Tax Tips

Thought to give out tax tips before tax season is upon us again. I do tax preparation in addition to full time jobs to earn extra money. Here are some tips before getting our taxes done.

1. Know the difference between Independent Contractor and Employee.

Employees fill out W-4 forms upon being hired to declare how much taxes to take out of their paychecks. They get pay stubs along with their paychecks spelling out the deductions taken out. Employers are required to issue W-2s by Jan 31.

Independent contractors don't have taxes taken out of their paychecks and receive 1099-Misc forms if they made over $600, which means they must pay estimated taxes and/or self employment tax if they made over $400 income (meaning Sales minus Expenses equals Income). Independent contractors need to keep records of expenses, business miles driven, and separate car/home office expenses into personal and business uses (insurance, electricity, phone, etc.).

Then there is self-employment who usually hire accountants to deal with all this. If you are a professional whatever and charge your customers/clients for your services, rent out houses/offices to tenants, or own the business you work for then you are self-employed and must declare your business income and pay estimated taxes along with self-employment tax. And don't think your self-employment tax is a bad thing cause it means you can collect social security and medicare when you retire. I like these clients cause they keep good records.

And finally there is paid under the table, which means employer doesn't report your income nor pay taxes on your behalf to the government. There is a thing called Labor Laws employers have to follow so this is illegal (Unemployment taxes, Health Insurance requirements go by # of employees at the company, Minimum Wage requirements, Employer Social Security Taxes, etc.). If your payroll department doesn't have you listed as being employed by them or have records they had paid you for work, you are being paid under the table by your manager and you have to pay taxes cause payroll didn't pay them. You can report employers like this to the IRS. Check this webpage to contact IRS for anything...https://www.irs.gov/help/telephone-assistance

2. When going to a tax preparation site, remember it takes usually 1 hour to complete a tax form. If you come in asking to do 3 years of income tax forms, it will take 3 hours. Many tax places offer to drop off and pick up later if you don't wish to sit around and wait. There is also a statute of limitations on income tax forms so no tax site will do a tax form beyond 3 years old. Remember tax places are busy Jan and Feb so you might want to make an appointment cause they get served before walk-in clients. Also remember that a tax preparer will not start your return 15 minutes before closing and will ask you come back the next day.

3. Be prepared with your paperwork. I have spent 20 minutes looking up college tuition and requesting IRS transcripts online because the client wasn't prepared. Many companies do not mail paper tax forms to the employees, investors, or students and the tax payer must obtain these forms online. If you haven't received your W-2, 1099-Misc, 1099-R, 1098, 1098-E, 1098-T, etc. by Feb 6, ask your employer, bank, college, etc. for the forms and if all else fails contact the IRS since copies are sent to them. Contact info website is in last paragraph of #1. A tax preparer cannot pull these forms out of a magic hat and cannot contact the IRS for copies on your behalf (you have heard identity theft, right?).

4. To get a refund, you must pay income taxes in the first place. The 1040 form determines what taxes should have been paid and then compares the amount to what is already paid through the year (through payroll and estimated taxes). If you are retired and pull money out of an IRA, you can tell the company to take out taxes on the amount withdrawn, which is usually 10% of the amount being withdrawn. People with large refunds have lots of deductions or are poor with lots of children under age 17. Refunds are not free money from the government and it's not a contest to get a bigger refund each year (you can argue Earned Income Credit and Additional Child Tax Credits are free money, but only to people who make less than their standard deduction).

5. Audits are simply the IRS saying "You took these deductions now prove you deserve them". You won't get audited if all you have is W-2 info on your tax form. If you keep your receipts and records of your tax deductions, then you have nothing to worry about. And remember that the IRS is not the Supreme Court and their decisions can be challenged in Tax Court (to do this I recommend a Enrolled Agent, CPA, or Lawyer to defend you).

6. If your electronic 1040 form is rejected, you can send a paper return in the mail. This usually happens with new social security #s of children recently born or a parent who should not have claimed a child does before the rightful parent sends in their return. You can also complete Amended Returns (1040X) up to 3 years after the due date and these must be mailed in and cannot be electronically filed.

7.If you get a letter from the IRS, take it to your tax preparer to handle. IRS letters describe in vivid detail what their issue is and how much more you owe. IRS never calls demanding money and will not threaten to arrest you (believe me that if the District Attorney plans to arrest you for tax evasion you won't get a warning so you can flee the country). You have rights with the IRS: the right to appeal their decision, the right to representation, and they have 800 numbers you can call for assistance. IRS also will not demand you pay with your credit card number over the phone nor demand you purchase gift cards to pay your taxes due. Plus, they don't email you either demanding you wire them money.

8. All tax preparers who complete more than 5 returns must be registered with the IRS. A tax preparer must put their PTIN (Personal ID #) on the form. You can lodge complaints on tax preparers on...https://www.irs.gov/tax-professionals/make-a-complaint-about-a-tax-return-preparer. You can also find a directory of tax preparers on...https://irs.treasury.gov/rpo/rpo.jsf

9. State Income Taxes are not connected to the IRS. All 50 states have their own Tax Revenue Office that collects sales tax, liquor/tobacco/gas taxes, and income taxes. Some states don't tax income and usually have higher sales tax percentages. So if you move into another state during the year, state income taxes likely won't be exactly the same as each state has its own laws on deductions and income tax rates.

10. Make sure your college attending dependent knows they are your dependent because dependents cannot claim education credits on their form. I had many college students want a bigger refund by claiming the regular standard deduction and education credits and their parents get angry at the tax preparer for letting them do that cause their return gets rejected if dependent form is sent before theirs. As I said above, these cases can be handled by mailing paper returns and amended returns.