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ACA Increases Penalties for Uninsured Americans

Millions of previously uninsured Americans have obtained health insurance coverage, thanks to the Affordable Care Act – commonly known as Obamacare. However, many individuals and households remain uninsured. Many of those taxpayers face significant financial penalties from the IRS for failing to obtain insurance under the individual mandate of the ACA – unless they can claim an exemption.AffordableCareAct

The Penalty Wasn’t Really $95 

During 2014, the first year health insurance coverage was required under the ACA, many individuals chose to remain uninsured. They figured that paying $95 as a penalty for failing to obtain and maintain coverage would be far less expensive than the premium for any policy they could obtain. Many people experienced sticker shock when they realized how large their penalties would be.

That’s because the penalty for 2014 wasn’t $95. The actual penalty was $95 for each adult age 18 or over plus $47.50 for each child under 18, with a maximum penalty of $285 — or 1% of the total household income above the threshold for filing federal tax returns, whichever was larger. The maximum penalty for all households was capped at the national annual cost of an individual bronze tier insurance plan in 2014, which was $2,448, regardless of income and household size.

For example, the penalty for a single taxpayer who earned $45,000 in 2014 and remained uninsured for the entire year would be $348.50. That’s the result of subtracting the minimum income for being required to file a federal income tax return ($10,150 in 2014) from $45,000, for a result of $34,850, and then multiplying that figure by 1%. Ouch.

Penalty Increases for 2015 and 2016

afforadable-care-act-penaltiesIndividual mandate penalties for 2015 are even higher, increasing to $325 per adult plus $162.50 per child, for a maximum of $975 – or 2% of household income, whichever is larger. As in 2014, the maximum penalty for all households has been capped at the 2015 national annual cost of an individual bronze tier plan.

Remaining uninsured in 2016 will take an even bigger financial bite out of taxpayers’ pocketbooks. The penalty has been set for a hefty $695 per adult and $347.50 per child, with a maximum per household of $2,085 dollars. As an alternative, the penalty will be 2.5% of household income, with a maximum of the average annual premium of an individual Bronze tier health insurance plan sold through the marketplace. Taxpayers will pay whichever calculation results in the higher penalty.

Exemptions to the Individual Mandate Penalty

Taxpayers hoping to avoid the individual mandate penalty by obtaining health insurance coverage late in the year will most likely only be able to reduce the penalty rather than eliminate it. However, there are a number of exemptions based on personal circumstances and financial hardships that allow some taxpayers to avoid the penalty. To claim total or partial exemptions, taxpayers must file an application with Healthcare.gov. Taxpayers whose applications are approved receive an Electronic Confirmation Number (ECN) to claim the exemption on their federal income tax returns.

Personal Exemptionsexempt-tax-penalty

The list below represents an overview of personal exemptions to the individual mandate penalty. A full list of exemptions is available at Healthcare.gov.Unaffordable Coverage: Lowest-price Marketplace plans exceed 9.5% of adjusted gross income, or employer-provided healthcare plans exceed 8% of AGI.

  • Low Income: Individuals or households with incomes below the minimum threshold for filing federal income tax returns are automatically exempt.
  • Short Coverage Gap: Gaps in coverage of less than three consecutive months are exempt. Taxpayers who purchased coverage anytime during open enrollment in 2014 are also exempt; even they remained uninsured until May 1.
  • Religious Conscience: This exemption is administered through the Social Security Administration.
  • Health Care Sharing Ministry: Members of recognized health care sharing ministries are also exempt.
  • Citizens Living Abroad: U.S. citizens who reside abroad at least 330 days during a 12 month period are exempt.
  • Participants in AmeriCorps State and National, VISTA, or NCCC: Participants with short term program provided coverage or self-funded coverage are exempt.
  • Undocumented: Undocumented residents are not eligible to purchase insurance through the exchanges and are exempt from the penalty.affordable-care-act
  • Incarcerated: Incarcerated individuals are exempt.
  • Native Americans: Members of federally recognized tribes are exempt.

