What to Know About Filing an Extension

One of the biggest misconceptions about filing an extension on federal tax returns is that it means individuals don’t have to pay any amount owed on time. An extension gives people more time to file, but not more time to pay.

Individuals can file an extension on their federal taxes, but it has to be done before the last day for filing the taxes. An extension provides taxpayers with additional months to prepare and file their return for any reason. The IRS automatically grants a request for an extension, but the proper forms must be filed and the extension is valid until Oct. 15. The extension can be filed electronically.

Taxpayers are expected to pay the full amount they owe by the tax deadline, even if they file an extension. The IRS assesses a penalty for late payments, usually 0.5 percent per month of the balance that’s due, but failing to pay can increase that penalty to a maximum of 25 percent.

There are 3 primary reasons that individuals file an extension. The first is missing or inaccurate information. Many people find that they haven’t received a form they need in time to file.

The second most common reason for an extension is that a taxpayer will be out of town during tax season. Many people from northern states winter in the south, while others choose to vacation during spring break. If they anticipate a refund, they often file an extension.

Lastly, people run out of time. Filing federal taxes can be stressful, leading to procrastination. Despite taxes being due on or near the same date every year, some individuals lose track of time, simply get busy, or find themselves dealing with a major life event.

For those that don’t have the money to pay their tax bill in full, the IRS offers some payment plans. Individuals will still have to pay their tax bill, along with any applicable penalties and interest, but at a lower rate. Installment agreements are also available, in which individuals pay a set amount each month. The IRS advises individuals pay their tax burden with a credit card or take out a loan to save money.

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Tax Preparation
posted by Mark Battalini
June 26, 2022

Adjusting Your W-4

There are some very good reasons to adjust your withholdings on your W-4. The form tells your employer how much money to keep out of your check for federal income tax. It will have an effect on your tax liability and prevent you from receiving an unexpected tax bill when filing your federal return.

Your W-4 is also critical for preventing a penalty for underpayment. Some people choose to claim every possible withholding, essentially living on less throughout the year to obtain a large refund at tax time. The IRS wants you to reduce your tax bill and have a refund that’s as close to zero as possible.

Life Events

Any time that your life circumstances change, you should complete a new W-4 with your employer. That includes a marriage, divorce or the birth or adoption of a child. Major life events also include buying a house, getting a raise, and contributing to educational funds. Some of those changes will make you eligible for credits on your federal tax return.

Part-Time Employment

If you normally work all year, but get laid off or experience downtime, you’ll need to adjust your withholding to account for those changing circumstances.

Second Job

It doesn’t matter whether you get a part-time job, work the gig economy, run a side hustle, or have a home business, you’ll need to adjust your withholding. There are a great many types of income producing ventures that are viewed as self-employment by the IRS, which makes you liable for income tax on the amount, along with the self-employment tax, Social Security and Medicare.

Spousal Employment

If your spouse gets a new job or changes jobs, they’ll also have to complete a W-4. Any change in income – an increase or a decrease – will have an impact on your income and amount of taxes you owe. Couples need to use both incomes and approximate as closely as possible what they need to claim on their W-4.

Can You Get Tax Help for Free?

There are dozens of reasons why you need assistance with your taxes, especially if you’re doing them yourself. If you’re one of the millions that prepare their own taxes online, the services offer help in the form of popup windows, but those can be even more confusing and you may want to speak with a real person that’s knowledgeable about your particular circumstances.

You should bear in mind that the IRS was overwhelmed with calls in 2020 and again in 2021. People waited for hours on the phone to have their questions answered. That situation is likely to continue in 2022 and beyond.

Volunteer Income Tax Assistance (VITA)

VITA can be found online. You enter your zip code and the distance within which you want to find a volunteer. If you don’t find someone within your search criteria, keep expanding the distance. The online search will provide you with the name of the agency, it’s location and directions for contacting it. VITA help is available at a variety of locations ranging from colleges to community centers.

Tax Counseling for the Elderly (TCE)

To qualify for TCE, you must meet certain criteria. You’ll need to be a senior citizen, disabled, earn moderate or less income, or not be able to speak English very well.

IRS Taxpayer Assistance Center

These are IRS offices where you can search for a location where you can make an appointment to speak with an IRS representative. However, these sites can be 50 miles or more away from your location.

Taxpayer Advocate Center

The service is an independent organization within the IRS. It can be a good resource for those with a financial hardship due to a tax situation, levy or lien.

AARP Foundation Tax-Aide Program

Operated by the AARP for over 50 years, its focus is on those age 50 and older with a low to moderate income, though technically they offer help to any taxpayer.

MilTax Program

This is for current military personnel, a spouse or dependent child of someone in the military, or those who have served in the past. The organization offers help over the phone 24/7 and appointments can also be scheduled for MilTAX at a VITA office.

Local Services

Each year libraries and community centers in almost every town offers services provided by volunteers to help individuals with their tax-related questions. Some offer tax preparation seminars and workshops.

