Sunday, October 19, 2014

Reenlistment Bonus, Social Security, Compensation Repayment and Taxes

If you received income, that you thought you were entitled to, like Military Bonuses, VA payments, AFLAC type income replacement, Social Security and many others, and you paid taxes on it, and THEN someone took it back, you are entitled to get the taxes you paid on it back (sort of):

Each year that you pay back taxed money (they will garnish wages and take tax returns - FYI) you will be able to claim that on your tax return for the current year.

They will send you a letter detailing the amount they took for the year (maybe - you should track the amount they take to the dollar, just in case.)

With this you can do a "Claim of Right" deduction or credit.

If the amount is less than $3000, it is an itemized deduction (which sucks if you don't itemize).


If the amount is more than $3000, you can either take the deduction above, or a credit for the taxes paid on the original tax return, whichever is better.


The credit gets complicated and will require a fair amount of record keeping if you repay over multiple years.  Essentially you will recalculate the tax return for the year of the bonus, and figure out the taxes you paid on money you repaid.  You then get that amount back on the current year's tax return.  It's refundable, so you will get the money no matter what.


I strongly encourage ensuring that in any year they take money that you pay at least $3000. This is the only way to be sure to get all the taxes you paid back.


Each year you do the credit, you have to refigure the tax return including the changes from any previous credit calculations.


Make sure you find a copy of your tax return for the year of the bonus.


You can get a transcript from www.irs.gov by setting up an account or having them mail you one.  The transcript is all you should need, so don't get the full copy since that can cost money.  Here's a direct link to the right page: TRANSCRIPT


Each state handles claim of right in their own way, so you might need assistance with the State.

Thursday, October 16, 2014

Everyday Taxes

My book is finished and just needs verification that numbers are current.  Expect availability for e-readers by December and physical books soon after.

Thursday, October 2, 2014

Open a Roth IRA Today! And Not For the Reason You Think

This article is not about Roth IRA's in detail.  It's about one little, under appreciated rule about Roth IRA's.  Many of the requirements for avoiding taxes and penalties on Roth IRA withdrawals involve a five year rule.  You have to have a Roth IRA for at least five years in order to take advantage of many exceptions.

The weird thing is that the rule isn't based on individual Roth IRA accounts, it's based on the first time YOU opened ANY Roth IRA account.  So, when you're starting out investing, throw a little money into a Roth IRA, just to get the clock started.  It doesn't have to be much, and, to be honest, it will probably not actually matter in the long run, but, if it does, you'll be happy you did it.

Obviously this should not be interpreted as investment advice, or an argument as to what IRA is better for you.  It's just a little helpful hint that has a small chance of saving you some grief someday.

Thursday, September 18, 2014

Obamacare, Affordable Care Act and Married Filing Separately - Warning

If you are receiving an Affordable Care Act subsidy (called the Premium Tax Credit), Married Filing Separately (MFS) is NOT an option for you.  With only one exception (domestic abuse, discussed later under Note 1) if you file MFS, you are ineligible for the Premium Tax Credit, and will have to pay your half of the subsidy back when you file taxes (the person you are married to pays the other half, unless you received all the subsidy on your own in which case you pay it all back.

You need to pay attention to this as the end of the year approaches.  If you are not divorced or LEGALLY separated as of December 31st, 2014, you are married for tax purposes, and your only choice for filing status is Married Filing Jointly (MFJ), MFS or (under a difficult to meet standard - see Note 2 below) Head of Household (HH).  If you can't file MFJ in this case, and don't meet the requirements for HH, you will have to pay back the subsidy (subject to limits based on income - but you'll pay some or all of it back).

Keep this in mind when considering changing your marital status, whether through divorce, marriage or separation toward the end of this year.  Also take it into account when deciding how to file with your soon to be ex-spouse.

Note 1 - If you are forced to file MFS due to domestic abuse, you have to meet the following requirements, and indicate that you meet them on the tax return to avoid the repayment: You must be forced into filing MFS due to domestic abuse (unable to file MFJ) and you must be living apart from your spouse at the time you file the tax return.

Note 2 - Make sure to research this if you think this applies, what follows is just the bare bones and there are lots of tricky parts.  If you are married at the end of 2014, but live apart from your spouse for the last 6 months of the year and payed more than 50% of the cost of maintaining a home for you and your dependent child you might be able to file HH by being considered unmarried for tax purposes.

If you want more than just tax information on the Affordable Care Act, check this book out:

Affordable Care Act For Dummies

Wednesday, August 13, 2014

Foreign Earned Income Exclusion Warnings - Update

This is an update on my previous post warning about the dangers of assuming the Foreign Earned Income Exclusion will prevent you from having to pay taxes.  If you are thinking this, or think the FEI Exclusion will apply to you, please read this post, and my previous post, linked HERE.

