Archive for the ‘Back to Basics’ Category
Back To Basics Part VI – Schedule B
Filed under: Back to Basics | Tags: 1099-INT, address, amortizable bond premiums, dividends, FinCen 114, foreign assets, Form 3520, Form 8938, interest, muni bonds, municipal bonds, nominee distributions, ordinary dividends, original issue discount, private activity bond interest, qualified dividends, Schedule B, seller-financed mortgage, Social Security Number, tax-exempt, U.S. Treasury Bonds, W-9
Leave a comment Originally published in the Cedar Street Times
December 26, 2014
In this issue, we are discussing Schedule B – Interest and Ordinary Dividends. Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.
Interest you earn from the use of your money by others is reported in detail in Part I of Schedule B and then summarized on Line 8a of Form 1040. Interest is taxed as ordinary income depending on your tax bracket. The most common form is interest earned from your banks or investment companies. You will generally receive a Form 1099-INT telling you the amount you paid if the amount is over $10. If it is under $10, there is no requirement for the payor to go through the hassle to report it to you and the IRS; technically that does not alleviate your responsibility to report it on your tax returns, however. This holds true for all IRS reportings. Some people think if no tax document is received, they are somehow relieved from the responsibility to report. This is an incorrect notion.
Other forms of interest to report on Schedule B could be interest earned from personal loans made to friends or family, or loans made to a business. In practice, you often will not receive a 1099-INT from individuals you loan money to, but they actually have the same requirements as a bank to file a 1099-INT for interest they pay to you, and they could be penalized for not doing so.
Another form of interest you need to report on Schedule B is interest earned from a seller-financed mortgage. If you sold your home and carried back a note on the house from the buyer, the interest they pay you is reportable interest on Schedule B. You are required to track the interest and report it properly. You and the buyer are both required to provide your names, Social Security numbers, and addresses to each other for proper tax reporting and matching. You list the buyer’s information in Part I of Schedule B next to the amount they paid you. A buyer will do the same for reporting the mortgage interest on Schedule A. A Form W-9 is the best document to request and provide Social Security Numbers. Buyers and sellers could each be penalized if they fail to provide their Social Security numbers for this purpose or if they simply get it verbally, and it is incorrect. A W-9 signed by the other party is a protection to you.
Be careful to not include any tax-exempt interest such as from U.S. Treasury Bonds or tax-free municipal bonds on Schedule B. These would be reported on Line 8b of Form 1040 and are generally not taxable unless there are other adjustments such as those made for Alternative Minimum Tax on Form 6251. Another source of interest to avoid reporting on your Schedule B is interest earned from investments in your retirement plan (I have see people make this mistake!).
There are other forms of interest or adjustments such as original issue discounts, private activity bond interest, amortizable bond premiums, and nominee distributions which are beyond the scope of this article.
Dividends are reported in detail in Part II of Schedule B and summarized on Line 9a of Form 1040. Dividends are essentially a return of part of the profits of the business to the owners. When you own shares of stock in a company, for instance, they may pay out a certain amount per share if the company is doing well. You can reinvest the dividends and buy more shares or take the cash. Either way, the dividends get reported on Schedule B.
Dividends are taxed at your ordinary income tax bracket rate unless they qualify for special capital gains rate treatment. Then they are called qualified dividends. To qualify for special treatment the dividends must be from U.S. corporations, corporations set up in U.S. Possessions, or in foreign countries with certain tax treaty benefits, or if readily tradable on U.S. stock exchanges. If you have held the stock for less than a year, there are also some specific holding period requirements that could still allow the stock to qualify.
The portion of ordinary dividends that are considered qualified are reported on Line 9b of Form 1040, and don’t actually show up on the Schedule B. This is a large advantage as people in the 10 percent or 15 percent income tax bracket pay no tax on capital gains and qualified dividends! People in the top 39.6 percent bracket pay a 20 percent rate on qualified dividends and everyone in between pays 15 percent.
Part III of Schedule B consists of questions about any foreign accounts or trusts you own or have signature authority over. These questions are EXTREMELY important to answer correctly. If you have a foreign account you will also need to file FinCen Form 114 with the Treasury Department. There are potentially massive penalties for failure to properly report on FinCen Form 114, even if unintentional, and possible jail time if you willfully do not report. You may also need to file a Form 8938, a 3520 or other forms related to foreign assets. If you have foreign assets, you should seek professional support that has experience in this area. Getting caught is much worse than coming forward.
