Topics:Dealing with tax debt tax debt facts Choosing a tax relief company Tax audits tax preparation financial planning business taxes
Guest Post by Kristen Baker Every year, roughly one million Americans have unclaimed tax refunds from the IRS that are due to expire. In four of the last five years, these unclaimed returns have totaled more than $1 billion. With last year’s median tax return at $879, the annual median has risen for six consecutive years. Unfortunately, many people don’t even know that they may be owed money by the IRS. Luckily, the IRS releases the data every year in March, giving taxpayers just enough time to claim before Tax Day on April 15th. What could you do with an extra $500 or more? Below are steps to determine if you have an unclaimed tax return and how to claim it if you do. Key Takeaway: Pay attention to the details. You might be missing a refund because: You didn't earn enough to file. Your address was wrong. You qualified for an EITC. Best practices for filing: Submit your tax return electronically. Choose direct deposit as your refund method. Hold onto necessary financial documents for at least three years. Why your refund is missing Whether you’re young or old, wealthy or poor, anyone can be missing a tax refund. In some cases you may have made a mistake while filing and in others you may not even be aware. These are a few reasons why you may be missing a return: You didn’t earn enough to file. This is often the case with teenagers, part-time workers, and the self-employed. If you failed to meet the minimum earnings threshold for your filing status, you probably never filed a return. However, you could still be owed a tax refund. If taxes were taken out of your paycheck every week, you can file a return. Your address was wrong. The wrong address is always a risk when choosing a mailed refund, rather than direct deposit. If your refund was mailed to the wrong address and bounced back to the IRS, they are not required to notify you. You qualified for an EITC. Even if you didn’t earn enough to pay taxes, you could be eligible for a refund through the Earned Income Tax Credit (EITC). An EITC typically benefits low to moderate wage earners, especially those with children. The IRS website can help you determine if you are eligible. How to claim your return First, you should review your last several tax filings to see if any are missing. Even if they’re all there, however, that doesn’t mean that you can’t claim a larger refund. You can still file an amended tax return to claim deductions like the EITC and others. If you suspect that you have unclaimed tax money waiting for you, or even if you’re unsure, all you have to do is file a return for the specific year. Luckily, the IRS gives you a three-year period to file for any unclaimed returns. This year, you can go back as far as 2016. Best practices for filing Whether it’s filing for past years, or even this year and beyond, there are several best practices to make the process easier. Submit your tax return electronically. Filing your taxes with a paper form leaves the process more susceptible to mistakes—an e-file does all of the calculations for you. Another consideration is the time it takes for the IRS to process returns. E-files will be processed and returned much quicker. The average time for the IRS to process an e-file is only a few days, whereas a paper file may take a few weeks. Choose direct deposit as your refund method. Direct deposit is the quickest way to access your refund. The IRS returns 90 percent of e-files with direct deposit within three weeks of when they were filed, as opposed to at least twice that amount of time for a mailed return. Hold onto necessary financial documents for at least three years. To avoid future misfilings or rectify missing tax returns from the past, you’ll want to keep your financial documents organized. By properly tracking and storing your documents, you’ll have a point of reference and readily available information, making tax season less stressful. Not only will these documents be useful if you need to file for an unclaimed tax return, but they can provide important insights for your next return as well. Documents that you should save include past returns, any itemized deductions, and income statements. Tax season can be stressful as you begin to file your return. However, by taking the proper steps, you can prepare yourself for success. Make the most of your tax return this year and don’t forget to check for any unclaimed refunds from years past. Kristen Baker is a personal finance enthusiast and content creator. Outside of work, she thoroughly enjoys taking her dog to “Dogs Allowed” coffee shops, reading, and admiring art exhibitions.
Guest Post by Lee Reams, Sr. If you have a simple tax filing situation, like being a single renter who lives in a state with no income tax and whose only income comes from one job, doing your own taxes just seems to make sense. However, you never know when life is going to throw you a curveball. Circumstances could be a cause to celebrate like becoming a high earner, getting married and starting a family, or buying a home. Less fortunate circumstances like filing for bankruptcy or inheriting assets from a loved one who died can also drastically alter your tax situation. Hiring a tax professional is the best course of action when your finances become more complex. Over half of Americans who file taxes hire a professional tax preparer to handle their tax returns. According to IRS statistics for the 2019 filing season, 57 percent of all electronically filed tax returns were submitted by a paid tax preparer. While there are more self-preparation options out there than ever for taxpayers who still want to go the DIY route, here's why you should opt for a professional tax preparer. Key Takeaway: Trust the professionals. Tax professionals stay on top of numerous tax law changes, so you don't have to. If you move, find a tax professional who specializes in the area(s) you've spent time in. Tax professionals must provide due care to you while DIY solutions do not. Tax professionals can show you deductions and credits you might not have thought of. Professional assistance is not limited to the years that the tax professional prepared your return. Tax professionals stay on top of numerous tax law changes, so you don't have to The Tax Cuts and Jobs Act (TCJA), better known as the 2018 tax reform, was the largest change made to the federal tax code in 30 years. While it's been two years since the law's passage, many aspects of it did not go into effect until 2019 or will not until future tax years. Various amendments were also made to the TCJA since its initial passage concerning tax breaks like the new deduction for small business owners and freelancers, and the individual mandate for the Affordable Care Act. While the individual mandate penalty was repealed as of 2019, some states are beginning to institute their own, with California being the most recent. Tax professionals stay on top of these laws so that you can focus on your professional and personal life, and not have to devote entire weekends to tax research and legal interpretations you may or may not be navigating correctly. If you move, find a tax professional who specializes in the area(s) you've spent time in If you move, your tax situation can end up becoming more difficult as a result. Even if you're departing a high-tax state like New York or California for a state with no income tax like Florida, you can end up facing residency-based tax issues and may need professional assistance getting it sorted out. Because states and local governments can have so many nuances that could deviate from federal income tax norms, working with a tax professional who is highly familiar with your state and local matters is imperative. An incorrectly prepared state tax return can have even more dire consequences than a federal tax filing gone wrong, because states do not have to provide you with the same process granted by the IRS under the Taxpayer Bill of Rights (codified in the 1998 tax reform). Tax professionals must provide due care to you while DIY solutions do not Professional tax preparers like CPAs, Enrolled Agents, and tax attorneys must act with a duty of care in providing services to their clients. In addition to following through with the standards of practice set by the IRS, they may also be subject to state laws and the standards imposed by professional societies to which they belong. This entails carrying professional insurance for errors and omissions so that in the event you are billed for a discrepancy, it's on the tax professional and not you. Since the tax professional is only responsible for what you tell them, this only applies to mistakes made on their part and not your omission of an entire source of income or other significant facts. If the tax professional does not comply with federal or local laws on professional conduct, misuses your tax refund, or does anything else that could be worthy of disbarment, you can take it up with the IRS or state tax authority. If you make mistakes on your own tax return, you are responsible for them. The "TurboTax Defense" does not hold up in Tax Court or with IRS appeals. While tax software may offer a helpline or audit assistance, it is not the same as working with a licensed and experienced professional from the start. You can get better results with a tax preparer prioritizing both the big picture and finer details of your tax situation, rather than being placed in a queue to get an answer for one question about a line item. Tax professionals can show you deductions and credits you might not have thought of Your profession or lifestyle could entail various tax benefits that you might not have been aware of. Some of these tax credits are rarely claimed, such as the credit for the elderly and disabled, so they are not discussed much outside of tax professional circles. Inversely, there are several activities that people tend to think have an effect on their taxes, like paying medical bills or donating to charity, but actually end up not having an effect. This is especially true after the passage of the 2018 tax reform. Deductions are of particular importance to the self-employed because they add up quickly, and many bleed into personal expenses that are otherwise not deductible. However, you might be unaware which deductions require more substantiation than just proof of payment. The Internal Revenue Code is thousands of pages long, and it isn't getting any shorter. State tax codes are not much simpler and don't always align with federal tax items; so, what may be deductible on the state level is not deductible at the federal level and vice versa. Because tax professionals focus on these areas for a living, they can find all of the benefits you qualify for and help you plan for them for future tax years as well, making their fees all the more worth it. Professional assistance is not limited to the years that the tax professional prepared your return If you file on your own using tax software and call the help line listed on the back of the box, you can only get assistance for the current tax year. You may have been cumulatively making mistakes on prior tax returns and keep receiving notices from the IRS, including for this year's return. Licensed tax professionals who are held to a high professional standard can help you with tax matters from any year, not just the years that they prepared your tax returns. Some professionals focus on tax preparation while others focus primarily on tax resolution, audit defense, and resolving issues with the tax authorities. In either case, tax professionals can help you with issues from any tax year and even help you file amended returns if your own prior year returns were done incorrectly and/or you missed out on valuable tax benefits. With your prior year and currently open tax returns prepared correctly, a tax professional can help you get a better grip on your tax matters and save you even more money in the long run. Lee Reams Sr., BSME, EA is the Chief Technical Officer for ClientWhys, TaxBuzz, and CountingWorks. In addition to being an expert on taxation and a leading speaker on tax-related topics, Lee has experience in managing his own 700+ client tax practice.
