Budget Cuts Could Delay Tax Returns

The budget cuts felt by the IRS could trickle down to taxpayers in the form of delayed tax returns, warn insiders and experts.

BudgetCutSignificant Cuts

According to IRS Commissioner John Koskinen, the IRS suffered budget cuts in excess of 300 million dollars this year, which has led to short staffing and difficulties when working through returns. As a result, taxpayers are likely to experience much longer wait times to speak with IRS customer service representatives.

As the filing deadline draws closer, experts warn that longer and longer wait times will be the norm. There simply is not enough staff available to handle all of the calls that come in during prime tax season.

Longer Waits

waiting

In addition, taxpayers expecting refunds will also have to wait longer, especially if they file paper returns. Paper returns require manual review, and there are simply fewer employees available to handle such reviews. Experts anticipate the stack of returns will grow larger and larger as tax season progresses, leading to significant backlog. There are also serious concerns among experts concerning the quality of return processing by IRS workers. With fewer hands on deck, employees are more likely to experience burnout that could lead to errors or missed fraudulent returns resulting from identity theft or attempts at tax fraud or evasion.

whatyoucandoWhat You Can Do

While taxpayers chomping at the bit for tax refunds will have to exercise patience, there are things that tax filers can do expedite the process, according to the IRS commissioner,

  • Electronic filing is much faster and more efficient than filing paper returns. And the majority of taxpayers qualify to e-file their federal returns for no charge.
  • Utilizing the services of a professional accountant or tax attorney can reduce errors and help taxpayers avoid IRS inquiries for further information. The money spent to pay a professional to prepare your tax returns could be money well spent this year.
  • Complete your returns sooner rather than later if you’re expecting a refund. Waiting until the April 15 deadline increases the likelihood that your paperwork will be buried in the onslaught of returns filed during the IRS’ busiest season.

The bottom line is simple:  the IRS is short-staffed, and the general public must remain patient and work with the IRS as tax returns are generated and mailed or e-filed.

Health Coverage Exemptions: What Are They, Who Is Eligible, And How To Claim Them

The Internal Revenue Service reminds taxpayers that they will see some new things on their 2014 tax return involving the new health care law, also known as the Affordable Care Act or ACA.

healthcare_reformWhat Is It?

Under the ACA Individual Shared Responsibility Provision, taxpayers are required to obtain and pay for qualifying health care coverage throughout the year. If the taxpayer does not obtain this coverage or fails to pay the monthly premiums, they will be required to pay a tax penalty when they file their tax returns.

Who Is Eligible?

Some taxpayers may qualify for an exemption from this requirement if they fall into one or more of the approved exemption categories. These exemptions may be made for a variety of reasons including when affordable coverage is not available, when a taxpayer had a coverage gap of less than three calendar months, or if they are low income and their state did not expand Medicaid.

To complicate matters further, some taxpayers may have coverage or qualify an exemption during some months, and owe a payment for other months.

If you were without qualifying health coverage for any period of time during 2014, you should determine if you qualify for a health coverage exemption. If you qualify for an exemption, you will not have to make the individual shared responsibility payment for that month.

An exemption tool is available at HealthCare.gov to help determine if you qualify.

The following is a list of the most common health coverage exemptions currently in place:connection

Unaffordable Coverage: You may qualify for this exemption if your available health care coverage is considered unaffordable. Coverage is considered unaffordable if the lowest amount you would have paid for available employer-sponsored coverage or for coverage through the Marketplace is more than eight percent of your household income for the year.

Short Coverage Gap: You may qualify for this exemption if you went without coverage for less than three consecutive months during the year.

General Hardship: You may qualify for this exemption if you experienced circumstances that prevented you from obtaining coverage under a qualified health plan, including, but not limited to, homelessness, eviction, foreclosure, domestic violence, death of a close family member, or unpaid medical bills.

Income Below The Return Filing Threshold: You may qualify for this exemption if your household income or gross income is below your minimum threshold for filing a tax return.

Resident Of A State That Did Not Expand Medicaid: You may qualify for this exemption If you are determined ineligible for Medicaid solely because the State in which you live does not participate in Medicaid expansion under the Affordable Care Act. Also, if your household income is below 138 percent of the federal poverty line for your family size and at any time in 2014 you lived in a state that does not participate in Medicaid expansion, you may be eligible for this exemption.

Certain Non-citizens: Individuals who are not U.S. citizens or nationals and are not lawfully present in the United States are exempt from the individual shared responsibility provision. For this purpose, an immigrant with Deferred Action for Childhood Arrivals (DACA) status is considered not lawfully present and therefore is eligible for this exemption. An individual may qualify for this exemption even if he or she has a social security number (SSN).

Members Of Indian Tribes: You may qualify for this exemption If you are a member of a federally-recognized Indian tribe, including an Alaska Native Claims Settlement Act Corporation Shareholder, or if you were otherwise eligible for services through an Indian health care provider or the Indian Health Service.

How To Claim An Exemption

While you can claim most exemptions on your tax return, some exemptions require you to apply for the exemption through the Health Insurance Marketplace. No matter where an exemption is obtained, it will be reported or claimed on Form 8965, Health Coverage Exemptions.

What Is an IRS Administrative Appeal?

courtroomIf you’ve been hit with an assessment from the IRS, for instance, as the result of an audit and you disagree with the results, you are entitled to present your case in Tax Court. However, an IRS administrative appeal may produce desirable results without the need to go to court. As a taxpayer, you are entitled to dispute the results of an IRS assessment through the administrative appeal process for any reason other than religious, moral or political, conscientious objections. The professionals at Optima Tax Relief can determine whether an administrative appeal is the right course for your situation.