In two weeks we will continue our Back to Basics series with Schedule C – Profit or Loss from Business
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Back to Basics Part V – Schedule A Wrap-Up
Filed under: Back to Basics | Tags: 2%, amortizable bond premiums, business miles, casualty and theft, casualty loss, education expenses, employment agreement, Federal estate tax, gambling losses, home office, income in respect of decedent, investment expenses, IRA fee, itemized deductions, job search expenses, legal expenses, meals and entertainment, miscellaneous itemized deductions, not subject to two percent, other miscellaneous deductions, phase-out, Ponzi schemes, reimbursement plan, Schedule A, tax preparation fees, theft loss, two percent limit, union dues, unrecovered investments in annuities, unreimbursed employee business expenses
Leave a comment Originally published in the Cedar Street Times
December 12, 2014
In this issue, we are finishing our discussion on Schedule A – Itemized Deductions. Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.
The fifth section of Schedule A is for personal casualty and theft losses. This is designed to help people with major losses. The deduction on schedule A is calculated by taking the amount of the loss, subtracting $100, then subtracting 10 percent of your adjusted gross income. Any amount left over will be an itemized deduction (if any). There are several ways to calculate the amount of the loss but it is generally limited to the lesser of your adjusted cost basis or the decrease in the fair market value. Sometimes appraisals are necessary to establish the decrease, but in all cases, the amount of any insurance proceeds received would reduce the loss. Another salient point is that the loss generally has to be sudden, unexpected, and permanent in nature; it is not the result of degrading over time. For instance, a car accident or theft would qualify; termite damage would not qualify. Losing something does not qualify either. Business casualty losses are not reported on Schedule A.
The next section deals with miscellaneous itemized deductions subject to two percent. This means you take all the deductions in this section, subtract two percent of your adjusted gross income, and the left over amount is your itemized deduction for this section (if any). Some of the deductions here include unreimbursed employee business expenses, union dues, investment expenses, income tax consultations and preparation, legal expenses related to your job or to the extent they deal with tax issues or the protection of future taxable income, job search or education expenses (if they relate to your current field), etc.
Unreimbursed employee business expenses are those which are ordinary and necessary and the employer expects the employee to pay for the expenses. If the employer has a reimbursement plan, but the employee simply fails to request reimbursement, the expense will not qualify. It is best if the employer has a written policy, or as part of the employment agreement, spells out what things the employee is expected to cover. Sales people can often have high deductions in this area through business miles on their vehicles and meals and entertainment for clients. If a company provides no office space for an employee and the person has an office in his or her home, deductions can be taken for that as well.
Investment expenses paid to financial advisors or even IRA fees can be deductible. Financial advisor fees must be prorated if you have taxable investment income and tax free investment income such as municipal bond interest. Only the portion allocated to taxable income is deductible. For IRA fees to be deductible, they must be paid with funds outside the retirement plan. This is preferred anyway so as not to deplete your retirement account by using IRA funds to pay the fees.
The last section of deductions on Schedule A is called “Other Miscellaneous Deductions.” These are NOT subject to the two percent of adjusted gross income floor, and the full amount become itemized deductions. These are less frequently encountered and include things like Federal estate tax on income in respect of decedent, gambling losses up to the amount of winnings, losses from Ponzi schemes, casualty and theft losses on income-producing assets, amortizable bond premiums, unrecovered investments in annuities and other items.
The final part of Schedule A is one more “gotcha.” If your income is over $305,050 for Married Filing Joint or $254,200 Single, part of your deductions begin to phase out. Medical expenses, investment interest, casualty, theft, and gambling losses are not subject to the phase out. The rest of the deductions can be reduced by as much as 80 percent! The amount is determined by taking your adjusted gross income, subtracting the above figure based on your filing status, and multiplying the result by three percent. That is your adjustment capped at the 80 percent maximum.