Are you looking forward to a big tax refund this year? According to a recent survey by FinanceBuzz, the ideal situation for 79 percent of American taxpayers is receiving a tax refund, rather than owing money to the government or even breaking even on their taxes. And for the most part, it looks like they’re getting their wish: In 2019, about 72 percent of tax returns filed resulted in a tax refund, for an average amount of $2,729, according to the IRS. After all, who doesn’t like getting a check for nearly $3,000? But there are reasons to avoid getting a large tax refund. "A tax refund is not free money," says Alexa Serrano, Finder's Banking and Investment editor. "It just means that you overpaid your taxes throughout the year." Because when you receive a tax refund, "that’s your own money you’re getting back," says Pamela Yellen, founder of Bank on Yourself and a New York Times bestselling author. "You’re giving the government an interest-free loan, while getting a zero rate of return on your money." So what's a smart taxpayer to do? Key Takeaway: Understand your tax responsibilities. Keep more of your money throughout the tax year so you have more money to invest. Use last year's tax return as a road map for this year's taxes. If you receive a large refund, try increasing your allowances on your W-4. Minimize your tax liability as much as possible. Determine your tax strategy The best option is to break even — don't receive a tax refund or owe money to the IRS. Although it's nice to get a big chunk of change in the form of an income tax refund, you can put that money to better use if it's available to you throughout the year. For example, instead of receiving a large tax refund all at once, you could set aside that money throughout the year and invest it, deposit it in a high-yield savings account, or put it in your retirement account. That way, instead of loaning money to the government interest-free, your cash earns interest for you. On the other hand, although many experts advise against getting a large refund check, that's not one-size-fits-all advice. “Deciding whether you want to owe taxes or receive a tax refund comes down to your personal goals and financial lifestyle," Serrano explains. In an ideal world, we'd all regularly deposit money into savings or investment accounts, so it could yield interest over time. But the reality is that many of us struggle to save money if it's just sitting in our accounts, available to use at any time. If that sounds like you, it may be a better strategy to pay more to the IRS throughout the year. "If you don’t have it, you won’t spend it," notes Peter J. Greco, a CPA and founder of the CSI Group, LLP. "It is basically a forced savings account." But “if you consider yourself financially responsible, you might want to opt out of receiving a tax refund at the end of the year," Serrano advises. And if you can't break even, the next best option is to owe a small amount, according to many experts. Just remember that the key is "small." "If you owe too much, you might just have a penalty for failure to pay estimated taxes," warns Steven J. Weil, an enrolled agent and president of RMS Accounting. Josh Zimmelman, owner of Westwood Tax & Consulting, suggests putting extra money throughout the year toward your emergency savings fund. "Worst case scenario, if you still end up owing taxes next year, you’ll have that extra money saved to help pay it," Zimmelman points out. Estimate what you might owe next tax year Taking a look at last year's tax return is a good way to gauge what you might owe next year — or at least how much you should pay to avoid owing penalties to the IRS. Ben Watson, a CPA and personal finance expert from DollarSprout.com, offers a few suggestions: 1) Pay 100 percent of your tax liability from last year, or 110 percent if you're adjusted gross income is $150,000 or more and you're submitting your tax return as Married Filing Jointly. 2) Pay 90 percent of your tax liability for the current year. Re-examine your withholdings When was the last time you looked at Form W-4? Withholding is what ultimately determines the size of your refund. “If you withhold too much, you might get a big refund, but you’ll likely be short on cash all year," Zimmelman warns. "If you withhold too little, you might find yourself owing money in taxes again next April.” According to FinanceBuzz's survey, 89 percent of taxpayers are confident their withholdings are set correctly. But if you're receiving a large refund, that generally means you're not claiming enough withholdings. If you don't know where to start, try the IRS's online Tax Withholding Estimator. And then make sure to revisit Form W-4 at least annually. "If you typically receive a large refund, you’ll want to increase your allowances," Serrano says. "If you owe the IRS, you’ll want to decrease your allowances. You can submit a revised W-4 form to your employer at any time." Just make sure to proceed carefully — owing a large amount of taxes isn't an antidote to the large-refund problem. Re-evaluate throughout the year Depending on what's going on in your life, once a year may not be frequent enough to check your withholdings. If you experience a significant tax event, such as getting married or having a baby, you probably need to take another look at the W-4 form. You should probably also pay attention to changes in tax law that might affect you. Minimize your tax liability The goal in avoiding a large tax refund isn't to pay more money in taxes; it's to keep as much of your money for as long as possible. One part of that is to claim every tax credit and all the deductions you can on your tax return. "A lot of people don’t itemize their deductions anymore because the standard deduction has been increased, but there are still ways to lower your tax liability even if you don’t itemize," Zimmelman says. "There are a number of tax credits and exemptions." Expedite your tax refund If you are expecting a refund, make sure you get it as quickly as possible by using direct deposit. There are multiple benefits of getting your refund through direct deposit: You'll receive your refund faster than if you'd opted to receive a paper check. If you're using your refund as a "forced savings," you can have it deposited directly into a savings account. It saves taxpayer money — according to the IRS, every paper check issued costs taxpayers $1, while every direct deposit costs only 10 cents. You can receive your refund via direct deposit whether you're filing electronically or with a paper tax form; just select direct deposit as your refund method via your tax software, tax preparer, or Form 8888. Be ready to provide your bank account number and routing number. Talk to a tax expert for personalized advice It's hard to actually break even on your taxes; it's more likely you'll be able to ensure a small refund or a small amount of taxes owed. "Working with a financial professional, like a CPA, can help ensure that you are paying enough taxes to avoid a penalty without providing the government with an interest-free loan," says Dewey Martin, professor emeritus from Husson University's School of Accounting. “Don’t wait until next April to start your research," Zimmelman advises. "If you find it too confusing, hire a professional to help.”
It's tax preparation season: tax returns for 2019 are due on April 15. You might receive a refund after filing, but it's also possible you'll owe more taxes. But what happens if you can't afford to pay your income tax bill? You might consider setting up an IRS payment plan or paying your taxes with a credit card. But what about taking out a loan? Here's what the experts say about getting a loan to pay taxes. Key Takeaway: A loan is not your only option. Consider other options first, such as an IRS installment agreement or an offer in compromise. Prequalify with several lenders to compare costs. Don't consider a loan a long-term fix. When should you consider using a loan to pay taxes? First, consider any options the IRS may offer for resolving your tax debt, such as an installment agreement or an offer in compromise, before turning to another lender. "Getting a loan to pay taxes should be the absolute last resort, after going through the ‘process’ of options that taxing government agencies offer," says Anthony J. Viola, a CPA and senior partner at KVLSM. If you don't have good credit, "the IRS might actually offer more affordable rates and terms," adds Anna Serio, loans writer for Finder. "Even if you have good credit, the longer terms that come with a personal loan can result in a higher overall cost, since it allows more time for interest to add up." On the other hand, Serio continues, if you have good credit, you might pay less in interest on a personal loan than you would in fees for an IRS payment plan. How does using a loan to pay taxes affect your credit score? Ryan Guina, founder of The Military Wallet, warns that paying your tax debt by taking out a loan would have the same effect on your credit score as taking out any other unsecured loan. Taking out the loan itself may not affect your credit score significantly, but other factors could. "However, your credit score may take a hit if you have other underlying problems, such as not being able to make timely payments, or you have maxed out your line(s) of credit," Guina says. If a potential lender uses a hard inquiry to check your credit score, that could hurt your credit at first, Serio confirms. "But it can ultimately boost your credit by adding to your record of on-time repayments and diversifying the types of credit you have on file if you don’t have any other loans in your name," Serio adds. Furthermore, regularly making a monthly payment to the IRS “mostly just keeps your credit score from dropping,” while making consistent payments on your loan will improve your credit score, explains Morgan Taylor, CMO for LetMeBank. Sean Messier, a credit industry analyst with Credit Card Insider, agrees that consistently paying down your debt on time could improve your credit score. "But, ultimately, the impact a loan has on your credit can vary based on your unique credit situation," Messier says. What are the advantages and disadvantages of using a loan to pay taxes? Taking out a loan to pay taxes is a good idea only if you know you'll be able to repay the loan quickly and if not paying your taxes on time would cause more financial trouble than the loan, according to Guina. "This could come from IRS penalties, backup withholdings, or wage garnishments that could cause additional financial troubles for you," Guina says. "In general, it's best to avoid negative attention from the IRS." Also be aware that taking out a loan to pay taxes might limit future debt you can accrue, such as for a student loan or home mortgage, Taylor warns. If you do decide to use a loan to pay your unpaid taxes, Serio suggests prequalifying with more than one lender so you can compare the cost of both the monthly payment and other fees. What options does the IRS offer for paying your taxes when you don’t have the money to pay your tax debt? If you owe less than $50,000, the IRS may agree to an installment agreement, according to Kathryn Dalli, a partner at Twomey, Latham, Shea, Kelley, Dubin & Quartararo. “In most cases, a taxpayer would save money by choosing an IRS installment agreement over a personal loan,” advises James Garvey, CEO of Self Financial, Inc. And an IRS installment agreement comes with an additional advantage, says Dalli: "An installment agreement with the IRS would not appear on your credit report and would not affect your credit." You can also apply for an offer in compromise, which allows you to settle your debt for a lower amount than you owe. Generally, youll need to prove that you owe more than you’re able to pay based on your income, assets, and living expenses,” Serio notes. According to Serio, less than 50 percent of taxpayers who apply for an offer in compromise are accepted. But no matter what, make sure you file your tax return on time. This will help you avoid penalties for failing to file your return,” Garvey says. And taxing government agencies are less likely to work with taxpayers when there are open tax year filings and/or late tax filings, Viola adds. “It’s never a good idea to borrow money you can’t afford to repay,” Garvey explains. “But defaulting on a personal loan will negatively impact your credit while defaulting on an IRS installment agreement can have more far-reaching consequences. What are other options for paying your tax debt? The IRS doesn't accept direct credit card payments, but you can pay taxes with a credit card through an approved third-party payment processor. "Those payment processors charge fees ranging up to a couple percent of the payment amount," Garvey says. "Plus, you’ll have to pay interest on the balance to your credit card company — usually at a higher rate than you’d pay with a personal loan or IRS installment agreement." On the other hand, you might be able to find a credit card with an introductory 0 percent APR offer. "These credit cards allow you to carry a balance interest-fee for a set period of time," explains Messier. "As long as the full balance is paid by the time that period ends, you won’t have to pay a single cent in interest." But also keep in mind that if you carry a high credit card balance for a long period of time, that could hurt your credit score. Using the services of a tax relief company is another potential solution for dealing with your tax debt. Tax Defense Network, Optima Tax Relief, and Community Tax are currently some of the best tax relief companies on BestCompany.com. What’s next? The experts agree that using a loan to pay your tax debt isn’t a long-term fix. "A loan is not a good solution if you aren't willing to change the underlying issues that caused you to owe the money to the IRS," Guina concludes. Also keep in mind that tax debt often requires different solutions than other kinds of debt. If you’re looking for debt relief related to taxes, be sure to look for a specialized tax relief company rather than a more general debt relief company.
