Don’t Sweat, Just File!

Missing the filing deadline does not automatically mean that you will be hit with penalties and interest. Interest and penalties only apply when there is tax due. However, a taxpayer can lose a refund due if they wait more than three years to file a return.

A majority of taxpayers are subject to withholding through their employer, and the withholding amount period estimates how much taxes will be due at the end of the period. Often, people have a refund at the end of the period because they paid in more taxes than they owe at the end of the year. If a taxpayer is due a refund and files late, there is no penalty or interest because there is no tax due.

However, if a taxpayer does owe at the end of the year, they should file even if they are not able to pay. The failure to file penalty is 5% of tax due per month up to 25%. So if a person has a tax bill of $3000, doesn’t file buy April 15, and isn’t able to pay, they should still file their return as soon as possible in order to save $150 a month in failure to file penalties. Further, if a taxpayer doesn’t file with 60 days of the due date, the minimum penalty is the smaller of $135 or 100% of the tax due.   The failure to pay penalty is .5% per month up to 25% and can be further reduced with a payment plan.

Regardless of the reason for not filing on time, a taxpayer should file as soon as possible. There is no statute of limitation on unfiled returns, so the IRS can collect on unfiled returns indefinitely! Contact Tax Relaxer for specific advice on unfiled returns.

The post I Missed the Filing Deadline! Now What? appeared first on The Tax Relaxer.

Don’t Let the Tail Wag the Dog Pig

You often hear of people saying that you should or should do something “because you get a tax deduction.” Changing your normal course of action just because a tax incentive is usually not a good idea. One can point to the 10% tax credit on home purchases in 2008. Home prices fell on average a total of 20% over the next 3 years and NOT taking of advantage of the tax credit could have saved a purchaser thousands on the price of a house.

There are a few tax breaks that are difficult to take full advantage and typically, modifying your course of action will not yield any benefit. We will assume a single individual making $40,000/yr. Below are a few examples:

Medical expenses – Medical expenses are deductible when they surpass 10% of (Adjust Gross Income) AGI and only when an individual itemizes. For our example, our single person would not only need to pay more than $4000 in medical bills for the year, he would need an additional $5950 in itemized deductions (mortgage interest, state sales tax, property tax) in order to receive a tax benefit from the medical bills. Often the amount paid in medical bills does not produce a tax benefit except in the case of extraordinarily costly procedures.

Hobby expenses  – Trying to deduct expenses from a hobby is a difficult task unless there are a lot of expenses to claim. Similar to medical expenses, hobby expenses must first surpass an AGI amount, this time 2%, and a taxpayer must itemize on their return. For our example, the taxpayer must incur about $800 in expenses before being able to take deductions on an itemized return. You can only deduct hobby expenses up to hobby income received, so you can never show a “hobby loss”. In reality, the taxpayer would be better off cutting expense in order to make his hobby more viable.

Unreimbursed Business Expenses – Unreimbursed business expenses like mileage, meals, and accommodations can provide a tax benefit but only when expenses surpass 2% of AGI and only when an individual itemizes. An employee would have to spend about $800 out-of-pocket before getting a tax benefit, which is not a very attractive situation. A tax payer would be much better off getting reimbursed for business expenses.

At Tax Relaxer, we understand and explain the differences in tax deductions. Let us know if we can help this tax season!

The post Difficult Tax Deductions appeared first on The Tax Relaxer.

Tax Court

Tax Preparation software like TurboTax or TaxAct can be thought of as a tool for individual taxpayers. Like any tool, the tax preparation software can produce fine work or can produce a complete mess. Just as a good carpenter never blames his tools, a taxpayer should never blame their software.

The Tax Courts determined that attempting to blame tax software for underreporting income and negligence penalties is not a valid defense. The courts point to two reasons. First, a taxpayer is required to know the law when filing a tax return; ignorance is no defense. Even though the tax code has become more difficult to understand over the years, a taxpayer is required to know the law and know what they are doing when using the software. Second, the tax software has no control over the inputs of the taxpayer enters into its system. If a taxpayer is going to enter only half the income they actually receive in a year, the tax software cannot be at fault for calculating off the bad information. Garbage In, Garbage Out (GIGO) as software creators call it.

Grossly understating the amount of tax due will incur interest for the months the tax was outstanding and will incur a 20% negligence penalty on top of the tax due.

The post The TurboTax Defense appeared first on The Tax Relaxer.