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Tax Preparation
posted by Mark Battalini
February 13, 2022

Rules for Amending Tax Returns

Nobody is perfect and mistakes happen, even on tax returns. Individuals may discover they didn’t claim all the credits or deductions for which they were eligible, forgot to claim income, or just made an error in addition or subtraction. Sometimes employers issue a corrected W2, which means the amounts used to file taxes are incorrect. All of those situations are good reasons to file an amended tax return.

Paper Copies

Don’t start over and try filing an entirely new tax return. The bad news is that individuals can’t e-file an amended return – it has to be a paper copy that’s mailed to the IRS. Individuals will also need to amend their state return. It’s best to seek the assistance of a tax professional for an amended tax return or if a superseding return is an option.

Time Limit

People that file an amended tax form must do so within 3 years from the date they filed the original return, or within 2 years from the date any tax was due – whichever is later. It can take up to 16 weeks for the IRS to process an amended return.

Additional Forms

It will also require filing additional IRS forms. A tax professional will know which IRS forms are applicable, based on the client’s particular situation. There are some special due dates that apply in the event of a natural disaster, service or injury in a combat one foreign tax credits, bad debts, and net operating losses.

The IRS will often catch simple errors and correct them. If a balance is owed due to the error or mistake, the IRS will send the taxpayer a letter indicating the nature of the problem and how much is owed.

Amended Returns & Audits

When filing an amended tax return, individuals can’t pick and choose the items to change or those that will obtain a bigger refund. Changes affect the entire return. Taxpayers should be aware that there’s a greater chance of being audited if they file an amended return.

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Tax Preparation
posted by Mark Battalini
February 13, 2022

E-File for a Quicker Tax Refund

E-filing a tax return is the quickest and easiest way to get a refund if one is due, prevent identity theft, and arrange for the financial resources required if a balance is owed. Despite the convenience and ease of filing digitally, many still don’t take advantage of the technology even though it has distinct advantages.

E-filing is offered by tax preparers, online tax services, and tax software programs. Filing digitally is an easy way to know if the return has been accepted by federal and state governments and track its progress.

Faster Refund

The biggest motivator for e-filing a tax return is a quicker refund for those that have money coming back. By choosing to file electronically, tax returns arrive quickly and individuals can have the funds deposited directly to their bank, a pre-paid card, or a cash app card. Paper tax returns take longer to arrive at the IRS and requires extra effort on the part of IRS workers to process. A return can take weeks to be processed.

Balance Due

For individuals that owe the IRS, filing early lets them know how much they owe and buys them extra time to come up with the money owed. The amount is due on the filing deadline. If the money owed is readily available, people can opt to have the money automatically withdrawn from their account.

Late Filers

There are those that always procrastinate and wait until the last minute to file their taxes. E-filing ensures that tax returns arrive at the IRS in a timely manner and prevents them from being late.

Avoid Extensions

Filing early can prevent tax payers from the need to apply for an extension. The IRS will charge interest and penalties on any outstanding tax debt until the balance is paid in full.

Identity Theft

The risk of identity theft and having a refund stolen increases the longer tax payers wait to file their return. The instances of fraudulent tax returns continue to increase and all the unscrupulous need to file a return and steal a tax return is an individual’s Social Security number. Tax payers at the highest risk are those that wait until the last minute to file.

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Tax Preparation
posted by Mark Battalini
February 13, 2022

Do you Have to Pay Taxes on Cryptocurrency?

Whether or not you pay taxes on your cryptocurrency holdings will rely on a variety of factors. Cryptocurrency is considered property by the IRS and is currently taxed in a similar way to stocks. However, if all you did was purchase digital currency with U.S. currency and it’s been sitting untouched in your wallet or an exchange, you may not need to report it.

Taxable Situations

You will need to report your cryptocurrency if you’ve traded one type of the digital currency for another or if you’ve sold cryptocurrency for government-issued currency known as fiat dollars. Similarly, the currency may be taxable if you’ve used it to purchase services or goods ranging from a cup of coffee to a new car.

Capital Gains

Using cryptocurrency doesn’t necessarily mean you’ll owe taxes on it, though you’ll need to report the transaction. Selling an asset such as cryptocurrency can be subject to a capital gains tax. Gains are taxed at either short or long-term rates. It will depend on when the digital currency was acquired and the date it was sold or disposed of, along with the amount you paid combined with any transaction fees.

Defer or Eliminate Taxes

You may be able to defer or completely eliminate, taxes on cryptocurrency holdings if you purchase inside an IRA, 401K or other retirement plan. Buying within a traditional IRA will defer taxes on the gains until you begin making distributions.

Hire a Professional

Cryptocurrency is still a gray area in the U.S. in many ways. It can be difficult and confusing to navigate the laws surrounding the digital currency. If your cryptocurrency history is complex, the expertise of a tax attorney can be invaluable when filing your yearly taxes. They can present you with strategies that are acceptable to the IRS for accounting for gains and losses.

Tax Accountant vs Tax Software

Individuals have an important decision to make each year at tax time – hire a tax accountant or use software. The decision will depend largely on how complicated an individual’s financial situation is, their income, investments, stocks and other factors.

