Category Archives: IRS

Natural Disaster Relief: Hurricane Florence

What does the IRS do to help with natural disaster relief?

We just watched Hurricane Florence slam the Carolinas, and last year’s hurricane season between Hurricane Harvey, Hurricane Irma and Puerto Rico’s Hurricane Maria were devestating. The last several years the IRS has typically acted to provide taxpayer relief for natural disasters such as hurricanes Kartina and Rita, the 2014-2015 record snow fall in New England, the 2010 New England floods, Hurricane Sandy, Hurricane Matthew, the Ebola Outbreak in 2014, and the 2010 Hatian earthquake. As you read this you would think we were facing the end, but thank goodness there has been help from the IRS. The typical measures often include delaying various filing deadlines, delating various payment deadlines, loosening rules for write offs for damage, and allowing for certain charitable contributions.

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Natural Disaster Relief: Hurricanes Harvey, Irma

What is the IRS doing to help with natural disaster relief?

We are getting hit with a one-two punch this hurricane season between Hurricane Harvey, Hurricane Irma and who knows what else will hit. The last several years the IRS has typically acted to provide taxpayer relief for natural disasters such as hurricanes Kartina and Rita, the 2014-2015 record snow fall in New England, the 2010 New England floods, Hurricane Sandy, Hurricane Matthew, the Ebola Outbreak in 2014, and the 2010 Hatian earthquake. As you read this you would think we were facing the end, but thank goodness there has been help from the IRS. The typical measures often include delaying various filing deadlines, delating various payment deadlines, loosening rules for write offs for damage, and allowing for certain charitable contributions.

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Oops, Forget to Enclose That Tax Document?

Did you forget to enclose that tax document on your tax return? This is the largest source of IRS notices that I see. Taxpayers forget to report income from a 1099 or did not think the income was necessary to report. So, how do you deal with an IRS tax notice when you forgot to enclose the document with the tax return? Continue reading

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Do You Owe Taxes to the IRS? Can You Afford the Tax Penalty?

Did you just learn that you owe taxes to the IRS this year? Can you afford the tax penalty on the money you owe to the IRS?

Nothing can be more stressful than finding out you owe the IRS when calculating your taxes, especially when you already are struggling financially. The issue of course, is even though you can’t pay the tax, you still must file your tax return by the deadline. And, if you owe money, and you don’t have it, you will face a tax penalty. More people hate tax time because of this! Continue reading

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IRS Takes Action on Tax Credits

Why does the IRS need to take action on tax credits?

The IRS takes action on tax credits for the 2016 tax returns during the 2017 tax season for a good reason. Tax credits and tax fraud costs the government billions of tax dollars a year. The IRS is clamping down on tax credits due to these costs. In an effort to rein in tax fraud, some new laws took effect in 2016. These laws clamp down on individuals who file a fraudulent claim on the American Opportunity Tax Credit (AOTC), the Child Tax Credit (CTC), or the Earned Income Tax Credit (EITC).

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Alimony Tax Issues

What alimony tax issues apply when paying or receiving alimony? After all, divorce can be difficult enough. Add to it that divorced individuals may have to pay or receive alimony just complicates issue. If this is your situation, here are some tips for how to correctly treat the payments on your tax return. Continue reading

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Address Change? Let the IRS Know!

address change, change of addressHave you changed your address lately? You may want to keep these things in mind to make sure you receive your refunds or information from the IRS. This is true for your home or business address.

Here are 11 ways to change your address on file with the IRS.

