Monday, April 18, 2016

10 Tax Things Everybody Should Do, but Nobody Does

1.  Take pictures of non-cash charitable contributions and make a detailed list: The IRS may ask for proof of your charitable contributions.  Take pictures (no need to print unless asked), make a detailed list of the donations, and attach the list to the receipt.  If you don't get a receipt (because you use a drop off location) note the location of the drop box and the name and address of the organization that the drop box goes to.

2.  This one applies mostly to online filers: Print a hard copy of your tax return and keep it, and your supporting documents, in a safe place.  When you move, these documents should go with you, in your car, and not in the moving van.

3.  Update your address with the IRS every time you move: Not getting a notice from the IRS due to a move is no excuse for not responding.  If the IRS has issues, they will notify you by mail, at the address on your tax return.  In order to use another address, you must file Form 8822.  It's simple, easy and IMPORTANT!

4.  Have an emergency fund of 3 to 6 months of expenses:  One emergency that can come up is an unexpected balance due for a current or prior tax year.

5.  Have your tax returns checked by a professional at least every 4 years: If you make a mistake, and leave some money on the table, you have 3 years after that tax season to get it.  Software is NOT reliable in providing accurate results.  Find an Enrolled Agent or CPA that is an expert at your type of tax return, and ask them to check the return for free, with the caveat that you'll pay them if they find a mistake and you decide you want it fixed.  Many will do this.

6.  Use a mileage tracking app like Mile IQ if you drive for work or business: We all suck at record keeping, and this is the best way to track mileage.  Many cost a small amount, but are worth it.

7.  Contact their tax dude before making big decisions that could impact taxes: Before you take money out of your IRA or 401k, for example, call your tax pro to find out what might be taxable, how much to withhold, and how to avoid penalties.

8.  Don't take tax advice from non tax professionals: EVERYTHING you hear about taxes is WRONG - until it is confirmed by a competent tax professional.  Just ask a few Boeing employees what they think of the advice they got from their coworkers.  Your banker is not a tax expert.  Your financial advisor is not a tax expert.  Your insurance agent is not a tax expert.  I don't give investment, insurance or banking advice (at least not without telling you to talk to an expert in that field).  Call your tax guy!  Or email me: (understanding that I might not know enough about your personal situation to give you the detailed advice your tax person could.)

9.  Get an 8332 as a non-custodial parent at the time of divorce: If you get divorced, and are the non-custodial parent, you generally can't claim your child as a dependent.  If your divorce decree says you can claim the exemption, the IRS will NOT accept that decree as proof (older decrees might be accepted - new ones not).  The IRS requires Form 8332 be signed by the custodial parent.  I highly recommend getting the 8332 signed at the time the divorce decree is signed, such that it covers all years the divorce decree specifies.  (If you are my client and are the custodial parent I recommend NOT signing the 8332 at this time).  This situation is complicated, so read my post on Divorce (or buy my book).

10.  Buy my Book: Everyday Taxes 2015.1.  Best tax book nobody is buying.  66 chapters covering the most common life events, and their impact on taxes.  You can read them BEFORE you do something, and make sure you do it right for taxes.

Saturday, April 16, 2016

Master Index of Posts

I've compiled a Master List of my posts for easy reference. Not every post is included, and I have changed the order to put the most important or timely ones on top, and to group some based on categories (Military, Obamacare, Tax Software). I will try to keep this updated and just below the latest post. Please let me know in the comments if I screw up a link :) Some of the posts are OLD so be careful assuming the information is current. 

2015 Everyday Taxes Book is here!

Important or Time Sensitive Posts

Tax Identity Theft - How Your State is Screwing You to Protect You
Need a Copy of Your Tax Return? Get a Transcript Online! NOT! Updated advice...
The IRS did NOT Call You!
I Got an E-mail from the IRS!
I Want to Lower my Taxes!
Last Chance for 2012 Refunds
10 Simple Pieces of Tax Advice


Military Spouses Residency Relief Act Details and Matrix
Retiring from the Military? Tax Warnings!
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
2015 Military State Tax Guide
2015 Boomer Deduction Worksheet
2014 Boomer Deduction Instructions for TurboTax Online
2014 Boomer Deduction Instructions for H&R Block at Home (store bought or downloaded)
2014 Boomer Deduction Instructions for TaxSlayer
2014 Boomer Deduction Instructions for TurboTax (Store bought or downloaded)
Boomer Deduction - History and References
More Boomer Deduction Information
Good Military Tax Reference
Minnesota Combat Zone Credit

