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Will your Teen's Summer Job Affect Your Taxes?

Author: Jenny Shilling

Summer is almost over, and with its end comes the end of summer jobs.  Having received paychecks for the first time was probably very exciting for your teen, until he or she learned just how much they would have to pay in taxes.  How much did your teen earn? Does the summer employment affect whether or not you can claim your teen as a dependent? Are there any child related tax credits you might lose because of their employment?

Many things change when your children start working. Let's look at the tax impact since those are clearer and certainly more readily explainable than other changes with our teenagers.

1. Filing Requirments. There is a minimum filing requirement. Dependent children have to file a tax return if they earned income of more than $6,200.  There are also other filing requirements based on gross income, which include items such as dividends and interest.
2. Do I claim their income? Your teen is required to file his or her own taxes if the child is working or receiving income other than interest and dividends.
3. Teens Owing Taxes? A good rule of thumb for your working child is to claim zero exemptions on their W-4 to ensure they have enough taxes withheld so they don't owe money to the IRS come tax time.
4. Still a Dependent? Your dependent child can have any amount of income and still be claimed as a dependent as long as they do not provide more than half their own support: gifts, entertainment, food, shelter, clothing, purchasing a vehicle, maintaining a vehicle, other forms of transportation and school expenses.  If your child can be claimed as a dependent on your tax return, they cannot claim their own exemption.
5. Child Tax Credit? Each dependent child under the age of 17 can qualify you for the $1,000 per child tax credit. The credit is available to you even if your child is working and paying taxes on their income.

For questions regarding your tax return, or your child filing for the first time, please contact a qualified tax professional.  The specialists at The Tax Office, Inc., are availble to field your questions.  Contact us for a no cost, no obligation discussion of your tax situation.

Married Filing Joint or Married Filing Separately - Which is the Best Choice?

Author: Jenny Shilling

The federal tax code, as you may know, gives benefits to those who file as "Married Filing Joint."  With the recent changes regarding same-sex marriages, it seems important that we discuss your filing status and how it can affect your taxes.

Under federal law, if you are legally married you have the choice of filling in one of two ways:  Married Filing Joint or Married Filing Separately.  For Federal tax purposes, you are considered married if on the last day of the year you are married and living together. This filing status includes common law marriages that are recognized in the state where you now live or in the state where the common law marriage began. Even if you are living apart, on the last day of the year you are considered married if there is no legal decree of divorce or separate maintenance. If you are divorced under a final decree by the last day of the year, you are considered unmarried for the whole year.

If you should choose to file as Married Filing Separately (MFS) there are a few  limitations that you may wish to consider:

Married Filing Separately (MFS) taxpayers may not be eligible to claim the following tax benefits:

• Deductions of tuition and fees
• Deduction of student loan interest
• Tax-free exclusions of US bond interest
• Tax-free exclusions of Social Security Benefits
• Credit for the Elderly and Disabled
• Child and Dependent Care Credit
• Earned Income Credit
• Education Credits

Other penalties/restrictions:

• When filing separately taxpayers have a much lower income phase-out range for IRA deductions.
• Both spouses must claim the standard deduction, or both must itemize their deductions. You cannot claim the standard deduction if the your spouse is itemizing.
• This filing status generally pays more in tax of all the filing statuses.

Filing status determines which standard deduction amount and which tax rates are used when calculating a person's federal income tax for the year. For 2014, a person who files as married filing separately can claim a standard deduction amount of $6,200.

Living in a community property state has its effects upon your taxes as well.  Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. If you file separate returns in a community property state, you and your spouse must each report half of your combined community income and deductions in addition to your separate income and deductions. Each of you are required to complete and attach Form 8958 to your Form 1040 showing how you figured the amount you are reporting on your return. Be sure to list only your share of the income and deductions on the appropriate lines of your separate tax returns (wages, interest, dividends, etc.).

Should you have questions regarding your taxes or your filing status, The Tax Office, Inc. will gladly give assistance.  Our tax specialists are available by phone or email. Contact us today for a no cost, no obligation discussion of your tax status.

