theconfidenttaxpayer

When The Children Grow Up- How To Adjust For Taxes

If you were used to receiving a refund because you claimed your children but can no longer claim them, the transition can be rough. The shock is common for parents, the first year they file without dependents. Refunds are considerably lower, or worse, there’s now a tax liability.

What to do?

If you’re paid wages or salary the easiest solution, from a tax point, is to update your W4. If you previously filed as head of household, and marked that status on your W4, you’ll want to go back and mark “single”.

If you’re self-employed and can no longer claim dependents the only solution available is to make estimated payments. These are quarterly payments that are meant to cover both your income tax and self-employment tax.

Estimated Payments

Taxpayers who expect to owe at least $1,000 on their tax return, and who are unable to have tax withheld, must make quarterly payments the year prior.

A good starting point is last year’s tax return. Your 1040 will show your gross income and expenses. If you expect your income and expenses to be similar, then your self-employment tax will also be similar. If you’re now filing single, instead of head of household, your income tax will be different, most likely higher.

Form 1040-ES offers worksheets that can help calculate accurate payments.

Tax Planning

Although you may still support your adult children, if they’ve fallen out of dependency eligibility for tax purposes, you’ll have to plan for a new tax scenario. Tax planning can be confusing, but hopefully this guide offers a good start for you.

You’re Going To Want To Keep Track Of Those Miles

If you plan on driving your car for business, in 2023, you might be able to deduct 65.5 cents per mile. If you drive for medical reasons the rate is 22 cents per mile. For charity, it’s 14 cents per mile.

Driving the same car for business and personal use will require you to calculate the use percentage for each. The miles driven for business are deductible, but the miles driven for personal use are not.

Business Miles

There are two methods of deducting the use of your car for business. There is the standard mileage rate (65.5 cents per mile), and there is actual use.

Standard mileage covers maintenance and repairs on your car, as well as gasoline and insurance. The 65.5 cent rate is a flat rate meant to cover all these expenses. You’ll have calculate which method will give you the biggest deduction.

You can alternate between methods every year, but only if you opted to use the standard mileage rate the first year you used your car for business.

Medical Miles

Although medical miles have a lower rate than business miles, they follow the same rules. You can either deduct the standard mileage rate (22 cents per mile) or actual expenses. Unlike business miles, which are deducted on Schedule C, medical miles can only be deducted on Schedule A, Itemized Deductions.

To figure out which medical expenses are allowed by the IRS consult Publication 502, Medical and Dental Expenses.

Charity Miles

If you used your car to provide services to a qualified charitable organization, you can either deduct mileage (14 cents per mile) or actual expenses. These expenses must be unreimbursed and out-of-pocket.

Like medical deductions, charitable deductions must also be claimed on Schedule A.

Final Note

Burden of proof lies with the taxpayer. Any car deductions claimed on the tax return must be ready to be substantiated in the case of an audit.

Miles driven, and the purpose of those miles, must be made clear to the IRS through recordkeeping.

How To E-File 1099 Forms For Free

If you’re a business owner who’s hired independent contractors for services rendered to your business, you can e-file 1099 forms for free. Through the IRS’s Information Returns Intake System (IRIS), you can file 1099 returns, as well as print recipient copies.

1099 Requirements

If you paid an independent contractor over $600 in a tax year, you’re required to file a 1099-NEC Form with the IRS and issue the independent contractor a copy by January 31^st.

As of 2023, if you must file 10 or more 1099 forms in a given tax year, you’re required to e-file them.

IRIS Taxpayer Portal

In order to use the IRIS portal you’ll have to submit an application to receive a Transmitter Control Code. This code will allow you access to the portal.

The application will require your business information and the information of the person submitting the application (also called a Responsible Office). The business must have an EIN, as social security numbers or ITINs are not acceptable.

How to Get an EIN

To get an EIN you’ll have to submit an application, providing your business information and the information of the Responsible Party. The Responsible Party is the person who exercises control over the business, like the owner. Most EINs are issued immediately.

More detailed information is provided in Publication 5717, Information Returns Intake Systems.

The #1 Reason To Open An IRS Tax Account

Benefits of a tax account

Signing up for an IRS tax account has multiple benefits. You can apply for an installment payment plan, request tax transcripts, sign powers of attorneys. Most importantly, you can view your tax activity. Why is this important?

Cases have increased in which taxpayers try to e-file their tax returns, only to have them be rejected because a return under that social security number has already been filed. This problem is more likely to go unnoticed by taxpayers who do not file every year, like senior citizens. If you have a tax account, and you check it routinely, you can catch a problem before it snowballs.

