Michigan Tax Credits

Just like filing your federal income tax return, certain states have their own income tax return. And just like the federal return, the state return has possible credits to help offset your income for the year. Two of the main credits for Michigan are the Homestead Property Tax Credit and the Home Heating Credit.

Homestead

Before getting into the property tax credit and the home heating credit it is important to understand homestead. An individual’s homestead is the place where they have a permanent home. The place you plan to return when you go away for a while. And the individual must own and occupy or be contracted to pay rent and occupy the home. An individual only has one homestead at a time. Second homes or other property one owns does not qualify as homestead.

Homestead Property Tax Credit

The purpose of this credit is to help families or individuals who have a household income of $50,000 or less. The credit is based off household income and property taxes paid. The maximum amount for this credit is $1,200. To claim the credit it is as easy as filling out Form MI-1040CR and meeting the qualifications. The qualifications for the credit are as followed:
• Homestead is in Michigan
• Resident of Michigan for at least 6 months
• You own or pay rent on a property in which property taxes were levied
• If you own a home: The taxable value is $135,000 or less
• If you rent a home: Your total household resources are $50,000 or less

If an individual is blind or a veteran, then Form MI-1040CR-2 is also filled out to obtain a large credit amount.

Home Heating Credit

Similar to the Property Tax Credit there are qualifications and a form for the Home heating credit. The form is the MI-1040CR-7 and the qualifications are:
• Michigan homestead
• Own home or contracted to pay rent
• No full-time student who was claimed as a dependent
• Did not live at college or university
• Income is within limits- Shown below in chart

Different from the Property credit the Home heating credit is based off the number of exemptions. With the standard allowance and ceiling goes up with the number of exemptions taken. Below is a chart on the amounts allowed with the income ceiling as well for 2017.

Exemptions               Allowance                            Ceiling
0 or 1                        $465                                  $13,271
2                               $626                                  $17,871
3                               $787                                  $22,471
4                               $948                                  $27,071
5                              $1,109                                $31,671
6                              $1,270                                $36,271
Over 6             +$161 for each additional           +$4,600 additional

Now both the Homestead Property Tax credits and the home heating credit are both great credit for lower income families in Michigan. These should be taken if an individual qualifies for them. However, when couples are married filing separate, some don’t take the credits. With Form 5094, Married Filing Separately and Divorced or Separated Claimants Schedule, it is possible to calculate total household resources.


Self Employed Quarterly Taxes

Going from an employee to a boss sounds great, and doing something you love everyday is inspirational. However, as a self-employed individual it is important to know about paying quarterly income taxes.

When to pay Quarterly Taxes

For individuals in a sole proprietorship, a partnership, or an S-corp. if the estimated taxes owed at the end of the year are over $1,000, then it is important to pay quarterly taxes.

Quarterly taxes, are taxes paid at the end of every business quarter during the fiscal year. A fiscal year is a year as established for taxing and accounting purposes.

Businesses whose fiscal year starts on January 1st the due dates for quarterly tax payments are: April 17th, June 15th, September 17th and January 15th of the following year. If the tax return is filed before January 31st the fourth estimated tax payment is not due if the tax is paid in full when the return is filed. If the businesses fiscal year does not start on January 1st then the estimated taxes are paid on different dates all depending on when the fiscal year starts.

If a tax is owed and is not paid in full when the tax return is filed there could be a penalty applied to the account.

How much to Pay

As an employee, taxes are taken out of your income automatically, the amount paid to the government in taxes is about 19% of your income. This is broken down into three taxes, federal income taxes, social security, and medicare.

There are different ways to calculate how much to pay in estimated quarterly taxes. It is possible to take the estimated the tax owed by taking the AGI, figuring out the taxable income amount, take off deductions and credits to find out about how much will be owed. However, it is easier to figure out how much to pay off last year’s tax return and estimating off that based on the amount owed last year.

