Monday, February 8, 2016

5 Tax Tips You Need to Know NOW to Prep for Tax Season

Ah, tax season. That dreaded time of year when you scramble to find YOUR crumpled-up receipts, hunt down people you haven’t talked to in months to gather obligatory paperwork from and hold your breath as you wait to find if you’ll be owing the government (wah!) or going on a shopping spree after this year’s returns are all said and done (come onnnnn, tax return!).
Go ahead and breathe. It doesn’t have to be this way! In fact, there are several steps that you can start taking right now to make the whole process easier on everyone — yourself included. Take it from Neil Johnson, aka “The Tax Dude,” a web expert on US tax planning and compliance. Here, he offers us several tricks of the trade for getting a jumpstart on good old Uncle Sam.
1. Don’t Rush: Neil’s first tip may seem counterintuitive (especially if you’re the type that likes to take care of business/get sh*t done), but the Tax Dude says filing too early actually results in the most common mistake he sees, which is missing information. “Sometimes there are situations where you [just] can’t file in January,” he says. “W-2s and 1099s are not technically due until the end of the month.” There are additional factors he points to, such as potential brokerage account extensions, W-2 corrections and missing forms (such as a K1 for inheritance recipients), which can contribute to erroneous returns and get you smacked with the dreaded CP2000 — a notice of proposed changes to your previously filed tax returns (which often involves paying back taxes). The bottom line? Don’t file until you are absolutely ready.
2. Choose Your Tax Expert Wisely: Quick and easy establishments such as H&R Block or do-it-yourself systems like TurboTax might seem especially attractive with their flash-in-the-pan promises of low rates and quick refunds, but Neil says you should pay very close attention to what you’re getting for your money. He points to H&R Block, which he says often “upsells on things called rapid refunds,” tacking on fees you might not even know you’re paying, as they can be automatically deducted from your return before you ever receive it. And while we usually support all things DIY, Neil says that it might not be the best way to go when dealing with the federal government. Just like any other skilled trade, Neil says taxes are an art form best left to the professionals. He likens preparing your own taxes to attempting construction with no prior experience. “If you put a jackhammer in my hands, I will make a mess of everything around me,” he says. But don’t just take our word for it. “I did an experiment a few years ago [where I offered to review] TurboTax prepared [tax] returns for $29.95,” he shares. “Every return I got was wrong.”
3. Get Organized: Now that you’ve gathered all your information and you’re ready to turn it over to your chosen expert, it’s time to get organized. “If you give me a shoebox of receipts, I have to look at them all and add them up. [But] I might make a professional call that’s… wrong for you,” he says. Not without good reason — “Only you know what you’ve spent those dollars on,” Neil says. “Give me totals.Give me a [finalized] list of what you’re spending.” That includes charity, which, when donated in smaller sums, Neil says is often overlooked. “Whenever you make a [charitable contribution] of a certain amount, [you] get some sort of acknowledgement,” he says. But it’s those smaller donations of $50 here, a $20 spot there, that people often forget to claim. “You’re not keeping track of them, or you don’t get a receipt,” Neil explains. Yes, that spring closet cleaning/Goodwill donation you made last summer counts — and every little bit helps!
4. Utilize Your Exemptions: If you’ve forever struggled between marking the “0” or the “1” as a single filee, Neil says to claim yourself and go for the “1.” While he says marking “0” will get you a bigger refund, he typically advises his clients to do the opposite. “From my point of view, why fund the government money [you don’t have to?]” he says. He’s got a point.
5. Do Your Research to Maximize Your Return: “I think one of the things that most people overlook is the ability to put money into their retirement plans,” Neil says. “When you have the ability to put money into your 401K, your employer may have a match for that — that’s an immediate return on your investment,” he says. Another helpful loophole Neil has discovered in his 28 years of prepping taxes? Tax-free IRA conversions. While Roth IRA accounts (special retirement accounts where you pay taxes on money being contributed) have minimum contribution thresholds for eligibility, Neil says you may be able to convert a traditional IRA account to a Roth IRA account “virtually tax-free.” He also suggests researching state deduction plans (he gives the 529 education plan in Illinois as an example) to see if you qualify for any additional subtractions.

Sunday, February 7, 2016

Consider classifying as an S corporation

Congress’ year-end legislative bonus to business owners in the form of the Protecting Americans from Tax Hikes Act of 2015 included the permanent enactment of several beneficial tax provisions that previously had only been extended from year to year. The permanent enactment of one such provision — the reduction in the built-in gains (commonly known as BIG) recognition period — should cause C corporation business owners to consider an S corporation election for 2016. 

C corporations can be tax efficient in years that dividends are not paid. In fact, tax rates for C corporations are in most cases lower than the rates for S corporations. This tax efficiency for C corporations is lost, however, if dividends are paid by the C corporation, because dividends will generate a second level of tax to be paid by the shareholders at rates as high as 23.8%. 

In the early years of a business where profits are put back into the business, C corporation status may make sense. When the business matures and profits are available for distribution, the second level of tax on dividends makes C corporations very inefficient from a tax standpoint. This might cause the business owner to hold the cash in the corporation to avoid the double tax, but if a C corporation accumulates too much cash, the Internal Revenue Service will assert a penalty for accumulating earnings beyond the needs of the business. Other methods of taking profits out of a C corporation, such as salaries to shareholders/employees, are not an effective long-term alternative to dividends.