5 Things to Consider After Divorce

Author: Jenny Shilling

When you were married it was supposed to last forever.  Sometimes "Happily Ever After" just isn't in the cards.  When your marriage doesn't last, there are many tax implications for both parties involved.  Living in a community property state can also make your taxes more complex.  Here are 5 things you should consider after your divorce is finalized.

1. Claiming your children as dependents. Deciding which parent will claim your children is critical.  After 2009, a parent must relinquish their claim for a tax exemption by filing IRS Form 8332.  This should not be taken lightly.  The parent who is able to claim a child as their dependent receives a deduction of $3,900 on their tax return. A tax payer is able to apply this deduction for all children living at home between the ages of 6 months and 19 years, or 24 if the child is a full-time college student.
2. Your new filing status.  When you were married you had the ability to choose between two filing statuses, Married Filing Joint (MFJ) or Married Filing Separately (MFS).  When your divorce is finalized your filing status reverts back to Single status.  The ability to file as Head of Household is a possibility if you have been living apart from your spouse for 6 weeks and contribute more than half of the money to support the household. Being able to file as Head of Household can bring about bigger tax savings, so review your situation–or have an experienced, qualified tax professional review your situation–carefully. If you are uncertain about what your filing status is, the IRS provides a handy questionnaire.
3. Receiving or Paying Alimony. While receiving alimony may be a benefit to a spouse who is not working, looking for work, or who makes less than their former spouse it is important to remember than alimony is taxable income to the recipient. Increasing your income may also have an effect upon your tax bracket and your tax liability.
4. Divvying up your Assets. Certain assets bring with them certain tradeoffs. If you own your home, a decision must be made concerning selling the home or receiving it as part of the divorce settlement.  If the house is sold, any gain must be divide in half between you. If the house is received as part of the divorce settlement, the receivor is able to deduct the mortgage interest. Discussing how the receipt or sale of  assets will affect your tax return with a qualified tax professional will enable you to know tax benefits or disadvantages you will receive or give up.
5. Retirement. When splitting up your retirement benefits be sure to obtain a qualified domestic relations order (QDRO) in order to secure treatment of these assets as your personal retirement assets and not those of your former spouse.

Know What Your Taxes Pay For...

Author: Jenny Shilling

Every year we pay our taxes. Where does that money go and why? In 2014, as in recent years, Americans will spend more on taxes than on groceries, clothing, and shelter combined.  So what do all those weeks of work get us?

In 2014 the $3.5 trillion federal budget for 2014 can be broken down into major categories. The biggest category is Social Security and income programs, which uses 24% of the budget.  Another 17% of the budget goes to defense and related items, and 26% goes to Medicare and health programs. The other 33% of the budget pays for the following categories:

• Veterans' Benefits
• Education, Employment, Training & Social Services
• Veterans' Services
• Energy
• Agriculture
• General Government
• Administration of Justice
• Community & Regional Development
• International Affairs 
• General Science, Space, & Technology
• Income Security
• Federal Civilian & Military Retirement
• Transportation
• National Resources & the Environment
• Income Security
• Health

Are taxes one of your biggest budget items? If so, you should take steps to make sure you’re managing your overall tax bill. Please consult a qualified tax professional for specific information regarding your individual situation. 

The Tax Office, Inc., works with you to compile your records and file your taxes.  If there are any questions we can answer regarding how your tax money is used, or taxes, please contact us. Our tax specialists are happy to assist with any tax related matters.

Prove Your Deduction Claim When the IRS Comes Calling.

Author: Jenny Shilling

Keeping good records is critical. Should the IRS come calling, you will have the documentation you need to prove that your deductions are correct.  Keeping proper records will also make your qualified tax professional very happy, as it makes their job a little easier.  Expenses that are "ordinary and necessary" can be deducted if you have the correct documentation.  Here are 4 tips for what constitutes correct documentation:

1. Cancelled Checks - A canceled check can be used as proof of payment if it has the name of the payee and shows the cancellation on the back. The IRS will also accept digital images of your checks if your cancelled checks are not returned to you.
2. Credit Cards, Debit Cards & Electronic Funds Transfers - Your credit card statement must shows the amount of the charge, the transaction date, and the name of the payee to be acceptible proof.
3. Invoices - You must have an invoice or some other form of documentation showing what you purchased. Canceled checks, credit/debit card statements, and records of electronic funds transfers only provide proof that you made a purchase.
4. Cash register receipts. If you receive a receipt with no details of the items purchased, write a description of the items on the slip. To prevent deterioration of cash register receipts, consider using your smart phone and a record keeping app to save proof of those receipts.