In two weeks we will continue our Back to Basics series with Schedule B – Interest and Ordinary Dividends.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Back to Basics Part IV – Even More Sch. A
Filed under: Back to Basics | Tags: acquire, cash donations, cash out, charity, construct, Form 1098, home equity debt, improve, investment income, investment interest, line of credit, mortgage interest, noncash donations, nondeductible personal interest, points, private mortgage insurance, qualified home, refinance, Schedule A, second loan, substantiation, volunteer expenses
Leave a comment Originally published in the Cedar Street Times
November 28, 2014
In this issue, we are continuing our discussion on Schedule A – Itemized Deductions. Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.
The third section on Schedule A covers deductible interest you have paid. For most people the big item here is the mortgage interest on their principal residence. You can also deduct mortgage interest on one other personal residence as well. A lot of people assume that if the interest shows up on a Form 1098 that it is deductible. Contrary to popular belief, that does not determine deductibility. People with rental and personal properties, for instance, that refinance and pull money out of one property and put it into another are especially at risk of having made a major mistake.
The home mortgage interest deduction requires the debt to be secured by a qualified home and have been used to acquire, construct, or improve the home up to $1,000,000 of debt and up to $100,000 of additional debt for any purpose. Assume someone refinances a rental property and pulls $200,000 out of it to buy a personal residence. The interest on the $200,000 is not a rental property deduction on Schedule E because the funds did not go into the rental property activity. It is also not deductible on Schedule A as home mortgage interest because the debt is not secured by a qualified personal residence – it is secured by the rental property! Oops – nondeductible personal interest! There are some work-arounds to this, but they are not always easily accomplished, and the problem is more likely to be found in an audit when it is too late.
Another common problem crops up for people on personal residences who take out a second loan, open a line of credit, or do a cash-out refinance and do not use the cash to improve the home. This portion is called home equity debt. You can only deduct the interest on up to $100,000 of total home equity debt. Anything beyond that becomes non-deductible personal interest, and would need to be tracked properly. If you later refinance your primary loan and the home equity loan into one loan, the character of the debt remains the same. This means you have to keep track of the portion of the debt that is home equity debt versus acquisition debt that comprises the one loan.
Other deductible interest would include points paid during a purchase or refinance. Often these are not included on the 1098 and you must look to the escrow closing statement to pick them up. New purchases allow 100% deduction of the points in the year purchased. Refinances, require amortizing and taking a portion of the deduction each year over the life of the loan term. Private Mortgage Insurance (PMI) used to be deductible as interest, subject to limitations, but is not currently slated for a deduction in 2014. Investment interest is another item that falls into this section of Schedule A. A simple example would be borrowing money to invest in the stock market – like a margin loan. However, investment interest expense is only deductible to the extent that you have investment income (Form 4952). So, if you paid $1,000 of interest, you better have made a $1,000 of investment income, otherwise the excess gets suspended and carried forward for the future.
The fourth section on Schedule A deals with gifts to charity. Volumes have been written on this topic! Gifts to charity must be made to qualifying organizations for U.S. tax purposes. There is a 50 percent of your adjusted gross income limit each year regarding regular donations to charities. There are also 30 percent and 20 percent limitations for donations to certain types of organizations and types of property donated. So if you gave a very large gift, it could get suspended and carried over to the future. There is generally a five-year carryover limit, at which point any remaining deductions would be lost.
All donations must have substantiation, no matter how small. Cash donations under $250 must be substantiated with a properly worded letter from the organization, a cancelled check, a bank statement, or a credit card statement. Cash donations over $250 require a letter from the organization. Noncash donations have a lot of rules. Every noncash donation requires a receipt from the organization. Noncash donations over $500 require the filing of an 8283. Noncash donations over $5,000 require a qualified appraisal as well. It would be in your best interest to ensure you have properly planned when making (or anticipating to make) a donation over $5,000. The $5,000 threshold is cumulative throughout the year for similar items. This means that many trips throughout the year of donating to the local charitable thrift store of household goods would retroactively require an appraisal to claim over $5,000. And it is hard to appraise items you no longer have! As you can see there can be much to consider.
You can deduct out-of-pocket charitable volunteer expenses such as uniforms or gear necessary for the volunteer work. If you travel on your own dime overnight, and you have substantial duties and very little personal activities, you may be able to deduct airline tickets, meals, lodging, etc. Volunteer excursions that are not away from home overnight do not qualify for meal deductions. If you use your vehicle for charitable purposes you can deduct the mileage at 14 cents per mile, or track gas and oil expenses.
