Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
What To Do if You Missed the April Tax Deadline
Monday, April 18, 2022, was the tax deadline for most taxpayers to file their tax returns, but if you haven’t filed a 2021 tax return yet, it’s not too late. Here’s what you need to do:
First, gather any information related to income and deductions for the tax years for which a return must be filed, then call the office to set up an in-person or virtual appointment.
If you are owed money, then the sooner you file, the sooner you will get your refund. If you owe taxes, file and pay as soon as you can, which will stop the interest and penalties you owe.
If you owe money but cannot pay the IRS in full, pay as much as you can when filing your tax return to minimize penalties and interest. The IRS will work with taxpayers suffering financial hardship. If you continue to ignore your tax bill, the IRS may take collection action.
Some taxpayers may have extra time to file their tax returns and pay any taxes due. These include: individuals living or working in a federally declared disaster area, military service members and eligible support personnel in combat zones, and U.S. citizens and resident aliens who live and work outside the U.S. and Puerto Rico.
How To Make a Payment
There are several ways to make a payment on your taxes: credit card, electronic funds transfer, check, money order, cashier’s check, or cash. If you pay your federal taxes using a major credit card or debit card, there is no IRS fee for credit or debit card payments, but processing companies may charge a convenience fee or flat fee. It is important to review all your options. The interest rates on a loan or credit card could be lower than the combination of penalties and interest imposed by the Internal Revenue Code.
What To Do if You Can’t Pay in Full
Taxpayers who cannot pay the full amount owed on a tax bill are encouraged to pay as much as possible. By paying as much as possible now, the amount of interest and penalties owed will be less than if you pay nothing at all. Based on individual circumstances, a taxpayer could qualify for an extension of time to pay, an installment agreement, a temporary delay, or an offer in compromise. Don’t hesitate to call if you have questions about any of these options.
Direct Pay. For individuals, IRS Direct Pay is a fast and free way to pay directly from your checking or savings account. Taxpayers who need more time to pay can set up either a short-term payment extension or a monthly payment plan.
Payment Plans. Most people can set up a monthly payment plan or installment agreement that gives them more time to pay. However, penalties and interest will continue to be charged on the unpaid portion of the debt throughout the duration of the installment agreement/payment plan. You should pay as much as possible before entering into an installment agreement.
Taxpayers who have a history of filing and paying on time often qualify for penalty relief. A taxpayer generally qualifies if they have filed and paid timely for the past three years and meet other requirements.
Your specific tax situation will determine which payment options are available to you. Payment options include full payment, a short-term payment plan (paying in 120 days or less), or a long-term payment plan (installment agreement) (paying in more than 120 days). User fees may apply depending on the type of installment plan you are approved for. A sole proprietor or independent contractor should apply for a payment plan as an individual.
You may qualify to apply online if:
- Long-term payment plan (installment agreement): You owe $50,000 or less in combined tax, penalties, and interest and filed all required returns.
- Short-term payment plan: You owe less than $100,000 in combined tax, penalties, and interest.
Cash Payments. Individual taxpayers who do not have a bank account or credit card and need to pay their tax bill using cash are able to make a cash payment at participating PayNearMe payment locations (places like 7-Eleven) in 44 states. Individuals wishing to take advantage of this payment option should visit the IRS.gov payments page, select the cash option in the other ways you can pay section, and follow the instructions.
What Happens if You Don’t File a Past Due Return
It’s important to understand the ramifications of not filing a past due return and the steps that the IRS will take. Taxpayers who continue to not file a required return and fail to respond to IRS requests for a return may be considered for various enforcement actions – including substantial penalties and fees. For example, the failure-to-file penalty is 5 percent of the tax owed for each month or part of a month that a tax return is late. However, this penalty is reduced for any month where the failure to pay penalty also applies. The basic failure-to-pay penalty rate is generally 0.5 percent of unpaid tax owed for each month or part of a month.
Need Help Filing Your 2021 Tax Return?
If you haven’t filed a tax return yet, don’t delay. Call the office today to schedule an appointment as soon as possible.