How to Pay

The IRS has many options to help everyone pay their taxes on time, in a way comfortable for the individual. Some different ways to pay the IRS estimated/quarterly taxes are:

• Pay Online
• Direct Pay
• Pay by Card
• Electronic Fund Withdrawal
• Online Payment Agreement
• Pay by Cash
• Pay by Check or Money Order

There are stipulations on some of the different ways to pay the IRS. Paying by card there is a small processing fee. Paying by cash is only possible under special circumstances and the individual must make a request. Paying by check or money order must be sent to the correct address which changes depending on where the individual lives.

To learn more on how to pay the IRS the link below shows all the possible ways.

https://www.irs.gov/pub/irs-pdf/f1040es.pdf


What to Expect When Being Audited on a Tax Return

Finally, you filed this year’s tax return and now can relax. Then suddenly a letter in the mail from the IRS, an audit. No worries, it is not as bad as it seems.

What is a Tax Audit?

A tax audit is an examination of individual or business income tax returns carried out by the IRS. The examination is to verify that the deductions and income are accurate.

Just because the IRS is auditing a tax return, it does not mean the tax return is wrong. Sometimes it is random selection so that the IRS can make sure everything is correct. In addition, if a tax return looks like there is a problem or if a tax return involves issues with other taxpayers, an audit may occur.

The Steps in the Audit

Step for when the IRS decides to audit an individual or business tax return:

• A letter from the IRS will be received in the mail
• Gather Supporting Documents
• IRS reviews documents
• Agree on an outcome

The letter will have all of the reasons and documentation needed for the audit. In addition, the contact information, like the mailing address for audits completed by mail, for the IRS is on the letter. If there are too many documents to mail other options include scheduling a face-to-face audit with an IRS representative.

Audit Timeline

The IRS tries to audit tax returns as soon as possible after filing. Most will be for tax returns filed in the last two years. However, the IRS can pull returns from the last six years for an audit if needed. The time the audit itself varies from case to case and depends on how much information is needed and the availability of both the individual and the IRS.

Once the IRS has mailed the audit request, 90 days are provided to collect the information and provide it to the IRS. An extension can be filed with the IRS; this request can be mailed to the IRS. After that if it is not resolved then that IRS can request extending the statute of limitations for assessment tax.

Audit Outcome

An audit can end in three ways: No change, Agreed, or Disagreed.

No change: An individual has supplied documentation on all of the concerns and there are will be no changes on the tax return.
Agree: The IRS proposed some changes to the tax return and the individual understand the changes and agrees with them.
Disagree: When the IRS proposes changes, the individual disagrees with the changes. When the outcome is disagree a conference with an IRS manager, or the IRS offers mediation is the next step.

Another option is filing an appeal if time allows it. After all of the information is given and a conclusion is reached, the audit is over.


The Time is Ticking to Collect Your Tax Refund

There are limitations for how long someone has to collect their refund, and there are two rules to go along with the limitations.

Rule 1

The first states that if after three years the tax return has still not been filed then the refund expires. For example if a 2016 tax return is due by April 18, 2017, the refund expires after April 18, 2020. That rule is called the due date rule. The due date rule is the most common.

Rule 2

The other rule slides through the cracks sometimes. This rule states that after two years from the date the taxes were paid someone could claim their refund. For example, same employee as above, a W-2 wage earner their last paycheck was on December 31, 2016, under this rule, they would have until December 31, 2018 to collect their refund.

Use whichever rule provides more time to collect. So in this case the employee would have until April 2020 to file and collect their tax refund using the due date rule.

Statute of Limitations

Likewise, the IRS only has three years to audit a tax return, then 10 years to collect any taxes owed. There is also the deadline for when someone must file his or her return by. All of these laws together create the Statutes of Limitations. Under the statutes of limitations, if the money is not collected in the time allotted the government keeps the money. The taxpayer cannot obtain the money, nor can it go towards future taxes.


