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04/13/2017

Taxes on Tips

While tips are discretionary and reflect a happy customer, taxes on tips are not optional and, if overlooked, can cause unhappy headaches for both taxpayers and their employers.

Tip jar picAll cash and non-cash tips are considered income and are subject to Federal income taxes. Tips include cash left by a customer, tips added to debit or credit card charges, and tips received from other employees or employer through tip sharing, tip pooling or other arrangements.

Employees who receive tips regularly are responsible for keeping a daily tip record and reporting all tips on their individual income tax return.  They must report tips that total $20 or more in any month by the 10th of the following month regardless of total wages and tips for the year.

If an employee doesn’t have or isn’t assigned a tip-tracking and reporting tool, the IRS provides a Daily Record of Tips (Form 4070) that an employee may use to document tips in the manner which is considered sufficient proof of tips received. Reliable proof of tip income would include copies of restaurant bills and credit card charges that show the amounts customers added as tips.

Automatic service charges that are often added onto bills are not considered tips, but rather are treated as regular wages so any taxes owed would be withheld by an employer on an employee’s next paycheck. Examples of service charges include things like bottle service charges, gratuity that is automatically added to a bill for large parties, delivery charges, and room service charges.

Employers must withhold income, social security and Medicare taxes on tips just as they would on other income earned by their employee.  If tips are not reported to an employer as required, an employee may face a penalty of 50% of the unpaid social security and Medicare taxes due.

If there are any unreported tips, a taxpayer must file a report of the income through another Form 4137 "Social Security and Medicare Tax on Unreported Tip Income" which helps the employee figure the amount that is subject to tax and how much is owed.

It can be a tedious process especially for workers who make money through a predetermined hourly wage with unpredictable tip income added to the total.  Workers who receive their tips at the end of each shift must make certain they record the tip amounts on their monthly tip report to their employers.  The taxes owed would then be deducted from their next paycheck. It’s possible that hourly wages may not cover the taxes owed. When this happens, any remaining taxes owed can paid out of the next paycheck through an employer agreement. This is the area where most problems occur as tax obligations on tips for one month may impact several paychecks.  It’s up to the employee to keep track of required tax payments so that there are no outstanding payroll taxes owed at year’s end.

If you need more help understanding how to record and report tip income, please contact one of our tax preparation experts at McRuer CPAs.

04/12/2017

Tax Reform Timeline

Although Republicans appear to have more agreement on the specifics of tax reform than health care reform, experts predict we’ll be hearing more debate in committees and in the media before an actual tax reform bill makes it to the House or Senate floor.  Now many experts predict a tax reform or reduction bill will pass, but it may not happen in 2017.

Capitol-hill-washington-d_cThe White House and Republican lawmakers know they need a more unified front to sustain a push for major tax reform, especially in the wake of continued angst and division over health care reform. Treasury Secretary Steven Mnuchin is a key player in drafting and negotiating a tax reform proposal.  He says he is optimistic that a comprehensive plan should win approval by the Congressional recess this August. But President Donald Trump has been less specific. When asked recently whether he could “cut a deal on tax reform this year” by a Financial Times editor, Trump responded he did not want to talk about timing saying, “We will have a massive and very strong tax reform. But I am not going to talk about when.”

Leading House Republicans, including House Speaker Paul Ryan, have proposed tax code changes that include a much-debated border adjustment tax. CEOs of 16 U.S. companies including General Electric and Boeing support the proposal that would reduce corporate income tax from 35% to 20%.  It would also impose a 20% tax on imported goods while removing taxes on exported goods.  Critics claim such a tax structure would cause consumer prices to rise and unfairly burden retail and automotive manufacturing industries that purchase low-cost parts and supplies from overseas.

Trump has also expressed an interest in pushing simplified personal income and corporate tax reform through at the same time and may also include an infrastructure investment package in a comprehensive tax plan. Tackling big issues with a massive all-encompassing bill may provide opportunities to please all parties, but may also result in the same kind of partisan and intraparty fractures suffered by health care reform efforts.  

Democrats are also unlikely to support major income tax cuts at either the corporate or personal level.

Based on their recent disappointment over a failed attempt to repeal the Affordable Care Act, Republicans know they need to build and confirm support for significant tax reform.  Many financial experts say that means an agreement may not be reached until late 2017 or early 2018.