The most significant tax issue for a C corporation is when the business is sold in a transaction structured as an asset sale. In these transactions, the C corporation pays tax on the gain at ordinary income rates, and a second level of tax is paid by the shareholders on the distribution of the sales proceeds. Assume the assets of a C corporation (with no basis in its assets) are sold for $10 million. The tax on the sale would likely be close to $3.5 million for the C Corporation. The shareholders would in most cases pay another 23.8% tax on the after-tax proceeds from the sale, for an additional tax of nearly $1.55 million and a total tax bill of more than $5 million — more than half of the sales price for federal taxes alone. Compare this to a probable total federal tax of $2.38 million if the business was taxed as an S corporation. If the owners are active in the business, the tax bill would be even lower.

A common reason for not making an S election is exposure to the BIG tax that S corporations pay if assets that were held when the business was a C corporation are sold during a period of time, historically 10 years, following the S election. While Congress has made changes to the 10-year waiting period from time to time over the last decade, often these changes were made at the very end of the year, when it was much too late to do any tax planning. The 2015 Act, however, permanently reduces the waiting period to five years.

Even if the five-year timeframe is too long for the exit plan of a particular business, the amount of gain subject to the BIG tax is limited to the gain built into the assets at the time of the S election. 

When the company sells its assets for $10 million in 2020 (prior to the expiration of the five-year BIG recognition period), the BIG tax is only applicable to the $3 million in “built-in gain” that existed in 2016. The $7 million balance of the gain is taxed only once at the lower individual capital gains rates, even when the proceeds from the sale are distributed to the shareholders.

Of course, there are very specific requirements that must be satisfied for a business to qualify to make an S election, but many closely held businesses will satisfy these requirements. An S corporation election for 2016 is due March 15. Because of the reduction in the BIG recognition period, this is a good time to review those requirements and consider or reconsider the S election.

Saturday, February 6, 2016

A Beginner's Guide To Filing Taxes In 2016

Tax season has arrived—again. That means once you have the appropriate paperwork you can e-file your tax return for 2015 income. You have until Apr. 18 to file and pay. (That is not a typo. As you probably learned in school, Apr. 15 is generally Tax Day, but the deadline was pushed back this year in recognition ofEmancipation Day, a holiday observed in Washington D.C. to commemorate the signing of the Compensated Emancipation Act. Who knew?)
If this is your first time filing, welcome to adulthood. You’ll do this many times in your life, so take it slow and don’t panic. That said, if you’re an employee who has taxes withheld from your paycheck–as many first time filers are—you’re likely to be getting a refund anyway. So, really, there’s no reason not to tackle your 1040 ASAP. Paying taxes is not fun, but filing can be pretty painless.
Theoretically many first-timers should be able to file free of charge with the help of software. In 2003, eager to head off free tax preparation by the Internal Revenue Service, a group of for-profit tax software companies, operating as the Free File Alliance, agreed to provide free filing for low- and moderate-income taxpayers. Each of the 13 alliance companies sets its own eligibility criteria, but anyone with 2015 adjusted gross income of $62,000 or less qualifies. (The group says about 100 million Americans meet the income criteria.)
The IRS vets the software for security and privacy standards and offers a handy Help Me Find Free File Software tool, which uses your age, estimated adjusted gross income and home state to recommend the best software for you. There are also questions about your earned income tax credit eligibility (if you’re single and childless, you can claim this credit only if you were older than 25 at the end of 2015 and had an adjusted gross income of less than than $14,820) and whether you or your spouse received military pay last year.
When determining what software is right for you, keep in mind that some participating companies will prepare state returns for free as well, while others will hit you up with a charge for state filing that can run more than $35. Also note that many “free” offerings are filled with gotchas that will force you to use pricier software. Maybe you have a health savings account or live in one state but work in another. These traps are hard to avoid, so before making plans for your expected tax refund, budget roughly $100 of it for preparation expenses.
The tax software market is dominated by Intuit’s TurboTax program, with H&R Block a distant second. Both companies offer easy to use programs with a fair amount of explanation and produced identical results when I tested them in 2014 (which, of course, they should). The sites can even import W-2 information for you, although it is worth entering the information manually at least once so you understand what is on there. It is eye opening to see just how much is withheld from your paycheck over the course of a year.
(A W-2 reports your annual wages and the amount your employer already withheld to pay federal and state income, Social Security and Medicare taxes. Your employer sends you a copy and the IRS a copy. An IRS computer matches the information on it against your tax return—form 1040—so if the numbers on your W-2 are wrong, immediately ask for a corrected form. Ditto for any 1099s you’ve gotten reporting interest or miscellaneous income. You should receive most formsby early February.)
If you’re self-employed or do a little freelancing and have to file Schedule C, you’ll likely have to shell out for a paid version of the software. Shop around. At the start of this tax filing season, TurboTax was offering Home & Business (its most advanced personal filing option), which it claims lists for $104.99, for just $79.99, with a note that prices were expected to  increase on Mar. 18. That online price includes only preparation and e-filing of your federal return; preparing and filing your state return will cost you an extra $36.99. (Prices will vary. TurboTax seems to offer lower prices on computers that have recently spent time on its site.) On the other hand, Amazon was selling downloads of TurboTax Home & Business for $64.85, and that includes access to software for one state. (You’ll still have to pay extra to e-file your state return, but to save $36.99, you can print it out and mail it in.) If you have investments, including a 401(k) from work, find out if your broker or mutual fund company offers discounted access to TurboTax or others, and if so, which versions.
A cheaper option is the third-largest player in the market, TaxAct, which offers free federal filing no matter what forms you must fill out. It charges just $19.99 for a “premium” version, with state filing costing $14.99. H&R Block charges $49.99 for its “premium” online version and $36.99 per state return filed.
As your return gets more complicated—say you’re self-employed and pay other independent contractors, make extra cash via Airbnb or Grandma left you some shares in partnerships that generate indecipherable Schedule Ks—you may want to consider upgrading to human advice. “I would caution people,” says Clarence Kehoe, head of the tax department at accounting firm Anchin Block & Anchin. “Under the old garbage in, garbage out scenario–the information you get out of that computer is going to be as good as the information you put in. You have to be careful.”
Hiring a pro can run into hundreds of dollars. “Most people who are starting out really can’t justify going to a tax preparer,” argues Margaret Starner, a financial advisor with Raymond James. But for people who feel they need guidance beyond what software (or their parents) can provide, she recommends going to a preparer one year, and then, after seeing how a pro does it, using that example to do it yourself in the future. “You should understand every line on your return,’’ Starner says. (Or at least have a good enough idea that if you enter something wrong in TurboTax, you’ll be able to notice when it spits errors.)