Estimated Tax Payments: The Facts
Estimated tax is the method used to pay tax on income that is not subject to withholding, including income from self-employment, interest, dividends, alimony, rent, and gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Filing and Paying Estimated Taxes
Both individuals and business owners may need to file and pay estimated taxes, which are paid quarterly. The first estimated tax payment of the year is normally due on the same day as your federal tax return is due. This year, that date was April 18, 2022.
For estimated tax purposes, the year is divided into four payment periods, and each period has a specific payment due date. For the 2022 tax year, these dates are April 18, June 15, September 15, and January 17, 2023. You do not have to pay estimated taxes in January if you file your 2022 tax return by January 31, 2023, and pay the entire balance due with your return.
If you do not pay enough by the due date of each payment period, you may be charged a penalty even if you are due a refund when you file your tax return.
If you had a tax liability for the prior year, you may have to pay estimated tax for the current year, but if you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings.
Who has to pay estimated tax:
If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. If you are filing as a corporation, you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.
Special rules apply to farmers, fishermen, certain household employers, and certain higher taxpayers. Please call the office for assistance if any of these situations apply to you.
Who does not have to pay estimated tax:
You do not have to pay estimated tax for the current year if you meet all three of the following conditions:
- You had no tax liability for the prior year
- You were a U.S. citizen or resident for the whole year
- Your prior tax year covered a 12-month period
Calculating Estimated Taxes
To figure out your estimated tax, you must calculate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. If you estimated your earnings too high, simply complete another Form 1040-ES, Estimated Tax for Individuals, worksheet to re-figure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter.
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 to enter the additional amount you want your employer to withhold. You had no tax liability for the prior year if your total tax was zero or you did not have to file an income tax return.
Try to estimate your income as accurately as you can to avoid penalties due to underpayment. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits or if they paid at least 90 percent of the tax for the current year or 100 percent of the tax shown on the return for the prior year, whichever is smaller.
When figuring your estimated tax for the current year, it may be helpful to use your income, deductions, and credits for the prior year as a starting point. Use your prior year’s federal tax return as a guide, and use the worksheet in Form 1040-ES to figure your estimated tax. However, you must make adjustments both for changes in your situation and for recent changes in the tax law.
The Electronic Federal Tax Payment System
The easiest way for individuals and businesses to pay their estimated federal taxes is to use the Electronic Federal Tax Payment System (EFTPS). You can make your federal tax payments, including federal tax deposits (FTDs), installment agreement, and estimated tax payments, using EFTPS. If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc., you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments so you know how much and when you made your estimated tax payments.
Don’t hesitate to call if you have any questions about estimated tax payments or need assistance setting-up EFTPS.
Choosing the Correct Business Entity
One of the most important decisions you’ll make when starting a business is choosing the right business entity. It’s a decision that impacts many things–from the amount of taxes you pay to how much paperwork you have to deal with and what type of personal liability you face.
Forms of Business
The most common forms of business are Sole Proprietorships, Partnerships, Limited Liability Companies (LLC), and Corporations. Federal tax law also recognizes another business form called the S-Corporation. While state law controls the formation of your business, federal tax law controls how your business is taxed.
What To Consider
Businesses fall under one of two federal tax systems, and the first major consideration in choosing the form of doing business is whether to choose an entity that has two levels of tax on income or a pass-through entity that has only one level directly on the owners:
1. Taxation of the entity itself on the income it earns and the owners on dividends or other profit participation the owners receive from the business. C-Corporations fall under this system of federal taxation.
2. “Pass through” taxation. The entity (called a “flow-through” entity) is not taxed, but its owners are each taxed (more or less) on their proportionate shares of the entity’s income. Pass-through entities include:
- Sole Proprietorships
- Partnerships, of various types
- Limited liability companies (LLCs)
- “S-Corporations” (S-Corps), as distinguished from C-corporations (C-Corps)
The second consideration, which has more to do with business considerations rather than tax considerations, is the limitation of liability (protecting your assets from claims of business creditors).