Capital Gains Tax

What are the effects of moving between the 10%, 15%, 25% and 28% marginal tax brackets? The answer, like most questions on tax, is that it depends. Different levels of income and family situations dictate the different level of income taxes paid. There is a difference to be aware of when moving from the 15% tax bracket to the 25% tax bracket if you have capital gains and dividends.

A capital gain is the positive difference between the purchase price of an asset, like a stock, house, or car, and the selling price. If you were fortunate enough to purchase $5,000 of Apple Inc. (AAPL) in late 2009 at about $210/share and sold it in late 2012 for about $510/share for $12,000, the $7,000 difference is a capital gain. The gain is typically taxed at 15% or 20%. However, when an individual or couple is below certain income levels, the gain can be tax-free.

For 2012, a couple making $70,000 in ordinary income or less can benefit from the $7,000 gain without paying any taxes. Here is how:

The $70,000 income is increased by the $7,000 gain for a total income of $77,000. The $77,000 is then reduced by the standard deduction of $11,900 and two personal exemptions at $3,800 each for a total taxable income of $57,500. The $57,000 is under the $70,700 marginal tax limit, therefore, the entire $7,000 gain is not taxed. Further, the couple could have an additional $13,200 in capital gains before the gains will be taxed at 15%.

It is important to note that when capital gains trigger a move to a higher tax bracket, only to amount over the marginal limit is taxed at capital gains rate. In this case, if the couple had $25,200 in capital gains, only the last $5,000 would be taxed at 15% as the last $5,000 are in the 25% tax bracket. The couple could save on the tax by timing sales of certain assets.

The Wall Street Journal recently wrote about the complexity of capital gains in greater detail.

At Tax Relaxer, we are here to help! Contact us for more information on how capital gains will affect you!

Arek

The post Moving Between Marginal Tax Brackets appeared first on The Tax Relaxer.

1040EZ

Thinking about Free 1040EZ through a national chain? Think again!

Many national chains will file a form 1040EZ for free as a service to customers but will always
try to sneak in hidden charges. The most common hidden charge is a fee to file a state return that
can cost upwards of $40 to file based off the information on the 1040EZ. Even worse, a few
situations will make a taxpayer file a form 1040 vs. a 1040EZ. Did you contribute to a retirement
fund? Are you claiming credits for attending college? Say goodbye to the free 1040EZ and hello
to tax preparation fees that can run more than $200.

Form 1040EZ is a relatively straight-forward form, but still keeps the complexity of the Internal
Revenue Code. The form 1040EZ is a one-page form but the instructions to it are 46 pages long!
There is nothing “EZ” about that!

Tax Relaxer offers transparent quotes and quick turnaround based on your needs! Call or email
for a quote today.

Arek

The post Free 1040EZ Myth appeared first on The Tax Relaxer.

Itemized Deductions

Do you own a home or give to charity in Oshkosh or the Fox Valley?  If so, timing certain payments can save you hundreds of dollars in taxes by grouping your deductions in certain calendar years. Tax Relaxer is available to help you maximize your deductions.

You may already know that you receive a tax deduction for paying real estate taxes, mortgage interest, and contributing to certain charities, but timing these payments can make all the difference. A well-known tax strategy called grouping deductions can be employed to create additional deductions just by knowing the tax code. Below is a simplified example of this strategy:

A homeowner makes $50,000/yr and contributes $1,000/yr to the Oshkosh Area Humane Society. In addition, he pays $2,500/yr in mortgage interest and $3,000/yr in property taxes. In 2013 he can pay the amounts each year with no tax planning and would itemize his deductions to total $6,500. He would contribute the same amounts in 2014 and itemize his deductions to the same $6,500.

With Tax Relaxer’s guidance, the homeowner mentioned would be able to create an additional $3,600 dollars in deductions by grouping payments.

The first step is to plan when to pay your real estate tax payment. In 2013, the homeowner would normally pay property taxes for 2012- often in the first few months of 2013. Then, rather than paying 2013 taxes in 2014, the homeowner would pay the real estate taxes in 2013, effectively paying $6,000 in property taxes for the 2013 calendar year. In addition, by donating $2,000 during 2013 and not splitting the contribution by calendar year, the homeowner creates $2,000 in deductions for 2013. In total, the homeowner has $6,000 in real estate tax deductions, $2,000 in charitable contribution, and $2,500 in mortgage interest for a total of $10,500 in federal tax deductions.