Be careful whom you hire—here are 11 questions to ask when hiring a tax preparer. Ultimately your tax return is your legal responsibility and neither “my tax pro was a dishonest idiot” nor “the software didn’t ask me” is a valid excuse for excluding income or grabbing deductions and credits you’re not entitled to. (You really don’t want to mess with the IRS; you could waste the best years of your life on hold waiting to plead your case with a human being and if you let problems fester you could be hit with tax liens that sink your credit score for years.) On the flip side, if you don’t know what you’re doing or skip sections in the software you could miss out on a bigger refund. The IRS won’t mind, but your wallet will.
Deductions and Credits
Deductions lower the amount of money you are required to pay tax on, and may even help you move into a lowertax bracket. Credits, on the other hand, cut your tax bill dollar for dollar. They are more valuable, but also rarer.
Exclusions and above the line deductions: On the W-2 you get from an employer, your gross pay will likely be higher than the W-2 wages that you’ll have to report to the IRS. That’s because certain amounts–such as what you contributed to a 401 (k) before tax, or paid for your health insurance, or contributed to a health savings account–aren’t subject to income tax right now, if ever. In addition you may be able to claim other “above the line” adjustments to income and deductions–they’re called that because they reduce your income before you get to adjusted gross income on line 37 at the bottom of the first page of a 1040.
(For more on why gross pay differs from what you take home read, “The Most Important Financial Document You Are Probably Ignoring“)
For example, if you don’t have a 401(k) at work, you may be able to deduct up to $5,500 above the line for a contribution to a pre-tax IRA. If you are self employed, you have a choice of retirement savings plan options that can reduce your gross income above the line.
Up to $2,500 in student loan interest payments can also be subtracted from your gross income. You can claim the deduction as long as the loan is in your name regardless of who paid the interest but the student loan deductions begin to phase out if your AGI (before the student loan deduction) is more than $65,000 for a single filer (or $130,000 for a couple). If you’re planning to get married watch out for what we are calling, “the Millennial marriage tax penalty”—you can only claim one $2,500 deduction, even if and your spouse both have big student loans.
Itemized/standard deductions: After determining your AGI, there are two options for further reducing your taxable income by at least $6,300 (assuming you’re no longer on your parents return, which recent grads may be). That magic number is the 2015 standard deduction for a single filer, which the government gives to people who don’t itemize or to people whose itemized deduction adds up to less than $6,300. Itemized deductions can include state and local non-business income taxes, property taxes, charitable donations, mortgage interest expenses and medical expenses (but only to the extent that they exceed 10% of your AGI).
Homeowners can easily cross the itemization line with mortgage interest deductions, but according to the Census Bureau’s most recent American Housing Survey the home ownership rate among households headed by people between 25 and 29 was 34% as of the 2013 and only 15% for the under 25 set, meaning most first time filers are unlikely to be itemizing deductions. Charitable giving is another popular deduction, but Millennials give away $481 a year on average according to a 2013 report from non-profit service provider Blackbaud, which doesn’t put them anywhere near the itemization threshold.
“Unless you are in Silicon Valley making $300,000, you are not going to have a lot of opportunities for tax breaks at this young age,” says Starner. “If you are making $30,000 or $40,000, that is not insignificant money, but there is not as much as you can do because you haven’t yet developed the expenses of itemized deductions – like a home.”
Software tools will walk you through an interview to roughly determine if you will hit the mark. If you have held onto papers throughout the year this process will be much easier; even if you know you won’t hit the number, going through this deduction exercise can help inform your tax planning going forward.
Credits: If you receive a $1,000 tax credit, $1,000 will be removed from your tax bill. They’re pretty sweet deals – but 20-somethings won’t qualify for most credits. The big exceptions are two types of education credits; students in their first four years of higher education may be able to claim an American Opportunity Credit which is worth up to $2,500. To claim the full credit you need to have paid your qualified education expenses, be attending school at least half time, be working on your first bachelor’s degree and have earned less than $80,000 as a single.
Students, who have already completed four years of college or people enrolled in too few eligible courses, may be able to claim a Lifetime Learning Credit worth up to $2,000. To claim the full credit you must make less than $52,000 as a single. Note that this is only a 20% credit; to save $2,000 you would have to pay $10,000 on qualified expenses.
Additionally, individuals making less than $30,500 and saving for retirement may be able to claim a savers credit of up to $2,000 depending on how much they put into qualified retirement savings funds. (For more on saving for retirement in your 20s read, “Start Now: A Step By Step, Tough Love Guide To Saving For Retirement In Your 20s.”)
Health Insurance
A major head scratcher for tax payers and pros for the last few years has been the implementation of the Affordable Care Act (a.k.a. Obamacare), with different tax requirements rolling out each year.