Let’s take a general look at each of the options more closely:
Types of Business Entities
Sole Proprietorships. The sole proprietorship is the most common (and easiest) form of business organization. Defined as any unincorporated business owned entirely by one individual. A sole proprietor can operate any type of business (full or part-time) as long as it is not a hobby or an investment. In general, the owner is also personally liable for all financial obligations and debts of the business.
If you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.
Types of businesses that operate as sole proprietorships include retail shops, farmers, large companies with employees, home-based businesses, and one-person consulting firms.
As a sole proprietor, your net business income or loss is combined with your other income and deductions and taxed at individual rates on your personal tax return. Because sole proprietors do not have taxes withheld from their business income, you may need to make quarterly estimated tax payments if you expect to make a profit. As a sole proprietor, you must also pay self-employment tax on the net income reported.
Partnerships. A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill and expects to share in the profits and losses of the business.
There are two types of partnerships: Ordinary partnerships, called “general partnerships,” and limited partnerships that limit liability for some partners but not others. Both general and limited partnerships are treated as pass-through entities under federal tax law, but there are some minor differences in tax treatment between general and limited partners.
For example, general partners must pay self-employment tax on their net earnings from self-employment assigned to them from the partnership. Net earnings from self-employment include an individual’s share, distributed or not, of income or loss from any trade or business carried on by a partnership. Limited partners are subject to self-employment tax only on guaranteed payments, such as professional fees for services rendered.
Partners are not employees of the partnership and do not pay any income tax at the partnership level. A Partnership reports income and expenses from its operation and passes the information to the individual partners (hence the pass-through designation).
Because taxes are not withheld from any distributions, partners generally need to make quarterly estimated tax payments if they expect to make a profit. Partners must report their share of partnership income even if a distribution is not made. Each partner reports their share of the partnership’s net profit or loss on their personal tax return.
Limited Liability Companies (LLC). A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state is different, so it’s important to check the regulations in the state in which you plan to do business. Owners of an LLC are called members and may include individuals, corporations, other LLCs, and foreign entities. Most states also permit “single-member” LLCs with only one owner.
Depending on elections made by the LLC and the number of members, the IRS treats an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return. A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it elects to be treated as a corporation.
An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for employment tax purposes and certain excise taxes) unless it elects to be treated as a corporation.
C-Corporations. In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation conducts business, realizes net income or loss, pays taxes, and distributes profits to shareholders.
A corporate structure is more complex than other business structures. When you form a corporation, you create a separate tax-paying entity. The profit of a corporation is taxed to the corporation when earned and then is taxed to the shareholders when distributed as dividends, which creates a double tax (aka “double taxation”).
The corporation does not get a tax deduction when distributing dividends to shareholders. Earnings distributed to shareholders as dividends are taxed at individual tax rates on their personal tax returns. Shareholders cannot deduct any loss of the corporation.
If you organize your business as a corporation, generally are not personally liable for the debts of the corporation, although there may be exceptions under state law.
S-Corporations. An S-corporation has the same corporate structure as a standard corporation; however, its owners have elected to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations generally have limited liability.
Generally, an S-Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. It is treated in the same way as a partnership, in that generally, taxes are not paid at the corporate level. S-Corporations may be taxed under state tax law as regular corporations or other ways.
Shareholders must pay tax on their share of corporate income, regardless of whether it is actually distributed. Flow-through of income and losses is reported on their personal tax returns and are assessed tax at their individual income tax rates, allowing S-Corporations to avoid double taxation on the corporate income.
To qualify for S-Corporation status, the corporation must meet a number of requirements. Please call if you would like more information about which requirements must be met to form an S-Corporation.
Seek Professional Guidance
When making a decision about which type of business entity to choose each business owner must decide which one best meets his or needs. One form of business entity is not necessarily better than any other and obtaining the advice of a tax professional is critical. If you need assistance figuring out which business entity is best for your business, don’t hesitate to call.
Special Tax Benefits for Members of the Military
Military personnel and their families face unique life challenges with their duties, expenses, and transitions. As such, military members may qualify for tax benefits not available to civilians. For example, they don’t have to pay taxes on some types of income. Special rules may lower the tax they owe or allow them more time to file and pay their federal taxes.
