PART TWO: GENERAL FAQS on TAX

PART TWO: GENERAL FAQS on TAX

WHAT’S NEW THIS YEAR?

By far the largest impact for the most people will be felt via the ACA. Everyone must have health insurance by March 31 or pay a fine on your 2014 taxes equal to $95 or 1% of your AGI, whichever is greater. Fines and percentages will keep increasing the next few years as well. Subsidies, if you qualify, are available two different ways: as a refund on your taxes at the end of the year, or as a reduction in your monthly premium. This will pose a unique problem for folks with fluctuating income—like freelancers—because underestimating your income and profits can result in not only a nasty tax bill, but a repayment of a portion of the subsidy as well.

Gay couples who were legally married in jurisdictions which recognize their marriage can now file joint federal income tax returns. In fact, legally married gay couples MUST either file Jointly or Married Filing Separately when filing their Federal taxes; they cannot file “Single” anymore. Gay couples can also amend any of the prior three years in which they were married. Check with your tax preparer to see if it’s worth it. Frankly, “Single” is usually a more advantageous filing status than half of “Married Filing Jointly”, which is usually better than “Married Filing Separate”. Some states are also allowing gay married couples to file together; if your state doesn’t, you’ll each file as “Single” or “Head of Household” if you’ve got kids. The real nightmare comes when a married couple works in multiple states—some which recognize the couple for tax purposes and some that don’t—“dummy” returns will have to be generated. Gay couples in civil unions or domestic partnerships will continue to file as before.

Married gay couples can now take advantage of many other tax breaks prohibited to them up until now, including unlimited spousal gifts and the ability to have your spouse on your deductible health plan or cafeteria plan at work. And after passing, the surviving spouse will get similar social security benefits as other married couples, as well as tax-free inheritance transfers of Traditional IRAs and 401(k)s which was the basis of the Windsor case.

Starting in 2013, only Medical Expenses which exceed 10% of your Adjusted Gross Income will be deductible. Anyone 65 or over gets to keep the 7.5% threshold until 2017, when it becomes 10% for everyone. Realistically, if you’re under 61, your new permanent exclusion rate is 10%.

Starting in 2013, instead of having to keep track of everything deductible for the home office (utilities, repairs, maintenance, cleaning supplies, etc), the IRS now allows a straight-up deduction of $5/sq. ft., with a max write-off of $1,500. So if you have 120 sq. feet which qualifies for a home office, you’ll have the option of the old option, or a $600 write-off.

The two-year payroll tax reduction for employees expired at the start of 2013, meaning self-employed folks’ rate went back to 15.3% from 13.3%. Hopefully, if you’re self-employed you’ve increased any quarterly estimated tax payments to cover the full amount.

The IRS has been warning of a huge increase in identity theft (criminal investigations are up 66%), and wants to remind taxpayers the IRS never makes first contact by e-mail or phone. One recent ID scam got the first caller ID to read the IRS. The caller gave a fake IRS badge number, warned of taxes due, and asked for bank numbers. When the taxpayer didn’t comply, the second caller ID looked like it was coming from the local police. Same warning for anything on the internet, even if the e-mail from the “IRS” looks real. Scammers will inform you of a tax debt or rebate opportunity and direct you to a realistic-looking site where they take your bank numbers. Another offers $80 to take a phony “IRS survey”. Every year, I have clients “phished” by fraudsters. No one is immune (I got phished!) and the crooks are becoming more and more savvy. Again, the IRS never makes initial contact by e-mail or a phone call, always via snail mail. If someone calls, or an official-looking e-mail shows up in your inbox, don’t fall for it! Instead, forward the e-mail as it is to phishing@irs.gov. Note: don’t mistakenly paste that address into website search box…it takes you to a phishing site!

The IRS is taking a step to combat ID theft. You can now truncate the recipient’s SS# (XXX-XX-1234) on their 1099—although not on the copies you keep or send to the IRS.

Starting in 2013, the State of Kansas ceased charging income tax on self-employment income, farm income, and rental income. Current rates for wages, formerly 3.5%-6.45%, dropped to 3%-4.9%. As a tradeoff, married couples get a higher standard deduction, but itemized deductions are reduced by 30% (other than charity) and the credit for child care is no longer in the tax code. The homestead claim for low-income renters is also gone.