This post is based on some IRS actions taken over the last year or so involving the status of a taxpayers tax home in a foreign country.  You see, most people think that meeting either the presence test or the bona fide residence test is enough to qualify for the exclusion.  This is not true.  For both tests, you have to establish a tax home in the foreign country.  Put simply, you need stronger ties to the foreign country than to the United States.  Factors involved in this are living quarters, community ties, financial ties, and social ties.  If you have family, a home and your bank in the U.S., this does not bode well.  If you live on a military base in the foreign country, and rarely leave it, this is not good either.  If you are there are a one year contract, that can be trouble too.  You need to establish bona fide ties in the foreign country.  These can include housing, banking (keep accounts less than $10,000 at all times), friends, family, community activity etc.  You can even try learning the language.  This is one of those "facts and circumstances" things, so there is no definitive test for your foreign tax home, but the more you do the better you are.  The longer you stay and the stronger ties you establish, the safer you will be.

As with my other post, the point is to be careful, and plan ahead.  Have them withhold from your checks as though the exclusion didn't exist, and, even if you get a refund using the exclusion, don't spend the money for a while, since the IRS can come back and take it away.  Obviously if you have a rock solid tax home in a foreign country, like wife, kids, banking and community involvement, you can ignore these warnings.

Wednesday, August 6, 2014

Charity Made Simple


I've said before, and I'll say it again: Don't do anything just for the tax benefits!  Usually this is because when you spend money to save on taxes, you save a lot less on taxes than you spend.  Charity contains one of the few exceptions to this: Non-cash contributions (think Goodwill).  It's a total win for everyone!  You give away stuff you don't want, the charity uses it to accomplish its mission, and you get a tax deduction!  That said, charity has a LOT of rules and record keeping requirements, so I'm going to give some simple rules to follow that will make your charitable giving simple and easy.  Most people will be able to tailor their giving to meet these requirements and won't have to read the encyclopedic rules that govern other charity.  Before I do that, let me remind you that charitable contributions are a part of itemized deductions, so, if you don't meet the itemized deduction threshold, you don't get any benefit from charitable giving.  

Here's the simple system:

1.  Give to established, mainstream charities who can confirm that they are allowed to receive tax deductible contributions and will provide you with a receipt.
2.  Give less than $250 by check or charge (no cash) to any given charity, on any given day.  (This means you can give your church or charity over $90,000 in a year without needing a written acknowledgement, and you can give to as many different organizations as you want. You can even give over $12,000 in weekly donations via $249 checks in the collection plate.)
3.  If you want to donate more to your church, make sure they provide a written statement acknowledging the donation and that it specifies that no goods or services were provided by them to you (intangible religious benefits such as church services don't count).  The acknowledgement will usually cover the entire year.
4.  Don't make donations with strings attached, designated for a specific person, or in return for something provided by the charity.
5.  If you make non-cash contributions, take a picture of the donated items (save it on your computer, no need to print), make a list of the donated items, and get a receipt (unless dropped at a dropbox - see below).
6.  Do not donate more than $5,000 worth of items in a single day.
7.  Do not donate more than $5,000 of a category of items (such as books) in a single year.

Follow rules 1 through 4 above and your cash contributions will be simple and easy.  5 through 7 will simplify non-cash donations).  The next four items are special cases that tend to come up, and/or cool tricks you can use.

1.  The drop box exception. I have called this the loophole you can drive a truck through.  You need a receipt if you donate non-cash items with the exception of places that don't normally provide a receipt.  The publications specifically list drop boxes as an example.  So you can donate non-cash items to a drop box, and make your own receipt.  I still recommend taking pictures and making a list, and you may want to take a picture of the drop box.  This exception is ripe for abuse, but don't lie to the IRS.  Trust me.  You will need the location of the drop box, the organization that placed it, their local address, the date you donated the items, the value of the items and a list of the items.  From this, you can make your "receipt."
2.  Garage sales.  I like garage sales.  What I don't like is when the vultures come around later in the day, offering you pennies for your items because they know you want to get rid of them.  Don't do it!  Sell your stuff for a reasonable price, then, while everything's on the table after the sale, take pictures of it all, load it into your car, and drop off at Goodwill or another place that takes non-cash contributions.  Or take them to a drop box like we talked about above.  If you itemize, you'll do better on your taxes than the pennies you'll get from the late comers.
3.  Auctions, dinners and shows.  If you buy a ticket for an event from a charity, you only get to deduct the difference between what you paid for the ticket, and the value of what you receive.  Good charities will provide this information.  If the values are close, don't waste your time with the deduction, just be happy you're helping a good organization.  Raffle tickets are not deductible.
4.  Volunteering.  Your time is not deductible.  Your legitimate expenses in providing your time are.  Don't try comingling vacations and volunteering, travel deductions for charity work are only deductible if charity is the sole purpose of the trip.  If you travel for volunteering with no significant personal enjoyment involved (other than the joy of giving) you can deduct your travel expenses (airfare, lodging, mass transit).  You can also deduct mileage (14 cents a mile), meals when away overnight, and uniforms that aren't suitable for everyday use.