If you had employer provided health insurance throughout 2015 all you’ll do is check a box. On a standard 1040 this box is at line 61. Whatever form you are using look for “Health care: individual responsibility … Full-year coverage.” Same goes if you bought your own insurance on the Health Insurance Marketplace and paid full price or if you bought insurance privately. This is also true if you are still on a parent’s insurance plan as a non-dependent, which is allowed until age 26. (If you are claimed as a dependent – under 19 or a full time student under age 24 – do not check the box.)
Employees will receive a form 1095 – B or C depending on employer size – but you just need to file that away. The IRS recommends keeping tax records for three years from the date you filed your original return. Your employer is not required to get this form to you until the end of March so employees don’t need to wait to file unless you have had gaps in your coverage (and don’t panic if you get this form after filing).
If you bought insurance on a Health Insurance Marketplace do not file your taxes until you have received your Form 1095-A from your insurance company. You need this form to determine if you are entitled to more or less credit than you received. If you file without this form you may need to file an amended paper return. Refunds on paper returns can take six or more weeks compared to as little as seven days if you file online and use direct deposit.
If you do not have coverage or did not for a portion of 2015 you will need to fill out a form 8965. You will use this to determine if you are eligible for an exemption from the coverage requirement or to figure out the penalty you owe. This is where things get complicated. For more details read, “What To Do With New ObamaCare Forms 1095-B, 1095-C For 2016 Tax Filing Season
State and Local Taxes
Unless you live in one of the seven states with no state income tax – this is the real reason your grandparents moved to Florida – you’ll need to file a state return by Apr. 18 in addition to your federal return. A few states have slightly later deadlines but it is easiest to knock out both your returns at once.
At the same time don’t assume that the rules governing your state return are the same as the rules you followed while completing your federal return. For example, health savings account contributions are an above the line deduction for federal taxes but are not deductible in Alabama, California or New Jersey. Presumably, if you’re using software, it should alert you to that fact.
If you moved to a new state in 2015 you’ll need to file part-year state returns for each state. If you moved from one job to another this is simply a matter of inputting the income listed on your W-2 for job A on the tax return for state A, and the income for job B on state return B. You can also take above the line deductions for certain moving expenses if you relocate for a job 50 miles farther from your old home than your previous job.
If you moved states but work for the same company find the pay stub from right before you moved and input your year-to-date income on the return for state A. Input the remainder for state B. If you finished college in 2015, moved to a new state and did not earn any income while you were still a student you likely do not need to file a return for the state where you attended college.
Remember to inform your employer if you’ve moved — especially between states — so they can withhold the proper amount for state taxes if needed. This can get tricky if you live in a different state than your workplace is located in. How tricky will depend on your employer’s tax situation and on if the two states have reciprocity agreements. Also inform your employer if you have moved within state, this will ensure not only that you receive your tax forms (though some employers now make these available online) but also that you are withholding the right local tax. If, for example, you move from a suburb of New York City to Manhattan you might pay a higher local tax post move.
A Note to Procrastinators
It may be tempting to wait to pay your taxes. Many people who will owe the IRS money do this to hold onto the dollars for longer. (Ask your parents to tell you about the long lines at the US Postal Service before the advent of online filing.) But the IRS takes deadlines very seriously–or at least those it imposes on taxpayers, if not itself. If it is Apr. 17 and you still haven’t gotten your tax act together you can get an automatic six month extension by filing form 4868. But you’ll still have to fill out that form and pay all you estimate you owe by Tax Day.