You've gotten a letter from the IRS regarding your taxes. You owe money. Problems with the IRS can lead to further financial consequences, which you'll want to avoid. Take your next step in a timely manner, whether you decide to contact the IRS yourself or reach out to a tax professional. Be careful with how you prepare to work with the IRS because there are pitfalls that you’ll want to avoid. Here’s what you need to know about tax debt and contacting the IRS: Understand tax debt consequences Prepare to talk with the IRS Contact the IRS Understand tax debt consequences If you don’t take care of your tax debt, it will accrue interest and late fees. Depending on how long you let your tax debt sit, you may have to deal with levies or liens. Liens are how the IRS lays first claim on any money resulting from the sale of your property, like your car or house. Levies allow the IRS to seize assets and use them to pay your tax debt. Assets include current income, retirement accounts, and bank accounts in addition to valuable property. Once you’ve received notice, you’ll want to know your options and determine the best way to approach your tax debt before you respond. Back to Menu Prepare to talk with the IRS Before you contact the IRS, you need to be prepared and respond to the IRS’s notice thoughtfully. Here are five things you should do before you call the IRS: Understand the IRS Know your situation Know your options Meet with a tax professional Be phone-ready Understand the IRS Understanding how the IRS works and what to expect will help you be prepared when you contact it.“Taxpayers are often terrified of the IRS, and rightly so. The IRS is one of the most powerful and feared government agencies in the United States with access to information beyond our imagination,” says Alissa K. Hollinger, CPA, CTRS and Hollinger Tax Resolution Owner.Having realistic expectations of what dealing with the IRS entails will help you decide the best way to move forward with your tax debt.The IRS’s purpose is to collect taxes. It will collect as much as it can as soon as it can, whether or not that deal is the most favorable to you.“People tend to forget that the IRS is merely a collections agency. It is their job to collect as much of the balance as quickly as possible. So, they often don’t really ‘work’ with the taxpayer to get them into an agreement to repay debt that actually functions for the taxpayer. Taxpayers often find themselves bullied into agreements that they can’t actually afford and then end up defaulting,” says Danielle Dryden, attorney and tax resolution specialist.The IRS is not on your side, and it has a lot of power to make your financial situation difficult if you fail to pay your tax debt.Because the IRS isn’t on your side, it may not bring up alternatives that can help keep you in a stable financial situation.“The IRS is notorious for placing taxpayers in payment arrangements when they qualify for an uncollectible status or even for an offer in compromise. The taxpayer needs to make sure they don’t agree to any type of arrangement that they cannot keep or that they do not understand. This simply causes the taxpayer to pay taxes they may not have to pay, or default on their agreement, incur additional fees, and possibly trigger aggressive collection activity,” advices Hollinger.You should also understand that you’ll run into inconsistencies when working with representatives.“First, know to expect a long phone wait and that every representative can be different, with some being more helpful than others,” says Vincenzo Villamena, Global Expat Advisors managing partner.The inconsistencies may be even sharper due to training and experience.“The IRS has had some trouble lately with personnel training. You’ll remember the government shutdown last year. New hires for the upcoming tax year are generally trained in late December and early January. Last year they couldn’t be trained because of the shutdown. This year, the IRS has hired hundreds of new employees all at once,” says Dryden.However, government shutdowns and hiring practices aren’t the only reason that you can expect inconsistency when speaking with an IRS representative.“Training isn’t consistent in collections departments across the country either. The result is that you have a taxpayer calling the IRS and talking to a representative that could very well have no idea what they’re doing. This is where a professional would come in handy. We know the rules when the IRS doesn't and can make sure a taxpayer doesn’t pay any more than they have to,” advises Dryden.You also need to be able to identify scams. The IRS will always send written notice before using other methods of communication.“The IRS will rarely call taxpayers or visit you in person, except for under special circumstances. If you have already received several letters about a longstanding tax debt, IRS collection employees may contact you via phone or visit your home or business.They will never call demanding immediate payment or threatening to send law enforcement to arrest you. If you receive a call like that, it is most likely a scam.They might assign private debt collectors to contact you, but only after giving you written notice.They might send an IRS representative to visit you, but only after giving you written notice. They will provide two forms of official credentials,” says Josh Zimmelman, Westwood Tax & Consulting LLC President.If you get any kind of communication about owed taxes that doesn’t come from the IRS, contact the IRS directly before proceeding further. If it is a scam, you can also report it to the IRS. Back to "Prepare to talk with the IRS" Know your situation While it may be more comfortable initially if you keep your head in the sand regarding your tax debt, it will ultimately harm you and make your situation worse. Take steps to become informed about your finances and tax debt. The notice you received from the IRS is a good place to start because it has valuable information.“I would recommend that they read the entire notice before calling the IRS. The information on the notice is usually time sensitive and is intended to help a taxpayer preserve their rights. The taxpayer can get very useful information about their notice and their taxpayer rights by visiting www.irs.gov,” advises Hollinger. Your situation will affect your options for resolving your tax debt. Before you reach out to a tax relief professional or the IRS you need to understand your situation and be prepared for how it will affect next steps.“It is important to know that compliance will be a key factor in the options available to a taxpayer. In fact, if a taxpayer is out of compliance, there is very little that can be done to prevent or stop aggressive collection action,” says Hollinger.Compliance refers to filing and paying taxes correctly.“Non-filers (someone who has unfiled tax returns) may find the process most challenging. Compliance is required to be eligible for any of the programs that the IRS has to help taxpayers who can’t pay their debt. Often, taxpayers have lost their tax records and struggle with this part. This is often when a professional can be extremely helpful and save the taxpayer a lot of time, aggravation, and even money. Fortunately, the IRS has policies in place to help non-filers get into compliance, even if they have years of unfiled returns,” continues Hollinger.If your tax debts have moved to collections, your options may be different. “If the taxpayer’s account is old and inactive, the IRS is moving many of these to a third-party collection agency. The assignment will impact the options available to a taxpayer and they should receive notification via postal mail if this has happened,” says Hollinger.If you’ve been contacted by a collections agency regarding your tax debt, you should proceed with caution to avoid scams. The IRS only uses four private collection agencies and has verification processes in place. Understanding your situation will help you evaluate options and be prepared to meet with a tax relief specialist. Back to "Prepare to talk with the IRS" Know your options When it comes to discovering that you owe taxes in April, of course it’s best to pay the full balance then. “Taxpayers who are going to owe in 2020 need to either pay the amount in full or get on a payment plan by April 15. Never put it off. Doing so only makes the situation worse,” advises Robert Farrington, TheCollegeInvestor.com Founder.However, that may not be possible in every situation. Whether you can’t pay the full balance in April or you’ve delayed tax payments long enough to have received additional communication from the IRS, you’ve got some options. Dispute what you owe In some cases you may want to dispute what you owe, but sometimes it’s not worth it.“If it is less than a couple of hundred dollars just pay it and move on. Right, wrong, or indifferent. If it is substantial, find a professional that practices in that area of tax law and hire them. It will be money well spent,” advises Charles Read, CPA, US Tax Court Practitioner and GetPayroll President and CEO. Make an installment agreement Installment agreements are payment plans agreed upon by the taxpayer and the IRS. While installment agreements allow you to avoid liens and levies, you’ll still pay interest on your tax debt. You may also pay late fees.Zimmelman explains how to set-up an installment agreement for yourself:“To request an installment agreement, you can apply online with the Online Payment Agreement Application or in writing with Form 9465.You will need to provide the following information: your name, address, email address, date of birth, filing status, social security number (or individual tax ID number), and the amount you owe. You’ll also need to be able to confirm your identity via a financial account number, mobile phone number (registered in your name), or an activation code received by mail.You may need to pay a set-up fee. You can request a waiver or reimbursement of the user fee if your adjusted gross income is under a certain amount.” Negotiate an offer in compromise An offer in compromise is a settlement payment. You can make the IRS an offer to settle your tax debt for less than you owe. If the IRS accepts, you’ll pay the settlement and the remainder will be forgiven.Zimmelman explains how to approach requesting an offer in compromise:“To request an offer in compromise, you must have filed all your tax returns and made required estimated tax payments for the current year. You must not be involved in an open bankruptcy proceeding.You can check if you are eligible for an offer in compromise (OIC) by using the Offer in Compromise Pre-Qualifer tool and then file for an OIC with Form 656-B.” Check eligibility for currently non-collectible status or innocent spouse relief If you can demonstrate hardship, the IRS can mark your account as currently non-collectible. This status marking prevents the IRS from taking aggressive action to collect, but your debt will accrue interest until you pay it off.Zimmelman reviews how to request and qualify for this status:“You will be asked to complete a Collection Information Statement (Form 433-F, 433-A, 433-B).You will need to provide proof of your financial status including assets, income, and expenses.” If you're experiencing IRS problems because of how your current or former spouse filed taxes, you may be able to have penalties removed and no longer be held responsible for the debt. The IRS has specific eligibility requirements that must be met for relief to be granted. Working with a tax relief professional can help you navigate those requirements and advocate for you to the IRS. Back to "Prepare to talk with the IRS" Meet with a tax relief professional Meeting with a tax professional or taking advantage of a free consultation from a tax relief company is a good idea because they have knowledge and experience to help you plan your approach to the IRS. (It’s also the advice overwhelmingly given by the experts who responded.)