As we’re just a few days away from the April 18 deadline for filing tax returns, and both taxpayers and tax preparers are gearing up for the final showdown, I am asked “what’s wrong with just filing an extension?” Unless your tax firm shuts down after the April deadline, my response to the extension question is “Why not?”
Let me preface this by saying that an extension, which will give you until October 15 to file your tax return, is NOT an extension to pay your taxes. If you believe you owe taxes, pay them by April 18, or you will incur penalties and interest. With that out of the way, I personally LOVE extensions. Here are some of the advantages:
You now have more time to gather your tax documents. If you’re missing a document, you can take your time retrieving it to ensure that you’re reporting the correct amounts on the tax return. Rushing to estimate certain amounts can risk reporting incorrect numbers (and possibly inviting an IRS notice).
You also have more time to come up with tax-saving deductions. I can’t tell you the amount of time a tax client left out charitable deductions, Vehicle License Fees, additional property taxes, etc., simply because they ran out of time to pull up those numbers! It’s even more important if you’re a business owner or landlord. An extension gives you time to go through your calendar to make sure you’re not missing tax-deductible mileage, meals or travel expenses.
If you have investments in securities, like mutual funds, stocks, etc., it is NOT uncommon for the financial adviser to issue an amended 1099– sometimes as late as mid-March or later. If your investments include Limited Partnerships, your K-1 forms may not even come in until April or May, so in those cases, you don’t have a choice but to file an extension. Nothing is more frustrating (and costly) than receiving an amended 1099 AFTER you’ve filed your return. Then you have to pay your tax preparer to file an amended return.
After the crunch season, your tax professional will be more relaxed and will be able to spend more time on your return. That reduces the possibility of error, as well as increase the possibility of finding more deductions (and of course, reducing your taxes).
And finally, after tax season is when we tax accountants like to take our continuing education classes and attend various tax law and strategy seminars to maintain our licenses. I know after I return from a tax seminar, I am totally pumped, excited and ready to take on whatever new tax challenge the client brings before me!
A tax extension is NOT a bad word, or an admission of failure. If you need more time to make sure your tax return is accurate, complete, and that you only pay the taxes you’re legally obligated to pay, then “Extend On!”
Estimated Tax. Self-employed taxpayers generally need to make quarterly estimated tax payments. IRS Publication 505, Tax Withholding and Estimated Tax, has details on making those payments.
Schedule C or C-EZ. Self-employed taxpayers must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040. For expenses less than $5,000, use Schedule C-EZ. Each form’s instructions provide the rules for which form to use.
SE Tax. For those making a profit, self-employment and income tax may need to be paid. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax.
Allowable Deductions. Taxpayers can deduct expenses paid to run a business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in the industry. A necessary expense is one that is helpful and proper for a trade or business.
When to Deduct. In most cases, taxpayers can deduct expenses in the year paid or incurred. Some costs must be ‘capitalized,’ however. This means deducting the cost over a number of years.
All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity.
Taxpayers with disabilities or parents of children with disabilities may qualify for the Earned Income Tax Credit (EITC). The EITC could put an extra $2 or up to $6,269 into a taxpayer’s pocket. Nevertheless, the IRS estimates that as many as 1.5 million people with disabilities miss out on this valuable credit because they fail to file a tax return (their income may fall under the threshold). Many of these taxpayers may be concerned that the EITC would count as income and impact their ability to get government benefits, but that is not the case.
Important Tax FYI for taxpayers claiming either the Earned Income Tax Credit, Child Tax Credit or Education Credit beginning for tax year 2016: The IRS is requiring tax preparers to perform additional due diligence for all 3 of those items by asking more questions and requesting additional documentation, or be faced with substantial penalties. In addition, refunds from those returns won’t be released until after February 15, and won’t be direct-deposited until the week of February 27.
Why the additional work and hassle? Refundable Credits (a tax credit where you get a refund above and beyond what you paid) are a hotbed for fraud and errors: In 2015 alone, $15.6 BILLION in refundable credits were INCORRECTLY paid out, of which 24% was for the Earned Income Tax Credit alone. That being said, the IRS wants to make sure that those credits are awarded to those who are legitimately entitled to them.
Another reason I love real estate: If you rent your vacation home LESS than 15 days in a year, you do not have to claim the rental income. Of course, you cannot claim the rental expenses either.