Friday, June 6, 2014

How Fast Can I Get my Refund?


This is a very untimely post, but I was writing about it for my upcoming book and decided it HAD to be a blog post so...

That's the most common question, and the answer is, despite anything anyone tells you, I don't know.  Anyone who promises to get you your refund faster than someone else is, as I said before, full of crap.  There are things you can do to make sure it doesn't go slower, those being: electronically file, make sure it's accurate, don't owe any government agencies money, and use direct deposit.  By not owe government agencies money, I mean, delinquent student loans, child support, government benefit agencies, and of course, back taxes.  If you do, the government can, and will, take the money out of your tax return, and it often delays the return as well.  If you ever get less money from the Feds than you expected, this is a likely culprit.  


I'm sure the answer above isn't very satisfactory, so I'll expound on it.  The IRS says you can expect an electronically filed refund in 10-21 days assuming there are no issues.  In fact, last year the IRS wouldn't even talk to you about your refund status unless it had been at least 21 days.  This pissed a lot of people off, but I agree with the IRS (this time).  People start calling the IRS after 14 days and tie up the lines that should be getting used to answer real questions and deal with real problems.  Do yourself and everyone else a favor, don't worry for 21 days.  You can check the status of your refund HERE.  You need your SSN, filing status, and your refund amount.  If you use a professional that takes your fees out of your refund, make sure you use the original refund amount, not the amount you will be getting after fees.  The honest truth is that the most people will get their money in 6 to14 days, and the vast majority within 28 days.  If it takes longer, either you (or your preparer) did something wrong, the IRS is taking a longer look (nothing you can do about this) or the IRS is messing up (not too likely, but it happens).  The Where's my Refund system at the link above should give you an update as to the cause of the delay, and sometimes tell you what to do.  You will also generally get a letter if the IRS decides to take an extended look.


Having said all of the above, those dates are from the time the return is accepted, and are the time frames for your money to get to the bank (your bank can legally hold a direct deposit for 4 days after receiving it, but if they do, I'd find a new bank).  When you send your return to the IRS electronically, they do a number of checks immediately, and, if they fail, it is rejected.  Common causes for rejection are names, SSN's, or birthdays on the return not matching IRS records, A person on the return has already been claimed or already filed, last year's Adjusted Gross Income that you provide to software isn't correct, or not including First Time Home Buyer's Credit payback on the return when required.  There are literally hundreds of other reject causes, but suffice it to say, the clock in the paragraph above doesn't start until you correct the problem and resubmit.  Most rejection problems are easy to solve, and, if you use a professional they should walk you through solving them.  I would say that 80% of my client's rejections are solved over the phone in 24 hours, another 10% require modifications to the return that affects the refund, about 5% require the return to be mailed in, and about 5% don't get resolved because the client disappears, or is unable or unwilling to make the changes required to the return.  If your return gets rejected, don't panic.  Your software support or tax pro should be able to help. 


Now let's mention a few wrinkles that some tax companies will introduce.  The first one is a system for withholding your tax preparation fees from your refund.  The way this works is that you agree to have your refund deposited with the tax companies bank, who immediately forwards the money (minus fees) to your bank account.  The main thing to understand about this is that they have no control over the speed of your refund.  They don't send you your money until the IRS sends it to them.  If the IRS sends you less, you get less.  If the IRS doesn't send enough to cover the fees, the company will expect you to make up the difference.  They will also take any back fees that you owe them from prior tax returns.  Also, if you are a careful tax return reviewer, you might panic that the direct deposit information on the back of the Form 1040 is wrong.  That's because it's the bank's information, and that's okay.  There is almost always a fee for this service, but it's usually not too much.  My mantra is that the fastest and cheapest way to get your tax return from a professional is pay the fee up front, electronically file, and use direct deposit.


Last thing is getting your money faster than the IRS sends it to you.  No matter what they call it, this is a LOAN.  They are required to disclose this fact, but not all are as conscientious about it.  Couple things to know about these.  First, they are EXPENSIVE.  Since the loan is for only a couple weeks, the interest has to be outrageous to make any money.  Plus, your fees have to cover them for the people who don't end up getting a refund.  The second thing is that they're not guaranteed.  Once you e-file, the bank can approve or disapprove the loan.  Generally if they say no, you only get charged for the conventional product of having your fees withheld and the timing is just like any other product.  The big thing to know is, if they loan you money, and the IRS doesn't issue you a refund to pay it off, the bank will want their money back.  This can be a lot of money.  My advice is to avoid these like the plague.