Our Taxing Times

Are You Sure You're Ready?

When I started this post on January 15, 2019, I hadn’t seen a W-2 yet! Nor had I seen a 1099-R, SSA-1099 or any other income document. It’s the 18^th now and I have seen my first W-2 and a SSA-1099. Everything is slow getting out. Actually, that might not be a problem.

The issue with those who try to file early is they generally don’t have everything they need. They have their W-2 but not the 1099-R for the money they took out of their 401K. Or they are missing the day care statement. So I thought I would give you a check list to help you remember what you are waiting for. However…

W-2s and other income reporting documents are not required to be mailed until January 31, 2019.

• W-2s – This may seem like a no brainer but did you change jobs during the year. Make sure you have W-2s for everywhere you worked. And no you can’t hold a late W-2 and include it in 2019’s return. Please, also check with your employer if they changed names or divisions or were bought out by another company since they might have to give you more than one W-2.
• 1099-R – Did you cash in part of your retirement plan? Default on the loan on your 401K? Did you rollover your retirement from one plan to another? If you did, you will need a 1099-R.
• 1099 – INT and DIV – the banks and other financial organizations will get these out to you. However, if the amount is under $10 they don’t have to send a form but you still have to include it on your return.
• SSA-1099 – is for form the Social Security Administration send to tell you how much you need to report on your tax return. If you have Medicare, your premiums will be also listed as will any withholding.
• 1099-G – is for government payments. Mostly taxpayers with unemployment will be the ones who get these but if you itemized deductions on your 2017 tax returns and received a state refund you will also get one.
• W2-G – did you gamble and win. You should have gotten this form at that time. Now is the time to find where you put it for safekeeping.
• 1099-MISC - is the catch all form. This is how businesses report what they paid independent contractors. It is also how they report certain rents paid. It is also a catch all for many prizes and other payments.
• 1098 – comes from your mortgage holder and tell you how much of your payments were allotted to interest. It should also tell you what real estate taxes were paid through escrow and the loan balance.
• 1098-T – will come from a post high school school. You’ll need this information for the education credits.
• 1099-S – documents the sale of real estate. It couple be land, a rental, or your personal residence. If you did sale your personal residence, you might not get this form if you meet the exclusion qualifications. 
• Brokerage statements are generally composites that could include several 1099 forms; interest, dividends, sale of stock. The big problem with brokerage statements is that they are usually not sent out until February. If they do come earlier, they may be revised later.

Hopefully, this post will serve as a reminder of a form you might have forgotten and save you time at your interview.

BTW – I will still need to see a valid driver’s license or state id.

 

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Crazy Season

This is going to be a crazy tax season!

Yeah, the tax law changes and the shutdown are making preparing income taxes even more unpredictable. However, those are seasonal issues. Some years you have them others you don't. But I foresee that this will be a crazy three months at McIntire Tax Center. Why? Because the local employer who is always the last to get their W-2s out has already mailed their forms. It is the only W-2 I have seen by January 18.

In 30 years of preparing taxes, I know there is a rhythm to when clients come in. In early January, you see clients with only one W-2 from a company with an onsite bookkeeper. Next employers are the nursing homes and the city. Then the online W-2s start showing up and the fast food restaurants. These are followed by SSA (out despite the slowdown) and the 1099-Rs begin trickling in. The school districts include their W-2s with the 2^nd payday of the month and Railroad Benefits make an appearance...

 

You get my point, there is a rhythm to a tax season. It differs a little each year but there is pattern. Not this year. The tax law changes and shutdown shake things up but when the basics of the business are out of wack -

It’s going to be crazy.

 

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Starting Date

It looks like the IRS has set the opening date for processing 2018 tax returns. They announced on Monday that they will begin on January 28^th. The IRS has begun calling employees back to work to prepare for tax season.

They have also changed the previous announcement that refunds will be held until the government shutdown is over. It seems that Congress set up tax refunds to come from a special appropriation and the shutdown does not affect that money.

