If you have an Individual Taxpayer Identification Number (ITIN) instead of a Social Security number (SSN), you might need to act now or you'll be unable to file a tax return for 2017. Here is what you need to know. What to Know about ITINsITINs are identification numbers issued by the federal government for people who are not eligible to receive a SSN. An ITIN can be used to file tax returns and is also a form of identification often required by banks, insurance companies, and other institutions. Unfortunately, ITINs are also a source of identity fraud. To fight this, the 2015 PATH Act made considerable modifications to the program. Now many ITINs will expire if not renewed by December 31.
Renew Your ITINDon't wait until the last minute to realize your tax return has been rejected and your refund delayed because of an expired ITIN. To renew, fill out Form W-7 with the required support documents. To learn more, visit the ITIN information page on the IRS website.
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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 CorrespondenceDo not let any issues raised in an IRS correspondence letter get to a point where a face-to-face examination is required. Ask for HelpDo 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 AskedClearly 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 AuditorThe 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. Keeping RecordsEducators 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-TermYour 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 RulesWhen 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 IncomeIn 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 SalesThe 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 CostsTax-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. 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 AOTCThe 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 CreditThe 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 DeductionsBoth 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 AssessmentThe 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 ProblemWhether 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 ImportantIn 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). If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The third-quarter due date is now here. Normal due date: Friday, September 15, 2017Remember you are required to withhold at least 90 percent of your current tax obligation or 100 percent of last year’s federal tax obligation.* A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment is necessary. Here are some other things to consider:
Underpayment penalty. If you do not have proper tax withholdings, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. So a payment at the end of the year may not help avoid the underpayment penalty. W-2 withholdings get special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it were made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference. Self-employed. Remember to account for the need to pay your Social Security and Medicare taxes as well. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter when you pay your estimated taxes. Don't forget state obligations. With the exception of a few states, you are often required to make estimated state tax payments when required to do so for your federal tax obligations. Consider conducting a review of your state obligations to ensure you meet these quarterly estimated tax payments as well. *If your income is over $150,000 ($75,000 if married filing separate), you must pay 110% of last year’s tax obligation to be safe from an underpayment penalty. It seems like there’s a tax statute that touches on nearly every aspect of our lives. But that’s not all. Tax laws also include the lives of our furry friends. That’s right, even your pets can show up in your tax return in surprising ways. Your Pet Can Be... MedicineYou can actually deduct the cost of your pet as a medical expense in the tax code. Dogs in particular are frequently used to provide medical services as guides for the blind, hearing impaired or otherwise physically disabled. The cost of buying, training and maintaining a service animal is deductible. This includes the cost of food, grooming and visits to the vet. What’s not a deductible medical expense: therapy animals. Dogs and other furry creatures are commonly used in hospitals and other care facilities to lift the spirits of patients. But there’s no tax deduction yet for the service they provide. Your Pet Can Be... BusinessYou can also deduct the cost of a dog or other pet if you use it in your business. This could be a dog used to guard a location, or even a cat if it is used to control pests like mice and rats. Farmers who use herding dogs can also deduct their animals, and so can animal breeders. However, when you deduct animals as part of your business they are actually treated like capital equipment. That means you would depreciate the cost of the animal, generally over seven years, just as you would office furniture or other business equipment. Your Pet Can Be... A HobbyIf you make any money on your pet as part of a hobby, you may be able to deduct the cost of buying, training and maintaining your pet. This could be the case if, for example, you win prize money in a dog show. Your pet costs could be a miscellaneous itemized deduction as long as your total miscellaneous costs add up to at least 2 percent of your adjusted gross income. Unlike with a business, you can’t deduct losses from your hobby expenses. That means you can only deduct as much as you earn (from pet contests or other activities). Your Pet Can Be... A Sign of HomeIn a recent court ruling, the CEO of Match.com won his case against the New York tax agency in part because he proved his primary home was where he kept his dog. New York was trying to tax him as a resident because of his New York apartment. He was able to prove that he had moved to Texas because, among other reasons, that’s where his dog was. The move of items “near and dear tend to demonstrate a person’s intention,” the court ruled.
When it comes to choosing where to live during retirement, weather isn't the only consideration. State and local tax laws have a significant impact on your nest egg. The charts below show the highest and lowest state tax rates and costs of living, from data provided by nonprofit think tanks the Tax Foundation and the Council for Community and Economic Research. State Income Tax Rates
State and Local Sales Taxes(state and average local tax rates combined)
Property Taxes (Rankings based on the statewide average of local rates.)
If taxes were the only consideration in our retirement destinations, everyone would move to Alaska, which has no state income or sales taxes. However, the "last frontier" state also has one of the highest costs of living in the U.S. Therefore, you may also wish to consider which states have high and low costs of living. Don't Forget: Cost of Living
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