The US Supreme Court let stand a NY Supreme Court ruling stating companies like Amazon and Overstock have enough of a “nexus” to the state to be required to collect and remit sales taxes. This ruling will pave the way for more states to join suit—figuratively and literally. It’ll cut down on rampant sales tax avoidance with online purchases, and hopefully phase out the “use tax” questions on state tax returns. (Use tax is sales tax you owe the state for what you purchased without paying sales taxes. Rates seemingly vary by every state, city, county, and ‘burb in existence.) Meanwhile, states estimate they lose $23 billion a year.

Some ideas, however, are law. At the beginning of 2013, Congress finally ended a lot of year-in, year-out changes by making parts of the tax code permanent, rather than subject to sunsets every year or two. Coming from Congress, this is rare positive news, as stability in the tax code is better in the long run. Planning is easier, and it cuts down on errors. The last few years have been maddening, as dozens of deductions would sunset, then return, then be adjusted, then get a new sunset, then get extended….

Similarly, certain aspects of the tax code we’ve become used to have been extended five years, including the Earned Income Credit, the Child Tax Credit, and the American Opportunity Tax Credit, formerly known as the Hope Credit.

There’s a new top income tax bracket of 39.6% for incomes over $400K for singles, $450K for married couples. This is a return to the Clinton-era top rates. The other brackets, including the beginning 10% bracket, are now a permanent part of the tax code.

Singles earning over $200K and married filers making over $250K are now subject to a Medicare tax increase of 0.9% on earned income and 3.8% additional on capital gains. Income tax for capital gains will top out at 20% from the current 15%, although assets held 5+ years will top out at 18%.

Speaking of capital gains, if all your security transactions submitted cost basis information to the IRS (category A on their paperwork to you), you can now enter only the totals instead of details from every transaction. But only if ALL transactions sent “category A” info regarding cost basis of the sold security.

The Estate Tax Exemption is now $5.34 million, and will continue to be tied to inflation going forward. This is another permanent part of the tax code, and not subject to sunset. If you’re involved in settling an estate, be sure to disburse the monies ASAP. Any income over $12K generated by the estate between death and disbursement is subject to the top 39.6% tax rate!

In 2013, deductible mileage rates were 56.5¢; they’ll drop to 56¢ for 2014. Medical & moving mileage was 24¢ for 2013 and drops to 23.5¢ for 2014; charity mileage remains at 14¢.

Restaurant workers will now see any automatic tips for large tables added to their wages on their annual W-2.

New proposals have surfaced which might change filing radically for folks on the road a lot, or folks who work in a states for short bursts of time. It’s still in the early stages (and some believe passing anything with “IRS” on it is impossible these days), but the suggestion is any connection to another state for less than 30 days wouldn’t trigger a tax filing. You’d still be liable to your home state, but wouldn’t have to file in another state because of a three-day shoot or a four-week engagement. Again, this proposal is still in the infancy stage, not law.

If you have Flex Spending Account for medical expenses through work, the old rule was “use it or lose it” by March 15. Now, if your employer amends your plan to allow it, up to $500 in unused amounts can be rolled over into the next year.

Certain long-time deductions have gone away, starting in 2014. There will no longer be the option to write off sales taxes in lieu of income taxes. This has been used in the past by itemizers who live in states without income taxes. Other breaks that end are the $250 deduction for school teacher’s supplies, the tuition deduction (other education breaks remain), the ever-increasing “expensing” limit (now back down to $25K annually), and the ability to write off PMI (private mortgage insurance) just like regular mortgage interest. These are all still available on the 2013 returns, but have ended going forward

Do you know people who pay their workers via a 1099, when they really should be paying them as employees? Now’s the time for them to get right with the IRS. For about 1% of the prior years’ wages, all other interest and penalties are waived, and a guarantee of no audits for prior years. They’ve now even included non-profits. For anyone flying under the radar, this is the time: I’ve never seen any amnesty program this generous in my 26 years of doing taxes, One more reason? States have been clamping down on misclassified workers in search of revenue.

In 2013, Social Security taxes were payable on up to $113,700 of earned income. In 2014, that goes up to $117,000. Medicare tax has no cap. This means the W-2 worker making $117,000 pays a higher percentage of her or his income in federal taxes than the millionaire or billionaire. Tax oddity: The vast majority of workers (about 2/3rds) pay more in federal payroll taxes (Social Security and Medicare) than federal income taxes over their lifetimes, including everyone in the 15% bracket, and up to and including a married couple making $100,000 a year, even if they’re childless and taking only the standard deduction.