IRS Administrative Appeal Categories

The IRS Appeals division operates as a separate entity from IRS offices that conduct investigations. The two types of administrative appeals available are Collections Appeal Process (CAP) or Collections Due Process (CDP) hearings. Administrative appeal hearings may be conducted by mail, telephone or in person. You may represent yourself or be represented by an accountant, attorney or individual enrolled to practice before the IRS. If your tax return was prepared by a third party who is not enrolled with the IRS, he or she may be a witness, but may not represent you.

ct-irs-tax-audit-mistake-problem-0306-biz-2014-001

Submitting Your Request for Administrative Review

For assessments resulting from an audit of less than $2,500, you may approach the auditor directly or submit your request through the appeals system. Protests involving assessments of less than $25,000 may be submitted as a Small Case Request. Use Form 12203 – Request for Appeals Review, available from the IRS website, or the form referenced by your assessment. You may substitute a written statement including the items to which you disagree and your reasons for disagreement. Assessments of $25,000 or more require a Formal Written Protest including all of the following items.

  • Your name, address, and a daytime telephone number.
  • A statement of intent to appeal the IRS findings to the Office of Appeals.
  • A copy of the letter showing the proposed assessment.
  • The tax period(s) or year(s) involved.
  • A detailed description of each item with which you disagree.
  • The reason(s) for your disagreement for each item.
  • Facts supporting your position for each item.
  • Any law or legal authority that supports your position on each item.
  • The following penalties of perjury statement stated exactly: “Under the penalties of perjury, I declare that the facts stated in this protest and any accompanying documents are true, correct, and complete to the best of my knowledge and belief.”
  • Your signature beneath the penalties of perjury statement.

If your request for appeal is prepared by your representative, he or she must substitute the declaration for penalties of perjury statement for individual taxpayers with a statement that includes each of the following elements:

  • An affirmation that he or she submitted the protest and any accompanying documents, AND
  • A statement of personal knowledge of stated facts in the protest and accompanying documents and a declaration that the facts are true and correct.

Collections Appeal Processindex

CAP generally produces faster decisions than a CDP. A CAP filed to protest a wrongful levy may be filed either before or after property has been seized, but must be filed before the property is sold. Filing a request for CAP within 30 days of the rejection or termination of an installment agreement prevents the IRS from issuing or executing a levy until the appeal has been settled. However, you cannot dispute owing additional taxes through a CAP. You are also barred from proceeding to Tax Court if you disagree with the conclusions of the CAP. You must file Form 9423 – Collection Appeal Request to initiate a CAP review. CAP can be used to address the following IRS actions:

  • Prior to or after the filing of a Notice of Federal Tax Lien
  • Prior to or after levy or seizure of property by the IRS
  • Proposed or actual termination of an installment agreement
  • Rejection or modification of an installment agreement
  • Rejection of proposed trust fund recovery
  • Denial of a trust fund recovery penalty claim
  • Denial of abatement request for late payment, late filing or deposit penalties
  • Rejection of an Offer in Compromise

Collection Due Process

Unlike the CAP, a CDP hearing allows you to proceed to Tax Court if you disagree with its findings. You must file Form 12153 – Request for a Collection Due Process or Equivalent Hearing, available for download from the IRS website, or a letter containing the same information as Form 12153 to request a CDP hearing. You generally have 30 days from the date you receive your assessment or audit examination report to submit your CDP appeal. After 30 days, you may request an Equivalent Hearing, but collection activities will not be suspended. You will also not be able to request a judicial review of the results of an Equivalent Hearing; you cannot appeal the results in Tax Court. You may request a CDP or Equivalent Hearing to request a review relating to any of the processes listed below:

  • Collection proposals (e.g. installment agreements or Offers in Compromise)
  • Lien subordination (relinquishing priority claim)
  • Withdrawal of Notice of Federal Tax Lien
  • Innocent Spouse defense claims
  • Existence or amount of additional tax assessment ( ONLY if there was no notice of deficiency or other opportunity to dispute tax liability)
  • Claim of economic or other hardship resulting from collection of tax liability

IRSThe Administrative Hearing Process

After submitting your request for administrative review, you generally have at least 60 days to prepare for the hearing. Draft a rough outline of the information you wish to include in your presentation. Categorize any other relevant information in spreadsheets or in visual displays, with separate folders for each item.

It’s wise to request a copy of the auditor’s file under the Freedom of Information Act (FOIA) immediately; FOIA requests can take at least a month to process. The letter should cover all relevant tax years and provide an offer to cover copying costs. Send the letter by certified mail or other traceable means.

The hearing itself will be fairly informal. You are entitled to take notes or record the hearing if you wish. Be prepared for requests for further information. If that happens, don’t hesitate to ask for more time.

If you reach a verbal settlement during the hearing, the settlement will be transcribed onto IRS Form 870 – Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, which can require months to show up in the mail. Double check all the figures and do not sign the form unless you understand and agree with everything contained within it. The professionals at Optima Tax Relief can address any questions you may have regarding this process.

Likewise, do not sign the form if you’ve found other mistakes by the auditor or appeals officer. Once you sign the form, you are barred from making further appeal to the Tax Court.