Hardship Exemptions

For most hardship exemptions, taxpayers must file supporting documentation; others are automatic. Some taxpayers who qualify for hardship exemptions may be allowed to purchase catastrophic health insurance policies; others may qualify for a special enrollment period outside of open enrollment. The list below briefly describes hardship exemptions along with required documentation. A complete description of hardship exemptions and relevant forms are available through Healthcare.gov.

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Dealing with Penalties Now – and Avoiding Future Penalties

maxresdefaultThe best way to avoid the individual mandate penalty is to obtain health insurance coverage – either through the Marketplace, an employer or another health insurance plan that meets the minimum guidelines for the ACA. Many taxpayers who obtain insurance through the Marketplace are eligible for tax subsidies that significantly reduce premium payments or provide refundable tax credits. Other taxpayers will qualify for an additional cost-sharing subsidy that can be applied to Silver tier plans to lower the overall cost of deductibles, copays and coinsurance.

Individuals who have questions about their eligibility for tax credits, the individual mandate or any penalties they might owe can obtain assistance through Healthcare.gov.   Specially trained Navigators can also assist individuals one-on-one, either in person or over the phone, with selecting appropriate coverage. Taxpayers facing large individual mandate penalties should consult with an accountant or with an attorney specializing in tax law.

Data Breach: Tax-Related Information for Taxpayers

A data breach is the intentional or unintentional release or theft of secure information. It can be the improper disposal of personally identifiable information in the trash or a sophisticated cyber-attack on corporate computers by criminals. It can affect companies large or small.  The one common link is the victim, the person whose identity, financial or personal information has been compromised.

data-breachWhat You Should Know About Data Breaches

Tax-related identity theft is when someone uses your Social Security number to file a false tax return claiming a fraudulent refund. Your tax account is most at risk if the data breach involves both your SSN and financial data, such as wages.

The Internal Revenue Service is committed to working with taxpayers to ensure that all tax accounts remain secure.  The IRS stops the vast majority of fraudulent tax returns.  If fraud is suspected, the IRS will contact you via mail with instructions.  However, some unfortunate taxpayers may discover they have been victimized by a data breach when they attempt to file electronically and have their returns rejected by the IRS as duplicates.

It’s important to note that not every data breach results in identity theft, and not every identity theft is tax-related identity theft.  Data breaches involving just credit card numbers, health records without SSNs or even driver’s  license numbers, while certainly serious, will not affect your federal or state tax return.

What to Do If You Are the Victim of a Data Breach

Determine what type of Personally Identifiable Information (PII) has been lost or stolen. It is important to know what kind of information has been stolen so you can take the appropriate steps. For example, a stolen credit card number will not affect your IRS tax account.  Regardless of the nature of the breach, you should stay in touch with the company that lost your data. Companies sometimes offer special services, such as credit monitoring services, to assist victims. In addition, you should take the following steps recommended by the Federal Trade Commission.

  • File a police report
  • File a complaint with the FTC
  • Notify at least one of the three major credit bureaus in writing — Equifax, Experian and TransUnion —  (preferably all three) to place a fraud alert on your credit file
  • Close any accounts opened without your permission

If you received IRS correspondence or your e-file tax return was rejected as a duplicate, take these additional steps with the IRS:

  • Submit an IRS Form 14039, Identity Theft Affidavit
  • File your tax return (most likely by paper) and attach Form 14039
  • Watch for any follow-up correspondence from the IRS and respond quickly.

Who Should File Form 14039?

Form 14039 — Identity Theft Affidavit should be used if your Social Security number has been compromised and IRS has informed you that you may be a victim of identity theft tax fraud or your e-file return was rejected as a duplicate. The fillable form is available at IRS.gov. Follow the instructions exactly. You can fax or mail it or submit it with your paper tax return if you have been prevented from filing because someone else has already filed a return using your SSN. You only need to file the form once. After the form is processed, you will receive a special number to use in place of your Social Security number to file your federal income tax returns.  This number can be used with electronic filing — but should only be used with your federal tax returns, not with your state tax returns.

IRS Tax News: Your Home Office Deduction Just Got Simpler

One Forbes.com article claims that half of all working Americans either work for or own a small business. Of that group, 52% are home-based and use part of their homes exclusively for business purposes. This article highlights the new IRS home office deduction guidelines.