The following year, the home owner would take the standard deduction at $6,100 because he would not have enough deductions to itemize by design. The only itemized deduction he would have is mortgage interest of $2,500, well below the $6,100 standard deduction. The ending result is $16,600 in total deductions. Without planning and itemizing in both 2013 and 2014, the homeowner would have $13,000 in total deductions. The difference is $3,600 and may not seem significant. However, the additional $3,600 in deductions can translate to an extra $500 – $750 in tax refunds at the end of the year! 

Contact Tax Relaxer to see if you how can employ the strategy above.

Arek

The post Tax Strategy – Itemized Deduction Grouping appeared first on The Tax Relaxer.

Home Office

If you are like most Oshkosh or Fox Valley business owners, you may have taken a deduction for your home office or for an area of your house used in business. Also, you may be familiar with the 43-line Form 8829, the form used to calculate an allowable home office deduction. The form not only asks you for the square footage of your home and square footage your office, but also the value of your home and utilities in order to calculate an allowable deduction. The form is a record-keeping nightmare. Also, a common rumor is that a home office deduction will increase your chances of an audit.

There is good news released by the IRS for tax year 2013. The record-keeping and partial expensing of utilities can go away with a Home Office Deduction Safe Harbor recently released. The calculation is simple: multiply the square footage of the office by $5 and take the deduction capped at $1500. Any home mortgage interest and real estate taxes that were associated with the home office deduction can be taken regularly on your Schedule A – Itemized Deduction.

The amount may be more or less than the calculated expense. In terms of ease, the hours saved substantiating expenses may well be worth the reduced deduction.

Arek

The post Home Office Safe Harbor Deduction appeared first on The Tax Relaxer.

View of Lake Winnebago from the Observation Tower at High Cliff State Park

The Fiscal Cliff

This past summer, my wife Jamie and I visited High Cliff State Park. The cost of admission was $7. I’m ashamed to say I grew tired climbing the path to the 40-foot observation tower at the vantage point of the cliff.   From the observation tower, we could see the cities of Appleton, Oshkosh, Neenah, Menasha and Kaukauna. We also had a great view of Lake Winnebago.

For the average American, the tax hikes mandated by the fiscal cliff will cost more than the admission cost of High Cliff State Park, and while High Cliff delivered on its promise of a wonderful view, the fiscal cliff gives no promise of a brighter economic future.

The reason there is so much attention to the fiscal cliff is because of the irresponsibility of congress to create a budget.   Many “Bush Era” tax cuts enacted in 2001 and 2003 were set to expire in 2010. Not wanting to be the bad guy, congress has kicked the can down the road each year since.

To appease those who believe government spending and party politics have gotten out of hand, congress set up automatic spending cuts to go into effect on January 2, 2013 to act as a punishment ONLY if a compromise was not put in place before then. To date (November 24, 2012), no compromise has been made.

There is no single change set in place that has everyone talking; rather a series of smaller “fires” that are all adding up to something much larger.  There are quite a few tax hikes coming in 2013 that may affect the average American:

1. Income tax rates will go back to 2001 levels, or an approximate 3% hike for all.
2. Payroll taxes employees pay (Social Security) will rise from 4.2% to 6.2% of each pay check.
3. Capital gains rates will rise from 0% and 15% to 15% and 20% respectively
4. The Child Tax credit will drop to $500 per child from $1,000.
5. The standard deduction for married couples will decrease.
6. Qualified dividends will be treated as ordinary income (as opposed to the current treatment as capital gains)
7. The Child & Dependent Care Credit will go down by as much as $1,200.
8. Estate taxes are set to jump as much as 20%.

There are also spending cuts to defense, education and farm support programs starting in 2013.

Putting all this together, it makes a lot of sense why a lot of attention is getting drawn to the fiscal cliff.   The end result will most certainly be more taxes paid by the average American and spending cuts by the Federal Government.   Given the current economic climate, and lawmaker’s apparent willingness to compromise, the tax hike for the average American will more likely feel like the admission to High Cliff State Park, rather than the magnitude of those hikes mandated by the fiscal cliff.

Kevin, CPA

The post 8 Ways The Fiscal Cliff Affects You appeared first on The Tax Relaxer.