It’s Worth the EffortLeslie Haviland

The administrative review process can be daunting, but the odds of winning your case are very good. Investopedia reports that according to at least one edition of the book Stand Up to the IRS, published by legal portal Nolo, claims that taxpayers who appeal their audits have their assessments reduced by an average of 40 percent. With Optima Tax Relief on your side, you have a good chance of achieving favorable results, too.

Congress Considers Provision to Turn Back Taxes Over to Debt Collectors

As of May 2014, the gap in federal income tax collection was approximately $385 billion according to Forbes. More than 5 million taxpayers were in arrears as of April 2014, the Washington Post reported. Under a bill introduced by Democratic Sen. Chuck Schumer of New York and Republican Sen. Pat Roberts of Kansas, the IRS would outsource collection efforts against delinquent taxpayers that its agents had been unable to contact within the past year to private collection agencies.

Schumer’s and Roberts’s bill was inserted into the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, sponsored by Democratic Sen. Ron Wyden of Oregon in May 2014. The EXPIRE Act restores several federal tax breaks that expired at the end of 2013. As of November 2014, the EXPIRE Act remained stalled in Congress.

courtsDebt Collectors and the EXPIRE Act

Efforts by private collectors to recover what the IRS calls “inactive tax receivables” would not apply to innocent spouses, military personnel deployed in combat zones and deceased taxpayers. However, heirs of deceased taxpayers may find themselves subject to collection efforts to recover estate taxes owed by the deceased. Taxpayers subject to penalties under the Affordable Care Act would also be subject to private collection efforts. Presently, four private debt collection agencies are approved by the Treasury Department: ConServe of Fairport, New York; Pioneer Credit Recovery of Arcade, New York; CBE Group of Cedar Falls, Iowa, and Performant Financial Corp. of Livermore, California.

The idea of using private collection agencies to enhance the collection of IRS revenues is not new. Past programs have netted limited success. A similar program administered from 1996 to 1997 resulted in a net loss of $17 million to the IRS, according to the Center for Responsible Lending. The most recent attempt to utilize private collectors to recover revenues from taxpayers in arrears took place between 2005 and 2009 and collected a total of $98 million. However, the program cost the IRS $86 million to administer. An additional $16.5 million was paid in commission to the private collection companies, resulting in a net loss to the IRS of about $4.5 million, the Post reported.

Support and Pushback

congressDespite past failures associated with utilizing private collection agencies to collect tax revenues, the Schumer-Roberts bill enjoyed bi-partisan support in both the House and the Senate. Advocates for the measure claimed that the IRS could net $4.8 billion in delinquent taxes over the next decade, according to the Post. Half of those revenues would be devoted to the cost of expanding research and development tax break for startup businesses. Another $1.2 billion would go toward hiring additional IRS agents and enhancing in-house collection enforcement. The remaining $1.2 billion would cover commissions paid to private collection agencies.

Schumer has been a longtime advocate of employing private collectors to recover federal tax revenues. He claimed that this particular measure would provide jobs for residents in his state’s poorest areas without requiring a reduction in federal jobs. Indeed, two of the four private collection firms presently approved by the Treasury Department to recover overdue tax revenues are located in Schumer’s home state.

Sen. Ben Cardin of Maryland pushed to revise the EXPIRE Act to remove the private debt collection provision. Rep. Steny Hoyer of Maryland and Rep. John Lewis of Georgia, both Democrats, also vigorously opposed the proposed bill, stating that private collectors are more focused on the bottom line than serving taxpayers. Other detractors noted that extra precautions would be required to protect sensitive taxpayer information from abuse by unscrupulous collectors. During past programs, taxpayers complained of abusive tactics by collection agencies, including harassment and threats.

calculateNational taxpayer advocate Nina E. Olson submitted a 21-page letter appealing to lawmakers in May 2014 urging them to reject the proposal. Olson insisted in her letter that the majority of taxpayers in arrears are financially unable to pay what they owe and not deliberate scofflaws. Olson also stated that paying commissions to private collection agencies was an unnecessary expense, because the IRS collects much of its revenue from delinquent taxpayers in the form of offsets of federal and state income tax refunds. Moreover, IRS agents have latitude to work with struggling taxpayers to form repayment agreements or make other arrangements to collect payments from taxpayers in arrears which private collection agencies do not have.

Tax Collection and the IRS

IRSThe IRS has a well-deserved reputation for being vigorous in collecting the revenues it is owed from individual taxpayers even without enlisting the aid of private collection agencies. Indeed, the IRS collects more than $2 trillion in federal taxes annually. The overall compliance rate for on-time payment of federal income tax is 84 percent.

The Treasury Department also has potent tools at its disposal for pursuing delinquent taxpayers domestically and abroad, including offsets of federal and state tax refunds as well as liens and levies. IRS levies in particular can be harsh, involving seizures of personal property or extracting significant chunks of wages and even Social Security payments and retirement pensions. A single person levied by the IRS in 2012 could have been forced to live on as little as $114.42 per week, Bills.com reported.

Tax Filing Help: What Is My Filing Status?

According to the Pew Research Center, 74% of online adults use social networking sites. A common feature of these sites is the ability to publish one’s current “relationship status.” Facebook, for example, has ten possible relationship options including “married,” “single,” and probably applicable to all of us at some time: “it’s complicated.”

Although many people opt out of these personal declarations, taxpayers are required to choose an appropriate filing status on their Federal Income Tax Returns each year. And, similar to Facebook, choosing a filing status can be complicated.

The following is a brief discussion of the different filing statuses and how they may apply to you.

singleFiling Single

A person may file “single” if the taxpayer is unmarried or legally separated on the last day of the tax year.