Rental Income and Expenses

Graduated college and getting ready to buy a house, then what? Is the plan to live there forever? What happens when it is time to move? For some the answer is yes they plan to live in their first house for the rest of their lives. For others they plan to just sell the house and move to the next when it is time. Then there are the few that decide to keep the old house and make it a rental for some extra income.

Now this house could be a vacation home that they visit one week out of every year, or a condominium they rent out to college students. Either way reporting the income from the rental home is a step in filing the yearly tax return.

Where to Report Rental Income

If renting out the property us just for some extra money, then the income and expenses are reported on the Schedule E, Supplemental Income and Loss. However, if this is how an individual is making a living, by renting out properties, then the income goes on the Schedule C, Profit or Loss from Business (Sole Proprietorship).

After knowing where to report the income and expenses of the rental property, it is important, to understand what would counts as income and expenses.

Income and Expenses

Incomes for the rental property are; amounts paid to cancel the lease, advanced rent payments, and security deposits. These all go into the income made from the rental property.

Some of the rental expenses are; depreciation, repair costs, and operating expenses. Other expenses include such as mortgage interest, real estate taxes, insurance, but there are limitations if the owner uses the house for part of the year, such as a vacation house.

It is only possible to deduct expenses for when the rental property was available to the general population. Therefore, family and friends that can go stay for free or little charge do not count as days the rental property was on the market.

Example:

Family and friends stay for 37 days in the rental home, and the home was then up for rent to the public the other 328 days in the year, then it is possible to deduct 90% of the expenses. Because 90% or the days it was available to the public.

Renting properties gives another person a place to sleep and grow. This also gives extra money the homeowner to help them in next chapter of their life. When renting the property just remember that the income and expenses need to go on the yearly tax return, and the rest will be easy.


Traditional IRA versus Roth IRA

Looking for a different retirement plan other then 401(k)s or 403(b)s offered by employers. There are also Traditional IRA’s and Roth IRA’s. The difference between each come down to the income limits, the tax incentives, and the withdrawal rules.

Income Limits

Traditional IRA

To contribute an individual must be younger than 70 1⁄2 and be earning an income. Whether the contribution is deductible depends on if the taxpayer or spouse (if married) is covered by a retirement plan through their job, such as a 401(k).

Roth IRA

For a Roth IRA there is not an age restrictions, but they have an income restriction. If someone made less than $133,000 in 2017 as a single taxpayer, they can contribute to a Roth. For married filing jointly, the gross income is $196,000 in 2017.

Tax Incentives

Traditional IRA

The contributions are tax deductible in the year that they were contributed. Then as withdraws are made from the account, it is taxed at the ordinary income tax rate.

Roth IRA

There is not a deduction on the contribution, however, when withdrawing from the account the income is tax-free.

For both accounts, taxes are not paid on the growth of the account funds, as long as the funds stay in the account.

Withdrawal Rules

A difference between the IRAs is the time someone must withdraw from the savings. For both the starting collecting age is 59 1⁄2.

Traditional IRA

An individual must start taking a minimum distribution when they turn 70 1⁄2 even if the funds are not needed at that time. The minimum distribution amount is calculated by the balance in the account and divided by the distributions period.

Roth IRA

The money from the account does not need to be withdrawn. However, for a Roth the first distribution made to the account must have been 5 years before withdrawing from the account without a penalty.

Extra Considerations

A Traditional IRA, can lower the amount of taxable income for that tax year and help some people qualify for different tax incentives such as the child tax credit or student loan deductions.

With Roth IRAs, there are no limits to what the money can be invested in like in a traditional one. Also with the Roth the withdrawing is tax-free before the age of 59 1/2.

With both a Traditional and a Roth, up to $10,000 can withdrawn for a qualified first-time home buyer expenses if the individual is under 59 1/2 .


How to Fill out Schedule C

To help fill out line 12 on the 1040 it was important to know how to fill out the Schedule C for a business.

