Correct mistakes on a federal return you already filed

You can make adjustment/changes to a return you already filed. Read on and learn why, when and how to file an amended return.

How can I correct math errors which are caught in the process of processing my returns?

If you realize you got your math wrong you should hold off before amending your returns because IRS has others tax mechanisms prepared to recognize those mistakes. Chances are you will already be getting a letter from the agency, since IRS scans all tax returns for math mistakes all through the processing. The most important thing to bear in mind is that there is already a process for handling your math errors. So, you don’t have to go through the extra work of filing your amended return.”

Amended return

It refers to the return you files to correct the entries in your tax return from a previous tax year. You can use the amended tax return to-

  1. Correct errors
  2. Claim more tax benefits:

It will be helpful to file an amended return if you misreported the following-

  • dependents
  • tax credits
  • your earnings

You have to use Form 1040X to file an amended return. You can download it from the IRS website. However, you have to be careful because you can only file your amended returns to increase your tax refund within 3 years upon original filing of your returns.

I did not report all of my income and I also failed to claim all my credits. What must I do?

If you misreported your income, or made any other mistake that can change how much you owe must file an amended returns. You also have to do the same thing if you-

  • Forgot your 1099 form
  • You will change your-
  • Credits
  • Deductions
  • Filing status

Remember that the agency has matching software to spot if you have any unreported income. If you forgot to include your 1099, you might be flagged for your most feared audit.

I forgot to attach a required schedule. What should I do?

Wait for IRS to contact you because they will ask for the missing information. They will send you a notification that certain forms are missing. Be sure to follow the instructions stated in the notification.

I forgot to sign my return and realized it after I mailed it to IRS. What’s my next step?

You wait for a notification from the IRS. They will send you a notification requesting for your signature and/or that of your spouse. You have to follow the instructions written on the notification. If IRS sends back to you your tax return, do the steps below:

  • sign the return
  • mail the return to IRS

Figure 1. Steps to amend return

When to amend a tax return 

Be sure to amend your returns within 3 years after your original filing date.

What must I do if my amended return shows that I owe more taxes?

Submit your amended return within 60 days before the 3-year statute starts to run. Remember that the IRS only has 60 days to make an assessment after it receives your amended tax return.

Does an amended return which does not show a net increase in my tax trigger an extension of the 3-year statute? No.

Tips when amending your returns

  1. Check the three year rule: You can only get a refund from your amended return within three years after you filed the original return. So, if you’re filing an amended return to get an additional refund you have to meet the cut-off time. Otherwise, you won’t get a refund anymore.

It’s been three years since I filed the original return. But, I found out that I owe taxes. Does the 3-year rule apply to me? 

No. You have to pay the amended return because IRS audit can go as far back as 3 years. IRS can also audit as far as 6 years after your original filing of returns with your permission.

  1. Fill up Form 1040X. You can use it to make changes to the following forms-
  • Form 1040
  • Form 1040A
  • Form 1040EZ

2.  You have to use this form whether you-

  • Want to get a refund
  • You owe money to IRS

How to get 1040X:

  • Visit IRS website and download Form 1040X.
  • Call the IRS and request for 1040X and they will send it to you by mail.

Make a copy of the form/schedule required to be attached in the amended return: If you have another W-2 after submitting your original tax return, make a copy of that W-2 and include it in your amended return.

Read and follow the instructions on the Form 1040X. There are explanations for each line and steps you should follow. There are also breakdown of the following-

  • exemptions
  • penalties
  • special situations
  • tax credits

Mail to IRS the completed 1040X Form for each tax year in which you have to make changes to your original tax return.

 


Ways to save tax for high net worth individuals

If you are a high net worth filer, you don’t have to feel guilty when you talk about tax planning. Saving money on your taxes is not synonymous to cheating the federal government. The IRS allows anyone, regardless of income range to take advantage of different legal strategies to minimize taxes.

Here’s a discussion of bad tax strategies to avoid and the legal tax strategies for high net worth individuals.

Tax strategies you should never use

The IRS allows all legal ways to avoid taxes even with rich investors. But there are abusive strategies that can put you in jail. Here are some illegal practices to avoid:

  1. Putting up family limited partnerships: It is used by many family members to pool their family assets and transfer their shares between generations, thereby minimizing estate tax. Many families are able to structure their FLPs the legal way. But, it is one of most abused tax evasion strategies that can put you in the IRS watch list.
  2. Non-arm’s-length transactions: Buying a home or other assets from someone you know may be a great idea because the process is quicker and the price is cheaper. But, if you are going to deal with someone you have a personal or professional relationship with, you better do it as if they were made between total strangers. You can’t sell real estate for half of its market value to avoid taxes. Otherwise, the IRS will haunt you.
  3. Offshore asset trusts: There’s nothing in wrong in opening offshore accounts but if you are doing it to avoid taxes, you’re in big trouble. The post-9/11 regulations are very strict when it comes to the amount and purpose of investing in foreign bank or corporations.  You have to declare all your offshore asset during tax filing.