“I would recommend paying a CPA or lawyer to help you decide the best course of action, and also protect your credit score as much as possible which will save you money in the long run. If you try to go it alone I recommend spending a lot of time on irs.gov learning the process and options,” advises George Birrell, CPA, GetTaxHub Founder.As you determine who to meet with, you should consider professionals with the right experience and expertise.“A tax resolution specialist will know the rules, when a tax preparer may not. Unbeknownst to many, a traditional tax preparer is seldom familiar and experienced with the resolution rules and options. The rules are completely different; similar to the difference between a heart doctor (the tax resolution specialist) and a general practitioner (the standard tax preparer),” says Hollinger. Meeting with a tax relief professional is advantageous for you because they know how the resolution process works and have experience with the IRS.Don’t worry about spending too much time meeting with tax relief professionals. Once you’ve chosen a reputable professional or tax relief company, the consultation shouldn’t take too long and the benefits of taking the time are high.“I do not recommend an uninformed taxpayer contact IRS without talking with a local CPA or Enrolled Agent for an hour so that the taxpayer has a plan on how to proceed. It should not take longer than one hour to determine the best plan for the taxpayer. Plus, the taxpayer will be much less intimidated by IRS,” says Robert Allman, Professional Public Accountants, LLC President.Depending on how your initial consultation goes and the complexity of your tax situation, it may be in your best interest to hire a tax relief company or tax resolution professional to take your case.“The Internal Revenue Code (as revised) runs over 5,000 pages of fine print. The regulations, manuals, and case law fills a substantial library and increases daily. As a CPA and USTCP there are tax cases I will not take because with only forty years of experience I am incompetent in many areas of the law that I don’t practice in on a regular basis. I refer those cases to an expert in that portion of the law.You cannot ignore the IRS, don’t make that mistake. But just like a defendant representing themselves in court has a fool for a lawyer, a taxpayer who tries to deal with the IRS is a fool. I see them afterwards and many times they have done something wrong that is irrevocable and is to their disadvantage,” says Read.On your own, you may not have time to go through and understand all the ins and outs of tax law or how the IRS works. You may also not be aware of the most recent updates on tax regulations.“Third, a tax resolution professional knows the alternatives available to you – they constantly take education in changing tax regulations and will be able to inform you of options you didn’t know existed,” says Dane Janas, Enrolled Agent and Boundless Tax Owner and CEO.The IRS may also take you less seriously if you’re on your own.“Some say professional representation causes the IRS to take the taxpayer more ‘seriously.’ Although there is no hard documentation to support this, I have had numerous clients that are basically disregarded by the IRS on their own, and I achieve resolution for them quite swiftly when representing them,” says Janas.In addition to benefiting from professional expertise and knowledge, you’ll likely save yourself time on the phone waiting to speak to a representative.“Your tax professional has shortcuts into the IRS phone system. Where the taxpayer is forced to call the number published on their notice and wait on hold up to an hour (or get the dreaded courtesy disconnect) — licensed tax professionals (CPAs, EAs, and tax attorneys) can call the IRS’s Practitioner Priority Line, likely cutting their wait time in half and getting a desired result much more swiftly. There is even a company called enQ that has built a service just for tax professionals that waits on hold at the IRS using robots, cutting IRS hold times on certain lines to just three minutes. (Unfortunately, individual taxpayers cannot subscribe to this service.)” says Janas. Back to "Prepare to talk with the IRS" Be phone-ready If you do decide to handle your tax relief yourself, make sure you’re ready. Have your research done and understand your options. “Be as prepared as possible before you speak with the IRS. Pull together your tax information and financial records so that you are able to reference any questions or disputes. The more prepared you are upfront the easier it will be to keep to the conversation moving in a positive direction to help you reduce your debt,” suggests Jared Weitz, United Capital Source CEO and Founder. Once you get on the phone, be ready to verify your identity, ask questions, speak to your situation as appropriate, and take notes. Verifying your identity Alissa K. Hollinger, CPA, CTRS and Hollinger Tax Resolution Owner“Taxpayers need to be prepared to verify their identity and provide updated contact information. This will include providing their social security number, date of birth, current mailing address, and contact phone number.”Dane Janas, Enrolled Agent and Boundless Tax Owner and CEO“When you reach an IRS phone operator, speak clearly and concisely. If you’ve received a notice, inform them what notice you’ve received (there is a number in the top right corner), and tell them you’d like to discuss the notice. They will usually put you back on hold for about five minutes while they look over your account, and will return ready to discuss with all the information at hand.” Asking questions Janas“When speaking with the IRS about your tax debt, inquire as to what alternatives are available at this time if you cannot pay the full balance at this time. The IRS phone operator will walk you through the options available to you, and may be able to process one of the options over the phone if you both agree upon it, such as an installment agreement. But again, this is an area where you it would be incredibly advantageous to have a tax resolution professional on your side, as the IRS will not necessarily inform you about options that are generally disadvantageous to them, such as Offers in Compromise or filing as Currently-not-Collectible.” Speaking to your situation Hollinger“The IRS will use every phone call as an opportunity to gather information on the taxpayer. The more information they can gather for collection, the better. This is where any information the taxpayer provides, can and will be used against them.The IRS employee may ask about the size of their household, the name, address, and contact information of their employer. The taxpayer should also be prepared to provide their household budget which will include their income and expenses. When they contact the IRS, the taxpayer needs to be cooperative and truthful. If they don’t know the answer to a question, 'I don’t know' is an acceptable response.” Taking notes Robert Allman, Professional Public Accountants, LLC President“If the taxpayer elects to contact IRS by phone, the taxpayer must have a pen and paper available and be ready to write down the agent’s name and ID number. The taxpayer may have to ask the agent to repeat the name and ID number because often the agent is talking too fast, or the taxpayer cannot understand what the agent is saying. Back to "Prepare to talk with the IRS" Contact the IRS If you do decide to deal with the IRS on your own, you can easily find contact information on the IRS’s website. To get in-touch with your regional office, a Google search is helpful. If you have received a notice from the IRS, the best way is to use the phone number on your notice. “When contacting the IRS, make sure you are contacting the correct department. If you have a notice, use the telephone number published on the notice. If not, the IRS has hundreds of telephone lines and reaching the incorrect one will just get you transferred and put on hold over again and over again,” advises Janas.The other important aspect of contacting the IRS is to be prompt.“Whether it's in-person or over the phone, it's crucial to contact the IRS punctually. Quick outreach not only relieves stress but also demonstrates a show of good faith to the IRS. Often, the IRS can work with an individual to take care of debt without any penalties or added interest," recommends Eileen Maki, FitSmallBusiness.com Tax and Accounting Analyst. Taking steps to resolve your tax debt will help you maintain financial stability. Understanding how the IRS works, your situation, and your options will help you find a good solution to your issue. Working with a tax relief company staffed by tax resolution experts or working with a tax resolution professional can help you achieve optimal outcomes and avoid pitfalls from failing to understand the tax code and IRS properly. Ready to reach out to a tax relief professional? View our top-rated companies.