04/10/2017

Deducting Work-Related Expenses

Work expensesTaxpayers who work for an employer and who pay for work-related expenses out of their own pocket may be able to deduct them on their income tax returns.  Qualified employee business expenses are deductible if when combined with other miscellaneous deductions, the total spent is more than two percent of a taxpayer’s adjusted gross income.

Some examples of qualified deductible employee business expenses may include:

  • the cost of purchasing required uniforms or work clothes not worn away from the work environment,
  • business use of a home,
  • business use of a personal vehicle,
  • business-related meals and entertainment,
  • work-related travel away from home, and
  • tools and supplies purchased for use on the job.

Other deductible expenses that employed taxpayers often overlook are costs of things like the depreciation of their own computer they use for work-related purposes, union dues, malpractice or business liability insurance premiums and subscriptions to professional journals and trade magazines related to work.

Taxpayers must to itemize the deductions and maintain records of income along with receipts of expenses.  If expenses have been reimbursed by an employer, they are not tax deductible.

The expenses must also be ordinary and necessary for their work.  An employee who purchases an item featuring their company’s logo may not deduct the expense unless the employer requires them to wear or use the item while performing their job.  For example, flight attendants who must buy their own uniforms to wear while serving passengers on an aircraft may deduct the expense of the uniform, but not the cost of personal earrings worn to complement their uniform.

K-12 teachers may be able to deduct up to $250 of certain out-of-pocket expenses.  Deductible expenses for 2016 federal income taxes may include the cost of books, classroom supplies, equipment and other materials teachers use to help instruct students.  For example, a physical education teacher may deduct up to $250 of athletic supplies purchased for students that were needed and used by the student(s) to complete or perform physical education course requirements. This particular work-related deduction is calculated as an adjustment to income rather than an itemized deduction, so they need not itemize to claim this deduction.

IRS Publication 529 “Miscellaneous Deductions” and Publication 463 “Travel, Entertainment, Gift and Car Expenses” provide more specific details about deducting employee business expenses.

If you need more information on deducting work-related expenses, contact one of our experts on tax preparation at McRuer CPAs.

04/07/2017

Tax Deadline Dance

So, once again, the mandated income tax filing deadline day gets a little kick and a jump this year from the designated April 15 date on the calendar.  For the second year in a row, the last day to file your federal and state income tax returns for the 2016 calendar year is April 18. And next year’s filing deadline for 2017 income tax returns will be April 17. The reasons for the date changes are nearly as complicated as tax laws.

Gene kelly tap dancing picThe three-year stretch in adjusted tax deadline days is due to the odd assortment of federal holidays and a restriction against the deadline falling on a weekend day. This tax season the assigned April 18 deadline is partly due to the fact that April 15 falls on a Saturday.  Normally the deadline would have then been moved to the next Monday.  However, this year, Monday is a holiday observed in Washington D.C. and, thereby, is a holiday that is observed by the IRS.  So, the tax deadline day for filing 2016 income tax returns moves to the next available calendar day which is Tuesday, April 18.  In case you’re wondering, the holiday on April 17 is Emancipation Day which commemorates the day President Abraham Lincoln signed the Emancipation Proclamation to end slavery.

Taxpayers in some states have an even longer time to file their tax returns because the IRS has enacted its authority to extend deadlines for taxpayers living in designated federal disaster areas.  In past months, thousands of taxpayers were affected by damaging storms in Louisiana, Georgia and Mississippi.  Those who live or own a business in Louisiana parishes designated as disaster areas have been given additional time to file their income and business tax returns as well as any quarterly tax payments. The deadline for them has been extended to June 30. Taxpayers living in disaster-designated counties in Georgia and Mississippi have until May 31.

For taxpayers living in Maine or Massachusetts, the Patriot’s Day holiday occurs on April 18 which pushes their income tax filing deadline to April 19.

Taxpayers living and working abroad as well as military personnel serving abroad or in combat zones may also qualify for an extension of time to file a return and/or pay their income taxes.

If you’re not able to get your records together in time for the tax return filing deadline that applies to you, you will need to request an extension of time to file to escape penalties. The IRS allows six extra months to qualifying taxpayers.  However, the deadline to pay the taxes you owe remains the same as the original tax filing deadline.  Penalties and interest accrue for all unpaid dollars.  Dare we mention that this year, IF you file for a six-month extension, even though the actual six-month calendar would reflect an October 18 deadline to file, the actual deadline is Monday, October 16.  That’s because the October deadline is based on the originally mandated April 15 filing deadline.  But, because the 15th of October falls on a Sunday, October 16 becomes the deadline. Makes you want to shake your head a bit, doesn’t it?

