The financial website NerdWallet, Inc. quizzed Americans on their tax knowhow this past January and determined that taxpayer’s lack of knowledge costs them big bucks in lost opportunities and penalties. Here are a couple of common examples. Many believe that If you file for a tax extension beyond this year’s April 18 deadline, you can hold off on paying any tax liability that you owe. Wrong. You’re supposed to estimate the amount you owe and send the IRS a check by April 18. Anything Uncle Sam receives after that deadline will be subject to interest and penalties. Almost 60% of taxpayers do not know what a Form W-4 is. Here’s a hint: It’s a document you fill out so that your employer knows how much federal income tax to withhold from your paycheck. Your input will determine whether you end up with a refund or a tax bill at the end of filing season.
A major life change, such as a new job or marriage, will warrant a review of your W-4, but consider giving it a look every year. Do it after you file your return to limit what you owe next year or reduce an overly large refund. Understanding your income tax bracket is key to tax planning. Your tax bracket, also known as your marginal tax rate, is the highest amount of tax paid on an additional dollar of income. Your bracket increases as income rises. Effective tax planning can help you avoid a higher tax bracket and manage your taxes. If you think you can’t pay your taxes, file your tax return anyway. The penalties for not filing your taxes are far greater than the penalties and interest for paying your taxes late. The IRS is certainly not your lender of choice, but they do have installment agreements and other methods to enable you to pay your taxes due over time or postpone payment until such time that you can afford them.
If you sell real property, information about the sale is reported to the IRS and you should report the sale and any gain or loss on your personal or business tax return. Failure to report the income will result in the IRS contacting you about this missing information. The gain or loss from a home that you have personally lived in during two of the last five years is generally not taxable. Many other facts and circumstances may also apply, so see your tax professional about how to treat the sale. Taxable income can come in many forms other than wages, business profits, interest, dividends and capital gains. You can receive income in the form of money, property, or services. You are generally taxed on income that is available to you, regardless of whether it is actually in your possession.
Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of property or services you receive in bartering. If you babysit, you should report this as earned income. Unemployment benefits are included in taxable income. Rental income from personal property or real estate is considered taxable income. Canceled debt, alimony, below market loans, bribes, and gains on sale of any personal property are considered taxable income and should be included in your personal income when tax time rolls around. The IRS will never, never, never contact you by telephone or email. They will first try to contact you by mail. The IRS contacts you if you have missing or erroneous information on your tax return, if you owe them money, or have not filed a tax return for a particular year and they have wage and income information that indicates you should file.
Please do not assume that a tax assessment the IRS makes on missing information or tax returns that have not been filed are correct. Many times, funds have either been misapplied, or the IRS simply needs additional information to assess tax properly. Always engage a tax professional to help you navigate the IRS if there is anything you do not understand. It will save you heartache, time and money. Not all tax preparers are created equal. Every tax preparer who prepares taxes for compensation must have a Preparer Tax Identification Number (PTIN) issued by the IRS. The PTIN must be present on the return and the return signed by the preparer.
The IRS requires paid preparers to e-file your return or provide an explanation why it is being mailed. Some preparers, such as Enrolled Agents, CPA’s or Lawyers, are professionals who can represent taxpayers before the IRS including audits, collections and appeals. Choose your tax preparer wisely, ask many questions, ensure they are professional and understand the level of tax law that is required for your situation. Anita Jean is an Enrolled Agent and owns Financial Fitness Tax Service. She can be reached at 940.365.3115 or 5099 US Hwy 377, Suite 400 in Krugerville.