It’s also not unheard of to have tax professionals change information on a client’s return after the client has left the office. If this were to happen, you can check the tax return on file against the tax return copy you were given.

Signing up for a tax account

To open a tax account with the IRS:

>Click on “Get your tax record”.

>Under, “Access Tax Records in Online Account”, click on “Visit or create your Online Account”.

>Click on “Sign in to your Online Account”

>Next, you’ll be prompted to sign in with your ID.me login.

If you don’t already have an ID.me account you’ll have to create one. ID.me verifies taxpayers’ identities by having them upload selfies and pictures of their IDs. Once you create an ID.me account you’ll be able to access your tax account.

As identity theft crimes keep rising, it’s important for us to remain vigilant as best as we can, not just of our own finances, but of our loved ones as well. This is just another one more way to do so.

Did You Claim The Employee Retention Credit? You Might Receive A Letter From The IRS.

The Employee Retention Credit came about as a result of mandatory shutdowns during the Covid pandemic. It was a credit meant to help businesses who at the time had paid employees, but who were forced to shut down. The ERC covered the periods after March 19, 2020 and before January 1, 2022. For a complete eligibility list go here.

In December of 2023 the IRS started looking into possible fraudulent claims of the credit. While businesses that claimed the credit without being eligible may face interest and penalty charges, the IRS acknowledges that many businesses claimed the credit as a consequence of “aggressive marketing” by promoters looking to benefit from businesses claiming the credit. As a result, the IRS is allowing businesses to withdraw from claiming the credit if they haven’t received payment or if they’ve received a check but haven’t cashed it yet. If this is your case, you can go here to start the withdrawal process. For those who have received payments, the IRS plans to release a voluntary disclosure program.

At the moment the IRS’s main concern is businesses who claimed the credit, but which did not exist during the eligibility periods, and those that did not have any paid employees. According to the IRS, the number of businesses set to receive disallowance letters is around 20,000.

If you were persuaded to claim the credit but aren’t sure if you were eligible to claim it, review the eligibility list. If you don’t qualify for the credit and haven’t received payment, or if you received a check but haven’t cashed it, consider starting the withdrawal process. The IRS assures claimants that the tax agency will act if the credit was never claimed.

Guard Your Personal Information Against Tax Scammers

Tax season is officially here, and with it are tax scams. Common among them are e-mail and text scams meant to look like they come from the IRS and other tax agencies. These scams aim to get your personal information, including your banking information. Some scammers have become successful enough that cybersecurity experts at Securonix have begun tracking them ahead of tax season.

Taxpayers who fall for these scams do so because they received messages claiming outstanding refunds, or in some cases outstanding tax bills. If you ever receive an e-mail or text from what seems to be a tax agency, do not reply or click on any links. Instead, capture a screenshot of the message and send it to phishing@irs.gov. The IRS encourages taxpayers to report these scams in order to make other taxpayers and tax professionals aware of them.

It’s important to know that the IRS initiates contact with taxpayers through mail correspondence. If you suspect that a letter with an IRS letterhead could be a scam, you can always verify its authenticity by calling the IRS directly.

Taxpayers can also create a tax account with the IRS. If you create an account you’ll be able to monitor new account activity and information, and know for sure if the IRS is actually trying to communicate with you. To sign up for a tax account go to https://www.irs.gov/, and click on “Sign in to your account.” If you don’t already have an ID.me account you’ll have to create one.

Why Self-Employed People Should Always Carry A Weekly Planner

A weekly planner isn’t just great for jotting down appointments. It can also serve as supporting documentation if the IRS were to ever audit your return. The U.S. Tax Court often makes it clear in case decisions that the burden of proof falls on the taxpayer claiming the deductions and credits. In the event of an audit, any unsubstantiated deduction will result in a higher tax bill.

But what should be written down? Even if you use third-party payment companies, such as Square, and pay for every expense with your debit card, it’s still beneficial to write down every sale and major expense to avoid discrepancies.

If you drive to clients’ homes or to any other business destination, it’s important to log in your mileage and destination to prove you are entitled to take the mileage deduction.

In a recent court case, a taxpayer’s mileage claim was disallowed after he was unable to back up his business mileage. Although he had a log of miles driven, he did not make it clear if the miles were for business or personal use. Writing down the purpose of the business trip could prevent a future disallowance.

Aside form helping you prepare an accurate tax return, a weekly planner can also help you manage your customer relationships. If you’re looking for recurring sales, knowing the date of your last visit can show your clients you haven’t forgotten them.

Documents You Need If Your Earned Income Credit Is Audited

If you’re claiming the Earned Income Credit based on a qualifying child, expect more rules than if you were claiming it only for yourself. The IRS claims “an estimated 33% of the credit is paid out in error.”

