Taxes: better late than never

April 15th has come and gone.  Most of us feel relief that the chore of filing the return and paying income taxes is done.  For some, the pleasure is fleeting - as they have simply filed for an extension, and so postponed the problem until August 15th.  And for others, those with taxable income who have not filed their return and do not plan to, somewhere in their future lurks the penalties for failure to file a return, and the failure to pay the tax that is due.  

Which one is worse?  Failure to file.  

The IRS can understand the failure to pay - if you don't have the money, then they will work with you.  But they take a more dim view of the failure to file.  Our system is one of voluntary compliance.  Everyone is counted on to pull on their oar.  And if you are not pulling on your oar, it means more work for the rest of us.

If you file late, you will need to pay 5 percent of the unpaid taxes for each month or part of a month that a tax return is late, plus a failure-to-pay penalty of 1/​2 of 1 percent of your unpaid taxes.  And if you never voluntarily file or pay, and they must find you, then you will face civil fraud penalties, a criminal misdemeanor charge, or even a felony charge for tax evasion.  So, the lesson is that it is better to file, on time, and then work with the IRS on a payment schedule if you can’t pay what you owe on time.  And with that introduction, here are tips from the IRS on how they will work with you on those issues.  

Tips for Taxpayers Who Missed the Tax Deadline

If you missed the April 15 tax filing deadline, don’t panic. Here’s some advice from the IRS.

• File as soon as you can.  If you owe taxes, you should file and pay as soon as you can. This will help minimize the interest and penalty charges. There is no penalty for filing a late return if you are due a refund.

• IRS Free File is your best option.  Everyone can use IRS Free File to e-file their federal taxes for free. If your income was $58,000 or less, you can use free brand-name software. If you made more than $58,000 and are comfortable preparing your own tax return, use Free File Fillable Forms to e-file. This program uses the electronic versions of paper IRS forms. IRS Free File is available through Oct. 15 only through IRS.gov. 

• IRS E-file is still available.  IRS e-file is available through Oct. 15. E-file is the easiest, safest and most accurate way to file your taxes. With e-file you receive confirmation that the IRS received your tax return. If you e-file and choose direct deposit of your refund, you’ll normally get it within 21 days.

• Pay as much as you can.  If you owe tax but can’t pay it all at once, try to pay as much as you can when you file your tax return. Pay the remaining balance as soon as possible to stop further penalties and interest.

• Make a payment agreement online.  If you need more time to pay your taxes, you can apply for a payment plan with the IRS. The easiest way to apply is to use the IRS Online Payment Agreement tool. You can also mail Form 9465, Installment Agreement Request. The tool and form are both available on IRS.gov.

• A refund may be waiting.  If you’re due a refund, you should file as soon as possible to get it. Even if you are not required to file, you may still get a refund. This could apply if you had taxes withheld from your wages or you qualify for certain tax credits. If you don’t file your return within three years, you could forfeit your right to the refund.

For more information, visit IRS.gov.

Additional IRS Resources:

• Electronic Payment Options Home Page
• Make a Payment
• Tax Topic 202 - Tax Payment Options

IRS YouTube Videos:

• Welcome to Free File – English
• Online Payment Agreement – English | Spanish | ASL

IRS Podcasts:

• Online Payment Agreement – English | Spanish

My Lender Forgave My Mortgage Debt. Now what?

You have a home mortgage, and were unlucky enough to buy high.  In the real estate crash, your home value sunk below the mortgage amount.  You were "underwater".  You could not sell the home because you would have had to come to the closing table with a large amount necessary to pay off the mortgage.  This is the situation when a "short sale" is used.  The lender agrees to accept less for its loan than what you owe, in order to cut its losses and get something out of the property.  So you sell the property.  You walk away.  The lender agrees not to chase you for the balance that you owe on the mortgage loan.  Are you done?  

Not quite.  Under federal tax law, when your creditor forgives a debt that you owe to him, the government considers that forgiveness as income to you, and you are taxed on it.  If today you owe someone $100,000 for a mortgage loan; and tomorrow that lender agrees that you don't have to pay it, then you are $100,000 richer.  And the government wants its cut.  

But the economic crisis that we have been through has given birth to legislation that changes that rule if the debt that is forgiven is home mortgage debt.  Here's the explanation for what you need to do to benefit, straight from the horse's mouth - IRS Tax Tip 2014-31:

Special Exclusion for Cancelled Home Mortgage Debt

If a lender cancels or forgives money you owe, you usually have to pay tax on that amount. But when it comes to your home, an important exception to this rule may apply in 2013. Here are several key facts from the IRS about the special exclusion for cancelled home mortgage debt:

• If the cancelled debt was a mortgage loan on your main home, you may be able to exclude the cancelled amount from your income. To qualify you must have used the loan to buy, build or substantially improve your main home. The loan must also be secured by your main home.