Without fanfare, the IRS removed wording requiring handwritten proof in the instructions on how to deduct. So besides the traditional pencil or pen on paper, there’s another way to keep appointments, mileage, and other records: electronically. Your entries into your electronic calendar on your smartphone are now just as legal as the old handwritten ones in your pocket calendar. This doesn’t release the taxpayer from any recordkeeping requirements, just adds the option for electronic recordkeeping in addition to the traditional handwritten. Also, the IRS will certainly look at this closely, and have been known to throw out an entire mileage logbook when they found willful false entries. Remember, a handwritten log of your notes and ample supporting receipts are always the strongest proof!

Electronic payers now report electronic purchases to the government—and you—via Form 1099-K, Merchant Card and Third-Party Payments. If you take credit cards as part of your business, the third-party (Visa, MasterCard, Paypal, etc) will issue a new 1099-K with the amounts they transferred to you. Be sure to keep good records, so any discrepancies can be corrected, and you’re not taxed for giving cash back, for example. You’re only supposed to receive these if you have over 200 transactions AND over $20,000 in payments, but I’ve had a bunch of clients who’ve received 1099-Ks without meeting either threshold.

Interest rates on money you owe to the IRS remains at 3%, which breaks down to 25¢ a month for every $100 you owe.

April’s filing deadline in 2014 is April 15. October’s deadline for extended taxes is October 15. Remember, if you’re not going to file, be sure to extend. Not extending can be 20 times the cost of not paying! And keep in mind, an extension to file is not an extension to pay; you’ll still need to pay what you owe. If you expect a refund, no payment is due, but be sure!

Deductible Tuition Costs have always included books and materials bought directly from the school, but now they can include books and other course materials bought from other sources, as well as computers, schooling software, and internet access for the student, which the student’s family can use as well, if the student is living at home.

Note: While room & board can be paid by Education Plans (Coverdell, & 529s), and while interest on loan repayment including room & board is deductible, room & board is NOT included in costs when determining Education Tax Credits. See Education for more.

Self-employed can deduct child health care

Self-Employed Workers who pay for health care can now deduct expenses paid for a child 25 and younger (by 12/31), even if that child is not your dependant.

First-time homebuyers: fourth payment due

First-time homebuyers who got the credit and bought during the first round in 2008 now have to pay their fourth installment of 1/15^th of the rebate back on their 2013 taxes. For those affected, it will add up to $500 to your tax bill or reduce your tax refund by up to $500.

K-1s, sent to partners and shareholders of S Corporations, can now be sent electronically.

Many states –Kansas for example—exempt certain government pensions from taxation, like workers within Kansas’ KPERS system or postal retirees. Like many pension plans, some of those entities will offer a portion of their pensions up front. In other words, you could be due $2,000 a month, but choose $1,000 a month and a lump sum, the concept being you’d try to generate the other $1,000 (or better) yourself. However, once you’ve transferred the lump sum into a self-directed retirement account, any distributions that would not have been taxable in Kansas become taxable in Kansas, even if the source of ALL your pensions would’ve been state-tax-free otherwise! What would (and should) be $24,000 annually in income tax-free to the state is now only $12,000 tax-free, and $12,000 taxable. Even you only took $6,000…ALL taxable. The lesson: DON’T take a lump-sum rollover before discovering if it suddenly becomes taxable in your home state!

You can go to YouTube and view IRS videos about tax tips, and how-to videos

Didn’t get a tax packet from the IRS? They don’t send them out anymore. Neither do most states or cities. They expect YOU (or me) to download them and print them out. Here are links for the IRS and for state tax information. Similarly, if you got unemployment, paid qualified state tuition payments, or got a tax refund from the State of Missouri, you must go to MO 1099-G to get that information, or call 1-573-526-8299. The state of Missouri actually sends out postcards to tell the taxpayer they won’t be sending out postcards.