There are 4 tests your qualifying child must meet before you can claim the credit. If audited each test must be supported by documentation.

1. The relationship test

Your qualifying child must be your son, daughter, stepchild, foster child, or a descendant of these. Your sibling, half sibling, stepsibling, or a descendant of these can also be a qualifying child.

2. The age test

The qualifying child must be under the age of 19 at the end of the tax year and be younger than you. Students under the age of 24 also qualify.

3. The residency test

The qualifying child must have lived with you over half of the year.

4. Joint return test

Your qualifying child cannot file a joint return unless it is only to claim a refund on income tax withheld.

Nothing is more frustrating than a taxpayer who is entitled to the credit but due to personal circumstances isn’t prepared to provide supporting documents when audited. It’s important to know what’s expected to better prepare.

The IRS generally looks for evidence that prove 3 of the 4 tests above are true. It wants you to prove that the child is related to you, lived with you, and is under the qualifying age.

To prove the child lived with you, you’ll need documents that tie both you and the child to the same address. There are situations in which one parent claims the child even though the child lives with the other parent. Typically, the child has the same address as the parent he lives with, posing a challenge to the parent wanting to claim the child.

Proving a qualifying relationship to the child usually means submitting birth certificates. If your qualifying child is your son or daughter this should be an easy task. If you’re a grandparent claiming your grandchild, however, you’ll have extra steps to follow. You’ll not only need the child’s birth certificate but also the child’s parent’s birth certificate to prove their relationship to you.

If the child is under the age of 19 you generally don’t need to submit anything. If the child is under the age of 24, you’ll need to submit proof that the child was a full-time student for any part of five months of the year.

An EIC audit can be a small deal to some, and a big deal to others. The best course of action is to know what’s expected and have everything ready, just in case. In the event that you can’t provide supporting documents the IRS might deny or reduce your EIC for future tax years. For more information consult Publication 596.

Canceled, Discounted, Or Modified Credit Card Debt

If you owe credit card debt and the lender decides to cancel (“discharge”) your remaining balance, or discount or modify the principal balance, you’ll likely receive Form 1099-C, Cancellation of Debt. The amount shown on box 2 is taxable as ordinary income, meaning it will not be subject to any extra tax besides the regular income tax.

It’s possible, however, to make some or all the canceled debt nontaxable. The IRS offers “exceptions” and “exclusions” to the rule, with exceptions considered first before exclusions.

For credit card borrowers, canceled debt might be nontaxable if the debt could have been deductible. If you were self-employed, and the credit card was used solely for business expenses, that debt could have been deductible and therefore the canceled debt would be nontaxable.

If your canceled debt does not qualify for an exception, you may still be able to exclude canceled debt from income if the debt was canceled due to a title 11 bankruptcy case. One other possible exclusion is insolvency. This exclusion can be trickier, and the services of a tax pro might be required.

Under the insolvency exclusion, your total debt, immediately before your debt was canceled, must have been more than your total assets. The IRS provides an insolvency worksheet in Publication 4681 that can help you figure out if you were insolvent immediately before your credit card debt was canceled, discounted, or modified. Publication 4681 also provides a full list of exceptions and exclusions, as well as examples that might be relevant.

If you qualify for an exclusion, it will have to be reported on Form 982, with the appropriate box checked.

If you do not qualify for any exception or exclusion your canceled debt will have to be included in income. There are two ways to plan for a possible increase in tax. You can either make an estimated payment throughout the year or increase your withholding at work.

Short Guide to Claiming the Used Clean Vehicle Credit

There are several good reasons to buy an electric vehicle. The main reason is the ever-increasing price of gas. It’s expensive going to work. For many who want to start a ride-sharing gig it just makes sense.

For several years now the IRS has offered people a credit for new electric vehicles. A new EV, though, may be out of range for many people’s budgets. For those who are aiming for a used EV, the IRS is now offering a credit to qualifying taxpayers.

To claim the credit, a taxpayer cannot be claimed on another’s return. The taxpayer must not be the original owner, must not have claimed a used clean vehicle credit in the 3 years before the current purchase, and must not have purchased the vehicle for resale.

Additionally, a taxpayer’s AGI must be under $150,000 if married filing jointly, $112,500 for heads of households, and under $75,000 if single or married filing separately.

To find a list of the current qualifying vehicles go to fueleconomy.gov. To qualify for this credit the vehicle must have a sale price of $25,000 or less and must have been purchased from a dealer.

The credit is claimed on Form 8936, for a maximum credit of $4,000. You’ll need the car’s VIN number. The dealer is also responsible for providing the following information:

Battery capacity
Sale date and sale price
Dealer’s name and tax ID