If you need help completing your tax return or submitting a request for an extension to file a return, please contact one of our tax experts at McRuer CPAs.

03/25/2017

Do's and Don'ts of Deducting Charitable Donations

So, you donated six bags of clothes to Goodwill and gave your used washer and dryer to the Salvation Army.  Now you hope to claim the donations as a deduction. There are a few things to know before your tax preparer reports your Gifts to Charity on your federal income tax return.

Please Give Jar picFirst, donations must be made to a qualified charity in order to be deductible.  Gifts to individuals, political organizations or candidates are not deductible.  A qualified charity that is designated as a non-profit organization or a 501(c)(3) must not benefit or have as a focus any private shareholder or individual.  Qualified charities must also be up-to-date on their information reports to the IRS that show that their profits are being used for their tax-exempt purposes. To check the status of a charity the IRS now provides a one-stop online tool called Exempt Organizations Select Check (EO Select Check).

In order to deduct a charitable contribution, you must first itemize deductions on Form 1040, Schedule A - Itemized Deductions.  It is important to have documentation that shows the dollar amount of all claimed qualified donations and the specific organization to which the donation was made.  Noncash contributions should have information or may even need an appraisal that reflects the fair market value of the donation at the time it was given.

If you happened to get something in return for your donation, the value of what you received must be subtracted from the claimed donation amount.  You may only deduct the amount that exceeds the fair market value of the benefit received.  Many taxpayers miss this point.  For example, let’s say you participated in a silent auction fundraiser and you “won” with the highest bid, and the item you received was worth more than the amount you paid for it.  You may only deduct the difference between what you paid for the item and the fair market value of the item.  This includes benefits you received like merchandise, meals, and tickets to events or goods and services.

If you donate property instead of cash, the deductible amount is limited to the donated item’s fair market value or the price a seller would receive if the property sold on the open market.  Many taxpayers struggle with determining the value of things like used clothing and household items.  The IRS requires that the items be in good condition or better, and has an online resource to help taxpayers determine the fair market value of items.  Technically each item, including a pair of socks, is supposed to be identified on a worksheet along with its value in order to calculate the actual value of a donation.  Many taxpayers simply take their chances and submit only a receipt from a recognized charitable organization that lists the date and a general description of what is donated, such as “2 boxes of clothing”.  If a taxpayer is audited, they must provide proof for each donation.  Cars, boats and other types of property donations are subject to additional rules.

Whether you donate cash or goods, if the amount of any specific donation is $250 or more, you must submit a written statement from the charity confirming the details.  That statement must report the same donation amount that you’re claiming, and a description of any property that was given.  It must also state whether any goods or services were received in exchange for the donation.

If you make total noncash charitable contributions that exceed $500 for the year, you’ll need to fill out another form, Form 8283, that requires more details and more proof of value.  The type of records that a taxpayer must keep depends upon the amount and type of donation.

Here are examples of charitable contributions:

  • Money or property given to churches, synagogues and other religious organizations
  • Gifts to nonprofit schools and hospitals
  • Gifts to qualified charities such as The Salvation Army, Boy Scouts or Girl Scouts of America, CARE and Goodwill Industries
  • Donations to War Veterans groups
  • Out-of-pocket expenses when you serve a qualified organization as a volunteer

Here are items that are NOT deductible as charitable contributions:

  • The value of your time or services
  • The value of blood given to a blood bank (yes, it has been tried)
  • Cost of raffle, bingo, or lottery tickets
  • Dues, fees or bills paid to country clubs, lodges or fraternal orders
  • Money or property to groups that lobby for law changes
  • Donations to candidates for public office or political groups

If you have any questions about deducting charitable donations from your federal income tax, please contact one of our tax preparation experts at McRuer CPAs for more information.

Find out more about deducting Medical and Dental Expenses in our blog.

03/22/2017

Deducting Medical and Dental Expenses

If you incurred medical or dental expenses, you may be able to deduct them on your federal income tax return.  You may also include medical expenses you paid for your spouse and/or a dependent.  To do so you must itemize your deductions; so keeping receipts and good records is important as is knowing what qualifies as a deductible expense.

Qualified medical and dental expenses generally include the costs of:

  • diagnosing, treating, easing and preventing disease
  • prescription drugs and insulin
  • insurance premiums for policies that cover medical care
  • dental x-rays, extractions, dentures and teeth cleaning
  • chiropractic and acupuncture treatments
  • and much more!