  1. Write the new address in the correct boxes on your tax return.
  2. Inform your employer of your new address, this will ensure that you get your W-2 forms on time.
  3. Send the IRS your new address in writing when you file your return. Include your full name, old and new addresses, Social Security Number or Employer Identification Number and your signature. If you filed a joint return, make sure you include the both taxpayers information. If since filing, you and your spouse or partner have moved to separate address, both of you should notify the IRS of your new information.
  4. Use a Change of Address Form, Form 8822, to submit a name or address change. You can do this any time.
  5. Should an IRS employee contact you about your account for another reason, they will do so in writing and will provide phone number to call. You may be able to verbally provide a change of address by phone while handling that other business.
  6. Notify the post office of your address change. This will help you if you changed your address after you filed your return. Your mail can be forwarded. This is especially true if you file quarterly estimated payments.
  7. You can find the address of the IRS center where you file your tax return or download Form 8822 and Change of Address information. The form is also available by calling 800-TAX-FORM (800-829-3676).
  8. Complete your change of address online. If for some reason you think your check was returned to the IRS, you can access  Where’s My Refund? on the IRS website. You will be required to provide your social security number, filing status, and the amount of your refund. For more information, read Understanding your CP31 Notice.
  9. The IRS does use the Postal Service’s change of address files to update taxpayer addresses, but it is still wise to notify the IRS directly.
  10. If you use the mailing label that comes with your tax package, make sure the correction of the address is readable.
  11. Taxpayers who make estimated payments throughout the year should mail a completed Form 8822, Change of Address, or write the IRS center where you file your return. You may continue to use your old pre-printed payment vouchers until the IRS sends you new ones with your new address. However, do not correct the address on the old voucher.

Address Change or Other Tax Information

Alex Franch, can give you excellent advise on address changes and other important tax topics. Worthtax will prepare the notices needed for the Internal Revenue Service and your state tax information. You can reach Alex at 781.849.7200. In addition to our guaranteed pricing, we are giving $50 American Express gift cards to any new clients who have their taxes completed and filed by WorthTax. Worthtax provides ultra-convenient service and triple check accuracy. We have locations in Quincy, Weymouth and Dedham.

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Should I Make An Estimated Tax Payment?

estimated tax paymentEstimated tax payments, should I make one? That is a good question and often comes up at the end of every year as to whether one should make an estimated tax payment or not. Let’s split this up into three parts: Are you required to make estimated tax payments?  Do I want to make an estimated tax payment?  Do I benefit from making an estimated tax payment?

Are you required to make estimated tax payments?

The rules for making estimated tax payments are a bit convoluted as outlined in IRS Pub 505.  If on 4/15 you will owe $1,000 or more, if you paid less than 90% of your 4/15 balance, or if you paid under 110% of your prior year balance, you might have to pay estimated taxes.  I will once again refer you to IRS Pub 505 for the details and whether they pertain to you.  Additionally, one must keep in mind that estimated tax payments should have been made in four equal installments on 4/15, 6/15, 9/15, and 1/15.  For example, if you were required to make estimated tax payments but you only made one payment in December, you will still get hit with an estimated tax payment penalty.  If you are behind, it is better to get caught up to stop future penalties from accruing.

Do I want to make an estimated tax payment?

Some people make their estimated tax payments regularly and prefer to overpay than to underpay or try to thread the needle and break even.  For some, the prospect of owing money on 4/15 is horrifying.  In the case of a taxpayer who regularly makes estimated tax payments, an overpayment can be applied forward in lieu of the April 15 estimated tax payment; after all, why get a refund just to write a check the next day back to the IRS.  A lot of this is personal preference.  That being said, we have discouraged using a large refund as a savings vehicle because there is a (small) risk that your refund gets delayed for a variety of reasons such as not being able to e-file or tax identity theft.

Do I benefit from making an estimated tax payment?

You may benefit from making an estimated state tax payment before 12/31.  As an individual, you are a calendar year taxpayer and you can deduct the state income taxes you paid in the year they were paid.  Therefore, if you make your state tax payment before 12/31, you can receive a deduction for it on this year’s taxes but this does not always make sense.  If you had a windfall, you can benefit from making the state tax payment in December as you will be in a higher tax bracket in the current year except when you are in the AMT in which case you are better off waiting until January.  If you make estimated tax payments regularly, the timing of the state tax payment may not matter as much since you then miss out on the deduction for next year.

Clear as mud right?  Should you then go ahead and make an estimated tax payment, I can definitively say, it depends. You are always welcome to call me,  Alex Franch, BS EA , at 781-849-7200.

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Is Your Hobby a For-Profit Endeavor?