 However… (You knew there had to be a hitch) tax returns with refundable credits like the Earned Income Credit, American Opportunity Tax Credit and the refundable part of the Child Tax Credit will still be held. Processing on those returns will begin on February 15^th. This hold was part of the Path Act of 2015 and enacted to try reducing tax fraud from people filing made up returns. The idea behind the act is that it will give employers a chance to file their W-2 and the IRS will use that info to check the returns to verify income.

No matter when the IRS starts processing tax returns, taxpayers need to allow at least 2 weeks for a refund sent by direct deposit. A mailed refund check can add to week to the wait time. The IRS may take longer to get your refund to you if they want any extra look at the return.

BTW, April 15^th is actually April 15^th this year for most taxpayers. No weekend to change to due date. The exception is taxpayers who live in areas that celebrate Emancipation Day.

 

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

W-2s

I have a couple very important things to say about W-2. But first, a quick reminder what a W-2 is.

What is a W-2?

A W-2 - Wage and Tax Statement is issued by an employer to document the wages and benefits they paid during the course of the year to each employee. Employees receive a set of identical copies to use to file their tax returns. The employer also sends a copy of the W-2 to the Social Security Administration which shares the information with the Internal Revenue Service (IRS).

What information is on the W-2?

The W-2 lists the amount of taxable wages the employer paid the employee for that year. It also identifies the amount of federal and state withholding and the employee's contribution to their Social Security and Medicare accounts. The employer also uses the W-2 to document benefits the employee received which might be subject to special tax treatment. This could include retirement plan contributions, dependent care benefits, moving expenses and health insurance.

What if the W-2 doesn't match the employee's last pay stub of the year?

The year to date wages on the employee's last pay stub often doesn't match their W-2.  Retirement plans and health insurance may not be subject to income tax and the W-2 reflects the total wages less the non-taxable portions of these types of benefits.

When is the W-2 issued?

Employers are required to mail the W-2 to the employee by January 31st each year. While the employer can choose to issue them before the end of the month, they aren't late until plenty of mailing time has been allotted.

What if the W-2 doesn't come or is incorrect?

The first step in either case is for the employee to contact the employer. If the original W-2 is wrong, the employer can use the form W-2C to make corrections to the original document. A missing W-2 can be re-sent to the employee.

If the problem continues, the employee can contact the IRS at 1-800-829-1040 and explain the situation. Taxpayers who call the IRS should have all the contact information for the employer available since the IRS will try to contact the employer about the missing W-2. They will also send the taxpayer a Form 4852 - Substitute W-2 to use to file their tax return if the W-2 doesn't arrive in time for the taxpayer to file their tax return. It's important that the correct wage income be reported on the taxpayer's tax return even if the W-2 is incorrect or missing. The IRS will match income reported to them by employers to what the employee include on their tax return. Missing income will generate a notice wanting more tax money, and interest and penalties, on anything not reported on the original return. The taxpayer is required for that tax, interest and penalty, not the employer,

 

Most taxpayers will receive at least one W-2 each year; it's the most common tax information document issued. The W-2 gives taxpayers the amount of taxable income they earned during the year and employee benefits which get special tax treatment on the tax return. Taxpayers should check their W-2s for accuracy and make sure they have W-2s from all their employers.

 

W-2s can be found in many different designs but the IRS has standardized the information reported on the form by the box it is placed. Federal wages will always be found in Box 1 and Federal tax withholding in Box 2.

Important Information!

First, employers do not have to have W-2s mailed until January 31, 2019. They are not late if you haven’t received your W-2 when you are ready to file your return in January. You need to wait. Nor can you electronically file your tax return without the W-2 (you can’t mail it either since a copy needs to be included with the return). There are ways to handle unavailable W-2s in mid-February or later but not in January. Just wait!

 

We’ve seen many tax changes that will show up on 2018 tax returns. For a lot of taxpayer this will result in lower taxes but not larger refunds!  When the Tax Cuts and Jobs Acts went into effect, I could project how the tax changes would change my client’s 2018 return. It sounded great. That projection, however, used the 2017 information including withholding. But the withholding was changed to reflect the lower tax during 2018. Taxpayers received more in their paychecks. Taxpayers dreaming of big refunds because of TCJA may see a smaller refund than they though because they have already gotten some of that money back.

