Tax Tips

Additional Medicare Tax

Additional Medicare Tax

Some taxpayers may be liable for an Additional Medicare Tax if your income exceeds certain limits. Here are six things that you should know about this tax:

  • Tax Rate.  The Additional Medicare Tax rate is 0.9 percent.
  • Income Subject to Tax.  The tax applies to the amount of certain income that is more than a threshold amount. The types of income include your Medicare wages, self-employment income and Medicare Taxrailroad retirement (RRTA) compensation. You must combine your wages and self-employment income to figure the tax.
  • Threshold Amount.  You base your threshold amount on your filing status. If you are married and file a joint return, you must combine your spouse’s wages, compensation, or self-employment income with yours. Use the combined total to determine if your income exceeds your threshold. The threshold amounts are:
Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household $200,000
Qualifying widow(er) with dependent child $200,000
  • Withholding / Estimated Tax.  Employers must withhold this tax from your wages or compensation when they pay you more than $200,000 in a calendar year. If you are self-employed you should include this tax when you figure your estimated tax liability.
  • Underpayment of Estimated Tax.  If you had too little tax withheld, or did not pay enough estimated tax, you may owe an estimated tax penalty.

If you owe this tax, file Form 8959, with your tax return. You also report any Additional Medicare Tax withheld by your employer on Form 8959.

Information from IRS Tax Tip 2015-41 was used in this blog.

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Late Filing and Late Paying Penalties

Late Filing and Late Paying Penalties

April 15 was the tax day deadline for most people. If you are due a refund there is no penalty if you file a late tax return. But if you owe tax, and you failed to file and pay on time, you will usually owe interest and penalties on the tax you pay late. You should file your tax return and pay the tax as soon as possible to stop them. Here are eight facts that you should know about these penalties.

1.    Two penalties may apply.  If you file your federalPenalties tax return late and owe tax with the return, two penalties may apply. The first is a failure-to-file penalty for late filing. The second is a failure-to-pay penalty for paying late.

2.    Penalty for late filing.  The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25 percent of your unpaid taxes.

3.    Minimum late filing penalty.  If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100 percent of the unpaid tax.

4.    Penalty for late payment.  The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.

5.    Combined penalty per month.  If the failure-to-file penalty and the failure-to-pay penalty both apply in any month, the maximum amount charged for those two penalties that month is 5 percent.

6.    File even if you can’t pay.  In most cases, the failure-to-file penalty is 10 times more than the failure-to-pay penalty. So if you can’t pay in full, you should file your tax return and pay as much as you can. Use IRS Direct Pay to pay your tax directly from your checking or savings account. You should try other options to pay, such as getting a loan or paying by debit or credit card. The IRS will work with you to help you resolve your tax debt. Most people can set up an installment agreement with the IRS using the Online Payment Agreement tool on IRS.gov.

7.    Late payment penalty may not apply.  If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.

8.    No penalty if reasonable cause.  You will not have to pay a failure-to-file or failure-to-pay penalty if you can show reasonable cause for not filing or paying on time. There is also penalty relief available for repayment of excess advance payments of the premium tax credit for 2014.

Information from IRS tax tip 2015-63 was used in this blog post.

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Tips for Filing an Amended Return

Have you found that you made an error on your federal tax return? If so, you may need to file an amended return. Here are ten tips that can help you file.

1.    Tax form to amend your return.  Use Form 1040X, 1040XAmended U.S. Individual Income Tax Return, to correct your tax return. You must file a paper Form 1040X; it can’t be e-filed.

2.    Amend to correct errors.  You should file an amended tax return to correct errors or make changes to your original tax return. For example, you should amend to change your filing status, or to correct your income, deductions or credits.

3.    Don’t amend for math errors, missing forms.  You normally don’t need to file an amended return to correct math errors. The IRS will automatically correct those for you. Also, do not file an amended return if you forgot to attach tax forms, such as a Form W-2 or a schedule. The IRS will mail you a request for them in most cases.