The US tax code is 4x the length of War and Peace. There have been over 5,000 changes to the tax laws since 2001, a rate of more than one a day. The IRS answered 60% of calls in 2013, with an average wait time of 20 minutes; both factors are trending worse. Their percentage of unanswered paper after 10 weeks was 40% in 2012, and 47% in 2013. Folks couldn’t get through to ask their own government how to pay their taxes 20,000,000 times last year. In their defense, they are constantly asked to do more with less. The IRS has over 7,000 less employees than they did in 2010, and now have to administer everything from the Earned Income Tax Credit to the Home Buyer’s Credit, to the ACA, to the spike in non-profit requests. It’s clearly straining other areas. This year, one of their cuts was to the tax preparer’s hotline. Meanwhile, a non-profit group called Tax Analysts had to sue the IRS to get them to release their internal guidelines to determining whether to grant tax-exempt status. In other words, it was the IRS’s intention to deny the public any and all insight as to how the government would interpret the law. And right after the courts told the IRS they had no legal authority over tax preparers, the IRS announced it was going to continue believing and acting like they have legal authority over tax preparers. To that end…

FAQs ABOUT YOUR TAXES

When it comes to taxes, you have a bullseye painted on your back. The IRS has loudly announced targeting the self-employed. A recent study showed about 80% of the underreported income comes from the self-employed, so audits have increased dramatically, and the IRS is convinced of two things: 1) If you get a 1099 or are self-employed, you’re hiding income, and 2) You don’t have proof for what you’re deducting. I’ve preached the value of keeping good records since the beginning; these increased audits have only made me a stronger advocate.

As for the income, I heard something during an audit that put a chill up my spine. From the next cubicle: “If you don’t know what that deposit is, we’re going to count that as Schedule C income.” It’s true: All wealth acquisition is considered income, unless you can prove otherwise. (Aunt Petunia’s birthday check is not considered taxable income…if you have notes or a copy to prove it.) Lesson: Keep records of your deposits, too.

What about public donation funds, like Kickstarter?

The IRS views funds raised via Kickstarter or any similar collection as self-employed income, and taxes it as such.

No. Use pennies, and only round the total. If you’ve already rounded, just make sure you’re consistent for the entire year. 49 cents rounds down, 50 cents rounds up.

Local travel for business, hands down. We all travel—car, bus, subway, etc.—much more for business than we realize. And if you qualify for a home office, the deductions can be enormous.

Spending the money from their retirement plans when they leave a job, instead of having it rolled over into another retirement plan. Not only are they probably triggering over 40% in taxes, they’re literally shortchanging their future. Other times people need tax advice and don’t always realize it: Buying a house, getting married or divorced, having kids, moving, or a death in the family. These are major life events, and all have long-term tax repercussions.

Only if the $500 was included in your prior income (which it probably wasn’t). Otherwise, since you didn’t receive any income from this person, no extra income will be reported, and no extra income tax will be due.

Yes. Think of it this way: If you got paid $400, and stiffed on $500, you wouldn’t suddenly be able to declare a loss of $100. You still got the $400, so that’s all you would claim as income.

You must have documentation of the business use to write off the business percentage. The simplest way to do this is called “sampling”. For two or three typical months, log EVERY CALL on the cell (or get a printout from your cell phone company; Verizon, for example, offers it free online). Compare the business calls to the total calls. That’s the % you can use.

For the computer, you need work logs that show hours of work time and hours of personal time. Note: If you qualify for a home office, the office computer and peripherals are deemed to have 100% business usage. That said, if you don’t qualify for a home office and have no usage records, the assumed percentage is ZERO. In truth, however, everyone with a computer or a cell has business usage!

I have a bundled plan with internet, cell, and cable. What do I do?

Check the bills and see if they’re split out. If they are, average three months’ breakdowns of each, and use those percentages on your annual totals, provided you’ve had consistent service. If they’re not split out, do it yourself as honestly as possible (don’t split it three equal ways if you have the bare bones cell plan and the top tier cable plan) and start there.

ALWAYS opt for the company reimbursement. That pays you back 100%, whereas a deduction only pays back somewhere between 0-40% (so never buy anything just because it’s deductible). A combined Fed/State bracket of 20% would return 20%. Reimbursement pays five times that amount! Here’s a chart of a $100 expenditure, and the relative returns in your pocket on your Federal return, rounded to the closest dollar. “House Item” in this example assumes 20% (one room out of five) of your home is used for business.

