Married? File Taxes Jointly

Taxes_DueDuring a recent tax filing season, a new tax client of mine openly cried at my desk because of her newly discovered $8,800 tax bill to the IRS and $2,200 tax bill to New York State. All primarily because she filed her taxes “married filing separately” instead of “married filing jointly” with her husband.

Married Filing Separately

Federal and state governments want legally married couples to file their taxes together and to encourage them governments don’t allow certain credits, deductions and exemptions for couples who file “separately.” It also puts couples who file “separately” in a higher tax bracket then those who file “jointly.”

Taxes for 1099 Independent Contract Work

My client also got the new tax bills because she worked as a 1099 independent contractor during the year outside of her normal 9-5 and did not pay taxes on that income throughout the year. $18,000 worth of self employment income.

W4 Exemptions/Allowances

To cap off her problems and to make matters worse, her job in the social services field did not take out enough in taxes every paycheck to meet her tax obligations for the year. Had she simply put zero or one on line 5 of her W-4 form, her employer would have taken out more each paycheck to meet her tax obligation.

Tax Solutions

To make my client’s life better going forward, I gave her a number of recommendations. First, I talked with her about the differences between filing separately and filing jointly. She’s going to try to work with her husband on that. Next, I gave her the necessary paperwork she’ll need to pay her estimated taxes for her self-employment.

Then, I told her to talk with her employer about changing her exemptions/allowances so she can make them as low as possible. That way more taxes are taken out of her paycheck then needed. Finally, I gave her the websites for the IRS and New York State to work out a payment plan for her outstanding debt. With all of this hopefully we’ll have a much better tax prep experience next year.

 

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Is An Employee Paid in Cash Worth Going to Jail For?

Michael-GrimmHere is a recent story of a US Congressman who lost his seat and is going to jail for his employees. Here are the details that stand out:

The indictment accused him of underreporting more than $1 million in wages and receipts to evade payroll, income and sales taxes, partly by paying immigrant workers, some of them in the country illegally, in cash.

Sentencing was scheduled for June 8. Prosecutors said a range of 24 to 30 months in prison would be appropriate, while the defense estimated the appropriate sentence as between 12 and 18 months.”

Here is the rest of the story.

In my upcoming book focused on Small Business and Accounting, I explain how to avoid this.

 

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Can I Write off My Work Clothes on My Taxes?

EarthWindFire_Legacy

Every so often, I get a variation of the same question from friends and clients, “can I deduct the cost of my clothes on my taxes?” The answer depends. If you are part of Earth, Wind & Fire or Twisted Sister, sure. If not, probably not.

In all seriousness, the IRS allows individuals to write off the purchase and care of their clothing if it is unique, special and required for the job. For instance, nurses, police officers and other professionals who have to wear a uniform for work, can write off the purchase and upkeep of their clothing.

If someone is a professional that wears a suit every day and needs it to keep up appearance like a news anchor, then they cannot write off the purchase and upkeep of their clothing. If they do write it off and the IRS does an audit, the write off will be reversed and the taxpayer will end up owing the IRS the money for the deduction.

For more information, here is what the IRS says about writing off work clothes:

Work Clothes and Uniforms

You can deduct the cost and upkeep of work clothes if the following two requirements are met.

• You must wear them as a condition of your employment.
• The clothes are not suitable for everyday wear.

It is not enough that you wear distinctive clothing. The clothing must be specifically required by your employer. Nor is it enough that you do not, in fact, wear your work clothes away from work. The clothing must not be suitable for taking the place of your regular clothing.

Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc.).

Musicians and entertainers can deduct the cost of theatrical clothing and accessories that are not suitable for everyday wear.

However, work clothing consisting of white cap, white shirt or white jacket, white bib overalls, and standard work shoes, which a painter is required by his union to wear on the job, is not distinctive in character or in the nature of a uniform. Similarly, the costs of buying and maintaining blue work clothes worn by a welder at the request of a foreman are not deductible.

Protective clothing. You can deduct the cost of protective clothing required in your work, such as safety shoes or boots, safety glasses, hard hats, and work gloves.

Examples of workers who may be required to wear safety items are: carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oil field workers, pipe fitters, steamfitters, and truck drivers.

Military uniforms. You generally cannot deduct the cost of your uniforms if you are on full-time active duty in the armed forces. However, if you are an armed forces reservist, you can deduct the unreimbursed cost of your uniform if military regulations restrict you from wearing it except while on duty as a reservist. In figuring the deduction, you must reduce the cost by any nontaxable allowance you receive for these expenses.

If local military rules do not allow you to wear fatigue uniforms when you are off duty, you can deduct the amount by which the cost of buying and keeping up these uniforms is more than the uniform allowance you receive.

You can deduct the cost of your uniforms if you are a civilian faculty or staff member of a military school.