4.    Most taxpayers don’t need to amend to correct Form 1095-A, Health Insurance Marketplace Statement, errors.  Eligible taxpayers who filed a 2014 tax return and claimed a premium tax credit using incorrect information from either the federally-facilitated or a state-based Health Insurance Marketplace, generally do not have to file an amended return regardless of the nature of the error, even if additional taxes would be owed. The IRS may contact you to ask for a copy of your corrected Form 1095-A to verify the information.

5.    Time limit to claim a refund.  You usually have three years from the date you filed your original tax return to file Form 1040X to claim a refund. You can file it within two years from the date you paid the tax, if that date is later. That means the last day for most people to file a 2011 claim for a refund is April 15, 2015. See the Form 1040X instructions for special rules that apply to some claims.

6.    When to file for second refund.  If you are due a 1040 crumpledrefund from your original return, wait to get that refund before filing Form 1040X to claim an additional refund. Amended returns take up to 16 weeks to process. You may spend your original refund while you wait for any additional refund.

7.    Track your amended return.  You can track the status of your amended tax return three weeks after you file with ‘Where’s My Amended Return?’ This tool is on IRS.gov or by phone at 866-464-2050. It is available in English and in Spanish. The tool can track the status of an amended return for the current year and up to three years back. To use ‘Where’s My Amended Return?’ enter your taxpayer identification number, which is usually your Social Security number. You will also enter your date of birth and zip code. If you have filed amended returns for multiple years, you can check each year one at a time.
Information from IRS Tax Tip 2015-64 was used in this blog post.

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Tax Information Regarding the Child and Dependent Care Tax Credit

Tax Information regarding the Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit can reduce the taxes you pay. If you paid someone to care for a person in your household last year while you worked or looked for work, then read on for facts from the IRS about this important tax credit:

1. Child, Dependent or Spouse.  You may be able Child and Dependent Care Tax Creditto claim the credit if you paid someone to care for your child, dependent or spouse last year.

2. Work-Related Expense.  The care must have been necessary so you could work or look for work. If you are married, the care also must have been necessary so your spouse could work or look for work. This rule does not apply if your spouse was disabled or a full-time student.

3. Qualifying Person.  The care must have been for “qualifying persons.” A qualifying person can be your child under age 13. A qualifying person can also be your spouse or dependent who lived with you for more than half the year and is physically or mentally incapable of self-care.

4. Earned Income.  You must have earned income for the year, such as wages from a job. If you are married and file a joint tax return, your spouse must also have earned income. Special rules apply to a spouse who is a student or disabled.

5. Credit Percentage / Expense Limits.  The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on the amount of your income. Your allowable expenses are limited to $3,000 if you paid for the care of one qualifying person. The limit is $6,000 if you paid for the care of two or more.

6. Dependent Care Benefits.  If your employer gives Child and Dependent Care Tax Credityou dependent care benefits, special rules apply. For more on these rules see Form 2441, Child and Dependent Care Expenses.

7. Qualifying Person’s SSN.  You must include the Social Security Number of each qualifying person to claim the credit.

8. Care Provider Information.  You must include the name, address and taxpayer identification number of your care provider on your tax return.

Information from IRS Tax Tip 2015-36 was used in this blog.

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Factors Affecting IRS Audit Risk

Factors Affecting IRS Audit Risk

Ever wonder why some tax returns are audited by the Internal Revenue Service while most are ignored? Short on personnel and funding, the IRS audited only 0.86% of all individual tax returns in 2014. And the 2015 audit rate will definitely fall even lower as the agency’s resources continue to shrink. For example, funding for enforcement in the IRS’s current budget is 5% less than last year. So the odds are pretty low that your return will be picked for review.

That said, your chances of being audited or otherwise1040 Audit hearing from the IRS escalate depending upon various factors, including your income level, the types of deductions or losses claimed, the business in which you’re engaged and whether you own foreign assets. Math errors may draw IRS inquiry, but they’ll rarely lead to a full-blown exam. Although there’s no sure way to avoid an IRS audit, these 9 red flags could increase your chances of unwanted attention from the IRS.