The tax code is not kind to taxpayers who file single. For example, individuals who file single have a comparatively small standard deduction, and their income is taxed quicker and at higher tax brackets. Also, for deductions and credits with phase-out features (such as student loan interest deduction), these phase-outs take effect at the lowest levels of income.

Despite the bleak tax terrain, a taxpayer who files single does have access to numerous deductions and credits, such as tuition and fees deduction and the earned income credit, which might otherwise be unavailable if he or she is married but files separately.

For taxpayers who are married, but separated, there may be the option to file single. However, this exception applies only where the taxpayer is legally separated and the couple has lived separately for the last six months of year.

Head of Householdhead of household

A person may file “Head of Household” if the following requirements are met:

  1. A taxpayer is considered unmarried on the last day of the tax year,
  2. The taxpayer pays more than half of the home expenses, and
  3. The taxpayer’s home was the primary residence of a “qualifying child” or a “qualifying relative.”

Taxpayers who file as head of household have a definitive tax advantage over taxpayers who file as single. Not only is the standard deduction higher, but the tax brackets accelerate at a slower rate, not to mention the increased number of exemptions, depending on the household size.

Similar to the exception for filing single, the head of household status also has a few caveats. For example, a married taxpayer may file head of household if the criteria above is met, so long as the couple was separated for the last six months of the year. Unlike filing as single, this does not require a “legal” or formal separation.

Also, for unmarried taxpayers who jointly support a dependent child, the head of household status may be a way for both parents to share tax benefits associated with the child. This happens when a custodial parent agrees to “release the exemption” by completing Form 8332 and having the non-custodial parent file this form along with his/her return. Although the custodial parent releases the exemption, he/she may still file Head of Household and gain other tax benefits from claiming the child.

Married Filing Jointly married

A taxpayer may file jointly if he/she has:

  1. Married and lived with his/her spouse throughout the tax year, or
  2. Married and not lived with his/her spouse, but has not been divorced or had a legal separation agreement.

In most circumstances, a married taxpayer who files jointly will enjoy a lower tax liability than with any other category. This is because the tax brackets accelerate slower, many tax benefits are doubled (such as the standard deduction or the primary exclusion for sale of a principle residence), and phase outs of certain tax benefits occur at much higher levels of income. Filing jointly also does not restrict access to credits and deductions that might be disallowed if filing separately.

Joint filers should realize, however, that in the event of an audit or underpayment of estimated taxes by one spouse, both signers will be fully responsible for correcting any issues with the return or deficiencies in taxes paid.

Married Filing Separatelyseparate

A taxpayer who is entitled to file married filing jointly, also has the option of filing “married filing separately”. There is a long list of disadvantages for filing separately, including the disallowance of numerous tax credits and deductions, as well as disadvantageous changes in how certain types of income are taxed, such as social security benefits. There are, however, some very important reasons why you may consider filing separately:

Separate liabilities – If either you or your spouse plans to file an aggressive tax return or if you anticipate an unpaid tax liability, filing separately can protect the other spouse from being jointly liable. Filing separately can also protect the refund of a non-liable spouse if the other taxpayer has prior debt for which their tax refund may be seized. In either situation, filing separately protects a married taxpayer from potential liabilities incurred by their spouse.

Preferential Tax Treatment – In some situations, filing separately will actually result in a lower individual tax liability. For example, if significant medical expenses are incurred during the year, the 10% AGI limit with the joint income may be too high to claim any benefit. However, by filing separately, the 10% AGI threshold could be much lower, allowing the taxpayer to deduct more of the medical expenses when filing separately. It is important to note however, that if one spouse files separately, the other spouse is also required to file separately. Therefore, taxpayers should review their separate returns together and compare those results to a joint return to determine the net benefit.

widowerQualifying Widow(er)

A taxpayer will qualify as a “qualifying widow(er)” if:

  1. The taxpayer’s spouse died in 2012 or 2013
  2. The taxpayer did not remarry before Jan 1, 2015
  3. The taxpayer paid more than half the costs of maintaining the home
  4. The home was the primary home for a dependent child during the tax year

Generally, in the year the taxpayer’s spouse has died, the taxpayer can file a joint return with the deceased spouse. The tax benefits of filing jointly is carried forward two additional years with the qualifying widow filing status, which provides greater tax benefits than filing as head of household. Effectively, the qualifying widow status allows the surviving spouse the same standard deduction and tax bracket as a joint-filer. This status, however, is only available to surviving spouses who have a dependent child in the household.

In conclusion, a taxpayer’s life and “status” may change from year to year, often making it a complicated process when trying to file their tax returns. While updating your filing status with the IRS may seem about as daunting as choosing your relationship status on social media sites, being aware of how the IRS defines each filing status will make that decision much easier and ultimately more beneficial for you.

Tax Filing Help: Deducting Medical and Dental Expenses

pub502-147x147Going to the doctor or to the dentist is almost never an enjoyable experience. Nonetheless, even if you’re in excellent health, you are still likely to accumulate medical and dental expenses – if only for insurance premiums and checkups. In some cases, you can recover at least some of your expenses through credits and deductions on your federal income tax returns. However, depending on your circumstances, recent changes in the tax code may make it more difficult for you to qualify for tax relief. If you have questions, the professionals at Optima Tax Relief can help you decipher which benefits you are entitled to and how to claim them.