Military service members and eligible support personnel serving in a combat zone have at least 180 days after they leave the combat zone to file their tax returns and pay any tax due. This includes those serving in Iraq, Afghanistan, and other combat zones. Furthermore, spouses of individuals who served in a combat zone or contingency operation are generally entitled to the same deadline extensions with some exceptions.
If you’re an active duty or reserve member of any of the armed forces listed below, you may be eligible for military tax benefits:
- United States Army (including Army Reserve and Army National Guard)
- United States Navy (including Navy Reserve)
- United States Air Force (including Air Force Reserve and Air National Guard)
- United States Marine Corps (including Marine Corps Reserve)
- United States Coast Guard (including Coast Guard Reserve)
Recently retired or separated members may also be eligible for benefits.
Let’s take a look at some additional tax benefits members of the military are entitled to:
If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you may be able to deduct some of your unreimbursed moving expenses. To deduct these expenses, the taxpayer must be a member of the Armed Forces on active duty, and their move must be due to a military order or result of a permanent change of station.
Combat Pay Exclusion
If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, military pay you received for military service during that month is not taxable. This also applies to people working in an area outside a combat zone when the Department of Defense certifies that area directly supports military operations in a combat zone. However, there are limits to this exclusion for commissioned officers. The monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received for officers.
Earned Income Tax Credit
You can also elect to include your nontaxable combat pay in your “earned income” for purposes of claiming the Earned Income Tax Credit (EITC). A special computation method is available for those who receive nontaxable combat pay. Choosing to include it in taxable income may boost the EITC, meaning owing less tax or getting a larger refund. For 2021, the Earned Income Tax Credit may be worth up to $6,728 ($6,935 in 2022) for low-and moderate-income service members. Furthermore, taxpayers can use their 2019 earned income to figure their 2021 earned income credit if their 2019 earned income is more than their 2021 earned income.
Extension of Deadlines
An automatic extension to file a federal income tax return is available to U.S. service members stationed abroad. Also, those serving in a combat zone typically have until 180 days after leaving the combat zone to file and pay any tax due. For more information about this, please call the office.
Uniform Cost and Upkeep
If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of those uniforms. Still, you must reduce your expenses by any allowance or reimbursement received.
Joint Return Signatures
Both spouses normally must sign a joint income tax return, but if one spouse is absent due to certain military duty or conditions, the other spouse may be able to sign for them. A power of attorney is required in other instances. A military installation’s legal office may be able to help.
Reserve and National Guard Travel
If you are a member of the U.S. Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.
Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during advanced summer camp – is taxable.
For questions about these and other tax issues, don’t hesitate to contact the office for assistance. Help is just a phone call away.
What To Know About Tax-related Identity Theft
Tax-related identity theft occurs when someone uses a taxpayer’s stolen SSN to file a tax return claiming a fraudulent refund. In the vast majority of tax-related identity theft cases, the IRS identifies a suspicious tax return and pulls the suspicious return for review. The IRS then sends a letter to the taxpayer and won’t process the tax return until the taxpayer responds.
Depending on the situation, the taxpayer will receive one of three letters asking them to verify their identity:
Letter 5071C, Potential Identity Theft during Original Processing with Online Option. This letter asks the taxpayer to use an online tool to verify their identity and tell the IRS if they filed that return.
Letter 4883C, Potential Identity Theft during Original Processing. This letter asks the taxpayer to call the IRS to verify their identity and tell the IRS if they filed that return.
Letter 5747C, Potential Identity Theft during Original Processing – TAC AUTH ONLY. The IRS sends this letter to a taxpayer who has been a victim of a data breach. This letter may ask the taxpayer to verify their identity in person at a Taxpayer Assistance Center.
If the IRS sends a taxpayer an identity theft letter, the taxpayer should follow the steps in the letter. That will provide all the information that the IRS needs. There is no need for the taxpayer to file a Form 14039, Identity Theft Affidavit.