Healthcare-costsEquipment and property improvements that are medically necessary may also be deducted.  This would include the cost of updates like installing railings and support bars, porch lifts, and widening doorways to address medical care needs.  However, the deductible amount of the capital improvement costs may be reduced if it increases the value of your property.  The allowable deduction would be reduced by the increase in the value of your property.

Even travel costs specifically related to medical care may be deducted; including public transportation, ambulance service, tolls and parking fees.  Personal vehicle mileage used for qualified medical care travel may be deducted using the standard medical travel mileage rate which is 19 cents per mile for 2016, or the actual travel costs may be deducted.

Costs that have been reimbursed by insurance and other sources do not qualify for a deduction.  You also may not claim a tax deduction for medical expenses that were paid from a Health Savings Account or Flexible Spending Arrangement, as those payments are made from pre-tax dollars and would be considered a double benefit.

Generally, you can deduct only the amount of your medical and dental expenses that is more than 10% of your Adjusted Gross Income (AGI).  But if either you or your spouse was born before January 2, 1952, you can deduct the amount of your medical and dental expenses that is more than 7.5% of your AGI.

To find out more about allowable qualified medical and dental expense deductions, click here for the tax information guide.  If you have questions, please contact one of our tax preparation specialists at McRuer CPAs for more information.

03/20/2017

April 1 Deadline For Required IRA Distributions

Taxpayers who reached age 70½ during 2016 have until April 1st to apply for and begin receiving required minimum distributions (RMDs) from an Individual Retirement Account (IRA) and/or workplace retirement plan.

Deadline approaches picThe April 1st deadline applies to owners of traditional IRAs, such as SEP and SIMPLE IRAS, but not Roth IRAs.  It also generally applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.  Some employees who are still working may wait to receive distributions, if their plan allows, until April 1st of the year after they retire.

The April 1st deadline only applies to the required distribution for the first year.  For all subsequent years, the RMD must be made by December 31st of each year.  So, a taxpayer who turned age 70½ in 2016 and has received the first required distribution by April 1, 2017, must still receive the second RMD by December 31, 2017.

The amount of the distribution is calculated using life expectancy tables matched to the year-end IRA account value of the IRA.  Worksheets and life expectancy tables are available in in IRS Publication 590-B “Distributions From Individual Retirement Arrangements”.

It can be costly to miss the deadline for receiving a distribution, as the taxpayer faces a 50 percent tax that would be applied to any required amount not received by the April 1st deadline.

For more information, click here to read through frequently asked questions or contact one of our tax experts at McRuer CPAs.

03/17/2017

Saver's Credit Option Offers Rewards

Hand holding moneyThere’s a little known tax credit for people who have low to moderate income and are putting money aside to save for retirement.  The Saver’s Credit is available to eligible taxpayers to use in conjunction with the tax deduction they may already have qualified for by contributing to an IRA.

If your adjusted gross income is below $30,750 as an individual, $46,125 as a head of household or $61,500 as a married couple in 2016, you might be eligible for tax credit.  It can be worth between 10 and 50 percent of the amount you contribute to an IRA up to $2,000 for individuals and $4,000 for couples.  You would receive the tax credit on top of the benefits of a tax-free or tax-deferred retirement fund contribution.

The Saver’s Credit applies to contributions made to a traditional or Roth IRA, a 401(K) plan, a SIMPLE IRA, a SARSEP, your 403(b) plan, 501(c)(18) plan or a governmental 457(b) plan.  Voluntary after-tax employee contributions to a qualified retirement and 403(b) plans may also be eligible for the tax credit.

Find out more by clicking here for detailed information.

Splitting Your Tax Refund

Many taxpayers are choosing to split their tax refunds. Splitting refunds is easy and is done electronically through direct deposit allowing the Department of Treasury to deposit your refund dollars in any proportion you want. You may split funds for deposits in up to three different accounts with U.S. financial institutions.

Splitting wood with axe 1A taxpayer may also choose to have a portion of a refund deposited into an Individual Retirement Account or make a deposit into an account with a pre-paid debit card. A refund should only be deposited into an account or accounts that are in the taxpayer’s own name or spouse’s name, if it’s a joint account.