BTW

The IRS has not announced the first date for electronic filing. The best I can do is prepare the return and hold it until filing is opened.

 

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

30 Years!!

I have been preparing income taxes for 30 years.

That came as a little bit of a surprise to me. But I double checked and it has been 30 years. Then I started thinking about the “tax world” I’ve seen in those 30 years.

I started working for an H & R Block franchise in January of 1989 preparing 1988 tax returns. I had taken their income tax course the previous fall. Besides learning tax preparation by preparing 1987 taxes we also learned about the tax changes which were starting on the 1988 returns. The big Tax Reform Act of 1986 had been signed into law almost 18 months before and was still being phased into service.

There have been a lot of tax bills since the Tax Reform Act of 1986. This year we have major changes under 2018’s Tax Cuts and Job Act (TCJA) and the Bipartisan Budget Act of 2018. Previously, there was the Tax Reform Act of 1993, Taxpayer Relief Act of 1997, Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), and Tax Increase Prevention and Reconstruction Act of 2005 (TIPRA). That doesn’t include tax changes that were stuck into other bills or all the extenders. In fact we are still waiting on this year’s tax extenders to be extended. (The House has sent their extender bill to the Senate but the Senate didn’t do anything with them before going on Christmas break.)

Tax code changes I’ve seen during those 30 years include the Capital Gains tax, education credits, DPAD, child  tax credits and all the changes because of the Affordable Care Act . Now, this year’s TCJA adds a 20% credit for some business, owners takes away the personal exemption for the taxpayer and spouse and makes major changes to the itemized deduction. And let’s not forget the increased standard deductions and tax rate changes.

Computers were not a big part of income tax preparation when I started. However,I worked for Quentin Stigers (a HRB franchisee) who did use computers for the federal returns. But there were no computers on the desks. We put the client’s info on input sheets and a data entry person put the information in a computer and printed out a copy. If there was a mistake, the return with changes went back to data entry. State returns and some forms had to be done by hand as did early season Federal returns since the tax software never came before February for the first several years.

All tax returns were checked. First, by the preparer checked their return then it was sent to a return checker to double check the return. We used pencils with blue lead to check returns because they didn’t show up on photo copies. A correct return was then sent to be copied. Besides making a client copy (the blue penciled copy was the office file copy) the copy person needed to know what states needed to be done and which needed a Federal return copy and which also needed other states. We regularly had federal returns that were only four or five pages but the Kansas copy would be a half inch thick because of the backup copies of the Federal and copies of other state to justify the Credit for Taxes Paid to other States on the Kansas return.

It’s amazing that so many procedures of how I handle tax returns began then. Procedures like never having more than one return open on my desk at the same time, double checking my data entry (but now using the check marks in my tax software instead of the blue pencil.), how I handle client W-2s and other documents or client folders. Even the tax software I use.  I was introduced to Drake Tax Software by Quentin. He found it the third or fourth year I worked for him and I haven’t found anything I liked better.

Since computers were not in wide use, there was no electronic filing in 1989. (Limited e-filing began in 1986 and the IRS adding more preparers each year. The program went national in 1990) Even once e-file went national, more taxpayers continued to file paper returns. These returns were mailed to the correct address (IRS was Austin then). We also had to learn to correctly put a return together. Form number didn’t always match the sequence number and where did the IRS or state revenue office want the W-2’s attached. When e-filing started, the bank products started too. Explaining the Refund Anticipation Loans to clients was a mess especially when you thought the program was stupid. I still remember the client who spent 30 minutes going through her purse trying to find something meet the two ID requirement.

I miss my Pub 17!  As the computer became a large part of tax prep, we also lost desk reference materials. Not really lost but it got harder to find paper copies of reference materials and tax returns. Now everything is on online. I miss the Pub 17 even though TaxBook is my go to now. The Pub 17, Your Federal Income Tax, was the desk reference when I started. In January, I would take my copy and review it for the upcoming tax season. I would highlight sections and tag pages so I could quickly find an answer to a client’s question. There were other books on my desk like The Master Tax Guide but the Pub 17 fit my clients and most questions.

