lamb thrown in a room with a lion. The IRS auditor does these audits every day. They know what to look for, and may ask leading questions that are easy to answer incorrectly. Here are some tips to help you when you are in the crosshairs of an IRS audit.
Timely Address IRS Correspondence
Do not let any issues raised in an IRS correspondence letter get to a point where a face-to-face examination is required.
Ask for Help
Do this right away. Too many clients think the problem is easy to resolve, but inadvertently say the wrong thing, resulting in another audit issue.
Understand What's Being Asked
Clearly understanding the core question behind the audit can simplify the solution. Why is the IRS asking to see your 1099s? Do they have a form that you do not? Why are they asking about your small business profits? Are they thinking your business is a hobby?
See the Audit through the Eyes of IRS Auditor
The IRS focuses auditor training on several areas. These are published in Audit Techniques Guides (ATGs) and are available for review on their web site at irs.gov (search for "Audit Techniques Guides" in the search bar). They are invaluable in identifying areas for potential audits, and can help you understand what the IRS likes to question. While most of the ATGs deal with business taxation, reviewing the topics can be useful in understanding where audit risks are and what you can do to prepare yourself in case of an audit.
Common ATG Topics
If you have business activity that touches any of these topics, it makes sense to understand how an IRS auditor is trained. By reviewing the specific ATG you will know the process of the IRS audit and gain some insight into how the audit will go.
The fall semester is in full swing. As teachers are getting to know a new group of students, they undoubtedly have a lot on their minds other than taxes. Still, remembering what to keep records of at this point can help lower their tax burden. There are three important work-related tax benefits that might help educators lessen their tax bill.
There are tax deductions for teachers who have qualified expenses related to their profession. The cost of paying for things like classroom supplies, training, and travel might be deductible.
The way to take advantage of these tax breaks depends on how you do your taxes: Claiming the Educator Expense Deduction (up to $250) or, for those who itemize their deductions, claiming eligible work-related expenses as a miscellaneous deduction on Schedule A.
A third key benefit enables many teachers and other educators to take advantage of various education tax benefits for their continuing educational pursuits, especially the Lifetime Learning Credit or, in some cases depending on your circumstances, the American Opportunity Tax Credit.
Educator Expense Deduction
Educators can deduct up to $250 ($500 if married filing jointly and both spouses are eligible educators, but not more than $250 each) of unreimbursed business expenses. The educator expense deduction, claimed on either Form 1040 Line 23 or Form 1040A Line 16, is available even if an educator doesn’t itemize their deductions. To do so, the taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide for at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.
Those who qualify can deduct costs like books, supplies, computer equipment and software, classroom equipment and supplementary materials used in the classroom. Expenses for participation in professional development courses are also deductible. Athletic supplies qualify if used for courses in health or physical education.
Itemizing Deductions (Using Schedule A)
Often educators have qualifying classroom and professional development expenses that exceed the $250 limit. In that case, they can claim these excess expenses as a miscellaneous deduction on Schedule A (Form 1040 or Form 1040NR). In addition, educators can claim other work-related expenses, such as the cost of subscriptions to professional journals, professional licenses, and union dues. Transportation expenses may also be deductible in situations such as, for example, where an educator assigned to teach at two different schools needs to drive from one school to the other on the same day. Miscellaneous deductions of this kind are subject to a two-percent limit. This means that a taxpayer must subtract two percent of their adjusted gross income from the total qualifying miscellaneous deduction amount.
Educators should keep detailed records of qualifying expenses, noting the date, amount, and purpose of each purchase. This will help prevent a missed deduction at tax time.
Taxpayers should also keep a copy of their tax return for at least three years. Copies of tax returns may be needed for many reasons. If applying for college financial aid, a tax transcript may be all that is needed. A tax transcript summarizes return information and includes adjusted gross income.
Although the markets have been up a lot this year, your investment portfolio could have a few lemons in it. Using the tax strategy of tax-loss harvesting, you may be able to turn those lemons into lemonade. Here are five tips:
1. Separate Short-Term and Long-Term
Your investments are divided into short-term and long-term buckets. Short-term investments are those you've owned a year or less, and their gains are taxed as ordinary income. Long-term investments are those you've held more than a year, and their gains are taxed at lower capital gains tax rates. A goal in tax-loss harvesting is to use losses to reduce short-term gains.
Example: By selling stock in Acme, Inc., John Smith made a $10,000 profit. John only owned Acme, Inc. for six months, so his gain will be taxed at his ordinary income tax rate of 35 percent (versus 15 percent had he owned the stock more than a year). John looks into his portfolio and decides to sell another stock for a $10,000 loss, which he can apply against his Acme, Inc. short-term gain.
2. Follow Netting Rules
When you’re tax-loss harvesting, use IRS netting rules on the realized gains and losses in your portfolio. Short-term losses must first offset short-term gains, while long-term losses offset long-term gains. Only after you net out each category can you use surplus losses to offset other gains. Use this information to your benefit to reduce your taxable income when selling investments.