Friday, February 5, 2016

Tips to make tax preparation easier, more secure

You may not have yet recovered from the holidays, but that's no concern to Uncle Sam. Tax preparation season has begun!
The good news is that, due to a local Washington, D.C. holiday, the tax filing deadline is April 18 rather than the traditional April 15, so you will have an extra three days. That doesn't mean that you should dawdle. In fact, there is a good incentive to get your act together earlier this tax season: fraud prevention.
Last year, the IRS acknowledged that criminals had accessed to steal or attempt to steal information on nearly 400,000 taxpayers. States are also on high alert after the filing of fraudulent returns, which last year prompted TurboTax to temporarily suspend e-filings. While the IRS announced several measures the agency says will prevent tax fraud, filing early may be your best bet to prevent crooks from trying to file a return in your name.
Another anti-fraud tip to remember: The IRS never initiates contact with taxpayers about their accounts through email, text messages or other social media. If you get an unsolicited email claiming to come from the IRS, do not open attachments or click on any links;forward the message to the IRS.
Whether you prepare your own returns or hire a professional, create a file called "2015 Taxes." In it, put last year's return, which will be your guide to what needs to be assembled. Be on the lookout for tax documents that are rolling in, including 1099s, W-2s and information from banks, investment companies and lenders. Tax documents should arrive by mid-February, though many forms are available online earlier. Gather your credit card summaries and review checking accounts for deductions, such as charitable donations and job-search costs.
You may be wondering if you need to hire a CPA. If you have a complicated financial life, it may be a good idea. For example, if you're self-employed, you may want someone who is familiar with Schedule C, who can advise on the best type of retirement plan to use, and who will let you know if you should file a Form 1099 to report any payments you made to others. If you had a lot of investment activity, sold property, have to file an estate tax return for someone else, or are subject to Alternative Minimum Tax, professional guidance will help minimize the tax consequences.
If this is the first year that you are hiring a tax preparer, it's best to contact to contact him or her now; otherwise, you may get shut out. To make sure that a preparer is legitimate, use the IRS database to check on credentials.
If you are going it alone and your income is $62,000 or less, the IRS provides free tax prep software called Free File. If you don't qualify, you are left with three main choices: Turbo Tax, H&R Block and Tax Act.
Most tax preparers that I spoke to say that Turbo Tax may be the best bet, even though it costs more than its competitors. They cite Turbo Tax's easier to use platform and the interface's ability to save time and reduce errors.
Whether you prepare your own returns or hire a pro, be sure to e-file, because the IRS says that the error rate for a paper return is about 20 percent, compared with an e-file return error rate of about 1 percent. And if you are due a refund, it will come faster if you e-file.

Thursday, February 4, 2016

Understanding Your W-2, Wage & Tax Statement


By now, you probably have a stack of tax forms from employers, banks, stockbrokers, lenders and more on your desk – or more likely, the kitchen counter. For some of you, those tax forms will end up in the hands of your tax professional; the rest of you will input the information on those forms, box for box, into tax preparation software – maybe with a little swearing along the way. No matter how you plan to do your taxes this year, you likely don’t know what all of the numbers, letters and other information on those forms mean. That’s about to change. This is the first in a series of posts meant help you make sense of all of those forms.
First up, here’s what you should know about the form W-2,Wage and Tax Statement:
A form W-2 is issued by an employer to an employee. That carries with it some significance and not only for tax reasons. An employer has certain reporting, withholding and insurance requirements for employees that are a bit different from those owed to an independent contractor.
The threshold for issuing a form W-2 is based on dollars – nothing else matters. Not time worked. Not position held. Just dollars, or dollar equivalents, earned. The magic number is $600. Every employer who pays at least $600 in cash or cash equivalent, including taxable benefits, must issue a form W-2. If any taxes are withheld, including those for Social Security or Medicare, a form W-2 must be issued regardless of how much was paid out to an employee.
An employer prepares six copies of each form W-2 per employee. Yes, that’s a lot of paperwork. If, as the employee, you don’t want to receive paper copies and your employer has an appropriate system in place, you can opt to receive your forms electronically. To do this, you must specifically consent; your employer may not send a form W-2 electronically to any employee who doesn’t consent or who has revoked consent.
Copy A looks different from the others forms W-2 because it’s printed in red: the rest are printed in black. That’s on purpose: the printed version of the form that you buy from a supply store like Staples or print out using software from Intuit can be scanned and read by the government’s machines. The version that you can download and print out from the IRS website is not. You can be fined for using the wrong version of the form so pay attention (and don’t click and download on this version: it’s not one of the fancy, scannable ones).
Copy A is transmitted to the Social Security Administration (SSA) along with a form W-3 (the form W-3 reports the total of all of the forms W-2 for the employer). The due date for employers to get that information to SSA is February 28, 2016; for employers who e-file, the due date is March 31, 2016 (due date changes are coming in 2017). Copy 1 is issued to any applicable state, city or local tax department. Copy D is retained by the employer.