Fear of Setting Off an Audit

auditCall it consensus, rumor or just plain urban legend, but according to conventional wisdom, claiming the home office deductions is a sure-fire IRS audit trigger. In actuality, there is no concrete evidence that claiming tax breaks for working at home was any more a trigger for an audit than any other tax deduction or credit. Certainly, claiming the home office deduction would seem to be less of a red flag than, say, claiming $25,000 worth of deductions on an adjusted gross income of $30,000.

For most taxpayers, it’s more likely that a combination of factors is what actually sets off audit red flags. Perhaps it’s not so much running a business at home, but claiming deductions for a business that consistently loses money that triggers an audit. A taxpayer attempting to claim a 10-foot by 12-foot dedicated home office who lives in a two bedroom home with his wife and two children would also likely raise an auditor’s suspicions.

Even without the fear of an audit, many taxpayers were tempted to skip claiming legitimate deductions, with good reason. Calculating home office deductions prior to 2013 could be a time consuming chore. The first step was to divide the entire square footage of the home to generate a percentage of the home that was dedicated to the home office. The next step was to add all the expenses for the home, including mortgage interest, property taxes, utilities and money spent at Home Depot for home improvement. The next step involved multiplying that total by the percentage of the home devoted. Now add all that up and multiply it by the percentage of the home used for the home office. You get the picture.

New Calculations

measureThis all changed when the IRS announced new rules which provided a simpler method of calculating home office expenses beginning in the 2013 tax year. All that’s needed now is to calculate the square footage of the space devoted to the home, then multiply that figure by five and put a dollar sign in front of the result. That’s it. The simplified formula can be used for home offices measuring up to 300 square feet, which translates to a maximum $1,500 deduction.

Taxpayers still have the option of sticking with the original method, which might be advantageous under the following conditions:

  • If a home office space is greater than 300 square feet.
  • If actual home expenses are higher than the maximum deductible amount through the new method.
  • For businesses that were not profitable during the previous tax year.
  • For taxpayers who changed residences during the previous year.

On the other hand, it’s a good idea to opt for the new method ($5 per square foot) if home expense records are incomplete, or if calculating actual expenses is too cumbersome. Taxpayers who have sizable real estate and mortgage interest deductions, which they prefer to itemize fully and separately from the home office deduction should also consider utilizing the new calculation method.

Taxpayers must choose one method or the other during any particular tax year, but may change methods from one year to the next. Regardless of which method is used, the following conditions apply:

  • The home office must be used exclusively and regularly as the main place of business.
  • “Exclusive” means that the home office is used only for trade and for no other family recreational or living space.

Don’t Miss Out

If you have a home office and have not been taking advantage of allowable deductions, you have been passing up tax benefits that can lower your overall tax liability. And with the new simpler method, you no longer have to perform tedious record keeping and computations. Read more about the home office deduction on the IRS website.

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Can Student Loans Lower Your Credit Score?

Student loans are much like other loans. Your credit rating gets a boost when you make your payments on time. Likewise, when you fail to make payments on time, your loan could fall into a delinquent status, which also causes your credit rating to suffer.

94817320While the government allows you a certain period of time (for most, it’s six months) to begin paying off student loans once you leave college, not all students are able to begin making payments. However, instead of communicating with their lenders, they often simply ignore the debt, which has a horrible effect on credit scores. To avoid negative credit impacts, lenders offer many options to students who are struggling to make their payments, including deferment or forbearance. These options keep loans in good standing, while allowing you to buy a bit more time to get into a better financial situation.

Student loans are viewed as “good credit” and when they’re in good standing, can help you qualify for other forms of credit later on. However, your credit score can take a dive if you pay off your loans too soon. This is because you benefit from having more than one type of credit. Your student loan is an installment loan, and once it’s paid off, while you’ll save money by not paying all of that extra interest to your lender, you will be potentially removing one type of credit from your credit report.

Many student loan borrowers worry that they’ve ruined their credit because they have defaulted on their loans. The good news is that it’s never too late to make things right. Options are always available to help you repay those loans and repair your FICO score. It might take some time, but if you’re dedicated to resolving the issues, you’ll get there, perhaps even sooner than you think.