Tax Software

TurboTax Admits That Easy Is Better Than Accurate
Tax Preparation Software Sucks - An Open Letter to H&R Block

Business Guides

Sole Proprietorships are Bad
Avon, Pampered Chef, Party Lites, Amway, etc. MLM Tax Guide
UBER Driver Tax Guide
Tax Guide for Contractors - or - 1099MISC WTF?
Real Estate Agent Tax Guide

General Posts

Getting Married? One Piece of Important Tax Advice.
Investing and Taxes - A Primer
How Much does it Cost to File Taxes?
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
Open a Roth IRA Today! And Not For the Reason You Think
Foreign Earned Income Exclusion Warnings - Update
Charity Made Simple
How Fast Can I Get my Refund?
Make Estimated Tax Payments the Easy Way
Depreciation Recapture - an inaccurate description
Don't Touch that 401K or IRA!!
What do you do with that Big Tax Refund?
It's Okay to Get a Big Refund - Really...
Common Tax Return Errors - Updated
Common Tax Return Errors
I Have a Blog and I Want to Bitch!
Mortgage Tax Credit Information
Lesson from the Government Shutdown - Emergency Fund
Don't Pay Capital Gains Taxes if You Don't Have To!
I got a 1099C - Now What?
Cancelled Debt and Insolvency
The IRS, email and privacy...
IRS Checking Facebook?
>$250 Donation Acknowledgement
Drop Box Donations - US Marines
Tax Scams
Rental Property Guide for Homeowners
Taxes and Divorce
Random Thought about Books
Taking Care of the Client
Warning - Tax Resolution Scams
Foreign Earned Income Exclusion - WARNINGS!

Affordable Care Act (Obamacare) Posts

The Affordable Care Act (Obamacare) and People with Health Insurance
Affordable Care Act (Obamacare) for the 2014 Tax Filing Season
Obamacare, Affordable Care Act and Married Filing Separately - Warning
Affordable Care Act, Obamacare update and advice
Healthcare Law, Obamacare, Affordable Care Act Info
Weird Obamacare Strategies and Incentives - 1
Weird Obamacare Incentives and Strategies - 2
Weird Obamacare Incentives and Strategies - 3
Weird Obamacare Incentives and Strategies - 4
Weird Obamacare Strategies and Incentives - 5
Weird Obamacare Strategies and Incentives - 6

Thursday, March 10, 2016

UBER Driver Tax Guide

If you like the blog, buy my book: Everyday Taxes 2015 only $6.99 for Kindle!  Paperback $12.49 or less!  MUCH more information on everything else!

This Tax Guide is written with very specific information for UBER drivers of all types.  It can be used by LYFT and other casual taxi drivers, but may not have enough information for true professional non-web based taxi drivers.

Most clients I see trying these businesses out have not given a thought to taxes, but UBER does a fairly good job of helping out.  The year end statement you receive has a wealth of useful information.  That said, there are a lot of deductions that aren't included that are a slam dunk, as well as some others that might be more shaky.  As with all new business models, a lot of how these things apply specifically to UBER have not been fought out with the IRS, so some things may evolve over time.  I'm going to start with a general discussion of things that every UBER driver should understand about taxes, and then get into the specifics of your documentation, and then get really specific on deductions.

First, some things you should know and understand:

1.  Your business model is a bit unique, and you're doing some things that are fairly common in the tax world, but on a much higher scale than normal.  You're using your own car for business, but the business side may be a very small percentage (or very large) of the use of your car.  Your car is now a business asset (in part) and thus there are potential implications when you buy, sell or trade it.  Keep things simple by only using one vehicle at a time, and taking the standard mileage rate (discussed later).

2.  You should be, at this point, a sole proprietor.  This means that you own and run the business by yourself, with no employees.  You will file the business taxes as a part of your personal taxes, usually on a Schedule C.  I strongly encourage you not to have any partners, even your spouse.  Your spouse can help, but should generally not be an employee, and not have any true decision making power, except the power that is normal in a healthy spousal relationship (advice and support, but no "official" role).  The reasons for this are myriad, and anyone who's delved into a partnership can attest to the issues that arise.  For now, just trust me.  Later you may want to form a more complicated business entity, but that will require professional assistance and guidance.  If your spouse or partner also drives for UBER, they will have a separate and independent business, with it's own schedule C, and, hopefully, their own car.  Co-mingling cars at this point will greatly complicate your taxes and probably seriously confuse your, or your preparer's, tax software.