When to File an Identity Theft Affidavit
If a taxpayer hasn’t heard from the IRS but suspects tax-related identity theft, they should complete and submit Form 14039, Identity Theft Affidavit. Signs of possible tax-related identity theft include:
- A taxpayer can’t e-file their tax return because a duplicate tax return was filed using their Social Security number. (Check that there’s no error in the SSN, such as transposed numbers.)
- A taxpayer can’t e-file because a dependent’s Social Security number or ITIN was already used by someone on another return without the taxpayer’s knowledge or permission. (Also, check that the SSN or ITIN is correct and be sure the dependent hasn’t filed a separate tax return.)
- A taxpayer receives a tax transcript in the mail they did not request.
- A taxpayer receives a notice from a tax preparation software company confirming an online account was created in their name, and they did not create one.
- A taxpayer receives a notice from their tax preparation software company that their existing online account was accessed or disabled when they took no action.
- A taxpayer receives an IRS notice informing them that they owe additional tax or their refund was offset to a balance due, or that they have had collection actions taken against them for a year they did not earn any income or file a tax return.
- The IRS sends a taxpayer a notice indicating that the taxpayer received wages or other income from an employer for whom they didn’t work.
- he taxpayer was assigned an Employer Identification Number (EIN), but they did not request or apply for an EIN.
The IRS will work to verify the legitimate taxpayer, clear the fraudulent return from the taxpayer’s account and, generally, place a special marker on the account that will generate an IP PIN each year for the taxpayer who is a confirmed victim.
Non-tax-Related Identity Theft; No Need to File Form 14039
Non-tax-related identity theft occurs when someone uses stolen or lost personally identifiable information (PII) to open credit cards, obtain mortgages, buy a car or open other accounts without their victim’s knowledge.
Potential evidence of non-tax-related identity theft can include:
- An individual receives balance due bills from companies with whom they didn’t conduct business, magazine subscriptions they didn’t order, notifications of a mortgage statement, and/or credit cards for which they didn’t apply.
- An individual receives notices of unemployment benefits for which they didn’t apply.
- An individual receives a Notice CP 01E, Employment Identity Theft.
- An individual receives a Form W-2 or 1099 from a corporation or employer from whom they did not receive the income reported, and they have not received a notice or letter from the IRS questioning them about that income.
- A taxpayer can’t e-file because a dependent’s SSN or ITIN was already used by someone known to the taxpayer but is not the parent or legal guardian, and the taxpayer did not provide permission for that person to claim the dependent. For additional information about this issue, please call the office for assistance.
Victims of non-tax-related identity theft don’t need to report these incidents to the IRS but should take steps to protect against the type of identity theft they’ve experienced.
Help Is Just a Phone Call Away
Don’t hesitate to contact the office if you have any questions or concerns about tax-related identity theft or need assistance with any tax-related issue.
June 15 Deadline for Taxpayers Living Abroad
If you live or work outside the United States, you generally must file and pay your tax the same way as people living in the U.S. This includes people with dual citizenship. People who live and work abroad have until June 15, 2022, to file their 2021 federal income tax return and pay any tax due. An automatic two-month deadline extension is normally granted for those overseas. If you’re a taxpayer with foreign income, here’s what you should know about reporting foreign income:
1. Report Worldwide Income. By law, Americans living abroad, as well as many non-U.S. citizens, must file a U.S. income tax return and report any worldwide income. Some key tax benefits, such as the foreign earned income exclusion, are only available to those who file U.S. returns. Any income received or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.
2. Report Foreign Accounts and Assets. Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.
3. File Required Tax Forms. In most cases, affected taxpayers need to file Schedule B, Interest and Ordinary Dividends, with their tax returns. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.
Some taxpayers may need to file additional forms with the Treasury Department such as Form 8938, Statement of Specified Foreign Financial Assets or FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (“FBAR”).
FBAR. Taxpayers do not file the FBAR with individual, business, trust or estate tax returns. Instead, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2021 (or in 2022 for next year’s filing returns) must file a Treasury Department FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (“FBAR”).