70 Foreign Countries Agree To Share Tax Information With IRS

The Internal Revenue Service recently received a significant boost in its quest to collect the dues which it is rightfully owed. In an important bit of IRS Tax News, 77,000 foreign financial institutions in nearly 70 countries agreed to share tax information with the IRS. This historic announcement marks a milestone in the agency’s quest to combat international tax evasion.

As part of the agreement, banks and investment funds agreed to share information with the IRS about American citizens who own accounts at their institutions. The participating institutions include banks from Switzerland, the Bahamas and the Cayman Islands, each of which has a reputation for being tax havens. As of March 2015, these institutions began sharing names, account numbers and balances for U.S. account holders with the IRS.

Surprisingly, 515 Russian institutions are part of the agreement. This inclusion is despite the fact that these institutions were required to apply directly to the IRS to be part of the agreement because of halted communications stemming from the Ukraine conflict. The number of cooperating institutions is expected to rise in the coming weeks.

irs-logoWhat It Means for You

Honest taxpayers are unlikely to be directly impacted by this agreement. After all, tax evasion is illegal. Nonetheless, the agreement could have significant indirect consequences for all U.S. taxpayers. Specifically, this agreement should free up IRS employees investigating tax evasion internationally, providing more resources to seek out domestic instances of tax fraud. The knock-on effect result in more closely examined tax returns and more frequent audits. That said, honest taxpayers have little to fear, especially those with incomes under $200,000.

On the other hand, this news seems to signal the beginning of a commitment by the IRS to work more closely with foreign institutions regarding international tax issues. In an increasingly globalized world, more of today’s workforce completes assignments for international employers and clients. Anyone who has ever worked with or for a foreign company understands the hoops taxpayers must jump through come tax time. But with continued international cooperation, these hoops could diminish. That’s good news.

However the situation plays out, it bears monitoring. For now, all we know is that despite recent foreign political challenges, the U.S. government and its agencies – including the IRS – are willing to work with their international counterparts on lowering financial crimes. That’s even more good news.

Settle Tax Debt

It is indisputable that the Internal Revenue Service is one of the most powerful collection agencies in existence. The IRS has the authority to access every U.S. financial entity in its mission to collect back taxes. The IRS can even penetrate the cloak of corporate anonymity to affix personal liability to its officers, with the ultimate authority to decide just who is responsible.

settle tax debt

The IRS “Hammers”

Although there are some constraints, the IRS has vast powers, defined in its approximately 80,000-page Tax Code. Specifically, the IRS has the authority to:

  • attach a lien on a taxpayer’s property to protect the government’s ability to collect delinquent taxes,
  • apply an outright levy, which freezes cash, securities and investment accounts, and seizes whatever property the taxpayer holds for sale to pay the tax debt, including a significant portion of a taxpayer’s paycheck.

The IRS files a lien notice at the taxpayer’s local courthouse. An IRS lien is like an 800-pound gorilla: it acts as official notification that the IRS has first dibs on the taxpayer’s property. Third parties who are entangled within an IRS lien or levy — bank officers, employers, insurance brokers for permanent life insurance policies sold to the taxpayer — have absolutely no choice but to comply with IRS legal sanctions on the delinquent taxpayer.

Facing Tax Debt Realistically

Obviously, paying income taxes on time — or later with penalties — will forestall IRS liens and levies. The IRS auditor works under the premise that if the taxpayer has assets and owes taxes, and that tax debt takes precedence over any natural desire to preserve wealth.

Time Is Not On Your Side

On the other hand, for taxpayers who are in dire financial straits, there are options in getting out of tax debt. However, those options never include trying to stonewall the IRS, because time is definitely not on the taxpayer’s side.

The IRS Paper Trail

A formal notification process begins once the IRS determines that a taxpayer owes back taxes. It takes about six weeks from the first formal notification until the final notice is issued. At that point, the taxpayer has 30 days to appeal.

Once a lien or levy has been issued, the IRS has provisions to lift or remove them. Each provision has the goal of freeing up the taxpayer’s assets to make it easier to pay off the debt.