General Info

The top section of the Schedule C is the general information about the business. This section includes; principal or professional business and the business code going with the principal business, for tax preparation services it is Code 541213. To find the business code look at the chart on page 17 of the schedule C instructions. This code helps tell the IRS a bit more about the business; such as what expenses are “normal” to deduct.

Other information needed is the Businesses Name, EIN, and Business Address. The EIN is the Employer ID Number given to a company from the IRS. In addition, it is important to know whether the business is on a Cash or Accrual accounting basis. Then at the bottom of the section are four questions with yes or no check boxes to answer about the business.

Part 1: Income

Line 1 for the Income Section is for gross receipts and sales; any money the business made through providing the service or product. Line 2 goes through returns and allowances for the business; items returned and a refund given for the product.
Line 4: Cost of Goods Sold is broken down in Part 3 of the schedule C. Other income is reported on Line 6 and includes things like federal and state gasoline tax credit or refund.
Lines 3, 5 and 7 are just adding or subtracting different line numbers together to get totals. Gross Sales subtract Returns and Allowances subtract Cost of Goods Sold and add Other Income is the breakdown of the Income Section.

Part 2: Expenses

Seperate this section into two mini sections. The first section is composed of lines 8 through 27b. It breaks down all of the expenses deductible for businesses. Some of the main categories include; Advertising, Office Supplies, Taxes, Travel and Wages. Line 9, Car and Truck Expense, is broken down farther in Part 4 of the Schedule. Line 27, Other Expenses, is also broken down in Section 5 of the Schedule C even more.

The second mini-section starts with total expenses on line 28; this is where all of the amounts in the above lines are added together. The other major line in this part is Line 30: Expenses for business use of home.

To calculate the business home deduction using the simplified method, take the area of the home office and multiply it by the home office deduction rate. In 2017, the rate was 5 dollars a square foot. A room 11’ by 12’ is used for a home office; this is a 121 square foot room. The deduction would be $605 using the simplified method.

Another way to calculate the home office deduction is through the expenses spent on the home office. For this method, Form 8829 is required. On this form, it will break down the total size of the home, the size of the home office and then all of the expenses paid towards it. Then taking the percentage of the home used for work and multiply that by the total expenses paid. To get a longer example look at the example if Part 4: Information on Your Vehicle.

Part 3: Cost of Goods Sold

Part 3 is a helpful section to help calculate the cost of goods sold for Line 4 of the Schedule C. Calculating cost of goods sold is a systematic process going through: inventory at the beginning of the year, inventory purchases, labor costs, and the inventory at the end of the year.

Part 4: Information on Your Vehicle

When a vehicle is used for business, not just commuting to work and home, then the vehicle becomes deductible. Use Part 4 of the Schedule C if the taxpayer is claiming car or truck expenses on line 9 of expense section.

Example: Susan drives her car for everything, getting to and from work, going to business meetings and appointments, driving her kids to sports practice and going to the store. During the last year, she drove 2,000 miles in commuting to work, 3,000 miles to appointments, and 4,000 miles of other miles. During the year, she also paid 100 for licensing, 300 in oil, 1,000 to repairs and 50 in tolls. How much does she report in Car or Truck Expenses?

Mileage

If Susan uses mileage to calculate her deduction, she will use Part 4 of the Schedule C. To calculate the expense she would take her the miles she used for work, being 3,000. Commuting miles are not included in the total business miles.

After, if Susan takes the 3,000 miles and multiples it by the mileage rate she will have her deductable amount. The business mileage rate for 2017 was .535. Taking the miles and the mileage rate, Susan’s Car and Truck Expense would come out to be 3,000*.535 = $1,605

Expenses

If Susan uses the expenses paid to calculate her car deduction then Form 4562 will be filled out instead of Part 4 of the Schedule C. First Step would be to find the business use of the car. With 3,000 miles for business and 6,000 total other miles (2,000 commuting + 4,000 other), the business use would be 33%. This means 33% of the expenses would be deductible. Total expenses on the car were $1,450 (1000 repairs, 300 oil, 100 licensing, and 50 tolls). This makes Susan’s Car and Truck Expense $478.50.