A few things that are definitely not deductible but are commonly misunderstood by individuals as well as by small charitable organizations: 1) gifts to needy or worthy individuals – even if you give to a qualified organization be sure you do not earmark your donation for a particular person or family, or your deduction is not legitimate , 2) gifts of your time or services – like the artist trying to deduct a self-created painting at “fair market value” – you can only deduct hard costs such as the canvas and paint costs. Since you never included in income and paid tax on your services, you cannot take a deduction for them, 3) charity raffles, bingo, lotteries 4) charitable auctions or other donations to the extent of the value you received in return – such as paying $75 in a charity silent auction, but you get a $100 gift certificate – no deduction allowed. Or the local public radio station sends you a set of CDs they value at $100 in return for your $125 donation – you only get to deduct $25.
In two weeks we will continue our discussion regarding Schedule A.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Back to Basics Part III – More Sch. A
Filed under: Back to Basics | Tags: 1040, chiropractors, Christian Science practitioners, contacts, copays, dentists, doctors, eyeglasses, health insurance, hospital bills, medical expenses, medical mileage, Medicare, personal property taxes, prescription drugs, real estate taxes, Schedule A, SDI, state income taxes
Leave a comment Originally published in the Cedar Street Times
November 14, 2014
Two weeks ago we discussed the purpose of schedules and forms in a tax return and then began a discussion on Schedule A – Itemized Deductions. We discussed that itemizing deductions is an option if you have more than what the IRS allots as a standard deduction to everyone for things like medical expenses, taxes, charitable donations, and other miscellaneous deductions. This week we are going to look more closely at the different types of deductions that you can itemize on Schedule A and how these deductions can get a shave and a haircut and look like less than when you started.
The first section on Schedule A covers out-of-pocket medical expenses (not reimbursed by insurance). Things like doctors, dentists, chiropractors, Christian Science practitioners, hospital bills, prescription drugs (not over the counter), eyeglasses, contacts, copays, etc. all fit into this category. Health insurance is also deductible here unless it is for self-employed people, in which case it can get potentially better treatment as an adjustment to income on page one of the 1040 instead. Health insurance would include your Medicare payments which most people see deducted from their Social Security checks.
Sometimes people are surprised to learn that substantial expenditures on your home can be deductible if done to improve accessibility – such as widening doors and bathrooms, installing ramps, hand rails, etc. (there are a number of rules to be aware of, however). You can also deduct medical related miles at 23.5 cents per mile and even deduct overnight travel expenses if you must drive to a hospital that is not local, for instance. The problem with medical expense deductions is that for the vast majority of people, none of the expenses even make it towards counting as an itemized deduction.
You have to have in excess of 10 percent of your adjusted gross income (the bottom number on page one of your 1040) in medical expenses before a single dollar counts. So, if your adjusted gross income is $100,000, and you have $10,500 of out-of-pocket medical expenses, only $500 counts towards your itemized deductions. If you or your spouse are over 65 you have a 7.5 percent threshold through 2016, and then you will jump to ten percent as well. A really nice planning opportunity around this dilemma is having a health savings account in connection with a high deductible plan. It has the ability to effectively convert some or all of your nondeductible medical expenses to deductible expenses. Ask your tax preparer or insurance agent about this.
The second section on Schedule A covers deductible taxes you have paid. This includes state income taxes you paid during the year, SDI withholdings from your CA paycheck, real estate taxes on your personal residence(s), personal property taxes assessed on value such as annual vehicle taxes (license fee on your CA DMV renewal), boat, aircraft, etc. Remember, as a cash basis taxpayer, these (as with generally all income and expenses on your tax returns) count in the year you actually pay them (or charge them in the case of a credit card), so it doesn’t matter what year they are supposed to cover – just look at when they were paid. There has been an option in past years to deduct sales taxes you paid during the year if they were greater than the state income taxes you paid, but that is currently not an option for 2014, unless Congress takes action.
In two weeks we will continue our discussion regarding Schedule A.
