Failure to File and Failure to Pay Penalties for Income Taxes

Would you believe that the penalty of not filing a tax return is much higher than the penalty for not paying the taxes owed? It is recommended to file a tax return on time to keep penalties from getting too high. As the penalties continue to grow on the already existing tax balance, interest is growing on top of that.

Failure to File Penalty

The Failure to File Penalty is 5% of the unpaid tax each month up to a maximum of 25%. There is a minimum penalty of $205, unless the individual owes less then 205 dollars, then the penalty is 100% of the amount owed. For example, for someone who would owe $100 after filing, the penalty for not filing is another $100. If someone owes $800 the penalty would be $205. Say if the amount due is around $5,000 the penalty would be and extra $250 a month for 5 months with a maximum penalty of $1,250.

Failure to Pay Penalty

The Failure to Pay penalty is 0.5% of the unpaid taxes each month. It can build up to as much as 25% of their unpaid taxes as well. For example, if after filing an income tax return there is a tax balance of $1000, IRS will charge an extra $5 penalty each month up to a maximum of $250.

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.

How to Fill out Form 1040- Part 4: Lines 13 & 14

Both lines 13 and 14 have something in common. They are either gains or losses on the sale of different property. The difference between the two are; line 13 is for a personal asset sold and can use Schedule D and/or Form 8949. Whereas line 14 is for business property and uses Form 4797.

Line 13: Capital gain or (loss).

When selling personal assets and taking a gain or a loss on them is needed information to fill out your 1040 correctly. The form used to organize the information is Schedule D. After Schedule D is filled out it gets attached to the back of the 1040.

To fill out the schedule it is first good to understand if your asset is a short-term or a long-term capital gain. A long-term gain is having the asset for a year or more before selling it. Where a short term gain is having the asset for under a year and then selling it and receiving the gain.

After that is established it will be important to know the proceeds from the item and the cost basis for the item. This is to help figure out the gain or loss amount of the sold property. The third part of the schedule is the summary section of the form. This part continues on to find the total of all sales.
Sometimes a schedule D is not needed for the asset sold. If this is the case, then next to line 13 on the 1040 there is a box. This box when checked lets the IRS know you had income or a loss from the sale of an asset but a Schedule D was not needed.

Line 14: Other Gains or (loss)

Very similar to line 13, however, instead of using forms 8949 and Schedule D, Form 4797 is filled out. Line 14 is used for assets that were used in trade or in business. Once Form 4797 is filled out then attach it to the back of your 1040.

To fill out the 4797 you will need to know the date the asset was acquired, the date sold the sale price, the depreciation amount of the asset, the cost basis, and then the gain or loss amount. To find the gain or loss amount take the sale price and subtract the depreciation amount and the cost basis.

There are different parts on the Form 4797 that contribute to the type of asset that was sold and when the asset was sold. Part 1 is for assets kept over a year. Part 2 is for ordinary gains or losses, also for short-term gains. In addition, Part 3 is for Gain from disposition of property under sections 1254, 1250, 1252, 1254, and 1255.

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.

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.

Time to Panic, Going to Next Tax Bracket

We are over halfway through the year. Do you know how much you will have to pay this year in taxes? Are you afraid of earning more income and going up a tax bracket?  We will review how the tax brackets work.  It is not as bad as you may think.  Continue reading…

Important 2017 IRS Due Dates

New for 2017 are some changes to the due dates for various tax returns.  For example, partnership tax returns are due on March 15 instead of April 15.  Also, a couple of the due dates fall on a holiday and/or weekend.  When this happens, the due date is the next business day.

January 23, 2017

Tax season starts.  The IRS will start accepting and processing tax returns on this date.

January 31, 2017

– Form W-2, Wage and Tax Statement; and

– Form 1099-MISC, Miscellaneous Income.

The due dates for Form W-2 and Form 1099-Misc includes filing necessary forms to the recipient, IRS and Social Security Administration.  The requirements for filing these two forms were slightly different in previous years.

February 15, 2017

Tax refunds due to Earn Income Tax Credit or Additional Child Tax Credit will be held until this date.  A new law was put in place requiring the IRS to hold the refunds.

March 15, 2017

– Form 1065, U.S. Return of Partnership Income; and

– Form 1120S, U.S. Income Tax Return for S Corporation Return.

In previous years, partnership returns were due on April 15.

April 18, 2017

April 15 falls on a weekend in 2017 and Monday April 17 is Emancipation Day.  Therefore, tax returns are due on Tuesday, April 18, 2017.

– Form 1040, U.S. Individual Income Tax Return;

– Form 1041, U.S. Income Tax Return for Estates and Trusts;

– Form 1120, U.S. Corporation Income Tax Return;

– Form 1040-ES, Q1 Estimated Tax for Individuals; and

– Form 1120-W, Q1 Estimated Tax for Corporations.

New this year, Form 1120 Corporation returns are due in April instead of March.

June 15, 2017

– Form 1040-ES, Q2 Estimated Tax for Individuals; and

– Form 1120-W, Q2 Estimated Tax for Corporations.

September 15, 2017

– Extended Form 1040, U.S. Individual Income Tax Return;

– Extended Form 1041, U.S. Income Tax Return for Estates and Trusts;

– Extended Form 1120, U.S. Corporation Income Tax Return;

– Form 1040-ES, Q3 Estimated Tax for Individuals; and

– Form 1120-W, Q3 Estimated Tax for Corporations.

October 2, 2017

– Extended Form 1041, U.S. Income Tax Return for Estates and Trusts

December 15, 2017

– Form 1120-W, Q4 Estimated Tax for Corporations

January 15, 2018

– Form 1040-ES, Q4 Estimated Tax for Individuals

Money Held for You in an IRS Secret Account

The IRS has a secret account for all U.S. citizens.  There is money in the secret account accessible to taxpayers.  By filing Form 1099-OID, taxpayers can gain access to their own secret account.  Taxpayers have received thousands of dollars from the IRS and you can to.  Does this sound too good to be true?  Well it is.

Continue reading…