3.  You are going to spend more time doing taxes, and it's going to cost more.  Even if you use software (which I highly discourage if you are running a business) you will pay more for the programs.  Based on the returns I've done so far, the more you drive, the more likely it is that you will also generate taxable income after expenses.  This income will be taxed at a much higher rate.  15.3% minimum for self employment taxes (the self-employed person's Social Security and Medicare).  The good news is, you only pay taxes on the profit.  We'll talk more about budgeting for taxes later.

4.  You might not actually be a business.  There's some tension between Hobby and Business income.  If you take losses year after year, the IRS may put the kabosh on taking a negative income from your business off of your regular taxable income.  This is called Hobby Income.  It means you do it more for fun than for profit.  UBER recruiting has not helped with this, as they sell it more like a Hobby than a Business.  As a Hobby, you still have to claim the income (on Line 21 - Other Income), but you deduct the losses on your Itemized Deductions (subject to 2% of income limit, maximum deductions equal to income and a bunch of other restrictions that ensure that you pay taxes on the income instead of getting write offs.)  My advice is to go full bore, gung-ho towards making a profit for 3 years.  File the Schedule C's and take the losses on your taxes (improving your refund).  If, after three years, you haven't made a profit, and gross revenues aren't approaching 5 digits ($10,000), take real stock of where you're at.  If revenues are growing and profitability seems close, keep things going.  If revenues are flat, profits are a distant dream, and/or your enthusiasm is waning, bite the bullet and either shut the business down, or tone it back and start filing as a Hobby.

Moving along.  Here's the advice you need to make things work...

Income:  This is the easy part.  UBER will issue you a 1099-K and (maybe) a 1099-MISC.  The 1099-K reports the income from all the rides you gave and the 1099-MISC reports all other income.  You just need the totals from these, though some software lets you enter the whole form and pulls the relevant data.  Box 1a of the 1099-K and Box 7 of the 1099-MISC is your Gross Receipts for your Schedule C.  I've seen UBER drivers that took tips, and others that did not.  If you get tips, add them to these amounts.  Any other income you make as a driver should also be added, but I think UBER frowns on this.

Record Keeping:  This is usually the biggest deal for a small business, but for UBER it should be very simple.  Keep a mileage log!!!!!  We will discuss mileage below but, know this, the one piece of information from UBER you should ignore is the mileage number - this is where you will save the most in taxes.  (Mile IQ is AWESOME for this)!  Other than that, have a notebook and an envelope for receipts.  When you make a purchase for the business, write down date, description and cost, if you get income not tracked by UBER, add it here as well.  Throw the receipt in the envelope.  You can add categories, but don't really need to, if you're unsure something's deductible, write it down and let your tax guy tell you if it's deductible.  That's it.  Really?  No sorting, categorizing or organizing?  No.  Simply put, your odds of ever needing them for an audit are slim to none.  Save the box, notebook, mileage log and tax returns for 7 years, and then throw it all away.  If you ever get audited, there's plenty of time to sort through the box and organize it to match the notebooks - but why do it if it's not necessary.  If I'm doing your taxes I'm going to use the notebooks, and remind you that you should have a receipt for everything.  You don't have to prove things to me.  It’s important to understand not to over think things.  You get money, it’s entered as income, you pay money, it’s entered as a deduction.

Keep in mind that UBER will report every penny you make, and then give you a report of deductions they took off.  This is the easy part.  For a lot of people, especially casual drivers, these will be all the deductions they have - except for the mileage log that you MUST have.  You can use UBER's mileage, but you'll be leaving your best deduction on the table (or in the car!)

Expenses: You can deduct any ordinary and necessary expenses for your business.  I generally describe the requirements like this: If it will make you more money, is required by someone in authority, or makes your business more efficient or your life as a business person easier, it's probably deductible.  The list below is actually a fairly exhaustive list of normal business deductions, tailored to UBER.  Some won't apply at all, but I'm leaving them there to stimulate your own thoughts.