  1. Making lots of moneyOverall individual audit rate is 1 in 116
    1. Individuals with $200k or more audit rate is 1 in 37
    2. Individuals with $1 Million or more audit rate is 1 in 13
  2. Underreporting income
  3. Taking higher than- average deductions
  4. Claiming 100% business use of a vehicle
    1. This is especially high risk when no other vehicle is available for personal use
    2. Keep detailed mileage logs with a date and purpose for every trip
    3. Actual expenses OR mileage may be deducted
  5. Writing off a hobby loss
    1. If your activity generates profit 3 out of 5 years it is considered a business and losses can be deducted
  6. Reporting large charitable deductions
  7. Running a small business
    1. Additional IRS scrutiny given to cash-intensive businesses
    2. IRS focusing away from large corporations and towards
  8. Deducting Business Meals, Travel and Entertainment
    1. Be prepared to provide records that document amounts, places, people, and purpose.
  9. Claiming the home office deduction
    1. The space must be used exclusively and regularly as your principle place of business

Information from Kiplinger’s Personal Finance Adviser May 2015 was used in this blog post. For specific questions about your audit risk, please contact us.

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Tax Deadline Tips

File on Time Even if You Can’t Pay

Do you owe more tax than you can afford to pay when you file? If so, don’t fail to take action. Make sure to file on time. That way you won’t have a penalty for filing late. Here is what to do if you can’t pay all your taxes by the due date.

  • File an Extension. An automatic six month exttAx Time Calculatorension is available for all taxpayers by filling out form 4868. This allows you to avoid IRS late-filing penalties. An extension only extends the due date for the paperwork, not the payment. If you owe money, you should estimate what the amount will be and make a payment along with your extension.
  • File on time and pay as much as you can.  You should file on time to avoid a late filing penalty. Pay as much as you can with your tax return. The more you can pay on time, the less interest and late payment penalty charges you will owe.
  • Pay online with IRS Direct Pay.  IRS Direct Pay is the latest electronic payment option available from the IRS. It allows you to schedule payments online from your checking or savings account with no additional fee and with an immediate payment confirmation. It’s, secure, easy, and much quicker than mailing in a check or money order.
  • Pay the rest of your tax as soon as you can.  If it is possible, get a loan or use a credit card to pay the balance. The interest and fees charged by a bank or credit card company may be less than the interest and penalties charged for late payment of tax. For debit or credit card options, visit IRS.gov.
  • Use the Online Payment Agreement tool.  You don’t need to wait for IRS to send you a bill to ask for an installment agreement. The best way is to use the Online Payment Agreement tool on IRS.gov. You can even set up a direct debit installment agreement. When you pay with a direct debit plan, you won’t have to write a check and mail it on time each month. And you won’t miss any payments that could mean more penalties. If you can’t use the IRS.gov tool, you can file Form 9465, Installment Agreement Request instead.
  • Don’t ignore a tax bill.  If you get a bill, don’t ignore it. The IRS may take collection action if you ignore the bill. Contact the IRS right away to talk about your options. If you face a financial hardship, the IRS will work with you.

In short, remember to file on time. Pay as much as you can by the tax deadline. Pay the rest as soon as you can.

Information from IRS tax tip 2015-53 was used in this blog post.

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2014 IRA Contribution

Still Time to Make Your IRA Contribution for the 2014 Tax Year

Did you contribute to an Individual Retirement Arrangement last year? Are you thinking about contributing to your IRA now? If so, you may have questions about IRAs and your taxes. Here are some IRS tax tips about saving for retirement using an IRA.