Increase in the Adjusted Gross Income (AGI) Threshold

Before January 1, 2013, wage earners were allowed to deduct medical and dental expenses that exceeded 7.5 percent of their adjusted gross income (AGI). However, from 2013 forward, the AGI threshold for most taxpayers to deduct medical and dental expenses has increased to 10 percent. Taxpayers who are married with at least one spouse age 65 or older may still use the 7.5 percent threshold to claim medical and dental expense deductions until December 31, 2016. Beginning in 2017, the AGI threshold for claiming medical and dental expenses increases permanently to 10 percent for all taxpayers who are wage earners.

deductionsAllowable Medical and Dental Expenses

Although the increase in the AGI threshold is steep, the list of allowable expenses to claim as medical and dental expenses is extensive. Insurance premiums, office visits, vision correction, chiropractic care, physical therapy and mental health treatments are all deductible. Even transportation to and from the hospital or doctor’s office can be deducted, including public transportation costs, parking and tolls. Taxpayers who use their personal cars to travel to and from their homes to receive treatment may deduct 24 cents per mile on their federal income tax returns for 2014. On the other hand, elective cosmetic surgery (reconstructive or corrective plastic surgery is deductable) and Medicare tax payments for self-employed taxpayers are not allowable deductions.

Wage Earners Must Itemize

Wage earners who take the standard deduction cannot claim an additional deduction for medical and dental expenses. Instead, wage earners must itemize their deductions by filing Form 1040, commonly called the “long form” along with Schedule A to claim those expenses that exceed 10 percent of AGI (or 7.5 percent taxpayers eligible for the temporary exemption). Taxpayers may claim expenses paid for themselves, their spouses and children or other individuals claimed as dependents.

Rules for Self-Employed Taxpayers

Self-employed taxpayers are generally exempt from the AGI threshold requirement, and can claim eligible medical and dental expenses even if they take the standard deduction. To claim the deduction, self-employed taxpayers should file Form 1040 along with Schedule C, Profit or Loss from Business, Schedule C-EZ, Net Profit from Business, or Schedule F, Profit or Loss from Farming. Although self-employed taxpayers are not required to meet the AGI threshold, they are still prohibited from double-dipping. This means that expenses paid through a HSA are not deductible. In addition, self-employed taxpayers cannot claim deductions for medical or dental expenses for any month that they would have been eligible for subsidized health care coverage by an employer, former employer, spouse’s employer or ex-spouse’s employer.

calculateCalculating Your Medical and Dental Expense Deduction

Besides meeting the AGI threshold, taxpayers are only entitled to deduct medical and dental expenses that are not reimbursed or otherwise accounted for. This means that expenses that were paid through a Health Savings Account (HSA) or Flexible Spending Arrangement (FSA) cannot be deducted, because withdrawals from HSAs or FSAs to cover medical and dental expenses are almost always tax-free. Taxpayers are also prohibited from deducting expenses that are covered by their insurance or paid for by their employers such as worker’s compensation claims.

Deductions can only be claimed for expenses paid during the previous calendar year. However, if you mailed a check or posted a credit or debit card payment on December 31, you can include that payment even if it doesn’t actually post until the new year. Therefore, be sure to keep your receipt or other proof of when the payment was made. If you are unsure about whether a specific expense qualifies for the medical or dental expense deduction, a tax professional, such as an attorney from Optima Tax Relief, can determine whether or not the expense in question is deductible.

Tax Filing Help: Who Are My Dependents?

dependentsEach year during tax season, U.S. taxpayers spend millions of hours compiling and sorting tax documents, meeting with tax professionals and hoping to stay out of the red. Some of the most important tax information affecting your return, however, is not related to your W2 or profit/loss statement; it’s related to your household.

For many taxpayers, the question “who are my dependents” is often not seriously contemplated until they are sitting directly across the table from their tax preparer. A thorough tax preparer will be able to help you examine details of your household and determine who may qualify. However, educating yourself on the following points will help you get the most out of your return.

Dependents Don’t Have To Be Related To You

When people talk about their dependents, most people infer they are speaking of their children. Indeed, a major category of dependents is the “qualifying child“. This category includes, for example, children and grandchildren who:

1) lives with you more than half the year,

2) are under the age of 19,

3) relied on you for more than half of their support and

4) if married, does not file a joint return unless it’s solely to claim a tax credit.

Adopted children, step-children, siblings and descendants of both also fall into this category.

A second, broader category of dependents falls under the “qualifying relative” category. Although it is implied by the name, no familial relationship is actually required under this provision. In fact, a qualifying relative can be anyone who:

1) lives with the taxpayer all year,

2) made less than the exemption amount ($3,950 for 2014),

3) relied on the taxpayer for more than half their support and

4) is not a qualifying child of another taxpayer.

An important distinctions between the qualifying child and qualifying relative categories are that the qualifying relative has no “age test”, but does have a “gross income test”.

Dependents Don’t Have To Live With You

collegeGenerally, dependents must meet a “residency test” in order to be claimed. A qualifying child has to live with the taxpayer more than half the year and qualifying relatives must live with the taxpayer all year to be considered dependents. However, a number of exceptions apply.

First, the qualifying relative category carves out an exception to the residency test for persons related to the taxpayer, such as children who exceed the age test, as well as siblings and parents who are related directly or through marriage. Under this provision, these related people are not required to be a member of the household where the taxpayer resides. For example, a taxpayer can claim a parent who does not reside with them as long as the “support test” and the “gross income test” are met.