Time Payments And Offers In Compromise

An experienced attorney can apply for a time payment plan to settle delinquent tax debts in manageable monthly installment payments. The IRS favors direct bank debits, but taxpayers may also mail in paper checks or money orders.

Another option is an IRS Offer in Compromise, which, allows taxpayers to settle their delinquent tax bills by paying only a portion of what they owe. As you might imagine, there are strict eligibility requirements to qualify. The bottom line is that taxpayers must be able to demonstrate substantial financial hardship for the IRS to accept an Offer in Compromise.

Getting Professional Tax Assistance

It’s easy to become overwhelmed when attempting to navigate complex IRS regulations, voluminous and confusing instruction booklets and forms on your own. Owing money to the IRS can be a confusing and intimidating thing. It is hard to know what you’re supposed to do to settle that tax debt.

Especially if you are faced with the immediate threat of a levy, or wish to negotiate an offer of compromise, it’s wise to seek professional help. That’s where Optima Tax Relief comes in. At Optima Tax Relief, it’s our job to be in your corner, helping you to eliminate IRS tax debt.

Let Optima Tax Relief Fight For You

We actually work with the IRS and the state authorities every day on behalf of our clients, and we use our knowledge to benefit you. From day one, our experienced staff is prepared to offer representation to provide you with full legal protection while we negotiate on your behalf. Further, we are able to help you understand what you should — and shouldn’t — say to the IRS.

Your tax issues are not too big or too small for us. If you need help or have questions about preparing your tax paperwork, we can help you. If you’re facing liens, levies, wage garnishments, criminal action or other penalties, we can help you with that as well. And if you need someone to negotiate on your behalf or to represent you before auditors or revenue officers, we are prepared to do so fearlessly.

Now is the time to rely on the experience and dedication offered by Optima Tax Relief. Contact us today for more information on how you can settle your tax debt.

IRS “Courtesy Disconnects” Skyrocket During 2015 Tax Filing Season

During this year’s tax filing season, the IRS processed 126.1 million individual federal income tax returns and issued 91.8 million refunds, compared with 125.6 million income tax returns processed and 94.8 million refunds issued the previous year. Taxpayers also received larger refunds from the IRS in 2015hold – averaging $2,711 compared with an average refund of $2,686 last year.

However, many taxpayers faced significant challenges in filing their returns due to new filing requirements related to the Affordable Care Act and other changes in the tax code. Unfortunately, millions of taxpayers who attempted to contact the IRS by telephone for assistance with their tax returns encountered long wait times. Nearly 9 million taxpayers who called the IRS seeking assistance encountered a dial tone instead.

New Challenges, Less Funding

In her mid-year report to Congress, National Taxpayer Advocate Nina E. Olson declared that the IRS generally had a successful tax filing season for 2015, at least for taxpayers who were able to file their own returns without assistance from the IRS. This was despite the fact that the IRS was forced to operate with a budget about 17 percent smaller than the allotted funds for fiscal year 2010 – when adjusted for inflation. In addition, the 2015 tax filing season was the first to occur after the full implementation of the ACA. In 2015, the IRS also began implementing major portions of the Foreign Account Tax Compliance Act (FATCA).

“Courtesy Disconnects”

During the busiest periods of the tax filing season, the IRS switchboard can become overloaded. During such periods, taxpayers could be subjected to what is known as a “courtesy disconnect” – essentially having their calls disconnected without being answered. In 2014, the IRS executed about 544,000 “courtesy disconnects.” During the 2015 tax filing season that number shot up to an eye popping 8.8 million, an increase of more than 1500 percent over the previous year.

In her report, Olson wrote “For the segment of taxpayers who required help from the IRS, the (2015) filing season was by far the worst in memory.”

More Calls Dialed, Fewer Answered

olsonAccording to Olson’s most recent report, taxpayer calls referred to telephone agents increased by 41 percent during the most recent tax filing season, with an average call duration 10 percent longer than the year before. The number of calls actually answered by IRS agents plunged by 26 percent – only 37 percent of all telephone calls placed by taxpayers, with an average hold time of 23 minutes. This is in sharp contrast to the 2014 tax filing season, when the IRS answered 71 percent of calls from taxpayers, with an average hold time of 14 minutes.