By splitting your refund, you benefit from the convenience of opting to have some of the money deposited into your checking account for immediate use and some deposited to an interest-bearing savings for future use.  In addition, you receive the safety and speed of direct deposit, allowing access to your refund faster than if you opt to receive a paper check. (See more about the direct deposit option in our blog “Going Digital with Direct Deposits”.)

You also may use part or all of your refund to buy U.S. Series I Savings Bonds for yourself or someone else.  The splitting of refunds is a rapidly growing choice among taxpayers as more digital resources become available and security concerns increase about paper trails and identity theft.

03/16/2017

IRA Moves That Save Tax Dollars

There’s still time to reduce your 2016 tax bill as you take steps to maximize the benefits of saving money for retirement.  There are different strategies that can save money or defer taxes through contributing to IRAs and retirement funds each tax year.  For the 2016 tax year, you have until April 18th to make a move. However, if you do make a qualifying IRA contribution between January 1 and April 18, make certain you specifically instruct your financial institution to apply the deposit to the 2016 tax year.  Otherwise, the deposit may automatically be considered a 2017 deposit.

Taxes and moneyUsing a Tax Refund for Tax Savings  Here’s another tip regarding your tax refund and saving for retirement: consider depositing all or part of your tax refund directly into an IRA.  It saves a step by directly depositing the money, it can speed up the timing of the contribution and ensures the deposit is made as you intend.  With a direct deposit, you can even choose to use your 2016 refund to pay for the amount of your 2016 IRA contribution as long as the tax return can be processed and the refund paid before the April 18th deadline. You would designate on Form 8888 “Allocation of Refund” how much of your refund should be deposited directly into your IRA and that it should be designated as your 2016 contribution.

How Much You Can Save  A working taxpayer can defer paying income tax on a contribution of pre-tax dollars up to $5,500 to a Traditional IRA and may split contributions to more than one IRA.  Income tax won’t be due on the money until it is withdrawn from the account.  Contributions to a Roth IRA are after-tax dollars and do not qualify for a tax deduction, though qualified distributions may be withdrawn tax-free at retirement. Contributions to both Traditional and Roth IRAs are limited depending upon modified adjusted gross income.

The actual amount of the tax deduction on a Traditional IRA depends upon the taxpayer’s income tax rate.  For example, a worker in the 25% tax bracket may save $1,375 in income taxes by making the maximum IRA contribution.  Workers in the 35% tax bracket may save $1,925 for the same contribution amount.

If you are age 50 and above, you may contribute an additional $1,000 to an IRA up to a total tax-deductible contribution of no more than $6,500. For example, the tax deduction can range from $975 for individuals in the 25% income tax bracket to $2,275 for those who are in a 35% tax bracket.

Married couples can double their tax deduction if they make the maximum contribution to an IRA in each spouse’s name.  Even if one of the spouses doesn’t work, a contribution can be made for that spouse subject to the spousal IRA limit. The combined contributions must be no more than $11,000 if both are under age 50, $12,000 if one spouse is 50 or older and $13,000 if both are at least 50 years old.

Who Qualifies For Tax Deduction  A taxpayer must earn income in order to save in an IRA. If a worker has no retirement plan at work, the tax deduction for Traditional IRA contributions is allowed in full regardless of income.  If a person or spouse has a retirement plan at work, the tax deduction and the contributions may be limited.  Amounts for both the allowable deduction and contributions phase out at higher income levels calculated as modified adjusted gross income.

People aged 70 ½ and older may no longer claim a tax deduction for their contributions to Traditional IRAs. Upon reaching that age, the fund’s owner must start taking required minimum distributions (RMDs).  Any deductible contributions and earning withdrawn from a Traditional IRA are taxable. Early withdrawals by a person under the age of 59 ½ may be subject to a 10% penalty.  Contributions made to a Roth IRA can be made after age 70 ½ and the amount in the account can be left there as long as the person lives. Qualified distributions are generally not taxable, but early withdrawals are subject to a 10% penalty.

Click here for a description of the difference between Traditional and Roth IRAs.

03/15/2017

Going Digital With Direct Deposits

More than ever before, taxpayers are choosing digital tools to file their tax returns and receive refunds. The latest numbers show 4 out of 5 taxpayers filed electronically in 2016 using a professional tax preparer or online software.  Of those taxpayers who qualified for a refund, 8 out of 10 chose to have the money deposited directly into a bank account rather than waiting for a check to arrive by mail.

