The Internal Revenue Service (IRS) is not a group you should take lightly as they have the authority to wreck havoc on your life.
One small mix-up on your tax return can cost you big.
For example, in recent years the IRS has increased its filing of levies, liens and wage garnishments. In fact, in 2010 alone, over 3 million levies were filed.
Look over this list of common ways people get in trouble with the IRS, hopefully you don’t fit any of them:
- Filing too many exemptions. An exemption gives you a major tax deduction, and some taxpayers can’t resist the temptation to report more exemptions than they’re entitled. You can only claim exemptions for yourself, a spouse, and for all “dependents.” Dependents have to meet specific criteria so make sure you follow the IRS guidelines so that you don’t mistakenly file an extra exemption. I’ll add a post in a few days to help you determine who satisfies the IRS’ criteria for dependents.
Being unaware of taxes levied for early withdrawal from certain retirement plans. If you withdraw from a retirement fund such as a 401(k) or IRA before you’re 59 1/2, you may face a 10 percent federal penalty on your investments, as well as a state penalty and an income tax on the money withdrawn.
Not paying enough taxes when self-employed. Many people who own their own business don’t know how much they have to pay in taxes. The tax structure for a self-employed person – what to pay, how to pay and what can be deducted – is decidedly complex, so it’s easy to become confused.
Gambling – Not paying taxes on winnings. It is necessary to report all gambling winnings, including winnings from lotteries, casinos and horse races, as income.
For people who are in trouble with the IRS, there are various programs available that can provide debt relief if a taxpayer qualifies. It’s best to seek the expertise from a CPA specializing in taxes, an Enrolled Agent, or a tax attorney, all of whom are approved to represent taxpayers before the IRS. In a later post, I’ll go into the differences between the three tax experts.
Until then, as always, feel free to reach out to me if you have any tax or accounting questions.
- Top tax rate is at 39.6%. Taxpayers earning in excess of $400,000 for individuals and $450,000 for married couples filing jointly.
- Medicare surtax of .9% applies to earnings in excess of $200,000 for individuals and $250,000 for married filing joint couples.
- Net Investment Income Tax from net investment income sources such as interest, dividends, capital gains, rental income, and royalty income causing a Modified Adjusted Gross Income (MAGI) of $200,000 for individuals and $250,000 for married couples
- Pease limitiations which reduce itemized deductions by 3% of the excess when your AGI exceeds $254,200 for individuals and $305,050 for married couples. The personal exemptions also begin phasing out at these thresholds.
- Don’t have health insurance and don’t qualify for the exemptions — you’ll have to pay either 1% of your taxable income or a flat $95 per uninsured adult and $47.50 per uninsured child (up to $285 per family) per month, whichever is greater. This fee (penalty, tax, or whatever you want to call it) is due with your 2014 return in April 2015. That fee increases every year to $345 in 2015 and $695 in 2016.
Home Office Deduction
- IRS introduced the new simplified method to claim the home office deduction which is equal to $5 per sq.ft. of home office space with a max at 300 sq. ft.
Defense of Marriage Act (DOMA)
- IRS will recognize all legally married couples as legally married regardless of whether they live in a jurisdiction that recognizes same-sex marriage.
Foreign Account Tax Compliance Act (FACTA)
- New FACTA deadlines — withholding on new accounts becomes effective July 1, 2014 along with new due diligence and registration requirements.
Expiring provisions, at least until Congress makes any last minute changes
- Seniors can no longer make direct monetary gifts to charities from their IRA up to $100,000 without first reporting it as income.
- Teachers lose their $250 educator related expenses deduction.
- Tuition and fees deduction up to $4,000 for qualified higher education expenses is gone.
- Energy-efficient tax credits up to $500 for installation of windows, insulation, doors, roofs, and certain water heaters and HVAC systems.
- No state income tax? The option to deduct local sales and use tax instead of state income tax is gone too.
- Qualifying homeowners can no longer exclude debt forgiven on a private residence as a result of foreclosure, a short sale, or a modified mortgage. That debt is now reportable and taxable.
- Business owners will see a reduction of the Section 179 expense deductionwhich allowed small to mid-size businesses to immediately deduct the purchase price of qualified assets rather than recoup costs over an extended depreciation schedule. The allowance was previously at $500,000 but has been reduced to $25,000 for 2014.
2014 is now underway and I’m so excited because there are a ton of great things in store for you.
In addition to experiencing your own greatness, we have decided to launch a few new items to enhance your experience with Simplified Accounting;
- Blogging – We will bring you the latest tax updates for individuals and businesses, small business tax tips, guidance for your tax problems, and much more.
- YouTube – Yes! YouTube. We have finally decided to join the millions of users on YouTube and will be delivering some great info through video too.
- Accountant on Call – For those times when a blog post or video just won’t do and you need help, the Accountant on Call program is your answer. We will have informational and instructional interactive webinars, conference calls, and web chats.
Of course, you can still connect with us via Facebook, Twitter, e-mail, or a plain old fashioned phone call. Whatever your pleasure, we are always here for you!
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