  • Age rules.  You must be under age 70½ at the IRA-Contributionsend of the tax year in order to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.
  • Compensation rules.  You must have taxable compensation to contribute to an IRA. This includes income from wages and salaries and net self-employment income. It also includes tips, commissions, bonuses and alimony. If you are married and file a joint tax return, only one spouse needs to have compensation in most cases.
  • When to contribute.  You can contribute to an IRA at any time during the year. To count for 2014, you must contribute by the due date of your tax return. This does not include extensions. That means most people must contribute by April 15, 2015. If you contribute between Jan. 1 and April 15, make sure your plan sponsor applies it to the year you choose (2014 or 2015).
  • Contribution limits.  In general, the most you can contribute to your IRA for 2014 is the smaller of either your taxable compensation for the year or $5,500. If you were age 50 or older at the end of 2014, the maximum you can contribute increases to $6,500. If you contribute more than these limits, an additional tax will apply. The added tax is 6 percent of the excess amount that you contributed.
  • Taxability rules.  You normally won’t pay income tax on funds in your traditional IRA until you start taking distributions from it. Qualified distributions from a Roth IRA are tax-free.
  • Deductibility rules.  You may be able to deduct some or all of your contributions to your traditional IRA. Use the worksheets in the Form 1040A or Form 1040 instructions to figure the amount that you can deduct. You may claim the deduction on either form. You may not deduct contributions to a Roth IRA.
  • Saver’s Credit.  If you contribute to an IRA you may also qualify for the Saver’s Credit. The credit can reduce your taxes up to $2,000 if you file a joint return. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit.

Information from IRS Tax Tip 2015-50 was used in this post.

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How to Get a Copy of Your Prior Year Tax Information

How to Get a Copy of Your Prior Year Tax Information

There are many reasons you may need a copy of your tax return information from a prior year. You may need it when applying for a student loan, home mortgage or for a VISA. If you don’t have your copy, the IRS can help. It’s easy to get a free transcript from the IRS. Here are several ways for you to get what you need:

  • Tax Return Transcript.  A return transcript shows 1040most line items from your tax return just as you filed it. It also includes forms and schedules you filed. However, it does not reflect changes made to the return after you filed it. In most cases, your tax return transcript will have all the information a lender or other agency needs.
  • Tax Account Transcript.  This transcript shows any adjustments made by you or the IRS after you filed your return. It shows basic data, like marital status, type of return, adjusted gross income and taxable income.

How to Get a Transcript.  You can request transcripts online, by phone or by mail. Both types of transcripts are free of charge. They are available for the most current tax year after the IRS has processed the return. You can also get them for the past three tax years.

Order online.  Use the ‘Get Transcript’ tool available on IRS.gov. You can use this tool to confirm your identity and to immediately view and print copies of your transcript in a single session for free. The tool is available for five types of tax records: tax account transcript, tax return transcript, record of account, wage and income and verification of non-filing.

Order by phone.  Call 800-908-9946. A recorded message will guide you through the process.

Order by mail.  The easy way to order your transcript by mail is to use the “Get Transcript by Mail” online option on IRS.gov. On the other hand, you can complete and mail Form 4506T-EZ to get your tax return transcript. Use Form 4506-T to request your tax account transcript by mail.

  • How to Get a Tax Return Copy.  Actual copies of your tax returns are generally available for the current tax year and as far back as six years. The fee per copy is $50. Complete and mail Form 4506 to request a copy of your tax return. Mail your request to the IRS office listed on the form for your area.

Delivery times for online and phone orders typically take 5 to 10 days from the time the IRS receives the request. You should allow 30 days to receive a transcript ordered by mail and 75 days for copies of your tax return. You can print tax forms online at IRS.gov/forms. To get forms in the mail go to IRS.gov/orderforms to place an order.

Information from IRS Tax Tip 2015-17 was used in this blog post.

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Tax Savers for Parents

Tax Savers for Parents

Children may help reduce the amount of taxes owed for the year. If you’re a parent, here are several tax benefits you should look for when you file your federal tax return:

  • Dependents. In most cases, you can claim your child as a dependent. You can deduct $3,950 for each dependent you are entitled to claim. You must reduce this amount if your income is above certain limits.
  • Child Tax Credit. You may be able to claim thedonation page Child Tax Credit for each of your qualifying children under the age of 17. The maximum credit is $1,000 per child. If you get less than the full amount of the credit, you may be eligible for the Additional Child Tax Credit.
  • Child and Dependent Care Credit.  You may be able to claim this credit if you paid for the care of one or more qualifying persons. Dependent children under age 13 are among those who qualify. You must have paid for care so that you could work or could look for work.
  • Earned Income Tax Credit.  You may qualify for EITC if you worked but earned less than $52,427 last year. You can get up to $6,143 in EITC. You may qualify with or without children.
  • Adoption Credit.  You may be able to claim a tax credit for certain costs you paid to adopt a child.
  • Education tax credits.  An education credit can help you with the cost of higher education.  There are two credits that are available. The American Opportunity Tax Credit and the Lifetime Learning Credit may reduce the amount of tax you owe. If the credit reduces your tax to less than zero, you may get a refund. Even if you don’t owe any taxes, you still may qualify.
  • Student loan interest.  You may be able to deduct interest you paid on a qualified student loan. You can claim this benefit even if you do not itemize your deductions.
  • Self-employed health insurance deduction. If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid during the year. This may include the cost to cover your children under age 27, even if they are not your dependent.
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Affordable Care Act Tax Tips

It’s always a good idea to prepare early to file your federal income tax return.  Certain provisions of the Affordable Care Act – also known as the Health Care Law – will probably affect your federal income tax return when you file this year.

Here are five things you should know about the health care law that will help you get ready to file your tax return.

Coverage requirements

The Affordable Care Act requires that you and each member of your family have qualifying health insurance coverage for each month of the year, qualify for an exemption from the coverage requirement, or make an individual shared responsibility payment when filing your federal income tax return.

Reporting requirementsHealth Tax Credit

Most taxpayers will simply check a box on their tax return to indicate that each member of their family had qualifying health coverage for the whole year. No further action is required. Qualifying health insurance coverage includes coverage under most, but not all, types of health care coverage plans. Use the chart on IRS.gov/aca to find out if your insurance counts as qualifying coverage.

For a limited group of taxpayers -those who qualify for, or received advance payments of the premium tax credit – the health care law could affect the amount of tax refund or the amount of money they may owe when they file in 2015. Visit IRS.gov/aca to learn more about the premium tax credit.

Exemptions

You may be eligible to claim an exemption from the requirement to have coverage.  If you qualify for an exemption, you will need to complete the new IRS Form 8965, Health Coverage Exemptions, when you file your tax return.   You must apply for some exemptions through the Health Care Insurance Marketplace.  However, most of the exemptions are easily obtained from the IRS when you file your tax return. Some of the exemptions are available from either the Marketplace or the IRS.

If you receive an exemption through the Marketplace, you’ll receive an Exemption Certificate Number to include when you file your taxes. If you have applied for an exemption through the Marketplace and are still waiting for a response, you can put “pending” on your tax return where you would normally put your Exemption Certificate Number.

Individual Shared Responsibility Payment

If you do not have qualifying coverage or an exemption for each month of the year, you will need to make an individual shared responsibility payment when you file your return for choosing not to purchase coverage. Examples and information about figuring the payment are available on the IRS Calculating the Payment page.

Premium Tax Credits1095-

If you bought coverage through the Health Insurance Marketplace, you should receive Form 1095-A, Health Insurance Marketplace Statement from your Marketplace by early February. Save this form because it has important information needed to complete your tax return.

If you are expecting to receive Form 1095-A and you do not receive it by early February, contact the Marketplace where you purchased coverage.  Do not contact the IRS because IRS telephone assistors will not have access to this information.

If you benefited from advance payments of the premium tax credit, you must file a federal income tax return. You will need to reconcile those advance payments with the amount of premium tax credit you’re entitled to based on your actual income. As a result, some people may see a smaller or larger tax refund or tax liability than they were expecting.  When you file your return, you will use IRS Form 8962, Premium Tax Credit (PTC), to calculate your premium tax credit and reconcile the credit with any advance payments.

If you have additional questions regarding your specific situation and how it relates to the Affordable Care Act, please contact us.

Information from IRS issue number HCTT-2015-02 was used in this post.

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