Legal and wise ways to reduce taxes

  1. Use a child-care reimbursement account to pay for child-care bills: Using your pre-tax dollars saves you 1/3 or more of the child-care cost. It’s because child-care reimbursement account helps you avoid paying for both of your income and Social Security taxes.
  2. Use Roth IRA or Traditional IRA: Roth IRA is one of the most amazing tax shelters in decades. But, if your Adjusted Gross Income is very high, IRS may not allow you to use this. If that happens, you can fund your Traditional IRA which is non-deductible. Although you won’t enjoy the tax-free withdrawals and upfront deductions available in Roth IRA-your earnings will accumulate overtime on a tax-deferred basis.
  3. Switch to your employer’s Roth 401(k):  While you don’t enjoy a tax break when you put your money into Roth, money that comes out of it in retirement is absolutely tax-free. On the other hand, money that comes out of your regular 401(k) is taxable.
  4. Use Tax lot matching:  This method allows you to specify the mutual fund or shares of a stock you are selling. You can save a lot of taxes when you sell your stocks with little gain or loss instead of selling gainful long-term investments.
  5. Take advantage of UTMA custodial accounts: It refers to the Uniform gift To Minors which is a great opportunity to save for their college expenses. If you own highly appreciated shares of stock you can gift it to your child. Consequently, your child can sell it and then you can report a portion of the profits at your child’s very low tax bracket.
  6. Put money in tax-favored retirement vehicles for the self-employed:  If you own a business, you can take advantage of the following:
  • Individual 401(k) s
  • Keogh plans
  • Simplified Employee Pensions (SEPs)

Why? Your money grows on tax-deferred basis while you cut your tax bill

  1. Use home office deductions:  If you use your home regularly for your business, you may qualify for deductions on your home office expenses and other costs such as-
  • home maintenance costs
  • insurance premiums
  • utility bills
  • other personal expenses related to your business
  1. Charitable donations: You can do any or all of the following to take full advantage of your charity related tax breaks-
  • Keep track of your donations for charity and include them in computing your charitable contribution deduction.
  • Give your appreciated mutual fund shares or appreciated stocks that you owned for more than 12 months instead of donating cash. Why? In computing the charitable contribution deduction, the IRS considers the fair market value of your securities on the date you gave the gift and not the amount you for paid it.
  • Set up a charitable-remainder trust because it helps you-
  1. Avoid capital gains taxes on appreciated assets
  2. Avoid taxes on appreciated assets
  3. Earn instant tax deduction
  4. Receive income for life
  5. Receive tax deductions for charitable contributions that you will give after you die

 

Talk to your trusted tax adviser for more information on minimizing taxes.

 


Should I file quarterly individual estimated tax payments?

Estimated tax refers to the periodic advance payment of your federal taxes based upon the following amounts-

  • Income you earned
  • Estimated tax liability you will incur as a result of your earnings

Are estimated taxes assessed on income which is not subject to any type of withholding? Yes, it includes the following-

  • capital gains
  • dividend income
  • interest income
  • rental income
  • self-employment income

When should I pay estimated taxes? You are usually required to pay it quarterly.

When are the interest and penalties assessed against the delinquent taxes you owe?

 It happens when the estimated taxes you paid do not amount to-

  • Less than 90% of your actual tax liability; or
  • 100% or 110% of the your prior-year liability

Note: The percentage depends on your adjusted income level

What happens if I am required to make estimated tax payments but I fail to do so by the deadline? You have to pay penalties.

How can I avoid penalties? Check whether or not you are required to make estimated tax payments.

Do you Owe Estimated Taxes?

Instances when you have to pay estimated income tax:

You are expecting to owe no less than $1,000 in income tax for the tax year; and

The amount which will be withheld from your income within the year, in addition to your refundable tax credits may be less than the minimum of the following:

  • 90% of your tax in 2012
  • 100% of your tax in 2011

I am a farmer. Is the ruling different?

If you are a farmer-

  • Your 90 percent shall be lowered to more than 66%
  • Your 100 percent shall be increased to 110 percent if you received a gross income of over $150,000 last 2011. If your filing status is married filing separately in 2012, it will be reduced to 75,000.