My big change happened in 2003 when I decided to go out on my own. No longer could I just come in to the office in early January for training and setting the office up and leave April 15^th. I needed to choose software, reference materials and continuing education myself. And buy publicity, vacuum the floor, and clean the bathroom. I also have had to deal with being by myself. I have a receptionist for a few weeks but no other preparers. There were always other employees (mostly women) when I worked for Quentin. Some were great to work with and others a challenge. ”D”(a fav) started when I did and used a credit card size calculator not the adding machine on the desk and used a pen to do the return (he used very little white out) . “T” was also a relief mail carrier and would tell clients where their house was and when she had delivered mail there (confidentiality issues), “B” had worked in Quentin’s other office the year before but the receptionist there refused to come back if “B” did. Since she was Quentin’s mom, our office got stuck with him. He told clients that he was using his “magic refund pencil” to do their return. There was the office manager who didn’t know anything about taxes but promising results that could not be delivered. It was just like any work place with fun and not so fun co-workers.

When I started in 1989, the biggest securing problem was making sure that incorrect returns and other confidential info was placed into the burn box. Later there was a shredder. Today one of the biggest problems for a tax office is the security of taxpayer information and identity theft. The IRS wants a written security plan and really wants us to use two step authorizations.

I would put the due diligence I have to do on some returns as my hardest current tax office problem. Fraud on Earned Income Credit and other refundable credit now require that I verify and document taxpayer info.

Let’s not forget how commercial tax software also affects tax professionals by reducing potential clients.

I’m sure that I am missing some tax business changes in the last 30 years. In fact, I just remembered checktapes and tax preparer licensing. But income taxes are still here and someone still needs to prepare tax returns. While I won’t make another 30 years, I will be at my desk for a few more years trying to explain to clients what Congress has done to their taxes this time.

Simplification?

As tax season approaches, I would like to discuss (vent about) the new “simplified” 1040 tax return.

First I need to explain that, to me, simplification means making something easier. Cutting down on the number of Christmas cards I send or stop trying recipes with dozens of ingredients. But to Congress that is not the case. Their idea of tax simplification is to make the tax form font smaller and to add six new schedules to get the same info from taxpayers.

Look at the examples, the top one is the sample “postcard tax return” that was waved around when the bill was signed. The second image is the current draft of page two of the Form 1040. 

The mock up is clean and easy to read even if it has nothing to do with tax law. It's clear that much was left out. The second example shows the reality of our tax code. To get what the IRS needs to know the font got smaller, dividers are gone and some entries disappeared altogether. They aren't really gone. They’ve been moved to the new schedules (six of them on top of all the old schedules and forms). The new Form 1040 only lists five major income sources. If the taxpayer has one not included; like unemployment, alimony or gambling winnings, they will need the new Schedule 1 to show that income. The Schedule 1 is also where the adjustments like the SE deduction or educational deduction will be shown.

There had to be some kind of change to the old 1040. It was running out of space. I heard at a pre-season workshop that there was only one line left open on the old form. However, there had to be a better way to solve the space problem than what we have now.

Much has been made that 90% of all 1040s are electronically filed and they won't be affected by the new forms. I disagree. Once a tax return is prepared, it has to be reviewed. I can see myself going over a return with a client: here are your wages and interest. Now we have to change forms. Here is your IRA deduction on schedule 1. Now we go back to the 1040 where the IRA is figured in with the income to get your adjusted gross income. From there, we go to your tax calculation. See what I mean? Taxpayers and preparers will have to spend more time reviewing the tax returns. I don’t think the IRS will take “new form confusion” as a way to get out of unreported income.

Taxpayers and preparers are not the only ones who will have to make changes because of the new 1040. Think all the paperwork that uses info off the tax return for some financial calculation. School financial aid, mortgages, or prescription drug reduced pricing come to mind. They all tell applicants what amount they need by the line it can be found on the tax return. These forms will have to be rewritten.

Bottom line, don’t let yourself get lured into thinking that doing your taxes will be easier this year since the 1040 was “simplified.” Take your time to prepare and/or double check your return so you don’t get a notice later.