Second, a qualifying child is not required to meet the traditional residency test if he/she is a full-time student during any five months of the year. This is because education is considered a “temporary absence” where the main home remains within the taxpayers home. Additionally, for full-time students, the age test increases from being under 19 to under 24 years of age.

Dependents Can Have Income

dependentsFinally, a person can be claimed as a dependent even if that person has their own income. Applying the gross income test correctly requires you to identify the type of dependent and the type of income received by that person. When applicable, the gross income test uses an income threshold that matches the exemption amount for the applicable year. In 2014 for example, that threshold (exemption) is $3,950.

First, the gross income test is primarily a concern for a qualifying relative, as the qualifying child dependent does not have to satisfy a gross income test. The following example is illustrative of this distinction:

In 2014, Junior (age 17) worked part-time for his father’s landscaping business and earned $5,000 for the year. Even though Junior’s income exceeded the $3,950 threshold amount, because he is under 19 years old and meets both the residency and support tests, his income does not disqualify him from being a qualifying child. However, if Junior was 22 years old in 2014 and not a full-time student, he would not qualify as a dependent under either category because he fails both the age test for a qualifying child and the income test for the qualifying relative.

Second, the type of income derived must be considered in the gross income test. Tax exempt income, such as social security benefits or municipal bond interest, is not considered income for the gross income test. So for example, if a taxpayer provides more than half the support for her aged parent and the parent receives $15,000/yr in untaxed social security benefits, the parent would still qualify under the income test as a qualifying relative.

In conclusion, being aware of the various ways a person can qualify as a dependent will help you be informed as a taxpayer, as well as ensure that you are providing the proper information to your tax professional (or software) and will ultimately help you get the most out of your tax return.

For more reading on this topic, see IRC 152 or IRS Publication 17.

Don’t Hang On: Check Out IRS.gov for Tax-Related Information

IRS building

This coming week which includes the Presidents Day holiday, is traditionally one of the busiest periods of the year for the IRS, with long wait times for individuals attempting to contact the IRS by phone. This year promises to be no exception. If anything, wait times should be even longer, if an earlier report from the IRS Taxpayer Advocate is to be believed.

 

Potential Long Telephone Hold Times For Taxpayers

on hold

According to the report, the IRS has been severely hampered in its ability to respond to telephone inquires from taxpayers due to cuts mandated by the sequester. Coupled with the expected surge in phone calls during the Presidents Day holiday period, the result could be extremely long waits for anyone hoping to reach an IRS agent by phone. The advice from the IRS is simple: don’t call us.

Instead, the IRS advises taxpayers that many of the answers they seek are available through the IRS.gov website, which operates 24/7 with no holds and no waiting. In fact, the IRS.gov website contains a wealth of information on subjects ranging from tax refunds to resolving overdue tax bills. The following list includes topics covered by IRS.gov. By checking out its resources, including 1040 Central and the IRS Services guide, you may save yourself from the frustrating experience of waiting, and waiting — and waiting – to attempt to reach an IRS agent by phone.

Where’s My Refund?   wheres my refund

If it’s been less than 21 days since you filed your federal income tax return, don’t expect an IRS representative to respond to inquiries concerning the status of your refund. Instead check out the Where’s My Refund tool on IRS.gov or via the free IRS2Go Smartphone app, available for iOS and Android mobile devices. Plug in info on your current, pending refund to obtain its current status. Status updates for “Where’s My Refund?” occur once every 24 hours, usually overnight, so checking once each day is sufficient.

No W-2? Try This Before Calling The IRS

By law, employers are required to supply workers with W-2 forms on or before January 31 each year. If you haven’t received yours by the middle of February, check with your employer to determine if your correct mailing address is on file. If appeals to your employer don’t yield your W-2 form, by all means, contact the IRS, which will issue a letter to your employer. But it’s best to wait until after the Presidents’ Day rush if possible. In the meantime, you can begin working on your tax return by using information from your final pay stub from 2014.

Need Help Preparing Your Tax Return? Volunteers And Free File Have Your Back

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If you’re tearing your hair out trying to complete your tax return, but cannot afford a commercial tax preparer, don’t despair. Check out IRS.gov for a listing of volunteer tax assistance available to low income taxpayers and seniors. The Volunteer Income Tax Assistance (VITA) program provides assistance to taxpayers with income of 53,000 dollars or less, disabled individuals, seniors and taxpayers with limited or no English speaking ability. The Tax Counseling for the Elderly (TCE) provides assistance to all taxpayers, especially seniors age 60 or older, who have questions about pensions and retirement-related issues. Information on both programs is available through IRS.gov.

Can’t Pay Your Tax Bill? Don’t Panic

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Individual taxpayers who owe 50,000 dollars or less or businesses that owe 25,000 dollars or less in combined taxes, penalties and interest are eligible to establish an installment agreement through the Online Payment Arrangement Application available on the IRS.gov website. The fee for establishing an installment agreement is 52 dollars for direct debit, 120 dollars for standard or payroll deductions or 43 dollars for low income taxpayers. The system is available from Monday through Friday from 6:00 a.m. to 12:30 a.m., Saturday from 6:00 a.m. to 10:00 p.m. and on Sunday from 6 p.m. to Midnight. All times listed are Eastern Time.

If you don’t qualify to apply online, you can still request an installment agreement by completing Form 9465 – Installment Agreement Request and Form 433-F – Collection Information Statement. Submit the complete forms, along with the fee by mail. You can also contact the IRS by phone at 1-800-829-4933, but again, it’s best to wait until after the holiday period to make the call. Even then, expect a lengthy wait.