Taxes are a part of life, no matter how old you are. If you’re receiving income, you’ll be paying taxes. Many seniors are retired and living on their savings and Social Security. While you’ll still pay taxes, it will work differently from how you paid W-2 taxes. If you’re looking for assistance with tax preparation or tax relief, check out these resources and tips from experts. Use the list below to navigate between sections by clicking on the titles most interesting to you. Tax preparation Tax preparation resources Tax relief Tax relief resources What to look for in a tax professional Bonus: top-rated tax relief companies on helping seniors Tax Relief Learn more about tax relief by looking at the top-rated companies and their offerings. See Companies Tax preparation Tax preparation as a senior will likely have some differences from how you’ve prepared taxes before. You’ll likely have received income from various sources and may also qualify for different deductions. As you age, you may have a harder time adjusting to changes in technology and changes to our complex tax code. Income You’ll start receiving Social Security and take required minimum distributions from your retirement savings. You may even have other kinds of income. “Many seniors have pensions, pre-death life insurance benefits, IRA or 401K savings, or other financial assets. This can make preparing and filing taxes more complicated,” says Jayson Mullin, Top Tax Defenders owner. You likely haven’t dealt with these kinds of income previously, so reporting this income and filing taxes can be an unfamiliar process. An accountant or IRS-certified tax preparer can help you understand and complete this process correctly. “Seniors have special tax issues including social security income, pension checks, retirement benefits, and spousal death that can complicate tax preparation and can increase the chance of an incorrect return. Knowing where to look for help can make tax time easier and less stressful,” adds Mullin. If you’re just starting to think about retirement, it can be a good idea to meet with a financial adviser or tax professional to discuss the best way to handle your retirement accounts and Social Security benefits before retiring and create a plan for making withdrawals. “Tax planning is another important area. Seniors, especially those who have retired but are not yet taking their RMDs (under 70.5 yrs), can rollover traditional IRA money into a Roth and reduce future taxes,” says Beth Logan, enrolled agent at Kozlog Tax Advisers. Deductions In addition to accounting for different sources of income, you may also be able to deduct other expenses, like medical and home improvement expenses. “Senior citizens often have higher medical expenses than other taxpayers. Luckily some of these expenses may be tax deductible. If you itemize your deductions, you might be able to deduct out-of-pocket medical expenses that exceed a percentage of your adjusted gross income,” says Josh Zimmelman, Westwood Tax & Consulting owner. You’ll also have a higher standard deduction, which helps lower your tax bill by lowering your taxable income. Once you turn 65, you may qualify for the Tax Credit for the Elderly or Disabled. This tax credit gives you credit on your tax liability between $3,750 and $7,500. Challenges You may also encounter new challenges as you age. These include becoming a target for scams, adjusting to changes in the tax code, and evolving technology. “Age isn’t the only factor that makes tax logistics so difficult for many seniors to manage. Changing technology, complex rules, and a lack of sufficient funds to hire a professional accountant or tax preparer can make even common tax issues seem like insurmountable problems,” says Mullin. Tax scams are also common, and seniors are often targeted. Knowing how the IRS communicates will help you keep yourself from becoming a scam victim. “In a phone scam, a caller will pose as an IRS agent and tell you that you owe money and threaten you with arrest (or other consequences) if you don’t pay it right away. The IRS will never directly contact you by phone unless you’re part of a specific group of taxpayers with longstanding debts. That means you’ll never get surprised by the news that you owe money. If you’ve been filing and paying taxes consistently (or know that you’re not required to file because of your income level) and have never received written notice from the IRS that something was missing, then you can be sure these calls are a scam,” says Zimmelman. You should also watch out for email scams. “Phishing is when someone tries to steal your information through a fake email or website. There is only one official website for the Internal Revenue Service (IRS.gov) and the IRS will never contact you via email. So if you get an email from the IRS asking you for personal or financial information, assume it’s a scam. You can forward any suspicious emails to [email protected],” advises Zimmelman. Knowing that you’ll receive a written notice first and being vigilant and talking with trusted friends and family members before taking any action based on scare tactics will help prevent you from falling for scams. Taking age, legal and technological changes, and scams into consideration, here’s a breakdown of what you should look for in a tax professional and what free resources are available to help with tax preparation. Back to Menu Tax preparation resources You can always file your taxes yourself or pay an accountant to take care of it for you. Depending on the complexity of your tax return, it may be best to pay an accountant to do it for you. “If a senior has trusts that require filing, businesses, rentals (more than one vacation home), complicated investments, etc., they would be better served by a professional regardless of income. The VITA volunteers are good but they are volunteers with limited training. If a senior needs more help, they should contact an Enrolled Agent (EA, https://taxexperts.naea.org) or a CPA,” advises Logan. However, if your tax returns are simple and you want assistance, check out these programs that can help you prepare your taxes: Volunteer Income Tax Assistance (VITA) Tax Counseling for the Elderly (TCE) AARP Foundation Tax-Aide Volunteer Income Tax Assistance (VITA) VITA is a tax preparation service from the IRS that trains volunteers to help people prepare their tax returns. “Generally, this service is offered to those who make $56,000 or less, persons with disabilities, and limited-English speaking taxpayers. Volunteers are provided training and must be certified by the IRS before helping provide tax-preparation services,” says Josh Trubow, MSFP, CFP®, advisor at Sensible Financial. Before setting up an appointment, check to see what services your local VITA site offers. VITA volunteers do not prepare all tax forms, so verify that they’ll help with the tax forms you need by looking at this document from the IRS. “Each location may have [its] own rules to qualify for this free service, so I recommend calling the closest location to confirm eligibility. Appointments are also highly recommended (and may be required, depending on location),” says Trubow. Be sure to go to the VITA site prepared with your ID and all relevant tax documents. VITA sites generally operate during tax season, starting in February and ending in April, though some may be active through October. Tax Counseling for the Elderly (TCE) TCE is another tax program run by the IRS. Unlike VITA, TCE is specifically for seniors. Organizations can apply to receive grant money from the IRS to reimburse its volunteers’ out-of-pocket expenses for meeting with seniors locally. TCE centers offer many of the same services that VITA sites do. Seniors interested in working with a TCE center should go prepared with identification and the necessary tax documents. Like IRS VITA sites, IRS TCE services are usually available February through April, while some areas may extend availability through October. AARP Foundation Tax-Aide The AARP Foundation Tax-Aide runs many TCE locations. Tax-Aide helps seniors prepare taxes regardless of AARP membership and age. Seniors who work with Tax-Aide receive assistance from IRS-certified volunteers. Back to Menu Tax relief Tax relief can be helpful if you owe more taxes than you can afford to pay right now and if you’ve started to deal with income garnishments and other consequences. Unfortunately, the IRS does not treat senior citizens differently from others. Tax debt accrues late payment penalties and interest over time, so you may owe more tax debt than you think. If you’re dealing with tax debt, you may also experience some financial consequences, including liens and levies. A lien means the IRS has first claim on funds resulting from the sale of property. A levy allows the IRS to seize your property and sell it to cover the tax debt. Levies can also be used for assets, like your income. If you’ve worked hard your whole life and have paid off your mortgage and saved for retirement, you especially do not want the government to seize your property. “Unlike younger adults, who tend to be income rich and asset poor, many seniors are asset rich and income poor – with homes paid off and retirement accounts fully available for use. This poses unique challenges, as the IRS will seek liquidation of retirement accounts and other more liquid investments to cover the tax liability,” says Michelle Kendall, attorney at Optima Tax Relief. Luckily, a skilled tax relief professional can help you deal with the IRS and protect your hard-earned savings and assets. “Assets are generally considered collectible property by the IRS, but with the right resolution plan and a skillful negotiator these assets can be excluded from collections consideration in an IRS resolution,” says Jessie Seaman, Community Tax, LLC Vice President of Servicing. Back to Menu Tax relief resources You can work directly with the IRS to work out payment agreements or settlements. However, it can be helpful to work with an experienced tax professional who will help you resolve your debt. Tax relief companies specialize in these services. Not only do their teams negotiate payment plans and settlements with the IRS, they also help remove penalties like liens and levies. Many tax relief companies employ tax attorneys, enrolled agents, and certified public accountants (CPAs). Enrolled agents are authorized to represent clients before the IRS and can help you negotiate payment with state government and the IRS. These solutions are Installment Agreements and Offers in Compromises. An Installment Agreement is a payment plan that you and the IRS agree on. Once you complete the installment payments, you will no longer owe the IRS. An Offer in Compromise is a settlement agreement between you and the IRS. If your Offer in Compromise is accepted by the IRS, you will make a one-time settlement payment and the rest of your debt will be forgiven. Tax relief companies can also help you remove penalties, like liens and levies. Unfortunately, the IRS does not remove interest or late fees from taxes owed. Best Company’s list of top-rated tax relief companies includes Tax Defense Network, Optima Tax Relief, and Community Tax, LLC. Back to Menu What to look for in a tax professional If you’re hiring an accountant, enrolled agent, or tax attorney to help you with tax relief or tax preparation, you’ll want to look for qualifications, experience, transparency, and trust. Qualifications Josh Zimmelman, Westwood Tax & Consulting owner“It is not required for