When gathering your documentation, be sure to indicate the business reason for your purchase on the invoice or receipt so you’ll be prepared for any questions from the IRS. Keeping your documentation stored in the cloud makes organization easier. With all of the records easily accessible from one location, they can be uploaded or sent to your qualified tax preparer through the use of email or portal access.

The Tax Office, Inc., works with you to compile your records.  If there are any questions we can answer regarding record keeping, storage or taxes, please contact us. Our tax specialists are happy to assist with any tax related matters.

Know Which Records to Keep

Author: Jenny Shilling

Keeping accurate records for your tax purposes is a must.  Every year, taxpayers go through the irritating task of gathering the information needed to file their federal income tax return. Once the information has been gathered together, what happens to it? Do you file it amidst your other years' tax information? Do you keep each year separate? How long do you store your records before disposing of them?

When collecting records for your tax return, the "Must-Haves" include:

• W2 forms from all employers.
• If you received a refund of state or local income taxes you need to file a form 1090G,.
• All 1099 Forms received.
• Receipts for itemized deductions.
• Records and receipts for any other income or expense that might affect your federal income tax liability.

What to Keep to Record Your Expenses?

If you are able to deduct travel, entertainment, transportation, or charitable gifts, proof of your expenses ais required.  Examples of acceptable proof include receipts, canceled checks, bills, or paid invoices that support all claims.

Generally, keeping a complete written record of all expenses to be claimed on an income tax return is helpful, using the following four categories:

• Amount:  the actual cost of the expense
• Time:  a written record of the dates you traveled on business or when clients were entertained.  If local travel is involved, the dates of car rentals, train tickets, or taxi fare.
• Destination:  the name of the city or town traveled to, the address of the restaurant, or the place of entertainment.  In the case of a gift, keep a written description of the gift.
• Business Purpose:  a written log of the purpose of the business expense, as well as the professional relationships of all involved.

When donating to charity, what records do I need?

As evidence of your charitable donation, the following options are available:

• Bank Records:  includes canceled checks, credit card statements, or a  bank or credit union statement showing the name of the charity, date, and amount of donation.  Your credit card statements need to show the transaction posting date as well as the name of the charity.
• Written Communication:  information received from the charity must show the name of the organization, date, and contribution amount.
• Payroll Deductions:  if you wish to deduct a donation made via regular payroll deductions, you will need to retain your pay stub, IRS Form W-2, pledge card, or other documents provided by their employer that shows the charity's name, date, and the amount of the donation.

The IRS requirements for charitable donations no longer allow written logs, diaries, or notes made by the taxpayer at the time of donation. 

Why should I keep accurate tax records?

Your tax records can help identify the exact source of all income. Your tax records can help you keep track of your deductible expenses. Your tax records are also necessary for filing a tax return.  In the case of an audit, your accurate records can help you prove your case.

The kinds of records to maintain include:

• Proof of Income:  include bank and brokerage statements, all Forms W-2, all Forms 1099, and Form K-1 for individuals involved with a partnership and / or a Subchapter S corporation.
• Investment Gains and Losses:  statements received from mutual funds and brokerage houses, all Forms 1099, and Form 2439 (Notice to Shareholder of Undistributed Long-Term Capital Gains).
• Deductible Expenses:  all written documentation received from charities, canceled checks, receipts, and invoices.
• Home / Housing Costs:  keep receipts that can be used to document  improvements made to your home, insurance records, and any closing statements you have regarding the sale or refinancing of your house. 
• Cash, Credit, or Debit Cards:  amounts paid, the payee, as well as the dates of all payments.
• Checks / Electronic Funds:  in addition to the above-mentioned information for cash, you need to record the check numbers and the dates these transactions were posted to bank accounts.