How can I pay my Estimated Taxes?

You have the following options:

  1. apply the amount to your estimated taxes if the IRS owes you a tax refund
  2. Fill-up the payment voucher which is included in your Form 1040-ES. Send it to IRS by mail together with your money order or check
  3. Pay electronically via the ‘Electronic Federal Tax Payment System’
  4. Use the electronic fund withdrawal method, and have the tax due debited from your account
  5. Pay via the Internet using the following-
  • Credit card
  • Debit card
  • Pay-by-phone system
  1. Complete Form W-4P to have the taxes due withheld from your wages. specify the additional amount you want your employer to withhold from you.

Using Form W-4V, you can also have the taxes due withheld from the following-

  • unemployment compensation
  • some federal government payments like-
  • social security income

Schedule of paying Estimated Taxes

You can pay estimated taxes on April 15, 2014. Or, you can also make quarterly payments on the following dates-

  • April
  • June
  • September
  • January

I am a fisherman. What should I know about estimated taxes?

If you are a commercial fisherman you have to know about the special rules relating to when you must pay estimated tax and when you should file your tax returns to avoid penalty.

You have the following options if 1/3 or more of your gross income comes from fishing:

  1. Pay your estimated tax in full by January 18. Then file Form 1040 on April 15
  2. File Form 1040 on March 1 and pay all your taxes due.

Attach Form 2210-F when filing. It is important to choose any of the options above to avoid penalty.

Household employee

It includes-

  • Babysitters
  • Gardeners
  • Housekeepers
  • Maids
  • Others working in or around private residence as employee

Do not include the following:

  • Contractors
  • Plumbers
  • Repairmen
  • other business people providing services as independent contractors

When is a person considered as household employee?

When you-

  • Control the work they perform
  • When you control how they do the work

When to withhold from your household employee:

If you are paying the following amounts to your employee:

  • $1,800 (in 2013)
  • 1,900 or more (in 2014)

If the above requisites are met, you should withhold the following amounts form the cash wages you give your household employee:

  • 6.2% for social security
  • 1.45% for Medicare taxes

am a high income earner. What must I know about estimated tax this 2014?

The tax hikes that took effect on January 1, 2014 should consider the following increase in tax rates:

 

Old tax rate 2014 tax rate
top income tax rate- 35% 39.6% rate
capital gains and dividends- 15% 20%
Obamacare tax (charged on your net investment income) Plus 3.8%0%
Medicare tax 0.9%
itemized deductions and personal exemptions(phased outs) Returned

 

Earned Income Tax Credit

If you are a low-income or middle-income filer you may be entitled to Earned Income Tax Credit and you can receive a tax refund. The tax credits can range from $487 to $6,044. EITC is also refundable. That means you may still receive the credit even if it is more than what you owe.

 

Illustration:

Paul qualified for a $1,000 Earned Income Tax Credit. If he owes $300 in taxes, he will receive a refund worth $700.

 

How can I qualify for EITC?

  1. Rules for everyone to claim EITC

You and your spouse (for married couples filing a joint return) should meet the requisites below:

1.Submit a Social Security Number  (valid for employment)

  1. Receive earned income from-
  • working for someone
  • running or owning a business
  • running or owning farm or another source
  1. Must be:
    •  U.S. citizen or resident alien all year or
    • Nonresident alien married to a U.S. citizen or resident alien. You have to-
    • file a joint return
    • choose to be treated as a resident alien

Big No’s when claiming EITC:

  • You can’t be a qualifying child of another taxpayer
  • You are not allowed to file as married filing separate
  • You cannot file Form 2555 or 2555-EZ (related to foreign earned income)
  • Investment income cannot exceed the income limits and maximum credits amounts for claiming EITC:
  • You can’t exceed the limits for earned income and Adjusted Gross Income.
  1. Other rules to meet aside from the general qualifications for EITC:

Upon meeting the general rules above, you are required to meet two other rules:

      1. Rules for workers without a qualifying child
      2. Qualifying child rules (if you have a child)

Workers without a qualifying child rules

  • You receive earned in income
  • You meet the rules for everyone
  • You and your spouse (for joint return filers) lived in US for more than six months of the tax year
  • at least age 25 but below 65(either you or your spouse must meet this age limit if filing jointly)
  • You are not a qualifying dependent of another person (or yoru spouse, if filing a joint return)
  • You meet the income levels to claim the credit

Qualifying child rules:

Five tests for qualifying child

A child meets the following qualifying child tests:

  1. Relationship test: He or she must be your

Child

  • Stepchild
  • Foster child
  • Descendant(grandchild)
  • Biological and adopted son and daughter

Relatives-

  • stepsister
  • stepbrother
  • sister
  • half sister
  • half brother
  • descendant (niece/nephew)
  • brother
  1. Age test: Your child is-
  1. A student below 24 years old at the end of the year.
  2. Permanently and totally disabled anytime during the year
  3. Below 19 years old at the end of the year.
  4. You (or your spouse) must be older than the child if he or she is not totally or permanently disabled.
  1. Residency test: Your child lived with you for more than 6 months. Exceptions for temporary absences:
  1. kidnapped children
  2. children was born or died during the year
  3. their parents are divorced

Rules on Temporary absences: Your child is considered by IRS rules to have lived with you during periods of time if your absence is due to the following:

  • Vacation
  • Military service
  • Illness
  • Education
  • Business
  1. 4. Support test: To qualify, the child did not shoulder more than 50 percent of his or her own support for the year.
  2. Joint return test: The child did not file a joint return for the year.

Exception:  If your child and his or her spouse file a joint return for the sole purpose of claiming a refund of income tax withheld or estimated tax paid.

EITC Income Limits

Earned income and Adjusted Gross income must not exceed the limits below:

For 2013-

3 or more qualifying children

-$46,227

-$51,567 (if married filing jointly)

2 qualifying children

-$43,038

-$48,378 (if married filing jointly)

1 qualifying child-

-$37,870

-$43,210 (if married filing jointly)

No qualifying children

-$14,340

– $19,680 (if married filing jointly)

Investment income limits- $3,300 or less for the tax year.

2013 Maximum credit:

2 or more qualifying children–$6,044

2 qualifying children-$5,372

1 qualifying child- $3,250

No qualifying child- $487

For 2014-

3 or more qualifying children

-$46,997

-($52,427 (if married filing jointly)

2 qualifying children

$43,756

$49,186 (if married filing jointly)

1 qualifying child-

$38,511

$43,941 (if married filing jointly)

No qualifying children

$14,590

$20,020 (if married filing jointly)

Investment income limits- $3,350 or less for the tax year.

2014 maximum credit:

2 or more qualifying children-$6,143

2 qualifying children- $5,460

1 qualifying child- $3,305

No qualifying child- $496

 

 

 

Disclaimer

All advice and articles on this site are of general nature. We absolutely do not encourage you to do any thing illegal. Before you act on any advice, you absolutely have to consult your CPA for better understanding. Laws are changing all the time and this site at times may not be update.

Again owners of this site, can not be held liable for your actions. You need to take advice from financial professionals and tax consultants who are qualified to deal with this subject better. The information given is of very general nature.

Tax write-offs for the Self-employed

If you’re self-employed, you can reduce your taxes while you boost your financial freedom.

Here are few tax-deductible expenses available to self-employed individuals:

Figure 1. Seven tax write-offs for the self-employed

Self-Employment Tax: If you are self-employed you have to pay theself-employment tax which is the employer portion of taxes on Social security and Medicare. All US taxpayers who work should pay these taxes.

IRS gives the following privileges to self-employed taxpayers to lessen the sting of taxes:

  • IRS only charges self-employment tax on your net business income. It means you are only taxed after you deduct all your business expenses.
  • Since the self-employment tax is a business expense, you can deduct it accordingly.
  • Subtract 50% of self-employment taxes from your net income.

Home Office: You can deduct home office expense if you use any workspace regularly and exclusively to carry out business. It doesn’t matter if you own it or you rent it.

But, it is important to prepare for an audit. So, you have to make sure that you can defend your home office deduction. To do this, you can make a detailed map of your workplace with its correct measurements. Sometimes, IRS requires taxpayers to present this information to get your deduction. You must also include the restroom because every office must have facilities as well.

You may deduct the following expenditures for your home office:

  • Annual home maintenance (if you use up 25% of you home, you can deduct 25% of your electric bill)
  • Mortgage or rent(business percentage)
  • Homeowners insurance
  • Property taxes
  • Utilities

Health Insurance Premiums

Requisites for eligibility:

  • Self-employed
  • Pays for own health insurance premiums
  • Eligible to participate in a plan through his/her husband/wife’s employer

You may deduct the following insurance premiums:

  • Health
  • dental
  • long-term care

Are health insurance premiums credits available to other taxpayers involved in business? No. These premiums are personal deductions and not business deductions. Only the self-employed taxpayers can avail of this tax break.