• If your lender cancelled part of your mortgage through a loan modification, or ‘workout,’ you may be able to exclude that amount from your income. You may also be able to exclude debt discharged as part of the Home Affordable Modification Program. Visit IRS.gov for more details about HAMP. The exclusion may also apply to the amount of debt cancelled in a foreclosure.

• The exclusion may apply to amounts cancelled on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or greatly improve your main home. Proceeds used for other purposes don’t qualify. For example, a loan that you used to pay your credit card debt doesn’t qualify.

• Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit card debt or car loans.

• If your lender reduced or cancelled at least $600 of your mortgage debt, you should receive Form 1099-C, Cancellation of Debt, in January of the following year. This form shows the amount of cancelled debt and other information. Notify your lender if any information on the form is wrong.

• Report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. File the completed form with your federal tax return.

• Use IRS e-file to file your tax return. E-file is the easiest way to file because the software will do the hard work for you. You can use IRS Free File to prepare and e-file your tax return with either free, brand-name software or online fillable forms – all for free. Otherwise, you may file electronically with commercial software, or through a paid preparer.

• Whether you use IRS e-File or mail a paper return, you can use the Interactive Tax Assistant on IRS.gov to find out if you must pay tax on cancelled mortgage debt.  

For more on this topic, see Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. You can get IRS forms and publications online at IRS.gov or by calling 800-TAX-FORM (800-829-3676).


Additional IRS Resources:

• Mortgage Forgiveness Debt Relief Act and Debt Cancellation

Unemployment Benefits and Taxes

We are in a winter (2013-14) that threatens never to end, and in an economic recession where the employment numbers improve only because people stop looking for jobs.  When will it end?  

And on top of that, if you are still receiving Unemployment Benefits, we are coming around to April 15th, and those benefits are taxable!  Here are some Tax Tips from the IRS on what you need to know about paying taxes on UE benefits, together with helpful links.

Five Facts about 

Unemployment Benefits

If you lose your job or your employer lays you off, you may be able to get unemployment benefits. The payments may be a welcomed relief. But you should know that they’re taxable.
Here are five important facts from the IRS about unemployment compensation:

1. You must include all unemployment compensation in your income for the year. You should receive a Form 1099-G, Certain Government Payments. It will show the amount paid to you and the amount of any federal income taxes withheld.

2. There are several types of unemployment compensation. They generally include any amount received under an unemployment compensation law of the U.S. or a state. For more about the various types, see Publication 525, Taxable and Nontaxable Income.

3. You must include benefits paid to you from regular union dues in your income. Different rules may apply if you contribute to a special union fund and those contributions are not deductible. In that case, only include as income any amount you get that is more than the contributions you made.

4. You can choose to have federal income tax withheld from your unemployment. You make this choice using Form W-4V, Voluntary Withholding Request. If you do not choose to have tax withheld, you may have to make estimated tax payments during the year.

5. If you are facing financial difficulties, you should visit IRS.gov. “What Ifs” for Struggling Taxpayers explains the tax effect of events such as the loss of a job. For example, if your income decreased, you may be eligible for some tax credits, such as the Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill, contact the IRS as soon as possible. In many cases, the IRS can take steps to help ease your financial burden.

For more details, see IRS Publications 17, Your Federal Income Tax, or IRS Publication 525. You can download these booklets and Form W-4V at IRS.gov. You may also order them by calling 800-TAX-FORM (800-829-3676).


Additional IRS References:

• 1040 Central
• IRS Tax Map
• Unemployment Compensation
• Tax Withholding
• Estimated Tax FAQs

So, get your tax returns filed, keep up on your shoveling, keep driving carefully, and hopefully we will see some sunshine on both ongoing issues in 2014.

IRS Warns of Phone Scam

The latest Tax Tip from the IRS, with advice on what to do if you get a mysterious call from the IRS demanding payment:

IRS Warns of Phone Scam

The IRS is warning the public about a phone scam that targets people across the nation, including recent immigrants. Callers claiming to be from the IRS tell intended victims they owe taxes and must pay using a pre-paid debit card or wire transfer. The scammers threaten those who refuse to pay with arrest, deportation or loss of a business or driver’s license.