3. Offset $3,000 in Ordinary Income
In addition to reducing capital gains tax, excess losses can also be used to offset up to $3,000 of ordinary income. If you still have excess losses after reducing both capital gains and ordinary income, you can carry them forward to use in future tax years.
4. Beware Wash Sales
The IRS forbids use of tax-loss harvesting if you buy a "substantially similar" asset within 30 days before or after selling it. Plan your sales and acquisitions to avoid this problem.
5. Consider Administrative Costs
Tax-loss harvesting comes with costs in both transaction fees and time spent. Reduce the hassle by conducting tax-loss harvesting once a year as part your annual tax-planning strategy.
Remember, you can turn an investment loss into a tax advantage, but only if you know the rules.
When you’re looking for a car and you go to a dealership, you have a couple options. You can buy the car, where you pay the full price with cash, or take out a loan which you pay back over time. You can also lease the car. Leasing is somewhat like a long-term car rental. You have monthly payments and after a certain period of time, usually three years, you return the car. There are some other differences too. Check out the infographic below for differences between buying and leasing a car. (Click to enlarge.)
There may come a time when you are on the receiving end of a debt collection call. It could happen any time you are behind on paying your bills, or if there is an error in billing. In the US, there are strict guidelines in place that prohibit any type of harassment. If you know your rights, you can deal with debt collection with minimum hassle. Here are some suggestions:
Ask for Non–Threatening Transparency
When a debt collector calls, they must be transparent about who they are. The magic words they must say are: "This is an attempt to collect a debt, and any information obtained will be used for that purpose." In addition, debt collectors may not use offensive or intimidating language, or threaten you with fines or jail time. The most a debt collector can honestly threaten you with is that not paying will harm your credit rating, or that they may sue you in a civil court to collect payment.
Know the Contact Rules
Debt collectors may not contact you outside of "normal" hours, which are between 8 AM and 9 PM local time. They may try to call you at work, but they must stop if you tell them that you cannot receive calls there. Debt collectors may not talk to anyone else about your debt (other than your attorney, if you have one). They may try contacting other people, such as relatives, neighbors, or employers, but it must be solely for trying to find out your phone number, address, or where you work.
If you think the debt is in error in whole or in part, you can send a dispute letter to the collection agency within 30 days of first contact. Ask the collector for their mailing address and let them know you are filing a dispute. They will have to cease all collection activities until they send you legal documentation confirming the debt.
Tell Them to Stop
Whether you dispute the debt or not, at any time you can send a "cease letter" to the collection agency telling them to stop making contact. You don't need to give a specific reason. They will have to stop contact after this point, though they may still choose to pursue legal options in civil court.
If a debt collection agency is not following these rules, report them. Start with your state's attorney general office, and consider filing a complaint with the US Federal Trade Commission and the Consumer Financial Protection Bureau as well.
Having insurance for your home and vehicle is vital to ward off financial catastrophe when accidents happen. Unfortunately, insurance policies are becoming increasingly more expensive. One thing you can do to decrease your insurance cost is to consider increasing your coverage deductibles.
Higher Deductible, Lower Insurance Cost
Deductibles are the out-of-pocket cost you must pay before your insurance company steps in with their coverage. If you are willing to increase your deductibles, your insurance company will lower your monthly insurance premium.
By increasing car insurance deductibles from $500 to $2,000, the average American would save 16 percent a year. The exact amount you would save on either car or home insurance depends on the state you live in, your demographic profile, and claims history.
Do the Math
Before you decide whether upping your deductibles is right for you, find out how much you would save. Suppose you would save $200 a year by increasing your car insurance collision and comprehensive deductibles to $2,000 from $500. After 7½ years, you would accumulate enough savings to make up the extra $1,500 out-of-pocket cost should you have an accident.
Now consider how likely you are to have an accident. About six in every 100 U.S. motorists file a collision claim every year and 3 in 100 file a comprehensive claim, according to the Insurance Information Institute. If those claims were spread out evenly, that means every motorist would go 16½ years before filing a collision claim and more than 33 years before filing a comprehensive claim.
Of course, claims are not spread out evenly and no one person's experience is "average." Your actual risk will greatly depend on how safe a driver you are, how many miles you drive a year, and where you drive. You need to make a similar estimate of your chances of filing a claim on your homeowners insurance.
Avoid the Rate–Hike Game
Insurance companies are well-known for raising your premium after you file a claim. A higher deductible reduces this risk as fewer claims need to be filed.
A Word of Caution
Remember that increasing your deductibles can create a financial hardship. In our example, you'll now have to have $2,000 on hand to cover the cost of an insurance claim. Before you change your policy, you need to be prepared by having enough money in a savings account to cover your higher deductible if an accident does happen and you need to file a claim.