The deadline for filing the FBAR is the same as for a federal income tax return and must be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 18, 2022. However, FinCEN grants filers who missed the April deadline are granted an automatic extension until October 15, 2022, to file the FBAR.
Form 8938. Generally, U.S. citizens, resident aliens, and certain nonresident aliens must report specified foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets if the aggregate value of those assets exceeds certain thresholds:
- If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year
- Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.
4. Review the Foreign Earned Income Exclusion. Many Americans who live and work abroad qualify for the foreign earned income exclusion when they file their tax return. This means taxpayers who qualify will not pay taxes on up to $108,700 of their wages and other foreign earned income they received in 2021 ($112,000 in 2022). Please contact the office if you have any questions about foreign earned income exclusion.
5. Don’t Overlook Credits and Deductions. Taxpayers may be able to take either a credit or a deduction for income taxes paid to a foreign country. This benefit reduces the taxes these taxpayers pay in situations where both the U.S. and another country tax the same income. However, you cannot claim the additional child tax credit if you file Form 2555, Foreign Earned Income or Form 2555-EZ, Foreign Earned Income Exclusion.
6. Request an Extension. Individual taxpayers who need additional time to file beyond the June 15 deadline can request a filing extension to October 15 by filling out Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. Businesses that need additional time to file income tax returns must file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.
7. Get Tax Help. If you’re a taxpayer or resident alien living abroad that needs help with tax filing issues, IRS notices, and tax bills, or have questions about foreign earned income and offshore financial assets in a bank or brokerage account, please don’t hesitate to contact the office.
Now Is the Time To Check Your Federal Tax Withholding
Now that tax season is over, it’s time to get the new tax year off to a good start by checking your federal income tax withholding. Taxpayers can do this by using the Tax Withholding Estimator on IRS.gov. Let’s take a look at why using this valuable online tool is a good idea:
The Tax Withholding Estimator helps employees avoid having too much or too little tax withheld from their wages. It is also useful for self-employed individuals who have wage income or estimated tax payments that they need to make to avoid unexpected tax bills when filing their annual returns. Having too little withheld can result in a tax bill or even a penalty at tax time; having too much withheld results in less money in their pocket. In other words, the estimator can be used to help taxpayers get to a balance of zero or a desired refund amount.
The Tax Withholding Estimator also helps taxpayers figure out whether they need to complete a new Form W-4, Employee’s Withholding Allowance Certificate and submit it to their employer or make an additional or estimated tax payment to the IRS.
How it Works
The Tax Withholding Estimator asks taxpayers to estimate:
- Their 2022 income.
- The number of children they will claim for the child tax credit and earned income tax credit.
- Other items that will affect their 2022 tax return when they file in 2023.
The online tool does not ask for personally identifiable information, such as a name, Social Security number, address, and bank account numbers. The IRS doesn’t save or record the information entered in the Estimator.
Gather Tax Documents
Before using the Estimator, it can be helpful for taxpayers to gather applicable income documents, including:
- Their pay stubs
- Forms W-2, Wage and Tax Statement , from employers to estimate their annual income
- Forms 1099 from banks, issuing agencies and other payers including unemployment
- Form 1099-K, 1099-MISC, W-2, or other income statement for workers in the gig economy
- Form 1099-INT for interest received
- Other income documents and records of virtual currency transactions
These documents are not needed to use the estimator but having them handy will help taxpayers estimate 2022 income and answer other questions asked during the process.
Taxpayers should be aware that the results of the Tax Withholding Estimator will only be as accurate as the information entered by the taxpayer. It should also be noted that individuals with only pension income should not use the Estimator. Those with wage income can account for current or future pension income. People with more complex tax situations, including those who owe alternative minimum tax or certain other taxes and people with long-term capital gains or qualified dividends, are advised to consult with a tax professional.
How To Check the Status of a Tax Refund
Tracking the status of a tax refund is easy with the Where’s My Refund? tool. It’s available anytime on IRS.gov or through the IRS2Go App. Where’s My Refund provides a personalized date after the return is processed and a refund is approved. While most tax refunds are issued within 21 days, some may take longer if the return requires additional review.