Incorporate Your Business in Wisconsin

You are incorporating your business for a couple of reasons.   Each business name has to be unique, and one way to protect the name of your business is by incorporating.   You are creating a living, breathing (okay, well maybe not breathing) entity that will limit your liability to the extent of what you put into that entity.   There are exceptions to that rule, such as committing fraud, but the general rule is, when you incorporate, you are protecting your personal assets.   To incorporate, this will cost you $170 or $130 if you file online.

Federal Employer Identification Number (FEIN)

You have to go to the Federal Government on this one, specifically the Internal Revenue Service.   You can apply online, and it is free of charge.   This is an important number, as you will need it to create a bank account in the company name.   You will also need this for income tax purposes.   You can theoretically apply for this tax number before you incorporate in the State of Wisconsin, but I would recommend against that, just in case there is trouble with incorporating and you need to use a different name.   It will create an administrative mess trying to correct the information associated with your FEIN.

Wisconsin Sales and Use Tax Permits

You will need your business to be incorporated, and have a FEIN associated with the business before you can apply for a Business Tax Number in the State of Wisconsin.   This costs $20, and it sets you up to pay sales tax to the State of Wisconsin.  

Now that you have that out of the way, all you have to do is run your business.   I’m sorry but I have to plug it.   A good CPA will make starting and running your business painless!   Good luck!

Kevin

The post Start a Retail Business in Wisconsin in 3 Steps appeared first on The Tax Relaxer.

The bulk of my work in tax return preparation is in the world (specifically the Appleton – Oshkosh area) of income tax .   I add up a taxpayer’s income, and then deduct everything I am legally able to in order to arrive at a “taxable income”.     One common theme (although not universal) is the idea that income that has already been taxed should not be taxed again.   This seems pretty straight forward, but the slippery slope of taxes can bring this down a very gray road.

……

I thought you would never ask me to provide an example (I am assuming that your curiosity had you asking something like “how can double taxation become gray?”).

I recently purchased a new cell phone.   I suppose a more accurate definition would be “smart phone” (among the sea of applications and features, it also can be used to make phone calls).   I had to pay a 5% sales tax on this phone.   Well, as those of us hopelessly trying to keep up with technology appreciate, the sales tax on this phone can accumulate to a rather large amount!   My wife and I both purchased the same phone, and combined the total came to $419.14.   Jumbled up in that figure were some phone accessories and, more relevant to this post, $19.96 sales tax.

Let’s take a step back and think about what is going on.   I was paid for my hard work by my employer.   I used a portion of that income to purchase phones; smart phones that my wife and I can’t put down for the life of us.   The State of Wisconsin sees I am doing well for myself, purchasing something that is not essential to survive (debatable), and wants a piece of the benefit, so $19.96 of my income ends up in the pocket of Uncle Sam.   At the end of the year, I’m going to report to the government the gross wages I received from my employer.   That gross figure is going to be taxed.   My $19.96 just got taxed twice!

I mentioned earlier that I make money at Tax Relaxer through finding my customers as many deductions as I can to help them arrive at the lowest “taxable income” as possible.   Shouldn’t sales tax be a deduction?   Well, the short of it is, it is, sort of.   You can choose to either deduct your state and local income tax withheld, or your total sales tax paid all year.   You get to pick.     Well, if you want to save all of your receipts, go right ahead, but the burden of proof when it comes to the IRS is on YOU and that is a hefty burden if you tried to claim sales tax rather than income tax.   That’s a lot to keep track of!

90% of the time it’s a deal that works out better for you.   We have 5% sales tax here in most of Wisconsin, but there are exceptions.   One of which is Brown County, which has an additional 0.5% to help pay for the renovations to Lambeau Field.   Let’s say you make $10 an hour working full-time.   That’s about $20,000 a year.   Assuming you didn’t monkey around with how much was withheld; you would have had about $1,000 withheld.

That’s a pretty high bar of sales tax to conquer!   I would have to go back and purchase 98 more smart phones for me to achieve that hurdle.   Unfortunately, that would cost me $20,537.86; conveniently enough, that’s just about all I made last year in this example!

Fair?   I think it’s fair.   We get double taxed on our income we use to purchase things, but the compromise more than makes up for it.   If you are a big spender, I’m sure you have larger concerns beyond taxes to worry about!

Kevin

See also: Should I pay tax from the money I get at a rummage sale?

The post Can I Deduct Sales Tax on my Tax Return? appeared first on The Tax Relaxer.