You should also keep records for the following expenses:  alimony paid, casualty and theft losses, child care expenses, charitable contributions, education expenses, un-reimbursed business expenses, gambling winnings or losses, retirement account contributions, mortgage interest paid, moving expenses, pensions / annuity payments, taxes paid, and tips received.

How long should I keep my tax records?

The IRS believes that you need to keep your tax records for as long as necessary to be able to prove a claim on your tax return. As a general rule, you are advised to keep a copy of your records for a minimum of seven (7) years. Although there are a few types here and there that are 1 year or 3 years.  It's better to just keep them all for 7.

How can I simplify my record keeping?

Using your smartphone with record keeping apps and a scanner for receipts and invoices will make keeping and storing your records easier.  A scanned form takes up less space than storing boxes of paper records.  Also, all of the records are easily accessible from one location, and can be uploaded or sent to your qualified tax preparer through the use of email or portal access. This can be especially helpful to paperless companies and you will be in no danger of losing the original copies.

If you have any questions, regarding your taxes, or your documents. The Tax Office, Inc., is here to help. We LOVE keeping accurate records, and so should you!

Manage Your Money Ahead of Time

Author: Jenny Shilling

While it's still only July, it's never too early to be prepared.  School will be starting faster than you think.  August is right around the corner; are all your ducks in a row?  The costs involved with your college education are not going to go down at all. They are simply going to increase steadily as your time spent at the institution progresses. Do you have a plan in place to cover the increase in costs? While you are spending your time studying, there isn't much left over for bringing in the cash.  What this usually means for students is DEBT, and lots of it.  However, with some money management tips, you may be able to save thousands of dollars over the course of your university experience—dollars you won’t be paying interest on when you’re 35.

1. Submit a FAFSA. A Federal Application for Student Aid (FAFSA) provides access to Pell Grants and subsidized student loans that can make college affordable for almost anyone. Be sure to mark the box indicating that your parents are not giving you assistance for college - if they are not assisting you.
   
   If you are working a part time job, you can generally qualify for $5,500 a year in Pell Grants, along with $10,000 in yearly subsidized, low-interest student loans—loans that don’t even start accruing interest until you graduate.
2. Community Colleges: If you are planning on graduating from a 4 year university, it is in your best interest to begin your studies at a local community college. You will be able to take your general education classes for less cost there, and then transfer to your "choice" school with only the upper division classes required for graduation.  Graduating from a community college will award you an Associates Degree. Depending on your high-school grades, beginning at the community college can even better your chance at attending your 4 year university.
3. Invest in a Tablet: With the convenience of a tablet / iPad, the cost of your textbooks can be greatly reduced.  Using an e-reader program, Kindle, etc., you will have the ability to download your textbooks for a fraction of the cost.  In fact, some teachers now require you to download the text rather than use a regular textbook.
4. Internships: To participate in an internship, you have to be enrolled in school. Doesn't matter which school exactly. While it looks better to the business you're applying to for the internship to be at the 4 year university, you could take classes over the summer at a less expensive school. Be aware, that there have been recent changes in the laws regarding internships.

Does the IRS Get a Share?

Author: Jenny Shilling

"Bees’ll buzz. Kids’ll blow dandelion fuzz. And I’ll be getting the yard sale set up. In summer..."  Thanks Olaf. Instead of lazing about with a drink in hand, I'll be hauling out all of the things that have collected in the garage/barn over the years, making advertisement signs, and deciding on prices, for a long weekend of sales. Just like thousands of other families across America. Yard sales can be simply a way to clear out your garage, a hobby, or a business for some people. 

Now, when you look at a yard sale, the merchandise that you are selling for the most part are items that you own for personal use: furniture, clothing, kitchen goods, music, books, etc.  When you sell these they are generally taxable as capital gains. Capital gain is the difference between the selling price and the basis (usually, the purchase price). If you do hit the yard sale jackpot and make money on the sale of your personal items or items held for investment (like a coin collection or collector’s item), you would report the gain on your federal form 1040 at Schedule D.

Now going back to the garage sale statistics. The overall average price of goods sold at a yard sales is $0.85.  Not quite the gain you were hoping for. But does that qualify as a loss? Not for federal income tax purposes.  If you try having a virtual yard sale online, the same rules apply: if you have a gain, you report it and if you have a loss, you end up with what someone is willing to pay.