First some things most UBER driver's could or should be deducting (details in the numbered lists): Mileage, any tolls, parking or access fees not included in the UBER statement, driving gloves, insurance riders, office supplies for the business, steering wheel covers, car equipment specifically for driving passengers that is not normal car equipment or maintenance, mileage tracking apps or equipment, business cards, commercial driver's license, car seat additions that help for long driving, and a percentage of cell phone bills if you use your cell phone for the UBER app.  Also any safety clothing or equipment that would not be considered normal for a car that was not used for driving paying passengers.  Examples might be first aid kit, flares, fire extinguisher, or a reflective vest.  Some might argue that these are normal for a regular driver, but how many people do you know that have these in their car?  I would deduct them.

Second, things you should not be deducting: Car maintenance including car washing, oil changes, gas, repairs or any other vehicle expenses unless they are specific alterations or additions to allow you to drive commercially (the mileage deduction covers all these things).  Meals and entertainment would be unlikely.  Uniforms or clothing would not be deductible, though possibly dry cleaning of a specific set of "driving clothes" - this would be shaky.  

Here's the exhaustive list:

1.  Pretty much anything the company charges you for.  If they deduct it off your commission check, deduct it off your taxes (you report the gross commission, not the commission after deductions).  These are all the deduction numbers listed on your annual UBER tax summary (except the income, of course).  They generally fit into nice categories on your Schedule C, mostly as commissions.

2.  Marketing Expenses:  I'm thinking most of this will be handled by UBER, but if you spend money for business cards, signage, websites, etc, these will be deductible.  I'm guessing you might have some for finding new drivers for UBER and getting the referral fee, though I'm not sure you should be recruiting your own competition.

3.  Insurance:  I'm not talking about homeowners insurance here.  I'm talking about ‘oops I screwed up and someone is suing me insurance.’  There's a lot of argument right now as to whether your personal car insurance is good enough for the business, and I'll provide a link to an article on the subject below this comment.  That said, if you have just regular, personal car insurance - no deduction.  If you pay extra for commercial insurance, or a rider for commercial use, or a special 'UBER' rider that some companies are providing, that cost is deductible.

4.  Entertainment and Meal Expenses:  You really shouldn't have any of these.  Your meals aren't deductible, even when waiting for a customer. I also can't really envision you taking someone to lunch.  Since UBER provides the customers, this is a no-go.  Some drivers have had mints or such in the car - I call those supplies (and they are deductible).  I guess theoretically you might take a potential driver to lunch to talk to them about driving for UBER in hopes of getting the referral fee.  In that case, save the receipt and write the persons name, and the topic of discussion on the receipt.  That would be deductible entertainment expense - don't abuse this.

5.  Travel Expenses:  Unless UBER starts running those educational seminars that the IRS hates, you won't have much of this.  I guess theoretically, you might drive to a big metropolis for a special event so you can make boatloads of money, so I guess we'll talk about it.  If you travel specifically to drive and make money for UBER, you can deduct airfare (though how would you get your car there), car rental (I guess you could rent a car and drive it, but I'll bet that violates a lot of terms of use), lodging, mileage, meals, tips, tolls and other necessary travel expenses.  For meals you can take a standard Federal daily rate for the area you are in (google 'per diem rates' and you'll find a list).  If the travel is not 100% for business - like you visit family and do a few rides, or drive to Vegas or New York City for a long weekend and some shows, and do some driving while you're there - it gets complicated.  You can take a portion of the travel based on the percentage of time spent "on the clock" for UBER.

6.  Cell phones, laptops and tablets:  You can take a portion of the phone and data costs for the phone you use for UBER.  Ratio based on time or data usage.  Don't go crazy figuring the exact ratio.  If you do a lot of driving, or it's your main source of income, you may want to get a business only phone, and/or laptop.  You can take a portion of your personal stuff, but it might not be worth it unless the ratio is high.  We'll talk about business use of home later.  The purchase of laptops or phones that you use for business generally requires them to be depreciated (taking a portion every year for several years.)  Your tax professional or software should handle this, but make sure you put the information in right.

7.  Vehicle Expenses:  Keep a mileage log.  Let me say it again, unless you have a vehicle that is 100%, no s**t, total business and no personal use, keep a mileage log.  Don't worry about gas, repairs, oil changes, insurance or any other car expenses (except as discussed above under insurance).  There are other ways to track vehicle expenses, but mileage is the best.  Do track annual car taxes and finance charges.  The easiest mileage log is a notebook where you right the date, the trip purpose and the miles driven.  You will also need to know the total miles the vehicle is driven for the year, so write the odometer reading down every January 1st!  Mileage will be one of your biggest expenses, so keep track of it religiously!  10,000 miles of properly tracked vehicle mileage can result in $1500 of tax savings!  UBER only tracks miles with passengers.  If you're "on the clock" driving around waiting for a call, driving to or from a pickup, or driving to do other things to support your business - write it down!  You pretty much get no other deductions for the vehicle, but the mileage deduction is very generous.