Loans and credit card interest:

Examples of tax deductible interests:

  1. Ordinary business loan you obtained from a bank
  2. Credit card interest, as long as the requisites below are met-
  • You used your credit card to make business purchases
  • Your card is a business credit card
  • You incurred interest

Internet and Phone: You can deduct the following expenseswhether or not you already claim the home office deduction:

  • Business phone
  • Fax
  • Internet expenses

How to deduct the above expenses:

  1. Deduct only the expenses which are directly connected to the conduct of your business. Is it necessary to carry out your business? If it is, then it is a qualified expense.
  2. Deduct specific costs that specifically link up to your business. If you only have one phone at home you cannot deduct its full monthly charge. You can only deduct the costs you incurred when taking or making calls related to your business.

I have a second phone and I use it exclusively for business. Can I deduct 100% of my bill? Yes.

I have an internet at home and I use it for my business. How much can I deduct from my monthly internet charge? You can only deduct your monthly internet cost in proportion to the time you spent online for your business. It could be from 25 to 50% of your time or even more.

Meals and Entertainment: Don’t you know that your meals are business entertainment expenses are deductible?

To qualify you have to-

  • Conduct business with a person
  • Entertain the said person under the following circumstances-
    • During the meal/event
    • Immediately before the meal/event
    • Immediately after the meal/event

You can deduct 50 percent of these expenses.

Examples of expenses you can deduct:

  • sporting event tickets
  • meal costs, including-
    • beverages
    • tax
    • tip
  • the cost of a golf game

How to prepare for audit: Since many people cheat in this category it is important to prepare for audit.

  1. Keep detailed records of your business activity including-
    • Date of the activity
    • How the transaction directly relates to your entertainment expense
    • The persons you transacted with
  2. Keep the receipts of your meals and entertainment expenses

Retirement Plans: The following retirement plans for the self-employed can reduce your tax bill and notch up your tax-deferred savings in the future:

  • Keogh plans
  • SEP-IRAs
  • SIMPLE IRAs
  • Solo 401(k)s

If you don’t make quite as much, you may put in to an IRA and a self-employed retirement plan to maximize your tax benefits. If you’re currently employed but your employer doesn’t offer you a retirement plan, you can take advantage of your self-employed status to maximize your IRA contribution. As a result, you can save more for your retirement.

 

 

Tax Deductions For Online Entrepreneurs

If you’re into an online business you can deduct business expenses or the cost of carrying on your business or trade.
Here are quick tips about tax breaks for your online business investments:

1) Web Design: Your website counts as advertising or the main method for your business so you can deduct all the costs related to your website exposure. It includes payment for web content, SEO, back linking and other strategies to increase online visibility.

Requirements:

1) You started developing your website after you launched your business. You can recover the money you spent before you activated you online business. But, you can deduct a maximum of $5000 for the start up costs during the first 12 months of your business operation and spread the rest over the next 15 years.

If you operate an online shop, you can deduct the ‘prior to-activation-costs’ before or after you sell it.

2) Your website is necessary for your business: You can deduct the costs you incurred when you or a contractor developed the site.

You have two tax options:

  1. Deduct the costs of developing the site on the same tax year you paid for it
  2. Follow the accrual model. It depends on how you handle the yearly accounting for your business. You can also amortize the expenses within three tax years.

Tax rules to follow when you buy a website:

You can amortize the expenses for a period of three years beginning on the first month you used it.

The costs related to your website must be –

  1. legitimate business expenses
  2. investments in your business
  • branding
  • customer relationship
  • sales channels

2) Software: IRS defines software as routines or programs used so that your computer will person the task you want. It includes the following:

  1. Documentation required to-
  • describe
  • maintain its programs
  1. Computer programs-
  • application programs
  • assembly routines
  • compilers
  • executive systems
  • monitors
  • operating systems
  • translators
  • utility programs

What’s not included in software definition:

Procedures external to the operations of computer-

  • external control procedures
  • instructions to the transcription operators

How to deduct software purchase

Two rules apply in tax deductions of software costs.

1) Purchase rules: If you buy software from a store and you use it without modifications-

You can use any of the two depreciation rules-

  • three-year rule: You can deduct 1/3 of the cost in each of the three tax years
  • Lump sum rule: You may deduct the acquisition costs of your software, every year in a lump sum.

2) Development rules: If you hire someone to customize or develop your software-

Depreciate the cost of the software over five tax years
3) Monthly Charges: IRS allows deductions for marketing or operational expenditures. These annual/monthly costs include-
·         Web hosting fees
·         Fees for your business domain name
4) Home Office: If you operate your online business from home, you may avail of the home office deduction.