Things can be a little more complex when you make yard sales more than an occasional occurence or hobby.  You can become a yard sale hobbyist if you engage in activities for fun, and not for profit. That doesn’t mean that you can’t make money, because you can,  but the IRS wants to know that profit isn’t your primary motive. 

If your sales happen more and more often, the IRS may determine that you’re running a business. This can be true even if you don’t feel like you’re running a business and even if you don’t make any money. If your activities rise to the level of a business, you would report your sales and expenses on your federal form 1040 on a Schedule C. The plus side of filing the Schedule C? If you qualify as a business and you lose money on your venture, you can claim the loss.

When it gets to that point - you've entered the world of Storage Wars, and we don't want to go there. It's much safer to simply empty your own storage facilities, make a little money on the side, and have the rest of the summer to enjoy. And rest assured, your children will soon outgrow another set of clothes in another month and you storage will replenish itself. And now you have time to browse other people's  yard sales.

Should you have any questions regarding taxes, capital gains, or if your yard sales fall into the hobby or business category, please contact the specialists at The Tax Office, Inc. Helping grow your business, hobby, or special interest is our speciality.

There is Still Time...

Author: Jenny Shilling

The filing deadling is today, April 15, 2014. If you owe taxes to the federal government, today is they last day to pay them before you start acruing penalties.  If you haven't filed your taxes by now you are still able to send in IRS form 4868 to get a six month extension to file your taxes until midnight tonight.  Thanks to the IRS e-file options, filing this form is easier than ever.

To get an extension of time to file your taxes, you need to fill out IRS form 4868 by April 15th. This form requires specific information including your name, social security number, your spouse's name and ssn, address, and income information.  This form is available from the IRS website.

IRS Form 4868 does not extend your time to pay the IRS.  It only provides an extension of time to file your tax return.  If you owe the IRS taxes, you must make your payment before April 15th or you will begin to accrue penalties at 0.5% per month or part of a month on April 16, 2014.

There are times when special circumstances grant you an automatic extension to filing your tax return. If you are a U.S. citizen or resident alien and on April 15th you are:

• Living outside the U.S. and Puerto Rico and your main place of business or post of duty is outside the U.S. and Puerto Rico; or

• On duty outside the U.S. and Puerto Rico for military or naval service.

If you qualify for these special circumstances you have until June 16th to file your tax return.  You must include a statement that explains your qualification with your tax return.

The deadline for filing tax returns and paying taxes is automatically extended if:

• You serve in the Armed Forces in a combat zone or you have qualifying service outside of a combat zone; or
• You serve in the Armed Forces on deployment outside the U.S. away from your permanent duty station while participating in a contingency operation.

Your deadline is extended for 180 days past the later of:

• The last day you are in a combat zone or serving in a contingency operation; or
• The last day of any continuous qualified hospitalization for a service injury from a combat zone or contingency operation.

Proactive Protection Can Save You More Than You Think!

Author: Jenny Shilling

Everyone knows you have to store your tax records in a safe place. But how do you keep them? You store them in a box in a back room somewhere, right? What happens if disaster strikes? Fire or flood wipes out your house or storage facility and all of your tax records get wiped out in one fell swoop. And, just to make matters worse, the IRS comes knocking and wants to audit your records...

Luckily, this situation doesn't happen often. For the few that it does happen to, there are ways to repair the situation.  When your records are destroyed or missing, the IRS regulations allow you to "substantiate a deduction by reasonable reconstruction of your expenditures or use." What this means is that you have a chance to reconstruct your records which is a very time consuming and expensive task.  There are very simple and less expensive ways to avoid this:

1. Invest in fire and water-proof filing cabinets to store your tax records.
2. Purchase a scanner or scanning app for your smartphone and store your records in the cloud or offsite. You can keep backup copies of your information this way.

While you probably won't get all of your original deductions with a reconstruction of your tax records it's your only option. 

At the Tax Office, Inc., we are a paperless office and scan all paperwork as it comes in and reccomend that you do the same. If there are any questions we can answer regarding record keeping, storage or taxes, please contact us. Our tax specialists are happy to assist with any tax related matters.