an accountant to be a CPA (certified public accountant) but it doesn’t hurt! Preferably your accountant with hold an MBA or at the very least have taken several continuing education courses in tax preparation. A tax attorney should have an LL.M in Tax.” Experience Jayson Mullin, Top Tax Defenders owner“Seniors should look for preparers that specialize in working with seniors. You’ll want someone who has the right experience for your particular needs and can work at a price you can afford. You should expect your preparer to be skilled in tax preparation and to accurately file your income tax return. You should trust him or her with your most personal information.” Zimmelman“Preferably your tax accountant will have at least five years of experience handling a broad set of issues. You should look for an accountant who has experience handling your particular type of tax return. Someone familiar with your business or industry is the best fit.” Beth Logan, enrolled agent at Kozlog Tax Advisers“Consider more than tax preparation. Look for a tax professional that will do tax planning with [you]. There is always a concern as seniors age that they might get dementia. A preparer should work with [you] early to make sure there is a plan in case [you] cannot handle [your] own finances.”Michelle Kendall, Optima Tax Relief attorney“The most important thing to consider is the firm's reputation and experience in tax resolution services. Not all tax professionals are well versed in IRS collection procedures, and not all companies in this space are trustworthy. An incompetent professional or disreputable company can turn your IRS problem into an expensive nightmare. Look for credentials, such as having licensed tax attorneys on staff. You want to find a truly qualified firm that can resolve your tax issues and defend you against collections, legally and comprehensively.” Transparency Zimmelman“Some accountants will charge by the hour, others charge a flat rate based on how simple your tax return should be. Fees will vary, but you should know what you are getting into and ask your accountant if there is anything you can do to keep costs down. The more organized you are, the easier it will be for your accountant to sort out all of your transactions and receipts and save you money in the end. Accountants have to charge for their work obviously, but many will be willing to take a few minutes to review your past tax returns for free. Having some information on your finances is necessary for an accountant to know if they are comfortable preparing your current tax return. A good accountant will be honest about whether they’re not the right fit for your situation.” Trust Logan“Look for someone who explains [your] taxes to you. Some only prepare the return and then say 'sign it.' Preparers should go through the return and answer any questions.” Zimmelman“Is this someone I can trust and with whom I can feel comfortable? This question is one you really have to ask yourself. Do you know anyone who has worked with this accountant who can vouch for their professionalism and honesty? Do they have references they can provide? Do they talk down to you or treat you with respect? Trust your instincts. If you don’t feel right about someone, then don’t hire them, no matter what their credentials are.” Jessie Seaman, Community Tax, LLC Vice President of Servicing“When considering a tax relief company, seniors should start their search with companies that are highly rated on sites like Google or the Better Business Bureau. Quality tax relief companies should willingly review your case and provide service recommendations for resolving your case risk-free for a relatively low fee. Stay away from companies that charge thousands of dollars or promise a specific result up front. And like most services, always use your best judgement and remember to tell yourself that if it sounds too good to be true, it probably is.” Back to Menu Bonus: top-rated tax relief companies on helping seniors Optima Tax Relief Kendall“At Optima Tax Relief, we take our responsibilities very seriously, and take particular care when serving seniors. We’re acutely aware that seniors have worked a lifetime to achieve what they have, and that their assets cannot be easily replenished. When approaching a senior's case, we evaluate the entirety of their situation. Once we have a thorough understanding of their personal finances and their needs and goals, we can focus on protecting their assets in accordance with their priorities. We negotiate with the IRS on their behalf, working tirelessly until we’ve obtained the best possible resolution for them.” View Optima Tax Relief Reviews Community Tax, LLC Seaman“Seniors tend to have different sources of income than the general taxpayer population such as Social Security and pension income. Community Tax can obtain access to IRS information databases (with a signed information authorization form from the client) to pull information on these income sources and make preparation of back tax returns and financial statements as easy as possible.” View Community Tax, LLC Reviews Back to Menu
Guest Post by Peter Spano It is a well-established fact that recycling has a wide range of benefits on the environment, primarily by reducing our society’s dependence on natural resources. For example, the process of recycling aluminum — a common non-renewable resource — requires 95 percent less energy than creating new aluminum from raw materials. That’s why it’s important for modern-day businesses to maintain viable waste reduction programs; it’s just the sensible thing to do for our planet. But apart from the ethical considerations of managing waste properly, recycling also provides some practical bottom-line benefits for companies during tax season. A business that recycles its waste products in accordance with accepted procedures can qualify for one or more tax breaks. What follows is a partial list of tax breaks and related financial incentives that may be available to a business that follows sound recycling practices. Helping the environment and receiving tax breaks at the same time? It’s a win-win. IRS tax credits The Internal Revenue Service offers the following financial incentives connected to a business's compliance with recycling standards: Qualified reuse and recycling property allowance “Qualified reuse and recycling property” refers to any kind of equipment or machinery, along with any software used in conjunction with it, that is dedicated to collecting, distributing, or recycling certain recyclable materials. If your property has been depreciated under the guidelines of the Modified Accelerated Cost Recovery System (MACRS), and the property was initially used after August 31, 2008, then you may qualify for a 50 percent depreciation allowance. To learn more about this allowance, please see IRS Publication 946, How To Depreciate Property. Qualifying advanced energy project credit This is accessible to businesses that invest in a qualifying advanced energy project for their manufacturing facility that produces fuel cells, microturbines, electric grids, certain electric motor vehicles, or other materials of this nature. More information can be found on Form 3468, Investment Credit. State tax incentives Many tax credits and related incentives are available through state governments in addition to those that can be obtained from the IRS. The majority of U.S. states have tax incentive programs for businesses that adhere to accepted recycling practices. These programs can take the form of rebates, tax credits, sales tax exemptions, or another type of incentive. Although we don’t have the space here to examine all the programs in force at the state level, we can briefly touch on some state tax incentives currently on the books. California The state offers a partial exemption of sales and use tax on specified manufacturing equipment used for generating, producing, storing, or distributing electric power. In addition, Department of Resources Recycling and Recovery (CalRecycle) has a Recycling Market Development Zone Loan (RMDZ) program, which provides loans and free product marketing to businesses that agree to use waste-steam materials from one of the specified zones across California. More information about these and other programs can be viewed on the official CalRecycle website. Florida The state offers a sales tax exemption for the purchase of any "resource recovery equipment" used for a local government recycling program. Texas The state has a Tax Relief for Pollution Control Property Program for businesses that maintain property or equipment capable of sufficiently reducing the facility's environmental burden. Kentucky The state allows individuals and corporations to claim a 50 percent tax credit on any recycling or composting equipment. Recycling incentives at the state level tend to change frequently, so it’s a good idea to check your local government’s website on a periodic basis for updates. Department of Energy programs The Database of State Incentives for Renewables & Efficiency (DSIRE), funded by the U.S. Department of Energy and operated by the North Carolina Clean Energy Technology Center, has a vast number of energy-efficiency incentives and programs. Some of these programs may be of help in lowering your company’s tax burden. The official website lists a variety of loans, grants, rebates, energy audits, advisory services, discount programs, tax exemptions, and other incentives that are available at the city, county, or state level. All fifty states are represented here. Take the time to search through the DSIRE website — most states have literally dozens of opportunities listed, and it’s likely that you aren’t already aware of some of them. It's also worth pointing out that maintaining eco-friendly operational practices can lead to additional financial benefits that aren’t as easily quantifiable as tax credits. Modern consumers, by and large, support environmentally positive business practices. They will often go out of their way to patronize companies that demonstrate a dedication to minimizing their impact on the environment. In fact, one survey has found that 88 percent of consumers have a preference for brands that help them live in an eco-positive way. If your company is doing its part to aid the environment, don’t be shy about advertising that fact. Publicizing your recycling efforts can bolster your bottom line. How a waste consultant can help These days, staying environmentally conscious is undoubtedly a wise business policy, but it can be difficult for organizations to reach their sustainability goals. For that reason, many organizations turn to a waste consulting company that delivers advisory services to the business community. Waste consulting services like these can go a long way toward helping businesses manage their recycling needs. By thoroughly analyzing your facilities and its processes, your consulting company will be able to issue recommendations for improving your waste management procedures. In some cases, a waste management consultant can even sell or rent state-of-the-art recycling equipment such as balers and compactors. It’s an excellent money- and time-saving way to boost your recycling efforts. Peter Spano is the founder and CEO of Global Trash Solutions, a company dedicated to providing waste management services and products to the business community. He is the inventor of the GTS2000 trash compactor, which has been successfully used by McDonalds, Burger King, Starbucks, and many other major corporations.