So what does this mean to a vacation homeowner whose business is incorporated? If your corporation utilizes your second home for board meetings, employee conferences, etc., you can charge your corporation rent for the use. Make sure it’s a REASONABLE amount by getting quotes from local hotels for their boardroom use. Also make sure it’s truly a business use and that you provide documentation as such.
As long as you rent the home LESS than 15 days in the tax year, you do not have to claim the rental income that you collected from your corporation. However, your corporation will be expensing the rent that it paid you for the business use of the property.
My friends and clients who know me well know I love real estate. Not the selling part (I leave that to my realtor friends), but the concept of the buying, the fixing, the investing part. In addition to being a great wealth-building medium, it can provide a steady income stream and tax deductions. Plus, you can leverage your money to purchase real estate (who ever heard of a bank willing to lend you money to purchase stocks?). While I certainly have no issue with investing in the stock market, I encourage you to also include real estate in your financial portfolio. Entire books and courses have been put together on this subject, but here are a few of my thoughts:
What kind of real estate investing attracts you? Do you want to buy and hold; do you want to buy rental properties; or do you want to buy, fix up and sell? The direction will determine the team you want to assemble. Either way, you want a real estate expert who has your back, as well as a good tax professional!
The “Fix and Flip” trend has seen a lot of press lately, thanks to several TV shows, and definitely has its merits. Like any investment, you really need to know the market, the financing, and have a good rehab team. If that’s the direction you want to take, the IRS will consider it a business and tax it as such, where you report the activity on a Schedule C and be subject to self-employment taxes (15.3%).
You can purchase a piece of property and hold onto it, hoping to re-sell it at a gain, like you would a stock. You obviously will need to know the market and be comfortable with the risks associated. The IRS will treat this transaction as a capital investment where you will report the gain or loss on your Schedule D form. The disadvantage here is that if you incurred a capital loss, your loss is only limited to other gains, and then the maximum loss you’re allowed is $3,000 per year.
You can purchase a property in the hopes of renting it out for monthly rental income. That will require substantial research on the market, lots of spreadsheets and cash flow analysis, as well as a good, reliable team (realtor, property manager, loan officer and of course, tax professional). If that’s the route you’re going to take, the IRS will treat you as a landlord, and you’ll file a Schedule E form with your tax return. In addition to the regular expenses ordinary and necessary in operating a rental property (property management fees, travel expenses, supplies, taxes, interest), you can also deduct depreciation expense on the building portion of the real estate– what we call “phantom expense.” If you sell the property later on, you will have to pay capital gains tax on the gain, plus “recapture” the depreciation that was taken. Or, you can choose to do a 1031 tax-free exchange, where you sell the property and purchase another “like-kind” property. Again, always consult with the tax professional in your team!
No matter which direction you take, please make sure you run the numbers and consult with your tax professional before making any financial decisions.
If you’ve made cash and/or non cash charitable contributions over the year, now is the time to review your documentation by going through your check register, credit card statements, receipts and mileage logs. A few tips along the way:
Obviously, the recipient must be a tax-exempt, 501(c)(3) charity. Giving money or goods to your neighbor in need does NOT qualify for a deduction. If you want to help a needy neighbor, donate these items to your church and have the church assist them.
If you donated $250 or more to a single charity, make sure you get an acknowledgement letter from the organization. Also, make sure the phrase “No goods or services were provided in exchange for this donation” appears on the acknowledgment receipt. This is very important, as deductions have been disallowed in the past if this phrase was missing!
If you donated a vehicle or boat valued at $500 or more to a charity make sure the charity issues you a Form 1098-C so that you can deduct the donation.
If you volunteer for a charity, don’t forget to track your miles driven in the line of your charitable work. Also, if you incur out-of-pocket expenses (printer ink, office supplies, etc) that were not reimbursed, you can deduct them as cash donations.
Purchasing raffle tickets is not deductible as charity. Neither is buying Girl Scout cookies. 🙂
If you wish to claim more than $500 in non cash charitable contributions, be prepared to give your tax preparer additional information, such as name of the charity, date donated, items donated, approximate purchase dates and prices, etc.
If you received something for your donation, say a gift or a dinner, your donation must be reduced by the value of that gift. For example, if you purchased a $100 dinner to a fundraising event, you’re allowed to donate the $100, LESS the value of the dinner. To avoid any issued, now most charities will now list the value on the ticket.