Prior articles are republished on my website at www.tlongcpa.com/blog.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Back to Basics Part II – Schedule A
Filed under: Back to Basics | Tags: 1040, 2014, charitable deductions, Forms, medical expenses, miscellaneous itemized deductions, mortgage interest, real estate taxes, Schedule A, Schedules, standard deduction, state taxes, unreimbursed employee business expenses
Leave a comment Originally published in the Cedar Street Times
October 31, 2014
Two weeks ago we discussed a general overview of the Form 1040 – a personal income tax return. The 1040 can be thought of as a two-page summary of your taxes in a nutshell. (I should mention also there are two other shorter forms that could be filed instead: a 1040A and a 1040EZ. These are for simpler returns and have income limits and other restrictions. In practice, however, anyone using tax software does not really have to decide which form to use and the software will generally optimize as appropriate. For our discussion we will focus on the 1040.)
The details for many of the items on the Form 1040 are actually determined on subsequent Schedules and Forms. Schedules are labeled with letters of the alphabet and additional forms are generally four digit numbers. Schedules are generally more major topical areas. For instance, Schedule C – Profit or Loss from Business, which is a summary of all the activity of a sole proprietorship. It may in turn have subsequent forms that support it. Forms are often more narrowly focused and would generally support other schedules or forms. For instance Form 4572 Depreciation, could support the calculation of depreciation expense for a business on Schedule C, a rental property on Schedule E, a farm on Schedule F, etc. I have not counted them all, but I have read the IRS has over 800 forms and schedules. The reality is that most people are covered by 30 or 40 of those 800!
Let’s start at the beginning of the alphabet – Schedule A. (I am sure this saddens you, but we will not be going through all 800 in this series of articles, but we will hit on a number of the most common ones!) Schedule A is for itemized deductions. You probably hear lots of people justify expenses by tossing around the phrase, “it’s deductible.” However, just because something may be deductible, does not mean it will benefit you. This is easily seen with Schedule A. Schedule A covers a host of “expenses” that most people have that our tax code has graced as good behavior and therefore allows a deduction for it. Medical expenses, state and local taxes, real estate taxes, mortgage interest, charitable deductions, unreimbursed employee business expenses, my favorite – tax preparation fees, investment expenses, etc.
Since Congress realized that everyone had some of this, and it would be a pain for people to track it, they decided to allow as an option a “standard deduction” for everyone in lieu of tracking and itemizing all those deductions. The standard deduction was created to generally cover what many people would have on the average anyway. For 2014 this standard deduction is $6,200 if you file as Single or Married Filing Separate, $12,400 if you file Married Filing Jointly or Qualifying Widow(er), and $9,100 if you are filing Head of Household status. If you believe you would have more than this, then you would itemize the deductions using Schedule A.
Mortgage interest and real estate taxes are the two areas that push most Californians into the itemizing zone. In other words, if you do not own a home, there is a good chance you won’t be itemizing. This is not always true: sometimes people don’t own a home, but make a lot of money and pay a lot of deductible state income taxes which would push them over the standard deduction, or maybe they work in sales jobs where they have lots of unreimbursed employee business expenses, or have major unreimbursed medical expenditures, or are perhaps like you dear reader, and have a heart of gold giving away buckets of money to charitable organizations each year! Or it could be a combination of things – paid some income taxes, have a stingy boss that won’t reimburse, and maybe you have a heart of bronze.
Next week we will discuss more specifically the deductions on Schedule A and how they can come out looking a little thin after running the Schedule A gauntlet.
Prior articles are republished on my website at www.tlongcpa.com/blog.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Back to Basics Part I – Overview of 1040
Filed under: Back to Basics | Tags: 1040, above the line, adjusted gross income, adjustments to income, Alternative Minimum Tax, AMT, basics, below the line, charitable contributions, childcare credit, credits, direct deposit, educator expenses, energy efficient upgrades, exemptions, filing status, first-time home buyer credit, health savings account contributions, Household employees, interest, itemized deductions, medical expenses, miscellaneous itemized deductions, moving expenses, other taxes, paid preparer, real estate taxes, retirement plan contributions, self-employment taxes, student loan interest, tax return, taxes, tuition and fees, understanding
Leave a comment Originally published in the Cedar Street Times
October 17, 2014
On Wednesday October 15, the 2013 personal tax filing season came to a close. Or at least it did for most timely filers. People who requested the six-month extension finally had to lay down their cards, or face increased penalties, and being branded delinquent by the taxing authorities. But I am sure you had your returns done long ago!