Only 39 percent of calls placed to the National Taxpayer Advocate toll-free hotline were answered by the IRS, with an average wait time of 19 minutes. About 45 percent of calls placed by practitioners to the Practitioner Priority line were answered by the IRS, with hold times averaging an astonishing 45 minutes. The news was worse concerning calls from taxpayers who called the IRS after being notified that their tax returns had been blocked by the Taxpayer Protection Program because of suspected identity theft. Only 17 percent of those calls were answered by the IRS, with an average hold time of 28 minutes. For three consecutive weeks during the tax filing season, the IRS answered fewer than 10 percent of such calls.

Rethinking the IRS Mission

Much of the blame for this sharp decline in service can be attributed to cuts imposed by Congress on the IRS’ operating budget. But the IRS also bears some responsibility. For instance, IRS Taxpayer Assistance Centers and outlet partners such as local libraries and post offices did not receive paper forms until February 28. Facilities that ran out of forms could not order more – and many outlets never offered paper forms at all. Such limited availability of paper forms hampered taxpayers with limited access to personal computers or the Internet, many of whom traditionally collect significant tax refunds.

national-taxpayer-advocate-american-expats-692x300Olson also cited continued IRS emphasis on enforcement and ensuring compliance instead of providing customer service as a contributing factor to the agency’s woes. Despite occasional splashy headlines generated by prosecution of big-time tax cheats, less than 2 percent of all revenues collected by the IRS are gained through enforcement efforts. The remaining 98 percent of tax revenues are paid voluntarily – and in timely fashion. According to Olson’s report, focusing the limited resources of the IRS on snaring tax cheats makes it more difficult for honest taxpayers to navigate the system. The effort could actually be detrimental to the overall efficiency of the operation of the IRS.

“This focus has all sorts of consequences for the vast majority of taxpayers who are willing to comply, not the least of which is that they bear an increased burden in navigating processes designed for evaders. That is unwise, counterproductive, and expensive,” Olson wrote.

The IRS Response

Volume 2 of the 2015 Taxpayer Advocate’s report includes IRS responses to the Taxpayer Advocate’s 2014 report, along with additional comments. The 2014 report made 93 recommendations. According to the IRS, 45 of those recommendations have been or will be implemented, although additional resources would be required to fulfill some of the recommendations. With luck, taxpayers seeking assistance during the 2016 tax return season will receive answers – rather than a dial tone.

When Your Tax Exemption Grows Up And Gets A Job

BabyIt is inevitable that at some point children will be able to claim their own tax deductions and get big refunds. At this point, it’s time to bring out the dependency worksheet.

Parents should know that if a child makes enough money to challenge your income tax exemptions, it could add significantly to your tax obligations. In addition, some parents mistakenly believe that as long as their children are under age 24 and in college full time that they can still claim them on their tax returns. However, if a child is contributing to more than half of his/her own support, then parents can no longer claim that child as a dependent.

Let’s take a hypothetical example of 16 year old Betty. She works after school and on weekends at a sporting goods store, where she earns a minimum wage salary and a commission on sales. She is gifted in sales, so even though she is still in high school, she made $11,500 the previous year. Betty and her three sisters live with her parents and her grandmother, and qualifies as a dependent for Betty’s parents on their joint income tax return.

boyAccording to the worksheet for the dependency support test, (available in IRS Publication 501, page 16) household expenses, including groceries consumed in the home, utility bills, repairs, and the fair rental value of the house must be divided by the number of residents in the household. In this case, with a married couple, a grandparent, and four children, the household is comprised of seven people.