Requisites:

  • Dedicate a particular part of your house for business
  • Document that you use the specific area in your home substantially for business

Car

Does your online business require trips to clients, post office and other places? You may deduct mileage using the standard rate if you are using your own car. Be sure to document it for audit.

Education

Online entrepreneurs sometimes attend continuing education seminars to keep abreast with the demands of the business. The expenses are tax-deductible and are included in the operation costs.
Depreciation: Your business equipment will depreciate overtime. You can deduct the depreciation for the following equipment:

  • computer
  • digital cameras
  • fax machines
  • printers
  • scanners

Requirements:

You can only deduct for depreciation only if-

  • You bought the product from a stranger (not your relative)
  • You limit the annual total depreciation to o $250,000
  • You use the item solely and primarily for business purposes

Other Deductible Business Expenses

These expenses are 100% deductible-

  • Utilities
  • Travel
  • Trade discounts
  • Telephone
  • Taxes
  • Supplies
  • Software
  • Small tools and equipment
  • Security
  • Salaries, wages, and other compensation
  • Rent
  • Promotion
  • Professional fees
  • Professional development and training
  • Print and copy
  • Postage
  • Pension and profit-sharing plans
  • Office expenses and supplies
  • Maintenance and repairs
  • Licenses
  • Legal fees
  • Laundry
  • Interest paid
  • Insurance
  • Factory expenses
  • Equipment rentals
  • Employee benefit programs
  • Dues and subscriptions
  • Delivery charges
  • Credit and collection fees
  • Contract labor
  • Continuing professional education
  • Consultation expenses
  • Commissions and sales expenses
  • Bank charges
  • Advertising
  • Accounting fees

Partially tax-deductible

  • Car/transportation expenses
  • Gifts: Up to $25 per person.
  • Home office
  • Meals and entertainment

 

Tax deductions for doctors

Doctors, don’t miss out on these 6 tax breaks available for you.

Business Expenses

If you are the main owner of a business, you can get business-related tax deductions. Sole proprietors, partners, or contractors must keep careful records of their business expenses (which are considered deductible)

Examples:

  • Accommodations
  • Board exam fees
  • CME expenses
  • Communication expenses
  • Licensing fees
  • Meals
  • Medical equipment
  • Office equipment and supplies
  • Travel

Does my business have to be medicine related to avail of tax breaks? No.

Charity

Although you cannot deduct the value for your time spent on charity work, donations to qualified charity are tax-deductible. These include the equivalent of goods, equipments you donated and the miles you used to drive to and from the charity of your choice. You can also include the expenses connected to donating your time.

Health Insurance

Health insurance is undoubtedly very expensive. But don’t worry because IRS allows you to pay for it with your pre-tax money. Health insurance premiums are considered as deductible business expense, as well as your contributions to your health savings account (otherwise called as the ‘stealth IRA’) which allows you to use for deductibles and co-pays.

This high-deductible health plan and stealth IRA combination may not work for all taxpayers. But, if you are healthy you can save lots of money on your premiums and taxes.

Requirements for medical, dental or long-term care insurance premiums deductions for the self-employed:

  1. You receive a net profit from your self-employment. Report this on any of the following-
  • Schedule C (Profit or Loss from Business)
  • Schedule C-EZ (Net Profit from Business)
  • Schedule F (Profit or Loss from Farming)
  1. You receive self-employment earnings as your partner reported to you on Schedule K-1 (Form 1065).
  2. You received wages reported on Form W-2 (Wage and Tax Statement), as a shareholder. You must own more than 2percent of the outstanding stock of a corporation.
  3. You use an optional method to calculate your net earnings from your self-employment on Schedule SE. It’s also known as Self-Employment Tax.

Mortgage Interest

IRS allows you to carry mortgage interest tax-friendly. Make sure that you convert loans into tax-deductible loans and loans with low rates.

Home mortgage interest refers to any interest you have to pay on a loan secured by your home.

Requirements to deduct home mortgage interest –

  1. File Form 1040
  2. Itemize deductions on Schedule A (Form 1040)
  3. The mortgage is a secured debt on a qualified home
  4. You have an ownership interest on a qualified home

Roth IRA

Though you cannot get a tax break for Backdoor Roth IRA this year, it will allow you to shelter your retirement investments from future taxes.