Guest Post by Lee Reams As the end of 2019 approaches, it also means that the 2020 tax season is imminent. If your tax situation is pretty simple — for example, you don't take any deductions and your income only comes from one job — you may think that you don't need much financial planning in this department. But if you're a taxpayer who has more complex sources of income like freelance work or owning a business, or if you experienced a major life or career change in 2019, you'll want to get moving on your 2020 tax planning strategy right away. Even if your financial situation seems simple, understanding where your money is going can help you with both long- and short-term decision-making. How soon should I start the tax planning process? Now that November is upon us, you want to get started right away. Certain aspects of your personal finances can be handled up until mid-January or even later, like making a last-minute IRA contribution or an estimated tax payment, but for most of them, you will only have until December 31 to have them count for 2019. The holiday season can also be a busy and stressful time of year, and tax planning could be neglected as a result. Holiday credit card bills are tough enough to deal with in January, and the last thing you want is a higher tax bill that could have been prevented with proper foresight. What to prepare for in 2020 Retirement Have you contributed the maximum to your retirement assets yet? If not, are you financially able to? The maximum 401(k) contribution for 2019 is $19,000. If you are 50 or older, you can make extra catch-up contributions as well for a total of $25,000. The contribution limit for IRAs is $6,000 for 2019 ($7,000 if you are over 50), and you can make this contribution until April 2020 and have it count for the 2019 tax year. If you are self-employed and able to start saving significantly more than you used to, this could also be a good time to assess opening your own 401(k) or SEP account to take advantage of the significantly larger contribution caps compared to what IRAs offer. Marriage and divorce If you and your partner were planning your wedding in 2020, you should get a look at how your taxes would look as a married couple compared to filing as two single people. If there's a significant benefit, it could be worth going to City Hall at the last minute: You literally have until midnight on December 31 to be considered married for the entire year. (You can still have the wedding, but just be married in the eyes of the law and the IRS.) If this is your first tax year as a married couple, you may have some teething issues if you and/or your spouse have been used to the tax planning process while single. If you are more on the up and up with financial planning than your partner is or vice versa, end-of-year tax planning is a great time to start getting on the right track financially as a couple. Your taxes also may have changed, and this is a good time to review those changes and other bureaucratic hurdles, such as notifying the Social Security Administration if your name has changed due to marriage. The inverse is true for divorce as well. Divorce can be financially devastating for both former spouses, especially if you have children or are still having disputes over assets and prior tax problems. Regardless of the stage your divorce is in, year-end tax planning is when you need to determine how your tax situation is going to be different and how you can prepare. Withholding and estimated taxes Year-end tax planning is a good time to assess if you are having enough taxes taken out of your paycheck. It's not just federal taxes, but also state and local taxes. If you changed jobs, your employer changed payroll providers, or you moved, your tax withholding may have changed. Review all of your tax withholding and determine if you are having the correct amounts, and types, of income taxes deducted from your paychecks. If you start receiving other income like rent, a side hustle, or investment income, then you may need to increase your withholding. If you don't mind a smaller tax refund and would rather have more of your money every payday, you might want to reduce your withholding by increasing the number of allowances claimed. Fill out a new W-4 form, plus a state-level equivalent, and give it to your payroll department or provider. If you are self-employed and have to pay estimated taxes on your own, it's common to fall short every tax season. Take a closer look at your net earnings over each quarter and determine how you can stay on top of these payments so that you don't end up with a tax bill you can't pay. Automatic deductions into a savings account dedicated to taxes can help, or you can set reminders to pay estimated tax every month instead of every quarter. Starting a family If you adopted or had a child in 2019, this definitely changes tax planning for 2020 as well as your overall financial planning since your priorities completely change upon starting a family. It's important to track down records for your expenses pertaining to adoption and childcare because there are valuable tax credits for them. If you'd like to get a jump-start on saving for your child's higher education expenses, you can also open a tax-advantaged educational savings account like a 529 plan. You can contribute up to $15,000 for 2019, and although you don’t get a tax deduction for the contribution, the investment earnings accrue tax free in the account. In the future, the proceeds will be tax-free provided that they are used for qualified education expenses like tuition and books. What if I owe money? If your tax planning efforts determine that you will owe money when you go to file, this gives you time to discuss your options and tax reduction strategies with a tax professional. You may need to go on a payment plan or figure out a way to make more money before April 2020 so you can pay your tax bill without incurring interest, late fees, and other associated costs. If your total expected federal tax liability is less than $1,000, you won't be charged an underpayment penalty, so you can wait until you file your tax return to pay the whole balance. However, if it exceeds $1,000, you'll want to take advantage of that mid-January deadline to make one more estimated tax payment that counts for 2019 so you won't face an additional penalty on top of the taxes you owe. You want it to be at least be below $1,000 if you can't afford to front the whole amount at the moment. Another option: increase your year-end withholding. The further in advance you can get a jump on planning for 2020, the less stressed and broke you will be with another tax season on the horizon. When it comes to taxes, being proactive is the most important factor. Lee Reams Sr., BSME, EA is the Chief Technical Officer for ClientWhys, TaxBuzz, and CountingWorks. In addition to being an expert on taxation and a leading speaker on tax-related topics, Lee has experience in managing his own 600+ client tax practice.
Guest Post by Riley Adams You’ve worked hard to create a business worthy of being viewed favorably by someone else — if you’re lucky, multiple someones! The profit you’ve earned has paid off and now you have considered making a change in your circumstances. Quite often, a common exit path includes selling your small business. However, before proceeding, you will need to consider the tax implications involved. Like any other transaction which nets you a profit, the sale of a business qualifies as income and you must pay taxes on any gains recognized during the sale. The income received classifies either as a capital gain or ordinary income and applies whether you sold assets of a company or shares of a company’s stock. The type of company When selling your business, the tax consequences and liabilities you face depend on the type of sale and transaction structure you set in place with the buyer. Most sellers make the mistake of not consulting with a tax advisor and needlessly hand away tax payments to the government. When considering how much you might ask for in the sale of your business and how you will classify assets (e.g., Section 1231, 1245, or 1250 property, inventory, or another category), you should conduct some due diligence ahead of time and see if the type of company makes a difference. Specifically, you should understand the tax consequences involved when selling your business from different corporate organization structures like a limited liability corporation (LLC), sole proprietorship, partnership, C Corp, or S Corp. Knowing the corporate structure will guide your tax strategy when it comes to selling your business. For example, if you sell the assets held by an LLC and your transaction results in a gain, you will only pay capital gains taxes. In this instance, because the IRS treats LLCs and sole proprietorships as disregarded entities, you only have one taxable event, not a separate event on your personal income tax return and your commercial tax return. As an option, you can have any gains made from the sale of these capital assets only appear on your personal income tax return, often resulting in a lower tax burden because long-term capital gains are lower than short-term capital gains (also referred to as ordinary income). When you sell a business (LLC or S Corp), because you’ve likely held it for longer than a year, you usually prefer to have the capital gains treatment because the tax rates are lower and only occur once. Basket purchase vs. sale of stock A purchaser has two primary methods for acquiring a company: a basket purchase of the assets or outright purchase of the company stock. In the former, the underlying assets transfer from seller to buyer with the agreed-upon market price allocated to the assets. In other words, if an asset has a depreciated value of $50 but is sold for $60, this new value must be assigned to the asset at sale, which is then depreciated by the new owner. To formalize this price allocation in the eyes of the IRS, the buyer and seller both file a Form 8594: Asset Acquisition Statement with their tax returns. In the event of an all-stock sale (stock purchased instead of assets owned by the company), the seller will realize a capital gain just like they would on the sale of capital assets. The seller must also decide which entity is selling the stock: if the company sells the stock, then double taxation will occur (tax paid at the corporate rate and then the capital gains tax paid on a personal income tax return). If you sell assets through an S corporation or partnership, the individual owners (or shareholders) will each have a responsibility to pay capital gains taxes on their personal returns. Now, let’s take a closer look at the capital assets involved in a business change of ownership transaction. Capital assets Per IRS rules, capital assets categorize into one of three different groupings: Real property — Real estate property of the business, such as land and building structures. Sale of real property has tax levied as a separate capital asset unless the buyer chooses to purchase the entire entity. Depreciable property — Type of property which loses value over time with normal wear and tear. Such examples include equipment, hardware, computers, office furniture, etc. The IRS treats the sale of depreciable property as a gain or loss, based on current value. If you held the property for longer than a year, you will face a long-term capital gain or loss. You will use the current value versus the purchase price to decide the applicable tax rate for this depreciable property. Inventory property — As a going concern, most businesses hold inventory which it sells at a markup in the attempt to earn a profit. This inventory, when converted to sales, represents ordinary income and the IRS considers this as part of your normal business income. However, when the inventory counts as part of the business sale transaction, the IRS considers this as a capital gain (loss) instead. As mentioned above, in the case of owning and selling an S Corp or LLC, you will strongly prefer a long-term capital gain resulting from your sale. This results in single taxation on your personal income tax return and at lower long-term capital gains rates. How to sell a business without any tax implications If you want to have Uncle Sam left out of this transaction altogether, an alternative does exist in the form of a stock exchange. In the event you’d prefer having stock in exchange for your own company’s stock, as opposed to cash or other proceeds, you can avoid paying taxes on this stock-for-stock exchange. Certain provisions for avoiding taxation exist pertaining to this business reorganization; however, this method can avoid paying any taxes on the sale of your business. The IRS states the seller must receive between 50 percent and 100 percent of the buyer’s stock in order for the transaction to side step paying any taxes. Tax implications of selling a business Finding a buyer for your company is part of the natural lifecycle of a business. From founding, startup, scaling and maturation, selling to an interested buyer only amounts to the next phase of your business’s life. When deciding how to structure the transaction, make sure you plan ahead on how you will classify the various assets of the business as well as how you might be able to avoid paying taxes at all on the sale. Riley Adams, CPA, is a senior financial analyst working for a Fortune 500 company in New Orleans, Louisiana. He also runs the personal finance blog called "Young and the Invested," a site dedicated to helping young professionals find financial independence and live their best lives.