If you wish to establish an Offer in Compromise, the process is more complex. But you can determine whether you should even undertake the effort by utilizing the Offer in Compromise Qualifier available through the IRS.gov website. Bear in mind that even if the results indicate that you may be eligible, there is no guarantee that an Offer in Compromise will be approved.

Missing Tax Return? Request A Copy Or A Tax Transcript Online

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If you are missing crucial information from a prior year tax return, you can request a replacement copy from the IRS by submitting Form 4506 – for a cool 50 dollar fee, not to mention a lengthy wait of up to 75 calendar days before your request is processed. Ouch. If you need an actual photocopy of your return, you’ll have to bite the bullet and pay the price.

But in many cases, you can obtain the same information from a tax transcript — for no charge and on the spot via IRS.gov or the IRS2Go app. You can also go the old-school route and submit Form 4506-T by mail. Expect to wait five to 10 calendar days for your transcript to arrive. The following list indicates the types of transcripts that are available.

  • Tax Return Transcript: Available online and by mail, a Tax Return Transcript includes most of the information from Form 1040-EZ, Form 1040-A and Form 1040. A Tax Return Transcript is usually sufficient for applications from mortgages lenders and commercial student loans.
  • Tax Account Transcript: Available online and by mail, a Tax Account Transcript includes basic information such as return type, marital status, adjusted gross income, taxable income, credits and payments. It also indicates estimated payments or prior year overpayments applied to the current year tax return.
  • Record of Account Transcript: Available only online, a Record of Account Transcript combines information from the Tax Return Transcript and the Tax Account Transcript.
  • Wage and Income Transcript: Available only online, a Wage and Income Transcript includes income date from W-2s, Form 1099 and Form 1098. Information for the current year is generally not available before July.
  • Verification of Non Filing Letter: Available only online, a Verification of Non Filing Letter only indicates that you did not file a federal tax return for a particular year, not whether or not you are required to file a return for that year. Verification of Non Filing Letters for the current year are only available after July 15.

Have General Tax Related Questions? Check Out Publication 17, Tele-Tax Or The Tax Map

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Publication 17, published annually, is a searchable income tax guide that addresses questions such as who can be claimed as a dependent or whether you are eligible for the Earned Income Tax Credit. The Tax Map allows keyword searches for single-topic queries. The Tele-Tax line (1-800-829-4477) provides recorded information on a range of tax topics 24/7, with no wait.

 

Make IRS.gov Your Go-To Site For Tax-Related Information

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As the above list indicates, IRS.gov is a rich resource of information and assistance. Content on the site is updated frequently, including download links for nearly all the forms needed to file tax returns and carry out tax-related functions. You can resolve many of your tax-related issues efficiently by utilizing the tools available. If your questions aren’t answered there, you can always consult one of the experts at Optima Tax Relief to resolve your tax-related issues.

 

 

How Taxpayers Loaned $192 Billion To The Government In 2013

Very few people enjoy paying taxes, and even fewer wish to overpay on their federal income tax returns. But 80 percent of taxpayers voluntarily do just that each year. Many of these same taxpayers celebrate when they receive large refund checks, failing to realize that they are merely recovering their own money.

According to an April 2014 article in the Washington Post, federal income tax over-payments by individual taxpayers totaled an eye-popping $192 billion last year. This figure represents the equivalent to one quarter of the entire federal budget deficit for 2013. By overpaying on their tax returns, taxpayers essentially provide the government with an annual 12-month interest free loan, a deal which the IRS does not reciprocate.

Regions with the Highest Rates of Income Tax Refunds

refundsThe regions with the highest rates of taxpayers receiving refunds are found in Appalachia and the Deep South. For instance, in Chattahoochee County, Georgia, an astonishing 95 percent of taxpayers received federal tax refunds during the previous year, according to the Post. It is no coincidence that these regions are also among the most impoverished in the country. Taxpayers in these regions of the country often have low or no federal tax obligation.

Many taxpayers in these areas also benefit from deductions and credits like the Earned Income Tax Credit (EITC), which is a refundable credit. Taxpayers who qualify for the EITC can receive some or all of the credits in the form of a tax refund check, even if they have no federal income tax obligation. The refunds of many low-income taxpayers in this region and elsewhere in the country are drawn from the EITC.

Areas with High Proportions of Taxpayers Owing Tax

dueAn additional 15 percent of taxpayers nationwide owed money to Uncle Sam, with an average tax obligation of $4,656, the Post reports. These taxpayers were largely concentrated in metropolitan areas on the East and West coasts, and in the Plains states. Many of these individuals were self employed entrepreneurs, ranchers and farmers, filing Schedule C, E or F along with their federal income tax returns.

 

New England and the Plains States

In Liberty County, Montana, only 38 percent of taxpayers received federal income tax refunds. Another 32 percent of taxpayers in Liberty County essentially broke even with Uncle Sam, neither receiving refunds nor owing additional federal income taxes. Liberty County is representative of the states in the upper Plains region, which featured a high concentration of break-even taxpayers. Other states with high numbers of break-even taxpayers include Michigan, Pennsylvania and Vermont, according to the Post.

Lending to Uncle Sam at Zero Interest

uncle_samIn 2012, the average tax refund was a whopping $2,742 according to the Post. And while many taxpayers enjoyed receiving those large checks, a broad consensus of financial experts agrees that it’s actually a bad financial deal. Taxpayers receive no interest on their refunds unless the IRS delays the processing of their refunds by at least 45 days after the filing date of their federal income tax returns. The amount of interest paid is adjusted quarterly. For 2014, the quarterly interest rate paid by the IRS on delayed tax refunds was a paltry 3 percent.