For Susan it would be smarter to take the deduction based off mileage. Leaving Part 4 of the Schedule C waiting to be filled out.

Part 5: Other Expenses

If there are expenses that don’t fall into one of the categories shown on lines 8-26 the expenses can go on line 27 Other Expenses. Each extra/miscellaneous expense should be reported here. To report the expenses start with the name of the expense, then the expense amount next to it. Total the line items and add the amount to line 27a.


How to Fill out Form 1040- Part 3: Lines 10-12

Continuing with the Income section of the 1040, there are documents and forms needed to be filled out with lines 10-12 on Form 1040. For line 10, the form used is Form 1099-G. For line 12, the additional document is the Schedule C.

Line 10: Taxable refunds, credits, or offsets of state and local income taxes

An individual is not required to report their tax refund if during the previous year they did not itemize their deductions or if they elected to deduct sales tax instead of income taxes.

If it is required to report the tax refund amount, then the individual should receive a Form 1099-G. On Form 1099-G Box 2: State or Local Income Tax Refunds, Credits, or Offsets is where someone can find the amount to report on line 10 of the 1040.

If a 1099-G was not mailed to the individual for the previous tax year, it is possible that the document was only made available online. An individual can check the status of the 1099-G with the government agency that made the payments to them.

Line 11: Alimony Received

On line 11, the Alimony received throughout the year is reported. Alimony is a husband’s or wife’s financial support or a spouse after separation or divorce, used in cases of child support.

Along with reporting the alimony received, it is important to obtain the receivers’ social security number for the payer. If this is not done, there could be a penalty for the receiver.

Line 12: Business Income or (Loss). Attach Schedule C or C-EZ

If an individual owns and operates a business, such as a sole proprietorship, then all of the income and expenses will be reported on Schedule C. After all the income and expenses are on the Schedule C the net income or loss of the business will be added to the 1040 on line 12. The net income or loss can be found at the bottom, on line 31, of the Schedule C.

Partnerships and Corporations are not required to fill out Schedule C. A business return, Form 1065, or a K-1 will be filled out for them. These will also not be reported line 12 of the 1040.


How to Fill out Form 1040- Part 2: Lines 7-9

Income Section of the 1040

After filing out the personal information section on the 1040 it is time for the income section of the 1040. For lines 7 through 9 there are multiple documents and forms that help to fill out the line amounts. Some of the different documents that an individual could obtain are W-2, 1099-INT, 1099-OID, and 1099-DIV. A form that might also be needed to help fill out the 1040 lines 8 and 9 is Schedule B.

Line 7: Wages, Salaries, Tips, Etc.

When looking at your W-2 at the end of the year it is important to know what numbers to use on the tax return. Box 1 on the W-2 is your wages. This number goes on line 7 of your 1040. If you have multiple W-2s it is important to add all the numbers found in box 1 on the W-2. More of the W-2 is used later on the 1040, but only box 1 is used on line 7 for the 1040.

It is also important to make sure there is a copy of all the W-2s attached to the 1040 before filing the return.

Schedule B

For lines 8 and 9 on the 1040 it is possible that a Schedule B is needed to also be filed. Schedule B is the Interest and Ordinary Dividends form. The form is easy to fill out and is separated into 3 parts. Part 1-Interest, Part 2-Ordinary Dividends, and Part 3-Foreign Accounts and Trusts. For line 8, only Part 1 will be used, and for line 9 only Part 2 will be used.

These are only if Schedule B is needed. Some of the different reasons a schedule B is required are:

  • Income over $1,500 of taxable interest or ordinary dividends.
  • Received interest from a seller-financed mortgage and the buyer used the property as a personal residence.
  • Had accrued interest from a bond.
  • You are reporting a lesser income than the amount shown on Forms 1099-OID and 1099-INT.
  • Having received interest or ordinary dividends as a nominee.
  • A nominee, in this case, is an individual or company whose name is given as having title to a stock, real estate, etc., but who is not the actual owner.
  • You had a financial interest in an account in a foreign country or you received a distribution from a foreign trust.

