Starting a Business This Summer? Here’s Five Tax Tips
If summer plans include starting a business, be sure to visit IRS.gov. The IRS website has answers to questions on payroll and income taxes, credits and deductions plus more.
New business owners may find the following five IRS tax tips helpful:
Business Structure. An early choice to make is to decide on the type of structure for the business. The most common types are sole proprietor, partnership and corporation. The type of business chosen will determine which tax forms to file.
Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax a business pays depends on the type of business structure set up. Taxpayers may need to make estimated tax payments. If so, use IRS Direct Pay to make them. It’s the fast, easy and secure way to pay from a checking or savings account.
Employer Identification Number (EIN). Generally, businesses may need to get an EIN for federal tax purposes. Search “EIN” on IRS.gov to find out if the number is necessary. If needed, it’s easy to apply for it online.
Accounting Method. An accounting method is a set of rules used to determine when to report income and expenses. Taxpayers must use a consistent method. The two most common are the cash and accrual methods:
Under the cash method, taxpayers normally report income and deduct expenses in the year that they receive or pay them.
Under the accrual method, taxpayers generally report income and deduct expenses in the year that they earn or incur them. This is true even if they get the income or pay the expense in a later year.
Around the middle of the year it is a good idea to ensure that by the end of the year you will have withheld your tax liability due. No more, no less. It’s common to adjust your withholding’s during the year to reflect life events or just to put more money in your pocket at that time. Time and time again it’s also common that you forget to adjust the withholding’s back to cover your tax liabilities. Knowing what your tax due will be is half the battle, but equal parts importance to earning your wage and paying your bills. It should be part of your monthly budgeting.
There’s more to it obviously, but the Individual income tax formula is as follows and can be used to estimate your taxable income to give you an idea what your up against and give you time to gather your options to lower your taxable income in an effort to conserve AFTER TAX WEALTH.
Individual Income Tax Formula:
Income (broadly conceived) Add income together if you file married filing joint. Don’t forget distributions from 401k’s, retirement or taxable social security, investment income, and net self-employment income or loss.
Less: Exclusions Ill go into the list of exclusions later
= Gross Income
= Adjusted Gross Income
Less: [Itemized or standard deduction] and [exemptions] for every person on the tax form
The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $54,000 or less, persons with disabilities and limited English speaking taxpayers who need assistance in preparing their own tax returns. IRS-certified volunteers provide free basic income tax return preparation with electronic filing to qualified individuals.
In addition to VITA, the Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older, specializing in questions about pensions and retirement-related issues unique to seniors. The IRS-certified volunteers who provide tax counseling are often retired individuals associated with non-profit organizations that receive grants from the IRS.
Before going to a VITA or TCE site, see Publication 3676-B for services provided and check out the What to Bring page to ensure you have all the required documents and information our volunteers will need to help you. *Note: available services can vary at each site due to the availability of volunteers certified with the tax law expertise required for your return.
Some VITA sites offer CAA service to taxpayers along with their VITA program.
Find a VITA or TCE Site Near You
VITA and TCE sites are generally located at community and neighborhood centers, libraries, schools, shopping malls and other convenient locations across the country. To locate the nearest VITA or TCE site near you, use the VITA Locator Tool or call 800-906-9887.
When looking for a TCE site keep in mind that a majority of the TCE sites are operated by the AARP Foundation’s Tax Aide program. To locate the nearest AARP TCE Tax-Aide site between January and April use the AARP Site Locator Tool or call 888-227-7669.
At select tax sites, taxpayers also have an option to prepare their own basic federal and state tax return for free using Web-based tax preparation software with an IRS-certified volunteer to help guide you through the process. This option is only available at locations that list “Self-Prep” in the site listing.
Helpful Tips to Know About Gambling Winnings and Losses
Taxpayers must report all gambling winnings as income. They must be able to itemize deductions to claim any gambling losses on their tax return.
Taxpayers who gamble may find these tax tips helpful:
Gambling income. Income from gambling includes winnings from the lottery, horseracing and casinos. It also includes cash and non-cash prizes. Taxpayers must report the fair market value of non-cash prizes like cars and trips to the IRS.
Payer tax form. The payer may issue a Form W-2G, Certain Gambling Winnings, to winning taxpayers based on the type of gambling, the amount they win and other factors. The payer also sends a copy of the form to the IRS. Taxpayers should also get a Form W-2G if the payer withholds income tax from their winnings.
How to report winnings. Taxpayers must report all gambling winnings as income. They normally should report all gambling winnings for the year on their tax return as “Other Income.” This is true even if the taxpayer doesn’t get a Form W-2G.
How to deduct losses. Taxpayers are able to deduct gambling losses on Schedule A, Itemized Deductions, but keep in mind, they can’t deduct gambling losses that are more than their winnings.
Keep gambling receipts. Keep records of gambling wins and losses. This means gambling receipts, statements and tickets or by using a gambling log or diary.
See Publication 525, Taxable and Nontaxable Income, for rules on gambling and Publication 529, Miscellaneous Deductions, for more information on losses. Publication 529 also lists specific types of gambling records a taxpayer may want to keep. Download and view IRS publications on IRS.gov/forms at any time.