 

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

 

Spoofing the IRS

According to the Federal Trade Commission, "Spoofing" occurs when a caller deliberately falsifies the information transmitted to your caller ID display to disguise their identity. It’s also a new ploy being used by scammers to steal your money by making you think you are actually dealing with the Internal Revenue Service (IRS).

The bad guys call you but your caller id says that you are getting a call from an IRS Taxpayer Assistance Center. When you question what the scammer is telling you, they suggest you use www.irs.gov to verify that you have been called from a legitimate IRS number. After they give you time to “check them out”, they call back and push you to pay the fake debt by pre-paid debit card.

Don’t let the scammers bully you! The IRS will not insist that you pay by a specific method like a pre-paid debit card or wire transfer. And don’t ever think on paying on the phone with a credit or personal debit card. You have the right to understand exactly what and why you owe the IRS. Make the scammer send you something in writing. And don’t let them threaten you with police or ICE.

The IRS has an article on spoofing and how to report it. Remember the IRS does not initiate collections by phone, email or fax. They will send you a notice by the US Postal Service.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

More Notices

Since the end of tax season, I have seen at least 2 tax notices a day come into the office. Oklahoma is asking for proof of withholding under the guise of identity theft protection and the IRS has started sending out CP2000s for 2016 tax returns. The result is another post on tax notices.

The Oklahoma notices are simple since all they want is proof of Oklahoma withholding. But I did get a kick out of the client who called the number on the notice to make sure it was legitimate and not an identity theft attempt. The OK customer service representative was not amused.

The CP2000 from the IRS is another matter. I call it the “oops” notice. It comes from the IRS matching what is on your return to what they have received from payers and it takes about a year to come out.  If you and the IRS match or you are reporting more than they have, you don’t get a notice. You do get a notice if the IRS has more income reported for you than you have on your return. Oops! The CP2000 is very important since it’s the notice that will give you the information you need to double check the IRS. If you ignore the CP2000, you will get more letters but they won’t have as much detail (and they will have more interest and penalties.)

It can be easy to miss adding income to the return. W-2G for gambling are given at the time of the win and can get forgotten when taxes are prepared. Many times a 1099-S for a property sale is issued at the time of the sale and forgotten. Then there are the surprises like the 1099-MISC from a casino combining all your prize and tournament wins for the year and the 1099-C for debt cancellation that no one mentions when your credit card debt is forgiven. Bottom line, you think you have everything you need but you file your return before everything is mailed.

Some late W-2s and 1099s can be prevented by making sure employers and other payers have your current address. It’s also a good idea to have “tax file” to put W-2Gs and other early forms. Also, ask if you will be getting some kind of 1099 you do something financial. If you filed your tax return before you received everything, you need to file an amended return. And don’t forget to file amended state returns too. Do not, I repeat, DO NOT hold on to it and add it to next year’s return. Keep it with the correct year.

People make mistakes. It’s easy to miss a tax form you don’t know you are getting or forgot about. Oops! However, the IRS (or any state agency) will not let you off the hook that easily. So check what the notice says and if it’s correct pay the tax. If you don’t agree with all or part of the notice –tell them why and document your arguments.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Did You Check That Notice Before Paying?

Just because you get a notice from the Internal Revenue Service or a state taxing authority does not mean they are right.

It happens at least once a tax season. The client and I are working on the current year’s tax returns and they mention that that got a notice from the IRS. They’re fuzzy on the details but they went ahead and paid what the notice said they owed. The noise you hear is me beating my head against the desk.

Sometimes those notices are wrong and by paying what they say you owe you are agreeing with them. That makes it harder to fight the changes.

Most of the notices, like the IRS’s CP2000, are computer generated. They are the result of matching what is on your tax return with the info the IRS receives from payers. If they don’t match, you can get a notice. Forget to include a W-2 on your return and you will get a notice. The same goes for a property sale where a 1099-S was issued or stock sales reported on a 1099-B,

But, did you work for that job that year? Could the employer made a mistake? Or did you file an amended return for that W-2 and it wasn’t caught by the system? Taking a little time to check what the IRS/state says and get them the documentation they ask for is cheaper than just paying them.