Similarly, instead of a raise, negotiate monthly parking. Your employer can reimburse the costs to you, up to $240 a month, and you get the full amount, TAX-FREE, while your employer doesn’t have to pay any additional payroll taxes! Another option is mass transit passes, up to $125 a month. Bicyclers can get $20/month. It’s a win-win situation.

A Qualified Performing Artist is anyone who works for at least two arts organizations with W-2s totaling at least $200 from both, has $16,000 of Adjusted Gross Income or less, and spends more than 10% of their arts income on maintaining their career. The advantage is the QPA gets both a standard deduction, and the itemized arts deductions, which can make a huge difference.

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  Any incidental charity given in cash—the fireman’s boot, cash in the church’s collection plate or donation box at the museum—is not deductible, even if it’s written down. Donate via check or charge card for proof. The person who dropped the $3,500 diamond ring in the Salvation Army kettle? No deduction.
  
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  Any single donation over $250 requires an acknowledgement letter from the charity, which you must have in your possession by the due date of the return, including extensions.
  
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  Charge card contributions are deductible in the year charged, regardless when they’re paid off. Checks are considered deductible the day they’re mailed, so a check in an envelope postmarked December 31 can be deducted that year, regardless when the check is cashed.
  
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  For charity events, only the amount over what the event would’ve normally cost is deductible. Example: $50 Opening Night Benefit tickets, normal ticket price $20, deductible amount = $30. Similarly, if you pay extra for a cause--buying a license plate that supports breast cancer research, the arts, autism, etc.—you can deduct the extra fee.
  
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  Money donated to a university, which also secures the right to buy tickets, can only be deducted at an 80% rate.
  
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  New, unopened, unused items given to a “Toys-for-Tots”-type charity are considered cash.
  
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  Keep your final pay stub of the year if you give to United Way through work.
  

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  We bought a ticket to a charity event, but couldn’t go. Is it deductible now?
  

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  I charge $50/hr, and I donated 4 hours to charity. Can I deduct $200?
  

These are donations of clothing, furniture, appliances, etc. Warning: The IRS has stated this is one of their “targeted areas”, meaning they believe this is an area of abuse. The best way to protect yourself is to keep good records, and take digital pictures of the donated items. Here are the requirements:

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  Get a receipt every time you donate from a worker at the charity. If it’s a drop site, a blank receipt should be available. The IRS’s requirement is name, address, date, and “reasonably detailed description”. You can value that individual receipt at its thrift store value, up to $249. This will link you to the Salvation Army’s Valuation Guide.
  
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  Similar to cash donations, $250 or more of value to one charity at one time requires an acknowledgement letter from the recipient charity, which you must have in your possession by the due date of the return, including extensions.
  
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  $500 or more (single gift) requires a professional appraisal, unless it’s a car or boat. (Appraisal fees are deductible as a “miscellaneous” donation.) The appraisal MUST be attached to the return.
  
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  If clothing or goods are donated, they must be in either good or excellent condition. No deduction is allowed for items in poor or fair condition, unless the value of that item is $500 or more, and you have a professional appraisal on that item.
  
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  $500 or more in total non-cash gifts in one calendar year requires information on each individual donation: date, recipient’s name and address, general description of donated goods, how you obtained them (purchase, inheritance, gift, etc.), either the price you paid or the value they were worth when you obtained them, and the amount of the donation as you value it.
  
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  If you donate a car or boat with a value of $500 or more, you must get a receipt—in the form of a 1098C—from the charity and attach it to the return, otherwise, no deduction. And be sure to give it to a charity that will use it. If they use it, you get the blue book value. If they don’t use it, but sell it, you get their proceeds or $500—whichever is more—unless the blue book value is less.
  

Here are the requirements to write off moving expenses if moving to a new city:

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  It must be at least 50 miles from your present location.
  
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  The move must be closely related in time and place to the start of work for the new job.
  
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  You must work in your new city for 39 weeks the first year if you’re employed, or 78 weeks the first two if you’re self-employed or a combination of the two.
  
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  If you’re married, only one spouse has to qualify.
  

Re-register to vote, get a new driver’s license, file a change of address with IRS Form 8822 (if you’re self-employed 8822-B), change your mailing address on bank accounts and legal documents, etc.

Tax law defines “work” as what someone in your profession would normally do, so even if you’re not being paid for work, keep notes on auditions, classes, lessons, research, studying, etc. It’s especially important if you’re self-employed or not yet hired.