 

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Benefits Of Reviewing Prior Year Tax Returns

IRS4Did you have your tax preparer look at your returns for the last few years? It’s a good idea for taxpayers to review their returns every year. In many cases the review may reveal missed credits and deductions taxpayers may be entitled to that ultimately give them a bigger tax refund.

Review Last Three Tax Returns

This past tax season I reviewed the last three tax returns for one of my clients. In the end, she was grateful I did. Not only had she done her own tax returns without knowing all of the educational credits she was entitled to but she also received bad advice from a co-worker about the number of exemptions/allowances to claim on her paycheck.

She did take some of the educational credits she was entitled to but because she didn’t realize the true extent (and calculation) of the tax law and credit available, she didn’t take the full credit.

Positive Review Results

The review I did revealed that extra unclaimed credit and resulted in her owing the IRS $300 instead of $1900. A huge difference, especially considering she hadn’t started to pay those taxes because she didn’t have the money.

We also fixed the number of exemptions/allowances on her paycheck based on her circumstances.

Not Just “Plugging Numbers into a Computer”

After going through this review process my client realized that filing taxes was not simply “plugging numbers into a computer.” She realized that she was good at her job but when it came to tax law and taking advantage of all the credits and deductions she was entitled to, she needed an expert.

She also helped the effort by telling me everything that happened in her financial life over the past three years, no matter how small the event may have seemed. This was important because given the complexity of the American population; the IRS has built in a number of credits and deductions to help taxpayers from different walks of life. Preparers know more about these benefits than taxpayers.

In the end for many Americans preparing taxes may seem like an easy undertaking of just plugging numbers into a computer but if they are not careful, they may be missing out on credits and deductions they are entitled to. Working with a qualified tax preparer can help ensure the right credits and deductions are taken.

 

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Average Tax Prep Fee Inches Up to $273 (REPOST FROM ACCOUNTING TODAY)

REPOST FROM ACCOUNTING TODAY:
WASHINGTON, D.C. (JANUARY 14, 2015)

The average fee for preparing a tax return, including an itemized Form 1040 with Schedule A and a state tax return, will increase a few dollars to $273 this year, a 4.6 percent increase over the average fee of $261 last year, according to a survey by the National Society of Accountants.

The figure also represents an 11 percent increase from two years ago when the survey was conducted.

The average cost to prepare a Form 1040 and state return this season without itemized deductions is expected to be $159, also a 4.6 percent increase over the average fee last year, which was $152. It is an 11.2 percent increase from two years ago.

“When you consider that it takes the average taxpayer five hours to complete a tax return, this is a very strong value,” said NSA executive vice president John Ams in a statement. “The tax code continues to become more complex each year, including some new Affordable Care Act reporting requirements. Professional tax preparers may also be able to find tax deductions and credits that may taxpayers might not notice.”

The NSA collected the fee information during a survey of preparers. The tax and accounting firms surveyed are owners, principals, and partners of local “Main Street” tax and accounting practices who have an average of more than 27 years of experience.

NSA member tax preparers typically hold multiple credentials that demonstrate their expertise, including Enrolled Agent, CPA, Accredited Tax Preparer, Accredited Tax Advisor, and others.

The survey also reported the average fees for preparing additional Internal Revenue Service (IRS) tax forms, including $174 for a Form 1040 Schedule C (business), $634 for a Form 1065 (partnership), $817 for a Form 1120 (corporation), $778 for a Form 1120S (S corporation), $457 for a Form 1041 (fiduciary), $688 for a Form 990 (tax exempt), $68 for a Form 940 (Federal unemployment), $115 for Schedule D (gains and losses), $126 for Schedule E (rental) and $158 for Schedule F (farm).

The NSA noted that the fees vary by region, firm size, population, and economic strength of an area.

The average tax preparation fee for an itemized Form 1040 with Schedule A and a state tax return in each U.S. census district are:

•    New England (CT, ME, MA, NH, RI, VT) – $246
•    Middle Atlantic (NJ, NY, PA) – $314
•    South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV) – $268
•    East South Central (AL, KY, MS, TN) – $262
•    West South Central (AR, LA, OK, TX) – $205
•    East North Central (IL, IN, MI, OH, WI) – $240
•    West North Central (IA, KS, MN, MO, NE, ND, SD) – $198
•    Mountain (AZ, CO, ID, MT, NV, NM, UT, WY) – $256
•    Pacific (AK, CA, HI, OR, WA) – $348

Most accounting firms offer prospective clients a free consultation, the NSA pointed out, which can be worth well over $100 based on the hourly fees of most tax preparers.

All the fees cited assume a taxpayer has gathered and organized all the necessary information.

Taxpayers should also make sure they provide information on time to avoid additional fees, the NSA noted. Many tax preparers will charge an average fee of $114 for dealing with disorganized or incomplete files.

Some will charge an average fee of $42 to file an extension, an average fee of $88 to expedite a return, and an average fee of $93 if information is not provided in advance of an agreed-upon deadline. For taxpayers who are audited by the IRS, the average hourly fee to handle the audit is $144.

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