Compared to insurance related tax shelters insurance agents often push on you, it is a far better option when it comes to tax benefits. Why? You can put a maximum of $5000 into a non-deductible IRA for yourself and another $5000 for your spouse. After that, you can instantly convert them to an IRA. However, you must be careful because the pro-rata rule does not allow you to have traditional IRA or any other SEP-IRA. But you can get around with this by rolling your IRAs into your 401K.

Tax-deferred Retirement Plans

You can squirrel away huge tax benefits on retirement account options. Many doctors miss out on these tax deductions maybe because some only have few savings while others don’t realize just how much money they can save with huge tax benefits on retirement accounts.

How? The government is not going to tax every dollar you put into a tax-deferred retirement account this year. You can have marginal tax rate as much as 50% if you belong to the highest tax bracket, and you have large state and local income taxes. As a result, you can save 50 dollars on your tax bill for every 100 dollars you put into your retirement account. That’s pretty wise move.

For doctor contractors: Contractors paid on 1099s must contribute 20% of their income to a SEP-IRA, up to $50,000 limits. If you’re over 50, you should pay an additional “catch-up” contribution worth $5500. If you don’t earn $250,000, you might want to use a Solo 401K which allows you to contribute more than 20% of your income.

For employee paid on W-2s: Doctors who are employed may be limited to as low as $17,000 into their 401K. But, don’t worry. Several 401Ks will match you. If not, many 401Ks will allow you to self-match up to the $50,000 limit. If your 401K doesn’t, you should talk to your employer to solve this issue.

What about a defined benefit plan?

It allows doctors to shelter additional money from taxes. In some cases, you can shelter as much as another $50,000 or more.

 

 

Should the jobless file taxes?

You are obliged to pay taxes even if you are unemployed. Even severance pay and unemployment compensation are considered taxable. The truth is-it doesn’t really matter if you are unemployed or not. You have to file a tax return if your income is above the IRS income threshold for your filing status.

Why do I have to pay taxes for my unemployment compensation?

Unemployment compensation is a replacement of your wages and not a government benefit. The following unemployment benefits are considered taxable:

  • Your state unemployment insurance benefits (up to 26 weeks)
  • your extended benefits (up to an additional 13 weeks)

Unemployment compensation is not considered as earned income, which would otherwise qualify you for the Earned Income Tax Credit or the portion of the child tax credit.

Do you qualify for tax credits?

If you are unemployed, you may apply for the following tax credits:

  1. Federal Earned Income Tax Credit: Earned income refers to taxable income and wages you get from working or from certain disability payments. If you are unemployed, you may still qualify for EITC if you receive any of the following taxable earned income.

Taxable earned income-

  1. Long-term disability benefits received prior to minimum retirement age;
  2. Union strike benefits;
  3. Wages, salaries, tips, and other taxable employee pay;
  4. Net earnings from self-employment for those who are working as-
  • Minister or member of a religious order
  • Statutory employee with income
  • Owner or operator of a business or a farm

However, you may not be eligible for the EITC if you receive the following income:

Income that are not Earned Income-

  • Alimony
  • Child support
  • Interest and dividends
  • Payment received as an inmate while working in a penal institution
  • Retirement income
  • Social security
  • Unemployment benefits

What Form to use: You can use IRS Form 1099-G if you receive your unemployment benefits during the year. You can report the unemployment compensation you receive in the income section of your tax form.

  1. Child tax credit: It is available for taxpayers with a qualifying child. You can claim it in addition to the Credit for Child and Dependent Care expenses.You may be eligible for as much as $1,000 for every qualifying child below 17 years old.

Limitations - The credit is limit depends on your modified adjusted gross income. Please check where the phase out limits begins:

  • All other taxpayer: It starts at $75,000.
  • Married taxpayers

Filing a joint return: $110,000

Filing a separate return: I $55,000

III. Child and Dependent Care Credit: It is available for people who paid someone to care for their child.

Maximum limits of credit: The credit can be up to 35 percent of your qualifying expenses (it depends upon your adjusted gross income).

  1. Tax deductible receipts: If you are searching for a job,you may be able to deduct certain expenses you incur during job search, even if you do not get hired.

Publication 529, Miscellaneous Deductions explains that the following expenses can be included as deductions:

  1. Amounts for the resume submissions (e.g. cost for typing, printing and mailing copies to potential employers)
  2. Employment and outplacement agency fees
  3. Travel cost: Ordinary and necessary travel costs in looking for work in your current occupation or attending an interview.

How can I deduct my job hunting costs? You have to file a Form 1040 and Schedule A. You can add the job hunting costs as miscellaneous itemized deduction. These items are subject to 2% Adjusted Gross Income limits.