Picture1The growth in digital tax tools use is due in part to IRS mandates.  Paper returns require more man hours to process; costing more and lengthening the time to receive a tax refund by weeks or months.  The IRS now requires most tax preparation professionals to file all tax returns and attachments electronically.  While under no mandate, more do-it-yourself taxpayers with simple tax returns are choosing to use the internet to prepare their returns using the IRS Free File software, and send electronically prepared returns through IRS e-File.  This trend reflects security and privacy concerns as well as worries about delays that can come from paper filings and paper checks.

Combining IRS e-File with the direct deposit program is the fastest way to receive a refund and the transaction is free.  Most refunds are issued within 21 calendar days once the IRS receives a tax return.  A taxpayer may request that their refund be split into deposits in up to three separate financial accounts.  There are also options to purchase savings bonds, have a portion of a refund deposited into an Individual Retirement Account or make a deposit into an account with a pre-paid debit card.  A refund should only be deposited into an account or accounts that are in the taxpayer’s own name or spouse’s name, if it’s a joint account.

Tax agency officials try to reassure taxpayers the system used to receive tax records and payments as well as send refunds is the safest system available.  In the fall of 2015 and again in January 2016, new IRS software updates crashed the system and a small part of its online payment collection system was hacked causing delays and the need to reset taxpayer pins for security.  

Today, the IRS uses the same electronic transfer system for refunds that is used to deliver almost all Social Security and Veterans Affairs benefits to millions of accounts.  It combines built-in security protection tools with layers of online protection programs provided by banks and financial institutions.

You can request the electronic direct deposit option to receive your refund even if you file a paper return by mail; yet know that processing a paper return takes the IRS on average two months longer than processing a digital return.  Requesting a direct deposit of your refund will not speed up the processing time.

If you have questions about the direct deposit option for income tax refunds, please contact one of our tax preparation specialists at McRuer CPAs for more information.

02/15/2017

Costs of Free Online Tax Prep Tools

More taxpayers who prepare their own taxes are turning to internet resources versus software, but they should be aware of information-sharing nuances as they sign-up for the growing number of free online services.

A recent Wall Street Journal article took a look at the “free” of free online tax preparation services to identify whether there were any hidden costs.  The article reveals that while the online companies are attracting millions of do-it-yourself tax filers by offering free tax preparation tools, some service providers seek “to collect income and other data from its tax-prep users to make recommendations for credit cards and other financial products to them.”

Online tax software probeThe article confirms that when a customer follows through and buys the recommended products, that’s when the service provider makes money by being paid by a third party financial institution. This doesn’t cost the user upfront, but it’s a type of third party advertising that uses information sharing as its money-making tool.

Free online tax preparation service provider Credit Karma was interviewed in the article about the practice and the Company responded that this year it requires people to become Credit Karma “members” before they can use the free tax preparation services.  On the Company’s website members must provide their name, address, date of birth, mobile phone number and the last 4 digits of their Social Security Number.  Credit Karma says it does not charge third parties to advertise about their products or services, but rather uses a member’s information to suggest products and services that could help the member financially. The members are not charged, and Credit Karma is only paid if a member buys a product or service that it suggested.

Credit Karma members can select an “opt out” option to prevent the Company from using their tax return data, which includes their income and tax payments or refunds information, but not all customers are aware that their basic membership data may be shared.  One customer was quoted in the article saying that she had been approached by her credit-card company asking her to update her income after using Credit Karma’s free tax preparation service.  Credit Karma responded that the notice had nothing to do with her membership, but the customer deactivated her account anyway. Other providers say they also offer users ways to opt out of any information sharing.

Some of the other major online tax preparation service providers include Intuit, H&R Block, TaxAct and Blucora.  These companies may provide easy-to-use cost-free tax preparation tools via the internet, but when it comes to more complicated tax returns or state income tax returns, there are usually charges for the necessary forms and data calculation which are considered upgrades by the vendor.

It is also important for taxpayers with more complicated returns to know the questions and forms they need in order for the systems to share information and solutions, so there can be confusion and missed opportunities to claim tax credits and file the proper forms.

More taxpayers than ever before are turning to digital resources both online and through software to prepare and file their simple tax returns, but they should be mindful that even basic tax preparation services may have a complicated back-end effect on privacy and hidden advertising tactics.

Going Digital With Direct Deposits


Internet-sales-tax copyMore than ever before, taxpayers are choosing digital tools to file their tax returns and receive refunds. The latest numbers show 4 out of 5 taxpayers filed electronically in 2016 using a professional tax preparer or online software.  Of those taxpayers who qualified for a refund, 8 out of 10 chose to have the money deposited directly into a bank account rather than waiting for a check to arrive by mail.