There are a few reasons a tax refund may take longer such as:
- The return may include errors or be incomplete.
- The return could be affected by identity theft or fraud.
- Many banks do not process payments on weekends or holidays.
If more information is needed to process a taxpayer’s return, the IRS will contact taxpayers by mail. It is important to note that calling the IRS won’t speed up a tax refund. The information available on Where’s My Refund? is the same information available to IRS phone assistors.
Taxpayers who claimed the earned income tax credit or the additional child tax credit, can expect to get their refund March 1 if:
- They file their return online
- They choose to get their refund by direct deposit
- The IRS found no issues with their return
Fast and easy refund updates
The Where’s My Refund tool provides a personalized date after the return is processed and a refund is approved. Taxpayers can start checking on the status of their return within 24 hours after the IRS acknowledges receipt of an electronically filed return or four weeks after the taxpayer mails a paper return. In addition, the IRS recently introduced a new feature that allows taxpayers to check the status of their current tax year and two previous years’ refunds (tax year 2019 or 2020 returns).
The tool’s tracker displays progress in three phases:
- Return received
- Refund approved
- Refund sent
To use the Where’s My Refund? tool, taxpayers must enter their Social Security number or Individual Taxpayer Identification Number, their filing status, and the exact whole dollar amount of their refund. The IRS updates the tool once a day, usually overnight, so there’s no need to check more often.
Is Your College Student’s Scholarship Taxable?
May 1st is the traditional deadline for undergraduate students to commit to their college of choice, which means tuition payments are not far behind. If you’re wondering if your child’s scholarships are taxable, here’s what you should know.
First, it’s important to understand how a scholarship is defined. Generally, a scholarship is an amount paid or allowed to a student at an educational institution for the purpose of study. It can include both merit and need-based institutional aid. Other types of grants include need-based grants (such as Pell Grants or state grants) and Fulbright grants. A fellowship grant is generally an amount paid or allowed to an individual for the purpose of study or research.
Fulbright grants may be either scholarship/fellowship income or compensation for personal services, which is usually considered wages. If you are a U.S. citizen recipient of a Fulbright grant, you must determine which category of income your grant falls into in order to know how the grant is taxed for U.S. Federal Income tax purposes.
If you receive a scholarship, a fellowship grant, or other grant, all or part of the amounts you receive may be tax-free. Scholarships, fellowship grants, and other grants are tax-free if you meet the following conditions:
- You’re a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
- The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution or for fees, books, supplies, and equipment required for courses at the educational institution.
You must include in gross income:
- Amounts used for incidental expenses, such as room and board, travel, student health insurance, and optional equipment.
- Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant. However, you don’t need to include in gross income any amounts you receive for services that are required by the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college.
Emergency financial aid grants under the Coronavirus Aid, Relief, and Economic Security Act, the COVID Relief Act, and the American Rescue Plan Act of 2021 for unexpected expenses, unmet financial need, or expenses related to the disruption of campus operations on account of the COVID-19 pandemic, are not includible in gross income.
Reporting a Taxable Scholarship on Your Tax Return
Generally, you report any portion of a scholarship, a fellowship grant, or other grants that you must include in gross income as follows:
- If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on the “Wages, salaries, tips” line of your tax return. If the taxable amount wasn’t reported on Form W-2, enter “SCH” along with the taxable amount in the space to the left of the “Wages, salaries, tips” line.
- If filing Form 1040-NR, report the taxable amount on the “Scholarship and fellowship grants” line.
Estimated Tax Payments May Be Due
If any part of your scholarship or fellowship grant is taxable, you may have to make estimated tax payments on the additional income. For additional information on estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax, and Am I Required to Make Estimated Tax Payments? For more information about estimated taxes, see the article Estimated Tax Payments: The Facts above.
If you have any questions about whether your college student’s scholarships are taxable, please call.
How Do You Manage Vendors in Quickbooks?