If the fair rental value of the home is $2500, then $357.00 person is the figure that will be applied to Betty’s support. The utility bills add up to an average of $500 per month. Divided by 7, Betty’s share is $71 every month. If groceries average $200 per week, then Betty’s share is $29 per week. Annual plumbing repairs of $840 translate to $120 per year for each person in the household. A recap of Betty’s annual household expenses is below:

  •                $4284 Fair rental value
  •                $852 Utilities
  •                $1508 Groceries
  •                $120 Plumbing repairs

This translates to $6764 for Betty’s total share of household expenses per year. Christmas presents, her share of an annual family vacation, clothing, recreation, electronics equipment, medical expenses not paid by insurance, and her insurance premiums add $12,000 to Betty’s share of total household expenses, bringing Betty’s total share of household expenses to $18,764.

teenLet’s recall Betty’s salary of $11,500. Unless her parents can prove that her earnings went to savings or investments, it will count as money spent toward her own support. As it turns out, Betty bought a car, and pays for her own insurance, which runs $300 or $400 per month. She spends an additional $10 or $11 a day on lunch or movies. Of course she wears the latest fashions, regularly downloads (legally) music from Adele, Katy Perry and Beyoncé, and has purchased the complete set of episodes for the first season of Game of Thrones. She also has an iPhone 6 Plus and a tablet. Life is large, and so is her tax refund. Meanwhile, her parents’ allowable credits and deductions have shrunk. Her parents have lost the child tax credit.

A second example considers Betty going away to college. Betty’s parents’ income has risen, but private tuition for Betty has also risen. Meanwhile, Betty pitches in by taking a part-time job while she’s enrolled in classes. Depending on how much she earns, her parents may lose the dependency exemption. If Betty qualifies as an independent student for financial aid purposes, her parents will lose the educational credit, too.

manIt’s important to remember that if you choose not to claim a child that qualifies as your dependent, the child still cannot claim the exemption for herself. To prevent tax surprises later, there should ideally be an understanding within the family before children start earning substantial salaries about establishing a savings account and other plans to minimize tax burdens for both parents and children. A good place to start is by enlisting the help of a tax professional. Contact us today to schedule a strategy session.

General Tax Info For The Gambler

In the last thirty years, gambling has changed its image from a quasi-legal activity to a major player in the economy. The IRS has responded accordingly, now requiring gambling winnings to be reported as a source of income, with losses deductible only to the extent of winnings. Even a professional gambler cannot generate a loss with gambling losses. (IRC section 165(d).) (If you win a prize in a drawing, that does not count as  “gambling.” It is reported on 1099-MISC, and other rules apply.)

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If you are fortunate enough to win $1200 in a jackpot at a slot machine, $1500 from keno, $5000 from a poker tournament, or $600 or more from “other” gambling winnings, then the casino will record your Social Security Number and the amount of the win, and write it off as an expense. Casinos offer a win-loss statement for their slot players that itemizes coin-in and coin-out, but vary in their player-tracking policies for other types of play. The casino will give you a copy of the gambling win, on Form W-2G and send a copy to the IRS. The IRS will use this gross figure as increased ordinary income unless you can indicate losses against this win. Senior citizens beware: the amount indicated on line 21 of Form W-2G will potentially make more of your Social Security benefits taxable!

The traditional place to declare gambling losses is on Schedule A under miscellaneous deductions, but there are problems with doing it this way. First, you must “qualify” to itemize deductions on Schedule A.  For Schedule A to do you any good, your deductions must be greater than what you would receive as the standard deduction.

Let us say that you are single, so your standard deduction for 2014 is $6,200. If your allowable itemized deductions total less than this amount, then filing a Schedule A won’t benefit you. However, if you have sufficient mortgage interest, real estate taxes or charitable contributions to justify itemizing your deductions, then declaring a $1200 loss on Schedule A will help to offset the $1200 win.

If you don’t qualify for a Schedule A, or if you want to report less than what appears on line 21 of Form W-2G , then you have significantly more bookkeeping to do. All winnings, not just W-2G winnings, are reportable. Therefore, you must maintain a day-to-day diary that itemizes ALL of your winnings and losses per session, not just amounts of $1200 and over. The diary, similar to a tip diary, must be credible. It’s a good idea to back it up with bank records, ATM slips, and casino win-loss statements.

gambleIf you travel to gambling resorts once or twice a year, be prepared to keep a log of your winnings and losses per trip. As you arrive at your resort or hotel, make a dated note of your “buy in”, the amount of cash that you brought along to play with. When you check out of the hotel or resort, make a note of your “win” (or loss). This is considered the end of your gambling session.