As an employee, you get three copies of your form W-2. Those three copies must be issued to you by February 1 this year (more on filing dates here). Copy B is used to report your federal income taxes and is generally filed with your federal income tax return (unless you are e-filing in which case you have to provide it to the preparer but it is not usually forwarded to IRS). Copy 2 is used to report your state, city or local income tax and is filed with the relevant taxing authorities. Copy C is for your records (you should retain Copy C for at least three years after you file or the due date of your return, whichever is later).
The left side of the form is for reporting taxpayer information; the right side of the form is used to report financials and codes. The bottom of the form reports local and state tax information.
Box a. Your Social Security Number (SSN) is reported in box (a). You should always double-check this to make sure it’s correct. If it’s not correct, you need to request a new form W-2 from your employer. An error could slow the processing of your return. Keep in mind that your entire Social Security Number should appear in this box: while the Regs allow for truncation of numbers on certain forms, it’s not allowable on your form W-2.
Box b. Your employer’s EIN is reported in box (b). An EIN is the employer’s equivalent of your SSN.
Box c. Your employer’s address is reported in box (c). This is the legal address of your employer which may or may not be where you actually work. Don’t let that throw you.
Box d. The control number is an internal number used by your employer or your employer’s payroll department. If your employer doesn’t use control numbers, box (d) will be blank.
Boxes e and f. These appear as one big block on your form W-2. Your full name is reported at box (e). It’s supposed to reflect the name that’s actually on your Social Security card (the SSA isn’t crazy about suffixes, even if you use them, so you shouldn’t see one on your form W-2 unless it’s on your Social Security card). If your name isn’t exactly as it appears on your Social Security card, you may need a new form W-2; ask your employer if you’re not sure. Your address is reported at box (f) and should reflect your mailing address – which could be a post office box – likely without punctuation (a USPS preference). If your address on the form W-2 isn’t correct, notify your employer: you won’t need a new form W-2 but your employer needs to update his or her records.
Now, here’s a closer look at the boxes on the right:
Box 1 shows your total taxable wages, tips, prizes and other compensation, as well as any taxable fringe benefits. It does not include elective deferrals to retirement plans, pretax benefits or payroll deductions. Since the figure doesn’t include those amounts, it’s not unusual for this amount to be less than the amounts included at boxes 2 and 3. It’s the number taxpayers care about the most.
Box 2 reports the total amount of federal income taxes withheld from your pay during the year. This amount is determined by the elections on your form W-4 based on exemptions and any additional withholding. If you find that this number is too low or too high, you’ll want to make an adjustment on your form W-4 for the next year.
Box 3 shows your total wages subject to Social Security tax. This figure is calculated before any payroll deductions which means that the amount in box 3 could be higher than the number reported in box 1, as in my example. It could also be less than the amount in box 1 if you’re a high-wage earner since the total of boxes 3 and 7 (see below) cannot exceed the maximum Social Security wage base. For 2015, that amount was $118,500 (more on rates here). If you have more than one job, for Social Security tax purposes, the cap still applies.
Box 4 shows the total of Social Security taxes withheld for the year. Unlike federal income taxes, Social Security taxes are calculated using a flat rate of 6.2%. The amount in box 4 should, then, be equal to the amount in box 3 times 6.2%. Since you should not have more Social Security withholding than the maximum wage base times 6.2%, the amount in box 4 should not exceed $7,347.00. In my example, the figure is $50,000 x .062, or $3,100.00.
Box 5 shows your total wages subject to Medicare taxes. Medicare taxes generally do not include any pretax deductions and will include most taxable benefits. That, combined with the fact that unlike Social Security wages, there is no cap for Medicare taxes, means that the figure in box 5 may be larger than the amounts shown in box 1 or box 3. In fact, it’s likely the largest number on your form W-2.
Box 6 shows the amount of Medicare taxes withheld for the year. Like Social Security taxes, Medicare taxes are figured based on a flat rate. The rate is 1.45%. For most taxpayers, this means that the figure in box 6 is equal to the figure in box 5 times 1.45% (as in my example indicated by the green arrow since $50,000 x 1.45% = $725). However, under Obamacare, an employer must withhold additional Medicare tax of .9% from wages paid to an individual earning more than $200,000, regardless of filing status or wages paid by another employer. Since your employer doesn’t know your entire financial picture, it’s possible that you may have to pay more additional Medicare taxes than your withholding depending on filing status, compensation and self-employment income.
Tips which were reported to your employer will be found in box 7. If this box is blank, it means that you did not report tips to your employer – this doesn’t mean that you don’t have to report those tips to IRS.
Allocated tips reported in box 8 are those that your employer has determined are attributable to you. Those tips are considered income to you. (For more on tip income, click here.)
There won’t be anything in box 9. The reporting requirement for that box expired a few years ago and the box hasn’t yet been removed from the form (go figure). At least it’s shaded in now, eliminating some confusion.
At box 10, your employer will report the total of any benefits paid on your behalf under a dependent care assistance program. Amounts paid out under a qualified plan which are less than $5,000 are considered non-taxable benefits. That number will include report the value of all dependent care benefits, including those greater than the $5,000 exclusion. If the value exceeds $5,000, that excess will also be reported in box 1 ($2,500 if you file married filed separately).
Box 11 is used to report amounts which have been distributed to you from your employer’s non-qualified deferred compensation plan: this amount is taxable. This isn’t to be confused with amounts contributed by you. That shows up in box 12.
Box 12 is the kitchen sink of form W-2 reporting. Here, you’ll see all kinds of codes. Not all of the income coded at box 12 is taxable. Here’s a quick rundown of the codes:
A – Uncollected social security or RRTA tax on tips
B – Uncollected Medicare tax on tips (but not Additional Medicare Tax)
C – Taxable cost of group-term life insurance over $50,000 (included in your wages at boxes 1, 3 and 5)
D – Elective deferrals to a section 401(k) cash or deferred arrangement plan (including a SIMPLE 401(k) arrangement)
E – Elective deferrals under a section 403(b) salary reduction agreement
F – Elective deferrals under a section 408(k)(6) salary reduction SEP
G – Elective deferrals and employer contributions (including nonelective deferrals) to a section 457(b) deferred compensation plan
H – Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan
J – Nontaxable sick pay
K – 20% excise tax on excess golden parachute payments
L – Substantiated employee business expense reimbursements
M – Uncollected social security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only)
N – Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (but not Additional Medicare Tax)(former employees only)
P – Excludable moving expense reimbursements paid directly to employee
Q – Nontaxable combat pay
R – Employer contributions to an Archer MSA
S – Employee salary reduction contributions under a section 408(p) SIMPLE plan
T – Adoption benefits
V – Income from exercise of nonstatutory stock option(s)
W – Employer contributions (including employee contributions through a cafeteria plan) to an employee’s health savings account (HSA)
Y – Deferrals under a section 409A nonqualified deferred compensation plan
Z – Income under a nonqualified deferred compensation plan that fails to satisfy section 409A
AA – Designated Roth contributions under a section 401(k) plan
BB – Designated Roth contributions under a section 403(b) plan
CC – HIRE exempt wages and tips (2010 only)
DD – Cost of employer-sponsored health coverage
EE – Designated Roth contributions under a governmental section 457(b) plan
In the sample form W-2, I’ve included two of the most popular codes:
  • Elective deferrals (Code D) are extremely popular. As noted above, these amounts will generally be included at box 3 and box 5 even if they are excluded from wages at box 1.
  • The cost of employer-sponsored health coverage is reported using Code DD. This might look new to you (I’ve indicated it with a red arrow). This amount is now reportable under the Affordable Care Act but it is not taxable to you.
Box 13 really isn’t one box: it’s a series of three boxes. Your employer will check the applicable box if you are a statutory employee (employees whose earnings are subject to Social Security and Medicare taxes but not federal income tax withholding); if you participated in your employer’s retirement plan during the year; or if you received sick pay under your employer’s third-party insurance policy.
Box 14 is a “catch all” box. Your employer reports anything here that doesn’t fit anywhere else on the form W-2. Examples include state disability insurance taxes withheld, union dues, health insurance premiums deducted and nontaxable income.
Your state and local tax reporting can be found at the very bottom of the form W-2.
Box 15 is very straightforward and includes your employer’s state and state tax identification number. If you work in a state without a reporting requirement, this box (along with boxes 16 and 17) will be blank. If you had multiple withholdings in a number of states, more than one box will be filled.