These days we're always hearing about "the 1%", but what is the fabled one–percent anyway? Who's in the 1%, and who's in the other 99%?
An interactive tool from the Wall Street Journal, What Percent Are You?, can help you find your place on the range of income levels in America. You can even compare your income based on different factors, like gender or age, to find your percentage.
The phrase seems to have originated out of the "Occupy Wall Street" political protests voicing concern over the difference in income levels of Americans. It is related to the similar "99%" statistic. Based on numbers from 2014, you have to make about $306,460 or more per year to be considered part of "the 1%".
With college students now settling into their first weeks of school, it's important for parents and students to remember that the $4,000 tuition and fees deduction they might have counted on in past years is not available in 2017. The good news is that there are alternatives. Here are two of the more popular education tax credits:
Alternative No. 1: The AOTC
The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 per student per year for qualified undergraduate tuition, fees, and course materials. The deduction phases out at higher income levels, and is eliminated altogether for married couples with a modified adjusted gross income of $180,000 ($90,000 for singles).
Alternative No. 2: The Lifetime Learning Credit
The Lifetime Learning Credit provides an annual credit of 20 percent on the first $10,000 of qualified tuition and fees, for either undergraduate or graduate level classes. There is no lifetime limit on the credit, but only couples making less than $132,000 per year (or singles making $66,000) qualify. Unlike the AOTC, this deduction is per tax return, not per student.
Credits Usually Beat Deductions
Both the AOTC and the Lifetime Learning Credit are generally more valuable than the expired tuition and fees deduction, because as credits they reduce your income tax directly, while the deduction only reduced how much of your income is taxed.
In addition to the two alternative education credits, there are many other tax benefits that reduce the cost of education. This includes breaks for employer-provided tuition assistance, deductions for student loan interest, tax-beneficial college savings options, and many other tax-planning alternatives.
As we enter into the fall months, it's a good time to check your tax withholdings to make sure you haven't been paying too much or too little. This is especially true if major changes took place in your life this year to your marital status, number of dependents, or your employment.
This quick checkup will ensure you are not surprised with a large tax bill when you file your income tax return. Fortunately, you still have a few months left to fix any problems.
Get an Accurate Assessment
The IRS has an online withholding calculator that will help you calculate how much your current withholdings match what your final tax bill will be. In order to get an accurate reading, you need to have a copy of your latest paycheck or last quarterly estimated tax filing (Form 1040 ES). It may also help to have your last tax return on hand if you expect to take similar credits and deductions this year.
Enter your data, including your filing status, dependents and any information about credits. Then refer to your last paycheck or withholding statement and enter in your total withholdings so far this year. Also enter what you expect to earn by year-end.
After you enter your information, the tool will output something similar to this:
Based on the information you previously entered, your anticipated income tax for 2017 is $15,145. If you do not change your current withholding arrangement, you will have $23,670 withheld for 2017 resulting in an overpayment of $8,525 when you file your return.
How to Fix a Problem
Whether you're paying too much or too little, you can fix it by filling out a new W-4 form and giving it to your employer. If you do so, you'll have to file another W-4 at the start of 2018 to return your withholding schedule to normal. If you're filing quarterly estimated taxes, you can adjust your next quarter's estimate in a similar way.
Why a Checkup Is Important
In a perfect world, you would neither owe too much nor get too large a refund. Unfortunately, the federal government refunds more than $3,000 a year to the average taxpayer. Think of that money as an interest-free loan the government borrowed from you. Conversely, a shortfall means writing a large check when you file your tax return. That's a surprise few of us need.
The IRS announced this week that Hurricane Irma victims in parts of Florida and elsewhere have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments.
This relief is similar to what was granted last month for victims of Hurricane Harvey. It includes an added filing extension for taxpayers with valid extensions that run out on Oct. 16, and businesses with extensions that run out on Sept. 15.
The IRS is offering this relief to any area designated by FEMA as qualifying for individual assistance. Parts of Florida, Puerto Rico and the Virgin Islands are now eligible, but taxpayers in localities added later to the disaster area, including those in other states, will automatically receive the same filing and payment relief.
The tax relief postpones various tax filing and payment deadlines that occurred starting on Sept. 4, 2017 in Florida and Sept. 5, 2017 in Puerto Rico and the Virgin Islands. Thus, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were originally due during this period.
This includes the Sept. 15, 2017 and Jan. 16, 2018 deadlines for making quarterly estimated tax payments. For individual tax filers, it also includes 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017. Because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief.
The IRS automatically gives filing and penalty relief to any taxpayer with an IRS address of record in the disaster area. So, taxpayers do not need to contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment, or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty removed.
The IRS will also work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers aiding the relief activities who are with a recognized government or philanthropic organization.
Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2017 return normally filed next year), or the return for the prior year (2016).