If you live in a gambling city such as Reno or Las Vegas, then there is technically no way to delineate a gambling session, since slot machines are available in supermarkets and convenience stores 24 hours a day, as well as in bars and restaurants. If you are reporting less than the amount of winnings reported on Forms W-2G, be prepared for an IRS letter or an audit, and have all of the records required for a day-to-day record of wins and losses.  You should also be aware of various state laws that may vary from federal requirements. In such cases, it’s a smart strategy to have a tax professional assist you with the reportable figure. This option will require conforming to the situation in the court case Shollenberger v. Commissioner T.C. memo 2009-306, as referenced in The Tax Book, by Tax Materials , Inc.

Don’t expect casinos to proactively withhold any portion of your winnings for tax purposes unless state law requires it. Most state laws do not. Exceptions include foreign winners or other special circumstances.

There are two obvious reasons casinos won’t voluntarily place tax withholdings on your gambling winnings:

  1.      Withholding creates added administration paperwork
  2.      Withholding disrupts the flow of business (if the money is withheld, then you won’t lose it back)

You can request that money be withheld from your winnings (perhaps based on your marginal tax rate or higher) at the time of the payoff. But you should not request withholding if your winnings come from the casino where you work. (Some states and casinos allow casino workers to gamble where they work; others do not.) However you go about doing so, having tax withholdings from gambling winnings can potentially save you hundreds or even thousands of dollars at tax time.

Things You Can Do After Tax Season To Make Next Year Easier

The best tax advice is to get an earlier start on filing income tax returns. Putting off completing your tax returns until April only increases the stress and anxiety of confronting all of the rules and regulations of the IRS. The strain of filing this year’s returns should serve as an incentive to make next year go a little smoother. To make that happen, incorporate a few organizational techniques, and aim for a goal to file your return by February next year.

mileageEspecially if you use your car frequently for business, you’ll find that the miles add up quickly.  Many taxpayers can legitimately claim the mileage deduction for their personal vehicles. However, the IRS wants a mileage diary at audit time. Many tax practitioners, afraid of accuracy penalties, are reluctant to include estimated mileage numbers on their customers’ tax returns.

The solution? Buy a small expense diary that will fit in an easy-to-reach cubby-hole near your dashboard. Attach a pen to the notebook. As soon as you buy the expense booklet, write down the mileage from the odometer, next to the date. Put the booklet and envelope in the glove box of your car.  You should also purchase a manila folder to keep by your computer.  Whether you prepare your own taxes or leave the task to a tax professional, the presence of the manila folder can remind you to either print out copies of mortgage statements or other transactions. If you receive statements or bills by mail, put them in the folder.  If there is a particular place where you empty your pockets or purse, make sure a second envelope or folder for receipts is nearby.

Your manila folder and glove compartment envelope can be used for any receipt, including prescription and over-the counter drugs or doctor receipts. Did you make a tuition payment online for your child’s college tuition? Print out a receipt right away, and stash it in the folder.

ReceiptsIf you occasionally make a purchase for your rental property, keep an envelope in the glove box to keep receipts. You can use the same envelope for gas receipts. Even though gas purchases are not deductible, gas receipts can provide substantiating evidence for mileage deduction claims. Did you take clothes or other donations to your church, or the Salvation Army?  Put the receipt you should have received in the envelope along with your gas receipts and receipts for rental purchases.  Maintaining receipts is essential in case the IRS questions your deductions.

Whenever you use the car for a deductible trip, copy down the odometer reader at the beginning and again when you return home. To cement the habit of keeping track of your mileage, copy the odometer reading every time you get in the car. Your log should include the date, the beginning odometer reading, the purpose of the trip, including names of people you’re meeting with if your trip is business related, and the ending mileage.

Once your system is in place, maintenance requires only a few seconds a day.  Writing down your mileage will become second nature. You’ll be surprised by how quickly your receipts add up as the year progresses.  And you’ll be able to look forward to a more lucrative and less stressful tax season next year!