The callers who commit this fraud often:

• Use common names and fake IRS badge numbers.
• Know the last four digits of the victim’s Social Security number.
• Make caller ID appear as if the IRS is calling.
• Send bogus IRS emails to support their scam.
• Call a second time claiming to be the police or DMV, and caller ID again supports their claim.

The truth is the IRS usually first contacts people by mail – not by phone – about unpaid taxes. And the IRS won’t ask for payment using a pre-paid debit card or wire transfer. The agency also won’t ask for a credit card number over the phone.

If you get a call from someone claiming to be with the IRS asking for a payment, here’s what to do:

• If you owe federal taxes, or think you might owe taxes, hang up and call the IRS at 800-829-1040. IRS workers can help you with your payment questions.
• If you don’t owe taxes, call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.
• You can also file a complaint with the Federal Trade Commission at FTC.gov. Add "IRS Telephone Scam" to the comments in your complaint.

Be alert for phone and email scams that use the IRS name. The IRS will never request personal or financial information by email, texting or any social media. You should forward scam emails to phishing@irs.gov. Don’t open any attachments or click on any links in those emails.

Read more about tax scams on the genuine IRS website, IRS.gov.

Additional IRS Resources:

• Treasury Inspector General for Tax Administration
• FTC Complaint Assistant
• Report Phishing
• Protect Yourself from the Dirty Dozen Tax Scams

IRS YouTube Video:

• Tax Scams – English | Spanish | ASL

Last minute tips for last minute taxpayers ...

I admit it - I am a last minute tax filer.  Sometimes even a "postpone it till October by asking for an extension" type.  My wife is not.  She is a "why haven't we already done this - I gave you my stuff two months ago?" filer.   As you can see, there is the potential for conflict.  I am attempting to resolve the conflict - by getting the returns filed on time this year.  I spent the day Saturday doing taxes.  I am about 80 percent done.  It is tedious work and I take no joy in it.  Like dental work, it is something necessary for my health - but never something to look forward to.

And having done it, the last thing I want to do is re-visit it later in life.  The IRS would prefer not to either - more work for them.  So they have passed along these tips so that you don't make the most common mistakes and invite a dialog with your local IRS office.  Now, let's buckle down and get this done - and done right the first time.  And if you want to delay the inevitable, check my April 2012 article on filing for an extension (though note that returns that year were due on 4-17; this year they are due on 4-15).

Eight Tax-Time Errors to Avoid

If you make a mistake on your tax return, it usually takes the IRS longer to process it. The IRS may have to contact you about that mistake before your return is processed. This will delay the receipt of your tax refund.
The IRS reminds filers that e-filing their tax return greatly lowers the chance of errors. In fact, taxpayers are about twenty times more likely to make a mistake on their return if they file a paper return instead of e-filing their return.

Here are eight common errors to avoid.

1. Wrong or missing Social Security numbers. Be sure you enter SSNs for yourself and others on your tax return exactly as they are on the Social Security cards.

2. Names wrong or misspelled. Be sure you enter names of all individuals on your tax return exactly as they are on their Social Security cards.

3. Filing status errors. Choose the right filing status. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction and Filing Information, to help you choose the right one. E-filing your tax return will also help you choose the right filing status.

4. Math mistakes. If you file a paper tax return, double check the math. If you e-file, the software does the math for you. For example, if your Social Security benefits are taxable, check to ensure you figured the taxable portion correctly.

5. Errors in figuring credits, deductions. Take your time and read the instructions in your tax booklet carefully. Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit and the standard deduction. For example, if you are age 65 or older or blind check to make sure you claim the correct, larger standard deduction amount.

6. Wrong bank account numbers. Direct deposit is the fast, easy and safe way to receive your tax refund. Make sure you enter your bank routing and account numbers correctly.

7. Forms not signed, dated. An unsigned tax return is like an unsigned check – it’s invalid. Remember both spouses must sign a joint return.

8. Electronic signature errors. If you e-file your tax return, you will sign the return electronically using a Personal Identification Number. For security purposes, the software will ask you to enter the Adjusted Gross Income from your originally-filed 2011 federal tax return. Do not use the AGI amount from an amended 2011 return or an AGI provided to you if the IRS corrected your return. You may also use last year's PIN if you e-filed last year and remember your PIN.