It is hard to believe that 2014 is rapidly drawing to a close, and soon we will start filing taxes all over again. This coming year, I would like to challenge you to spend some time looking at your tax returns and learning something new. I am a firm believer that everyone should have at least a basic understanding of the flow of a tax return. This document is a linchpin in your financial life. Let’s spend a few minutes talking about the big picture. You may wish to do this with a copy of a 1040 close at hand.
Tax returns can be hundreds of pages long with many supporting forms and schedules, but it all boils down to a two page summary whether you are John Doe or Warren Buffett…this is your Form 1040. Essentially, the first page lists your income, adjusted by a few preferential items leaving you with your all important “adjusted gross income.” “Below the line,” as it is known, is the second page, and lists your deductions and credits, calculates your tax, and determines what you owe or will get refunded.
Looking at page one in more detail, the top section captures your name, mailing address, and Social Security number. There is also a somewhat passe little box to designate three dollars of the tax you are already paying to the Presidential Election Campaign fund. If you want to learn more about this, I wrote an entire article on its history on April 18th. You can find it at www.tlongcpa.com/blog.
The first real section is where you designate your tax return “filing status” – single, married, head of household, etc. This is very important because it determines how much your standard deduction is and how quickly you will climb the tax brackets as your income increases. Your status is determined by rules, not choice. That said, married people do have the choice of the generally unfavorable Married Filing Separate status.
The next section deals with “exemptions.” This is where you list the dependents in your household – generally your children up through college (even if away at college). A parent or someone not even related can qualify, but they have to meet strict limiting rules. You get an exemption from your taxable income of $3,950 (2014 amount) for each of your dependents. Children under 17 may also qualify you for child tax credits which would go on page two.
The income section falls next. Wages from your job, interest, dividends, business income, rental income, sales of stock, money received from retirement accounts or plans, pensions, social security, etc.
After getting your total income figure, you then are allowed certain favorable “above the line” deductions for things like educator expenses, moving expenses, retirement plan contributions, health savings account contributions, student loan interest, tuition and fees, etc. After subtracting these adjustments, you arrive at your AGI (adjusted gross income). AGI is a key figure and is used in a lot of calculations which could affect your taxes in many areas. Above the line deductions are therefore preferable for that reason, but also because they will have a direct impact on taxable income. Below the line deductions such as itemized deductions are less certain and do not impact your AGI.
The taxes and credits section is at the top of the second page. This is where you get to subtract all your itemized deductions listed on Schedule A- things like medical expenses, taxes paid, interest, charitable contributions, and miscellaneous other deductions (like tax preparation fees!). If you don’t have many itemized deductions you get the standard deduction instead (for example – $12,200 for married status) as determined by your filing status from the first page.
Next, the number of exemptions you claimed on the first page is multiplied by $3,950 (2014) and that is subtracted out to leave you with your taxable income. Your tax is then calculated using tax tables and other rules.
With income generally in the $100,000 to $200,000 range ore more, you may also hit alternative minimum tax (AMT). In simple terms, AMT is a parallel tax system that has a different set of rules and allows less deductions. You calculate the AMT system on every return. If the AMT tax calculation yields a larger tax bill than the regular system, you pay the incremental difference as alternative minimum tax. Real estate taxes and miscellaneous itemized deductions subject to two-percent such as unreimbursed employee business expenses are common items that get kicked out in the AMT system.
Next you get to subtract any tax credits you may have. Tax credits are a dollar-for-dollar reduction of tax owed and are therefore more valuable than deductions, which only save you a fraction on the dollar. Depending on your circumstances there are credits for education, childcare, children in general, energy efficient upgrades, etc.
The next section is “Other Taxes.” There are a handful of other taxes people might incur , such as tax on taking money out of retirement plans too early, household employee taxes, repaying a first-time home buyer credit, etc. The most common, however, is self employment taxes. Business owners must pay the employer and employee side of their Social Security and Medicare taxes. After you add these taxes and determine your total tax liability, you then look at the payments section to see was has been paid in or credited to your account, and whether you will end up owing, or getting a refund.
At the bottom of the second page, you can choose things like direct deposit, or applying the payment to the following year. You can also designate a third party such as the tax preparer to be able to discuss the return with the IRS, if the IRS wants to discuss it. At the bottom, a paid preparer also has places to sign and fill out.
In two weeks we will start examining Schedule A – Itemized Deductions.
Prior articles are republished on my website at www.tlongcpa.com/blog.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 