Being your own boss and calling the shots makes self-employment very appealing. However, self-employment also comes with additional responsibilities, like being fully responsible for your taxes. Before you start your self-employment adventure, understand how self-employment taxes work and make a plan to pay them. Here are five things tax experts suggest considering when becoming your own boss. Key Takeaway: Know your responsibilities. Understand your full tax liability Consider incorporating Pay taxes quarterly Know what the penalties are Keep good records Understand your full tax liability If you’re transitioning from being a W-2 worker to self-employment as a sole proprietor or in a partnership, your tax liability changes. You’ll also need to become familiar with Schedule C (Form 1040) to report on your business’s gains and losses. You’re still responsible for state, local, and federal taxes, including FICA taxes. FICA taxes are the Social Security and Medicare taxes that workers pay. “For those who are self-employed, they bear the entire tax burden of paying taxes into Medicare and Social Security. For those not self-employed, their employer is responsible for half of the FICA taxes due,” says Chane Steiner, CEO of Crediful. Since you’ll be responsible for your full FICA tax obligation instead of splitting it with your employer, you need to figure out how they’re determined. “There may be ways to see how you should handle FICA taxes because they’re are assessed on self-employment income, but not profits. Accordingly, if you were to incorporate your self-employed business and pay yourself a salary, any profits would not be subject to self-employment taxes, but the wages you pay yourself would be subject to self-employment taxes. You should contact a qualified CPA or attorney who may help you with this distinction,” advises Paul T. Joseph, attorney and CPA with Joseph & Joseph Tax & Payroll. It’s also important to keep a good financial record, especially if you haven’t incorporated. “They are not being paid a wage and instead, a self-employed individual must keep a set of books showing income and expenses associated with their self-employed business allowing them to determine taxable profits (or losses). While an employer and an employee each pay half of the FICA taxes due on an employee’s wages, the self-employed person pays 100 percent of these taxes — termed the self-employment tax (SE tax for short) — on their self-employment profit. If the individual has more than one self-employment activity, the net profits and losses from all the self-employed activities are combined to determine the amount of the SE tax,” says Lee Reams, Sr., BSME, EA and Chief Content Officer with TaxBuzz & CountingWorks. If both you and your spouse are self-employed, you are not allowed to combine your self-employment income when calculating taxes. “If married and both spouses have self-employment income, the couple cannot combine their SE incomes when figuring their individual SE tax,” says Reams. While ensuring that your federal tax obligations are met, it’s also important to understand what your tax obligations are for your state and in states you offer services to. “In addition to paying the federal government, business owners need to remember to pay estimated taxes to the states in which they do business. If the business provides goods and services to clients in multiple states, the business may need to pay estimated taxes to all of those states based on the revenue from each state,” says Beth Logan, EA, Kozlog Tax Advisers. Consider incorporating The amount you pay in taxes is calculated differently depending on whether you’ve formed a corporation or just operate as a sole proprietor. If self-employment is going to be your main source of income, it can be a good idea to form an S-corporation for tax purposes. An S-corporation is an entity that gives its total income, losses, deductions, and credits to its shareholders, which means that shareholders can report the income on their personal taxes to be taxed at their normal income rate. If you’re self-employed and form an S-corporation, the S-corporation would pay you a salary for the work you do. “Self-employed people should begin by setting up a company taxed as an S-corporation. By setting up this business entity, it allows self-employed to minimize their FICA taxes since income earned through an S-corporation is not subject to FICA taxes — only the salary they pay themselves (which must be reasonable) is subject to FICA. An S corporation, reported properly, will also minimize the chance of an IRS audit. Keeping good documentation, including receipts, for all income and deductions is essential as well,” advises Tom Wheelwright, CPA, CEO of WealthAbility and author of Tax-Free Wealth. When deciding whether or not to incorporate, it’s a good idea to meet with a tax professional to get advice specific to your situation. Pay taxes quarterly W-2 filers have their taxes withheld throughout the year and may only think about paying taxes when it’s filing time in April. “To manage their tax liability, self-employed should make estimated payments each quarter so they don’t get a big surprise in April. Most importantly, these individuals should hire a qualified tax advisor and an attorney to help them get everything set up properly and to minimize tax liabilities,” suggests Wheelwright. If you’re self-employed, you’re taking full responsibility for your taxes. Whether or not you’ve incorporated, you’ll need to make quarterly tax payments. “These estimated taxes are paid with an IRS Form 1040-ES and include the taxpayer’s income and SE taxes. In lieu of filing Form 1040-ES and sending a check to the U.S. Treasury, the payments can be made online through the IRS’s website or by using the government’s Electronic Federal Tax Payment System (EFTPS), which allows payments to be scheduled up to a year in advance, by having payments automatically withdrawn from the individual’s bank account at specified dates,” suggests Reams. Looking at the IRS’s schedule and deadlines for quarterly payments will help you make sure you’re paying on time. “Since self-employed taxpayers need to pay estimated taxes quarterly based upon their taxable profits for the quarter and, after the first quarter of the year, taking into account prior quarterly profits and estimated taxes already paid for the year,” says Reams. To make quarterly payments, you’ll need to estimate the taxes you owe. Be sure to include all of your income when making this estimate. “Remember tax pre-payments are not just based on the self-employment income and must factor in all other taxable income including investment income, retirement income, the self-employed individual’s wages from other work, and a spouse’s wages or self-employment income, as well as account for withholding from other sources,” adds Reams. How you calculate an estimate will vary depending on how you’re filing. Tiffany Powell, Sapphire Bookkeeping & Accounting Inc Owner, has tips for S-corp and Schedule C filers: “If you are self-employed filing as an S-corp, we want to make sure that the required salary is reasonable and has the necessary withholding to cover all the taxable income at year-end so that payments are made throughout the year in smaller payments. If a client is being taxed as a Schedule C, we plan using estimated tax payments or increasing a spouse's withholding to cover the taxes owed on the additional income. The state you are located in will determine what amount of money should be set aside for taxes. You always want to use your effective tax rate plus about 10 percent to cover the Self Employment tax for Social Security and Medicare after adjustment.” Working with a tax professional can help you navigate this process successfully. A tax professional can also give you advice tailored to your situation. You can also work through the process yourself. However, it’s important to be sure that you know what you’re doing because you want to make sure you’re paying your taxes correctly. “You can always fill out the tax form and pay by check. You can also use https://www.officialpayments.com or services like these to pay by credit card or bank transfer,” says Aalap Shah, 1o8 Founder and a former accountant. Know what the penalties are If you’re paying estimated taxes quarterly, it’s important to have good estimations to avoid penalties. “If a self-employed taxpayer pre-pays less than 90 percent of their current year’s tax liability, including Social Security and Medicare taxes for the year, they can be subject to a penalty which assesses interest on underpayments by the quarter,” says Reams. While it’s important to be aware of this penalty, it’s also important to realize when there are exceptions. “The underpayment penalty does not apply where the final amount due on an individual’s tax return is less than $1,000. The penalty also does not apply where a taxpayer, for a full 12-month year, did not have a prior year tax liability,” Reams continues. Self-employed taxpayers can make estimates based on the current year’s revenue or use safe harbor methods to avoid these penalties. Reams identifies two safe harbor methods: “100 percent of the prior year’s tax liability paid evenly for each quarter provided the prior year’s adjusted gross income was $150,000 or less ($75,000 if using the filing status married filing separate). 110 percent of the prior year’s tax liability paid evenly for each quarter if the prior year’s adjusted gross income was greater than $150,000 ($75,000 if filing married filing separate).” The safe harbor methods may make more sense in some situations and can be less advantageous in others. “One thing to consider when deciding whether or not to use the safe harbor method is that since the safe harbor estimates are not based on current year’s profits, a self-employed individual could be in for an unexpected substantial tax liability at tax time. Or, if their current year income is significantly less than it was in the prior year, they could be overpaying their current year tax and be eligible for a large refund when they file their current year return. If an overpayment results, all or part of it can be applied to the next year’s estimated taxes instead of receiving a refund payment,” says Reams. As you evaluate your self-employment income and projections for the current tax year, you’ll be better able to weigh your options and determine how you’re going to calculate your quarterly tax payments. If you have specific questions, it’s always worthwhile to talk to an accountant or attorney who specializes in taxes. Keep good records Taxpayers who are self-employed have a higher chance of getting audited, so it’s even more important to be sure you have good financial records if you’re self-employed. “We recommend keeping separate bank accounts for business and personal so that income and expenses are easily traceable. It is also recommended that you keep some kind of bookkeeping whether an app or by paper so that you can verify your income and expenses,” offers Powell. Shah has done this for his expenses: “The best and easiest way that I handle keeping track of my records is to use one credit card and bank account that records my income and expenses. I have connected it to Quickbooks for ease of record keeping and use my google calendar to record travel expenses or milage when the need arises. You can use Evernote to keep receipts and other docs on the go but I find that having limited options to spend and record income keeps everything centralized and easier to manage at tax time,” he suggests. Having good records and keeping your business expenses separate from your personal ones will help you be prepared in the event of an audit. Working with a tax professional and following these five tips will help ensure that you are meeting your tax obligations and are prepared in the event of an audit.