Tag: tax planning

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.

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.