8.  Home Office:  If your business is getting big, set aside a space in your home that is 100% business use.  Never used for anything else, and regularly used for business.  This is where you keep your business records, your business computer or laptop, and do other business related things.  The tax term is regular and exclusive business use.  If you do this, you deduct a percentage of the household expenses - rent, interest, taxes, utilities, insurance, repairs, etc, based on the square footage of the office ratioed to the home square footage.  Expenses directly related to the office, such as a dedicated phone line; do not have to be ratioed.  You can also take a small depreciation deduction for the home losing value (let your tax guy handle this - it's a b**ch!)  The IRS "simplified" this, allowing you to take $5 for every square foot of Home Office, up to $1500, but it's BS to call it simplifying, because any tax guy worth their salt is going to run the numbers both ways and take the number that makes the most sense.

9.  Depreciation:  Some items that you buy for your business, that have a useful life longer than a year will have to be depreciated over time rather than deducted all at once (examples include computers, digital cameras, machinery, big tools or office furniture).  There are many options for deducting it up front, but be wary of this, there are tripwires that can cost you if you dispose of something before it has passed its useful life.  Talk about these items with your tax advisor.

10.  Licenses: If you get a commercial driver's license, that is deductible.  If you have to pay for special licenses, tags, access fees or other things to let you pick up passengers in an area or work in an area, those are deductible.  UBER pays some of these for you and accounts for them on your statement, so don't double deduct!

11.  Taxes:  Unlikely, but sales or other taxes may come into play in some super psycho jurisdictions.  UBER should handle this, but don't assume they do.  You also may need to pay business taxes and licensing fees to State/County/City.  These are deductible, but you need to work these out on your own - this is an income tax guide, and these other taxes vary too much by locale to cover here.  Again, don't screw these up.  The local governments can be worse than the IRS if you mess up.

There's more that's deductible, but I think you get the idea.

Do I need a Separate Bank Account?  This one might be a little controversial, but I believe it's the be all end all of successful businesses.  Once your business really gets going, and is more than just a little side income, it's this, combined with record keeping discussions above, and budgeting discussions below, this will make everything easier.  Open a separate bank account for your business.  It doesn't have to be in a different name, just separate from your personal business.  If you use credit, get a second credit card that is exclusively for business (again, it doesn't have to actually be a business credit card, just one that you use only for business).  Put all business income in this account, and pay all business expenses out of it, or with the business credit card.  Pay off the business credit card out of this account.  The only expenses not paid out of the account are car expenses (especially gas) and home office expenses that will be divided based on square footage as discussed under home office above (utilities would not be paid out of the account, but office supplies and business only cell phone would).  The beauty of this method is that it simplifies budgeting as we'll discuss below, and it allows reconciling of expenses to make sure your notebook covers everything.  A good tax expert should be able to compare your account statements with your notebooks and know if you missed something (assuming you don't intermingle personal and business expenses).

How do I Budget if my Income goes up and down?  Now that you have an account that is separate for business, you can start thinking about budgeting.  Your income may fluctuate wildly, so you can use the business account to pay a "salary" to your personal account.  I recommend letting some money build up in the business account until you have a feel for your income level.  It will probably start small, but build up over time.  Once you have a good feel, you can pay yourself this salary.  The salary should be no more than 50% of your annual gross income or 60% of your net income (divide it by twelve obviously, to get the monthly amount).  You need to play around with it.  Start small and raise it if income exceeds expectations, but NEVER pay yourself more than 60% of net income.  Having a salary allows you to budget like you had a normal job.  Keeping a buffer amount in the account allows you to have a "salary" even during lean months.  By paying yourself a salary and saving the rest, if you have a really big month, you end up saving more, which in turn allows you to have the money to pay the tax bill that the big month will generate.  When you file your taxes, you should have plenty of money to pay the tax bill, and still have money left to maintain a buffer, and, if you're lucky, have the ability to pay yourself a bonus to your personal account for a big purchase or vacation!