The growth in digital tax tools use is due in part to IRS mandates.  Paper returns require more man hours to process; costing more and lengthening the time to receive a tax refund by weeks or months.  The IRS now requires most tax preparation professionals to file all tax returns and attachments electronically.  While under no mandate, more do-it-yourself taxpayers with simple tax returns are choosing to use the internet to prepare their returns using the IRS Free File software, and send electronically prepared returns through IRS e-File. This trend reflects security and privacy concerns as well as worries about delays that can come from paper filings and paper checks.

Combining IRS e-File with the direct deposit program is the fastest way to receive a refund and the transaction is free.  Most refunds are issued within 21 calendar days once the IRS receives a tax return.  A taxpayer may request that their refund be split into deposits in up to three separate financial accounts.  There are also options to purchase savings bonds, have a portion of a refund deposited into an Individual Retirement Account or make a deposit into an account with a pre-paid debit card.  A refund should only be deposited into an account or accounts that are in the taxpayer’s own name or spouse’s name, if it’s a joint account.

Tax agency officials try to reassure taxpayers the system used to receive tax records and payments as well as send refunds is the safest system available.  In the fall of 2015 and again in January 2016, new IRS software updates crashed the system and a small part of its online payment collection system was hacked causing delays and the need to reset taxpayer pins for security.

Today, the IRS uses the same electronic transfer system for refunds that is used to deliver almost all Social Security and Veterans Affairs benefits to millions of accounts.  It combines built-in security protection tools with layers of online protection programs provided by banks and financial institutions.

You can request the electronic direct deposit option to receive your refund even if you file a paper return by mail; yet know that processing a paper return takes the IRS on average two months longer than processing a digital return.  Requesting a direct deposit of your refund will not speed up the processing time.

If you have questions about the direct deposit option for income tax refunds, please contact one of our tax preparation specialists at McRuer CPAs for more information.

02/14/2017

Saving with myRA

The US Department of Treasury is offering the new myRA retirement savings account for people who have no access to a retirement savings plan at their job or lack other options to save.  It is a simple fund that is easy and free to open.  The idea is that if you give people a bit of help, they will learn the benefits of saving money and begin new habits that will last a lifetime.

MyRA logoA myRA account earns interest at the same rate as investments in the Government Securities Fund (average annual return of 2.94% over the last ten years) which are backed by the US Treasury.  It costs nothing to open the account and there are no fees.  A myRA is operated under Roth IRA Rules, so there is an annual contribution limit of $5,500 ($6,500 for individuals 50 years of age or older).  The fund is limited to a maximum $15,000.

The fund’s owner may withdraw any amount of money at any time tax-free and with no penalty.  The money can also be transferred to a private-sector Roth IRA at any time with no penalty.

Contributions may be made from direct deposits from a person’s paycheck, checking or savings account, and a federal income tax refund by marking the “savings” box on the refund section of a return.

The fund is designed to be a part of what is described as a “larger savings journey” with online tracking tools including a myRA Savings Goal calculator.  For more information, click here to visit the “Get Answers” page of the myRA website.

02/13/2017

EITC Refunds Slow

Big-tax-refundChanges in tax law may cause a delay in receiving tax refunds for early tax filers.  New in 2017, the 2015 Protecting Americans from Tax Hikes (PATH) Act has moved up the Forms W-2 filing deadline for employers and small businesses to January 31st from the previous end-of-February deadline.  The new deadline also applies to certain Forms 1099.  The new January 31st deadline is designed to help the IRS spot errors in early returns filed by taxpayers.  Having the Forms W-2 and 1099 sooner makes it easier to verify legitimate tax returns and send out refunds.

However, the changes will mean that early tax filers who apply for certain tax credits should expect that their refunds will arrive later than in past years.  If you claim the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC), the law prevents the issuing of the refund(s) until February 15th.

The way the calendar dates occur this tax season, even if a qualifying taxpayer has a refund issued on the first available day, February 15th, the money may not arrive even through a direct deposit until the week of February 27th.  Financial institutions need a few days to process the deposits and many do not process payments on weekends or holidays.  The President’s Day holiday on February 20th will also delay processing.  If a taxpayer has requested their refund to be paid by check, the delay in receiving payment could be several days or weeks longer, even into March.

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