If the following year you realize you didn’t qualify for the required weeks, the moving expenses aren’t deductible, and you’ll need to account for that by either amending back taxes, or –an easier route they allow—adding the amount you deducted back into your current return.

If you’re an actor and employed for 27 weeks or more, it’s counts as 52 weeks that year toward qualifying for the moving expense deduction.

For example, if the new state doesn’t tax capital gains and your current state does, it would make sense to wait until you move to sell profitable investments. Finally, if you’re dodging creditors and about to inherit millions in IRAs, do it in Arizona, Connecticut, or Florida!

The Adoption Credit is $12,970 for tax year 2013 and $13,190 for 2014, but as it was in 2012 and going forward the Adoption Credit is no longer a refundable credit, meaning you can only use the credit against your tax liability and cannot get a massive refund as in prior years. Using the Adoption Credit requires filing IRS taxes by paper.

The Kiddie Tax now affects dependant children up to age 18, up to 24 if a full-time student (full time for any part of five months or more). If they have unearned income (interest, dividends, etc.) over $1,000, they’ll owe income taxes on the amounts over $1,000 at the parents’ rate. If that’s the only income they’ve earned, the parents can elect to claim it on Form 8814, so the child won’t have to file as well. Also, if your child works, but will make less than $6,100 in wages for the year, be sure to put “exempt” on their Federal W-4, so you won’t have to file just to get a refund. If she or he is self-employed, however, that threshold drops to $400. States start charging income tax at varying levels. For example: MO at $1,200 and KS at $3,000.

The Gift Tax Exemption is the amount you can give tax-free, or receive without the giver incurring taxes. The exemption is $14,000/person/year, which means a couple could give another couple $56,000 per year. By using the five-year averaging plan, an up-front gift could be up to $70,000 per person, tax-free. A couple could give a couple up to $280,000, provided nothing is given the next four years. Note: I do not advocate giving or receiving the full amount, as that could make small things like lunch or birthday cards taxable. A better strategy is to aim for a few hundred under the limit. Be sure to cash the check by Dec. 31. Loophole: paying for medical or educational expenses are not affected by these limits, if paid directly to the school or the health provider. It’s called the “Med-Ed” exception.

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  My parents’ names are on the mortgage, but I pay the bills each month. Can I deduct the taxes and interest?
  

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  I provide support for my parent. Can I deduct them as a dependent?
  

When it comes to you and education (with or without kids), it breaks down into four categories: saving, spending, deducting, and repaying.

This includes Coverdells and 529 plans, essentially tax-favored savings plans for education. In general, Coverdells are best for grade school and high school, 529s for college funds. Here’s a general guideline highlighting the main differences:

	Coverdell	529 Plan
Contributions Limit/Yr	$2,000	Gift Tax limits
Contributor Income Limit	$110,000/person	No limit
Expenditures	Kindergarten on	Post-high school only
Time Limit	Ends@18;Used by 30	No age limit
Deductible?	No	Yes, most states
Investment Choices	Any IRA-type	States offer menu
Investment Changes	Any time	Once a year
Grow Tax-Deferred	Yes	Yes
Annual Deadline	April 15	Usually Dec 31
Purchase Supplies	From Any Vendor	From School Only

Generally, funds contributed within one year of filing for bankruptcy are not exempt from creditors’ claims, and monies contributed more than one year and less than two are only protected up to $5,000, although your particular state may offer greater protection.

If you’re thinking about selling appreciated securities to pay for someone’s education, consider ‘gifting’ those securities to the student if they are in a lower tax bracket than you.

One (relatively tiny) downside: currently, student financial aid (grants, scholarships, etc.) is reduced by 5.64% of the student’s account balance per year. If the student has $10,000 in her 529 plan, the financial aid package will be $564 less that year than otherwise. Still, a great idea.

If you have education expenditures, you may be eligible for either the American Opportunity Credit or the Lifetime Learning Credit. Here’s a thumbnail view of the main differences:

Since the tuition and other expenditures were deductible the year they were incurred, only the interest is deductible each year thereafter. You should receive a 1098-T every year stating your interest paid, and that number CAN include room and board expenses.

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  I pay my child’s student loan payments. Can I deduct the interest?
  

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  My ex and I alternate deducting our offspring. What do we have to do?