There is no time this is more important that when the IRS asks about property or stock/mutual fund sales. You don’t pay tax on the sale price. The difference between what you sell the item for and your cost in that item can be a gain or loss. Sometimes the IRS has the cost info but they may not and you need to show them your cost.

When you get an IRS or State notice:

• Don’t panic too much.
• Don’t ignore the notice. Or if you do, put the notice up where you can find it. You will get more correspondence on the issue and the later notices won’t have the same information.
• Try to figure out where the problem is. This is where having a tax pro can help. There are also phone numbers on the notices if you DIY.
• If the notice is right, pay the bill. You can set up an installment agreement if you can’t pay it all at once.
• Get the documentation together and organized if you don’t agree with the notice. Remember you have the burden of proof. So if you took out from an IRA and used the money to start another IRA, you need to get documentation on when the withdrawal and contribution were made. The IRS will not take your word that the transfer was within 60 days. Telling them that your business lost money won’t cut it. They’ll want a profit and loss statement to start with.
• Once you have submitted why you disagree with some or all of the changes give them time to process what you have sent.
• If you get a second notice on the same issue, look at where they are still having an issue. Are they right? If you still want to fight their decision, I would suggest getting a tax pro to help.

A notice from the IRS or state tax authority is scary. But if you take the time to make sure that the proposed changes are correct, you might find you don’t owe as much (or any) as they say. Then it’s just doing the paperwork to prove your side.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Tax and Withhold Social Security

Tax Day 2018 is over!

Now we can start thinking about 2018 taxes. Over the next couple of weeks I want to cover tax topics that gave my clients problems. The most common was a big balance due. I’ll be covering ways you can prevent that next year. The first topic is withholding, specifically withholding on Social Security. (I’ll cover other withholding in future posts.)

The biggest surprise I hit clients with is that their Social Security can be taxable. The news can come when we discuss their retirement or when I explain why they owe so much tax. BTW-as I discuss Social Security, the tax treatment also applies to Railroad Tier I benefits.

Taxable Social Security is a bit of pet peeve with me. I began preparing income taxes in January of 1989. At that time, Social Security was taxed if half of the Social Security and all of the rest of the income on the return was over $32,000 for a couple filing Married Filing Joint (MFJ). For most everyone else, the threshold was $25,000. (Some taxpayers filing Married Filing Separate (MFS) can have their Social Security taxed from dollar one.) Those rules are the same. The only change was back in 1989, the maximum Social Security take could be taxable was 50%. Now it is 85%.

My issue is that the thresholds have not changed in 29 years. They have not been indexed for inflation but retirees’ income has changed. When I started only a few clients found their Social Security to be taxed; now only a few don’t have taxable Social Security.

Your Social Security is going to be taxed but you can prepare for the tax. You can adjust (increase) the withholding on other income to cover the tax on Social Security. If you or a spouse is still working, you can have extra federal withholding taken out of your pay check for the higher tax. The same goes for a pension.

You can make estimate payments to cover the tax on your Social Security, You estimate how much extra you need to pay for the next year and send a quarter of it to the IRS. The payments are sent in in April, June, September and January on the 15^th of those months. Your tax pro can get you vouchers to go with your payments.

Finally, you can have Social Security withhold from your monthly payments. They will only do federal withholding and they use a percentage method. They will withhold 7%, 10%, 15% or 25% each month. The amount they withhold will be reported to you on the 1099SSA you get in mid-January. To get Social Security to start withholding for you, you need to fill out Form W-4V and send it to or drop it by your local Social Security office. You can get the W-4V on the IRS web site. You also can use this form to get your Social Security withholding stopped. (If you are getting RRB Tier I, please check with the Railroad Board where to send your completed form or if they have a different form for you to use.)

A note about state tax on Social Security. It depends on the state whether Social Security is taxed. In Kansas, it’s not taxed if the federal adjusted gross income is less than $75,000. But over that, it is taxed. Oklahoma doesn’t tax Social Security at all. Please check your state.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.