If you are subject to state income taxes, box 16 will indicate the total amount of taxable wages for state tax purposes. If you live and work in a state that doesn’t impose an income tax, this spot will be blank.
If you have wages reported in box 16, box 17 will show the total amount of state income taxes withheld during the year. If you live in a state that has a flat state tax (like PA), you can double check to make sure that your withholding is correct by multiplying the amount in box 16 by the flat tax rate.
If you are subject to local, city, or other state income taxes, those will be reported in box 18. If you have wages subject to withholding in more than two states or localities, your employer will furnish an additional form W-2.
If you have wages in box 18 subject to local, city, or other state income taxes, any amount of withholding will be reported at box 19.
Box 20 is exactly what you’d expect: the name of the local, city, or other state tax being reported at box 19.
And that’s it! You should have received your form W-2 – with all of this information properly reported – by February 1, 2016. If you haven’t, here’s what to do. Employers should be pretty on top of getting forms to you on time – especially this year. As of January 2, 2016, higher penalties apply for failure to file correct Forms W-2 by the due date (or at all).

Wednesday, February 3, 2016

February Tax Planning

As many individuals scramble to organize and complete their personal income taxes in time for our government April filing deadline, one should also consider what can and should be done to be better prepared for next year. Our tax laws and requirements are complex and it makes sense to plan throughout the year to achieve the most advantageous tax position over time.

As a business owner or for individual purposes, knowing tax law will be of great help in decision making. Waiting until December to make a series of quick decisions can lead to less-than-optimal results. Today, none of us knows exactly what positions we will be in by December, but many of us probably know what expenditures and investments will be necessary and desirable this year. It might be safer to wait until December to buy a more efficient piece of equipment when available cash amounts are more clear, but that probably will not produce the best business results or tax advantage for the year.

Perhaps 2015 was a good year for you and you have decided to pursue a new business opportunity or give some added support to your favorite charity. Knowing a little about the various tax laws can be helpful in each of these circumstances. Federal taxes play a role, as do state and local taxes. Wisconsin offers some excellent tax incentives for new business ventures, venture capital and charitable giving that might prompt a different course of action.

If you don’t care to learn or don’t want to take time to learn about tax laws, a good tax adviser will help immensely. Tax planning is a year-round process, not just a December exercise.

Tuesday, February 2, 2016

8 Dangerous Tax Mistakes

Pinching pennies and investing are not the only sound strategies to build long-term wealth. Smart tax planning and avoiding dangerous tax mistakes play a big part in increasing your disposable income as well.
Learn a bit about the tax system and save yourself thousands of dollars. Here are the eight most dangerous tax mistakes you will face throughout your life. 