  1. Moving costs: Certain moving costs are considered as deductible if you meet the following time and distance requirements:
  • Your move has to be closely related in time to the start of your new job
  • you must have moved at least 50 miles

Use Form 3903 to calculate moving costs.

  1. Back to school deductions:You may avail of tax benefits available for going to college or taking college courses to increase your chances of employment.

What are considered as tax deductible school expenses?

According to the Treasury Regulations:

  1. The education must not be pursued to meet the minimumeducation requirement for your employment
  2. The education should not qualify you to be employed in a new trade or business.

Example: If you’re a nurse, but you decided to take up Law, your education expenses in the college of law will not qualify as deductible education expenses.

Source: http://www.irs.gov/pub/irs-pdf/p4128.pdf

 

 

 

IRS Refund – Useful Information

IRS Tax Refund Facts

Tax refund season is here, and you have many different options when receiving your refund. These include the direct deposit into 1 to 3 bank accounts, inflation indexed savings bonds and debit card arranged by independent tax preparers and traditional check.

What is tax refund?

Tax Refund refers to the return of excess amounts of the taxes you paid to the government in the past year. You can also receive tax refunds if you have fully refundable credits even if you didn’t owe taxes. Contrary to what other people think, tax refund is not a bonus from the government. It is an interest-free loan that you made to the government by paying in excess of what you owe. To avoid receiving a refund, be sure that you only have enough taxes deducted from your paycheck.

What are the IRS-approved options for receiving my income tax refund?

You have the following options:

  1. Direct deposit the refund into 1 savings or checking account: By using direct deposit, your check will not be lost or stolen. The mail man will not return it to IRS for being undeliverable. With direct deposit, you can access your refund faster than the traditional check.

 

  1. Get the refund as a paper check in your mail:It is the traditional and slowest means of receiving tax refund. Many taxpayers prefer this method due to the following reasons-
  • Ignorance of other options
  • Resistance to the use of advanced refund methods
  • Lack of trust on the security of distrust of the electronic payments
  1. Invest in U.S. Series I Savings Bonds: You can buy up to $5,000 with your refund.Simply fill out Part II of IRS form 8888. Include this form when you file your return.

 

  1. Split the refund with direct deposit: You can divide it into 2 or 3 checking/savings accounts. You can conveniently manage your money by sending a portion of your refund to an account for your current and future needs. Direct deposit is also safe and speedy.

 

How can I split the refund?

It is very easy to split your refunds. Simply follow the steps below:

  • Download IRS’ Form 8888, Allocation of Refund (plus Savings Bond Purchases)
  • Read the instructions on the form and fill it up. If you don’t want to split your refund, you can use the direct deposit line on the form to let IRS know that you want to deposit your refund into just one account.

Can a tax preparer company guarantee early tax refund?

No. Many people need their refund as soon as possible to take care of the bills. So, they choose to go to tax preparer companies like HR block and agree to pay tons of interest on refund in exchange for a quick turnaround. But, many customers are disappointed because they don’t get the refund on the promised date. Others also get in on time, but they have to suffer from exorbitant interest on refund.

There are many factors that can affect the tax refund time. These include the following:

  • Method of filing and refunds (paper filing and tradition check refund option is the slowest)
  • Accuracy of tax returns filed. Returns that require corrections or review can take a while

If you want a faster refund processing, choose e-file with direct deposit instead of paper filing. With the recent technology upgrades, IRS will issue refunds in as short as ten days (compared to the average processing time of 21 days) for those who chose e-file with direct deposit.

How to receive your refunds early

There are things you can do to speed up the processing of your tax refund. You cancheck your return before you send it. An error in entries is the major cause of delay in the processing of your tax refund.

Here are the top tax return errors you must avoid:

 

  1. Entering data on the wrong lines of the tax form
  2. Miscalculating the tax you owe based on your marital status, taxable income, credits and deductions
  3. Not entering your Social Security numbers
  4. Writing incorrect Social Security numbers

What if I don’t get my tax refund?

If you didn’t get your tax refund because you lost or destroyed your check, or it didn’t reach your account, you can file an online claim at IRS.

IRS’ “Where’s my Refund” tool can give you updates for the current tax year you filed a return. You can access your refund information within the following time-frame:

  • E-file: 24 hours after IRS acknowledged the receipt of your (e-file) return
  • Paper return: Four weeks after you filed a paper return.

irs refund

What do I need to use “Where’s my Refund” information?

You need the following-

  • Exact refund amount
  • Filing Status
  • Social Security Number