Do I need to make Estimated Payments?  My advice is that you should use the budgeting advice above to pay your taxes.  You'll still need to make estimated tax payments if you're making good money, but you should pay the minimum required to avoid an underpayment penalty.  Your tax advisor will calculate them for you, but to explain simply: you need to pay at least as much as your prior year's total tax liability in withholding or estimated taxes to avoid a penalty (oversimplified explanation, but really all you need to know).  This is an easy calculation for your tax guy and he will set up quarterly payments and provide vouchers for paying them.  (The timing is a little weird.  You pay on 4/15, 6/15, 9/15 and 1/15.)  You can also pay varying payments to try to avoid a tax bill, but it gets complicated, and the government won't pay you interest.

Keep the record keeping up to date.  It's a nightmare to back fill.  Work your ass off to generate business and make money.  Research best practices and talk to the people making money doing this.  The idea is to MAKE money, and then be pissed off that you are paying taxes on it.  Getting a big tax deduction from your unprofitable business is only good at tax time.  Paying taxes is a sign of success!

Friday, March 4, 2016

Getting Married? One Piece of Critical Tax Advice!

You know that W-4 that you filed?  The one you give your employer to decide how much taxes to withhold from your pay?  The one with a box for Married and a box for Single, and a box for Married, but withhold at higher single rate?  Ever wonder why there's a box for Married, but withhold at higher single rate?

Because when you get married, and don't have any kids or other tax unusualness (made up word of the day), then it is sometimes necessary to continue withholding at the Single rate.  Since this is an official government form, some people are very uncomfortable checking the Single box when they're actually Married.  It feels like lying to the government, and we see people go to jail for that. 

In this case, it's okay.  In fact, you can pretty much do whatever you want as far as entries on the form - as long as you don't owe the IRS more than $1000 when you file your taxes (states have similar rules with different thresholds.)  Just ask Boeing employees here in South Carolina.  They love to go Exempt just before bonus time so they get the whole bonus (that 25% plus state withholding kills the bonus).  If they do it right, no big deal.  Side note: they never do it right so STOP IT Boeing employees - you're going to be SCREWED come tax time!

So what does this have to do with getting married?  Well, the W-4 form is pretty much useless unless you're a single income family.  If you and your wife-to-be both have incomes, and no kids, your combined tax return will have pretty similar results to your individual returns from before getting married.  This is because the deductions double, and the tax rate thresholds double.  So if you like your results before getting married, don't change your W-4 to Married.  If you do change your status on the W-4, your paychecks will go up, but your tax return will go down, sometimes to the point you end up owing at the end of the year!  Leave it alone until you file that first married tax return and make adjustments based on those results.

By the way, if you get married before 12/31 of the tax year, you're married for tax purposes.

If your situation is more complicated, the W-4 situation is more complicated as well.  In this case, I suggest as a starting point that the highest income use Married and an exemption number of family size minus 1 (husband, wife and 2 kids would use 3).  All other income sources would be Single and 1 (zero if you have high incomes or want some extra safety margin.)  This is often overkill, but doing it wrong can get ugly fast.  After filing tax returns for the year you can start tweaking things to get your desired refund for the future.

Monday, January 18, 2016

TurboTax Admits That Easy Is Better Than Accurate

Okay, so before TurboTax sues me, they haven't actually SAID that, but that's the impression I get from their latest commercials.  While we're on the subject of getting sued, let me be clear that this post represents my OPINION, which I BELIEVE to be true based on what I've seen, read and experienced as a Tax Professional and by using their software and watching their commercials.  Also, this applies to pretty much all tax software, but TurboTax is the one embarrassing themselves on TV right now.

That said, how else can you interpret what the commercials are saying?  Any idiot can use our software.  Got it.  It actually makes sense, as I've been arguing for a while.  Tax preparation software has competing interests: ease of use, cost, and accuracy.  It doesn't take a rocket scientist to figure out that nobody's going to buy tax software unless it's easy to use, and price matters for everyone.  So obviously the software developers are going to make SURE that it's easy to use, and not too expensive.  Problem is, those two criteria are in direct conflict with Accuracy. 

Taxes are COMPLEX!  4 million words in the Tax Code alone.  Then there are revenue rulings, publications, tax court results and tons more.  Even the simplest of topics: owning a home, having kids, going to college are not as cut and dried as TurboTax would like you to think.  I believe it is literally impossible to write a software program that both asks enough questions to be accurate, and still is easy to use.  Not possible - and my experience fixing TurboTax returns bears this out.