1. College Students: Forgetting to File

Consumed with studies, parties and part-time work, college students might not think about taxes. But it is crucial to avoid mistakes by spending a few minutes to understand your tax situation.
If you are single and made more than $6,300 in wages last year or received at least $1,050 in unearned investment, interest or profits from selling — including those eBay sales — you must file a tax return, said tax expert Crystal Stranger, an enrolled agent and president of First Tax, which bills itself as the “first nationwide tax firm created exclusively for small businesses.” 
If you had a side business, you are not off the hook. Did you earn more than $400 from self-employment income, or more than this amount on a 1099-MISC tax form? If so, you must file, even if you do not meet the gross income thresholds.

2. Young Professionals: Delaying Investing in a 401k

By investing in your employer’s retirement plan as early as possible, you can easily secure a large retirement nest egg. Wait a few years before participating, and you will end up paying more taxes today and having a smaller retirement account later. 
Those who qualify can enjoy additional tax benefits, Stranger said. The saver’s credit and various education credits can put more money in your pocket by cutting your taxes. Many people can benefit from the latter, including parents paying for their chidren’s education and adults adding to their own skills. 

3. Newlyweds: Choosing the Wrong Filing Status

When you begin married life, set a sound foundation for your financial future. Smart tax-planning can put more money in your joint bank account.
When completing tax returns as a married couple, compare the total amount of tax due between the two filing status options: married filing jointly and filing separately. Find out which status nets you the lowest tax bill.
This is easy to do with tax software. Or, ask your tax professional to do the calculations for you. Choose the wrong filing status, and you will end up costing your new family money unnecessarily.

4. New Homeowners: Failing to Keep Track of Everything

Buying a home is one of the most stressful ventures of adulthood. Forgetting the tax implications of a home purchase makes the situation even more trying. Remember, “not all closing costs are deductible,” said Bill Farmer, an enrolled agent with Lexington, Ky.-based HTI Tax Service
Unlike business expenses, home improvements are generally not tax-deductible, Stranger said. However, if you use part of your home for a business, you might be able to deduct applicable repairs. Do not skimp on this one — maintain your records and check with the IRS to ensure you are in compliance with the law. 
Finally, there is another reason to keep track of your home improvements. Ultimately, when you sell, you can add the cost of improvements to your original price, or basis, and save on capital gains taxes if you owe them. Keep the records where you can access them, because at sale time they are worth money to you in the form of tax savings.

5. New Parents: Not Applying for Junior’s Social Security Number

Having children is a joy — and a wonderful way to lower taxes. For every child and dependent, you receive a tax credit. For 2015, the personal exemption is $4,000. 
However, if you forget to apply for Junior’s Social Security number, you will not be able to prove to the IRS that you are eligible to claim the juicy exemption, Stranger said.
There is a caveat to this important tax saver: If you are a high-income earner, you may not qualify for this tax break. Anyone married filing jointly with adjusted gross income in excess of $309,900 will experience a phase-out.

6. Self-Employed or Small-Business Owners: Keeping Poor Records

If you have a small business or just a side hustle on top of your 9-to-5, do not make the mistake of keeping poor records that fail to support deductions associated with business expenses. 
Attorney Richard C. Watson III, founder of Santa Ana, Calif.-based Watson Tax Law Group, reminds business owners that if they cannot substantiate a declared business expense in an audit, the IRS might not allow it, thereby costing them additional taxes and penalties. 
Watson urges business owners to claim every legal business deduction allowed. That means supplies, memberships and business use of a vehicle, to name a few.

7. Retirees: Thinking Tax Planning Stops When Work Ends

Just because you are retired does not mean you will not owe taxes. Stranger and Farmer both underscored the importance of tax planning and awareness of tax obligations in retirement. For all but very low-income taxpayers, Social Security is taxable. Stranger said that up to 85 percent of your Social Security income might be taxed. 
The IRS has an easy method to estimate whether your Social Security is taxable on its website. 

8. Throughout Your Life: Failing to Itemize Deductions If You Can

Many taxpayers start out claiming the standard deduction when they first begin paying taxes and might not realize that itemizing deductions instead can slash their tax payments. To help you decide whether to claim the standard deduction or itemize your deductions on Schedule A, IRS Publication 501 lays out the details: 
For 2015, standard deductions are as follows: 
  • If you’re single or married filing separately, your standard deduction is: $6,300.
  • If you’re married filing jointly or a qualifying widow(er) with a dependent child, your standard deduction is: $12,600.
  • If you’re filing as head of household, your standard deduction is: $9,250.
For example, Maria has a new home and is making mortgage interest — not principal — payments totaling $18,000 per year. Her property taxes are $3,000 per year. Add up those two items and her itemized deductions are $21,000, well above the single standard deduction of $6,300.
Tax software — or a flesh-and-blood tax professional — can help you decide whether it makes more sense to itemize or to take the standard deduction.
Spend a few minutes at the IRS website every year, and investigate the annual changes and updates to the tax code. By avoiding common tax mistakes, you will increase your account balances and have more money to save and invest.