Homeowners may qualify to exclude from their income all or part of any gain from the sale of their main home.
Below are tips to keep in mind when selling a home:
Ownership and Use. To claim the exclusion, the homeowner must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, the homeowner must have:
Owned the home for at least two years
Lived in the home as their main home for at least two years Gain. If there is a gain from the sale of their main home, the homeowner may be able to exclude up to $250,000 of the gain from income or $500,000 on a joint return in most cases. Homeowners who can exclude all of the gain do not need to report the sale on their tax return
Loss. A main home that sells for lower than purchased is not deductible.
Reporting a Sale. Reporting the sale of a home on a tax return is required if all or part of the gain is not excludable. A sale must also be reported on a tax return if the taxpayer chooses not to claim the exclusion or receives a Form 1099-S, Proceeds from Real Estate Transactions.
Possible Exceptions. There are exceptions to the rules above for persons with a disability, certain members of the military, intelligence community and Peace Corps workers, among others. More information is available in Publication 523, Selling Your Home.
Worksheets. Worksheets are included in Publication 523, Selling Your Home, to help you figure the:
Adjusted basis of the home sold
Gain (or loss) on the sale
Gain that can be excluded
Items to Keep In Mind:
Taxpayers who own more than one home can only exclude the gain on the sale of their main home. Taxes must paid on the gain from selling any other home.
Taxpayers who used the first-time homebuyer credit to purchase their home have special rules that apply to the sale. For more on those rules, see Publication 523. Use the First Time Homebuyer Credit Account Look-up to get account information such as the total amount of your credit or your repayment amount.
Work-related moving expenses might be deductible, see Publication 521, Moving Expenses.
Taxpayers moving after the sale of their home should update their address with the IRS and the U.S. Postal Service by filing Form 8822, Change of Address.
Taxpayers who purchased health coverage through the Health Insurance Marketplace should notify the Marketplace when moving out of the area covered by the current Marketplace plan.
Avoid scams. The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.
The documentary America – From Freedom To Fascism can be viewed on youtube.com and has been viewed over 785,000 times. The question, Aaron Russo, a well known producer and director, inquired about should be a top priority for every citizen of the United States.
The tax in question is solely the income tax on wages. The following list (taken directly from the film) are the many types of taxes we maybe be required to pay depending on our wants and/or needs:
Automobile Registration Tax | Building Permit Tax | Capital Gains Tax | CDL License Tax | Cigarette Tax | Corporate Income Tax | Dog License Tax | Estate Tax | Federal Unemployment Tax | Fishing License Tax | Food License Tax | Fuel Permit Tax | Gasoline Tax | hunting License Tax | Inheritance Tax | IRS Interest and Penalties | Liquor Tax | Local Income Tax | Luxury Tax | Marriage License Tax | Medicare Tax | Property Tax| Parking Meters?| Real Estate Tax | Septic Permit Tax | Service Charge Taxes | Social Security Tax | Road Usage Tax | Sales Tax | Recreational Vehicle Tax| Road Toll Booth Taxes | State Income Tax | State Unemployment Tax | Telephone Federal Excise Tax | Telephone Federal Universal Service Fee Tax | Telephone Federal, State and Local Surcharges Taxes | Telephone Recurring and non Recurring Charges Tax | Telephone State and Local Tax | Telephone Usage Tax | Toll Bridge Tax | Toll Tunnel Tax | Trailer Registration Tax | Utility Tax | Vehicle License Registration Tax | Vehicle Sales Tax | Watercraft Registration Tax | Well Permit Tax | Workers Compensations Tax | ….
And once you’ve paid all that, then there’s this: the Tax Rate Schedule for individuals.
Keep in mind the term TAXABLE INCOME is imperative because it’s the base amount to determine what your tax will be according to the tax rate schedule. It already accounts for most of those prior taxes listed above that you’ve paid and then some.
*Yes, there “credits and deductions” available to help lower that taxable income, but they will be covered in a different post.
Two concepts to notice with the tax rate schedule are:
There is the tax + the percentage over “the next dollar (S)” of income.
You are either paying half (employee) or the full (self-employed) cost of your SOCIAL SECURITY TAX AND MEDICARE taxes throughout the year.
I had a client call me after I prepared her returns one time asking why she doesnt get a refund of boxes 4 and 6 on form W2. Well ma’am, those are non-refundable taxes paid on your wages (employment taxes). Box 2 is somewhat of a refundable tax meaning if you chose to withhold more than what’s due, you’ll get the difference back.
There is so much more to discuss here, but this is just my intro into the topic of tax reform. It’s a touchy subject, I know, but it should be on the minds of everyone who earns a living and spends their hard earned cash. I encourage you to pull out last years copy of your W2’s and your 1040 (just 2 pages) and scrutinize it a little bit. Know what your taxable income was last year. You have a tax adviser/preparer, yes, but it will benefit you to also have an understanding of this very important information. You have a stake in you!
Currently, I try to use the Internal Revenue Code to my advantage to maximize after tax wealth; but that doesn’t mean that I don’t fantasize about what a world the less stress on the implications of income taxes would be like. Anyway. More to come.