Line 8a: Taxable Interest

If you receive a 1099-INT or a 1099-OID at the end of the year, then you probably have some taxable interest.

On Form 1099-INT Box 1: Interest Income is the most common box filled out for individuals. This amount would be put on Line 8a on the 1040. Also Box 3: Interest on U.S. Savings Bonds and Treas. Obligations would go onto line 8a.

On Form 1099-OID boxes 1 and 2 are the interest income used for line 8a on the 1040.

Line 8b: Tax-Exempt Interest

Similar to Taxable Interest, on Form 1099-INT there is a box for tax-exempt interest, this is box 8 on the 1099-INT. This number flows though to line 8b on the 1040. This income can be from tax-free securities such as municipal bonds.

On the 1099-OID form, there is a box for non-taxable interest as well. Box 11- Tax-exempt OID, this box will also go onto line 8b along with the interest income from any 1099-INT that is non-taxable.

This number does not affect the individuals AGI. However, the tax-exempt interest helps to determine the taxable amount of social security benefits.

Any interest that is reported on line 8b also must not be recorded on line 8a. Make sure the two lines do not have crossing-over numbers. There is no interest amount that is both taxable and non-taxable.

Line 9a: Ordinary Dividends

What is a dividend? A dividend is an amount of money paid to shareholders of a company. Dividends are typically paid quarterly and come out of the profits of the business.

Another form you might receive at the end of the year is a 1099-DIV. Box 1 on the 1099 is the number that is put on line 9a for ordinary dividends.

Line 9b: Qualified Dividends

When you receive a 1099-DIV box 2 has the Qualified Dividends amount. This amount goes on line 9b of the 1040.

If you have more than one 1099-Div make sure all of the box 1’s are added to go on line 9a and all of the box 2’s are added for line 9b.

 


Blog Series: How to fill out Form 1040- Personal Information, Filing Status, and Exemptions

When looking at the top of the form 1040 there are three sections before you even get to numbers. These sections can help let the IRS help identify each individual, and figure out how much should be deducted on the tax return for everyone.

Personal Information

In the personal information, it starts with the taxpayer and spouses (if filling a joint return) full names and social security numbers. After that, it goes into the taxpayers address, city, state, and zip code. For 2017, there was also a box that could be checked if you wanted to put three dollars to the presidential election campaign.

Filing Status

Filing status is broken into 5 sections:

1. Single

2. Married filing jointly

3. Married filing separately

4. Head of Household

5. Qualifying Widow(er)

If you are a single individual with no dependants, you check the box next to single. However, if you are un-married and have dependants, the correct box to check is “Head of Household.” If you are married, you can choose between married filing jointly or married filing separately as a filing status. This is up to the taxpayer and spouse, both must file using the same status, one cannot choose joint and the other choose separate. When filing joint, it combines all of your income and expenses onto the 1040, where if you file separate returns it is similar to filing a single tax return.

Exemptions

There is also a section on exemptions. This starts by checking the box for yourself and your spouse, if applicable. Then any dependents that you and your spouse potentially have get added. Similar to the “Personal Information” section dependent’s information includes full name, social security numbers, and relationship to taxpayer.

After filing out the dependents section and checking the boxes for yourself and spouse, (if necessary) there is one last step. On the side of the exemptions box there are five lines. The top one is the number of checks you made. This number could be a one or a two. A one is for single, head of household, and married filing separately. While a two is entered for married filing jointly.

The next three lines are for number of dependents. Line 1 is for dependents who lived with the taxpayer during the year. The second line is for dependents who did not live with you due to divorce or separation. The third is for dependents that were not listed in the above two sections.

The 5th line is for the total number of exemptions. You can find this number by adding all of the above lines together.