Additional IRS Resources:

• IRS Free File
• E-file Options
• IRS Tax Tip 2013-13, Determining Your Correct Filing Status
• Tax Topic 303 Checklist of Common Errors When Preparing Your Tax Return

IRS YouTube Videos:

• Do Your Taxes for Free: Taxes Made Less Taxing - English | Spanish
• Tax Return Errors - English | Spanish | ASL

IRS Podcasts:

• Tax Return Errors - English | Spanish

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Nine Tips on Deducting Charitable Contributions

If you are a slowpoke like me and have not done your federal income tax return yet, then here are some tips from the IRS on taking charitable deductions:

Nine Tips on Deducting Charitable Contributions

Giving to charity may make you feel good and help you lower your tax bill. The IRS offers these nine tips to help ensure your contributions pay off on your tax return.

1. If you want a tax deduction, you must donate to a qualified charitable organization. You cannot deduct contributions you make to either an individual, a political organization or a political candidate

2. You must file Form 1040 and itemize your deductions on Schedule A. If your total deduction for all non-cash contributions for the year is more than $500, you must also file Form 8283, Non-cash Charitable Contributions, with your tax return.

3. If you receive a benefit of some kind in return for your contribution, you can only deduct the amount that exceeds the fair market value of the benefit you received. Examples of benefits you may receive in return for your contribution include merchandise, tickets to an event or other goods and services.

4. Donations of stock or other non-cash property are usually valued at fair market value. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.

5. Fair market value is generally the price at which someone can sell the property.

6. You must have a written record about your donation in order to deduct any cash gift, regardless of the amount. Cash contributions include those made by check or other monetary methods. That written record can be a written statement from the organization, a bank record or a payroll deduction record that substantiates your donation. That documentation should include the name of the organization, the date and amount of the contribution. A telephone bill meets this requirement for text donations if it shows this same information.

7. To claim a deduction for gifts of cash or property worth $250 or more, you must have a written statement from the qualified organization. The statement must show the amount of the cash or a description of any property given. It must also state whether the organization provided any goods or services in exchange for the gift.

8. You may use the same document to meet the requirement for a written statement for cash gifts and the requirement for a written acknowledgement for contributions of $250 or more.

9. If you donate one item or a group of similar items that are valued at more than $5,000, you must also complete Section B of Form 8283. This section generally requires an appraisal by a qualified appraiser.

For more information on charitable contributions, see Publication 526, Charitable Contributions. For information about non-cash contributions, see Publication 561, Determining the Value of Donated Property. Forms and publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

• Publication 526, Charitable Contributions
• Publication 561, Determining the Value of Donated Property
• Schedule A, Itemized Deductions
• Form 8283, Noncash Charitable Contributions

IRS YouTube Videos:

• Fair Market Value of Charitable Donations - English | Spanish | ASL

Barter - the Black Market Economy & Taxes

With the economy in decline, many people resort to the age old method of exchanging value - "I'll give you this, if you'll give me that."  Bartering takes place under the radar, and typically does not leave much of a paper trail.  Does this happen that much?  According to a recent article in Business Week, "the U.S. barter market is a staggering $12 billion annually. In other words, $12 billion worth of goods and services are traded every year without any currency changing hands."   Much of that amount escapes tax - not because it is not taxable, but because ... well ... err ... basically because it takes place under the radar, and does not leave much of a paper trail.  But the IRS wants you to know that when you are paid in products or services rather than money, it is still taxable income to you, and needs to be reported.  Here is their latest Tax Tip on the subject:

Issue Number: IRS Tax Tip 2013-29

Inside This Issue

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Four Things You Should Know if You Barter

Small businesses sometimes barter to get products or services they need. Bartering is the trading of one product or service for another. Usually there is no exchange of cash. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services.

The IRS reminds all taxpayers that the fair market value of property or services received through a barter is taxable income. Both parties must report as income the value of the goods and services received in the exchange.

Here are four facts about bartering:

1. Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually. The exchange must give a copy of the form to its members and file a copy with the IRS.

2. Bartering income. Barter and trade dollars are the same as real dollars for tax reporting purposes. If you barter, you must report on your tax return the fair market value of the products or services you received.

3. Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.

4. Reporting rules. How you report bartering varies depending on which form of bartering takes place. Generally, if you are in a trade or business you report bartering income on Form 1040, Schedule C, Profit or Loss from Business. You may be able to deduct certain costs you incurred to perform the bartering.

For more information, see the Bartering Tax Center in the business section at IRS.gov.

Additional IRS Resources:

• Bartering Tax Center
• Schedule C, Profit or Loss from Business, and instructions

IRS YouTube Videos:

• Miscellaneous Income - English | Spanish | ASL