If you buy and resell products or need to purchase materials to create your own items, good management of your company’s vendor records is critical. Maintaining a physical card file is way too inflexible. You can’t find or edit individual records quickly or easily. They get lost or are illegible because you’ve updated the cards too many times.
When you create a transaction like a purchase order or write a check, you have to look back and forth between your card and the form, and it’s easy to make transposition errors. And you can’t generate reports – not even an alphabetized list.
QuickBooks solves all of these problems. It includes blank vendor records that you can fill in and save. You can find the ones you’re looking for in a couple of seconds, and modifying them is a simple process. If you need to use vendor data elsewhere in the software, you only must select the correct entry from a list. And vendor reports are plentiful.
Here’s how it works:
The Vendor Information Screen
QuickBooks displays all of your vendor records and related tools on one page. To get to it, click Vendors in your toolbar to open the Vendor Information screen. There’s a list of vendors and transactions to the left and a small horizontal toolbar at the top containing action icons. But most of the page is taken up by your vendor records, displayed one at a time. To create a new one, click New Vendor in the upper left corner. A window like this appears:
Figure 1: Partial view of a QuickBooks vendor record.
Fill in the blanks to complete your vendor’s contact information. Below that section, you’ll enter a physical address. Click Payment Settings in the series of tabs in the upper left. Here, you can enter an account number (if applicable) and select payment terms (like Net 30). You can also specify a credit limit and indicate how the vendor’s name should appear on checks. Click Tax Settings to enter a Vendor Tax ID and mark them as eligible for an IRS Form 1099 (using information from the vendor-provided W-9).
Clicking the Account Settings tab opens a window that may be confusing to you. If you’re entering a phone bill, for example, you’ll need to assign the correct expense account to it, which in this case would be Utilities: Telephone. That account will be automatically selected when you create a transaction for that vendor. There’s space for two alternate accounts here, too, if you think you’d ever have occasion to use a different one.
Warning: You must be accurate when assigning default accounts anywhere in QuickBooks, or you may run into problems with reports and taxes. If you have questions, please call, and someone can go over this concept with you.
Click the final tab, labeled Additional Info, and you’ll have two options. You can specify a Vendor Type, like Utilities or Subcontractors (or create your own) and you can define Custom Fields that will appear on your customer, vendor, and employee records. You can assign up to 18 total, no more than seven to vendors.
Figure 2: You can define up to seven custom fields for your vendor records.
When you’ve completed your vendor record, click OK, and it will appear in your Vendors list and be available to use in transactions.
More Vendor Options
When you highlight a name in your Vendors list, the screen changes to display their contact information in the upper horizontal pane. Click the paper clip icon in the upper right corner to attach a file and the pencil icon to edit the record.
The lower half of this screen is divided into five sections, accessible by clicking tabs. It opens to Transactions, which is a list of all of your activity with the vendor. Click Contacts to see that vendor’s contacts, and To-Do’s to see any related tasks that have been created (you can right-click in the table and select Create New to generate your own). Notes are similar; right-click and select Add New. The final tab, Sent Email, displays just that. Links at the bottom of the screen let you Manage To-Do’s and Run Reports.<img width=”100%” src=”https://www.cpasitesolutions.com/content/newsletter/images/042022/Fig3.jpeg” alt=” Figure 3 – You can add To-Do’s for your individual vendors.”>
Figure 3: You can add To-Do’s for your individual vendors.
Manage Your Vendor Relationships
Your business relationships with vendors are critical right now, considering it may be hard to get all the supplies you need. QuickBooks can ensure that you have the information you need about them – information that is comprehensive and easy to access. It can also save you time and improve the accuracy and thoroughness of your transactions and reports. Please call if you need help with any element of vendor management or if you need assistance with your use of QuickBooks in other areas.
Tax Due Dates for May 2022
Employers – Federal unemployment tax. Deposit the tax owed through April if more than $500.
Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the first quarter of 2022. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until May 10 to file the return.
Employees who work for tips – If you received $20 or more in tips during April, report them to your employer. You can use Form 4070.
Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the first quarter of 2022. This due date applies only if you deposited the tax for the quarter in full and on time.
Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in April.
Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in April.