Tax Accountant

One of the major benefits of hiring a tax accountant is that minimizes the potential for an audit. That’s especially important for high-income earners and those with stocks and investments. The IRS audits approximately 4 percent of all returns. The chances increase for people making over $200,000 per year, business owners – especially sole proprietorships, the credits and deductions claimed, if foreign assets are involved, and the complexity of the return.

Anyone with those risk factors would do well to seek the services of a tax accountant. They’re highly trained professionals that are knowledgeable about all aspects of tax law. Individuals consulting a tax accountant for the first time are usually surprised at the number of legal deductions they’ve been missing. A tax accountant can also provide advice about tax planning to lower your tax burden and help manage finances more effectively.

Tax accountants have access to professional-level tax software that’s far more sophisticated than that available as a single purchase or online as a service. A tax accountant is available to answer questions and provide guidance throughout the year, not just at tax time. Complicated business and investment issues that can be handled with alacrity by a tax accountant can take individuals days or weeks to research.

Tax Software

Most people simply look at the cost of consumer tax software as a primary benefit. Software to install on a computer can cost as little as $50. Online tax software fees are based on the complexity of the services requested and are charged when the taxes are completed. Software solutions are less expensive but really aren’t designed for those with complex tax forms.

Using tax software is easy, user-friendly, and faster than the services of a tax accountant, who make take several days or a week to complete taxes. Tax accountants must deal with sometimes hundreds of clients one at a time, while software servers can accommodate millions of users at the same time.

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Tax Preparation
posted by Mark Battalini
November 29, 2021

Reasons to File a Tax Extension

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Tax Preparation
posted by Mark Battalini
November 29, 2021

4 Ways to Organize Tax Records

Documentation is essential for the IRS when filing taxes. Saving receipts and a myriad of tax-related items can seem overwhelming. Without a system for preserving documents, individuals can easily lose track of those important papers. The result is lost money in deductions.

No matter what method people use, it’s important that they choose a system that best fits their needs and more importantly, they’re likely to maintain. No one enjoys the process of saving documents for tax time or sorting through them, but it’s a critical step for income tax returns.

Another option that people are turning to is digital documents. Digital scanners are an excellent way to keep a backup copy of paperwork of all types. It’s a good idea to keep originals, while digital copies provide an important resource in the event of an audit. Digital documents can also be backed up to the cloud. The following are four ways that people can utilize to keep their tax documents organized.

Boxes

It may seem old-fashioned, but a simple box with file folders is still a reliable way to keep track of tax documents. When individuals receive receipts and other important paper documents, simply place them in the correct file folder. However, many people still maintain a box in which they drop documents, pay slips and receipts and just sort them at the end of the year.

Envelopes

Equally effective is using 9×12 manilla envelopes and labeling each envelope for specific categories. Don’t forget to write the tax year the documents are for on the envelope. The envelopes need to be placed in a box or file cabinet to ensure all tax documents are kept together in a single location.

Category

There are deductions for a wide variety of situations. Individuals can organize their documents by categories that include, home, business, military service, and employer, and self-employment for side hustles.

Spreadsheet

Individuals will still need to keep the originals, but a spreadsheet is an easy method to jog a memory at the end of the year and ensure that income and expenditures match the paper documents kept in boxes and envelopes.

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Tax Preparation
posted by Mark Battalini
September 5, 2021

5 Reasons a Tax Professional is Better than Online Filing Services

Millions of people across the nation file their taxes each year using popular online software. It’s easy, convenient, and fairly inexpensive. The IRS recommends that individuals use e-file options for their taxes. However, the best solution can be a tax professional. The more complex the tax filing, the more a tax professional makes sense and they can also e-file for clients.

Year-Round Help

Online tax software is only available for a limited time each year and it can’t provide advice on potential tax issues that may arise during the coming year. A tax professional is available to answer questions and concerns at anytime during the year, not just at tax time.

Best Software

Tax professionals have access to better and more sophisticated software than that offered online. An individual’s information can be scanned, entered, and organized quickly and efficiently. The process eliminates manual data entry, significantly reducing the potential for human error.

On Time

Online software depends on individuals buckling down, collecting their information and beginning the task of filing taxes. Fear of a mistake is common among self-filers and it’s exacerbated when the individual happens to be a procrastinator. Provided that individuals get the information to their tax professional in a timely manner, taxes will always be filed on time, thereby eliminating late fees and running afoul of the IRS. Filing via a tax professional may also reduce the potential of an audit.

Business Needs

Complying with new tax laws for operating a business and investments becomes more complicated every year. A tax professional is one of the first to have access to upcoming changes that affect clients’ taxes and livelihood. They have a thorough understanding of tax laws in multiple areas and can guide individuals. Even those with straightforward tax returns will fare better.

Stress

Tax time generates a considerable amount of stress each year and it’s compounded when people try to do their own taxes – even with online software. The changes in tax laws and the COVID-19 pandemic are further confusing requirements. An ordinary tax return can take up to two hours to complete online. A tax professional saves clients time, effort and stress.

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