2015_07_23 Hobby or business photographer 13113978_071b7938fbWhether an activity is a hobby or a business may not be apparent to the customers of the endeavor. However, distinguishing the difference is necessary for tax purposes. Why? Because the tax treatments are substantially different. The IRS provides appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or if it is engaged in as a hobby.

Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”

This article provides information that is helpful to determine if an activity qualifies as an activity engaged in for profit. It also addresses what limitations apply if the activity was not engaged in for profit.

Is your hobby really an activity engaged in for profit?

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.

The following factors, although not all-inclusive, may help you determine whether your activity is an activity engaged in for profit or a hobby:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
  • Have you changed methods of operation to improve profitability?
  • Do you have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed to be engaged in for profit if it makes a profit in at least three of the last five tax years. This includes the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

Hobby Deductions

If it is determined that your activity is not for profit, allowable deductions cannot exceed the gross receipts for the activity.

Deductions for hobby activities are claimed as itemized deductions on Schedule A and must be taken in the following order and only to the extent stated in each of the three categories:

  • Expenses that a taxpayer would otherwise be allowed to deduct, such as home mortgage interest and taxes, may be taken in full.
  • Deductions that do not result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent that gross income for the activity is more than the deductions from the first category.
  • Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent that gross income for the activity is more than the deductions taken in the first two categories.

Do you have questions about your endeavor, if it is a hobby or a business?

If you have questions related to your specific business or hobby circumstances, please give please give Alex a call at 781-848-7200. You are also welcome to leave a comment below or on our Facebook or Google+ page. Either way, Alex can help you sort through the tax treatments for what you do.

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photo credit: diego pablo via photopin (license)

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Winning the Lottery, What is the Best Payment Option?

2015_05_20 Lottery2Did you win the lottery? If you are reading this, I will assume you did. You are asking yourself whether to take the lump sum or the 20 year payout option. Our Weymouth office is on the opposite end of Columbian Street Lottery office so we get more than our fair share of lottery winners around our office. To be fair, most are lost and looking for directions.

Lottery Payment Options

If you won a large sum, say $1M or more, you have the option of taking a lump sum or a 20 to 30 year payout on your winnings depending on the lottery and state involved. I believe Massachusetts offers a 20 year payout. The 20 years are guaranteed so if you die, someone else gets to spend it.

Lump Sum

The pros to the lump sum include a boatload of money right now! The cons are that you won’t get the full prize. You might get 60% of the prize money. In addition, you will be thrown into a higher tax bracket, This means a bigger chunk of money will go to taxes.

Annual Installment

In this case, if you take annual payments, you do not have a boatload of money burning a hole in your pocket. You will eventually receive the full prize. And, you may save a chunk on money on taxes.

Which one is better?

On smaller prizes, say $1M to $3M, you may be better off with the payment option. It is very easy to spend the lump sum of money and paint yourself into a corner financially with a house and grown up toys that are too expensive to maintain. They payment option can provide an income stream for many years after your prize. Additionally, because the annual payments are smaller, they will be likely be taxed at lower rates.

On larger prizes, say greater than $20M, you may be better off with the lump sum. Even the reduced amount is difficult to spend down and should be able to provide an income stream on its own. Because the annual payments are larger, the tax becomes more equalized between the lump sum and the payment options.

I crunched a few numbers on a $2M prize and a $50M prize. I also made the following assumptions: 5% rate of return, $20K spent per year on the small prize and $120K per year spent on the larger prize. On the $2M prize, the payment option is better after year 13. On the $50M prize, the payment option does not catch up until year 16. That being said, the greater the rate of return, the better the lump sum is.

Other Lottery Considerations

How old are you? Remember, you cannot take it with you.

Do you still want to work? Are you working for the weekend, do you have a meaningful career, or would you prefer neither?

How responsible are you? Are you going to make it rain like you are insane in the brain, or would Homer chide you as ‘Boring!’?

Do you have questions about Winning the Lottery?

WorthTax can help you work through all the IRS and State rules. If you have any questions, please call Alex at 781-849-7200 and make an appointment today.

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