The IRS is not nearly so generous with taxpayers in arrears. Even if you file your return on time, if you don’t pay your full federal income tax obligation, the IRS tacks on a failure-to-pay penalty of ½ of 1 percent on the amount due EVERY MONTH or partial month after the filing due date. The total penalty can equal 25 percent of the amount owed. Taxpayers who request an automatic extension of time to file do not automatically escape the failure-to-pay penalty. These taxpayers must pay at least 90 percent of what they owe by the ORIGINAL due date to escape the penalty.

Neither a Borrower nor a Lender Be

moneyMost taxpayers understandably don’t want to owe money at tax time, so they hedge their bets by overpaying. While it’s a good idea to allow for a small cushion to cover income tax withholdings, the IRS also cuts taxpayers who honestly underestimate their tax obligations a bit of slack. You can escape what the IRS calls the underpayment of estimated tax if your total federal tax obligation is less than $1,000. You may also escape the penalty by paying 90 percent of the current year’s federal tax obligation or 100 percent of your tax obligation for the previous year, whichever is smaller. Wage earners can make adjustments in the withholdings listed on W4 forms. Self-employed workers can meet this obligation through quarterly estimated tax payments.

Many taxpayers enjoy receiving their refunds in a lump sum rather than as small additions to their paychecks. That’s understandable as well, but it’s not necessary to overpay Uncle Sam to achieve that goal. Simply divide your average tax return by the number of paychecks you receive. Open a savings account or money market account and deposit the resulting amount into your account with each paycheck. If you want, you can make periodic transfers from your account into a Certificate of Deposit or other investment instrument. At the end of the year, you will have accumulated a tidy sum that equals or exceeds what you would have received as a tax refund.

Reporting Foreign Income To The IRS: What You Need To Know

You may live or work abroad, but if you are an American citizen or legal permanent resident, Uncle Sam still wants his rightful share of your income. Even if you reside outside the United States and receive earnings from a source located outside the United States, you must report that income.

Depending on your circumstances, you may have to pay taxes both to the government where the company from which you earned your income is located and to the Internal Revenue Service. However, in some cases you may receive tax credits or tax exclusions for some or all of your foreign income.

The details of reporting foreign income vary according to individual circumstances. Nonetheless, there are general guidelines for nearly everyone who receives foreign income.

Foreign Income Tax Credit

If you are taxed by the country from which your income is earned and that country has established a tax treaty with the U.S., you may be able to claim the Foreign Income Tax Credit. This credit was designed to help you avoid double taxation and allows you to claim a credit for income tax that you have paid to a foreign government. The intended net result of the tax credit is to ensure that the total income tax that you pay is no more than the highest result that you would have paid to a single government.

If you hire an accountant or a tax attorney to figure your taxes, he or she will undoubtedly apply the Foreign Income Tax Credit on your income tax return. Some tax preparation software programs also include provisions to calculate the Foreign Income Tax Credit if it applies to you. If not, choose a different tax preparation program.

Foreign Earned Income Exclusion

Do not confuse the Foreign Earned Income Exclusion with the Foreign Income Tax Credit. The Foreign Earned Income Exclusion is designed to allow American citizens and legal residents who reside outside the country to exclude most or all of the income earned from foreign sources from their federal income tax liability. The amount of the exclusion varies each year; for 2013 the maximum exclusion was $97,600 per individual taxpayer. Married couples could conceivably claim a larger exclusion.

The Internal Revenue Service has established strict guidelines for taxpayers who wish to claim the Foreign Earned Income Exclusion for a given tax year. Taxpayers must meet all the guidelines listed below to qualify for the exclusion.

  • Must have foreign earned income
  • Must have established a tax home in a foreign country
  • Must pass either the bona fide residence test or the physical presence test

The bona fide residence test requires that you are a bona fide resident in a foreign country for a period that includes at least a full tax year. The physical presence test requires you to be physically present in that foreign country for at least 330 days during a single 12-month period. You need not be present for 330 consecutive days, however.

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U.S. Government Employees Living Overseas

Income earned by employees of the United States government, including military personnel on active duty, does not qualify for the Foreign Income Credit or for the Foreign Earned Income Tax Exclusion, even if the income was earned overseas. However, spouses of government employees who earn income from foreign sources may be eligible for either the Credit or the Income Exclusion. It is necessary to consult with an attorney or accountant who specializes in this subject with specific questions about your particular circumstances.

Foreign Income Earned While Living in the United States

If you reside within the United States full time, in most instances, you must report income earned from foreign sources on your federal income tax return, even if you are taxed on that income by the foreign government. This requirement pertains to earned and unearned income. Self employed workers who earn income from foreign clients must also report their foreign earnings on their federal income tax returns.

No W2 or Form 1099? No Excuse

The requirement to report foreign income applies even if you do not receive a W2 Form, Form 1099 or equivalent form from the foreign income source. It is your responsibility to provide an accurate calculation of your income by calculating payments from pay stubs, wire transfer records, dividend reports, bank statements or PayPal monthly statements.

Once you calculate your foreign income, you must combine it with any domestic income you have earned in order to calculate the adjusted gross income to be included on your federal income tax return. Failure to report foreign income is considered tax evasion, and if you are caught, the consequences could be dire. You could be hit with hefty fines or even face jail time.