Sure, if you work hard, answer every question, read every pop-up, and refer to the instructions, you might do okay, but you also might not.  I know some really smart people (REALLY SMART) who have gotten their taxes wrong with TurboTax.  In addition, as far as TurboTax is concerned, this is YOUR fault, not theirs.  Their software did the math right - you just put the wrong stuff in.  Don't believe me?  Here's their words: "100% Accurate Calculations Guarantee
If you pay an IRS or state penalty or interest because of a TurboTax calculation error, we'll pay you the penalty and interest."

So what do you do?  Do you have to use a professional?  Not exactly.  But if you do, make sure they know what they're doing.  Use an Enrolled Agent or a CPA experienced with YOUR tax situation. 

If you still want to do it your self, here's what you need to do:

1.  Download the Publication 17 and the 1040 instructions from the IRS and browse through them.  The 1040 line by line instructions can help you think of things to look for in the software.
2.  Buy my book: Everyday Taxes 2015.1 and read the sections that apply to your life.  Yes, this entire post was a thinly veiled advertisement for my book.  Not really.  Yeah kinda, but it is a good book.  The sections are based on life events and it's written in ENGLISH.
3.  Click on the more information buttons and carefully read everything.  If you have questions, refer to the Pub 17 or download the specific publication for the topic.
4.  Don't use their values for Goodwill type donations.  These are a perfect example of the "ease of use" vs. "accuracy" issue.  They have to use low, average values for this, to make sure they don't over-estimate your values.  that means the $400 designer shoes you donated will be GROSSLY undervalued.  Spend a little time on ebay, amazon, bookfinder, and in second hand stores (for profit - not Goodwill) to get an idea of the value.
5.  When done, pay for your return and don't file it until you've printed it out and reviewed it, line by line, using the 1040 instructions.  You can also have it checked by a professional.  Many will do it for free (I know I will) hoping to find a big error, and then convince you that you should be paying them to do your taxes.
6.  E-file your tax return.  Print a copy and keep it with the documents you used to file it.  Save for at least 4 years (I have a file box that holds about 7 years worth - when I can't stuff a new year in it, I shred the oldest)

If you don't want to have a professional review before you file, at least have them reviewed every 4 years.  Bring the whole package for the current year and the previous 3 years to a professional and drop them off for review.  This way, if you left any money on the table, you can still get it back.  After 4 years - it's gone forever.

Sunday, January 17, 2016

Tax Identity Theft - How Your State is Screwing You to Protect You

Tax Identity Theft is a BIG DEAL!  The federal government is paying out BILLIONS in fraudulent refunds and MILLIONS of people are affected.  In this relatively long post, I'm going to tell you how the fraud usually works, how it affects you, what the Feds are doing about it, and State by State what the states are doing and how it affects you.  Then I'm going to tell you what you can do about it.

The way this usually works is that identity thieves get your (and possibly your children's) names, Social Security Numbers and birthdays through some form of data breach.  A lot of big retail companies, insurance companies, federal and state agencies, and even the IRS have had data breaches that have probably affected you, whether you know it or not.  The identity thieves use this information to electronically file fake tax returns.  They are not technically stealing YOUR refund, but they are basically inventing a refund out of thin air.  They make up a W-2 and file a tax return in your name, having the refund deposited on a prepaid debit card like some stores offer.  The IRS doesn't get W-2 data until later in the tax season, so they have no good way of knowing the W-2 was made up.

If this happens to you, when you e-file a tax return, it will reject because you (or your kid's) data has already been used on a tax return.  This will now require you to mail your tax return in.  You would usually file an identity theft affidavit with it (possibly requiring a police report), and include proof of your identity such as a copy of your driver's license or birth certificates.  It can take a while for this to get sorted out and for you to get your refund (weeks or months) but you will eventually get it.

The easiest way for the IRS to combat this would be to delay refunds until they have the W-2 data and can safely issue refunds.  They could also disallow prepaid debit cards, or send checks when there is potential identity theft involved.  None of these options are politically palatable, so the IRS is relying on some techno stuff and working with the big tax prep companies to try to stop this.  They also have some long term plans to add codes to W-2's (This is being tested this year, so some W-2's will have codes, but using or not using these will not impact your filing).  None of this is likely to put a big dent in things.

The States face a lot less political pressure and are doing a lot of things to prevent ID fraud.  Last year one state blocked Turbo Tax filed returns for a while until more security measures were put in place.  I'm going to go state by state to tell you what they're doing.  Since a lot of it's similar, I'm going to list the more common things below, with a letter code and advice on what to do, and then just use the codes for each state, with more details if necessary.

Before I get to the details, here's some general advice: Don't share your families Social Security numbers with anyone you don't have to.  Keep this information safe and secure in your home.  Don't use fly by night tax prep services.  File early if possible.  Use an address on your return that you will definitely be able to get mail at.  Keep this address updated with the IRS and your State.  Also, buy the best tax book nobody's buying: Everyday Taxes.

Here are the State's ID Theft measures (I am relying on information from State DOR websites and other sources - the information may not be completely accurate or may become outdated):

A: Requiring or requesting driver's license information on a tax return.  For most states this is optional, but your refund might be delayed if you don't provide it.  Alabama won't let you e-file without it.  Some states require extra processing without it.  My advice is to provide this to your preparer or put it in the tax software you used when asked.  Make sure to enter it accurately.

B: Flipping suspicious tax return refunds from direct deposit or debit card to paper check.  The idea here is that an identity thief won't have the picture ID needed to cash the check.  Not much you can do here except make sure you use a good mailing address, and keep it updated with the state if you move.  Also be aware if your mail is at risk by thieves and take action if it is.

C: Online or phone security questions for random or computer selected people.  These will generally be letters sent to the mailing address on the return requesting you (and your spouse possibly) to answer security questions to verify your identity.  This is usually done online or over the phone.  Failing to get the answers right will result in having to take some onerous actions to prove that you are YOU.  Ohio did this a couple years ago and it was a nightmare!  Make sure you use a good address on the return, and update it with the state tax department if it changes.  Have your tax return and the letter handy when responding.  (If I have a phone number for assistance with this I will put it in parentheses after the 'C' code.)

D: State may request additional documentation of identity by mail.  Make sure you use a good address on the return, and update it with the state tax department if it changes.

E: State will not process refunds until March 1st.  This is to allow verification of income documents.  You can still file earlier, but you won't get you refund until mid March at the earliest.

Here's the state rundown:

Alabama:  A (DL info required for e-file), B , C (800-535-9410)

Arizona:  Arizona's site indicates that they are taking efforts, and that these efforts may delay refunds, but don't specify what they are.

Arkansas:  None I can find

California:  A, C

Colorado:  A (returns will require special processing actions if DL not provided)
Connecticut:  B, C (855-842-1441)

Delaware:  A

Washington DC:  A, B (If 1st time Direct Deposit (DD), DD info changed, or gap in filing will not get DD), C (202-727-4829)

Georgia:  C

Hawaii:  They have not specified specific actions they are taking but say that SOME refunds may be delayed for up to 16 weeks. They advise filing early for the best chance of not having a delay.

Idaho:  A, C, D

Illinois:  A, B (all first time filers will get refund as a check), E

Indiana:  C (317-233-1642)

Iowa:  A, B

Kansas:  None I can find

Kentucky:  A

Louisiana:  A, C (225-219-0102)

Maine:  None I can find

Maryland:  A

Massachusetts: A, C (800-771-7144)

Michigan: A, City of Detroit refunds will all be checks

Minnesota:  Does NOT want Driver's License submitted

Mississippi:  A (Special processing will be required if Driver's License not provided)

Missouri:  None I can find

Montana:  A, C

Nebraska:  A

New Jersey:  They have not specified any specific security measures but do identify that they are watching for it and may delay some refunds to prevent it.

New Mexico:  A (Special processing will be required if Driver's License not provided)

New York:  A

North Carolina:  None I can find

North Dakota:  A, In addition, they have stated that they are taking steps to prevent ID theft and that these steps may delay refunds.

Ohio:  A, C (855-855-7579)

Oklahoma:  A, C, D

Oregon: A, C

Pennsylvania:  A, C

Rhode Island:  A

South Carolina:  A, B, E

Utah:  A, C (801-297-2200), E (If Utah DOR gets all documents from employer and employee refund might be processed faster than March)

Vermont:  A

Virginia:  A (Special processing will be required if Driver's License not provided), B (If name on account doesn't match tax return the refund will be sent via check), C (804-404-4185)

West Virginia:  None I can find

Wisconsin:  A, C (608-264-4598)